BarroMetrics Views: Common Trading Mistakes II
In today’s blog, I examine the idea that ‘good psychology’ is the panacea for trading success.
I am often asked to identify some perceived psychological reason for a trader’s failure. More often than not, there is truth in the perception that the ‘problem’ lies with some variant of a trader’s default future. But the assumption seems to be that all that is needed to succeed is to identify this issue – do this and all problems will fix themselves. But guess what? It ain’t that easy.
To succeed we still need to develop our risk management rules and we still need to develop a trading philosophy and trading set of rules. The psychological aspects come in when we have our rules and find we are unable to execute them with any degree of consistency. On the other hand, our psychology can be the best in the world but without our money management and trading rules we won’t succeed.
That’s the nub of the matter.
My recent trading provides a good example. As regular readers know, 2009 has seen my largest drawdown since 1990. I follow certain processes whenever I am in an Ebb State – they range from reducing size to stopping trading for ‘x’ days. They idea here is to take the pressure off. I know that with time, I’ll ride out the Ebb and move to a Normal or Flow State; my job as a trader is to survive the Ebb State with as much equity as possible.
My trading involves exiting positions before my stop gets hit. Now sometimes this will mean that I’ll exit and have to re-enter because the market moved my way without having gotten to my stop level. This occurred with a short I took in the ES U9 at 996.75. Having exited Thursday, the market gapped down yesterday.
My trading defined when and where I would re-enter; it also defined the initial stop placement. My money management rules defined the position size and ensured the prospective reward justified the risk; finally the psychological tools and rules ensured that I executed in accordance with my rules.
Trading success comes from the interplay of the three factors of success and not from focusing on just one of them.