Trading is Easy

09 April 2011

In simple terms, trading is definitely easy. Trading can be accomplished from someone who manages a million dollars using all the latest technology to someone trading off of a laptop with $50 to their name. The simple act of buying and selling can be accomplished from whoever has the will to push the button.

With such a simple task at hand why do as many as 90% of traders fail and lose all of their capital? One of the key components for the high failure rate is lack of discipline. But first let’s start at the beginning. Most beginning traders see the stock market as fast cash. And really, who can blame them? We’ve all known someone who knows someone that invested in a penny stock that took off and now they are headed for early retirement. We’ve all placed that lucky trade at the beginning of our careers that quickly saw 30+% gains. Almost instantly our minds are filled with the thoughts of dream vacations, fast cars, and financial freedom.

Just as you are on your high of winning trades you get hit with a loss, then another, and another. Now instead of dreaming of vacations you fear for your capital. The winning high that you’ve been on is now replaced by fear and anxiety. Your thought process has shifted from where is the next winner to how do I prevent any more losses. This is how they say, the beginning of the end.

What most people don’t realize is putting on the actual trades is the easy part; the hard part is the discipline it takes to run those trades. The discipline needed to run your trading plan, control your emotions, and consistently extract profits from the market.

Every trader should lead off with a trading plan. The plan should outline entry and exit points, what to look for in trades, how to take partial or all profits, and when to cut losses. A trading plan allows the trader to take some of the guess work out of trading. By following a plan you don’t have to quick decision if you need to enter a trade or take a loss.

Discipline of emotions is the hardest to control. If one can master their emotions then they are on their way to being successful. Trader emotions take on the full gambit: anger, happiness, anxiety, fear, boredom, depression, bliss, etc… all of which can be felt no matter if you are winning or losing. So how does one contain these emotions? Unfortunately complete control of emotions will differ for everyone since it will depend heavily on that person’s situation and expertise.

We can touch on a couple areas that should be universal for everyone. First, no trader should trade with money they don’t have or can’t afford to lose. Losing money is never fun but trading with this month’s utility bill puts unwanted pressure on the trader. Trade with money you can afford to lose and you will remove some of the anxiety. Second, not every day is meant to be traded on. There are approximately 252 trading days in the year so some of those will be spent in cash or on the sidelines. Taking a position in cash is taking a position just like taking on a trade and needs to be done on occasion. However, on the sidelines traders can get bored especially as they watch other traders put on positions and take out profits. Boredom can lead to putting on trades that don’t fit your criteria or over trading, both of which will lead to losses. Spend your days on the sidelines being productive instead of watching other traders or the market go by. Use these days to gather more charts, fundamental information, write a financial blog, develop a new trading skill, create a profit/loss sheet, etc... Just because you are not monitoring positions doesn’t mean there isn’t work to be done. Third, if you are losing sleep over the positions you have open then perhaps the positions should be closed and a new trading system developed. Figure out why you are losing sleep; is the holding period to short or to long? Is the position size and risk to big? Did you enter a trade without following your rules? Ask yourself these questions and then fix it. No trades should cause so much fear that you cannot receive a good night sleep.

Not all bad emotions are the culprit of bad trades. Happiness and the feeling of bliss can also hurt one’s trading career. Happiness can make it easy to forget your trading plan rules or cause you to make trades you are not comfortable with. Having a winning streak of trades can create laziness and the lack of drive to further one’s skillset.

Remember, putting on a trade is a simple task but consistently extracting profits from the market is a full time job. Profits and losses should be taken hand in hand without the slightest difference in emotions.

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