Knowing When to Stand Aside

You gotta know when to hold 'em, know when to fold 'em, know when to walk away, know when to run.
Kenny Rogers

In addition to knowing when to buy and when to sell it's equally important to know when to stay out of the markets and in cash. When market conditions aren't conducive to profitable tradition, just stand aside. Even seasoned professionals frequently step back and reevaluate their methods. Old market cliche' when in doubt, stay out! Do not be afraid to acknowledge your limitations, do not force trades, take a rest, and enter the markets when you're ready. There are many practical reasons for standing aside.

You may feel tired, down, or just not feeling at your best. At times like these it is best to stand

aside until you are rested and can return to the positive objective mindset you need for trading. If your psychological resources are depleted you may act emotionally and or impulsively. If you are tempted to trade when your psychological resources are depleted you risk putting on bad trade after bad trade, not only will your account balance be hit so will your ego.

Another good reason to stay out of the markets is when your method seems to cease to have its winning edge. No trading method works indefinitely. When market conditions change, even a "foolproof" method can stop working. Don't make this situation even worse by continuing to trade. When a method stops working, it can really stop working. Your account balance will decline with each trade.

Most professionals often say that they are at their best when their old method starts to falter and they have to devise a new one. They view the situation as a puzzle they must solve. They step away from the markets, and take a close look at their methods. They try to identify what went wrong with the method, and look forward to tweaking it until it works again. They search for market factors that may have changed, and when they think they have found the solution, they put on a few small trades to test out their new, revised method. So when your method stops working, don't continue trading at the same level of activity. Step back, look things over, and wait until conditions are just right before entering.

Trading profitably requires that you keep track of the market moods and your psychological moods. When either one is not conducive to trading, it's best to stand aside and wait for the situation to change. By staying out of the markets, you can survive to trade another day, when you're in a peak performance mental state and the market conditions are optimal.

Reprint from Prudent Trader Archives 2005

Sticking To Your Plan

Every fighter has to go in there with a game plan. 

Rau'Shee Warren

New traders often say they have difficulty sticking with their trading plan. There are many possible reasons. A common issue is not having a clearly defined plan. When a trading plan is not clearly defined, it becomes hard to follow, easy to abandon. You may be prone to over-thinking your plan or you may become easily consumed with self-doubt. When you clearly define a plan, in contrast, you can implement it more automatically. You can enter and exit more effortlessly. Many traders say, however, that even when they painstakingly outline a trading plan, they still have difficulty following it. This may have much more to do with your personality, than your particular plan.

People who are disciplined in everyday life, ironically, tend to have the most trouble sticking with trading plans. Disciplined people are rule followers, and research studies have shown that rule followers prefer certainty. Anyone who has traded the markets for a few months soon realizes that the markets are not certain, and conventional wisdom is not consistently valid. Oddly enough, people who are impulsive in everyday life have less difficulty following a trading plan. They view trading the markets as a "game", they enjoy the risk. They have a natural, carefree attitude when it comes to trading as with the rest of life. They can easily think, "Why not follow a plan? It doesn't matter if it goes awry."

Most traders have trouble approaching trading with a carefree attitude. As an example, you see the price rise initially then it stalls before reaching your objective. You begin to think, "How much longer can it go up? I can't wait. I've got to sell and lock in my profits right now." You start thinking, "Don't be greedy can it be a bad thing to get out early and get a profit?" Now it becomes extremely difficult stay. All of a sudden you have abandoned your plan when economic success depends upon your staying the course. It's simple mathematics. Although there may be several profitable trade setups out there, finding a really good one is

relatively rare. You'll see many more setups that don't pan out than actually do. When you hit upon one, you must capitalize on it, and maximize your profits, getting as much out of the trade as possible.

If you are a natural born risk taker, sticking with your plan is less difficult. Risk takers get a rush from the trade and can't wait to see what happens. The psychological rush is more enjoyable, in some ways, than the outcome. But most of us are naturally worried about the outcome and a little cautious voice nags us to get out of a trade before it comes to fruition.

How do you quiet this voice of caution? Not easily that's for sure. I think the best thing you can do is to manage risk. If the outcome of the trade truly doesn't matter, then you won't worry as much and can stick with your trading plan. Winning traders view trading as a game, they think, "I'm just trading for fun." They look at a trade and think, I want to see if it reaches my objective or not. They are a student of the markets. The learning experience is more important than the outcome. Winning traders are not only players of the game, but observers. If you can cultivate such an attitude, you'll be able to follow your trading plan, and silence the voice of self-doubt that often thwarts your trading efforts.

Reprint from Prudent Trader Archives 2005

Disconnect Yourself

Every single day the world seems like it is on the brink of falling apart. But then I look outside my window, and things look about the same as they did a week ago. It's almost a form of cognitive dissonance....Moby

When your self-esteem is not on the line, odds are you are trading objectively. All that is on the line then is mere money. There is an old cliché that states "Don't let your net worth define your self worth." This is not to say that making money is not important but it must be put in its proper perspective. Your overall trading over time is not dependent upon your next trade alone. The fact that your last trade was very profitable does not in and of itself make you a genius, therefore the converse becomes true, if your last trade was a loss or even part of a series of losses, it does not make you dumb or a loser. To the extent that you can trade with a logical and unemotional mindset the more effortlessly and profitably you will trade, most of the time.

This is much easier said than done. Although you will find performance is best when the outcome truly does not matter, it is very difficult to set up such circumstances. Outcomes often do indeed matter and disconnecting yourself from trading outcomes is emotionally difficult. In several research studies, it has been demonstrated that performance is hampered when outcomes are tied to your sense of self, or your ability to satisfy basic psychological or emotional needs. For example, when the outcome of a trade impacts your sense of security or identity, the pressure is on, and it will be hard to perform under the pressure. Relieving the pressure will improve your ability to perform.

The ideal situation, for example, is a multi-millionaire who can afford to make several losing trades and lose $5,000 a day with relatively few scars. Most of us, however, are not that fortunate. Perhaps the next best scenario is the trader who has a relatively small trading account and uses the profits from it to pay monthly leisure expenses, such as gourmet dinners or extra luxury items. If the losses really don't matter, the pressure will be lessened. Most traders however are not in one of those positions.

When traders become interested in trading for a living, that's when trading becomes really difficult. Be it the lone trader trying to support a family or the professional hedge fund manager trading clients' money. The outcomes of trades do matter. If too much money is lost, you do not survive economically. The psychological impact can be substantial. Your identity is usually closely linked to being a good provider, a successful member of society. When you lose a lot of money, your sense of self and self-esteem is diminished. In the back of your mind, you always know that should losses mount too drastically, you can actually be harmed financially and psychologically.

So how do you disconnect yourself from trading outcomes? Preventative measures can be taken. First, one can manage risk. If you know that it is unlikely that the outcome of a series of losing trades can hurt you, you'll feel more at ease and be able to remain calm and objective. Second, you must have a sense of self that is defined in many different ways. For example, don't just define yourself as "a trader." View yourself from multiple perspectives: a good friend, a loving spouse, a caring parent, and an upstanding citizen. Multiple views of oneself will lessen the importance of maintaining the view of oneself as "the winning trader," and will ease some of the psychological pressure. The more you can disconnect your trading performance from your sense of self, the more you can trade logically, effortlessly, and profitably.

Reprint from Prudent Trader Archives (2005)