BEST TO KNOW AND DO AS A TRADER
Professional traders know that their emotions are going to affect their trading whether they like it or not. As a result, they develop personalities that allow them to overcome their emotions and trade profitably. Two of the most important personality traits are patience and discipline, because they allow you to handle one of the most difficult aspects of trading.
Making Up Trades
Possibly the most emotional time for a trader is when their profit / loss is negative, and they are waiting for their next trade to come along. During this time they will be impatient and anxious, and they will be desperate to take their next trade in order to make back the money that they have lost. Most new traders (and also many experienced traders) will start taking trades that are not part of their trading system (known as making up a trade). As soon as this happens, their loss will increase, and will continue to do so until they realize what they are doing and correct their behavior.
Accepting Your Emotions
The solution to emotional trading is not to try and remove or control your emotions (good luck if you decide to try), but to develop character traits that allow you to control your response to your emotions. By developing a personality that counteracts your emotions you will be able to continue making logical decisions, even when your heart is pounding and sweat is streaming down your face (maybe this is a slight exaggeration).
Patience and discipline are vital personality traits for professional traders. Being patient allows you to wait for your next trade regardless of your current profit / loss, and being disciplined allows you to take only trades that are part of your trading system (not making up a trade). For some traders, the thought of losing money is enough to make them instantly patient and disciplined, but for others, the emotions are too strong, and they need to cultivate their patience and discipline.
Trading Log
One method of learning how to be patient and discipline is to keep a detailed log of every trade that you take. At the end of the day (or week, or month), replay every trade, and compare the replayed trades to your trading log. If there are any differences, you should be able to determine what caused them, and hopefully know what you need to avoid the next time.
Another method of becoming patient and disciplined is to have absolute confidence in your trading system. Knowing that your trading system will make money over the long term can be enough to overcome the negative emotions that occur when you are experiencing a negative profit / loss. The only way to have confidence in your trading system is to test the system thoroughly. If you have tested your trading system over a significant length of time, and it is consistently profitable, there is no reason to question that it will continue to be profitable.
• Leading and Lagging indicators…
Technical chart indicators come in two different forms; they are either “lagging” indicators or “leading” indicators. Lagging indicators are also known as “momentum” indicators, the most popular lagging indicators are MACD and moving averages. Lagging indicators claim to help traders make money by spotting trending markets, however, the problem is that they are “late” to the ball, meaning they fire off a buy or sell signal into a trending market after the market has already started to trend, and just as it is probably about ready for a counter-trend retracement.
The other problem with lagging indicators like MACD and moving averages is that they will chop you to pieces in consolidating markets; firing off buy and sell signals just as the market is about ready to reverse and re-test the other side of the trading range or consolidation area. So, essentially, the only real use that lagging indicators have is in helping to identify a trending market, and I do actually use certain moving averages to aid in trend identification. Check out my price action trading course to find out exactly how I implement moving averages with my price action setups, they are the only indicator that I use and I do not use them for anything other than identifying dynamic support and resistance areas.
Leading indicators include such popular ones as the stochastic, Parabolic SAR, and Relative Strength Index (RSI), these are also known as “oscillators”, because they oscillate, or move, between a buy signal and a sell signal. The problem with these leading indicators is that they work horrible in trending markets because they show “over-bought” and “over-sold” conditions nearly the entire time the market is trending. So, if a market is in a strong uptrend, an oscillator will show the market as being over-bought for the majority of the uptrend, even if it continues rising for a great deal of time. The opposite is true in a downtrend; oscillators will show over-sold conditions almost continually in a downtrend.
This means that these “leading” indicators try to get traders to pick tops and bottoms; an over-bought or over-sold condition implies that the market is due for a correction, when in fact this may not be the case. The problem is that no one ever knows how long a market will trend for, so you are going to have a ton of false signals before the actual top or bottom of the market occurs. And guess what? It is often the exact top or bottom that is showed in examples of these oscillating indicators by people who are trying to sell indicator-based trading systems. They don’t show you the numerous losing signals that were fired off leading up to the actual top or bottom however.
So, because we have lagging indicators that work ok in trending markets but terrible in consolidating markets, and leading indicators which work ok in consolidating markets but terrible in trending markets, many traders try to combine them on their charts in order to use them to “filter” each other. You can probably guess what results from the combining of numerous opposing indicators all over your charts; a heap of confusion and mess that causes second-guessing, doubt, over-trading, over-leveraging, and every other emotional trading mistake you can imagine.
