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Be In Harmony with the Market

We make money trading when we are in harmony with the market. We are long

when the market is going up, and short (or out of) the market when it is going

down. If we bring an opinion with us while trading, we will end up fighting the

market. We keep trying to go long as the market is declining, or we keep shorting

a market that it is in a bull phase.

DON’T FIGHT THE MARKET

Fighting the market is not good for two reasons. First, we lose money. How much

we lose depends on how well we are managing our money and controlling our

risk. Second, fighting the market affects our judgment, and causes us to try to

confirm that our judgment is correct, or persist in fighting a trend so that we will

eventually prove to be correct. We figure that if we persist long enough, no matter

how long it takes, we will eventually be right.

The same can be said for being in a canoe in a river. There is a reason for leaving

your car downstream, launching your canoe upstream, and paddling downstream.

It is much easier and eminently more fun to go with flow and paddle downstream.

We could do the opposite and paddle upstream. Eventually we may even get to

our destination, but the cost would be substantial. It would take much more time,

more physical and emotional stamina, and we would be constantly fighting the

current. Reaching the goal would not be worth the cost.

Even if you ultimately make money fighting the market, it is not worth the price

you have to pay, both financially and with peace of mind.

LET THE MARKET TELL YOU WHAT TO DO AND WHEN

The correct attitude for successful trading is to let the market tell you what to do.

If the market says to go long, buy, and if it starts to go down, sell. This sounds

easy but it is much more difficult than you think. We always like to believe that we

can be in control. We want to be in control of our trading and of the market. If

you accept the notion right now that you cannot control the market, that all you

can control is your execution of trades, you will take a great step toward being a

successful trader.

Instead of trying to control the market, let the market tell you what to do. Let the

market and your strategy take you long rather than you personally trying to predict

or decide when to go long. Let your strategy take you out or get you short. Once

you realize that you can’t understand the market, and that you can’t predict when

the market will move, you will move into that detached state of mind where you

let the market take you where it will when it wants to.

THE MARKET GIVES AND THE MARKET TAKES AWAY

To remove your personal biases and let the market tell you what to do is to give

up control, to give up the notion that you are actually in charge of how much

money you make. For profitable trading, you need to move into the mental state

of letting the market determine the profits, not you. It won’t be whether you

predict the market correctly that determines the profits, but whether your strategy

is in a profitable mode or drawdown mode as determined by the market.

So, let the markets tell you what to do based on your strategy. Let it get you long

and put you short. Let the market determine how much money you are going to

make. Trade your strategy and let the market do the rest. And know that the

market gives money and the market takes away money. Your goal should be to
develop a strategy that gives you more money than it takes away.

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Have a Healthy Time Horizon

One of the biggest problems new traders have is that they think they will make a

large amount of money right away. They think they will get rich quick. This type

of reasoning is very similar to the short-term thinking in American business in

general, usually managing for the current quarter’s profits, focusing on short-term

earnings at the expense of long-term investment and profit growth.

TRADE FOR PROFITS OVER TIME

Traders tend to get wrapped up in current market conditions, the news of the day

and the current trade, usually at the expense of the big picture and profits over

time. My grandfather used to have a saying, “You can’t go broke taking profits.”

He was very wrong. You can go broke taking profits. If you take profits before

the market tells you to, or you succumb to fear and close out the trade before its

time, you are focusing on the short-term and forgetting how to make money over

the long haul. Close out no trade before its time.

GIVE YOUR TRADING STRATEGY ENOUGH TIME TO WORK

We tend to be impatient, and we sometimes think that we should get instant

gratification. This will not work in trading. The only way you will really know

whether you are a successful trader is to be successful over time. A week or a

month will not be enough time to tell you how you are doing. You should be

trading with the objective of making money in the long run, consistently, and with

the confidence that your strategy will make money given enough time.

One of the benefits of trading with a strategy is that having done the requisite

historical testing, you should know how long it should take you to start making

money. You should have an idea as to the length of time that the strategy has lost

money in the past, how much money it has lost, and how long it will take the

strategy to become profitable. If the strategy has proven profitable historically, it

should be profitable in the future. You just need to give it the necessary time to do

its work.

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Understand the Psychological Keys of Trading

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
greatly enhance your ability to trade effectively.

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.
They should be your friend because you will be spending a lot of time with them.

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.

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