Are You Open to All Possibilities?

The possibilities are numerous once we decide to act and not react.        George Bernard Shaw

Winning traders are flexible. They look at a trade from different angles and they are not afraid to explore alternatives. Good traders know and understand they may be wrong, but being wrong doesn't bother them. It is crucial to be flexible when examining all the possibilities. If you rigidly adhere to one course of action, you may pay the price for it in terms of losses. Try to be as flexible as possible, and you'll see more profits. 


The greatest obstacle to being flexible and open to different possibilities is fear. When we think we are about to experience harm, it is so very important for our survival, that we mobilize our resources and focus our energy, on the source of harm. It is the same with trading when we experience fear and potential harm. When we unconsciously perceive something may be wrong, we instinctively focus our attention on the harmful agent. Rather than scanning and considering a variety of options, we restrict our attention. 


Fear can sometimes play a role as we devise a trading plan. Some traders secretly fear that their plan is unlikely to succeed. Rather than carefully consider all possible adverse conditions, this trader focuses on only one possibility and develops no alternative plan of attack should an unwanted event thwart the trading plan. For example, one may anticipate a stock rising, yet secretly doubt whether the move will pan out. Out of fear, this trader may be afraid to consider and account for possible adverse events, such as earnings reports, a possible interest rate hike, or a sudden change in general market sentiment. The flexible trader, in contrast, has no fear of looking at all these possibilities, and determining which are likely. Openness to all possibilities allows the flexible trader to change his or her plans if required, and recover from a potential setback. 


People are the most inflexible when they are afraid, so the best antidote is to reduce fear. Fear can be reduced by managing risk. If you know that you can survive the worst-case scenario, then you'll feel calm and relaxed. Similarly, if you trade with money you can afford to lose, you'll have little to fear and you can more easily examine all possible alternative factors that may impact your trading plan. By cultivating a relaxed mindset, you will be less fearful and more open to looking at all the possibilities. And the more flexible you are, the more profitably you'll trade.

Reprint from Prudent Trader Archives

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