By Gabe Velazquez, Online Trading Academy E-minis Instructor
How many times has this happened to you? You see a trade setting up. Every condition you look for is present; it's time to take action. But just before you click the Buy/Sell button, that nagging doubt begins to set in... You have second thoughts. Suddenly, you're mired in negative what ifs, and before you know it, the market does what you expect and you are not participating. As the market begins to gain momentum, your frustration builds until the thought of missing the move becomes so unbearable that you finally jump in. And of course, most of us know the end of this picture does not turn out well.
Why is this scenario so common among traders? Part of it has to do with a belief system that is not conducive to consistent profitability. In the earlier depiction, the trader missed the trade, perhaps because he/she didn't truly believe that his method afforded him high probability trades. Perhaps there may be other reasons for his indecision however, strong conviction in an idea or method will often serve to suppress the inevitable doubts that plague so many traders.
Let's explore this. When I teach new traders some of my strategies, I begin by saying "this is my strategy" because I BELIEVE it works, and specifically, it works for me. I follow that statement by telling them that only when they do their own work, will they begin to build confidence and thus believe that what I'm telling them actually produces results. Showing them in a live market setting is also helpful in building trust in a methodology.
The process begins by observing and analyzing the information and asking plenty of questions. What percentage of the time does the setup work? In what market environments is it most effective? Does the method fit my personality? Finding these answers may help boost the credence of a system, and reinforce the belief that implementing it will garner profits. Finally, when all the analyzing is done, the student has to make the trades with every signal generated. Believing that a system is viable truly begins when profits are realized on a consistent basis. Few people (except gullible ones) will take just anyone's advice on other matters at face value, so why would it be any different in trading?
Changing people's belief systems is what I strive to do as a trading instructor. Let's take, for example, the fact that most people starting out in this business believe that they can successfully trade, if they can just find a special indicator. They become laser-focused on finding that technical tool that will make them rich, and in the process will create many illusions - to their detriment - that they sincerely believe are true.
Another common belief is that by holding on to a position long enough, it will eventually come back and repair the loss. That's another way of saying that stop loss orders are not necessary to be a successful trader. Admittedly, there are highly successful traders, money managers, and hedge fund operators that trade without the use of actual stop orders in the market; however, they do know when to cut their losses.
The most prevalent belief I encounter while interacting with new traders is the notion that there is a direct correlation between forecasting the direction of the market correctly, and being profitable. This, in my humble opinion, is the hardest belief to break. To counteract this idea, I try to instill the belief that markets move due to imbalances of buyers and sellers, and that finding those imbalances is more fruitful in the long term than trying to figure out what the market will do next. Put another way, stick to identifying trends, support, and resistance levels. Let me stress this point: This is my method, and not the only method. If you do some work, you will find yours.
If you're a trader struggling to make a decision everytime your technique signals that you go long or short, you need to reflect very seriously on what you believe. If you don't have a strong conviction about what you're trading or how you're going about it, then you have work to do. If you believe that you can be a successful trader by avoiding losses at all cost, then you have work to do. If you believe you can be consistently profitable without a plan (set of rules), then you have a lot of work to do. Finally, is your belief system in direct alignment with your financial goals? If not, just like the tires on your car, you're going to require a realignment before one of them falls off.
Until next time, I hope everyone has a profitable week.
If you have questions or comments, please email me at gvelazquez@tradingacademy.com
- Gabe Velazquez
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