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More to Trading than the Charts

Mon, May 18, 4:31 PM ET, by Don Dawson, Online Trading Academy Commodity Futures Instructor

 

This week, I would like to talk about getting inside the head of a winning trader and seeing how they are thinking. Do you ever ask yourself why others seem so successful while you continue to struggle? Usually the answers may be something like "they are just lucky, it will run out" or "they know somebody who told them the secret about the Holy Grail."

 

In all honesty, none of the above is the case. They have simply learned that trading is more than just a strategy or system. Here are three steps that could help you to become the successful trader you deserve to be:

 

1. Understand that there is more to trading than chart reading

2. Absorb what these winning traders are thinking

3. Practice, practice and repeat over again

 

1. The Basis of Prosperous Trading

 

Success in trading lies in the acceptance that this business is about probabilities. Obviously when we place a trade, we feel that our "edge" will give us a winning trade. We must remember, though, that with probabilities, not all trades will be winners.

 

Your trading strategy will be responsible for finding these trades that give you this "edge." That being said, I would like to remind you that in my opinion, 85% of trading is psychological, 10% is money management, and 5% is strategy.

 

I recently attended a meeting with a group of traders. From the very moment the meeting began, all that the attendees wanted to talk about was what "strategies" and particular settings I use for studies. So I asked a couple of questions to everyone about having trading plans and maximum dollar losses for the day. Not one person was interested in this very vital aspect of trading. All they wanted was that "5%" of the equation, thinking that was somehow going to turn around their trading careers. This just reminded me that the failure rate in Futures trading is almost 90% in the first 6 months of trading. If you are one of these people focused on finding the "perfect" trading strategy the kind where you walk up to the ATM and punch in your pin and out comes some money every time - I can assure you that you will be searching until the end of your trading career.

 

Just remember that prosperous trading is simply a business of probabilities. Mark Douglas has written a book called "Trading in the Zone." Towards the end of his book he has an exercise that works to help traders see how trading the markets is nothing more than probabilities. He asks the trader to find a simple system or strategy that they are comfortable with. Keeping it as simple as possible, yet one that uses rules to give them that edge they need. Making sure they understand all the entry and exit rules so they will stick to it while doing this exercise. He asks that the trader take the next 20 trades in a row without any human interference, being as mechanical as possible. At the end of the exercise he tells you to sum up the win/loss ratio. He points out that you more than likely did not win or lose all 20 trades. But instead, you may have had 13 winners / 7 losers or 8 winners / 12 losers etc. The purpose of this exercise is to get you to think in terms of probabilities. Once you start thinking in terms of probabilities, you will realize that if you have a losing trade that you are that much closer to a winning trade coming soon. This helps to keep you from having negative thoughts about losing and never winning again, possibly keeping you from revenge trading. I recommend you read his book.

 

2. The Makings of a Prosperous Trader

 

A prosperous trader has a written trading plan, complete with money management and "actually" has the discipline to follow his plan. The best plan in the world is useless if you do not have the discipline to follow it. Much like the trader who buys a trading system that boasts an 80% return, if you do not have the discipline to follow the system rules there is no way you will achieve this level of return.

 

A good trading plan will cover your entry point, profit exit strategy, stop loss exit, risk management, number of contracts to trade, maximum dollar loss per day and anything else you may need to be as objective as possible with your trading.

 

Regardless if you day trade or hold positions overnight, you must accept the laws of probabilities. They are, having a good market and strategy understanding along with a good sense of money management that in the end, you will come out with a positive return. Remember that with good money management skills, you can have a 40% win rate and still be successful in trading. This requires cutting your losses short and letting your profits run by having good risk/reward ratio returns.

 

Something many people don't realize about day trading is that when you are trading really well, you are "bored" out of your mind - that's right. For some reason, people always think that prosperous day traders are screaming into phones, clicking so fast and furiously placing orders that they wear out their mouse each week, maybe even using trading to get their adrenaline fix for the day. In reality, a truly prosperous trader just treats each trade as just another trade on his way to success, keeping in mind that trading is nothing more than statistics in action. Just like in statistics, we must have a large sample size to determine our outcome. To get this, we must consistently follow our plan and act each time we are supposed to. We have all experienced that trade where we became selective in taking our setups and passed on the best trade ever.

 

3. Preparing the Mind to be a Prosperous Trader

 

Here is where we ask the question of what is blocking you from becoming a prosperous trader? The answer is most likely "you." Once you start thinking of trading in terms of probabilities and realize that most strategies in the long term are designed to give you a positive outcome, then the only thing you are responsible for is acting upon the signal. At this point you are trading with logic and much less emotion. I say "much less" simply because we are all humans and will never remove emotions totally from our trading. What we are trying to do here is get our emotions under control.

