Note: This is a guest post written by Brian McAboy of InsideOutTrading.com. He teaches Traders how to trade with confidence and consistency by focusing on their Psychology. I believe that this is the most important aspect of trading, so I was very happy when Brian approached me to write about what he does. Enjoy…
Is it possible that the reason so many traders struggle for so long is because they are asking the wrong questions, at least not the right ones for where they are in their growth as a trader, and thus wasting inordinate amounts of time and money pursuing the wrong answers?
There’s a path going from a rank amateur to being a self-sufficient, fully proficient trader, a developmental curve with several key events and milestones that need to be achieved before you reach the promised land of time freedom and financial prosperity as a trader. Many fail to consider where they are on that curve and reflect on whether their focus should perhaps be directed to something other than where they’ve had it.
One such erroneous question I get on a regular basis is, “Should I be a discretionary trader, or is mechanical a better way to go?” The big question isn’t IF you should be a discretionary trader, so much as it is a question of WHEN. If your purpose in trading is to realize the consistent generation of profits, then it is simply a matter of taking advantage of a few realities of your nature as a human being in the world of trading.
If we step back from trading for a moment a look at it from a slightly different perspective, then we’ll see that it is a skilled occupation, not just one of acquiring a system and then finding techniques to trick or force yourself to stay disciplined to it. You are not an undisciplined person by your nature, as shown by the many things you’ve been able to accomplish in your life. Doesn’t it make sense then, that if discipline has been an on-going challenge in your trading, then perhaps the reason you hesitate, over-trade or are off in your timing, is because of something other than the commonly attributed emotions of fear, greed, hope and revenge?
Trading is a decision-making process operating in an environment with uncertainty built-in, yet attempting to find reliability and consistency through application of specific methods and tools. Trading is a very mental activity, in which you take in information, evaluate it and make decisions according to particular criteria, and then you act on those decisions based on the various possibilities at each given point along the way. Now in any skilled, performance activity, there are specific factors that come into play for a person to achieve proficiency where success comes regularly, naturally, and without a monumental effort. This includes trading.
Put very simply, to enjoy consistent and reliable success at anything requires that you have good tools to work with, and you need to be good at working with those tools. In trading, the first and most important of your tools is your trading system. In order for it to be a ‘good’ system, it needs to meet a few criteria. It should be constructed properly, based on sound reasoning and be a good fit for you. The good fit part includes being congruent with your attitudes and biases, and just plain making sense to you, but also it needs to match well with your current level of skill and understanding.
Success or failure with trading depends on how well you make decisions and then act on them in a timely manner. This requires clear thinking, maintaining sound judgment, and keeping your emotions from interfering. Since consistency is your goal, it only makes sense that your method and tools should incorporate as many elements as possible that support this goal and specifically eliminate or minimize anything that creates variability. Your trading system is your guide to finding, entering and executing trades and outlines the decision-making process. If try to trade with a discretionary system, you are by definition, incorporating variability into the process – and creating open invitations for your emotions to come into play in the decision-making process.
Until you reach a certain point in your development, where you have experienced a significant and sustained period of knowing success, and for most traders this period should be six months or more, you simply are not emotionally equipped to objectively deal with the undefined or ‘discretionary’ decision points. It is just too easy for doubt, fear and all the other emotions to still influence your evaluation of the information and the ‘what to do now’. Only when you’ve traded successfully for several months will you have established the confidence in yourself and your system to fend off emotions.
So what should you do if you haven’t yet experienced that sustained period of success? Until you reach that point where you are proficient and have established the confidence, you really need to trade with a ‘mechanical’ system, one where how you’ll make the decision at each of the decision points is clearly defined, so that there is no question as to what to do in any given situation. Then you can simply focus on doing, rather than wrestling with figuring out ‘what’ to do.
There’s still one more big hurdle to overcome though. Remember we said that trading is a game of skill, and that you need good tools to work with? This includes your system and knowing how to tell if you have a good system is a skill in and of itself. There are a number of qualities that make for a good system that is easy to trade consistently. Even if a given system is based on a decent theory, if it is constructed poorly or lacking the right attributes, it will be difficult to trade and the usual problems will continue.
To discover the psychology of trading systems and how to know that you have a solid system that you can rely upon and with which you can enjoy solid confidence, I invite you to watch the video you’ll find at http://tradingsystemmastery.com
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About the Author: This article was written by Brian McAboy of InsideOutTrading.com. Brian’s years of experience as a trader, Quality Engineer and Business Consultant position him uniquely to give you significant advantage as a trader through performance psychology and good business principles and practices.