Speculating and taking part in the markets can be an exciting activity. Making money doing it is the greatest feeling in the world. Losing money takes you to emotional lows. Over time this can take its toll. The stress in itself can be a distraction to making profitable decisions.
There is one thing that I know master traders do to avoid the emotional trap of trading. THEY NO LONGER TRADE.
You might be thinking I’m starting to talk in riddles. I assure you, I’m not. The master trader let’s go of what he “thinks” will happen as well as what “wants” to happen. Execution is taken over by a SYSTEM. Often this system is composed of RULES that increase the mathematical probability of a successful outcome- profit.
The beauty of a developing a systematic way of trading is YOU CAN ADJUST your system. Many traders make blind desicions about executing a trade. Maybe they heard some news, or a friend just bought a boat load of Apple stock, so you follow along. You might even know a great trader and follow his trades. While this might be profitable for some, when the market starts to turn against you, and you start losing money, how do you adjust?
A master trader has a rule that detects a market turn. For example, I start to notice that I have had a string of 10 losing trades in a row, and all the breakouts have failed miserably. I also notice that during those trades the indexes are showing that the 50ema is below the 200ema a bearish technical indication. So from now on, anytime the indexes moving averages are showing the 50 below the 200, I will not buy breakouts. I will sell short stocks.
It doesn’t matter if you’re a trend trader, a day trader, or a swing trader. YOU NEED A SYSTEM. Let the system take over and based of performance make adjustments and test these theories over a series of simulated trades. Back testing your rules for performance is the reality of the outcome. I recommend manually back testing by hand. You will be much more involved in the simulated trade and the mechanics of the entry and exit. Do this with several stocks and soon you’ll realize the RULES do the trading for you. While computer backtesting is a powerful way to test strategies, this is a whole different specialty that requires rigorous study.
Some might argue that there are “discretionary” traders that don’t use computer black boxes. However, their trading is still SYSTEMATIC. They trade the same on every single trade. They risk is same for every single trade. Even for unusual circumstances, they have a system or technique to approach a trade.
