The many comments and questions our company has received over the past few months as equity markets have been massively sold off and some portfolios have suffered significant drawdowns leads me to this weeks topic on trading and investing from the markets perspective, that is, becoming empathetic with the market. I have discussed aspects of the importance of developing a Portfolio Mindset in an earlier blog. This week’s topic has a deeper look at developing the mindset and mental attributes of a skilled trader. This centres around your edge as a trader, understanding and accepting it, to allow you to trade and invest objectively and confidently over the long term.
From an early age in our life we are taught to think that losing is bad. We live in a competitive society where we are conditioned in our business, sporting and social environments to think that we must win at each and every task. This ‘competing to win’ mindset becomes ‘hard-coded’ into our thoughts and resonates through all facets of life. It has a profound influence on us each day, both consciously and subconsciously.
We are conditioned throughout our lives by our parents, peers, media and other environmental and social stimuli to feel negative emotions such as anger, embarrassment, disappointment and frustration when we lose or we are wrong. When we lose we think we have failed. We worry what others will think and how society will view us because of the loss. We know also, that winners are praised for their accomplishments.
In share trading, negative reactions to losses are no different. The same pressures, beliefs, expectations and disappointments are evident. Unskilled traders see losses and drawdown as failures. Resultant inconsistent trading often leads to complete withdrawal or avoiding executing for fear of more disappointments, not to mention poor results.
People in this position are dramatically different to a skilled trader who looks at the market objectively and consistently. Both have experienced the same conditioning from their environment – skilled traders have learned to think, feel, see and act differently.
To become consistently successful in the share market, skilled traders have learned to think in terms of overall probabilities – not in terms of winning and losing on individual trades. The relevance of the outcome of individual trades is minimal. They focus on the long term performance of the probabilistic edge of their trading method. Winning, losing, new portfolio equity highs and portfolio drawdown are seen by the skilled trader as the probabilities playing themselves out in the market. These are normal occurrences for the skilled trader. They actually expect them to happen and have conditioned themselves to accept that they will happen in the natural course of their trading and investing business knowing that the variables and combinations of variables that interplay in the market are near limitless.
So what do we mean by probabilities and where do these probabilities come from? We mean that you must understand what your probabilities of success/failure are from the way that you trade the market. These probabilities are determined by the number of times that you win and how much you win compared to how much you lose, on average, over a large sample.
When this is measured through research over a large sample of trading events, through different types of markets, you can determine the mathematical expectation for the way that you trade. If you cannot understand or define your probability of success then you are gambling and should not commence trading until you do understand your probabilities of success. All of Share Wealth Systems’ solutions have been designed from this perspective.
Many novice traders draw rash, subjective and impulsive conclusions from small samples and brief experience. Immediate success is craved for confidence building and self determination. This is another trait learned from modern society, that of instant gratification rather than delayed gratification. It is normal to want to win as many times as possible, especially early in a new trading enterprise. The confidence gained from success leads to an expectation of future success. However, sophisticated traders define their edge precisely, know the probability of success that it represents, know the term over which it delivers success and know an adequate sample size is required for long-term results.
To make the transition from a novice trader’s perspective to that of a skilled trader who thinks from the market’s perspective, often means changing ingrained beliefs and ‘reprogramming’ our mindset to a new understanding. Share Wealth Systems’ training services and solutions are designed to help you become a skilled trader.
Becoming empathetic with the market means that you will no longer think in terms of “right” or “wrong” or “win” or “loss” on individual trades. Taking new trades and closing trades based on your trading system simply means you accept the probabilities of your edge. Whatever the result of individual trades, you can be at peace knowing that the overall outcome will reflect the statistical probability of the system over a large sample of trades.
Being empathetic with the market means that you expect to have winners, losers, new portfolio equity highs and portfolio drawdown, that’s the innate personality of the market, that’s how it is wired, that is what successful traders are empathetic of.
Most traders do not understand, or fully accept, this concept. Many dismiss it as unimportant but most of these traders are destined to failure. I suggest that being empathetic with the market is an absolutely essential component in the make-up of every successful trader.
Take time to seriously consider how you think and feel about each trade you execute. Critically analyse your feelings and actions to determine what you need to do to better align your thinking with the market’s movements – probability, as opposed to over emphasising the results of each and every trade and becoming overly involved emotionally with these trades. Know and really understand your system and trading edge so that you expect, accept and embrace the outcomes. It is the long term performance that is far more important that the result of each winning and losing trade.
If you don’t have an EDGE yourself, you should seriously consider SPA3 as your trading system. Not only does SPA3 provide investors with an EDGE, it provides the rigour, process and structure for long term success in the market.
To take advantage of SPA3’s 10th Anniversary special offer, click the link below.