ENEMIES OF THE TRADER
As traders and investors, we are always struggling with the demons that deminish performance or that cause us to lose money. The best trading tools are useless in the hands of an undisciplined trader whereas a mediocre trading approach can be transformed into a money-making swan. The critical variables that differentiate winners from losers are not on a function of the pragmatic considerations but they are also related to the internal and/or behavior factors that affect the trader.
The enemies of the trader are usually those that reside deep within the psyche of the trader or in learned behavior patterns that may have served their purpose at one time but which are no longer functional at this time. Trading and investing are, at best, difficult undertakings and, at worst, losing propositions. Yet in spite of the difficulties, the allure, the intrigue, and the possibility of striking it rich continue to attract traders the world over. Unfortunately, many of the newcomers lack the trading skills as well as the trading discipline. Jesse Livermore (alias Edwin LeF`evre) expressed it eloquently as follows: The chief enemies of the trader are always boring from within.
What or who are these chief enemies? How can we recognize them? How can we locate and eradicate them? Are there proven methods for doing so? There are many roadblocks to successful trading. In fact, hundreds of pages could be written about the factors that limit success but fewer yet on the factors that facilitate success. There are literally hundreds of things traders can do that will lose them money. There are only a few things that lead to profits.
The major loss producing factors (i.e., the enemies of the trader) as shown below. While it is certain that there are many who disagree with these conclusions, they have drawn on many years of experience in trading as well as observations of thousands of traders the world over. Here is a synopsis of those findings. It is followed by a brief commentary about each.
Imagination
An active imagination can prove highly beneficial to a fiction writer, an artist, or a musician, but it has no place in trading. Many traders are prone to overly
active imaginations. They envision or create positive as well as negative scenarios. Both can be destructive because they may lead to unrealistic conclusions and expectations. It is best for the trader to avoid imagining possible outcomes for a given trade.
To counteract this tendency, the trader must rely on his or her trading methodology to the exclusion of all other expectations. Once you have entered a trade, do not allow your imagination to rule your emotions or your expectations.
Overthinking
Overthinking is a form of an overly active imagination, in a more concrete or intellectual way. Once you have developed a trading system or method, and once you have entered a trade, all the thinking or analysis in the world will not change the outcome of that trade. In fact, too much thinking may cause you to lose your confidence, thereby prompting you to make a costly error that is not based on your original methodology.
Avoid talking or thinking in phrases such as If I had only, or I should have or What if or If I added more indicators to my system then . . . Other statements to avoid are Looks like the market wants to . . . or I think it is time to get in. This type of analysis should be done when developing a system, not after a trade has been entered and not after your system has indicated that a trade should be entered. The market does not care what you think. The market will do its own thing no matter what you think and no matter how strongly you think that it looks like it wants to go up.
Overdosing on the News
The amount of news that is available on the markets is staggering, and it is growing larger by the second. The rapid growth of Internet communications,
blogs, websites, and e-mail has created a news overload situation. There is so much news out there that it can often be confusing and even misleading.
Experts are plentiful. Opinions are available virtually everywhere. Traders have a love-hate relationship with news. They love the news when it supports their position in the market(s) and they hate the news when it is contrary to their position in the market(s). Unless you know the news before it happens, or unless you are the person making the news, the odds are that it will not help you make money.
As market technicians, we expect that our indicators and methods will let us know when markets are likely to change direction or that they have changed direction. Most market technicians believe that their methods are sensitive enough to detect the behavior of insiders before the markets make their moves. We believe technical indicators will tell us the impact of the news and not the news itself. As a technical trader, avoid being exposed to the news if you are prone to deviate from your system or trading plan. The news can be your best friend and your worst enemy. Try to avoid either of these extremes.
Fight Your Fear
Fear is the most serious enemy of the trader. It can cause you to avoid making a trade and it can cause you to exit a trade too soon. The time to be fearful about a trade is before you enter it. Once it has been entered, your fate is sealed. Let the trade run to its logical conclusion as prescribed by your system or method. Do not get out too soon and do not get out too late.
Simply stated, follow the rules and they will eliminate the fear, or, at the very least, minimize it.
The best antidote for fear is confidence. Confidence does not just happen. It is the product of an effective trading strategy. If you have confidence in your methods then you will have less fear. And less fear will bring more profits through less error.
Keeping Greed in Check
Greed is not as serious an enemy as fear, but it runs a close second. Greed can also prove to be your greatest enemy by causing you to stay with a trade
after it should be closed out. When it is time to get out of a trade, then get out. Do not hold on, attempting to force the last drop of money out of the
trade.
Furthermore, do not accumulate a larger position on any market if your finances and risk will not allow it. Having too large a position at the wrong time can and will destroy you.
Managing Expectation
If there is anything you should rightfully expect after you put on a trade it is that you will take a loss. Beyond this any profit you make is confirmation
and affirmation that your methodology is effective and that you are able to execute it thoroughly. Expect the worst-case scenario, not the best!Expectation falls into the category of imagination as discussed above. Be less imaginative and more mechanical.
Avoiding Rationalization
One of the worst things a trader can do is to avoid taking responsibility for his or her losses. It is very tempting to blame everyone but yourself. Do not try to explain away your losses by resorting to all manner and sorts of excuses. You lost on a trade either because your system or method was wrong orbecause you didnt follow the rules. You must assume full responsibility in order to facilitate learning by correcting your error(s). There is always thetemptation to blame your broker, or your trading advisor, or a newsletter writer or a friend. There are no excuses. Most traders have a repertoire ofexcuses that grows with each loss. Forget about making excusesthey are not productive.
