Excellent article entitled “Why Do Traders Fail”over at Financial Sense this weekend. I’d like to add a 6th reason to the list and call it “The Need to Win Now”. One could argue that this falls under #2, which is the failure to follow your own discipline, but I think there’s something else here at play that is important to delve into.From the moment you get into a trade, it’s important psychologically to see green on your screener right away, but not absolutely necessary.
Have you ever gotten into a trade, and as soon as you pull the trigger it’s in the red. It continues to stay there and you see the trade going against you tick by tick, and you begin to doubt whether you made the right choice.If you’re confident inyour system it’s no big deal because you know where you’re going to cut your loss if it reaches that point, but if you have the slightest doubt in your system you start to second guess every move. If you do bail on the trade because you psyche got the best of you, I’m almost certain you’ve experienced the instant stap back of a stock after you sold it. These are the moments that destroy trader’s confidence because of the need to be right as soon as you place a trade.
Be sure to give the stock ample room to bounce around before letting snap judgements take you out of trades and fight that instant gratification urge. Here are the 5 reasons from the article.
1. A Method
You must have a method that is objectively definable. This method should be thought out to the extent that if someone asks how you make decisions to trade, you can quickly and easily explain. Possibly even more important, if the same question is asked again in six months, your answer will be the same. This is not to say that the method cannot be altered or improved; it must, however, be developed as a totality before implementing it.
2. The Discipline to Follow Your Method
‘Discipline to follow the method’ is so widely understood by true professionals that among them it almost sounds like a cliché. Nevertheless, it is such an important cliché that it cannot be ignored. Without discipline, you really have no method in the first place. And this is precisely why many consistently successful traders have military experience – the epitome of discipline.
3. Experience
It takes experience to succeed. Now, some people advocate “paper trading” as a learning tool. Paper trading is useful for testing methodologies, but it has no real value in learning about trading. In fact, it can be detrimental, because it imbues the novice with a false sense of security. “Knowing” that he has successfully paper-traded during the past six months, he believes that the next six months trading with real money will be no different. In fact, nothing could be farther from the truth. Why? Because the markets are not merely an intellectual exercise, they are an emotional one as well. Think about it, just because you are mechanically inclined and like to drive fast doesn’t mean you have the necessary skills to win the Daytona 500.
4. The Mental Fortitude to Accept that Losses Are Part of the Game
The biggest obstacle to successful trading is failing to recognize that losses are part of the game, and, further, that they must be accommodated. The perfect trading system that allows for only gains does not exist. Expecting, or even hoping for, perfection is a guarantee of failure. Trading is akin to batting in baseball. A player hitting .300 is good. A player hitting .400 is great. But even the great player fails to hit 60% of the time! Remember, you don’t have to be perfect to win in the markets. Practically speaking, this is why you also need an objective money management system.
5. The Mental Fortitude to Accept Huge GainsTo win the game, make sure that you understand why you’re in it. The big moves in markets come only once or twice a year. Those are the ones that will pay you for all the work, fear, sweat and aggravation of the previous 11 months or even 11 years. Don’t miss them for reasons other than those required by your objectively defined method. Don’t let yourself unconsciously define your normal range of profit and loss. If you do, when the big trade finally comes along, you will lack the self-esteem to take all it promises. By doing so, you abandon both method and discipline.
So who was the all-time real-money profit record holder who turned in a 444.4% return in a four-month period in 1984? Answer: Robert Prechter … and throughout the contest he stuck to his preferred method of analysis, the Wave Principle.
