Yes, We Can not! Or Can We?
Just like there is a main distinction amongst theory & practice, reading trading books & trading the markets are hardly the exact same point. Otherwise, just reading a very good investment book would quickly place a load of revenue in our pockets.
Similarly – there is a major distinction amongst who we want to be & who we seriously are, otherwise we’d be living in a a lot superior planet.
Just like the marketplace discounts anything, in trading who we are discounts who we want to be.
The markets are not an atmosphere for guesswork.
You can not predict the marketplace, and you can not manage it.
But you can manage your self, and to a massive extent, by figuring out how you function you can predict your actions really accurately. In addition, no one particular else can do this superior for you than your self. This is an edge for you, the trader.
So let’s get private. Beginning from a handful of information about who you are, let’s attempt to identify your fundamental psychological profile & no matter if trend trading is seriously for you or you must be a knife-catcher as an alternative)
Patient vs. Rapidly & Jumpy
Are you a patient fellow? Absolutely everyone talks about “respecting your trading strategy” & “getting disciplined” in your trading & certainly, patience is one particular important person good quality related with discipline in trading. Even though patience is necessary for Each approaches, it is a lot a lot more crucial in trend-trading, due to the necessity to keep longer in the marketplace following the trend, reduce your losses brief & maintain your earnings operating.
Got itchy fingers?:) When you are trading counter-trend, you have much less time to react & enter a trade (if you are slow, you miss the train). Trend-trading demands much less speed of reaction, because a trend you are arranging to “ride” is not some thing that disappears from one particular minute to the subsequent, whilst possibilities against the trend are by nature much less in quantity & a lot more restricted in time.
Rational & Organized vs. Emotional & Erratic
Are you a cause-driven individual? Against widespread belief, there is a lot more stress on a trend trader than on a counter-trend trader. Feel how a lot of instances you closed a trade as well early, and you will quickly recognize why. Becoming in a position to recognize all components of the trading strategy & act on them in a lucid, coherent way will aid you in following the discipline of the trend. Trend-following trades will need to operate like surgeons, cutting their way by way of the trend at precise moments.
Do you enable Feelings to take more than? When trading against the trend, you will normally go for SHORTER trades (compared to the length of the trend). There will be much less time to crack below stress, and figuring out your trade will quickly be either in profit or closed for a loss must maintain you from interfering with it (hence growing the possibility of respecting your trading strategy). if you know your self to make emotional choices at instances when cause must prevail (when trading, that is often!) then you could want to seriously think about counter-trend trading, as trend-following action could not be your cup of tea.
Threat Taker vs. Security Freak
Do You Get pleasure from a Excellent Thrill? Human nature drives us towards security (closing realized earnings, even smaller) and away from the unknown (unrealized earnings, on the table, at danger), even if we do have a trading strategy and the wish to comply with it. Most traders I interacted to (up to 95%, give or take) have at least for some time in their trading profession reduce their trades as well early hence losing very good prospective earnings in equity. As a trend trader, you will will need to beat this obsession with security, and enable your trades to be exposed to controlled danger (because you have the benefit of probability on your side). You will will need to by psychologically powerful adequate to take a danger without having blinking (controlled & calculated danger, of course – according to your rational & organized character), as breaking the dynamic of the trend can kill your method in the lengthy run.
Not Comfy in Risky Conditions? Trend trading is growing the odds of closing trades as well early, whilst counter-trend strikes are much less psychologically burdening. Apart from, cease losses can be moved to break even a lot more rapidly when getting in a “ideal or incorrect” situation (hence placing the trader’s thoughts at ease more rapidly about obtaining to take a loss), whilst when riding a trend cease loss placement can be problematic due to the massive stops related to higher probability trading (trend trading has in common larger probability of accomplishment, despite the fact that it could not often have equally very good danger/reward). So, if you are not the sort of guy who enjoys living on the edge, counter-trend trading could be your point.
Conservative vs. Aggressive
Not the Adventurous Variety? if you do not thoughts walking the beaten path (which is also safer, clearer & a lot more predictable!), then you are in all probability a lot more of a trend-trader than a counter-trend trader. if you do not thoughts taking your pips in the middle of a trend – as lengthy as it is quite clear you are on the ideal path – you are a trend lover at heart. If you like carrying out issues the confirmed, “ideal” way, if you choose a recognized “very good” to an unknown “possibly superior” & do not like getting the 1st at a celebration, then the trend can certainly be a very good buddy to you.
