Trading Teaches You How to Be Forgiving
Imagine this scenario: you run your scans, you eyeball yourcharts, and after several hours of intensive research you come up with what looks to be the best trade of the week.In fact, this chart is the best-looking chart you have seen in a long time. The markets have been choppy and tough to trade lately, but this setup looks like a surefire winner.So at the open you fire off your stop-limit order to enter the trade, and sure enough, half an hour later it executes.You are now long XYZ in size. It closes the first day with a 3 percent profit—not a bad start. It closes the second day at a 5 percent profit, and the third day at 7 percent. All is well, and you envision the trade hitting your 15 percent profit target by the end of next week. That evening, however,the company comes out with some bad news: earnings are not going to be as great as everyone expected and so the company is lowering its guidance figures by a considerable amount. The next day, the stock opens below your entry price and proceeds very quickly to trade down through your stop-loss. You are out of the trade with a loss.In a quick Wall Street minute your hopes have been dashed.How do you feel at this point? I’ll tell you how youfeel. You feel betrayed and resentful. The company’s management let you down. They are bumbling idiots. It’s all their fault! Or, if you are a neurotic like me, you will blame yourself. You should have done more research. You should have taken some profits while you had the chance. You should have seen that internal weakness in the chart. If only this, and if only that, you will say. Regret and shame color your mood.Now, those are perfectly understandable emotional responses to a disappointing experience. But are they the best way to respond to a trade gone bad? Of course not.Over time, those negative experiences (and at times they will come in large batches) will eventually drive you out of the trading game if you can’t get a handle on them. This is precisely what trading teaches us to do: in order to get beyond the blame game or the “woe is me” game, we need to learn the art of forgiveness. Forgive the company for mishandling a bad quarter. Forgive the chart for not drawing your attention more strongly to that hidden pocket of weakness. Forgive yourself for not being diligent enough,or prescient enough, or whatever enough. Forgive and forget and move on to the next trade. It is an essential lesson to learn in life—to forgive the mistakes of others as well as your own—and it is an essential lesson to learn in the process of trading for life.
Trading Teaches You to Hold Your
Biases Loosely
A bias is simply a partiality I hold toward some expectedoutcome. Negatively, biases can hinder us from evaluating a situation objectively. Positively, a bias is often the only reason I would evaluate a situation in the first place. Let me illustrate. It is often said that there is a liberal bias in the media today. For the sake of argument, let’s assume that is true. Negatively, this means that media investigations of an event may not provide us with an objective reading of what actually happened. Instead, what we get is an assessment from the liberal perspective, not the whole story. But positively, that liberal bias is likely what initiated the investigation in the first place. Without that bias, there might not have been enough interest to generate a news
story at all. Hence, biases can play a productive role if kept in check: they generate the initial interest in an outcome and give that outcome its significance.Statistics defines accurate results as results that are free of all bias. Science defines a well-designed study as one that is free of all bias. But stock trading is not so objective.We need an initial bias—bullish, bearish, or something in between—in order to generate our initial interest in, and then our directional commitment toward, a particular trading outcome. We need a sense of where we see the markets headed over the short term at least so that we can apply the most profitable trading systems for that market type. And we need to know whether the chart we are scrutinizing is more likely to move up, down, or sideways in the near future. This is why trend traders use technical analysis:
moving averages, trendlines, candlesticks, and indicators all help us build a rational, probabilistic bias toward the markets in general as well as toward our individual trades.Traders get into trouble, however, when they cling too closely to their biases. Learn this market mantra: “Let the markets do what they want to do!” If our bias gets us into a trade and it turns out that our bias was wrong, we need to cling loosely enough to it to let it go. Too strong a bias will prevent us from doing what we should be doing with a trade gone bad: taking the quick loss and moving on. Biases can also hurt us with our winners. How many times have we held on to a nice winner, believing in our bias that it would be a big jackpot win only to see those paper profits
dwindle to nothing? All too often, no doubt. So again,traders need to hold an initial bias toward the markets and truly commit themselves to it in the form of real-money trades, but they must also refuse to cling to that bias when it proves to be a misread.
Trading Teaches You to Be Humble
This brings us to our last lesson: along with holding loosely to our biases, trading teaches us to hold loosely to our pride. The markets are just too big for any mere mortal to conquer. There are too many vectors, too many inputs, too many inter- and intramarket relationships, for any single person to get a handle on them all—but put together a string of healthy winners and you will soon feel like you are (blast the fanfare) Master of the Market Domain! Strike down that attitude as soon as you feel it creeping up on you. No one—not Buffett, not Cramer, not Seykota, not Soros—masters the market. The best we can do is to learn
time-tested systems that put as much probability on our side as possible, and then be diligent in applying those systems day in and day out.Trading psychologist Bennett McDowell suggests in
an online article that a humble, submissive posture toward the power of the markets is of much greater benefit than an aggressive stance. He writes:
Some new traders who had to be aggressive in
their chosen businesses tend to think they need
to be aggressive with the markets. It seems logical.
