Part 2 of our Trading Secrets series – trading psychology
In trading we operate in a sea of uncertainty. Things are only certain after the event. We see a possible opportunity. We aren’t certain whether or not the trade will work out. We aren’t certain that the market will go the way that we anticipate, we aren’t certain whether other traders have seen what we have seen.
At this stage we have a choice. We can take the trade or we can wait.
If the scenario on our charts meets the criteria for a trade according to our system this is when we must trade.
If we wait until we can see things more clearly then the chances are that the opportunity at hand has gone. There may be another opportunity just around the corner but the opportunity that presents itself right now has gone.
Windows for trades with a good mathematical equation do not stay open long. Other traders see them and they pounce. Before we know it the market has moved on and the equation is less favourable.
If we find that we cannot make decisions in situations like this then we either need to refine our systems, improve our knowledge or change our mindset.
Change your mindset – trading is about probability
Let me give you an example. Take a double top. We see the market make a high. It pulls back a little. We then see it make another similar high and pull back slightly. This is now our window of opportunity. If the top is in the right context and it looks like a double top then we must take the trade.
We cannot be sure that the market is going to go down. However it meets the criteria for a double top trade. We must trade at this point. If we wait for another candlestick to emerge, or a for another few minutes to pass on a five minute timeframe then the mathematical equation for the trade will have changed. Our risk will have increased, our potential reward will have shrunk or we will find that the trade wouldn’t have worked out.
This is how we work the concept of probability and this is our edge in trading.
We make a decision based on a set of criteria. We take the opportunity and the trade either completes successfully and we make money or we get stopped out for a loss. If our mathematical equation, our traders equation is positive then over time we will make money.
Let me show you another equation that will help you with your traders mindset. Cause is greater than effect.
Trading Secrets – Cause>Effect
In life we can either take the cause side of the equation or the effect side of the equation, trading is the same.
On the cause side of the equation we are at cause for your results. On the effect side of the equation we are at the effect of other peoples actions or we give reasons for our non success or lack of results.
“I couldn’t make money today because…..” These are reasons and excuses. Other people did make money today on the same markets, they are not making excuses.
“I didn’t do what I said I would do because….” Reasons and excuses. Sometimes we even kid ourselves that the reasons are genuine and unavoidable. Successful people find a way.
Being at cause is a decision that we take. We can take responsibility or we can decide not to.
If we blame other people or things for our mistakes and do not take responsibility for them then we will continue to make them.
Are you feeling happy today? If not then why not? You are alive, you can choose to be happy anytime you like. If you are choosing to be happy then you are at cause for your good mood. Good for you. If you are not happy then you are at effect of other people or other outside influences.
When we are at effect then we give our power away to the thing that is influencing us. If we are blaming someone else for our unhappiness, or we are blaming the market or the economy or the news or other traders for our losses then we are at effect and we are giving our power away to these things.
When we are at cause we take responsibility for our results. On the effect side we give reasons or make excuses for why things haven’t worked out for us.
You may ask, “how can I take responsibility for my trading when I am at the mercy of the market? I cannot move the market with my trades therefore it is outside of my control.”
Yes, it is true that the market is outside of our control. It will go wherever it decides to go. However we must be at cause for our actions, our thoughts and our trades.
Take responsibility, gain control
We can be at cause for when we decide to trade. We can be at cause for staying in our trade as long as it takes for the market to reach our predetermined target, we can be at cause for setting a protective stop in a sensible place and for getting out of our trade when we are wrong.
We put ourselves at cause for our trading results by learning about the markets so that we know a good reward to risk equation when we see one, we can be at cause for having the knowledge to judge the probability of a trade completing successfully.
It is true that we cannot take responsibility for things that we cannot influence. However we can take responsibility for the way that we respond to these things.
If we are losing money and we are taking trades without a good traders equation, if we are not following our system to the letter and we are taking impulse trades for example then we are at effect. We must take responsibility for following our system or for finding a system that works. We cannot blame our results on anyone else or on any other thing. As long as we blame outside influences then we will not change. We will not make the changes needed to become consistently profitable. There is only one way to become consistently profitable and that is to have a good trading system and to stick to that system.
If we have managed to accept our losses by kidding ourselves somehow that we are using someone else’s money, then we need to wake up to the fact that we are not taking responsibility. Step onto the cause side of the equation.
Decide now that you and only you are responsible for your results. Decide what you need to do to improve and commit to doing those things.
Successful people do not blame other things or people for things that don’t work out. They take responsibility for their own great results. They learn from their mistakes and they get better.
Live at cause in your mind, make that decision now. The world will seem like a different place, your results will improve and you will start moving towards where you want to go.