Do your palms begin to sweat just before the opening bell?
Are you elated when a trade goes your way?
Do sexy, high-risk trades distract you from your plan?
If so, your trading is in a mess.
That mess is a result of your belief systems.
If you’re a rational person with common sense, you’re smart enough to be a professional trader. Most struggling traders don’t lack intellect– they lack a belief system that is in sync with the market.
These 4 trading tips will help you begin to change your belief system and get yourself out of that mess.
One of my favorite trading books is Reminiscences of a Stock Operator by Edwin Lefevre. In it, he writes:
“The speculator’s chief enemies are always boring from within. It is inseparable from human nature to hope and to fear. In speculation, when the market goes against you, you hope that every day will be the last day – and you lose more than you should had you not listened to hope – the same ally that is so potent a success-bringer to empire builders and pioneers, big and little. And when the market goes your way, you become fearful that the next day will take away your profit, and you get out too soon. Fear keeps you from making as much money as you ought to. The successful trader has to fight these two deep-seated instincts. He has to reverse what you might call his natural impulses. Instead of hoping, he must fear; instead of fearing, he must hope. He must fear that his loss may develop into a much bigger loss, and hope that his profit may become a big profit. It is absolutely wrong to gamble in stocks the way the average man does.”- Reminiscences of a Stock Operator, page 114
Hope is essential. It keeps us going through tough times. Without hope, we would probably perish as a species.
But in trading, if a trade starts going against you, hope might keep you in the trade and cause you to lose more than you should have.
On the other hand, fear can cause us to pull out of winning trades too early. When things are going great, fear kicks in and keeps us from making as much money as we could have.
The way our brains are hardwired for survival can get in the way of our trading. While you can’t stop being human, you can pay attention to the ways hope and fear affect you. Then you can begin to minimize their impact on your trading.
“Win or lose, everybody gets what they want out of the market” – Ed Seykota
Most traders don’t want to get out of their mess. They don’t want to be consistently profitable.
They want to win.
They want emotional satisfaction from trading.
They want a thrill.
This is the same reason people go to casinos, despite consistently losing money for years. They do it for the excitement.
Trading randomly is gambling, and it gives you the same thrill.
When I first started trading, I thought my number one goal was to be consistent. But that wasn’t true at all.
When I dug a little deeper, I realized that I didn’t actually care about consistency — I cared about winning money.
When I worked for a Big Four accounting firm, we used to say “garbage in, garbage out.” To develop consistency, you have to audit your inputs.
You must develop a consistent trading routine and system so that you can pinpoint what isn’t working. Once you find the problem, you’ll be able to stop doing what doesn’t work.
For now, forget about figuring out what works and just worry about what doesn’t.
What works for me may not work for you. So I can never tell you what works. But what I can tell you is that when you start focusing on eliminating what you know does NOT work, your trading will take a giant step forward.
When you’re attached to a certain outcome, the first thing to go out the window is objectivity. You don’t see things as they are anymore.
Most traders are constantly checking their P&L because they’re attached to the money.
This is why it’s easy to trade on a simulator. You aren’t attached to the outcome.
The biggest difference between simulator trading and actual trading is the psychological element, the emotional part.
When you're trading your own account, your money's on the line. If you are too attached to the money, you can neither lose it nor make more with it.
“A blindfolded monkey throwing darts at a newspaper's financial pages could select a portfolio that would do just as well as one carefully selected by experts.” – Burton Malkiel
Most traders can quickly become proficient in reading charts.
It’s not that difficult. There are two colors (red and green) and three trends (up, down, and sideways).
What’s more difficult is developing the psychological intelligence required in trading.
Psychological intelligence relies on developing and maintaining an objective state of mind.
When I first started trading, I recorded my entire screen so I could go back and review the trades I made. Once the market closed, I would be baffled, wondering why I got in on some trades and got out of others.
At first, it seemed like there were no reasons why. But there was a reason — it’s because I was psychologically messed up as a trader.
No matter how well you understand charts, it won’t overrule the psychology behind your trades.