“To the destructive element submit yourself.”
J. Conrad
Successful trading is 80% psychological and 20% methodical. As I have already said,
self-knowledge is the key to market success. A trading method by itself, no matter how
well thought out, cannot be successful if it is not applied in the correct manner. It is
in the application of a trading method that many traders end up losing. Consider the
analogy of a high performance-racing car. No matter how aerodynamic or technically
advanced, it needs to be driven. An advanced piece of engineering such as racing car
needs to be driven by a person who can drive it with care. Just as a disciplined driver
is needed to race a car, a disciplined trader is needed to apply a trading method. All
traders have heard the word “discipline”, but few really understand what it is and why it
is so important to develop it.
EMOTIONS AT WORK
“When dealing with people, let us remember that we are not dealing with creatures of
logic. We are dealing with creatures of emotion, creatures bursting with prejudices and
motivated by price and vanity.”
Dale Carnegie
Intelligence, knowledge and talent have to be applied. Any person who is successful
knows that application requires discipline, self-control and confidence in one’s abilities.
Bjorn Borg was a great tennis player, he had talent. However, what always gave him the
edge when playing was his mental control, which earned him the nickname “Iceman”.
He combined talent and discipline to achieve his success and you must do the same.
We are all put in situations where, after they have occurred, we look back and feel that
if only our emotional control had been better. You are going for a job interview and role-
play Th a friend beforehand. You come over as assertive and confident. In the interview
itself, however, the confidence goes. You practise a best man’s speech, it ows well and
sounds great; however, on the day, delivery suffers as you feel nervous and shy.
All the above we can associate with. The fact of the matter is, when the pressure is
on, our actions are in uenced by our emotions. The more important the scenarios, the
greater the in uence will be.
Trading is no different. As soon as money is committed, logic can go out of the window
and basic emotions take over. Consider the difference between paper trading and trading
real time. Whilst paper trading, you earn very good profits, you are confident and
optimistic. You see a very lucrative business opportunity, so you now decide to open an
account and trade for real.
On studying your charts you see an opportunity, a perfect double bottom and prices
low in historical terms, now is the time to buy. You ring your broker to place the trade;
however, the overwhelming confidence of paper trading has now deserted you. Perhaps
you had better double-check the formation. After much deliberation you decide to
phone the broker and the trade enters the market. For the next two days prices rise
dramatically, your profits grow; you feel great, what an easy way to make a living. The
next day prices drop and your profits are cut in half. You feel uncertain; perhaps you
should take the profit now before it gets away. You decide to wait. The next day prices
fall further and close below your mental stop loss. Your system is telling you that you
should be cut. However, you only have a small loss and it should turn around and you
will soon be back in profit. The next day, to your horror, prices have collapsed and the
majority of your equity is now lost. Your reaction is now one of anger, why didn’t you
bank the profit when you had it! The market’s move is totally illogical, you feel anger,
pain and frustration, you are now totally disillusioned and fed up, and all you want to do
is exit the trade.
Welcome to the real world of trading!
“Seeing is believing, but feeling is the truth.”
Thomas Fuller
The above is a hypothetical yet common example of how traders who have made money
on paper suddenly crumble under the strain of real trading. Many people deride paper
trading and say it is of little use. However, providing you know the pitfalls in advance, it
is a great way to mentally prepare yourself for the day you have to trade real money.
“The mainstay of training her is confidence. That’s why we show them how to let a tank
run over them - it gets their confidence up.”
Officer in Charge
US Special Operations Command
Of course nothing will take the place of the real trading arena; however, practicing the
basics on paper is a very useful exercise. To ridicule paper trading is similar to saying
soldiers should not go on manoeuvres because the bullets are not for real! In conclusion,
paper trading is useful if we adopt the right attitude to it, (i.e. we make it as realistic as
possible and we don’t cheat).
Going back to our hypothetical example, it is clear that the trader was making investment
decisions based upon his emotions rather than logic. No matter how good the trading
system was that he used, he would still fail due to his lack of discipline and self-control.
This is not to imply that you can trade any system with discipline and be successful;
however, a disciplined trader with a mediocre trading system has the edge on the best
trading system in the world if its operator lacks discipline.
To develop discipline you need to acquire total confidence in your abilities, i.e. acquire
self-control. You can do this by acquiring knowledge, practicing on paper and real time
trading experience. Nothing replaces real time trading, but preparation in terms of
understanding the markets and how you should relate to them will give you a distinct
edge in the quest for the big profits.
