- Most traders want to make too much profit per-contract, per trade. Just because a trade has a decent expected profit does not mean it is going to work every time, much less mean you can expect a large winner every time. Yet psychologically, it is easy to fall into hoping for this to happen, which can lead to poor trading judgment.
- Nervous traders use tactics that harm their strategies longevity and their P&L: For example: The psychology of a momentum trade is this: You, by your buying and selling, want to be a part of the market that is supporting and pushing price to a new level. Think about it this way: A “momentum” setup is usually a market event that is set up to punish short-sellers: Do you want to let them off the hook easily? Of course not. Yet, when traders try to be too tactical – doing things like putting in super-close stops, or “trailing” close stops, they are often doing this. This type of activity is what kills a working trading strategy when large numbers of traders (Or a few large traders) start doing it. If you do not understand this idea, I suggest that you spend as much time as needed to grasp it. When I see a momentum situation developing, I “Buy, Buy, and Buy again” and put limit orders in below the market to buy more. Raw aggressiveness at the right time does not simply anticipate the move, it supports the move. The ability to see this simple competitive dynamic (I call it, “who is pushing who”) is one of the most important skills a serious trader can have
- Not updating strategies as time passes and not learning new angles, or “edges”. I have found that good traders are always hungry for new angles and more information. Great traders are always hunting for extra knowledge: They are not content to just trade a pattern and hope it keeps working; they search for fine points, refinements, improvements, and extensions. .
- Let me provide an example: One expert trader that I talk with always seems to be struggling with his strategy. A newbie might listen in and think, “Man, this guy can’t seem to figure the game out”. In fact, it is just the opposite! This is one of the most profitable, knowledgeable, and experienced traders around.
- Using hindsight to judge results –The reality is, “early” or “late” is an idea that is only available with hindsight. Don’t let this type of thinking throw you off your game. On the other hand, if you feel your exits consistently tend to be premature, use this feedback to see if a longer holding period would help results (For example, many of these “morning momentum” variants work well with a full-day holding period). Rather than beat yourself up over vague notions of “exiting to soon, or too late” take that feeling and use it to motivate your inquiry.
- One of the Stewart Clan mottos was, “Courage grows strong at a wound”. This to me is an amazingly apt motto for a trader. Let me tell you a story: In 2009 when the current bull market was just getting started, I went through a rough period of losses. My mentality was still geared towards the 2008 environment, and I was having trouble adjusting to the “grind higher” bullish environment. At times I felt psychologically paralyzed, trapped by the market – trying to “short and cover” tactically yet noticing the market always reversed just at or above my “cover” level. As painful as this was, this period actually ended up being amazingly beneficial. It is where I laid the groundwork for many of my current trading strategies, and also re-affirmed my belief that a keen “survival instinct” is a must for all traders.
- One of my favorite ideas is a notion I learned from reading a book about Ayn Rand about 10 years ago: “A concept is a mental integration of two or more units possessing the same distinguishing characteristic(s), with their particular measurements omitted” (source). This idea is very useful when creating trading strategies or trading a discretionary approach.
Good Trading, Nat