A few weeks back, I kicked off the Intelligent Investor Series as part of my weekly commentaries. Th...
The Confident Trader
08/17/2009 9:59 am EST
Do you ever wonder what separates an average trader from a great trader? There are two very important things that differentiate these two types of traders: Discipline and confidence. Today, I would like to focus on the latter. Being a confident trader is paramount to succeeding. Quite frankly, without it, it will be very difficult to attain a high level of success.
There is a fine line between confidence and doubt, especially in trading. After several winning trades, most people typically have a positive approach to their next trade. However, after a few unsuccessful trades, many traders lose that “swagger” and the shrouds of doubt begin to creep into their mind. These demons can appear in several aspects of trading. Sometimes it’s as simple as being afraid to pull the trigger on your next trade. Other times it’s that strong desire to make your money back at any cost and then taking every trade you see, despite the patterns being of lower quality. Confidence will even affect trade management. For example, selling the winners too soon, and allowing the losers to run right into your stop loss, and on the extremely undisciplined side, letting losers run past your stop loss. These are just a few of the things that can happen when a trader loses confidence and lets doubt cloud their vision. This is why confidence can literally make or break a trader!
I’m sure many of us have watched a basketball game in which a great player scores 50 points. After the game, the interviewer commonly says, “You were on fire! So what was it like out there?” The player often responds with something to the effect of, “I hit a few early on, built some confidence, and after that I was in the zone! The basket looked twice as big as usual! I was really feeling it tonight.” Trading is not much different. After four or five winning trades in a row, we believe we can do nothing wrong. Why? Confidence. On the flip side, if a basketball player misses ten shots in a row, they might be more hesitant to take the next shot. However, the best players still want the ball. Despite missing ten shots in a row, they still want to take the game-winning shot. In this situation, most average players would shy away from that kind of pressure, especially after such a terrible game. But the best always want the ball, regardless of the situation. It’s simply a matter of confidence. Down to their core, they still believe they have what it takes to win the game, regardless of what happened previously. Do you have that level of confidence in your trading?
How can we keep a confident, consistent approach to trading despite the inevitability of losses? The first thing any good trader will do is objectively evaluate the situation. Take a step back and look at the trades you’ve taken and ask yourself if they are within your trading plan, and what was the root cause of the problem? Were the patterns lacking in quality? Were you distracted by an outside influence or some other event in your life? Was the market not conducive to trading (i.e. a no-follow-through market)? Or was it just a matter of simple odds? Yes, sometimes it’s just a matter of odds. Although it doesn’t happen often, on occasion, even good trades don’t work.
Unfortunately, after most traders have lost a few in a row, they get very “gun shy” and start thinking about all the negative things that could happen if they took another trade. In this way, we start to question whether a certain pattern is “good enough” or whether we ourselves are good enough to make it in this business. By this point, our positive mental approach has been shattered, filled with fear, and riddled with doubt. So the next time a great pattern appears, we will often pass on the opportunity due to our increased sense of loss.
One of the huge differences between a novice trader and a successful experienced trader is the ability to recognize what is happening without letting our emotions make the decisions for us. A professional trader is a disciplined, objective individual who is extremely confident in their approach. Not only does this relate to taking trades, but it also relates to managing trades. Many novice traders will sell too soon in fear that the trade will go against them, yet they are all too happy to let a trade stop them out. The novice will take full advantage of the losers, yet cut the winners short. The root of this problem is confidence, or lack thereof. For a professional trader, their hope for gain far exceeds their fear of loss, whereas with a novice trader, their fear of loss far exceeds their hope for gain. The experienced trader knows that in the long run, over the course of a week, a month, or a year, the odds will work in their favor. So maybe they lose three in row, or perhaps they have a trade that gets within three or four cents of their target, only to watch it pull back and stop them out. Despite these circumstances, they are not tempted to deviate from their trading plan when the same situation arises again because they are supremely confident that the odds will work in their favor in the longer term.
How many people have almost gotten to their target, only to watch the trade pull back and stop them out? What happens the next time this situation occurs? Many novices will take the money and run, fearing that the same situation might happen again. Once bitten, twice shy. Yet, to their dismay, this time the trade continues on and not only hits their first target, but eventually goes on to hit their final target. Frustrating, isn’t it? This is why it is so important to stay disciplined and confident at all times and to not adjust your plan until you have back tested the results over a period of several weeks or several months.
Professional traders come in everyday with the same positive attitude, expecting to make money. Even if, for some reason, they lose money on Monday, this absolutely will not change their approach on Tuesday or Wednesday. They wake up with the same belief every day, and that belief is the product of confidence. They are confident that what they are doing is right, and it will produce results. Even the best traders have losing trades, and on occasion, losing days. Losing is part of this business, and it is completely unavoidable. It’s just a matter of time before you have a losing trade. This doesn’t mean you are a failure, or that you don’t know what you’re doing. It just means that for one trade out of hundreds, or even thousands, something went wrong. It’s our job to figure out what went wrong and to fix it. Remaining confident and positive allows the astute trader to quickly evaluate the situation and move on with even more confidence than before, because they’ve now eliminated one more way to lose. Remember, confidence breeds success, and success breeds confidence!
So, the next time you find yourself in a rut, perhaps having lost several trades in a row, do not let fear and doubt creep into your psyche. Just remain focused on the task at hand, which is to find quality patterns that produce results. We’ve all had losing trades, but it’s how we handle them that will define our success. Remember, those few losing trades will be very insignificant compared to a lifetime of trades. Don’t let your fear of loss overpower your hope for gain, because the disciplined, confident trader is a successful trader. Always stay positive and objective!
By Jared Wesley of Pristine.com
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