Module 12 Innerworth — Mind over markets

Chapter 138

A Must Trade: Sometimes It’s Better To Stand Aside

A dream. Pure hope. A winning lottery ticket. These images capture what the masses think of trading. They don’t take it seriously, and in the past couple of years, they think anyone who trades is wasting their time and money. Unfortunately, many would-be traders don’t seem to take trading seriously either. For example, many traders fail to properly set realistic goals.

It’s quite common to hear a trader proclaim, “My plan is to make $400 a day, so I can make $100,000 a year.” Where’s the flaw in this kind of thinking? Setting a performance goal based on a specific objective per day compels one to think that he or she must trade every single day, to meet the $400 a day, $100K a year objective. But what if the markets don’t move at all on a given day? Is it time to become the range trade specialist? What if the markets are quiet ahead of an important economic or earnings announcement? Is it still a good idea to trade? Sometimes it is better to stay out of the market completely, rather than fail at trading the low probability setups available on a given trading day.

Even if one has the skills to make $400 a day, when opportunities are available, it may not be a good idea to conceptualize your goals in this way. Consider the consequences of such a strategy. Suppose Monday’s trading session comes to a close and one’s Profit/Loss statement remains unchanged. On Tuesday there will be a strong need to make $800 so as to stay on track with the $400 per day, $100,000 a year goal. But if there are no trading opportunities, the objective again will not be achieved. Not only will you fail to make profitable trades, but you’ll also spend a tremendous amount of your capital on commissions.

And your stress level will be elevated as well, potentially starting a never-ending cycle of frustration and disappointment. So after spending hundreds on commissions on Monday, and possibly losing a little capital on poor trading opportunities, what happens if Tuesday is also a poor trading day? At this point, it is quite likely that the majority of the move will take place overnight and a trader will be “forced” to evaluate the market at levels far beyond the previous day’s settlement. Inevitably, the market will then move erratically for the first 30 minutes and then “fall asleep” for a number of hours, creating even more frustration, which is further intensified when one continues losing money and falling behind the goal of meeting the $400 a day objective.

Setting more appropriate goals will relieve frustration. It’s useful to have a rough idea of how much money you want to make on a given day, but setting a specific dollar amount that you must achieve on any given day is often a hindrance for a novice trader. Research psychologists have found that pushing yourself to achieve a specific goal only works when one has the skills to back it up. In other words, if you have a strong track record in which you have proven that you can make $100,000 a year, then, by all means, go for it. However, if you are a novice trader and the most you have made is $15,000 a year, then setting a goal of $100,000 may be unrealistic. You may be setting yourself up for failure. When you fail to reach your goal, you’ll feel frustration and disappointment, and may start trading based on your emotions.

Setting a daily goal is even worse. Seasoned professionals suggest taking it one day at a time. Overall, they may aspire to make $100,000 a year, but they know that on any given day, opportunities may be limited. They know how to patiently wait for the opportunities to come to them. They don’t impose their will on the market. And that’s what traders are doing when they set a performance goal in terms of a specific dollar value per day. They are implicitly thinking, “I must get $400 out of the market today and every single day.”  But it doesn’t matter what you wish for. There may not be enough opportunities to get $400 out of the market on any given day.

How can this potential pitfall be avoided? Remember that you don’t have to trade every single day. Winning traders patiently wait for market conditions where they know they can excel. If the market is quiet, they wait for optimal market conditions. They understand that the same quiet market will handsomely reward traders who are patient. They understand that forcing the markets to move to their levels is not a blueprint for success. It’s also useful to remember that all that really matters is performance across a series of trades. Many traders can lose 60% of the time, four days a week, but on that fifth day, a winner of many thousands quickly offsets nominal losses accrued across a series of trades.

When you are setting goals, it’s vital that you keep them in perspective. Goals are useful when setting correctly. Set goals that match your skill level. Shooting for goals that are beyond your skills will frustrate you more than motivate you. Also, remember that you can’t impose your will on the market. You don’t know what market conditions will be until you see what they are. And if optimal conditions aren’t there, you can’t do much about it. You must accept what the market is willing to give you, which may mean patiently waiting for conditions to change. By doing so, you may not profit every single day, but in the long run, you’ll be a consistently profitable trader.

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