Charlie Wright of Fall River Capital offered:
I always tell traders who are having difficulties that to trade well you have to trade against your human nature. You must buy when everyone is selling and sell when everyone else is buying. If you think about it, the market is simply the sum total of all actions made by millions of human decisions. These decisions reflect human nature. Researchers have found that 95% of all traders lose money. If we accept this to be true, then almost all of those millions of decisions will ultimately be wrong. As these decisions move the market, the market reflects human nature, and if 95% of the traders are losing money, it is clear that to make money you cannot trade like everyone else.
If everyone else is trading as human nature demands they must, to be successful you have to trade against human nature, your human nature. The most profitable trades I make usually feel like losers when I put them on. Taking these trades always goes against my human nature. For instance, many years ago I used to day-trade the S&P futures. On one particular day I had suffered a string of six losing trades in a row and had experienced a drawdown in excess of $11,000. This was an extremely difficult day and I was ready to quit when with 45 minutes to go in the day I got another signal.
What I really wanted to do was to throw my computer out the window and go home. There was no reason to put on another losing trade. Why throw more money after bad? I was not a masochist! The market was choppy all day and I surely was not going to make any money on another useless trade. At this point however, I decided that if I did nothing else for the day, at least I would take all of the trades my strategy gave me.
If the strategy lost money, then I would have to change the strategy, but I never wanted to say that I did not have enough discipline and stamina to implement the strategy I had developed, even though my instincts told me this next trade would be financially stupid. So I took the trade, and vowed to take every subsequent trade until the market closed. I was not going to follow my inclination and quit.
I would assess the strategy after the markets closed, not during market hours. During market hours, my only job was to implement the trades. Well, the market exploded into one of those end-of-the-day moves that lasted until the closing bell. Not only did I made back all of the day’s losses, I ended up with an $8,000 profit for the day! Many people were trading the trend this particular day. Trend traders had built up large losses in a very choppy market and most of us simply gave up.
Just when we were ready to give up, the market moved. Those who gave up missed the big move. The human thing to do, the financially conservative thing to do was to quit and preserve money for another day. The people that made money traded against their human nature and stuck it out. It was a very difficult thing to do, but I learned a great lesson on that day.
Detach Emotions from Your Trading
A successful trader has a well thought out strategy and possesses the self-discipline and self-knowledge to stick to his plan. He knows his abilities and limitations. He knows exactly how he will react to the market. He analyzes the market, doesn’t take short cuts, is aware of his reactions, and makes a sound plan. This emotional control is greatly helped by the use of a trading system.
A system helps to take away that decision-making hesitancy that traders often face. By trading trend following techniques you can see quickly the results of sound strategy.
Relax (well just a little at least)
Trend following has profited over decades. Knowing the prior success of the great traders can allow a sense of confidence as you approach the markets.
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