No profession requires more hard work, intelligence, patience and mental discipline than successful speculation…Robert Rhea (The Dow Theory)
Back in the bad old days when I first started to trade, I was absolutely dumbfounded when people talked about losses or drawdowns. I remember looking at a bunch of trading sites that I now know were honest and no bull and they put losses and wins. This was not attractive to me so I fell for the load of bull that I kept getting from the ruthless promoters who only talked about their wins and conveniently forget to mention their losses. I could not accept that a trading method would have losses built into it. It was the same as telling me that four out of every ten of my patients would die within a short period of time. Because of my inability to accept there would always be losing trades, I struggled for nearly a year to make money in the markets and ended up losing almost everything.
Those who have traded for even a little while know full well that no one wins 100% of the time. In fact, it is a common misconception among novice traders that every trade is a winning trade. Of course, this cannot be true because traders are always dealing with risks and rewards. Once a trader truly embraces the reality that there is no reward without risk, he or she is on the road to becoming a winning trader.
There are two major psychological aspects of the risk/reward concept. Although they may appear to be similar in nature, they are not. The first aspect involves doing things correctly. This means making a trading plan and following it with extreme discipline. As easy as this seems, this is where traders struggle the most because it involves keeping a trading journal, writing down every trade and keeping an honest inventory of all actions taken during the trading day. Sadly, some do not do this and have no record of what they did or why they did it. This is similar to a businessman who does not keep up the books for his business. How long do you think such a business will survive?
The second aspect of the risk/reward concept is avoiding mistakes. We are all human and make mistakes, but there is a benefit to this. That benefit is obtained by studying the mistakes thoroughly (via the trading plan and journal) and then doing everything possible not to repeat them again. This is how we grow and develop — both as traders and in life.
We learn through our mistakes–more so than by doing things correctly. It is through making mistakes and accepting them with rigorous honesty that we accumulate regret. This regret is a form of personal responsibility that then drives us to make a firm commitment to never repeat that mistake again.
The two practical principles that help us anticipate and even avoid making mistakes are self-discipline and personal responsibility.
Personal responsibility plays a significant role in trading success. This is because the trader is completely responsible for his or her own choices in the markets. It is the trader who makes the decision to enter or leave a trade, and the trader must accept this decision. If he doesn’t, it is like jumping out of an airplane with a busted parachute, hoping that it will start working before he hits the ground. It is like a poor swimmer heading into treacherous waters because she sees a lifeguard on the beach and believes that she will be rescued if needed. In the markets, you are your own parachute and your own lifeguard. No one is going to save you but you! The power of personal responsibility in trading cannot be taken lightly and should be a bedrock belief for everyone who enters the markets.
Personal responsibility can be achieved through diligent practice and self-reflection and incorporated into your trading plan. The basic questions to ask are:
- Has anything changed from my original plan?
- Has the technical pattern or company profile changed from the time I entered the trade?
- Has my initial price objective changed?
- Has my stop been hit?
These four questions should be written at the top of every page in your trading journal because they remind you that you are responsible for every aspect of your trade. If the answer to any of these questions is “yes” then it is your responsibility to exit the trade. If the answer to any of these questions is no, then it is your responsibility to manage the trade.
As you can see, personal responsibility is the foundation for self-discipline. Thinking about losing or winning requires discipline. By adopting the practice of focusing daily on your trading journal and the four questions above, you get into the habit of discipline. Examining your daily trading journal is the best way to spot mistakes and to analyze where you have acted impulsively, impatiently or allowed your rat brain to take over. Taking personal responsibility for any mistakes and then being disciplined so as to avoid making them again is among the quickest way to achieve lasting trading success.
Good luck is what happens when preparation meets opportunity; bad luck is what happens when lack of preparation meets a challenge…Paul Krugman (Economist, NYT Op-Ed March 3, 2006).
Janice Dorn, M.D., Ph.D. received a Ph.D. in Anatomy (Neuroanatomy) from the Albert Einstein College of Medicine in New York. She is certified by the American Board of Psychiatry and Neurology as well as the American Board of Addiction Medicine. Dr. Janice Dorn has written over 1,000 articles on trading psychology and behavioral finance. Dr. Dorn is dedicated to providing education and training about how the brain, psychology and emotions impact financial decision-making. Janice is an advocate for the elderly, lifelong dancer and a pianist. Her website is: www.mindmoneymarkets.com
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