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You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
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I could have made money on that tradeBEING OBJECTIVE Do you believe anything can happen in the market at any time? This is what being objective is all about. You need to constantly be thinking that the market can do whatever it wants whenever it wants at any time. Many people get into trouble by thinking the market cant or wont do certain things. Many people will put mental limits on where they think the market should go. These mental limits can have some very bad results. I remember a time a few years ago when I was in the S&Ps, there were about 4-5 minutes left until the market closed. One trader told me he thought the market was going to break another 500 points in the S&P Futures. I said there was no way this was going to happen with only 4 minutes left until the market closed. He said that it didnt matter if there was only 1 minute left, for the S&Ps (or any market) to move, all it has to do is be open. And you know what, he was right. In the next 4 minutes, the market dropped 500 points just as he predicted. If I hadnt limited my beliefs, I could have made money on that trade. But unfortunately, I was not objective enough to believe the market could really break that far in that short amount of time. My limited beliefs prevented me from making money in that trade. But in the long run, that situation helped me to be more objective in the future. It was definitely one of the stepping stones for me to realize anything can happen at any time in the market. All it has to do is be open. If you believe anything can happen at any time, then you release yourself from distorting market information. When you distort market information, you are obviously not acting in your own best interest. For example, lets say you usually look at a certain indicator to help you find profitable positions. Lets say this indicator got you into a short position a little while ago. Youve been sitting with this position and the indicator is still telling you the market looks like it should go down. But the problem is the market is not going down. And now some of the other tools you use are starting to look like the market is going to start to rally (go up). But your indicator still says down. So you ignore the things that are saying the market is going higher. Now you have conflicting signals. As Im sure you know, most people will not be objective. They will hope that the indicator is right and the other stuff is wrong. In fact, they will probably try not to look at the stuff that says the market is going higher, or they will dismiss it as not having as much weight as the indicator because it doesnt conform to what their expectations are. Normally, if they werent in a trade, they wouldnt even put on a position with these conflicting signals. But since they are already in a trade, they distort the information right in front of them and hope and pray that the market does what they want it to. But is that the objective thing to do? No, of course not. The objective thing to do is to get out of the position and reevaluate. (Or at the very least, move your stop order very close to where the market is trading to take less risk.) That would be acting in your own best interest. But instead, most people ignore the information and hope and pray that the position will work out the way they think it should. This happens because most people get locked into their opinions of the market and have a lot of trouble facing the fact that they could be wrong. Its O.K. to be wrong about which way the market is going. But its not O.K. to be wrong about the market direction and ignore signs that its time to get out and start over. That lack of objectivity will kill your trading. To be objective, you cannot put your demands and expectations on the market. First of all, you cut yourself off or distort vital information that the market offers to help you decide which way its going. Second of all, you dont have enough power to control the market to make it live up to your demands and expectations. Thus, you must learn to be objective in your market observations. This doesnt mean that you cant have an opinion about the market. It only means that your opinion can just as easily be wrong as it is right. And you need to be completely ready and comfortable for it to be wrong just as much as it could be right. You need to release yourself from having to be right. The more objective you are, the less you will distort the information that you receive. Mark Douglas, author of The Disciplined Trader states there are seven characteristics of an objective person. Here they are so you can recognize it when youve achieved it: 1)You feel no pressure to do anything.2)You have no feeling of fear.3)You feel no sense of rejection.4)There is no right or wrong.5)You recognize that this is what the market is telling me, this is what I do.6)You can observe the market from the perspective as if you were not in a position, even where you are. 7) You are not focused on money, but on the structure of the market. If you can see any of the above qualities in yourself, youre on the right road. Again, you need to release yourself from the need to be right. If you constantly need to be right, you are unfortunately in the wrong business. To be a successful trader, you dont always need to be right, but you always need to be objective. BEING AN ACTIVE WINNER AND LOSER Some people believe trading is like gambling. Its not. In a gambling game, you have to participate to lose and do absolutely nothing to stop losing. If, after one bet, you dont put another bet on the table, you will not lose. There is also no way youll win. But, at that point (if you dont place another bet), there will be no risk. Obviously, in trading its very different. You must participate to get in a trade, and you must participate (in other words do something) to cut your losses. If you do nothing, the possibility exists that your entire account can be wiped out. And even that wont stop your losses if you still do nothing. (Although, at that point, your broker will most likely participate for you by getting you out of the market.) In gambling, you know exactly what your risk is and the game always ends before the next one starts. But in trading, you dont know beforehand exactly what your risk is. (You may have an idea, but even with stop orders there is always the possibility of slippage.) But the real big difference between gambling and trading is the event never ends as the market keeps moving. A good example of an active winner and loser might be a person playing blackjack at a casino. You must make a conscious choice to play and risk your money. And when the game is over, the rules force you to be an active loser. If you want to play and risk your money again, you must place another bet. Without another bet, you cant be a loser again. You must actively participate to lose and do nothing to stop losing, the exact opposite of trading. This is why (in trading) being an active winner and an active loser is so important. But because the event never ends, its easy not to be an active winner and loser. There is always the possibility (no matter how slim) of the market coming back in any trade youre in. You dont need to actively participate to get back your losses, you could simply stay with the trade and let the market come all the way and give you back your losses. Because of this reality, theres always a constant temptation not to cut your losses. Cutting losses for many traders is painful. So many choose to avoid the pain and not be an active loser. They simply think they are in a winning trade that has yet to show profit yet. Or we will look at only the evidence that says our position is right and ignore the rest of the evidence against that notion. These are obviously traits of someone who is not an active winner and loser. But being an active loser (as well as an active winner) is the only way to be successful. Again, the temptation to not cut your losses is always there. But it will do nothing but get you in trouble. Successful traders know that cutting your losses actively, before they get too large and unmanageable, is the only way! Someone once told me, To make money trading, you cant sit on your hands! Basically, what that means is you need to do things like getting yourself in and out of winning and losing trades to be successful. In other words, the way to make money trading is not only act in your best interest, but to actually act and do things to help your trading. That means when a trade is going against you, you really cant sit on your hands and do nothing. You must cut your losses instead of hoping the market will come back. And when a trade is going your way, you must act in your own best interest by being an active winner. Trail your stops to lock in profits, cover your position when it reaches your target instead of looking for a home run, etc. etc. etc. This is what being an active winner and loser is all about. Dont sit on your hands. |
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