System Trading

The Confidence Conundrum

The key to confident trading is being well prepared for losing money.

Many traders enter this business with the view that finding a winning strategy will be the key to long term success. But like many who enter the world of trading with the aim of making large sums of money instantaneously, the reality often leaves an everlasting imprint on their minds of how diffcult trading can be. Quite often a trader will leave the trading arena with disappointing results.

Of course there is the other side of the coin, where you’ll find traders who have a winning streak that just never seems to end. They make trading appear so easy that one can be forgiven for thinking that the illusion of riches is well within anybody’s reach.

When you sit down and think about it, the function of how to trade markets is actually quite simple. It really comes down to making a choice. The market will only ever go Up, Down or Sideways. If a trader thinks the market is bullish and likely to go higher then this opinion will work in his favour in two of these three scenarios. So why is it then that the casualties in the spread betting markets are so high?

Having spoken to traders who have experienced losing trades, the interesting factor that comes out is that the fear of losing is also associated with the anxiety of winning. Nobody in their right mind wants to lose money. But at the same time when you have a winning trade that creates the fear of giving back profits. This is especially apparent when a trader has had a series of losses and then suddenly a winning trade, with the sense that markets are running against you it is quite easy to feel as though the market is going to “take back” what it has just given you. This anxiety can and does get in the way of rational thinking.

To overcome this problem a profitable trader will create a system or method designed to eliminate or reduce the decision making process during a live trade. This is because it’s clearly better to make these decisions outside of market hours and focus on trade adjustment and execution only at the time of the actual trade.

Professional traders realise and embrace the fact that losing is part of the spread betting industry, and that not every trade will be a winner. Too often traders will aim for more winning traders than is realistic, or even a perfect system, not realising that the actual key is in controlling risk to ensure that losses are minimal. This is why it is essential to incorporate Money Management and Risk Management as part of the strategy. You can have a series of small loses and just one or two large winners and still yield a net profitable outcome.

Some traders believe that by eliminating emotions they can become a better trader. But this is not necessarily true. In the sports arena icons such as Lance Armstrong, Muhammad Ali and other professionals often displayed intense emotion. The key for them would be to allow their emotions to come to the fore, but become conscious of their emotional state and then deal with each individual factor e.g. fear, greed and uncertainty.

It is imperative to understand that in the financial markets uncertainty is a factor that needs to be dealt with. As humans we generally do not like uncertainty, and have a tendency to revert to a herd mentality and therefore avoid uncertainty. We naturally gravitate towards situation where we believe we can know the outcome before the event. This is why many traders will try to predict the markets, because it feels more comfortable to think you recognise what is going to happen rather than not knowing the outcome.

Instead of seeing uncertainty as a threat it would be better to view it as a state or a condition. And then by detaching yourself from the state of uncertainty you can then embrace the outcome as natural rather than forcing your opinion on the event. By forcing an opinion we prevent ourselves from being flexible. Because markets can and do change direction, a key skill to have is the ability to move with the market rather than become stuck with one strategy because of a conviction in a market prediction.

Once flexibility has been developed into your skill set, confidence can be nurtured to a degree where the market just becomes a playing field rather than an emotional rollercoaster. Becoming more focused on developing each individual skill then becomes vital to long-term success. A tennis player can spend months practicing a forehand swing or perfecting their backhand. Similarly traders need to develop skills in executing trades and managing the trade as well as their mental state.

Trading psychology is a huge subject which is now becoming recognised as a key component of winning formulas. It’s been realised that it’s not just strategy that needs to be applied well to be successful, but also a balanced mental state that needs to be achieved in line with that strategy. Zen trading is not something of the past, but rather a complimentary skill for the future.

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