GOOD LUCK IN YOUR TRADING
Professional traders know that their emotions are going to affect their trading whether they like it or not. As a result, they develop personalities that allow them to overcome their emotions and trade profitably. Two of the most important personality traits are patience and discipline, because they allow you to handle one of the most difficult aspects of trading.
Making Up Trades
Possibly the most emotional time for a trader is when their profit / loss is negative, and they are waiting for their next trade to come along. During this time they will be impatient and anxious, and they will be desperate to take their next trade in order to make back the money that they have lost. Most new traders (and also many experienced traders) will start taking trades that are not part of their trading system (known as making up a trade). As soon as this happens, their loss will increase, and will continue to do so until they realize what they are doing and correct their behavior.
Accepting Your Emotions
The solution to emotional trading is not to try and remove or control your emotions (good luck if you decide to try), but to develop character traits that allow you to control your response to your emotions. By developing a personality that counteracts your emotions you will be able to continue making logical decisions, even when your heart is pounding and sweat is streaming down your face (maybe this is a slight exaggeration).
Patience and discipline are vital personality traits for professional traders. Being patient allows you to wait for your next trade regardless of your current profit / loss, and being disciplined allows you to take only trades that are part of your trading system (not making up a trade). For some traders, the thought of losing money is enough to make them instantly patient and disciplined, but for others, the emotions are too strong, and they need to cultivate their patience and discipline.
Trading Log
One method of learning how to be patient and discipline is to keep a detailed log of every trade that you take. At the end of the day (or week, or month), replay every trade, and compare the replayed trades to your trading log. If there are any differences, you should be able to determine what caused them, and hopefully know what you need to avoid the next time.
Another method of becoming patient and disciplined is to have absolute confidence in your trading system. Knowing that your trading system will make money over the long term can be enough to overcome the negative emotions that occur when you are experiencing a negative profit / loss. The only way to have confidence in your trading system is to test the system thoroughly. If you have tested your trading system over a significant length of time, and it is consistently profitable, there is no reason to question that it will continue to be profitable.
• Leading and Lagging indicators…
Technical chart indicators come in two different forms; they are either “lagging” indicators or “leading” indicators. Lagging indicators are also known as “momentum” indicators, the most popular lagging indicators are MACD and moving averages. Lagging indicators claim to help traders make money by spotting trending markets, however, the problem is that they are “late” to the ball, meaning they fire off a buy or sell signal into a trending market after the market has already started to trend, and just as it is probably about ready for a counter-trend retracement.
The other problem with lagging indicators like MACD and moving averages is that they will chop you to pieces in consolidating markets; firing off buy and sell signals just as the market is about ready to reverse and re-test the other side of the trading range or consolidation area. So, essentially, the only real use that lagging indicators have is in helping to identify a trending market, and I do actually use certain moving averages to aid in trend identification. Check out my price action trading course to find out exactly how I implement moving averages with my price action setups, they are the only indicator that I use and I do not use them for anything other than identifying dynamic support and resistance areas.
Leading indicators include such popular ones as the stochastic, Parabolic SAR, and Relative Strength Index (RSI), these are also known as “oscillators”, because they oscillate, or move, between a buy signal and a sell signal. The problem with these leading indicators is that they work horrible in trending markets because they show “over-bought” and “over-sold” conditions nearly the entire time the market is trending. So, if a market is in a strong uptrend, an oscillator will show the market as being over-bought for the majority of the uptrend, even if it continues rising for a great deal of time. The opposite is true in a downtrend; oscillators will show over-sold conditions almost continually in a downtrend.
This means that these “leading” indicators try to get traders to pick tops and bottoms; an over-bought or over-sold condition implies that the market is due for a correction, when in fact this may not be the case. The problem is that no one ever knows how long a market will trend for, so you are going to have a ton of false signals before the actual top or bottom of the market occurs. And guess what? It is often the exact top or bottom that is showed in examples of these oscillating indicators by people who are trying to sell indicator-based trading systems. They don’t show you the numerous losing signals that were fired off leading up to the actual top or bottom however.
So, because we have lagging indicators that work ok in trending markets but terrible in consolidating markets, and leading indicators which work ok in consolidating markets but terrible in trending markets, many traders try to combine them on their charts in order to use them to “filter” each other. You can probably guess what results from the combining of numerous opposing indicators all over your charts; a heap of confusion and mess that causes second-guessing, doubt, over-trading, over-leveraging, and every other emotional trading mistake you can imagine.
GOOD LUCK IN YOUR TRADING
MY OPINION NOT FINANCIAL ADVISE
