The Two Realities of Trading

The Two Realities of Trading

There are two realities every trader must understand and accept before she/he can actually start trading for a living!

1) It Is Impossible to Predict Market Turns

It has become very common in the financial markets for analysts or "experts" to offer their "outlook", or predictions for various markets. In fact, it has become so common that many traders just assume that if so many people claim to be able to predict the future action of the markets, then it must be possible. Nothing could be further from the truth.

There are two great emotions at work in the markets - fear and greed. However, contrary to conventional thinking, greed is not always manifested as a lustful longing or need to make money. Quite often it is manifested in the form of "hope". And what could give a trader more "hope" than the belief that he may be able to know in advance what a given market is going to do? But, think about it for a moment. Can you think of any other endeavor where people can actually predict the future?

In order to be a successful futures trader, you must learn not to rely on predictions and forecasts. It is possible to find a person or committee or indicator or wave count which will occasionally offer a prediction which actually comes true. However, the fact of the matter is that there is no person, committee, indicator, or wave count, etc. which can consistently and accurately predict tops and bottoms in any market. It is simply not possible to do so on a regular basis.

Once you free yourself of this notion, you open up your mind to the more important task of determining the current trend in a given market. In the long run, such knowledge will be much more useful than a thousand forecasts.

2) Losing Trades are a Natural Part of Trading

Novice traders have a great deal of trouble accepting the notion that losing trades are a "natural" part of trading. Yet, if you are actively "cutting your losses" on trades that don't go in your favor, a losing trade can actually be thought of as a positive step, because it is the act of consistently limiting your losses to a manageable amount which allows you to keep coming back to trade another day. While losing money on a given trade is not in itself a good thing, the very act of keeping each individual loss to a minimum is a necessary step in trading profitably over the long run.

When starting out, traders often shoot for a high percentage of winning trades, even though that generally means taking profits quickly and missing some big winners. More experienced traders come to realize that the percentage of trades which are winners is often a meaningless statistic. In the end, the only thing that counts is if the amount earned on winning trades exceed the amount lost on losing trades. As long as that is the case, it matters little if 3 out of 10 trades are profitable or if 7 out of 10 trades are profitable. The key is to make alot when you win and to lose a little when you lose.

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Best Wishes!

Traderji

www.Traderji.com

Dear Traderji,
You have presented the sockmarket truths very correctly. We have to move according to the market. Then only we can survive. We have to take the winning and losing trades sportively and control our emotions while trading which affects the judgement. Nobody can predict the market correctly over a period of long time. In the short term many predictions may come true. But the market has its own judgement and moves accordingly.
gvnarendra.

In connection with the above,few lines from Alexander Elder from "Trading for a Living"........

"The amateurs in most fields ask for forecasts,while professionals simply manage information and make decisions based on probabilities.Take medicine for example.Apatient is brought to an emergency room with a knife sticking out of his chest-and the anxious family members have only two questions:"Will he survive?" and "when can he go home?"They ask the doctor for a forecast.
But the doctor is not forecasting-he is taking care of the problems as they emerge.His first job is to prevent the patient from dying from shock,and so he gives him pain killersand starts an intravenous drip to replace lost blood.Then he removes the knife and sutures damaged organs.After that he has to watch against infection.He monitors the trend of a patient's health and takes measures to prevent complications.He is managing -not forecasting.When a family begs for a forecast,he may give it to them,but its practical value is low.
To make money trading,you do not need to forecast the future.You have to extract information from the market and find out whether bulls or bears are in control.You need to measure the strength of the dominant market group and decide how likey the current trend is to continue.You need to practice conservative money management aimed at long term survival and profit accumulation.You must observe how your mind works and avoid slipping into greed or fear.A trader who does all of this will succeed more than any forecaster.

My observations...

I have come to the conclusion that trading is not an exact science. You can't do X and get Y every time. It is as much an art as it is anything else. There is no magic formula. Trading is all about probability. It is the art of correctly applying a set of carefully thought out rules and allocating the probability of that event to result in success.

Each trade is an independent event. The market does not remember if you lost or made money the last time you traded.

The way you approach the market psychologically has as much to do with your success as any trading plan.

Risk management is crucial if you want to have any hope of becoming a successful trader.

Matching a method of trading with your personality is the only way you will ever feel comfortable in the markets.

An adequately funded account is necessary - not only to be able to take the trades you want, but also so you don't feel every trade is a live or die situation.

The journey to the road of successful trading will make you confront your deepest fears. Your armor on this journey will be confidence, knowledge and belief in yourself that you can achieve your dreams.

Never, equate your success or failure in the markets with who you are as a person!

Wise words....Agree with you wholeheartedly....Looking forward to more from you.

i am wondering if one can put this kind of strategy to work: buy an equity at X price, sell some of it at a profit, put that cash amount into an fixed deposit so u protect part capital and part profit and wait for the equity to go further up, then sell it completely and keep money in cash until market goes thru a major correction say, for 5 days in a row, and then re-enter at lower levels.
Is there something wrong in this strategy? I am a novice so do give me your inputs. Thanks!

Hello Lata ,
What u are doing is wise of u, to do that,nothing wrong, profit making is the chief criteria and u are not lossing the sight and experiencing each with its trade value, keep it up and as u gain u can make more profits with ur thoughts and ideas about the each script.

with regards,
Sincerely,urs,
www Nksagar.com

Hi Guys,
Its really a fantastic artical.I always used to wonder is trading different from any normal activity of life.And here you guys exactly correlated it,which is helpful in building up confidence of novice traders like me.

To SAINT and others,
Never have i run across like minded individuals who agree/subscribe to the notion that markets cannot be forecast or predicted. Period, end of story.

The two things I focus on in terms of method is always limiting risk/managing risk and compounding yield. We may agree on some of the strategies of entering and exiting trades, but the ONLY objective data i review and analyze is price, specifically macro price trends.

I'm just now getting into commodities with paper trades and have been able to translate my techniques from my stock and options trading with considerable success. But it requires patience and perseverance...an unattached, unwavering, unyielding, immovable determination. I liken it to the Terminator who in eveything he did, centered around negotiating the chief objective without vague, ambiguous, and oten eronious debate and reasoning. He was cold and calculating, always calculating mathematical probabilties as events unfolded. This is what I do and how I do it.

Others have their way, no doubt, but i find objective data and objective responses/reaction to be especially profitable and helpful in mitigating losses. I am long term, so as to avoid the perils of mean reversion. Anyway, I look forward to continued discussion on this and other topics.
happy Trading, MasterChief

Masterchief,
Let me take this opportunity to congratulate you on a great attitude.Agree with you on all counts.......Forecasting ,having an opinion is great---great to write newsletters,great to present seminars,great to seem intelligent,great to make people feel one is an authority on the markets.Take a look at their records,one truly doubts if they are successful.The market is right...always right.The market is right when we think it should go in a particular direction.The market is right when it goes the other way.The market is never wrong.We are wrong if we went the wrong direction.One's opinion does not matter.To go with the flow of the market is everything........

Forecasting prevents vision.It prevents one from acting in the present because one's mind is rooted in the future.Once one is able to live in the present,one then gives up all resistance to the flow of the market.One then automatically takes stops and not go into hope mode.One then naturally lets the trade run with trail stops.

Masterchief,great going........and Happy Trading!!

Saint