In fact, that is what made them successful
before as sales people, managers, executives, doctors,
business owners, entrepreneurs, etc. In
trading however, this aggressive type of behavior
can actually be your biggest weakness. The
belief that you can force the market to do what
you want and make your trade work, just won’t
happen! The markets are too big. In fact some of
the most successful traders I know approach the
market passively! They tend to “Follow” the markets
and not force an outcome.
Again, learn this maxim: “Let the markets do what they want to do!” This book gives you the tools necessary to do just that and earn a great living from them. In truth, trend trading is really all about trend following. You will note that in nearly every setup we offer here, a trend is already in place—either in price, in the indicators, or in both—before we enter the trade. The prideful trader wants to glory in
trying to outthink the markets, to buy when everyone is selling and to sell when everyone is buying in the hopes of catching the reversal before anyone else sees it. But unless you have insider information, or you are as business savvy as a Warren Buffett or a Peter Lynch, it is best to stick with what works. What works in trend trading is a humble posture toward the market, letting it tell us as clearly as possible what it is likely to do next.
Another area where pride needs to be swallowed and humility adopted is that of sticking firmly to your trading systems. Let me give you an example from one of the worst trades I’ve made in recent memory. While my trading systems normally require that we sell prior to an earnings announcement, I decided to hold one of my positions over the announcement in the hope that the company, like it did
in the previous two quarters, would beat Street estimates.The company closed trading at a price of 25.48, a full 12 percent over our entry price. Our subscribers happily logged their nice gain and moved on. I, however, woke the next morning to find the same stock trading below 20.00 after both earnings per share (EPS) and guidance came in below the Street. And when the dip buyers failed to come to my rescue (the stock traded briefly under 18.00), I finally sold my position for a very embarrassing loss.
This kind of agonizing mistake happens even to the best of traders, but it cannot happen to successful traders
very often. What caused me to hold overnight? Well,greed, pure and simple, yes, but also pride—the prideful attitude that led me to believe that I knew better than my own trading systems. Imagine that! So in short, for the sake of your trading success, adopt a humble attitude toward
both the markets and your various trading disciplines. Both
know better than you do.
Imagine this scenario: you run your scans, you eyeball yourcharts, and after several hours of intensive research you come up with what looks to be the best trade of the week.In fact, this chart is the best-looking chart you have seen in a long time. The markets have been choppy and tough to trade lately, but this setup looks like a surefire winner.So at the open you fire off your stop-limit order to enter the trade, and sure enough, half an hour later it executes.You are now long XYZ in size. It closes the first day with a 3 percent profit—not a bad start. It closes the second day at a 5 percent profit, and the third day at 7 percent. All is well, and you envision the trade hitting your 15 percent profit target by the end of next week. That evening, however,the company comes out with some bad news: earnings are not going to be as great as everyone expected and so the company is lowering its guidance figures by a considerable amount. The next day, the stock opens below your entry price and proceeds very quickly to trade down through your stop-loss. You are out of the trade with a loss.In a quick Wall Street minute your hopes have been dashed.How do you feel at this point? I’ll tell you how youfeel. You feel betrayed and resentful. The company’s management let you down. They are bumbling idiots. It’s all their fault! Or, if you are a neurotic like me, you will blame yourself. You should have done more research. You should have taken some profits while you had the chance. You should have seen that internal weakness in the chart. If only this, and if only that, you will say. Regret and shame color your mood.Now, those are perfectly understandable emotional responses to a disappointing experience. But are they the best way to respond to a trade gone bad? Of course not.Over time, those negative experiences (and at times they will come in large batches) will eventually drive you out of the trading game if you can’t get a handle on them. This is precisely what trading teaches us to do: in order to get beyond the blame game or the “woe is me” game, we need to learn the art of forgiveness. Forgive the company for mishandling a bad quarter. Forgive the chart for not drawing your attention more strongly to that hidden pocket of weakness. Forgive yourself for not being diligent enough,or prescient enough, or whatever enough. Forgive and forget and move on to the next trade. It is an essential lesson to learn in life—to forgive the mistakes of others as well as your own—and it is an essential lesson to learn in the process of trading for life.
