At this point in the stock market’s overall phase many people are blundering around wondering what both the market and they as investors will do next. Is the market in a consolidation phase, is this a dead cat bounce in a continuing bear market, or is the 15% rise from the recent trough the start of the next great bull market?
This environment is creating feelings of fear, doubt and anxiety amongst those without a solid plan for either engaging the markets for the first time, or re-engaging the market for the more seasoned traders and investors. People feeling these emotions are perplexed. There is conflict in their minds. They are fearful of entering trades in case they lose money, yet they also fear missing out on making profits. They are doubting their ability and questioning when they should start buying shares, particularly when all the news is full of doom and gloom…. but the market has bounced. These emotions are, in turn, making them anxious and indecisive. If they have lost money in the past as a result of being ill-prepared they now only want to make ‘good’ trades, and not take any ‘bad’ trades.
The key to making good trades is confidence. The key to developing trading confidence is preparation and trust. Before getting into detail about confidence, preparation and trust, I will explore what a good and a bad trade is.
There will always be winning profitable trades and there will always be losing trades. Randomness will ensure this. But there does not necessarily need to be ‘good trades’ and ‘bad trades’. It is possible to always execute good trades. A profitable trade is not necessarily a good trade nor is a loss trade necessarily a bad trade. Both profit trades and loss trades can be good trades. Similarly, profit trades and loss trades can also be bad trades.
The majority of people who give this trading caper a go will define a good or a bad trade by the outcome of the trade. This is a big mistake because it sets the trader up for conditioning themselves with a losing state of mind. The outcome of any individual trade is affected by almost a limitless number of variables. The majority of these variables are beyond the control of the trader. This means that we could define a loss outcome as bad when the cause for the loss was a variable that was out of our control. (Another mistake for the trader with this situation is blaming the variables outside of the trader’s control thereby relinquishing responsibility– more on this later). Similarly, we could define a profit outcome as good when we actually made a trading error by doing a trade that should not really have been done but a variable outside our control caused the profit outcome (this could be called luck).
Being attached to the outcome and defining a loss trade as a bad trade will create a negative frame of mind. As human beings we tend to take winning for granted and put more significance, logical and emotional, on losing. Also, most trading outcomes will be negative, especially for the beginner, leading to more negative conditioning than positive conditioning. In turn, this will lead to a lack of confidence, the opposite of what is required to make good trades.
If good and bad trades are not defined by the outcome of the trades then what is the definition of a good trade? A good trade is a trade that is executed precisely according to your trading process. It follows that if you adhere to your trading process all the time then you will make good trades all the time. This requires emotional detachment from the outcome of every trade. Your process becomes your trading focus. Consistent traders are attached to their process not to individual trade outcomes.
One of the most important steps in a trader’s development is the shift from a focus on the outcome of each trade to that of focusing on the processes of trading. Process thinking will allow you to focus on what you can control in the market – namely, adhering to the criteria of your trading rules, and executing ALL entry and exit signals without attachment; and not on the myriad of variables within the market over which you have absolutely no control what so-ever – namely, the opinions, actions, research and decisions of thousands of other market observers, traders and investors, which may positively or negatively impact on your trades.
In the next few blogs we will discuss the trading process and how confidence, preparation, trust and taking responsibility come into the picture and how to achieve them in the trading environment.