 

As with other aspects of trading, developing the mindset of a prosperous trader takes time and practice. I have put together some exercises you may want to try for a while to get your mind in that "prosperous trader" state.

 

Pre-Market

 

Have a trading mantra to say each day before trading. I keep mine posted on my monitor. It goes like this: "I have no idea what the markets will do, but that is okay and I will play whatever comes my way." From this article, I hope that you will also post a note to remind you that trading is all about probabilities. This truly does help reduce some of the emotional decision making in your trading.

 

Try sitting quietly and visualizing yourself going through the trading day taking all your signals and following your plan just as it is spelled out. Entering when you are supposed to and following the trade for as long as your strategy tells you too. Also, taking losses quickly and letting your profits run. This helps burn a positive image in your subconscious mind to allow you to act consciously later in the day.

 

Before trading starts, remind yourself that you have a trading plan that will not allow you to be ruined by a small number of losses, nor will you become rich from just a few trades. Remind yourself that one trade does not make a trader. It takes a series of trades to determine that. So each trade is simply just a small piece of the big picture. Win or lose is not as important as following your plan and being able to stay in the game long enough to enjoy the profits of your trading.

 

The Trade

 

It is not uncommon to feel a little excitement while you are in a trade. This is normal for people who enjoy what they are doing. The key is not to allow the excitement to creep into our physical body and cause us to tense up during the trade. Once we get to the state of physical tension, then our emotions will come storming in. Keep as relaxed as possible by doing some breathing exercises, making sure to take deep breaths and not shallow ones that will create stress. If you feel this physical tension coming on, stand up and stretch some. Sitting down for long periods of time allows our blood to pool in the wrong places, thereby causing the brain not to get the blood needed to function properly.

Keep in the moment. The last trade is history and we have no idea what the future will bring. Not staying in the moment invites "what if" thinking and then "fear of the unknown" sets in.

 

Forget the P/L of the trade and the day. You are only concerned with what the "price action" is telling you at the moment. Once you start thinking about the money, you will cut your profits short and let your losers run.

 

If your trading plan says to exit at a specific price, then stick to the plan. What happens as you learn more about trading is you start to see different events happening in real time as your trade progresses. For example, you may never use Stochastics in your trading but you may be long a market and then for some reason pop up a Stochastics indicator and see it overbought. This may make you get out of your trade even though it is not a part of your exit strategy. I like the quote of "if you get in on Paul's advice, then get out on Paul's advice." This is saying nothing more than follow your plan and do not allow outside influences to interfere with your trading.

 

While in the trade there is nothing wrong with talking out loud. This actually is a way of relaxing, too, for it helps your breathing. Talk about the positives of your trade. Remind yourself that your trade isstill in the direction of the trend, you have a protective stop in place to eliminate any large loss, your profit exit has been identified and has an order there to exit at a very nice profit, you are following your plan perfectly, you are aware of the next support/resistance levels in the market and once the market moves to a profit you will be moving your protective stop to breakeven for a "free" trade. At that point the trade is on auto pilot. It does not get any more relaxing than that. All of this "self coaching" helps you to stay objective.

 

Remember that it takes a series of trades to make a trader. So keep reminding yourself of what a prosperous trader does. This particular trade is just one "small data point" in a large statistical study on your trading. By using your trading plan, you remove a majority of the emotions that come with trading allowing you to focus on the trade and not the money. Over time, you will get to the point where you will not notice if the trade is a winner or loser but simply will be following your plan and making consistent money.

 

Postmortem

 

Review the day by keeping a journal of your results. Some days will be easier than others but we must be honest with ourselves if this exercise is going to help us.

Did we follow our plan to get the results we did? Were we trading logically or emotionally today?

 

Journals can also help lead us back to where we were if we start to have a drawdown period

 

Think of this journal as a personal diary of ourselves. We want to document all of our behavior for the day, also. Believe it or not, we can be very different people than what we think we are while in a trade. An example is this, ever tried doing an audio or video recording of yourself during the trading day? You will be amazed at the person you see or hear. I can almost bet you will not recognize yourself.

 

With that, I leave you with another thought: "One's destination is never a place but rather a new way of looking at things."

 

- Don Dawson

DISCLAIMER:

This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results.

Reprints allowed for private reading only, for all else, please obtain permission.


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