There are 2 kinds of traders. Those who have experienced a trading slump, and those who will. Any experienced trader who says he's never been through a slump is a liar. The majority of good traders have gone through flat periods at some point in their career. Many slumps have a psychological reason behind them. Your belief and confidence in yourself are going to be your main tools iin pulling yourself out of a slump. Let's say you've found a trading method that works for you. You've also developed good money management rules. Everything is in place, yet you find yourself still not pulling the trigger. You still don't feel comfortable following your rules, you have trouble exiting losing trades, and in general, you've lost your "rhythm" with the market. What's missing? The psychological part of trading is the most important, yet that is the side that people spend the least time on. How many people are willing to admit that the battleground isn't the market itself, but what's going on inside them? The more you talk with other traders, the more you'll learn that they all go through common experiences. Speaking personally, most traders have run the gamut through all the classic mistakes, and back again.
But what distinguishes those who can overcome them? The markets are an exciting game, but at the same time, they are also emotionally, and sometimes physically challenging. The mental side can be summed up as 1/3 beliefs, 1/3 concentration, and 1/3 managing the stress. Learn how to deal with distractions, because they're going to be present almost every single day. You will have more confidence if you're following a defined method. You must feel like you're making the right play, rather than worrying about the outcome. It's OK to make the right play and not have the trade work out. Don't worry if the price goes a little bit higher after you sell it. I always say to treat trading mistakes like cheating on a diet. There is nothing you can do to undo the damage except get back to exercising to work it off. Stress impairs your judgment, so learn to recognize when your thinking is being clouded by stress. Your mental state outside market hours will affect your decision-making ability during market hours. A person can have all the knowledge in the world, but if he doesn't have the presence of mind to handle a stressful situation, where does that knowledge go? Straight out the window.
It's easier to be flexible and change your mind when you're relaxed. If you're all tensed up, it blocks the flow of thought. Unfortunately, human beings are creatures of emotion. Intelligence with regards to trading is not about knowing the names of every company in the S&P 500, but more about reacting the right way under pressure and making the right decisions when they need to be made. Experience is learning how to recognize your mistakes when you make them. However, speaking personally again, experience doesn't always keep you from making the same mistakes. Quit thinking about ways you can lose money. It's better to put the trade on and assume some risk than it is not to try at all. Once you've made it back after a drawdown, your confidence will triple. You will quickly get a "feel" for the market when you have a trade on. However, you're always going to be the most objective when you don't have a trade on. Funny how that works. If any of this has struck home or if you have stories to share, please feel free to email me.
When the equities markets switched to decimals a few years ago, many intraday traders were affected by it. Traders had to "adapt" their trading methods to conform to the tighter spreads and decreased volatility. Those that didn't adapt either blew up or left to do something else. I did a comparison of this past 8 weeks' ranges in the S&P 500 and the Dow to the same time period a year ago. The average weekly range for the S&P 500 in the past 8 weeks is 29 points, compared to 51 points for this time last year. The Dow is roughly in the same boat. The average weekly range for the Dow in the past 8 weeks is 270 points, compared to 495 points for this time last year. You could make another comparison with this past summer's ranges also. What does today have to do with last year or this past summer you ask? The answer is absolutely NOTHING. The point is that you have to make adaptations to your trading to conform to the changing market conditions, whether it be on your stops, your profit paring, or your expectations and reactions in general. I use the word "conform" in a humble sense because none of us are not big enough to make the market comply with our methods. If the range on what you're trading is too tight for you, or your expectations aren't realistic for what the market is giving you, then you need to adapt your trading plan parameters or find something else that suits you with a better tradable range.
I really believe that before you can get anywhere substantial as a trader, you really have to flush your ego down the toilet and embrace the pain of feeling like a fool sometimes. No matter how much it hurts. Most people can't do this. They may want to, they may talk like they can do it, but they can't. You know how some people talk and talk and talk, and despite what they say, you know it's just talk? When it comes to embracing the pain, that's the barrier right there. Most people are weak, plain and simple. That's just the way it is.
The only real secret is to always treat yourself like a beginner. Thinking is the key, whether you have just a few rules, or a truckload of rules. Thinking things all the way through is the only way to make those connections. Tips won't do it, and advice won't do it, because nobody really knows what your flaws are, except you.
I think a dedicated trader's progress can be compared to a chart that puts in a long base of steady sideways action, and then has a major breakout to the upside, followed by a sustained uptrend if the base was good. It can be VERY frustrating to get nowhere but sideways for a long period of time, yet the knowledge base is necessary to get the big uptrend that follows. I'm trying to make the point that "hints, "tricks," technical "mumbo jumbo," and "holy grail" trading systems aren't the solution. Your knowledge, your curiosity, and your strength to develop a foundation and a sense of understanding is the solution. Understanding what is going on in the market NOW. Not yesterday, not 6 months ago, not 3 years ago with the Internet bubble, and not next week. NOW!
Awhile ago, when I'd been doing this for maybe 2 years, I remember feeling like a complete know-nothing jackass. I had made money and lost it. Made some again, and lost it. I'd made a decent return in a few months, and gave it all back. I'd probably read 50 books on the mechanics of the market, but I didn't really "get it." I was feeling like another fool who could talk the talk, but couldn't walk the walk.
