It's All In How You Play the Game

01/20/2015 6:00 am EST

Focus: STOCKS

Frank Kollar of Fibtimer.com explains how the only true success in trading can be measured over the long-term. He illustrates how discipline and consistency can help traders make justified trades—a vital strategy—especially during periods of extreme volatility.

There is an old saying, "It's not whether you win or lose but how you play the game."

Few realize just how relevant that saying is to achieving profitability in the financial markets.

The Only True Measure of Success Is Long-Term Profits

Typically, those new to stock market timing work under the assumption that winning is all that matters. Obviously winning is important, but being profitable is more important. And it is a goal that the majority of traders fail to realize.

The ultimate goal is being profitable over the long-term, with profits greater than what can be achieved with a buy and hold strategy.

It takes years of experience to achieve long-term profitability and beating the averages. New traders usually find this out the hard way when they begin trading with the absolute certainty, felt only by those who have never experienced a loss, that they can easily achieve huge gains.

In fact, a new market timer may develop what he or she feels is a great timing strategy and immediately have a short-term gain from it. Or they may exit a winning strategy and take a trade based on emotions or a news event.

But they will quickly find it's difficult to continue winning.

The stock market is a tough playing field.

Being profitable over time is the only true measure of a market timer's success and such success requires experience, discipline, and a tried and true trading strategy.

"Emotional investors are what makes the stock market so profitable for those who understand what the majority of investors are doing, and use this information to profit."

Simply said... If you trade by the seat of your pants, you may get a win here and there, but you will not accumulate profits. You will not win over the long-term.

Now let's get into the details of this commentary, "It's all in how you play the game."

Paying a Psychological Price

How do you approach market timing?

Do you try to follow a detailed and disciplined timing strategy? Or do you rely on current news events, market sentiment, and your gut feelings to make sure all your trades work out the way you want?

If you rely on the latter, you may pay a psychological price when it comes to your ability to trade with discipline.

Making a quick profit without a solid and proven market timing strategy may provide short-term pleasure, but these kinds of winning trades can adversely influence discipline in the long-term. That one short-term profit may cost you a great deal more over time.

Rather than using a well defined market timing strategy, following it, and getting rewarded by trading it, an undisciplined market timer puts on a trade haphazardly and may be coincidently rewarded.

In this case, a lack of discipline is rewarded, and this unjustified reward may increase a timer's tendency to abandon timing strategies in the future because he or she has been rewarded for doing so in the past.

NEXT PAGE: When Emotions Are Running High…

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However, the positive outcomes are usually short lived and a lack of discipline ultimately produces losses. Trading without a plan makes you part of the herd that follows their emotions over cliffs, over and over again. Don't be one of them.

The stock market is filled with investors who are trading by their emotions. Emotional investors are what makes the stock market so profitable for those who understand what the majority of investors are doing, and use this information to profit.

Justified Versus Unjustified

It's useful to distinguish justified wins from unjustified wins.

A justified win is when a market timer follows a timing strategy and over time generates a nice profit. A win resulting from following a timing strategy is justified and reinforces discipline.

An unjustified win occurs when a market timer (or any trader) doesn't follow a well defined strategy or exits a strategy because of emotions (fear & greed), current news events, market volatility. He or she may be rewarded that time, but the outcome occurred by chance. The win is unjustified and can reinforce undisciplined trading.

"Taking every trade ensures when the big trade occurs, the one that makes most of your profits for the year, you will be onboard and profiting from it."

That chance win can cost a great deal of money over time. The easier it is to abandon a sound market timing strategy when emotions are running high, the more money will be lost over time. You will have become part of the emotional "herd." And the herd, the majority of traders, lose.

Discipline Is Crucial

Discipline is crucial for market timing success.

Successful market timers execute a proven trading strategy, over and over, so that across a series of buys and sells, the strategy produces a solid profit. Taking every trade ensures when the big trade occurs, the one that makes most of your profits for the year, you will be onboard and profiting from it.

Consistency is key. One must follow the timing strategy consistently and execute each and every single trade.

Don't let an unjustified profit interfere with your ability to maintain discipline. If you abandon a timing strategy-and get an unjustified win-you may feel good in the short-term, but you'll pay a long-term price when it comes to your ability to maintain discipline and that price is losses.

Follow a real-time tested timing strategy and reinforce the idea that if you follow it, you will end up with excellent profits in the long run.

By Frank Kollar, Editor, Fibtimer.com

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