I’ve been thinking about and analysing the trades that I’ve done over the past few months and have managed to come to a conclusion – of sorts – about what has been going wrong. I think the main problem has been that I have allowed myself to take views. In other words; I’ve allowed myself to project my expectations of what I believed the market “should” do onto the market.
When there is enough fundamental data to base an expectation on and you are a long term equity investor, then sure, it makes sense to do this. But if you are a shorter term trader, these types of expectations can really be very dangerous.
Having an expectation about what some certain point in the future will look or feel like almost always leads to disappointment. Over the longer term rationality will prevail, but in the shorter term sentiment and momentum rules the day. I have to remember that it is not my job to predict the market, but merely to follow it and to take the opportunities that it makes available to me.
In order to do this I need to create the right mindset that will allow me to flow in and out of the market without bias or fear. The best way to do this is once again stick a bunch of sticky notes to my screen that constantly remind me of Mark Douglas’ Five Fundamental Truths of Trading (review of the book Trading in the Zone is here). So written in barely legible crab scribble, I will be sticking the following truths to the bottom of my screen:
1. Anything can happen.
The world, and the market, is completely and totally random and cannot be predicted. If you can fundamentally accept that anything is possible at any given point, there is no logical way that you can hold any expectations about what ‘should’ happen. And therefore forming a bias or a view is irrational. Anything is possible and it is your job to react to the changing environment.
2. You don’t need to know what is going to happen next in order to make money.
Self explanatory I think. If you just follow the market the opportunities to make money will present themselves. Anything is possible remember.
3. There is a random distribution of wins and losses for any set of variables that define an edge.
An ‘edge’ is what your rules gives you. A setup for a trade… a set of variables that indicate to you that an opportunity exists. No strategy works all the time and no system will get every trade right. The more you trade the more probable that 100 losing trades in a row becomes. Likewise the more probable that 100 winning trades in a row becomes. None the less, the distribution between winning setups and losing setups are mostly random and unpredictable.
4. An edge is nothing more than an indication of a higher probability of one thing happening over another.
Seeing as nothing can be predicted with certainty and that anything is possible, all we can do as traders is to put the probability of success in our favour. Our edge gives us this, but we must remember that just because it is probable, doesn’t mean that it must happen.
5. Every moment in the market is unique.
Every single day countless people interact with each other all acting on how they are interpreting the market’s behaviour. Just because a chart pattern repeated itself few times does not mean that it will repeat itself again. It is impossible for anything to ever truly be repeated, exactly like it was before. For that to happen each and every person interacting with the market will have to do exactly what they did before, in exactly the same sequence. Even if one person is not at their desk, or is in a different mindset, the pattern that you are banking on repeating, will not be exactly as it was before. In fact, it may not work at all. Every moment is entirely unique and different and remember, anything is possible.
Accepting these five Fundamental Truths of Trading sounds a lot easier than it is, although I believe that they are vitally important to anyone’s success as a trader. They need to be ingrained in your mind and always at the forefront of your thoughts. This will leave no room for expectations to creep in and make your life difficult. If you haven’t read Trading In The Zone yet, do yourself a favour and read it.
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