The simplicity of trading for short term income or long term wealth generation is really down to the basic dynamics concerned with how to actually trade in an effective, objective and logical manner. Let’s face it there are only three things you can do in the market after all, that is buy it, sell it or do nothing. It doesn’t get much simpler that that, does it? Once you are in a trade you have to decide for yourself what you are going to do next. This is the more complex part. Obviously you are either going to win on the trade, lose on it or maybe break even from time to time but whatever the outcome, this is the one true unknown element and thus, is what makes the act of trading not so easy.
You see, as human beings going about our daily lives, we have become used to having a high degree of certainty running throughout our existence as we go about our daily business. Of course Murphy’s Law suggests that if anything can happen, it will happen but again we are still fairly comfortable in knowing that many events which transpire in our lives have fairly predictable outcomes. We have gotten used to pretty much knowing what is going to happen next in most aspects of our lives and have taken a deep-rooted level of comfort in this habitual awareness. Therefore, I would suggest that when it comes to trading, the majority of people find a huge challenge in not knowing what is going to happen next.
Of course the markets are rather predictable to a certain extent, firstly because if they weren’t nobody would make any money out of them and secondly because they are created by none other than human beings, which we have already recognised as being creatures of habit and repetition. Taking these two factors into account is what makes it possible to make consistent gains from today’s markets if a solid and disciplined trade plan is followed to the letter. We must accept the unknown variables that the market is happy to throw our way on a daily basis and also understand that there will always be things that we never have any control over whatsoever. There are on the other hand, things that we can control and must do so efficiently so as to account for the unknown and keep our emotions in check at all times.
I can’t control how far the market will move for me when I am on the right side of a trade. This is one of those big unknowns which makes trading not so easy. What though, can we do to compensate for this? Well straight away we can control our losses by deciding in advance exactly how much we are prepared to lose if the trade fails. Secondly, we can also go for achievable profit targets on the trades we decide to take. I like to encourage my students to “grab the low-hanging fruit” on their positions, meaning that they should train themselves to not be too greedy and going for unachievable targets. This too often results in gaining large chunks of upside potential gains, only to then watch them be given back and ending up with nothing or maybe even a small loss at the end of the trade. This is a common mistake by many traders and definitely is an issue which tends to contribute to the “not easy” scenario. To keep things simple and as effective as possible, we must overcome any potential hurdles on our trades well before we face them. Objective and unemotional profit-taking is one such example of how to do this.
