As previously said a professional trader is most concerned about risk. If they have a system that they have tested and know to be profitable then they know that if they look after the risk, the profits will look after themselves.
Student’s Comment:
As previously said a professional trader is most concerned about risk. If they have a system that they have tested and know to be profitable then they know that if they look after the risk, the profits will look after themselves.
The novice trader is unlikely to have a system and will trade on instinct and try to chase trades and quite often trade at exactly the wrong moment as the market makes a correction. They will become frustrated and double up on the next trade to win back their losses and quite often lose more. The more they lose the more impulsive and emotional they become and are even less likely to be successful. Quite frequently they will get to the end of the day and realise that they were convinced the market would go in a certain direction, say down, and it has ended lower as they thought it would. Unfortunately they were in and out of the market half a dozen times buying and selling the wrong way all over the place. Tomorrow they resolve to make their money back.
The next day they’re feeling a bit tense and are telling themselves not to be so stupid again and if they’re lucky (or unlucky), they win the first trade of the day but without any consideration for money management they will be lucky to make money by the end of the day, or week or month. Overall they will win a little and lose a lot.
The professional trader should start the day with psychological self analysis and mental rehearsal of placing his trades. He will have a low risk idea that signals an entry for his trades so he isn’t trying to predict what the market is doing. He is not trying to predict the future just basing his trades on ideas that he has tested. His ideas will suit his personality and temperament so he will not be trying to day trade if he is more suited to the detached analytical analysis of end of day trading. He will know that his money management method produces profits in the long term so will not be concerned about expected losses. Nobody has a 100% success rate so losses are inevitable and are not something to worry about. He is not trying to predict the market or be a Master of the Universe so is not taking the losses personally.
If however he is drawn to day trading he will have realised the importance of his psychological welfare (a subject completely ignored by novices who would think that kind of thing was for wimps, if they thought about it at all); and will start the day recording his psychological self analysis and feelings in his trading diary (something else that novices do not bother with). He will trade with detachment and will have no emotional attachment to any trade. His trading diary will also be used to record trades placed and reasons why. At the end of the day he will record his feelings about the day, his mental state and whether he has followed his rules. If he has followed his rules he will be proud of himself and pat himself on the back whether he made any money or not. He knows that if he follows his rules in the long run he will make money. As said before, everybody has losing trades. He knows he will only lose money if he breaks his rules. Self discipline is the key. His rules will include provision for what to do if he breaks his rules, such as closing the invalid trade immediately and stopping trading for the day or week or as long as required to understand why he tried to sabotage himself.
He will also have fixed amounts of loss depending on the time frame he trades. A short term trader might allow himself a certain number of losing trades a day or a fixed percentage of equity. For longer term traders it may be a fixed amount per week or month. If he hits his limit say for the month he will analyse his results (he has a trading diary) to see if there were any problems with his rules or how he traded them. If there is a problem he will work to correct it. If the loss was through no problem of his and was just one of those days/weeks/months then he may demo trade to keep a feel for the markets until the next new time period.
The novice trader will put a dollar trade on and win twenty points and realise that if he had used lots of leverage and put on $100 he would have made $2,000 and so he has just lost $1,980. He will therefore, whilst mentally polishing his new ferrari, put on the largest trade he can straight away as there is no time to lose.
The professional trader knows that sometimes the best trade is the one you do not take, especially if you are not feeling 100% that day, and sometimes it is better to take the day off and go out and enjoy yourself and think about something else. A private trader does not have to trade. This is a big advantage. A professional will not be constantly flicking through all the charts desperately looking to put a trade on for the sake of it. If they do not receive a signal to trade they won’t trade (rules again).They place a trade following their rules because they have worked out that it gives them a statistical advantage. Placing a trade that doesn’t follow their rules is an unknown.
The market will always be there tomorrow.
Power Course Instructor’s Response:
Great post…as a matter of fact it made me shudder thinking about when I made the mistakes you mention back when I started out trading. Also thanks for posting what you see as the way to change those bad habits to good habits. But you are correct in that the biggest challenge is us…how we handle trading and our own emotions. Successful traders will tell you that profitable trading can be quite boring. They see this happen and they do that…time and time again. But there are other things in life that offer excitement for these professionals. Taking unnecessary risks is definitely not one of them. Thanks for taking the time to share your thoughts