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
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
2. Absorb what these winning traders are thinking
3. Practice, practice and repeat over again
1. The Basis of
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
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
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.
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
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
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
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.