Know The Vicious Cycles When Trading The Financial Markets
Once the majority of speculators begin trading the Financial Markets, when it comes to technical trading, substance begins to isolate itself once reading the charts are assumed perfected, the theory being the majority of the trades will become winners.
The charting setup which may of worked once or twice in succession, the only task then becomes executing the trade, and more often than not, should work out in the traders favor.
The idea being that most of these executions will work out and win. There are times, more often than not, when it doesn’t work out that well, and those instances doesn’t even cross the new traders mind. This because the market is completely random and a dynamic environment, that’s constantly finicky and evolving.
The breakout setups on the chart which may be working today, will completely fail later, or the next day. If you have X number of wins one year, and then expect to repeat again, you’ll then be in for a rude awakening.
Working Out A Trading Strategy
Developing a trading strategy which is say focused on penny stock breakouts, you’ll discover that you will become at the mercy of how well they perform as a whole. One year, in say a relatively bull market, everything may be running well, and the trading strategy as a result will work the entire year.
Then the following year, it may not be as favorable of a bull market, more choppy, and you’re not able to read the formation of the breakouts which are triggering, as they’re not behaving like it did previously.
Although there’s still money that can be made in these markets, it just won’t come as easily as it did during the sustained bull run. The markets are unpredictable and random, and can be an extremely moody mistress. It will alter itself at will.
The Psychology Of Trading More Important Than Technical Trading
So the discussion isn’t about how the current markets are behaving, as the conditions won’t most likely be running as smooth as desired, and because there are still a lot of favorable setups which can trigger a winning trade.
These conditions will always improve or get worse, you just need to be ready, know what to expect, and then react once it happens. You’ll need to remain as focused, alert, and as in sync as possible, with what’s going on in the markets, and then adapt and react to it.
In a perfect world, traders are able to alter their style or strategy at will, and as a result, should make a financial killing in any market environment, but this scenario is virtually impossible.
The only thing that you can do is continuously attempt to evolve your trading by becoming as versatile as possible when required. It can become a long winded process based on trial and error, and is obviously easier said than done.
So once you think that your main strategy of trading is working well, you may aggressively begin exploiting it for everything that you can. When the strategy begins to falter, then the aggressiveness should be adjusted to the same degree.
If it ever gets to the point where the strategy just plain stops working, then stop using it. The reason being you should make enough during all of the good periods, which makes up for the slow or bad periods.
Every trader would love to make money trading every single day, but the cold hard reality is, you hope that you break even, or are able to pay the bills and live comfortably.
If you’re not making enough during say the first half of the year, to pay for the rest of the year, then the main objective, the bare minimum strategy should be not giving too much of it back to the market.
Every Trade Can Be A Loser
The main priority of any trader should be dealing with the losing trades. Every trader deals with this differently, and as a result, every trader needs to address the losing themselves, and then personalize it to their mindset and their own personality.
Traders And Breakouts
The reason why some technical traders play breakouts is because they’re able to minimize the losses as well as the draw backs. They first check if there’s any breakout patterns appearing in the initial scans.
If there is, then they decide how many there are that’s triggering. Once they do trigger, they find out how they’re initially performing. If they’re not finding a lot of suitable setups, then they simply don’t trade them.
If they find a lot of setups but they’re not triggering, then again, they don’t trade the breakouts. If the triggers aren’t running that strong, or they’re failing more than normal, then they reduce the position size and decide to take their profits sooner than they usually would.
This isn’t a chalk board or a “black and white” method where the trade is either on or off. The degree and decision will always infinitely vary.
Back To Trading Psychology
This then relates back to trading psychology. When your particular strategy is working well for the current market behavior, you may become confident and teeter on cockiness.
You get extremely proud of yourself for trading the financial markets for a living, knowing that the majority fail, but you’re able to do this as an occupation until you retire. These become the easiest of times to be a trader.
But for some unknown reason, your methods stop working, you begin getting stopped out of multiple trades in succession, and suddenly the losses become prolonged. It can then be weeks, or even months, without winning trades and making any money.
The self doubt then begins flooding back into your consciousness, and you say, “How can I continue to trade for a living. It’s been several months since I’ve had a really good trade.”
Then the worse case scenario that can and will invariably happen is you begin forcing things, and start doing damage to your account, thinking and becoming upset on how you gave back months worth of profits in such a short time.
The doubt, the lack of confidence, and panic will begin filtering in during this period of losing. This happens, or has happened to each and every trader who’s ever traded.
Trading Is A Long Term Cycle
The entire process of trading the markets is a continuous cycle, and should be viewed as that at all times. You originally begin with not knowing the nuances of trading, but you dive in head first anyways, being confident that you can succeed at it.
You may initially have some luck early, and your confidence soars, you feel that you’re one of the few who can beat the daunting odds. Then that quickly evaporates because your skill level and lack of experience is nowhere near what your confidence level is.
Reality sets in and your initial account is wiped out, which becomes a humbling experience. Now you’re not as confident, in fact you begin having doubts about whether trading the markets is even realistic for you.
But you stick with it, you continue to learn and improve your trading skills, and eventually your persistence begins to translate into success. The success then breeds into a better foundation of confidence, but overconfidence invariably once again sets in.
Overconfidence in trading equates to aggressive trading, doing trade setups which don’t completely fit the criteria, or you also begin using larger lot sizes than what the rules dictate, which leads towards larger losses.
These larger losses then cycles back towards self doubt, and this doubt will soon deflate the ego bubble. So the vicious psychological cycle of trading, which has nothing to do with the markets, starts over again.
You’re account then gets drained out for the second time, but ideally you’re continually learning and taking a few different steps forward while you take couple steps back.
Confidence Translates Into Aggressiveness
Overconfidence translates into aggressiveness when entering trades and position sizes, which lead towards larger losses. Instead of recognizing and then adapting to the staggering bull conditions, you go into revenge mode and then try to counter the losses with much riskier trades.
That’s obviously against all of the rules when it comes to successful trading, and as a result will not turn out well. The losses bring back the voices of doubt once again.
But based on the cycle, the losses aren’t the blame on your trading system, the losses occurred because you didn’t stick to the rules. The toughest thing is your at the mercy of the markets, and not sticking to the plan isn’t going to allow you to make any of the profits back.
Preserving Trading Capital Money Management
The biggest thing you can learn before successfully trading the markets is preserving and protecting your trading capital. Learn how to tread water as long as possible, to ensure survival over the long run, and not panicking and then drowning in the process. Disciplining yourself to take the safe route at all times will give you the best chance of survival.
You don’t need to be an extraordinary trader during periods of constant bull markets, but it does take a successful trader to survive and manage the down times and draw backs. So you need to learn how to stay afloat long enough to capitalize when the times are good again.
So losing as little capital as possible is a winning trader, and an area of trading which every trader should excel in. It’s also advised to know and embrace the trading cycle of the particular instrument.
Know when to minimize the negatives while capitalizing on the positives. Don’t allow the losses to turn into doubt, which forces you to act erratically.
Rather focus on the roots of your trading system. This so perhaps, one day, you’ll have repeated the pattern long enough so that you’ll no longer be at it’s mercy. For now, all you can do is be aware of the process while working with it and not going broke.
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