Thursday, August 21, 2014

The Most Important FACTOR Behind Traders’ Failure – Part 1

“No methodology will work unless you are able to develop the proper mindset to follow it.” – Dave Landry

The world of trading is full of things that work and things that don’t work. To be honest, there are many successful traders who’re also teaching people how to become successful. There are many signals providers who provide winning signals. There are many strategies that work and there are many programs, like webinars and trading rooms which can help other traders to improve significantly. Unfortunately, in spite of these, the percentage of losers still remains above 90%. Why?

There is a primary reason for that (other reasons are merely secondary). The human mind isn’t wired to trade properly – unless the mind is trained to adapt to the seemingly ‘strange’ but helpful approaches that guarantee one’s survival. We don’t find it easy to do the things that can ensure our permanent triumph. What we find easy to do are things that agree with our faulty mindset, but which can’t help us in the long run. If you can’t ride your winners, it’s because your mindset is against that, and you’ll always find it difficult to do. Even if a swing trading system has a high hit rate, it won’t make money if profits aren’t allowed to run.

For instance, most motorists obey traffic rules because they want to avoid the legal consequences for not doing so, not because they take their own safety serious. Why should the use of helmet be enforced for bikers? Don’t they know that the use of helmet is for their own safety? They know, but they still find it easier not to put on helmet than to put on one. That’s human mindset.

It’s known that making phone calls or receiving phone calls while driving is dangerous (for the brain of a driver who does that doesn’t fare better than the brain of a drunkard, at that time), yet some drivers find it a fanciful and agreeable thing to do.

I once chattered at taxi. While the driver was driving me, his phone began to ring consistently. He sensed that the call was very important, and as a result of that, he located a suitable place to park. He parked and received the call. After that, he continued the journey. What the man did might look stupid in the eyes of most drivers. How could he begin to look for a place to park simply because he wanted to receive a mere call? In contrast, most drivers would prefer to answer the call while driving – the thought of tickets being the only thing that can prevent them from doing that. 

In the world of retail trading where retail traders are allowed to trade as they like, it’s no wonder that they often end up losing. Even if they know what they can do to safeguard their accounts in the face of the vagaries of the markets, they’re prone to ignore that because of irrational emotions. If retail traders could be forced and micromanaged to do the right things while trading, the percentage of losers would decrease dramatically, but such a thing isn’t possible.

For example, false breakouts are common in consolidating market phases, and trading them would have adverse effects on our portfolios if we’re invested for the long-term. You may’ve sworn never to trade a consolidating market, but because of the faulty mindset, you suddenly open a position in a consolidating market because you feel the position is promising. You’ve sworn to respect your stops, but you suddenly see yourself running a gargantuan negative position. Obviously, you’ve refused to smooth the position because you feel it may go back to the entry price.

When institutional traders cover their positions, the market pulls back, but the noobs think they can follow the direction of the pullback.  When you see a significant bias that occurs without plausible economic reasons, the bias can be transitory and the pullback might even be a new protracted market outlook. You’ve sworn to be a swing trader or position trader, opening a few trades per month or week, but you suddenly start scalping or opening too many positions that you close within 24 hours because of too much negativity. You call yourself a position trader or an investor, but you suddenly find yourself watching the one-minute chart because you can’t sleep while you’ve open positions. You know, a position trader got nothing to do with one-minute charts. You think new significant biases may start and you want to be an early bird by looking at one-minute charts.

You’re swing/position trader, and thus you need to use wide stops so that you can create more room for normal market fluctuations. But you find yourself using stops that are too tight: you don’t want to allow a trade to move against you by a few or several pips and you call yourself a position trader! Tights stops cause frequent losses – even trades that ought to end up winning would be stopped out if the stops are too tight.

Doing the right things require discipline, even if it makes you look stupid sometimes. You’ve got to find a way to condition your mind to do the right things; no matter what. That’s what pays in the long run. It’s better to look for ways to control losing streaks than to look for ‘wise’ trading rules that don’t improve any statistics. This is what’ll ultimately help you by making you avoid severe roll-downs. It’s after you survive severe roll-downs that you can hope to make some gains. 

This article is ended with the quote below:

“One thing is sure: a trading strategy that is not adapted to the traders individual preferences concerning philosophy, trading frequency or time exposure will not generate profits simply because it will not be followed.” – David Pieper

Learn from the Generals of the Markets: Market Generals

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