A Trader’s Psychology

Your “self”, or whatever you want to call it, is so incredibly important in all facets of life and particularly so in trading. Your frame of mind, attitude, focus, and confidence will, not can, but will make a difference in your trading results.

If you do not struggle with theses feelings, then you either have mastered your ability to deal with those feelings or you are a machine. There is no alternative. We are human thus we have human feelings, different in each of us, but yet so similar in a lot of respects, particularly so in trading.

You will see a lot of discussion of things like fear of loss and confidence in your trading abilities and they are, in fact , incredibly important. But today I want to address a topic that lies beneath the obvious churning that goes on in the brain and stomach. Yeah, I know, that is a lot of emotion. OK , so maybe you do not get that worked up.

I confess, I love to trade, perhaps too much. I am not bothered with any of the aforementioned emotions to a point that I cannot deal with them. Thus, my love of trading is one that I need to deal with. You see, if I am not incredibly careful, I find myself over trading. I recall Orson Wells back in the 70’s doing a wine commercial for Paul Masson wines where he states,
” We will sell no wine before its time.” That was a comment that I have taken to heart by paraphrasing it into “I will take no trade before its time”. Perhaps the wine was not that great. but the slogan was priceless.

Sometimes little things make big differences. In my case, that slogan has made a huge difference. Waiting for a signal with everything right about it was the sure answer to successful trades. Knowing when not to trade may be even more important than knowing when to enter a trade. Equally so, knowing when to get out is huge. So I have developed a little routine that I follow and it never fails me when trading the e-minis.

First picking the right time to trade. When I say time I mean time, like the time of day. There are ways to trade market open but it is not just entering when market opens. That can be an equally rewarding as well as a painful experience. Large rewards are most often combined with large risks so one must keep that in mind when entering the highly volatile market open. You cannot get greedy at that time and must be ready to exit at the first signs of a reversal in your fortune. The problem exists; when is that? And that is why I rarely trade market open unless it is a continuation of pre-market trading and rather smooth in comparison to normal market openings. This morning was one of those times and I did extremely well trading three of the indexes.

The time of day between market open and approaching lunch break for wall street generally offers good opportunities to enter trades going both directions. If the market is not highly charged when it opens it will find a time where profit taking happens before the lunch break. When they return you will likely see a similar setup for an hour or so until you see end of day position settlement. Time is critical because plans and intentions are connected with time. Remember price is a reflection of people. People with emotions just like our own. When the herd goes one way so does price, but only until it is no longer a herd mentality and there is where we hope you find yourself. Knowing what to expect might happen is huge because sometimes it actually does. If we are watchful enough we will find we get it right more often than not. And that my friends is the markings of trader.

What about getting out? Through experience I have learned when to take profits and let it go regardless of where it goes. I keep a close eye on the power indicator to tell me when when the fizzle is fading off the champagne and that is where I exit. Sometimes too early, you ask? Never, if I am at profit. Learning to accept an acceptable reward was hard for me, because, well, I was greedy. Guess what, greed is an emotion too and something we need to get a handle on as well. My TW trade manger shows me what the calculated risk is but I am not obligated to accept it. I generally do, but more important I sometimes use that same amount as an exit point. Sometimes I get right back in, but now I have money in the bank and fear no loss. One might say that a 1:1 loss to win ratio is too tight. If I were not diligent in my entry actions that would be so, but with a high winning ratio it is just fine. And who is doing the calculations and what is an acceptable loss? If I follow what I see before me, I will have a high winning ratio. From there on it is about trade management and that is where a lot of folks get burned. Using the tools offered by Tested Wisdom and controlling my emotions, I am pretty much guaranteed a positive return. I may not hit a home run everyday, but if I can just avoid striking out most of the time, I should end up on the bases. Games are won with base hits.

Sorry about the baseball analogy, it just fit so well.

See you on the other side–