This is a continuation of my previous blog Preparing for the Unexpected in Trading. I did not dare include this part, because I knew most traders would have a good feeling about their trades early this week (news were coming out). But this is end of the week and it's time for a reality check!
1) In Sun Tzu, The Art of War, it says “every battle is won even before it is fought”, which most people automatically assume that it only means thorough planning, but it also means, in certain cases, that the strategic underpinnings of any course of action are more important than the specific tactical implementation. In other words, one’s mental and psychological approach to winning is equally or more important than the actual planning. In the case of trading (specially before the news), I believe a trader should NOT be anticipating profits based on predetermined trading plan and strategies, because it is a psychological poison for 2 reasons: 1) you have no idea what’s going to happen in volatile condition with whipsaws etc… 2)Profit expectations are usually fueled by hope and greed. So as soon as the market starts going against your plan, fear begins to kick in. And there is usually a direct correlation between greed and fear. Meaning the amount of profit you hope for is usually the same amount of loss you end up with when greed/ fear become a factor. So a trader’s mental approach should always be void of preconceive notion of profits, and be ‘in the flow’ with the market; viewing price action for what it is and do what is sensible at the moment (View The Naked Woman in Trading).
2) Expect to lose! Losing is inevitable in trading, so traders should expect to have losses no matter how experienced they are or how great their trading strategies are (it’s part of the game). The only losses a trader has control over are those caused by mental errors due to lack of focus or discipline. Nonetheless, one’s mental approach to losing is what differentiates the pro traders from the amateurs. A pro takes a loss as part of the ‘cost of doing business’; while an amateur takes it personally by blaming himself, his strategies or the market. A pro has a ‘thick skin; short memory’ approach to trading, so he doesn’t take losses personally, because he knows that there will be plenty more other opportunities. At the same time, he also does not gloat about his ‘trading intelligence’ when he wins or feels extremely prideful about his gains.
3) Tactical Implementation. Ultimately, your mental approach will lead you to implement some tactical strategies when the market hit you with a loss, because you will admit that losses are a big part of the game, so you have to prepare for the inevitable. Usually the tactical implementation to losses entails minimizing your losses by using Stop Loss or by scaling down your position size. Or when you do lose, not to quickly get back to the market in order to prevent the quicksand dilemma in trading (the more you are trying to recover your losses, the more you dig yourself in deeper). Moreover, some losses can be prevented by simply not entering the market. Most traders often don’t realize that not trading is also a position. Minimizing your loss or not entering a position will help you SURVIVE, which is the most fundamental and important winning strategy in life, war, business or trading.