Thursday, March 26, 2015

Sometimes It Is Best To Do Nothing!

I never buy at the bottom and I always sell too soon. -Baron Rothchild

I am well aware that many, including myself, have been a little confused and daunted by the markets action of late. During these times we need to avoid the big pipe dream, the pure hope, the thinking we have to make money today. Many if not all of you have a plan, a goal in mind on where you wish your trading to take you. Be careful how you define your goal. Perhaps your goal is to make $100,000 per year in the markets and that's wonderful, however if you break it down into to finite a goal you will defeat yourself. Breaking down the $100,000 into roughly 250 trading days per year equals $400 per day or $2,000 per week or approximately $8,333 per month. Sounds great and easy, doesn't it? However, there is a flaw in this thinking?

Setting a goal based on earnings every day (or week or month) and you will feel compelled to trade. What if the markets do not move very much today? What if everything is quiet waiting for a piece of news? It may be best to stay out of the market completely rather than fail at what could be a low probability trade. Another problem - what if you fail to make your $400 today due to a lack of opportunity (let's not even consider a losing day). Now the next day you will feel compelled to attempt to make $800 to make up for your no profit day, then $1200 and so on. Your stress level will be elevated and you may well begin a never-ending cycle of frustration and disappointment.

Setting a more appropriate goal will probably relieve the frustration. It's useful to have a rough idea of how much money you want to make, but setting a specific dollar amount that you must achieve on any given day (week or month) is often a hindrance. If you are new to trading and the most you have made is $15,000 in a year, then setting a goal of $100,000 is probably very unrealistic. You are setting yourself up for failure. Perhaps, an increase of 20% is more appropriate. Because if you fail to reach your goal, you will feel frustration and disappointment, and may start trading based on your emotions, the death Nell of many good traders. 

Professional's know how to patiently wait for the opportunities to come to them. They do not impose their will on the market. That is what traders are doing when they set a performance goal in terms of a specific dollar value over a specific period of time. Winning traders patiently wait for market conditions where they know they can excel. They understand that the same quiet market will handsomely reward them if they are patient. It's also useful to remember that all that really matters is performance across a series of trades. Many traders can lose 60% of the time, then happen upon a winner of many thousands that offsets previous losses accrued across a series of trades. 

When you are setting goals, it is very important that you keep them in perspective. Set goals that are equal to your skill level. As your skill level improves then reset your goal. Shooting for goals that are beyond your skills will frustrate you more than motivate you. And please remember that you cannot impose your will on the market. You do not know what market conditions will be until you see what they are. If optimal conditions are not there, you cannot do much about it. You must accept what the market is willing to give you, which may mean patiently waiting for conditions to change. By doing so, you may not profit every single day, but over the long run, you will be a consistently profitable trader.

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