Mindstate of a Trader: Things to Avoid

[Soultrader 12]

"When you learn what not to do in order not to lose, only then can you begin to learn what to do in order to win." - Edwin Lefevre, Reminiscences of a Stock Operator

 

In the book, The Art of War, Sun Tzu mentioned that defense was another form of offense. This is true in trading. A trader must be able to determine whether to act or stay aside depending on market conditions. Being flat is as good as being long or short. Conservation of capital is king.

 

Many traders feel the need to be involved in the markets all the time. While they sit in front of the monitor, they will wonder "Should I buy? Or should I short?". They automatically assume that if they are not long a position, they must be short and vice versa. Staying aside and not trading, however, is also an option. If you keep this in mind, you will be able to spot out better opportunities with more patience and discipline.

 

Boredom:

 

One of our biggest enemies in trading. Our minds our programmed to avoid boredom hence forcing unnecessary trades. If you ever played minimum $10/$20 blinds limit holdem in a casino, you would know the meaning of boredom. The discipline to play a couple hands an hour is a technique of a true grinder. Knowing when to press hard when the time is right is also a technique one must learn to maximize profits.

 

There is no need to make 10+ round trips a day trading. In her book Street Smart, Linda Raschke mentioned how she knew traders who made a living off one setup. 2-3 trades a day can provide a comfortable living; only if you know what you are doing.

 

Trying to be right instead of trying to make money:

 

Trend trading is alot easier then counter trend trading. Yet, I am surprised to see the numerous amount of counter trend traders. They may catch the dead low or highs but only after being stopped out a trillion times. There is no need to fight the market and try to catch the entire move. Leave the buns to bottom fishers, work on catching the meat.

 

Are you trying to be right? Or are you trying to make money? Once you understand that your ego is not going to help you in trading, you will learn to obey the markets.

 

Averaging Down, Letting Losses Run:

 

How many times have we disobeyed our stops? Holding onto a loss hoping that the markets may come back to your entry point is a bad idea. The moment you hope, it is usually a good sign to close your position. Always honor your stops. Your mission is to make money. Without any chips on the table you have no ammo. Forget the tiny loss, live to fight another day.

 

Averaging down is a bad habit that one must avoid. You want to be long when its moving in your direction, not against you. Averaging down is a similar to calling with your 6-8 off suit out of frustration. DO NOT PLAY ON A TILT. I played poker professionally for quite some time prior to trading. The best opportunity was when the other player was on a tilt. Do not be that sucker.

 

Learn to think in probabilities:

 

Trading like poker is a game of probabilities. There is always a chance your pocket Ace's will not hold up. This is the same in trading. You may get rivered. Who cares! Understand that losses are a part of the game. If the odds favor your proven strategies and setups, you will come out ahead. People lie. Numbers don't lie.

 

Swing like Ichiro, no need to aim for the fences:

 

In day trading, survival is based on hitting singles and doubles. Not home runs. New traders are so full of greed that they can not ring the register with a tiny profit. Leaving money on the table hurts them more than losing money.

 

Focus on perfecting your skill. The money will flow with it. "When it rains, it pours!"

 

Position Size:

 

Do not double your position after a losing trade. This is a stupid way to lose more money than intended. This is something idiots do in a casino. Risk tolerance will develop over time through enough trading experience. Until then, focus on your goals. There is no need to compare yourself with the trader next to you who is making $10k daily.

 

Greed is your enemy. Trade the markets, not your P&L. If you hate losing $5 that you will regret it for one week, stop trading. You are better off switching careers.

 

Revenge Trading:

 

What is the point of yelling at your monitor? Do you think the markets owe you an apology. Forget it! Revenge trading is the same as playing on a tilt. Find ways to cure this. For example: limit your daily loss to 3 trades and walk away. Or take a 10 minute walk after every losing trade. It is absolutely necessary to shake of your losses and reenter the game with a clear mind. Trading is 30% mechanical, 170% psychological.

 

Regards,

 

Soultrader