Emotions: Proper Balance
Every book that you’ve read about trading says that you need to be an emotionless robot, day in and day out, in order to be successful as a trader. Unless you use an automated system, I believe that total elimination of emotions is impossible. Plus, I feel that a proper balance of emotions is necessary to be successful. Think of it this way, greed allows you to let profits run, fear allows you to cut losses short; you need to have healthy levels of greed and fear.
The Formula:
(A Trading Plan x Warranted Confidence in the Plan) + Patience + Discipline + (0.5Greed) + (0.5Fear) = Proper Emotional Balance
The Trading Plan
First, have a trading plan, but don’t just have any trading plan; have a trading plan that you are confident in. Importantly, this confidence in the plan should be 100% warranted. In order for you to determine if the confidence in your plan can be warranted, the following criterion needs to be satisfied:
- Plan provides fundamental analysis and determines fundamental bias
- Plan provides multiple technical analysis time frames and determines technical bias
o Plan clearly defines technical criteria needing analysis
- Plan provides entry execution rules
o Defines entry process for ranging market
o Defines entry process for trending market
- Plan provides exit rules
o Defines target parameters
o Defines risk parameters / stop placement rules
o Defines acceptable level of R Multiple (Reward to Risk ratio)
A system, in time, needs adjustments to work optimally. Due to this, monitor the performance of your system rules, and adjust accordingly to improve results. Perform regular maintenance and make minor tweaks here and there if needed, do not overhaul your entire system; just improve inefficiencies where they appear to be present.
Patience: the key to success
Impatience = Failure. Patience, be it waiting for 36 hours for your trade setup or performing your daily analysis everyday prior to entering the market, is key to success. Impatience needs to be eliminated. This is the one emotion that cannot be present in this business. It is also one that has the potential of getting eliminated quickly because it is usually a personality trait for some traders, not an actual emotion per say. A proper trading plan can help reduce impatience, but patient needs to be learned by the trader himself. Take the time in what you do, prepare, monitor, and execute. Apply patience in your daily analysis, don’t rush through it because you just want to be in the market. The more time you put into your analysis, the more successful you will be. As a trader, your primary job is not trading; your primary job is being an analyst and risk manager. Spend time on your analysis, put 100% of your effort in reading the market. If you apply this concept, trading will be the easy part. As a trader, your duty is not to sit there and fire off trades, it’s to analyze the markets and take the positions that follow your system. If you think you missed a trade, it doesn’t matter, there will be millions more; be patient.
Discipline: without it, you are nothing
Never, ever, stray from your system / rules. Always obey your rules, follow them, apply them, and profit from them. A disciplined trader acts as an operator of the system he is applying. He performs analysis, decides what needs to be done, and patiently waits for his setup. When the setup occurs and his system criterion is met, he does not hesitate on taking the position. Once in a trade, he has no emotional involvement with the trade, everything is defined, all possible situations have been run through and potential decisions for certain situations have been established. The execution of the trade is the easiest part, it’s the click of a button. The hardest part is entering with confidence according to system rules, removing emotions when in the position, and then exiting according to system rules. In order to perform this day in and day out for a profit, the trader needs extreme discipline, without it, the trader is nothing.
Fear and Greed: not so bad?
Greed is the reason you are a trader. You can be greedy for money, more time with your family, or being your own boss. For most, it’s a combination of them; having the money to provide for your family while living a comfortable life performing a job using your intelligence and being the decider of your wealth. Without greed, you would be just like any other content working man, working for a paycheck until 65 and then dying; making nothing exciting of his life, leaving no legacy. I believe there are two scenarios of greed, as described below:
1) Being greedy for (x), putting in countless hours of work to achieve (y), building a plan / an approach (z) to reach (y), with disciplined application of (z), (y) will be achieved.
a. You realize it will be the hardest job you have ever done. You understand that the money will not occur over night but instead over time. You do what it takes to discover (z) in order to achieve variable (y).
2) Being greedy for (x), you open an account, have no plan / approach (z), and expect to reach (y to the 5th power).
a. You think its easy money. You’ll be a millionaire overnight. You have visions of easy $ signs in your head; a mansion, Ferrari, and vacations by the end of the year.
i. If it’s as easy as you think, why doesn’t everybody do it and why aren’t they all rich?
The failure rate of traders is around 97% according to government research. The (# 2) type of trader becomes a statistic in the 97%. However, the (#1) type of traders are the 3% of traders making extremely large amounts of money from this business. I will tell you in one sentence how to be part of the 3%:
ANALYZE, be PATIENT, execute according to PLAN, and DON’T MAKE MISTAKES.
That’s it, that’s the “Holy Grail”. The process is very simple. Analyze, analyze, and analyze some more. Be very patient, wait for your setup; the setup that agrees with your system. Then, execute the entry according to your plan. Finally, don’t make a mistake.
While in positions, fear and greed will be present. Whether it is setting your profit targets, stop losses, or deciding to exit a position for a certain reason; fear and greed will impact those decisions. Fear and greed determine how much you return and risk when you exit for a profit or cut a loss. Once again, think of it this way: greed allows you to let profits run, fear allows you to cut losses short; you need to have healthy levels of greed and fear in order to have the most efficient results.
well said, my friend
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