How to Maintain Control and Discipline in Your Trading
It’s our basic human nature to have expectations. We like to know ahead of time ____ … fill in the blank from there. The human mind is designed to operate within boundaries, guidelines, deadlines and limits. Nowhere does that play a bigger role than inside the trading profession. Our minds easily grasp the ideas of overbought, oversold, support, resistance, extremes. All of those terms describe boundaries and limitations.
Of course we know that market action can be unlimited and boundaries are routinely broken. That in itself squelches more fledgling traders than most anything else. Clinging to the failed logic of averaging long into a plunging tape or shorting into a ramping tape clearly explains the reality of price action having no limits. Each of us learns that harsh lesson at least once or more in our career. For some, it is the last lesson ever learned with real money at work.
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Nil Control
Whether you realized it at the time or not, you’ve picked a career which has limitless variables and nil constants to deal with in every equation. We could fill pages talking about all of the different factors in your chosen financial market(s) that evolve, morph and change. So let’s just summarize things at that and save ourselves time spent rehashing that stuff. You’ve either figured out or you will figure out the fact that not much at all remains under your control as a trader. Dealing with an endless set of variables using a mind that’s geared by nature to defining constants is a tough task. It’s the yin & yen thing. Constant struggle against our natural mental makeup for survival.
So I’ve told you things that you already know. We’ve listed a given problem, now how about some solutions?
Patterned Response
Price patterns occur in all financial markets pretty much the same way they have since financial market inception. Patterns of price behavior are merely reflections or should we say manifestations of collective group human behavior. To a new recent degree, those patterns even reflect computer program behavior which is a logical offshoot of human behavior. If you stop and think about it, computers and their operation are nothing more than predetermined thoughts within boundaries and guidelines set by humans. Even neural nets, one step into the process of computerized detached thought is still reined in by man.
There is order and repetition, aka constants or “control” in financial markets. Newbies cannot easily see it. Heck, even veterans struggle sometimes to spot what should be the obvious. But in time and over time we learn to see = measure the same things over and over and over again with predictable outcomes. Here’s the catch: that predictable outcome is spread across a large number of similar setups averaged together. Take ten, twenty, fifty, one hundred or one thousand similar patterns and apply semi-rigid trade method entry rules with a trade management method giving at least a +2/-1 (if not greater) profit to loss ratio and you are guaranteed success.
Now that’s assuming quite a lot. The similar patterns have to be something relatively defined. The trade entry method has to be rigid enough to have some quality control before we’re chasing trades up & down a chart, but relaxed enough to let us enter trades where each one makes technical sense. The trade management method we opt to match with trade entry method (those two aspects are always unrelated) has to create a fiscal edge for success. A win ratio for trades is far, far less important than the profit/loss ratio it creates. An 80% win ratio sounds great, but is an incomplete part of that equation. What good are 80% wins that make $50 per trade when the 20% losses lose -$200 per trade? Add that up, subtract, multiply and divide that equation any way you see fit. Creative math will still result in $0 earned before trade costs are applied in that otherwise impressive +80/-20 win ratio example.
Trade Signals Do Not Guarantee Follow-Thru
One little fact that most traders seem to miss is this: a trade signal per any method or system known to man does not mean price follow thru is assured. Did you ever really stop and think about what a trade signal per any method or system actually is?
A good method, system or approach has three basic (and unrelated) components. The first component is a trade entry signal. The other two components are loss protection (initial stop) and trade management (trailed stops and exits away from initial stop) as a complete trade execution approach. The latter two are subjects for another time. The trade entry aspect is on-topic here. Your approach to selecting where a trade entry exists should be based on some type of criteria (other than impulse feelings or wild guesswork) that determines that area on the chart is a key tipping point for price. In other words, some factor(s) exist in an area or zone (never a finite spot) that if hit or crossed, should see price action continue higher or lower from there.
The tipping points aka trade entry points identify where a directional bias is confirmed. That confirmation only has any type of edge over a large sample of the same patterns & setups. Hopefully you realize that any single sample or example does not mean anything at all. We cannot make long-term decisions over short-term actions or behaviors. But that’s exactly what too many failed traders do. You might see particular patterns or sequences failed several times in succession thru a session or two. By the third morning, doubt has crept in. Maybe “crept in” is not the right term: entrenched is probably more apt. More than just about any other profession I know, traders are an insecure bunch. They fear never finding an edge to trade profitably. Once they find that edge, they fear it will not last. Any time their edge experiences consecutive failures = drawdown, that fear raises its ugly but natural head.
Outta Control
Again, it’s all about control. Our human minds desire consistent, predictable, expected results. Not sometimes, mind you. Every time. We like to know that the sun will rise tomorrow. We like to know that 2+2=4. We like to know that water runs downhill, and a hot stove will burn us if touched. We like to know that every single trade we take based off criteria that creates our respective approach = similar outcomes. It’s all about building a belief system, which is based on constants = control. Both words stem from the same root of “con” for a reason. Only when we think we’ve found consistency with constants as an equation, we build confidence thru feelings of being in control.
Which is exactly why we do not like the fact that each individual trade taken from the same criteria for decision has random results. We do not like the fact that at times several of those trade decisions in a row will have failed results from our favorable expectations. So guess what happens then? Can you guess? Do you already know?
