Some people are afraid of success; others fear failure. Either way, the expression of the behavior is the same-not doing what is necessary and known in order to achieve success.
If you purchase a program that doesn’t help you select trades and have clearly defined entry and exit points, it’s incomplete. If you purchase a program that doesn’t clearly separate risk management tools from money management tools, it’s incomplete. If you don’t have a clear way to create a trading plan from the core ideas presented to you in the program, then it’s incomplete.
It is constantly said that 95% of traders lose money when it comes to trading. That means that 5% of the traders are collecting all of the profits. What are they doing differently?
There are four areas of a trade that have to be managed correctly in order for a trader to feel satisfied in his trading, whether he wins or loses. You have to know why you are selecting a trade, how to enter a trade, how to properly monitor the trade you are in, and, finally, how to exit the trade to the best of your ability.
If your decision-making process is faulty in any one of these key areas, you will start to cycle through the six emotions and become discouraged in your abilities as a trader.
Selecting Trades Properly
This is where so many traders go wrong. From the outset they don’t know what type of trader that they want to be. The guru is a day trader or an option-only trader, so you should be, too. If the guru is trading a $50,000 account or recommends a $10,000 account, you should immediately follow suit.
You must trade to your strengths, interests, seed capital, time constraints, and abilities. Look at the experience of the program creator and realistically look at yourself. If you can’t stomach day trading, don’t do it. If position trading is too stressful for you, don’t do it. Whatever the case, avoid putting on trades that simply don’t match who you are as a person.
If you are looking to stretch your boundaries into new trading arenas, first use a demo account and apply, to the best of your ability, the same conditions that you would experience if you were actually trading that way. As we know, ideal conditions never set the rule-they prove exception.
A little self-knowledge can go a long way to diminishing or eliminating improper trades from your lifestyle.
Entering Trades Properly
This leads us into how to enter a trade. In order to make a trade successful, you have to know how you are going to get out and what you have at risk. By fixating on the profits, you set yourself up for failure. The reality of trading is that profits take care of themselves. If you have picked a good trade and the market is going in the right direction, there is little you can actively do to make that trade any better.
However, the question in the back of your mind should always revolve around: “What if I am wrong?” By entering a trade with that question on your mind, you can figure out if the trade is worth taking at all. Successful trade entry is based solely on what you will do to exit.
Often, this has to take into account what risk management tools you will use in order to make the trade successful.
Monitoring the Trade
If you are a position trader, why are you watching the market hour by hour? If you are a swing trader, why are you looking at end-of-day results? These are genuine questions I have had to ask clients over the years. The key reasons fall back on one of two answers.
They don’t want to put a “stop order” in the market because they are afraid their stops will be run, so they keep mental stops and sit at their screen to get out fast; or they just like to “watch the market.” They are actually letting every tick on the screen influence how they act or, more importantly, how they will react to the market.
Whatever the reason of how and why a trader monitors the market, the core reason is fear. They don’t trust the judgment that they have used to get into the trade, and they really don’t know how to protect themselves from losses besides either ignoring the market completely or watching tick by tick to anticipate what will happen next in the market.
Successful monitoring has to also have a back-up plan. Much like chess, you need to be three, five, maybe even seven moves ahead of your opponent. There is only one way to succeed in a trade: The market has to move in your direction. But there are at least two ways to lose: the market moves against you or the market does nothing.
If you prepare for these contingencies, your monitoring becomes a function of your preparation, not a crutch to rescue a trade that goes bad.
Exiting the Trade
Who determines how you get out of a trade, you or the market?
If it’s you, then maybe your actions are reactionary or you simply don’t have enough capital to be trading the markets that you are in. This is exactly why you have to know yourself when you execute a trade.
How you got in the market should be the exact reason why you get out of the market, if the markets fundamentally shift supply and demand in the opposite direction of your initial position.
When the market shifts, you should have targets in place to capture profits you have made or to protect your principal. These don’t necessarily need to be monetary targets; they could be overbought/oversold indicators, Bollinger bands, and so on. The key point is that you have a reason for why you do what you do, coupled with a back-up plan that helps you reenter the market without being whipsawed or chasing the markets.
The exact way you get out of a trade will have a direct impact on how you get back into the market. It will determine if you can even get back in or if it’s too late, or if you can double up on your contracts, or if it’s time to find a new market altogether.
The exit, profits, and losses, should all be carefully prepared far in advance of ever putting your first dollar on the trade. This is the only way to prepare for an exit of a trade-leave a little room for unpleasant surprises.
Written by Noble DraKoln, he is founder of Speculator Academy, http://www.speculatoracademy.com. After becoming a licensed broker at the age of nineteen, he has gone on to author seven trading books. He is a former editor of Futures Magazine, regular contributor to Forbes, has been a featured guest on numerous financial channels, and is a sought after consultant speaker in the futures, forex, and options world. Needless to say his twenty-one years in the industry have been well spent.
He is also the author of the books Trade Like a Pro, Winning the Trading Game, published by Wiley and Sons, and the author of four book “Small Speculators Series”.
His books have been translated into German, Romanian, and is currently being translated into Chinese, Korean, and Spanish.