Innovative Trading - Day Trading
Learn the Secrets of Day Trading and How to Make More Money!

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Innovative Trading - Day Trading

BECOMING A DISCIPLINED INVESTOR

“A key to self management is the capacity for self-observation, it is not the same as overcriticism ... it is rather a consistent monitoring of one’s performance from a perspective significantly detached to allow accurate evaluation.” --A. Garfield

It is clear that knowledge of oneself is just as important in trading as knowing facts, economic theories, news or trading methods. In the trading world, often emotion reigns supreme, facts are ignored and there is no wrong or right. The person who has control of himself due to his discipline and emotional self-control will ultimately emerge from the battlefield a winner.

However, coming to terms with our strengths, weaknesses and personal traits is not easy. It is not easy to analyse yourself objectively because you will naturally have a subjective perspective.

When trying to understand yourself, you must be willing to be totally honest with yourself. This can be difficult and painful. The person must have the ability to accept the results of looking within. Most people, however, find it difficult to admit they made a mistake. Ask a room full of people how many of them are happy admitting their mistakes and you will see few, if any, hands go up. Admitting mistakes, however, is a positive not negative attribute in trading, as it is in life. The world is full of people who want to be right, but the reality is everyone cannot be right all of the time.

“Learning is after all not whether we lose the game, but how we lose and how we have changed because of it, and what we take away from it that we never had before to apply to other situations’ losing in a curious way is wining.” --Richard Bach

All of us have physical and mental disabilities, which prevent us from achieving all our goals and desires. No one is perfect. It is possible, however, to isolate and work on weaknesses. This is similar to reviewing and working on your trading method. You must understand the strengths and weaknesses of the system and try to improve it, but realise perfection is impossible. Remember, in the final analysis you have inherent weaknesses and may not have all the required attributes for trading, but neither does anyone else. The more traits you possess, the greater your advantage, but the more you work at obtaining these traits, the better your chances for success.

THE SECRET OF MARKET SUCCESS

“For surely we are not ... no simply contending in order that my view or that yours may prevail, but I presume that we ought both of us to be fighting for the truth.” --Socrates

The aim of any investor is to make money by correctly identifying and acting upon the truth. The truth, however, is elusive, as there is no scientific method to get us to the truth. The truth is difficult to see as it can be totally different to what your emotions and natural instincts are telling you. Furthermore, the fact that the majority of people agree or disagree with you has no relevance in the pursuit of the truth.

To succeed in trading you need to understand that there are no certainties, only probabilities, and to seek the truth you need to have a deep understanding of yourself and the market you operate in, and how you relate to it. You need to stand-alone and, from your perception of what is going on around you, decide what the truth is.

I started this essay with a quote from Lao Tzu, who founded the Chinese philosophy of Taoism over 2,500 years ago. Many of the beliefs of Taoism are relevant to trading.

Trading is a reflection of life. This is why there are so many contradictory ideas and shades of grey instead of black and white answers. Just like life, trading is unpredictable; people who believe that there is a scientific law to investing that can predict commodity price movements are missing the point. Trying to reduce everything to numbers if, in Lao Tzu’s words, like trying to catch running water in a bucket.

Many elements of Taoism hint at the psychological course of events. This is particularly relevant in trading. Tao in English means “the way”. Tao is the missing link in trading, it is effectively the ability to see an event before it is definitely known, that is the key. It is really the intuitive ability to see and then to act.

In the world of Taoism you need the ability to use both analytical and intuitive skills. Relying on both right and left hemispheres of the brain to process and analyse information, this is the key to identifying and acting upon the truth. Once you have brought your thoughts to bear on the facts of a situation, then you need to let go. This is the incubation stage where you are letting your thoughts go where they may, without the influence of anyone else. When you learn to think and act in this manner, you will be surprised how you see many situations the crowd will never see.

Investors spend millions each year on “Holy Grail” trading methods, books and tapes that they believe will give them regular and consistent profits from the market, with low drawdowns. These people will never make money; in trading there are no certainties, only probabilities, and a trader must accept this if he is to make money.

A scorpion wants to cross a river, but he can’t swim. He asks a frog, who can, if he can hitch a ride on the frog’s back. “You’ll sting me,” says the frog. “It would not be in my interest to sting you,” says the scorpion, “because then I would drown.”

The frog thinks about the scorpion’s logic, finds it impeccable, agrees to take the scorpion on his back, and then braves the waters. Halfway across the river, the frog reels a burning spear in his side; the scorpion has stung him after all. As they sink beneath the waves, the frog cries out, “Why did you sting me Mr Scorpion, for now we both will die?”

“I can’t help it,” replies the scorpion, it’s in my nature.” --(From the movie “The Crying Game” 1992)

We are all human, and we all have emotions that are inherent in our biological make-up, we can’t rid ourselves of them. What we can do is understand them, and try to control them. If we don’t, our trading will be doomed to failure.

Obviously there is limited space in this essay to cover all the psychological aspects of trading. I would, therefore, strongly recommend you consult the enclosed reading list for further information.

FURTHER READING

Recommended:

1. The Disciplined Trader by Mark Douglas
2. The New Investors Quotient by Jacob Bernstein

These books cover all aspects of psychological problems encountered in trading and give clear guidance on how to avoid the emotional traps that destroy most traders’ equity. These two books complement each other, and are essential reading.

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