Our human minds desire consistent, predictable, expected results so badly, so deeply that we lean on fear & doubt to create a new belief system. The confidence in an expected successful outcome is replaced by confidence in an unsuccessful (aka failed) outcome. In both cases our confidence = control is exactly the same. Regardless of how it all turns out in the end, we have an ingrained need to expect = predict = know ahead of time. Anything other than structured control skews our natural desires. The less secure a trader is with first himself, secondly the market and lastly the method or system, the faster that mental switch from positive to negative expectancy occurs.
Protectionism Prepared
Deep down in our subconscious mind, we have no care at all whether trades win or lose. Our real desire is primeval. We want to know the expectancy of outcome based on what is known to us already. That’s just our basic survival mechanism at work. Is the pretty colored snake in our path harmless or deadly? Is the next time(s) we risk our money to the market going to be painful or pleasurable? We’re wired for a deep need to know these things ahead of time so we can avoid that which is harmful. That’s pretty critical information to have before dealing with the snake. Positive identification can result in 100% correct sequence of identifying venomous from benign critters to steer clear of those which we should. Real handy to know, for sure. But no one on earth can ever know the outcome of each individual trade taken until the benefit of hindsight has evolved.
Too many traders have no idea what’s going on in their minds when markets are live, charts are streaming from the hard right edge of great unknown with real money at risk of being risked on the next trade taken. Figuring out what makes me tick and what makes you tick is a critical, essential part of trading success. These are not empty rhetoric words here above arranged to simply fill space in a website magazine. The stuff we’re talking about here is critical, is vital to your success or failure. Every day of the week, countless traders having an operable edge in their market fail to manage & execute correctly. They find themselves paralyzed at the opportune time to enter (trigger shyness). They find themselves entering once the prime opportunity (chasing an entry). They find themselves haplessly clicking in orders against their well-crafted trading plan (impulse trading).
When the dust settles after those closing bells ring, these failed traders look back in hindsight and clearly see every single thing they did wrong. Do you know why they can see clearly after the fact where no visibility existed at the time? Did the bars magically change form on their charts when the day was done? Or were their deciding mental factors limiting the ability to see = react = respond correctly?
Mentally Prepared
The only way I know of to build a strong belief system in any given method, system or approach to trading is no-risk observation for a long period of time. How long, you ask? Long as it takes. As long as it takes any person to shift from fear protectionism avoidance sequence to trust confidence consistent application of a successful trading approach. Unless you realize this already, I’m here to tell you that it absolutely cannot happen if you or anyone tries to build mental = emotional confidence while trading real money in the process. It absolutely, positively cannot happen and you will certainly, undoubtedly 100% fail without question. Adding the real-money risk variable to an equation of building trust will ruin results every time. Every single time.
Mental preparation comes from practice. Studying charts pulled backwards thru weeks and months of data to visually back-test results. Watching charts in real-time to visually see results. Over and over again, as long as it takes to build and maintain confidence in your approach. If you succumb to the usual human weakness of trying to “earn while you learn” it will result in “burn while you learn” every time. Every single time.
Do not fall prey to the logical failure which so many before you have done. Practice, practice, practice. This weekend ahead is the annual NFL draft. Some of the top picks straight out of college will be signed to eight-figure contracts of staggering proportions. None of them, not a single one is ready to start a real NFL game against experienced players. All of them will spend endless hours in class rooms, in the weight room, in film study and then on the practice fields. Why is that? To build their inner belief systems that they can each compete and succeed in real time when it counts.
So why does anyone with a few thousand dollars in a trading account believe the process is any different for them? One reason is the random-chance aspect of trading. It is possible to click into a trade, essentially throw money at the market in pure gambling fashion and have more money thrown back as a result. It is entirely possible in trading to hit a big score, any time. It’s equally possible for the first QB picked in any draft to step onto a playing field for the first time in September without any practice at all and throw a touchdown pass. Or two. Or three. But will that same rookie QB build a hall-of-fame career like that? What happens when they get sacked five times, fumble two times and throw three interceptions in the first half of their next game? Do you have a stable, confident athlete on the sidelines? Or do you have a muddled, puddled mess of insecurity and dejection slumped over on the bench?
Summation
Real traders have net-loss trades. Real traders have net-loss days. Sometimes weeks, once in awhile months. None of that has anything to do with long-term successes. Consistent, methodical trading is not about trying to figure out what the market is going to do at every wiggle & twist using logic or reasoning power. Consistent, methodical trading is accomplished by knowing which specific setups = a high odds tipping point on the chart. Using that knowledge to apply action at the proper time, not too early or too late for entry, not too crowded or too loose an initial stop, not too small an average profit or too large an average loss all stems from confidence. Correct confidence stems from realistic expectation. Reality is, we have no control over any individual trade’s profitable outcome. We can control loss to reasonable extents within our overall approach. We can control wins by letting each trade have benefit of favorable expectation instead of unfavorable doubt. That keeps us from cutting profits short while letting losses run.
Don’t try to be perfect. Don’t even expect to come close. Don’t try to figure out every wiggle & jiggle on the charts. Don’t try to win every trade, or even prevent every trade from losing. Trying to prevent every trade from losing will likewise result in net-loss overall. Do work hard to study your approach, learn its nuances thru all market behaviors and build your inner belief level to its highest degree possible. Any attempts at short-cuts there leads to short-circuited trading careers.
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
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