Lessons from the Pros

It’s All About You

In most instances when we hear this phrase, "It’s all about you," it will usually be intended to inform you that you are being self-centered or selfish. However, in trading it takes on a totally different meaning. Trading truly is all about you. You will make all of your own trading decisions and be responsible for all of your actions taken. As an independent trader, we do not have to answer to a boss, follow company policies or even ask for time off. With all this independence comes a huge responsibility to our selves. We must create some structure in this independent environment. This is where having a written Trading Plan and a separate written Business Plan creates this structure. I have discussed these plans in previous articles and encourage you to read them.

Now for the kicker; we may have these plans and they could be the best in the trading world. Sometimes the problem is having the discipline and patience to actually execute these well-thought-out plans. For this reason, I am writing about the individual trader and how their psychology holds the key to successful trading.

Each of us brings our own set of expectations into trading. For that very reason, we must be able to understand our attitudes and individual beliefs about topics such as windfall profits, comfort level about having money and possibly being rich, realistic understanding of where the market may go based on technical analysis, the impacts of relationships with others and also your physical health conditions. This will be how you will respond to the markets and then condition yourself to facilitate a mental environment that is conducive for a sound trading career.

Being that we are human, there will be bias and opinions. In some areas of life, these two items can come into play and you will be fine. In trading, there is no room for either, much like egos. Having a belief that you know where the market is going or what it will do next without supporting evidence is much like gambling. Amazingly, what most of us believe about the market’s optimism or pessimism, comes from within ourselves based on us as a person or some personality trait. A quote I like is, "We do not see things as they are, we see them as we are."

Focus

Trading Futures can have you on an emotional roller coaster like no other endeavor you encounter. I like to tell students, "This will be the hardest, easy money you will ever make". In this business, you must be willing to accept the risk involved. You must be both psychologically and financially able to accept this risk. Remember, in trading that it is extremely easy to lose capital, but much more difficult to make it. This is why when you start your trading day, you must make sure that you are focused and ready to protect your emotional and financial reserves.

There will be times when we must call upon ourselves to make some difficult decisions. During this time, we must be operating in the subconscious portion of our minds. Being able to focus will be difficult if we are operating in a state of fear and indecision that usually results from operating in the conscious mind. You get to this optimal level of focus by having a trading plan and knowing it by heart. This allows us to follow our strategy without injecting emotions that typically lead to fear and anxiety. We discuss in class that one must have discipline, patience and commitment in order to inject your strategy into the market. Without these traits, one could easily fall prey to the inevitable whipsaws in the market and find themselves feeling personal guilt and failure. These are symptoms that are sure to arise if you trade without focus and concentration. This will lead to more emotional trading, which is just the opposite of what you want.

Limit Your Highs and Lows

In trading, you must accept the fact that the unknown will happen and you must be prepared for how you will react to this event. Keeping our emotions in check is very difficult, both from the euphoric to the depressed states of the mind. By keeping a cool head while trading, even during the great times, we can be more logical and less emotional in our decision making process. I have heard of traders who trade in trading rooms who actually exit their trades when traders all around them are doing high fives because a trade is doing so well. Their thinking is that the market has now reached an emotional state and is due for an imminent correction. Keep this in mind the next time you’re trading and you start to pound the desk or do your happy dance before you have exited your trade, and observe how soon the trend you are in actually comes to an end. Since trading can flow over into our personal lives, learning how to create this balance can play an important role of other aspects of our lives, as well. We soon need to recognize that the trade-off between the stress and challenges of trading for that sought-after paycheck has its rewards if we can keep this balance. The key word here is balance, for when we allow the stress and associated discomforts from it into our lives, we stand a chance of damaging our trading and personal lives, as well.

Taking losses in trading is just part of the business. With that said, let’s face it – nobody really likes to lose money. For this very reason, we encourage our students to keep their inevitable losses small. A series of small losses is not as damaging as a large loss to a small account. We must guard against the negative state of mind this can put us in. If we don’t, then we stand the chance of other events in our lives combining with this and creating severe issues like depression and/or anxiety. This will lead to problems in your trading for sure. Once this happens, you are subject to issues like unclear thinking (emotion based trading), and perhaps a fear to place trades because of the past and how it made you feel.

Preparing for Battle

Helping us over these previous obstacles involves having some kind of plan to handle the events when they arise. No matter how long you have been trading, one of the most dangerous states of mind to have is the one of "I know it all about trading." Trading is much like riding a horse; just when you think you know how to ride and you have mastered the horse, you will be thrown from your saddle at the least expected time. No matter the outcome of the fall, it will hurt. In trading, there really is no pinnacle to reach as far as knowledge goes for a good trader is always in the learning mode. The markets are forever evolving and so must a good trader or risk being left behind while others proceed forward with their new knowledge.

Learning to trade is much like learning to golf. If you don’t start out with good instruction, you will develop bad habits that will take much longer to correct. So many people try to learn trading by reading books and watching videos. Until they actually understand the mechanics of the markets and get exposed to live trading, they will never have a balanced education. Just having the theory of trading is no match to the actual hands-on experience of live trading. What many don’t understand is that theory does not explain how "you" will react to certain events while you are risking real capital in the markets. As you have been reading here, there are many events that can happen to a trader psychologically that have a huge impact on their success.

Keep in mind that when you start out trading, you will no doubt have a limited amount of funds to trade before you have to stop. You will need to pre-determine how much of this you are actually willing and comfortably able to lose. You can talk with other traders about how they manage their own risk but will find it difficult to learn from since you will need to find out for yourself what is comfortable when determining how much you want to risk.

Starting out in Futures requires very little capital. This can be both a blessing and a curse for some. Before you actually start trading, you must take into consideration your starting capital and set your expectations accordingly. A very popular question we get in the classroom is, "How much can I make with $5,000 in the first year?" Starting with such a small capital base will require extreme discipline and patience to wait for the setups in your trading plan. Otherwise, you stand the chance of blowing out your account too soon before you learn how to trade. A common misperception for new traders is that they can actually make a living on an account this size. There truly is no way you will survive trying to make a living on this size of account. People with this expectation starting out generally lose all their trading capital very quickly because they take too big of a risk for their trading accounts. Traders starting with a small account should set their expectations to generating "supplemental" income until they have grown the account to a generous size. This will allow for all the inevitable draw-downs and other unexpected life expenses.

In the end, a successful trader will keep records of their trading and monitor their behavior in order to have a better understanding of them in the trading equation.

When a trader enters the trading arena, he is faced against some of the world’s most experienced traders trying very hard to take the new trader’s money. This endeavor should not be treated like a hobby. To be successful you must take this as a serious business adventure. By having an understanding of you, combined with your market knowledge, you will have a much better chance of success. Together, these two will keep you focused on the task of trading.

Good trading,

- Don Dawson