For the past few months we've
focused on looking at market entries with statistical edges. We've
looked at buying 10-day highs vs. 10-day lows; we've looked at market pullbacks;
we've looked at how markets have performed closing at their daily extremes; and
we've looked at the role the VIX plays in helping identify overbought and
oversold markets.
This week, I'd like to change the pace a bit and move over
to the psychology of trading. Or actually I should say the psychology of not
trading.
Why "Not Trading" Is Good
I've touched on this subject before and I feel it's very,
very important so I'm going to touch on it again. Too many people fail at
trading or underperform as traders because they overtrade.
They look for edges when there really is no edge. Their philosophy is "I'm a
trader and therefore I must trade." This philosophy make sense, doesn't it? It
does, except in my opinion it's wrong. And here's why:
As we have learned over the past months, successful
trading is a game of edges. These edges must be defined and they must occur
enough times in order to make them viable. There's no guarantee that any of
these perceived edges will play themselves out in the future, but through
historical testing, it helps gives us a guideline as to what has happened in the
past when similar situations have occurred. That's a good start to begin your
daily plan of attack.
So where do many people go wrong (especially a lot of unsuccessful traders)? When they move away from their edges and start
looking for action. No edge exists for a few days (hours?) and their definition
of themselves as traders is at odds with their lack of action. But it's goes
further than this. It's also at odds with how they are wired. Many, many traders
are wired to succeed. And in every other profession, how do you succeed? You
work. The harder you work, the better your results. It's proven true in
academics; it's proven true in athletics; it's proven true in previous careers
and it's the trusted and proven formula for success in nearly all aspects of
your life...except trading!
^next^
One Very Important Piece Of Successful
Trading
Succeeding at trading does not always mean exerted effort.
It means sitting on your hands, sometimes for days at a time. It means waiting
for the correct opportunity to strike. And for many of us that can be very, very
hard. We've all been trained for taking action. And, it's very likely that the
more successful you've been in life, the better trained you are for taking this
action. But in trading, taking excessive action many times leads to failure. It
leads to over-trading, it leads to taking trades that really do not have an
edge and it too often leads to losses. Yes, it's very boring to be sitting
there doing nothing. And yes, your job is to trade.
But, what is your primary purpose? It's certainly not to
be entertained. It's to make money. And the way to potentially make money is to
wait until the edge is in your favor. And historically when has that been? Well,
that depends upon the time frame you trade and the style you trade. And you've
learned about some of
those times in the columns we've published over past few
months.
The above lesson can be very hard to learn. It may take
years to master. The path you've taken to succeeding at everything else in life
is not always appropriate to trading. But, by waiting for the right time to
enter the market, you increase your chances of success. We'll continue in this
column to look for the times when it appears the edge is on our side. But the
real key is to have the patience to wait for them to appear. And more
importantly, sitting firmly on your hands when they don't.
Have a great week trading, and please feel free to send
any questions you may have to
lconnors@tradingmarkets.com
Larry Connors
