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Misconceptions No Trader Can Afford
05/08/2012 8:00 am EST
Coming into the markets expecting immediate profits and living and dying by the outcome of every trade are costly misconceptions that can cost traders their career, writes Frank Kollar of FibTimer.com.
While the desire to succeed in market timing is perfectly fine, the desire for immediate profits and winning trades is not.
The desires that motivate your trading could mean the difference between success and failure. We time the financial markets to make money; not to satisfy our emotional needs.
Motivated By Immediate Rewards
Very simply, the market is unlikely to hand profits to you. Although market timing is all about being profitable, it is not about satisfying our emotional needs. Rather, it is the following of a rational plan to create wealth over time.
A winning market timer must tirelessly execute a trading strategy that will often come into conflict with the timer’s emotions. The outcome of any one buy or sell may not produce a profit. It’s quite possible that the overall outcome of a series of buys or sells may not produce a profit. It’s essential that these possibilities be acknowledged.
People are motivated by rewards, and in modern society, that usually means money. The more money we are offered, the harder we work.
Perhaps you were attracted to market timing because of the large potential profits you can make over time. It’s natural to want to receive a reward for your hard work, but if you expect an immediate reward for your efforts and it isn’t forthcoming, you’ll be frustrated and disappointed. And when it comes to market timing, immediate rewards aren’t always there.
For example, everyone expects to get paid on the date their paycheck is due, but have you observed what happens when a paycheck is late? Everyone is quite frustrated and some people can get very angry. People were expecting a hard-earned reward but received none instead.
Unless one has the right perspective, market timing can feel that way also. One may put in an enormous effort and receive no "immediate" reward for it.
If one is "expecting" an immediate reward, it can be frustrating and disappointing when it does not appear. That is why it is important to take the proper perspective with market timing, and the proper perspective can only be based by looking at timing results over a long time frame.
The Big Picture and Laws of Probability
It is essential for a market timer to think in terms of the big picture and in terms of probabilities. You must realize that the outcome of any one buy or sell signal is not significant. It’s the outcome over time that matters.
The more trades you make with a winning trading strategy, the more the law of averages will work in your favor, and across the series of trades, you’ll be profitable.
Market conditions, as we all know, are not always conducive to our plans. This is a reality of market timing and it’s necessary to prepare for it. If you are aware of this, you’ll be less likely to react emotionally to losing trades, and also less likely to make bad decisions when they occur.
Seeing the big picture, and sticking to the trading plan, are the keys to timing success.
If you anticipate that you won’t win on a single buy or sell signal, you will not feel disappointed when it happens. If you acknowledge that you may not profit even after a series of buy or sell signals, you will similarly be able to deal with it, bounce back, and be ready to take the next trade.
But, on the other hand, if you aren’t prepared for these possibilities, you’ll feel frustrated and disappointed. You may feel like giving up on timing.
Some market timers hit the jackpot and start timing right at the beginning of a profitable trend. Those who started in mid 2008 and took our bearish positions made huge, immediate profits. Those who started in early 2009 made profits in excess of 50%. Those who started in 2010 are nicely profitable, but those who started in 2011 are only just becoming profitable.
Typically, however, we start our market timing during difficult market conditions.
The right perspective goes a long way in coping with the inevitable hardballs that the market throws at us. Those who stay the course reap the rewards over time.
How do we post the excellent trading results that have been attained in our various timing strategies? Because the reports follow a disciplined plan. They follow the buy and sell signals without question. Accordingly, over time, they show the profitable results of sticking to the plan.
We do not leave after a loss and then return after a large gain, thus locking in the loss and missing the gain. Those who allow emotions to rule their trading tend to lose money in both up and down markets, an amazing but common feat.
Over time, disciplined trading becomes easier, but be careful not to minimize the importance of self-control and discipline. The more disciplined you can be, the more profits you will realize.
By Frank Kollar of FibTimer.com