Saturday, August 11, 2012

What makes a consistently profitable trader?

Every trader who is starting out, is starting with the belief that they can eventually make a living with trading. Initially it seems so easy. They soon come to realize that trading can be one of the most frustrating experiences . On the face of it, all you do is press a button on a mouse. It worked in the past, in fact I made money this way yesterday and I'm doing the exactly the same thing today, so what went wrong?

What makes consistency so challenging?

Mark Douglas says.. "It requires learning the type of skills that people are simply not used to learning, mental skills. Most people assume that because their technical method gives them a signal to get into a trade, that if their method produces a high percentage of winners, it will equal a consistent income. Not taking into consideration that the execution of that system requires mental skills."

The metaphor of a basketball player..

Imagine a professional basketball player who practices 5 hours a day throwing hoops, day after day he consistently throws the ball in the net. In fact he can string a number of winning throws through the net without missing a single one.  

Now the question is...

Could that basketball player make a winning throw if she was the finals of a major basketball championship, her team is down 1 point and there is only a few seconds left on the clock, and she was just fouled? Under these circumstances, without the mental skills, making the winning throw is highly unlikely.

Can you stay focused on the process of trading, under the pressure of the trading conditions. Without being distracted by your emotions or the pressure of losing money? or what the consequences are if this trade went wrong.

You may have a good technical method, that could potentially make you large profits. Without the mental skills of a Basketball player that can shoot the winning hoop in the pressure of a win or lose situation has, it is unlikely that you will be able to follow your trading plan correctly enough to produce the consistent results, without making a number of execution errors.

Mark Douglas of says..

 "to stay positively focused on the process of trading, by doing exactly what we need to do, when we need to do it, without hesitation, reservation or fear.

"No matter how good a technical method is at generating winning trades, turning those winners into a consistent income requires the ability to do or not do some things that the method itself can't help us with. 

For example:

  • Our method cant force us to predefined the risk of getting into a trade.
  • Or if we do predefined the risk, our method cant force us to take the loss that ends up turning into a bigger loss.
  • Our method cant prevent us from moving our stop closer to our entry point, where we get stopped out and the market trades back in our favor
  • Our method cant prevent us from hesitating and getting in too late, or jumping the gun and getting in too soon, where the signal to actually get in never really develops.
  • our method cant stop us from getting out of a winning trade too soon and leaving money on the table.
  • our method cant prevent us from letting a winning trade turn into a losing trade without getting any profits
These mental errors are a result of thinking, believing or assuming that our technical method is telling us, what's going to happen next on a trade by trade basis. Not understanding that technical methods aren't designed to do that. Technical methods and patterns are designed to put the odds of success in our favor over a series of trades. It may not seem like it on the surface but their are some profound psychological implications here. What this means is that the outcome of the signals generated by any technical method on a trade by trade basis are unique and random. in other words their is no way to know in advance what the outcome to any particular signal will be or what the sequence of wins or losses will be over a series of trades."

The solution..

A consistently profitable trader accepts the randomness of the outcomes. Every moment in the market is unique!

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