Thursday, November 8, 2012

The Trader's mind III - Eagerness and Dispair

Eventually, the trader settles in and realizes that trading is not easy but he can see patterns much more clearly. This is chop; this is a breakout and so on. However, in the eagerness to trade, the trader enters too early. The market stops out the trader and gives a better entry and resumes the move.

The trader may go into dispair at this point. An emotionally sensitive trader may have also reversed his position, thinking that the failure of a great setup is a very strong signal and may get stopped out a second time. If this happens enough times, the trader will find his confidence shaken and weak.

The good news is that the reason the market goes where you expect it to go is because you are now able to read the market. The bad news is that the human brain is extremely efficient at recognizing patterns and will alert you as soon as it can. This is a survival advantage. The earlier you spot a predator or prey, the better your chances of having a good meal and seeing another sunrise. Because of this, you will see the pattern a lot earlier and you eagerness will force you to act prematurely.

The right mental adjustment you need to do is to separate the pattern recognition from the action. Once a pattern is recognized, take it as directional advice and wait for a definitive signal. Some traders manage by using large stops. While this may work ok for many, I prefer precise entries since it maximizes my reward to risk (R multiple or RX). A larger RX in various kinds of price action is essential for me personally for trading large size with confidence.

Patience and the willingness to pass on a potential large move are essential for consistency. Once you are able to wait patiently and make a rational choice regarding any signal, you may take slightly lower probability trades if the RX is statistically very large such as 1PB in the first hour.

Patience -- the ability to wait for the right setup depends on detachment -- the ability to pass on a trade and miss a large profit. Combined with discipline, the ability to follow your own rules by resisting short-term temptations to meet long term goals is key trading behaviors for success.

No comments:

Post a Comment