To aspire to greatness in trading requires a key virtue that’s common to most professions and most arts: balance. Each trade requires us to split ourselves into two parts: caution and courage. We need enough caution to be patient, enough courage to get in and stay in, and enough caution again to protect our gains once they’re made.
Most important is the courage to admit when our decisions are wrong and to get out, fast. Great trading is all of these things, which is why great traders are so rare.
Admit When Your Trade Is Wrong
This balancing act is the reason so many purely type A personalities perform so badly in the markets. While they may have decisiveness, boldness and fearlessness, they often lack the caution, the patience, and the ability to accept that their first decision was the wrong one.
More to the point, they lack the ability to concede defeat, to admit that while their setup seemed as attractive as a Norweigan au pair, the trade just didn’t play out as they had expected. The market doesn’t care about your reasoning for getting in –it’s going to do what it wants to do.
To Win The Battle In Their Mind, A Trader Must Plan
Something happens at the beginning of a trade, a psychological battle. It’s that classic image of the devil sitting on one of your shoulders and the angel on the other. One tells you to hang in there with everything you’ve got, that the promised land is on the horizon, that you will get your way eventually, no matter what the facts are telling you. The other screams in your ear to save yourself, to get out, to take a tiny profit or a tiny hit. Just get out! It’s a powerful sensation, especially for the beginning trader, which is why a clear trading strategy is critical.
A trading plan in which you will place all your confidence is like a pair of noise-cancelling headphones – blocking out the din to help you direct your focus. Trading without a gameplan is like swimming in shark-infested waters with a couple of raw steaks strapped to each leg. You might get some good exercise, but the longer you swim, the more likely you are to meet an untimely demise.
It’s when you deviate from your plan that fear really takes hold, and when that happens, it’s easy to lose perspective and exit too early, cutting your chance for profitability at the knees.
Fear Breeds The Opposite of Fear – Know When To Exit A Trade
Yet fear can also cause traders to do something that seems the total opposite of fear – it can cause you to stand your ground, ratchet up your nerve and stay in the position long after the signs of danger have revealed themselves. That is, fear can trigger paralysis disguised as irrational courage.
Yes, it takes courage to stay in a trade. But the lesson that too many traders learn far too late, is that it takes just as much courage, if not more, to get out of a losing trade. The greater your nerve, the greater your chance of ruin. As most generals know, retreat is a legitimate military tactic. Of all the comparisons one can make between battle and trading, none may be truer than this one.
There is no shame in taking small losses. In fact, when taking a small loss prevents you from taking a much bigger one, it should be considered a victory. If things aren’t going the way you hoped, preserve your weaponry (your capital), and live to fight another day.
And remember, reentry is only a spread away! Clear your mind – the market is still going to be there the next time you check in.
The Zen of Great Traders
It sounds simple – as if you could simply decide at the beginning of each trade you will neither exit early nor late, and that you will have the right degree of courage at the right time – but in actuality, this is a tremendous shift in perspective for most traders.
We’re all geniuses when we’re looking at the charts in hindsight, or before we place a trade – but it’s making decisions in real-time, when we don’t know what’s going to happen next, that can make or break an account.
There is a certain zen mindset that is achieved by the greatest traders. In fact, this is one of the most interesting paradoxes of the trading world – an ambitious, ferocious group of people who have somehow resolved to let their ego get out of their own way.
Stay Calm To Enter The Best Positions
Once you accept the constant ebb and flow of the markets, and the endless renewal of opportunity, then you will understand that there’s no need to enter the market of half-baked convictions. Just sit back and wait until a setup has presented itself with clarity. Not a maybe or an almost – but an undeniable presence that’s made itself known. And even then, if it doesn’t work, it doesn’t matter.
Your only job is to take the opportunity when it presents itself – not to gain otherworldly power over the global financial ecosystem and ensure your trade is a success. That’s what stop-losses are for.
In the meantime, perhaps your biggest task is to fight off the boredom and keep your trigger-happy fingers firmly clasped together. Traders who open a position out of boredom will find themselves spending all their time managing that rubbish trade, while much better trades pass them by.
The opportunity cost just isn’t there with mediocre setups, as you’ll only set yourself up to miss the best ones. Getting in too late and getting stopped out just means that someone else is eating your lunch. When you don’t stick to your plan, you help every other trader who is following their plan.
Infinite Possibilities For The Right Mindset
Markets change every day. Like a game of chess, there will never be the same exact combination of actions from one trade to the next. The seriousness of that fact can be hard to grasp when you read about the same kinds of setups, or anticipate the same kinds of moves day in, day out. But the market really is ever-changing and forming new combinations. There is an infinite number of possibilities in any given minute.
Did you know that every time you shuffle a deck of cards – the chances are that no deck of cards has ever been shuffled in that exact order? If those odds are staggeringly astronomical with a deck of cards, imagine what that implies about the markets, where you have thousands of variables that change from day to day.
For that reason, it’s critical that you take a fresh look every day and consider the new possibilities, not just the same ones you considered the day before, but in terms of this moment, today.
The great traders have courage, patience, and humility. Great traders bring no preconceptions to the table, and instead ask themselves, always, “What is the market showing me today?”.
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