Flexibility as a Trader Is Key
Do you have days when you sit down at your trading desk in the morning, open your platform and know exactly which direction the market is going? But those days are typically the ones where you lose the most money, right? There is a big difference between having a feeling for where the market will go and actually trading and executing your trades. You will notice that the best traders have strong opinions about the markets but, at the same time, they are just as fast at throwing their opinions over board and going the opposite direction.
The most important change in my trading career occurred when I learned to divorce my ego from the trade. Trading is a psychological game. Most people think that they’re playing against the market, but the market doesn’t care. You’re really playing against yourself.
– Marty Schwartz
Ego vs. opinion
Understanding the difference between ego and opinion is a key to trading success. Opinions are formed by performing a detailed analysis about the markets. You pull up your trading plan, write down your notes, create trade scenarios and convince yourself about what you think is likely to happen. Then, you execute your plan during live trading.
Ego, on the other hand, refers to how strong you hold on to your trading plan. If your trading plan says “Buy”, does your ego keep you from looking for short alternatives and does your ego prevent you from cutting a loss when clear short signs are given? The term “as a trader, you have to leave your ego at the door” has been around for years for a reason. The traders who attach their egos to their trades are less likely to cut losses and are more likely to miss out on profit opportunities.
The art of humbleness. Accept that you don’t know anything.
Opinions are important; they create a state of confidence and they help you execute your trades; traders who lack strong opinions and confidence often miss trades or are too scared to enter a position.
But, the best traders also know that they don’t know anything. The multi-million Dollar market wizard knows just as much as you do about where the market is going next. The difference is that they can accept being wrong and they understand that they know nothing. Amateur traders have the need to be right, to prove that their trade idea was correct and so they mix ego and opinion.
Being humble and open minded is what separates the professional from the amateur trader. The ability to cut your losing buy-trade and immediately reverse short if you see clear signs that sentiment is shifting, is what makes the difference between the two. In trading, you can’t will your trade to be a winner and you no matter how hard you try, you have no influence over the outcome.
“The best traders have no ego. You have to swallow your pride and get out of the losses.”
– Tom Baldwin
How you should approach your trading day
Now that you know why letting your ego get in the way has to be avoided at all costs and how opinions and egos differ, let us take a look at a better way to approach your trading. There are a few simple principles how you can avoid the ego-trap and approach your trading more open minded:
- Always create a trading plan for both ways. When people perform their market analyses, they will typically come up with an either bullish or bearish rationale. This creates a fixed mindset and people trade like as if they have blinders on.
Knowing when to look for long trades and when to look for short trades is very important. It allows you to be prepared for every eventuality and you are less likely to miss profit opportunities.
- Honor your stop. Even if you are prepared to go long AND short, you have to keep control of your ego. If you can’t close your trade for a loss, even though your stop has been reached, profitable trading is impossible. Over the course of your trading career one loss has no importance and meaning at all. Just move on and don’t let one bad trade get the best of you.
The sole objective of trading is not to prove you’re right, but to hear the cash register ring.
– Marty Schwartz
- If you can’t deal with a loss, walk away. Advice is cheap and we all know what we should be doing. The hard part is following through. Some people just can’t deal with losses and they always end up revenge-trading or widening stop loss orders. If you notice that you just can’t control your emotions, close your platform after a loss and get your mind off the subject for a few minutes.
Trading futures and options involves substantial risk of loss and is not suitable for all investors. Past performance is not necessarily indicative of future results. The risk of loss in trading commodity interests can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition. The placement of contingent orders by you or broker, or trading advisor, such as a “stop-loss” or “stop-limit” order, will not necessarily limit your losses to the intended amounts, since market conditions may make it impossible to execute such orders.