Trader Mentality
Sunday, February 27, 2011 at 4:36PM A Trader’s Mentality Must Be Guided by “PROOF”
It is always said that there are two kinds of investor – the long-term buyer and holder of securities, the Warren Buffett type, and the actively managed portfolio investor, known more succinctly as a swashbuckling trader, looking for every opportunity to gain on market volatility using technical tools and a business-like decision-making process to produce his gains in the market. The former has time to think, but the active trader must be decisive in his actions, blocking his mind from intervening while exercising judgment in highly stress-filled situations.
It takes a special personality type to align with a trader’s mentality, but in volatile markets, there is opportunity in the chaos. However, the trader must maintain his focus, typically achieved by practicing for hours to gain the confidence and consistency necessary to survive and thrive. Simple anagrams can also help to keep key principles in top of mind, and one simple such phrase to follow when trading is “PROOF”:
· Preparation: All traders must have a step-by-step trading plan that guides their every action before, during, and after a position is closed. The plan must also be practiced for hours in order to become almost “habitual”, the only known way to prevent your mind from undermining your decision-making process. Never trade based on gut instincts – that is pure “Hollywood”. Act like you are a business, making decisive decisions based on specific metrics;
· Recognize: Your plan will specify your key fundamental benchmarks, but as an individual trader, you will never be able to compete on information with banks and hedge funds. You must rely on technical analysis and pattern recognition. Your plan will guide you on what defines a prudent trading opportunity, the risk/reward ratio, and where to enter a position;
· Order Size: Money management principles are key if a trader is to survive to trade another day. Trading is about speculation. The fact is that you will have many losing trades, possibly more than winning ones, but you must cut short your losers and let your winners run. Never put more than 2% to 3% of your capital at risk in one position, and never have more than three positions open at one time in the market. Your objective is for the “net” of your trades over a period of time to remain in positive territory, the definition of consistency;
· Order Execution: Now is the time to execute your strategy, or per the Nike commercials, “Just Do It!” However, wise risk management principles demand that you place a stop-loss at the same time that you enter your execution order. In the forex market, not all currency pairs are the same. The “GBP/USD” pair is more volatile than the “NZD USD” pair, such that the “stop” for the former will be more “pips” than the latter. Learn to use an “Average True Range”, or “ATR”, indicator to assist you in this placement sizing;
· Finalize: OK, you are in the market now! Assuming that you have not been “stopped out”, the decision awaiting you is when to close your position, the most difficult task in the trader’s regimen. You must rely on your carefully practiced plan to define where your exit should be. You are looking for specific signals to guide your decision, and when they occur, pull the trigger, and take your profit. If your plan allows you to place a trailing stop-loss order to lock in profits and continue the ride, then once again, “Just Do It!”
Trading with real money on the line can be a daunting task, but remember “PROOF”, if hesitation arises.
Reader Comments (20)
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you said that " Finalize: OK, you are in the market now! Assuming that you have not been “stopped out”, the decision awaiting you is when to close your position, the most difficult task in the trader’s regimen."
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