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THE TWO OBSTACLES TO YOUR TRADING SUCCESS
IN my opinion trading is easy, but we make it difficult. We make it difficult because we experience two obstacles to success. I mentioned these in the introduction, but they are worth repeating:
1.Traders donât have a system or method to trade.
2.Even if they do have a method, they donât stick to it.
IDENTIFYING AND IMPLEMENTING A TRADING METHOD
As mentioned in the introduction, many trading methods are about probability, often using systems with set rules to produce a mathematical edge. A mathematical edge does not need to be complex. An edge is simply when the probability of your method can consistently deliver more profits than losses. A mathematical trading edge can be obtained in many ways, and there are many different methods that provide an edge. However, for most traders a numerical edge is not enough to overcome the problem of not sticking to a method â because of their intense emotions.
My first book, Mindful Trading using Winning Probability, focuses on method and probability, showing you why and where the edges are in a robust trading system. That system has a win rate of around 50% and a winner-to-loser ratio of nearly 4 to 1. I will discuss a similar system later in this book. (I suggest you donât go looking for it now. If you do, you will be committing a typical error of losing traders â impatience!) Since the winning trades make almost four times the losing trades, it should be obvious to you that if you stick to it, over time the system will be highly profitable.
Many traders do not have a system based on probability; they begin trading without a sound method. Preferably, they should employ a method that is as simple as possible, which makes it easy for aspiring traders to take the first steps along the path to trading mastery. Most aspiring traders are not taught a simple method at the beginning of their education. They often attempt too many methods or are taught complex and confusing methods, making processes hard to adhere to.
An example of a simple training process can be found in the movie The Karate Kid. The Japanese martial arts master teaches his student to polish cars by waxing on with one hand and waxing off with the other â a seemingly unimportant and boring process. It is only later, while defending himself during a competition fight, that the student realises the significance of mastering the basics of repetitive and co-ordinated hand movements.
I know from my own trading experience, and from observing colleagues and students, that many traders will struggle to trust and implement not only my systems but any system or method â even one they have developed themselves, no matter how simple it may be.
THE DIFFICULTY OF STICKING TO A METHOD
Not being able to stick to a method is something many traders donât realise is a problem. It seems to take beginners a few years to come to the realisation that they are self-sabotaging their performance. No matter how logical, rational, convincing or seemingly robust a trading system is; no matter whether it is operated manually, automatically or under the advice of another; the overall success of the strategy is determined by the traderâs ability to cope with their emotions, which are created by their interpretation of market volatility.
There are as many methods as there are traders, and as mentioned, the percentage of successful traders is very low: as low as 5% to 10%. Obviously, there is another obstacle to trading success apart from just sourcing a simple trading method with a mathematical edge.
The reason why you (or other traders) wonât stick to a method is not complicated: the simple answer is fear. Fear of an undesirable outcome, coupled with complicated and often confusing emotions that arise when traders are faced with uncertainty.
Many trading experts have offered opinions about the psychology involved in trading. Below I list some of the prevalent advice and opinions â many I am sure you have discovered yourself or heard about before:
âąDeeply accepting losses is the holy grail of trading.
âąYou need to be peaceful and calm â but strike quickly when needed.
âąThe only guarantee in trading is that you will lose.
âąThe most important skill is accepting losses.
âąIt is not about the perfect method, but the perfect mind.
âąDo not repeat the same non-working process.
âąYour rules are only as strong as the emotions that created those rules.
âąYour subconscious rules your behaviour.
âąTrading is all about your subconscious programming.
âąThe subconscious determines how much money you win or lose.
âąEven smart people lose, because of their emotions and subconscious.
âąWhen a trade goes against you, you get nervous and uptight. You canât think straight.
âąThe market works by taking money from emotional tr...