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Wednesday, July 8, 2009

The Biggest Enemy In Trading -- YOU

Here's an excellent article I read at thinkorswim, Pls read the whole article, seriously.


"What is the most important factor in learning how to trade. I'm reading lots of books and have attended a few seminars but am not sure if its all "clicking". I know there is no holy grail, but if you could pick one thing that is most important, what would it be?"


Your question is awesome and brings up a lot of issues. The big secret is.........(ominous music begins playing in the background)... YOU. Yes, you read that correctly, the big secret is YOU. Beyond all of the analysis skills it will always come down to YOU. Not the market, not technical analysis, not fundamental analysis, not even my beloved market internals. Because if you know all of that cold and you have not mastered yourself, then you will still lose.

Making trades is never pitting yourself against the market or other traders. It's simply you versus you. This is because the market is essentially a distillation of the same forces that govern life itself. Our entire existence is one teeter-totter between desire and a need for security. You either want something, or you want to be secure. In the market this is characterized by greed and fear. These forces wreak havoc on your mindset as you are entering the postion, holding the position, and exititng the position. But in reality its all just YOUR reactions to the postion because you have some money on the line and that of course changes everything. In reality, the market does not know you have the postion on, nor does it care, and unless you are a really large institutional player, nobody else knows or cares that you have the postion on either. Every tick is essentially magnified because its coming through this cloudy filter that is you.

So how do we eliminate the "you" so that there can just be market and our reactions can be neutral regardless of our positions moving in or out of our favor? There are a number of ways that this can be developed. An interesting excercise to do is to sit by your window if you live in the city (or just find a park bench) and casually drop $100 bills into the wind. Watch them as long as possible and while watching them, try and watch your mind even more closely. Note how quickly it begins to "hope" and construct false scenarios that would allow you to run out later and retrieve the money. Oooh, its caught up against that bush! I think the wind will stop blowing now and it will stay stuck there. I could run our right now and get it back.... Sound familiar? How about Ok there's support here, its definitely going to bounce, etc etc..... Try it. You "win" when you can just watch the money float away and the mental gymnastics stop. Authors Note: While we feel this excercise definitely has merit, we did start to have shades of doubt when we were awakened for the third time by homeless bums throwing little pebbles at our window and yelling "hey man, do you have any more money?"

Don't want to throw a few grand out the window you say? Well then do anything you can to de-energize the markets actions. By this we mean simply to systematically decrease whatever sensations the market is causing you to feel. Easier said than done obviously. Amongst others, two big steps in the right direction are to cut size down to manageable levels and keep a trading journal. The first helps you to "not care" about the money because with appropriate size, no one loss can ever end your career. And the second creates that "from a distance" macro view which shows every single trade to just be one of many, thereby making each individual one less important. Obviously this is just scratching the surface of what is a very big issue. All of this is discussed in greater detail in our second favorite trading book of all time (right after Reminiscences...) by Mark Douglas called "The Disciplined Trader".

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