| There are many people who teach the psychology of trading. There have been |
| many books written and effort spent on seminars trying to teach the discipline |
| needed for trading. I don’t think trading is that complex. I have developed a few |
| simple psychological rules for myself, and once you accept them, they should |
| ACCEPT LOSSES AS A COST OF DOING BUSINESS |
| Most successful traders will tell you that the most difficult thing about trading is |
| accepting the losing trade. We all have the desire to be to be right, to be correct all |
| of the time. For novice traders, the losing trade means that something is not |
| working and that you have somehow made a mistake. For experienced traders, |
| losses are just a cost of doing business. |
| Some of the best traders in the world lose money on more than half of their |
| trades. If you look at the performance results of the best traders and money |
| managers, you will see that they all have a large percentage of losing trades. If you |
| trade, I guarantee you that you will have losing trades. Learn to love losing trades. |
| USE HISTORICAL STATISTICS |
| I don’t think anyone has ever traded without first looking at historical statistics. |
| Even some traders who deny they are strategy traders have used historical data. |
| And before EasyLanguage and TradeStation were available, most good traders |
| developed a strategy’s history by hand. I can remember countless hours pouring |
| over charts spread out on the kitchen table, writing down trades by hand. Before I |
| would trade it, I absolutely insisted on knowing what the strategy’s personality was |
| and how much money it would have made. |
| Using historical statistics gives you great peace mind, particularly in learning to |
| love losing trades. Knowing the history of a trading strategy can give you |
| tremendous psychological comfort during those tough periods of losing trades |
| and drawdown. Historical statistics tell you how much money the strategy has lost |
| in the past, how many losing trades it has had in a row, and the largest losing trade |
| the strategy has experienced. This is very important information if you are learning |
| to accept losing trades. Comparing historical data with the current string of losses |
| and drawdown can give you much comfort that what you are experiencing now is |
| not unusual and has happened before. Maybe not in exactly the same manner, but |
| it has happened before. |
| LET THE MARKET AND STRATEGY DETERMINE THE PROFITS |
| Don’t have an opinion, don’t try to predict the market, and don’t try to second- |
| guess your strategy. It’s human nature to have an opinion about things, but this |
| opinion can become a stumbling block if we let it affect our trading. One of the |
| alluring aspects to having an opinion on the market is the exhilaration of being |
| right. Even though we know that the chances of being right are slim, we |
| nonetheless want to prove our intellectual prowess by being right. |
| Your trading strategy is ultimately a little business. You have developed and tested |
| the product and are now operating the business in the real world. Let the strategy |
| be the strategy. Let it make the money you know that it can. And know that if the |
| market doesn’t move in the manner that will allow the strategy to make money, it |
| won’t make money. Ultimately, the market determines the profit through its |
| movement. If it doesn’t make that move, there will not be profits. |
| Put the responsibility of making money on the strategy and the market. When they |
| work together, you will have a profitable business. |