Trading Teaches You to Hold Your
Biases Loosely
A bias is simply a partiality I hold toward some expectedoutcome. Negatively, biases can hinder us from evaluating a situation objectively. Positively, a bias is often the only reason I would evaluate a situation in the first place. Let me illustrate. It is often said that there is a liberal bias in the media today. For the sake of argument, let’s assume that is true. Negatively, this means that media investigations of an event may not provide us with an objective reading of what actually happened. Instead, what we get is an assessment from the liberal perspective, not the whole story. But positively, that liberal bias is likely what initiated the investigation in the first place. Without that bias, there might not have been enough interest to generate a news
story at all. Hence, biases can play a productive role if kept in check: they generate the initial interest in an outcome and give that outcome its significance.Statistics defines accurate results as results that are free of all bias. Science defines a well-designed study as one that is free of all bias. But stock trading is not so objective.We need an initial bias—bullish, bearish, or something in between—in order to generate our initial interest in, and then our directional commitment toward, a particular trading outcome. We need a sense of where we see the markets headed over the short term at least so that we can apply the most profitable trading systems for that market type. And we need to know whether the chart we are scrutinizing is more likely to move up, down, or sideways in the near future. This is why trend traders use technical analysis:
moving averages, trendlines, candlesticks, and indicators all help us build a rational, probabilistic bias toward the markets in general as well as toward our individual trades.Traders get into trouble, however, when they cling too closely to their biases. Learn this market mantra: “Let the markets do what they want to do!” If our bias gets us into a trade and it turns out that our bias was wrong, we need to cling loosely enough to it to let it go. Too strong a bias will prevent us from doing what we should be doing with a trade gone bad: taking the quick loss and moving on. Biases can also hurt us with our winners. How many times have we held on to a nice winner, believing in our bias that it would be a big jackpot win only to see those paper profits
dwindle to nothing? All too often, no doubt. So again,traders need to hold an initial bias toward the markets and truly commit themselves to it in the form of real-money trades, but they must also refuse to cling to that bias when it proves to be a misread.
Trading Teaches You to Be Humble
This brings us to our last lesson: along with holding loosely to our biases, trading teaches us to hold loosely to our pride. The markets are just too big for any mere mortal to conquer. There are too many vectors, too many inputs, too many inter- and intramarket relationships, for any single person to get a handle on them all—but put together a string of healthy winners and you will soon feel like you are (blast the fanfare) Master of the Market Domain! Strike down that attitude as soon as you feel it creeping up on you. No one—not Buffett, not Cramer, not Seykota, not Soros—masters the market. The best we can do is to learn
time-tested systems that put as much probability on our side as possible, and then be diligent in applying those systems day in and day out.Trading psychologist Bennett McDowell suggests in
an online article that a humble, submissive posture toward the power of the markets is of much greater benefit than an aggressive stance. He writes:
Some new traders who had to be aggressive in
their chosen businesses tend to think they need
to be aggressive with the markets. It seems logical.
In fact, that is what made them successful
before as sales people, managers, executives, doctors,
business owners, entrepreneurs, etc. In
trading however, this aggressive type of behavior
can actually be your biggest weakness. The
belief that you can force the market to do what
you want and make your trade work, just won’t
happen! The markets are too big. In fact some of
the most successful traders I know approach the
market passively! They tend to “Follow” the markets
and not force an outcome.
Again, learn this maxim: “Let the markets do what they want to do!” This book gives you the tools necessary to do just that and earn a great living from them. In truth, trend trading is really all about trend following. You will note that in nearly every setup we offer here, a trend is already in place—either in price, in the indicators, or in both—before we enter the trade. The prideful trader wants to glory in
trying to outthink the markets, to buy when everyone is selling and to sell when everyone is buying in the hopes of catching the reversal before anyone else sees it. But unless you have insider information, or you are as business savvy as a Warren Buffett or a Peter Lynch, it is best to stick with what works. What works in trend trading is a humble posture toward the market, letting it tell us as clearly as possible what it is likely to do next.
Another area where pride needs to be swallowed and humility adopted is that of sticking firmly to your trading systems. Let me give you an example from one of the worst trades I’ve made in recent memory. While my trading systems normally require that we sell prior to an earnings announcement, I decided to hold one of my positions over the announcement in the hope that the company, like it did
in the previous two quarters, would beat Street estimates.The company closed trading at a price of 25.48, a full 12 percent over our entry price. Our subscribers happily logged their nice gain and moved on. I, however, woke the next morning to find the same stock trading below 20.00 after both earnings per share (EPS) and guidance came in below the Street. And when the dip buyers failed to come to my rescue (the stock traded briefly under 18.00), I finally sold my position for a very embarrassing loss.
This kind of agonizing mistake happens even to the best of traders, but it cannot happen to successful traders
very often. What caused me to hold overnight? Well,greed, pure and simple, yes, but also pride—the prideful attitude that led me to believe that I knew better than my own trading systems. Imagine that! So in short, for the sake of your trading success, adopt a humble attitude toward
both the markets and your various trading disciplines. Both
know better than you do.
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