Over the years Naturus.com has trained hundreds of traders. That training always involves practicing trade executions in a simulated trading “paper” account – real data, real executions but imaginary money.
Over the years we’ve noticed a remarkably consistent pattern. A very high percentage of our trainees can trade brilliantly in the simulation program; steady consistent profits, sharp entries and exits, excellent grasp of market conditions and a clear, rational plan for exploiting them
And then they start trading real money.
It’s like somebody turned out the lights. Almost immediately things turn sour; they jump in too soon, get scared out of good positions, hang on to losers and cut their winners short … the exact opposite of what they should be doing, and the exact opposite of what they were doing in the simulation program.
WHAT HAPPENED?
The only difference between real and imaginary – and between good and horrid – is the emotional impact on new traders of having real money at risk. They succumb to the two emotions that drive the market: greed and fear.
Nothing cranks up our emotional responses faster than money. And trading is about nothing else. But successful trading requires a kind of cold, calculating rationality, and any emotion – giddy joy as well as bitter despair – is fatal.
So we see trainees doing things they know are dumb:
- They jump on the long side of an uptrend because “they don’t want to miss the trade,” even as the trend is ending.
- They cling tenaciously to losing positions hoping the price will come back – an attempt to avoid admitting you made a dumb trade that usually turns a small loss into a big one.
- They pull their stops so they won’t get hit. Really!
- They double down on losing positions – if it was a good short at 1675 it must be even better now that the price has moved up 10 points – and watch, paralyzed with horror, as their losses multiply; then they exit the position, just as the market turns their way.
- They become so traumatized by losing that they take excessive risks hoping to get back even.
- Finally, they quit in despair, close their trading account, burn the computer, and retreat into a dark place to lick their wounds.
None of this is necessary. All of it can be avoided. Here are some things that help.
HOW TO FIX IT
- Learn to curb your enthusiasm. Nothing will kill your account faster than impatience. Entering trades too soon usually means you have to hold on through some draw-downs where the market moves against you. That puts a strain on your emotional control. You don’t have to get every dime from every move to make a profit; all you need is a piece out of the middle.
- Learn to act decisively. Trading is a bit like warfare: long periods of inactivity followed by short bursts of explosive movement. You need to learn to wait for the moment; but you also need to learn to jump when the moment is right. Which means you have to …
- Learn to read the market. The market is cyclical. Periods of expansion are followed by periods of consolidation which end in a new expansion. The patterns repeat in every time frame, and at every price level – traders call them “fractal” patterns. You need to learn to read price charts because they can help you see when one part of the cycle is ending and the other is beginning – break-outs from trendlines, for example, or reversals from patterns like double tops and bottoms. There are hundreds of these technical patterns, but you don’t need to learn them all; just the ones that work for you. We know traders who have made a good living for years trading just 2 or 3 trade set-ups. They have mastered a very small slice of the market … and that’s all they need.
- Learn from experience. You can’t learn to trade by reading about it – or by watching somebody else do it – any more than you can lose weight by reading diet books. You have to do it yourself. There is no substitute for time spent in front of the screen, studying the market and trying to see what it is likely to do next. The more frequently you see how it behaves – the more experience you acquire – the easier it is to control your emotional responses and profit from your knowledge.
- Learn yourself. You can learn to recognize the stimuli that trigger foolish trading, and identify the emotional states that sabotage your trading decisions. Develop strategies to manage them. Get up and walk away, for example, or turn your attention to something else until you calm down. When you get excited you are much more likely to do dumb things that cost you money.
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Related Reading:
Why Smart Traders Do Dumb Things