But the personal pity party got real old real fast. I said to myself "If I suck, then I suck, but since I've gotten pretty much nowhere, I might as well start over." So, I declared myself a dummy, and went back to square one from a mental perspective. I went back over ALL the old ground. And you know what? At that point, after trying to trade for 2 years, is when I really started to learn.
Giving your mental process a "rehaul" is not throwing away what you've worked so hard to learn. It's just the opposite. It's taking a fresh start with the goal of maximizing what you've learned and getting the pieces to fall into place. It's more like taking a blowtorch to everything you've amassed so far and burning away the garbage, so that only the important things that apply to you are left. Don't see a mental "rehaul" as an admission of failure, or if you do see it that way, don't be afraid to admit you failed! I call it "creative destruction." Thinking is hard, admitting your own inadequacy is hard, and embracing the pain is just a bitch! But that's the whole point of it. Doing this will ALWAYS be tough. Mediocrity is like a black hole. You have to fight with all your might not to be sucked into it. If everyone in the human race was strong, smart, and disciplined, then everyone would be trading!
We've all heard the old traders' adage, "Cut your losses quickly, and let your profits run." Easier said than done, right? An amateur trader is usually thinking about how much he can make on a trade. If the trade goes in his favor, he fears that he'll lose his profit and takes it right away. When a trade moves against him, he hopes that it will come back and he swears he'll never do it again. Sometimes, the market helps in its own perverse way by allowing a break-even trade and further re-enforcing an ultimately devastating habit. A professional trader is constantly thinking how much can be lost on the trade. So, he takes the emotions of an amateur and turns them around into a positive scenario. The pro trader fears when the trade goes against him and cuts his losses within his risk limits. When a trade goes in his favor, he has confidence in it and stays with it as long as an exit signal isn't generated or his stop is hit. And just as importantly, he has confidence in his set-ups and knows when NOT to trade.
Sometimes, what happens during the trading day comes down to knowing yourself. Are you tired from the night before? Are prepared before the open? Are you relaxed or distracted? Is something in your personal life affecting you mentally, or even physically? If you can't trade that day, then don't. And don't overanalyze the reasons why you should or shouldn't trade. Psychoanalyzing something that happened in your 4th grade art class 30 years ago isn't going to help your trading today. Unfortunately, I watched most of today's action from the sidelines with a heat pad on my shoulder, after waking up with a pinched nerve in my neck. I thought I'd experienced pain before, but when I turned my head, I actually saw spots! Because this was only 1 out of 260 or so trading days for the year, I'd rather play defense and protect my account than try to trade in a less than optimal state of mind.
Every trader who has lasted in this business has developed their own unique methodology that has, at its core, and "edge." What is your edge that will give you an advantage over the countless thousands of other traders? Contrary to what many believe, your edge is much more than some magical trade set-up or system. Your edge is being able to control the mental twists of this business that seem to hold so many back. Your edge is in KNOWING YOURSELF. Knowing yourself well enough to avoid the types of market conditions or times of day that can get you into trouble. Knowing what works and what doesn't work for YOU. Your edge is in your ability to quickly admit you're wrong and apply proper risk management. Most importantly, you must believe that you have an edge to provide personal motivation.
What constitutes playing offense in the market, and what is a defensive stance? Defense means trying not to lose, and usually taking the 2nd or 3rd opportunity. It means trying to hold your own, and waiting for the perfect opportunity. In general, it means not being in control. An offensive stance, on the other hand, starts with being in control, clearly seeing the potential and making trades when they first appear, not dwelling on negative outcomes, bouncing back after making mistakes, constantly attacking the market in a consistent way, and making trades when, and only when, the opportunity exits.
Comparing trading to sports, on the field a strong offensive team will control the ball longer. An offensive trader is more likely to be in tune with the market and aboard for the bigger moves. Defense is basically trying to stop the market, characterized by quick entry and exit, and generally calls for more perfection in order to get good results.
Good record-keeping is a ritual and a tool that will help you to stay focused and gain control over areas that are prone to distractions. It is also the main tool for you to monitor your performance, and focus on both your strong and your weak areas. Every top athlete keeps detailed records on their physical performance and progress. Record-keeping monitors your progress in reaching towards your GOALS. If your goals aren't written down, then they're worthless. Once you write something down, that's a firm step towards commitment. Writing down your goals firmly implants them in your subconscious, and you're less likely to change them. Have you written down your goals for this year?
Do you spend a lot of time and energy trying to figure out which moves will pay off, and which moves will not pay off? Do you use a basketball analogy (head fakes) and an engineering term (noise) to describe moves that don't work out profitably according to your analysis and plan? It seems trite to say that the future is uncertain, and that we cannot know what will happen with certainty, yet this is the REALITY of trading.
I personally don't view the market as either true moves or fake moves. I consider all moves that are of a minimum range to be true and moves that are less than the minimum range that I'm looking at are pullbacks within the trend. I don't believe that the market is ever wrong - it just exists and moves. So by my definition, there is no such thing as a fake move.
Our job is to be aware of what the market is ACTUALLY doing. To achieve this, we have to be DETACHED from the market in order to objectively see the reality that is going on in the market, like an impartial spectator, rather than as a fan who roots for one side or the other. We can then use our analysis and plan to see if any of it applies to the current situation. This requires being objective and true to our plan and not fudging it to make it fit the situation.
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