As traders, we are challenged on a daily basis. The prospect of maintaining a business approach coupled with cat-like reflexes can be a daunting task even for the most seasoned investor. These challenges can be technical; questions like "Is this a good entry point for this trade?" "When should I get out of the market?" "Should I be taking partial profits if it goes my way?" "Which way is the market headed?" These are all aspects that we must address regardless of our trading timeframe.
In my experience, one of the most difficult challenges that traders face comes down to a psychological one. Discovering ones hang-ups and shortcomings when it comes to trading is a fairly uncomfortable exercise. Not many of us are thrilled with the prospect of putting our mistakes under the microscope. It's not uncommon; in fact it's human nature. The basic concept of physical exercise is to place ones body in a place of stress and discomfort. The reward for that discomfort is a stronger body. By approaching our trading with a similar mindset, we are equipping ourselves with the necessary mental strength to deal with the psychological challenges that trading can bring.
One of the tools that I found most useful in my trading career came after a string of losses that should for the most part been profitable trades. At the time, I was unequipped to deal with the psychological part of trading that I later discovered was a hindrance to my success. In the midst of my epiphany, I came to the following realization; I must come to terms with an outcome. The outcome can be a winning trade, a losing trade or a breakeven trade. These are the only three possible outcomes. For every outcome, there is an action.
1. Winning Trade: I insure that I work with a trailing stop to capitalize to the fullest potential.
2. Breakeven Trade: I am financially no worse or better after taking this trade.
3. Losing Trade: I keep a tight control of risk in the event that I am wrong.
By coming to terms with these outcomes before I ever enter the market, I can trade with a clear mind knowing that I have a plan of action for any scenario.
There are a variety of good books that deal with trading psychology. Two of my personal favorites are;
1. Investor Psychology Explained by Martin Pring
2. Trading in the Zone by Mark Douglas.
Learning to deal with the outcomes doesn’t usually happen overnight, but just like physical exercise, the secret is in consistency. Every trade you take has a hidden lesson regardless of outcome. Practice evaluating your trades every night to discover what it is you do well and what may need work. Through this exercise, you’ll find some peace of mind in knowing that you can deal with whatever the market throws your way.
Trade Smart…
~Duane Gott
Thanks Duane...
Am currently reading "The Psychology of Risk" by Ari Kiev.
Will check out Pring and Douglas next.
Keep up the good work
Posted by: CDweller | November 05, 2007 at 04:38 AM