“If you make a bad trade and you have money management you are really not in much trouble. However, if you miss a good trade there is nowhere to turn. If you miss good trades with any regularity you’re finished. For example, let’s say the market moves rapidly through your buying zone and you miss it, you miss your buy signal and instead wait for a retracement to maybe buy cheaper. But, the market just keeps going higher and higher and never retraces. Now what do you do? There’s a great temptation to reason that now it’s too high to buy. If you buy it now you’ll have an initiation price that’s too high? No, the initiation price simply won’t have the kind of significance you suppose it will have after the trade is made. You can’t miss these trades. Trading systems force discipline to make sure these trades are not missed.”
There are two traders. They each have:
- The same amount of capital.
- The same tolerance for risk.
- The same trend following system.
What must they do? They must both trade exactly the same. What do we mean? If two traders are essentially equal then there is neither room nor reason to act differently. Successful trading requires precision and discipline. There is no room for ego, personal opinion, subjective interpretations or emotion.
Do not try to recoup your money. Trade for today, not yesterday. Trade what you have now. Since you can’t change the past and you can’t change the market, don’t let your past trades determine what you trade today. Take Cisco. Many people rode Cisco straight up and they made a fortune. Many of those same people rode Cisco right back down and lost most of it. Were there sure signs to sell Cisco after it peaked? Yes. There was the falling share price. However, once people became fixated on Cisco with fond memories of how much they made originally and how good winning felt, they could not stomach accepting a loss, any loss. Instead of following a system and selling Cisco after it peaked, they elected to keep holding on in the hopes that it would come back. As Cisco continued on its death spiral their focus was still on the past as they asked themselves, how do I get my money back in this one stock?
Do not try to take revenge. Why do you have to get even with the market on this one stock? No one cares that you lost money but you. Trying to recoup in the one stock that sank you is not a strategy. It’s an emotional attempt at revenge that is doomed to fail. You can’t get revenge on the market. Trade for today, without regret, without wishful thinking, without anger. Trade by following a system.
Entry Is Not the Key
William Eckhardt once offered:
Suppose two traders, A and B, who are alike in most respects except the amount of money they have. Suppose A has 10% less money but he initiates a trade first. He gets in earlier than B. By the time B puts the trade on, the two traders have exactly the same equity. The best course of action has to be the same for both of these traders now. Mind you, these traders have very different entry prices. What this means is that once an initiation is made, it does not matter at all for subsequent decisions what the entry price was. It does not matter. Once you have made an initiation, what your initiation price was has no relevance. The trader must literally trade as though he doesn’t know what his initiation price is.
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