The nature of trading, on one hand, offers us virtually unlimited freedom of expression, meaning, we pretty much make our own rules. Except for margins and account minimums, we virtually have no one looking over our shoulder, telling us what to do. On the other hand, that same freedom can be dangerous. It opens up the potential for us to do serious damage to ourselves. While the freedome is nice, we need rules and boundaries guiding our behavior to be effective in the trading environment. We must create a foundation of focused mental discipline so we always act in our own best interest. This structure must be inside us-our mindset-which is tricky because for most of us, society combined with our upbringing has shaped us differently. This is why so many people who are successful in other endevors fail miserably at trading. To be successful as a trader they (we) must realign our mind set to accommodate the nature of the market. Let's discuss four problems that can be sabataging to our success as traders because of all this freedom with no boundaries.
1. Unwillingness to create rules:
This is difficult for most people, especially those who are attracted to the freedom trading provides. However, trading without a regime that is organized and consistent, containing sound money management guidelines is death to trading accounts.
2. Failure to take responsibility:
Trading gives us freedom to make choices (when to get in a trade, when to get out, how much to risk, etc.) with an immediate outcome. We want this freedom, but too many don't want to accept the responsibility for the outcome of our choices. If you want consistent, positive results, you have to believe and totally accept that no matter what the outcome, you and you alone, are totally responsible. Not your broker, not the market, not other traders.
3, Addiction to random rewards:
Another mistake many traders make is making random or poorly planned trades. That is if they plan at all. The markets behavior is not random. The same behavior patterns appear over and over again. Individually they seem random but a series of patterns prove to be consistent. This is a paradox remedied with a disciplined, organized, consistent regime. When inexperienced, undisciplined people trade, sometimes they experience a winning trade, sometimes not. It's these occasional wins that they become addicted to. They are addicted to the euphoria of making money on a trade, even if they've experienced several losses. The problem is that this type of trading is not consistent and more times than not, leaves the trader losing money.
4. External vs. Internal control:
Most of us were raised in such a way that taught us to depend on others to fulfill our needs, wants, and desires. Along the way, we've adopted socially based, controlling and manipulating ways to get others to behave in a manner that is in line with what we want. The problem with this when it comes to trading is the markets are not a social environment. In the markets, it is literally every man or woman for him or herself. It is impossible to control or manipulate what the market does and cannot depend on it to do anything for us. Since we have learned techniques to manipulate our social environment to respond to what we want, it can be very difficult when we embark in trading since we cannot control the market. So what's the solution, we must alter our mindset. We cannot control the market but we can control ourselves, our own behavior. We can control our perception and interpretation of market information, thus creating a new mental environment within ourselves that ensures we always trade in a way that is beneficial to us.
In my next post, I will talk more about accepting the responsibility, shaping your mental environment, and reacting to loss.
Wednesday, January 23, 2008
Is it possible to make money as a trader?
The answer is most definitely Yes!
Although trading carries with it a 95% failure rate, there are a select few who separate themselves from the pack and enjoy a steadily rising equity curve. What is it that separates successful traders from unsuccessful traders? Is it education, intellect, or work ethic? Are they better market analysts? Do they have a better trading system? The answer is most definitely No! Consider the fact that most of the people who fail at trading are doctors, lawyers, engineers, scientists, CEO's, and entrepreneurs. Intellect and market analysis can help but that is not where successful traders focus their attention. The fact is, consistently successful traders, the best traders, THINK differently from the rest. Furthermore, they have learned to manage their emotions. Have you ever taken up a new trading system, practiced your trades on a demo account and done well, then switched to your live (real money) account and failed miserably? This happens because when real money is on the line, most traders tend to let their emotions prevail and so they experience fear. That fear then causes them to make errors that eat away at their bank account. Successful traders, on the other hand, have developed a unique mind-set that allows them to stay disciplined, focused, and confident in their trades no matter what is happening in the market. They are able to enter in to a trade without hesitation or conflict, and just as easily without hesitation or conflict, admit it isn't working, get out of the trade, even with a loss, and not experience the least bit of emotional discomfort. Why? Because they have learned to accept and embrace the inherent risk associated with trading. They live to trade another day instead of blowing up their whole account, knowing that there will be other trades that will go their way allowing the law of probabilities to work in their favor. Most traders take on the risk of putting on a trade, but successful traders have also truly accepted that every trade has a non-guaranteed, probable outcome with possible consequences. Ironically, this is what keeps them in the positive, carefree state of mind that brings them consistent success. Trying to avoid consequences that are unavoidable actually brings those very things to you and has crippling effects on your ability to trade successfully. If you want to make money consistently with your trading, you must manage your emotions and learn to THINK like a successful trader. You must develop a "trader mind-set".
Although trading carries with it a 95% failure rate, there are a select few who separate themselves from the pack and enjoy a steadily rising equity curve. What is it that separates successful traders from unsuccessful traders? Is it education, intellect, or work ethic? Are they better market analysts? Do they have a better trading system? The answer is most definitely No! Consider the fact that most of the people who fail at trading are doctors, lawyers, engineers, scientists, CEO's, and entrepreneurs. Intellect and market analysis can help but that is not where successful traders focus their attention. The fact is, consistently successful traders, the best traders, THINK differently from the rest. Furthermore, they have learned to manage their emotions. Have you ever taken up a new trading system, practiced your trades on a demo account and done well, then switched to your live (real money) account and failed miserably? This happens because when real money is on the line, most traders tend to let their emotions prevail and so they experience fear. That fear then causes them to make errors that eat away at their bank account. Successful traders, on the other hand, have developed a unique mind-set that allows them to stay disciplined, focused, and confident in their trades no matter what is happening in the market. They are able to enter in to a trade without hesitation or conflict, and just as easily without hesitation or conflict, admit it isn't working, get out of the trade, even with a loss, and not experience the least bit of emotional discomfort. Why? Because they have learned to accept and embrace the inherent risk associated with trading. They live to trade another day instead of blowing up their whole account, knowing that there will be other trades that will go their way allowing the law of probabilities to work in their favor. Most traders take on the risk of putting on a trade, but successful traders have also truly accepted that every trade has a non-guaranteed, probable outcome with possible consequences. Ironically, this is what keeps them in the positive, carefree state of mind that brings them consistent success. Trying to avoid consequences that are unavoidable actually brings those very things to you and has crippling effects on your ability to trade successfully. If you want to make money consistently with your trading, you must manage your emotions and learn to THINK like a successful trader. You must develop a "trader mind-set".
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