The Mind of The Hunter
Editor’s Note: Hank Pruden developed these ideas in collaboration with market psychologist Van K. Tharp.
Have you ever watched a cat hunt a bird? First the cat picks a likely candidate. Then it stalks the bird, watching the bird carefully as it gradually approaches its prey. Stalking the bird in this way brings the cat close enough so that the kill is almost certain. At the critical moment, it pounces. Cats have been around a long time, proof that their hunting methods work.
The behavior of top traders is similar to the hunting behavior of predators. Based on my studies of top performers, successful trade entry has three stages.
Developing a Low-Risk Idea
The predator must know the location of his prey, the water holes used by his prey, and the habits of his prey. This knowledge substantially increases the hunter’s odds of success.
This stage might be called “market analysis”. But that term does not adequately cover the preparations top traders make. Most traders collect data, look at charts and indicators, and make some sort of prediction about the future direction of price. But predicting prices has little to do with successful trading. Successful traders do not predict the future course of prices, they handicap the odds of a trade. Consistently successful traders consider the probabilities of winning and losing and the amount that might be won or lost. Their analysis focuses on finding low-risk trades.
Stalking The Trade
Once a low-risk trade has been singled out, the trader has two choices. He could just jump into the market, or he could attempt to find the best possible price by becoming a day-trader. A top trader stalks a trade by focusing on the smallest time frame possible. The essence of stalking is to find the best possible entry. Stalking is another form of risk control.
The best possible entry point may come during the day on a test of support or resistance, or during a minor shakeout. A trader once told me that he trades like a lion. He watches the herd for weeks until something causes the herd to panic and run in his direction. At that moment, he makes his move.
Stalking is difficult for most traders because it requires patience and intensity. Most traders are ready to go once they have completed the analysis stage. But if they act at once, they miss the opportunity to improve the odds of success further by waiting for the critical moment.
One trader stalks his trade by paper trading his target in the opposite direction of the one he is planning. This helps him develop a “finger-tip” feel for the behavior of his target. He knows that the best time to get out of his paper trade is also the best time to enter his planned position.
Taking Action
The action stage only takes an instant. But to perform it correctly, you must be aggressive, bold, and courageous. The action phase of trading must be strong and intense. A weak response will not get the job done, because it lacks the necessary commitment. Learn to pounce on the trade.
This may require the use of market orders instead of limits. If the trader has stalked his trade and recognizes a short-term low-risk entry point, then use of a limit order is not only unnecessary but risks missing the trade altogether. Action involves commitment, and a market order is the strongest commitment a trader can make on entry.
Delay is inappropriate. You should have already considered the consequences of the trade prior to the action stage. You should know in advance what risk you are willing to take and how long you are willing to remain in the trade before it begins to work. The moment in which action must be taken is not a moment to consider risk or to have second thoughts.
Many traders cannot shift easily and quickly to the action stage. They cannot pull the trigger. Such traders have not mentally prepared themselves for the trade by first handicapping, then stalking, the trade. In The Art of War, Sun Tzu’s observation is one that all traders should take to heart: the battle is won or lost before it starts. In the case of trading, your mental state and preparation virtually determine whether you will win or lose even before you enter your order.
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