Beginning this week, we are starting a series of articles and journal entries which highlight and reflect trading psychology and behavioral patterns which should be helpful to first our subs and then to the larger group.
As most traders with any experience know, great trader differ from good ones in their ability to position their entries. The ability to “call “ the market is relatively easy in comparison to getting properly positioned within the market. That is where the real work of lasting trading success really lies. All of us have found the actual bottom or top of a significant move but failed to capitalize on that opportunity for one reason or another.
It is not just enough to know the trends and call some far away targets but your success is judged by your ability to enter and exit a trade.
An example of good entry was when we published the charts on EURAUD as it was breaking at 1.2650. Our entry was at 1.267 with a stop at 1.2635. There was debate and research on this trade but it had fundamentally satisfied the C3X indicator for a good and strong advance. Good research is one part of the story but it is an entirely another matter to get an entry into a great trade. Often when a trade breaks out, some traders will wait outside to see if it will retrace and then enter. But when it does retrace, it will make the same traders question the entry. Once again they miss the trade and then they start chasing it. That in my view is showing a deep behavioral malaise which needs to be addressed cause as a trader you will never improve if you let a good entry go by.
Primarily successful traders with a high degree of intelligence and sincerity fail cause of their behavioral biases. One of the biases that we would like to highlight for today session is the bias of “attachment to results”
There are two ways by which you can get attached to your positions even though you may feel that you are unbiased:
1. Over trading: A thumb rule for traders esp beginners (those who have spent less than 250 days trading) is to not trade more than one trade a day. Point. No matter what happens you must make sure you are sticking to this rule. Not two trades but one trade. More often than not traders will be jumping in with multiple trades at multiple entry points attracted by sheer adrenaline of see ticks converting into dollars. One of the most tragic paradoxes that can afflict a beginner is if his first few trades hit their mark. He will feel over confident and the beginner’s brain would have been sub consciously trained to accept the fact that he is superior to the rest of the market. Over trading is as much a malady as any other disease afflicting a trader. In the case of overtrading, it represents the psychological need for immediate results (or positive results) without the corresponding willingness to allow time to pass. I think it is safe to say that a certain amount of time is required for any trading style to generate a gain and the unwillingness to let the required amount of time to pass comes out in the markets as constant execution over some timeframe. Now if you use an hourly chart, let me suggest that at least an hour should pass before you judge the potential of your trade. If the market moves against your position which is to be expected, it is unreasonable to assume you will “buy the low” or “sell the high” every time you trade.
Now if the market moves against your position, if that action affects your personally (getting angry at your colleague, not taking your wife phone are some I can think of) then you much re evaluate whether you are in the right frame of mind to trade. It could well be time to take a break.
Most traders with this problem now seem to forget the high degree of study, preparation and thought they invested into picking that spot to execute. For some reason, the long-term fundamentals are forgotten, the technical studies are re-evaluated in real time, the protective stop order might be moved and the limit order to take the gain is moved closer to the market. Or any number of things. Then this trader executes to exit the market. Prices remain near their entry or advance. The sheer attachment to tick movement and results will shout and scream at you “Go for it again. You were right!” and this trader now executes again for an entry. As prices return to the first entry price, this trader again has a small open-trade loss; again the trader’s attachment says the trade is not going to work. This process may repeat itself several times over a short period of time, especially if the market is advancing in the intended direction. The problem is not the market price action; the problem is the attachment to results imposed by the trader creating an urge to action that is not consistent with normal ebb and flow of most market action. The problem is that the trader is not in the right frame of mind to trade. He is too attached. He was fine while doing his research and analysis but given that trading requires extreme amounts of patience and mental fitness, he is mentally fatigued to trade. He is not ready to let time pass by to evaluate his position. During a major price advance or decline that was properly observed, this trader has small gains or even net losses when his just sitting tight for a period of time would have resulted in a nice gain.
This is the malaise of over trading.
2. Holding losses: The reason why so many good trader never achieve greatness is cause of their inability to cut losses. Get out of a position which is clearly shouting at you to get out. Assume you have a simple trading rule which has done well for you while backtesting. Let the rule be the simple 20-20 rule of turtle traders: “I will buy when prices cross the 20 ma and will sell when prices go below 20 ma”. One friday tired from looking after his baby in the night decides to trade the rule. He buys EU as soon as it crosses the 20 MA but two ticks later the prices fall below his entry price. The prices continue to fall and his sell rule has been activated. The trader stays firm that may be this one time the rule could be wrong. He holds the losses and wipes off his weeks profits. But he now believes that prices have fallen so much that it will now at least fade its fall and do a simple bounce which it does. He is happy with the bounce and thinks the bottom is in and decides to buy. All the while the trading rule is screaming to cut losses but he has already forgotten the rule. Prices after a small bounce falls off again and this time the fall is even more brutal. He is not only in large losses but it has shaken his confidence to the core. The fact is that it was not the market which was wrong but the trader who forgot his own rule. He was mentally fatigued to trade but even then he should never have forgotten the fundamental trait of a great trader “Cut your losses”. It is not as difficult as it sounds and can be easily achieved by a trader who is in the right frame of mind. Cutting losses is the second lesson for the weekend.
May you take time jorunal down your trades this week and introspect about how you were feeling as you took those trades. Mental fatigue can make you over trade or make you hold your losses. Were you fatigued? Were getting too attached to the results and was that making over trade? Were you not cutting your losses?
The sooner you address these issues the better your results will start looking