The monthly S&P500 Emini futures candlestick chart has not had a pullback in 14 months. This has...
03/01/2012 3:56 pm EST
Many of us who are reading this right now possess some technical trading skill; some of us have a great deal of this specialized knowledge, but lasting or consistent success remains elusive. We continue the search for more knowledge to increase our likelihood of trading success when, in fact, it is not purely the information that makes us better traders, but how we use that information to drive proper execution of trades by making better choices and decisions. This is much more difficult to study about ourselves and overcome―this idea of learning how we make determinations to move ahead with a trade or not. It’s just much easier to keep searching for new indicators.
We do know that, in the end, it is our decision making ability that drives success―or automated systems would have little to no appeal. So, why not consider what an alternate approach to success might be? Perhaps, we realize that trading is a complicated business but that we can find a few indicators, build solid strategies around it, and learn to make complicated decisions quickly.
How do we make complicated decisions? What does it take to make a complicated decision quickly? We mull them over in our minds, weigh the pros and the cons―we often ask those we trust to walk with us through them. The short response is that we DON’T make complicated decisions quickly―it is not part of our DNA. Yet, we expect that we can make these decisions accurately with a great deal of speed and clarity during our trading day. Trading decisions are complicated ones―they are not simple and not intuitive, and are not the kinds of decisions that work out well if we make a rush to judgment about where we should go. Strong successful trading decisions are made with structure through a series of logical assumptions and evaluations―things our minds do not normally process quickly. It’s the example of “slow thinking” referenced by Daniel Kahneman in Thinking Fast and Slow. Daytrading which needs to be accomplished with speed, therefore, presents an unusual set of problems for our minds OUTSIDE of a lack of technical knowledge.
Is it any wonder that most daytraders do poorly?
Strong trading skill is more a matter of decision making than overall knowledge and technical acumen. According to many beginners that I have questioned on this matter, who incidentally have not spent hundreds of hours in front of screens trading, would largely disagree. But indeed, the more experienced the trader, the greater the likelihood that they would agree with the original comment. Trading for a living becomes an exercise in the continual personal development―it exposes weakness in our decision making, attentiveness, concentration, and consistency. And the more we trade, the more of our weaknesses are revealed. The market becomes a quality control machine setting about to stretch us to our limits and find the spaces that can break us―a perpetual stress test machine.
It is no wonder, with these hurdles, that we find difficulty finding success. But there is hope. We must learn to trade well by immersing ourselves in the systems of trading―whether fundamental or technical or a combination of both. Create concrete and complete strategies―clear entries, exits, stops, and fail-safes. This is not enough, however, because no matter how much technical acumen we try to develop, we will fall short of trading excellence if we do not take the time to understand how and why we make decisions. If this is not something you have approached yet in your trading career, I urge you to break out that trading journal and write down your trades―try to find patterns of why you tend to take higher measures of risk when you should not―patterns of impatience that make you open or close trades early―events in the market that cause you to leap without looking―and work at circumventing the bad behavior. Working at eliminating the bad behavior will amplify the good behavior/trades you are making―as one very famous investor says, “It’s not how much you make, but how much you don’t lose.
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