Are you bold & daring? Some people today like the trading adrenaline just as a lot as they like earnings. That is OK, as lengthy as they do not appreciate it Far more than the earnings & start out trading for thrills as an alternative of money. If you feel that just jumping on a trend just after it began & just after it is been confirmed is just as well boring for you, then forcing your self to do just that will not aid & could ultimately bring you to acts of indiscipline. Stick to counter-trend trading & you will consistently knowledge the pleasure of getting in a move just before everyone else – the satisfaction of carrying out what you appreciate can aid you keep “in the zone” & love your hours of trading.
Modest vs. Proud
Like Maintaining a Low Profile? If you do not thoughts taking three losses for 1 win – if the win tends to make four-five instances a lot more than a loss – then you are surely effectively-reduce for trend trading. If you are not interested in proving your self to your self or anybody else & what matters is the all round equity curve, not obtaining a massive quantity of winners & getting “incorrect” will not matter & will not place unnecessary stress on you. The trend will give you sustained rides, a lot bigger than your initial danger, moves than can conveniently cover for two, three or even four of your losses. Regularly scoring a 40% win price on a two:1 danger/reward method will make you quite lucrative in the lengthy run, despite the fact that you will be incorrect a lot more typically than not.
You Get pleasure from Saying “I Told You So”? Some people today just like getting ideal & sticking it to other people. Even though this is some thing every single trader must consistently attempt to fight against (due to the fact the marketplace is the only one particular ideal all the time!) it is nonetheless a function of our character that we must attempt to acknowledge & – why not? – even use as an edge if doable. A optimistic mindset (provided by a higher quantity of wins) can aid you keep motivated as lengthy as it does not turn into outright cockiness. If you know your self to be proud & you typically count the winners against the losers then you have to appear for a method with a higher winning price, even if the danger to reward could not be a lot more than 1:1. It is most likely a counter-trend method could give you just that, whilst a trend-following method could bring up feelings of aggravation as you would have a tendency to concentrate a lot more on the damaging side of issues (wins vs. losses) as an alternative of the optimistic (a lucrative equity curve).
The markets are a difficult atmosphere & trading is a extremely sophisticated activity. We seriously do not will need to add in our personal private weaknesses to make our job a lot more tricky. We must all do our homework just before we trade, study about our strengths & weaknesses & come to the battlefield ready & effectively-armed.
Ee will need to recognize & totally use ALL OUR EDGES to prevail on our competitors. Other traders are NOT our enemies – the marketplace is an objective, great entity, bear in mind? We are our worst enemies, and our indiscipline is our enemies’ leader. The marketplace does not take our revenue, we give it away ourselves by way of our actions.
We are not great entities, and figuring out ourselves, admitting our private character biases is Essential for enhancing our trading benefits (no matter if we are newbies or pros).
Cautiously analyze your character just before building your trading strategy, and come up with some thing will operate for you NATURALLY. Normally feel about WHO YOU ARE, not WHO YOU WANT TO BE! If you are into self-improvement (and you must be!), do that outdoors your trading hours. You could not be great, but whilst you are in front of your platform you must strive to turn into a great entity as well: a machine that completely follows a pre-created trading strategy.
Some of you are totally “automated” traders (with or without having robots), strictly following guidelines & only guidelines, leaving absolutely nothing to discretion or actual-time subjective evaluation. That is good, due to the fact whilst you could be missing out on some action every single now & then, you will be a lot much less most likely to be hit by a poor drawdown (normally designed by indiscipline).
If on the other hand you are a DISCRETIONARY trader, you have to very carefully define the limits of your discretion. You do not want to be discretionary to the point of carrying out what ever you want anytime you want, overriding your complete trading strategy. This strategy can lead to absolutely nothing but failure. Once more: discretionary or mechanical, trend-following or counter-trend trading – there is no ideal or incorrect answer.. But when it comes to YOU, there is a superior way to do issues, that comes out of figuring out your self & providing the markets (as effectively as anything else) the very best of who you are.
This is a private re-writing of Mihai’s current webinar on trend-trading psychology. As I located it very exciting, I made use of an audio transcript of the session & Mihai’s personal notes to make it readily available to other traders. It is also my way of saying thank you to a good trader & teacher for the dedication & patience he place in my education & all the lengthy messenger chats more than the previous four years:) For more than three years I am effectively trading each trend-following & counter trend methods & make a seriously very good living as a trader & not too long ago as a fund manager.