The mental (emotional) aspect of trading is hands down the toughest hurdle between aspiring traders and consistent success. For sure our technical nuts & bolts portion is vital. It goes without saying that we need some type of method, system or approach for trade entry, management and exit parameters that create a defined edge. The truth is there are countless ways to create such a viable “edge” over the long-term, but human management of such is the weakest link in that chain.
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Out there in the real world we are taught to set tangible goals. Timelines, limits, targets and objectives are all part of the path to success. Need a roadmap to get where you’re going in order to get there, right? At some point in our career we realize trading is a whole lot different than any other mainstream profession. Most of the rules that apply elsewhere are null & void in our world. Fiscal goal-setting is one of those. It’s natural for traders in general and day traders in particular to set structured daily goals. We work a defined set of hours in our given shift… our time is exchanged for monetary reward expected. The people that we know have similar expectations. “How much did you make today?” “How were the markets today?” I see on the news that stocks went up (down) big… how did you do today?”
The word “today” is sprinkled into every question we hear. Yesterday is history, tomorrow remains a mystery. The only measurement of success is today… one day at a time. But in reality our profession is nothing more than a series of wins and losses strung together over (hopefully) long periods of time. There is no way to eliminate risk or loss, because risk is an equal part to reward in our equation. Focus on keeping loss controlled is a very different aspect than fixation on avoiding all losses, period. One is a normal part of operation, the other is a path to failure.
Many times we’ll read somewhere and/or hear about traders who never have a losing day. It is said they string together weeks, months or years worth of stretches with nothing but wins in the end. We’ve also heard about bigfoot sightings all over the world for over a hundred years now. To my knowledge no one has ever produced a physical specimen of the latter or real-money proof of the former. Perhaps traders who never lose and sasquatch each exist, I wouldn’t rule either completely out. A little bit of solid evidence would be nice.
Meanwhile, those of us in the real world approach each trading day with one overall goal in mind: perform our functions correctly, follow our script and let the law of large numbers work our mathematical edge in favor. That includes taking valid trade signals after a string of losses. That includes letting the fourth trade work towards its intended profit objective following three straight controlled losses prior. That includes trading through some adverse sessions where nothing we can do results in net-profit for the day.
Punching Clocks Through Wins And Losses
Just because markets are open at a set time every day does not mean similar opportunities for profit and loss exist. Some sessions make it seem like money falls from the sky between both bells. Other times the morning or the afternoon is generous while the other half is stingy. There are days, sometimes several of them in succession where it appears the market is closed for business. Price action goes nowhere, there is nil chance to make money and nothing can be done about that fact.
Traders revel in those single days where favorable price movement results in profits that would normally reflect an entire week or even month’s worth of effort. With the human-nature outlook of exchanging time for reward, we readily accept those occasions without a second thought. Such windfall but infrequent sessions are outside the norm, just like a true choppy or whipsaw congested session where it’s all but impossible to avoid stiff losses let alone make two dimes of profit. But we view those impossible-to-profit event differently. Whereas investing one day’s worth of effort for a week’s average profit result is just fine, investing a second day’s worth of effort for one day’s average net loss is not fine. To some it is downright terrible.
Patience & Discipline
The worst trading sessions are often followed by the best. Dull, flat, volume-less sessions usually lead to high volume and range expansion the next day. If there are two or three dead sessions back to back, that period usually resolves with several days of hyper-active price movement. Stored energy is released, released energy eventually exhausts movement. It’s a fundamental part of financial market behavior. Knowing this cycle exists and expecting it to repeat as usual is important. When we struggle to make headway for a day or two, better get ready for some very active tapes ahead. It’s coming.
Obviously we’d all love to have every trading day result in new all-time high profits. None of us would ever opt to experience a net-loss session again. That’s just one of numerous human emotions in the mix. Reality is, wins and losses distributed intraday and likewise day to day are all part of the natural course. Traders with gambling tendencies or ultra-competitive personalities tend to struggle with accepting loss as part of our profession. They take various small to extreme measures in fighting the natural process. Sometimes the result is benign, other times career ending.
There are four segments one needs to harness = master before consistent success is possible. They are:
#1 – Ability to read charts/markets and determine whether price is more probable to go up, down or continue sideways from any bar forward. We need to know whether visible clues give odds of probability for pending direction, or not. We need to know this information inside all market conditions: low volatility, normal volatility and high volatility. Intraday traders will commonly face all three varied conditions one or more times daily. We especially need to know when we cannot know what is probable to happen next. When price movement goes from favorable to unfavorable per your method or approach, we need to know that through the shift of change.
#2 – Ability to determine where high-odds trade entry locations exist. Mastery of step #1 makes this process possible. There are no shortcuts… no red arrow/green arrow, no automated systems, no blind following dual indicators, no shortcuts exist to overcome ignorance of reading market action. Everything the market knows at any moment in time is reflected in its chart(s). The ability to weigh = measure = read that collective information determines our ability to identify exactly where long or short entry signal locations with greater than 50% odds to succeed exist in front of us.
#3 – Ability to determine your own method of trade management. I can promise you this: no one on earth can teach you how to manage your trades when your real money is live in the market. When your real money is ebbing & flowing in your account, anything else that anyone tells you will be forgotten. The only thing that will matter to you is making yourself feel good about the end results of that individual trade. That is not an opinion… it is an absolute law of human-nature fact.
#4 – Ability to manage yourself through all aspects of reading market action, determining trade entry and managing live trades from entry through execution to exit. That includes self-honesty of admitting when price action appears measured and predictable versus unruly. Honoring and acting on trade entry signals when confirmed, instead of succumbing to trigger-shy hesitation and/or chasing trade fills well past ideal entry locations due to fears of loss on both counts. Holding stop-loss orders to contain risk at predetermined levels based on logic and reason rather than crowded too close or pulled to avoid loss out of emotional fear.
Those are the four separate legs of our profession that overlap but stand apart. The first two aspects can be taught by someone to others. Managing live trades and managing ourselves through the entire process are learned on your own, because they can’t be taught by anyone else.
The very moment someone places a live trade in their account, mental = emotional mode shifts from objective gathering of information to tunnel-vision focus on outcome results of the trade. All else ceases to matter from there as survival mode instincts kick in. Voices are tuned out, text is ignored and advice doesn’t even almost begin to reach closed minds. The only thing that trader cares about then is exiting this trade in a manner which makes him (her) feel good about the whole experience. That’s it… all about the feelings. Any type of profit beats any type of loss, obviously. The measures a trader will take in managing or mismanaging their trade is directly related to emotional comfort needs at that stage of their development.
For these core human instincts, any attempts for one trader to follow another through the process of trade management and exit verbatim will always fail to meet the objective. No two traders, let alone any group of traders will ever hold all of their trades through the same curve of stop management and exit for profit or loss result. Never has happened, never will happen, cannot happen until nature repeals the human nature of survival instincts.
Too many traders never get past the shallower thinking levels from the point where beginners begin. Yes the technical nuts & bolts aspect of trading is important. Fancy charts filled with arrows, pointers and text instructing someone on where to get in a trade and why always hold everyone’s attention. And for good reason. But then what? What do you do once that trade, the next trade and the next ninety-eight to follow all behave somewhat differently from one another? That is where the real measure of success or failure begins to unfold.
Austin Passamonte is a full-time professional trader who specializes in E-mini stock index futures and commodity markets. Mr. Passamonte’s trading approach uses proprietary chart patterns found on an intraday basis. Austin trades privately in the Finger Lakes region of New York. Click here to visit CoiledMarkets.