This Is A Question Every Trader Must Answer…

But what about in the markets?

Does saying “I don’t know” mean that you are ignorant when
you are talking about the markets? Is this necessarily bad? If you “know” the
market is going up, does this knowledge really lead you to bigger profits? Or
does the “knowing” fill the mind, shutting out the ongoing signals of the market
from your perception? Is a mind full of “knowledge” regarding what may happen,
able to perceive what is actually going on? Is there a difference between the
following?

I know the market is going up.

I think the market is going up.

The market has to go up now.

I want the market to go up.

Why isn’t this market going up?

It looks like the market is going up.

I’d say that the most valuable statement above that will
help the mind stay detached is the one that starts with “it looks like.” This
is the only statement that refers to actual price action, above knowing,
thinking, wanting, needing and questioning. The “it looks like” statement is
very powerful in centering the mind where it needs to be centered, which is on
reality rather than on internal needs to be right. A trader who is in this
right frame of mind will often answer the question, “which way is the market
going?”, with I don’t know, but it looks like it is going up. Not only is the
trader who makes the above statement able to see what is actually going on, he
is open to new market action, and rather than being committed to a statement
about the market going up or down, the trader is committed to what he is seeing
without becoming closed off from what is actually going on.

The statement, “I don’t know” is a way of telling the ego
to butt out. When you are in an “I don’t know” state of mind, it is difficult to
become emotionally attached, and that is a state of mind that can prove
profitable. Granted, observation can be mistaken, but unattached observation
lends itself to clearer pictures and quicker reversal.

So, those who don’t know, know, while those who know,
don’t know.

There is a fine line between thinking about what might
happen, and then entering just as it starts happening and thinking about what
might happen, and entering BEFORE it starts happening. Let’s look at a
hypothetical example of a simple “line in the sand” type of system. The system
buys on bar close when it crosses above the line, and sells on bar close when
price crosses below the line (on a closing basis). A chase parameter is set of 1
point above/below the line where entries may be taken via limit orders. Now
let’s assume for the sake of argument that a given line is typically crossed 5
times per day on a closing basis, and that of those crosses, on average only 1
of those crosses makes money, but enough to cover all the other small losses and
secure a small profit. After trading this system for some time, the trader
begins to see unfilled entries, where the bar closed more than 1 point beyond
the line and didn’t look back, and would have been profitable had they been
taken. Now bear in mind that the original system is profitable, but just not as
profitable as it would be with those missed entries.

Can you see where this is heading?

So the trader changes his rules. He starts anticipating
the fact that the bar is going to close beyond the line, and takes a pre-emptive
entry. The first thing the trader notices is that the vast majority of these
anticipated entries are false signals. He starts noticing just how many bars
actually poke through this line on a non-closing basis that never trigger a
signal based on his original rules. He finds that his total number of daily
trades more than doubles on average, and that almost all of the newly added
trades are losses. These losses are really starting to add up.

The trader further notices that his method is now losing
money because he has taken too many losses to be made up by the 1 or 2 big
winners on a given day. The trader also starts to notice that he is hesitating
in executing some of the trades now, and that those trades that he is missing
are turning out to be overwhelmingly profitable.

So the trader starts to work on self-discipline by trying
to follow the rules, including the anticipated entries (I hope you see the irony
of trying to follow the anticipated entries in a disciplined manner). Meanwhile
he starts looking at various filters to know when a poke through the line is
valid or not, and so he gets into various oscillators, moving averages and other
technical indicators. Before long, the trader has a complex trading system that
might make money if he could only follow all the signals, but in the end is only
marginally more profitable (or even not as profitable) on paper than his
original simple system. You know the old adage, “If it’s not broke, don’t fix
it.” Ultimately every person has to answer a single question that determines
what they get out of trading. Unfortunately, most people don’t answer the
question truthfully (at first).