You are not your Trade

Traders can make psychological mistakes when trading that can end a trading career very fast. Here are a few examples:

• They take on more risk than they can deal with, stress takes over and they start making bad decisions.
• They become married to a trade, they become stubborn and ignore their stop losses, wanting to be “right” they wait while losses mount.
• Their egos take over their trading. They are more concerned about proving how smart or clever they are than making money. They begin to be more concerned with bragging about their winners than managing their losing trades. It becomes an ego trip that will not end well.
• Their system does not match them, someone who likes fast paced action should not be a long term growth investor and someone who loves investing in growth stocks they believe in should not day trade.
• A trader loses many times in a row so they change systems right before the big pay off. If you have a proven system trade it for the long term benefits.

Here are some solutions:

• Understand the possible risk of loss in any trade and accept that before you trade. If you are very stressed out over a trade you are trading too big, size down.
• Honor your stop loss or trailing stop the first time. Trust me, it is not worth it on your nerves or psyche to hold a losing trade.
• If you are a disciplined trader then it is your system that wins and loses on every trade, not you. It is not a victory or loss for your ego after each winning or losing trade. Trend traders make money when there is a trend, growth stock investors make money in markets rewarding growth stocks, day traders make money when their planned entries work out. The market determines if you win or lose by whether it behaves in a way that is conducive to your system winning.
• You must adjust what you are trading, the time frame you are trading, and how big you are trading until you are comfortable with it completely.
• Decide who you are as a trader, find the system that fits you, and stick with it over the long term.

The less emotional you can make your trading and the more it feels like a business, the more successful you will be as a trader.

Why Does The News Always Move The Market?

Clearly news must be important.  One might think, given its abundance, that news is more important than money, or love, or family, or even food!  It is a wonder scientist have not spent more time studying the phenomenon of news the way they have studied other resources which are essential to human survival.  For certainly the evidence suggests that without news, society would come to a grinding stop.  Perhaps, were a scientist to study the why of society’s news addiction, they would discover that in fact it must have a monetary importance!  That’s why news is so essential to our everyday life.

While readers of the tabloids certainly would not agree with this conclusion, anyone who watches the financial news networks would see the obvious evidence.  After all, that is the reason they exist.  To provide the news as it relates to money.  And thankfully, there is no lack of essential news to drive the financial markets.

Have you ever noticed how major news events miraculously occur at major pivot points?  How does news manage to time these releases so perfectly?  I never cease to be amazed.  A stock, or an index, approaches a major pivot area and like clockwork a news report is released just in time to dictate the next direction of the trade.  How can news be so timely?

The answer is IT’S NOT.  The timeliness of news is related to the psychology of the people investing.  Investors,  regardless of what they have been told, have an underlying belief that up is good, and down is bad.  This belief leads investors to dismiss bullish markets as normal, and look for excuses for bearish markets.  Rational human beings?  Of course not.  It must be something outside of us, something greater – the news!  But the facts remain; it is not news which drives the markets.  News simply kicks people over the edge by acting as a unifying voice of the herd which was already feeling one way or the other.  I know that statement is pure controversy to traditional thinkers. 

Think about it:  How often does the United States have riots?  Moreover, how often does the United States have riots in multiple parts of the country at the same time?  Yet during the month of October that is exactly what the “occupy” movement has been able to pull together.  The news in the month of October was full of angry anti-capitalists and anti-government protestors taking over parks, city blocks, government lawns…. Heck! By the news reports you’d think these occupiers are multiplying like rabbits!  Yet the market roared forward.

In reality the month of October was riddled with negative stories, any one of which could have, and justifiably should have sent the markets tumbling… yet the market roared on.  Why?  Because when the herd of human behavior falls into a deep belief that the buying opportunity exists to make money, the news is suddenly irrelevant – after all, they are “investing on fundamentals”.

Why do these things keep happening?  More importantly, how do they miraculously keep happening at pivot points?  The answer is simple:  Markets do not move based on news, and not based on fundamentals, but rather, markets move based on human emotion.  And human emotion moves in waves, just like every other part of nature.

For this reason, Technical Analysis is the only form of market analysis which can truly predict market movements.  Sure, we don’t specifically know which news story will break when.  And technicians don’t specifically know exactly what the herd is feeling, but based on solid technical analysis, a well trained analyst can easily determine where those changes in mood will occur, and after confirmation, they can trade those mood swings for great profits.