Article: Four Basic Responsibilities

All of us have bad days in the market. That’s a fact. No one ever wins all the time. What goes around comes around. I think it is critically important to determine what happened when you do poorly. It’s always easy to see what you did right when you have a good day. So what is it when you do poorly? Either you don’t feel well, felt lethargic and not “with the program”, or there are times you just can’t put your finger on what is wrong. It is important to be as objective as possible in determining what went wrong. This is not a witch hunt. It’s an attempt to discover the errors you committed and install fixes for those errors with procedures and processes that will allow you to be successful.

So how do you do that? First, never beat yourself up. You are not a dummy etc. Allow no negative self talk. That’s hard to do when things are going badly. The first thing you should do is stop trading real money as soon as you feel “out of control”. Traders are bull headed animals usually and we are all trying to demonstrate discipline and that we are “with the system” and will follow it implicitly. That philosophy sometimes manifests itself as bull headedness where you are losing trades and just will not stop trading and “following the system”. You aren’t actually following the system because you are losing trades. You are “out of control” when you lose two or three successive trades and can’t seem to figure out why, immediately stop, take a break, a walk around the block, or at a minimum go to paper trades and take the heat off your back. Try to determine what it is that you are doing incorrectly. Be objective, not personal. Consider yourself an “expediter of the system”. You are an extension of the system. Your only function is to run the system correctly. Make it a game. Not a personal life or death mission. Determine if there is something that is distracting you or limiting your ability to do that. Also look at the methodology. Are you really following the trading plan and the system’s signals? Be brutally honest in this regard. You cannot work with lies and deceptions to yourself.

A trader has four basic missions/responsibilities in trading. First is to develop a good sound trading plan and relegate it to writing. Make it easily understandable, as simple as possible, and such that it can be applied ruthlessly on a consistent basis. In that plan, be sure you have clear, concise, and relevant entry and exit criteria. What makes a valid entry signal and exit signal? Exactly what are you looking for? If you have four indicators, are you looking for three of the four to be firing for the signal to be valid? Or do you want the stochastic to be turning over from the top or bottom of its range and coming through the 20% or 80% line, thus taking trades only when the stochastic is coming from an extreme condition? Or take only trades when the Moving Average is in your favor. That’s all up to you and how your system is designed. The main thing is to have it all down in writing and be able to consistently follow it when trading.

Second, realize that your job as a trader/operator of the system is to recognize the signal that may be occurring and then validate the signal (does the signal meet your entry criteria as set forth in your trading plan?). It is not your job to evaluate whether the signal will be successful or not. Your only job at that time is to validate the signal. Is it a valid signal in accordance with your trading plan criteria for entry/exit and whether or not the entry fits your risk/reward ratio are the only things with which you should be concerned.

Third, you are to execute the entry/exit in a timely manner. Let’s say that last part again, “in a timely manner”. That is critical. You must have the faith, trust, and confidence to execute the signal that your system generates on time. Late/hesitant entries are what kill a lot of traders. Late = lose in most instances. Early doesn’t guarantee success but it sure slants the odds in your favor. If you chase trades, you are like the dog that used to chase cars. Notice I said “who used to chase cars”? I think you can see my point.

The fourth and last mission of the trader is to manage the trade in accordance with his/her trading plan. Stay in the trade until your system tells you to exit. Do not cut winners on pure emotional decisions. The name of the game is to run winners and cut losers. The trader who can control his/her losses is the one who will win the war. You can lose many battles but you must run winners and cut losers to win the war. It is therefore of some importance to develop and exit strategy that can be consistently applied. That’s how you lock in profits and stay ahead of the power curve. Have specific reasons to exit trades and follow them. If you get out of a trade, there should be a concrete reason. Look for significant places on the chart where an exit might occur. Support and resistance lines, recent pivot points, yesterday’s high or low, etc. These are places where things can happen on the chart. When these areas are approached have a plan about how to exit. Maybe a fast stochastic hooking or an Ergodic that is hooking along with the simultaneous building of a down bar. Just have something that you look for when you near the important areas on the chart. Consistency in exits is a big key to success. Once you have an exit system perfected, do it the same way every time.

When the day is over and you do your homework (what I call an “After Action Review) and look at the day in hindsight (highly recommended) you will usually find that the system made money. If you lost money, the bottom line is you lost money, and that is the criteria of success or failure in trading whether we like it or not. If you have a good system, that consistently makes money, and you apply your systems, methods, and procedures correctly, you should also make money. If you are successful in your playbacks (always replay each day), but unsuccessful in the real time environment then I suggest you evaluate your trading psychology. The real time, real money pressure is changing the way you trade. Read Mark Douglas’ books The Disciplined Trader and Trading in the Zone. Commit the principles found there into your memory and your actions. You have to believe the things Mark talks about to implement them. Reading them is not enough. You have to internalize them. That is a step that is essential to getting over the psychological hump. If you don’t live it you can’t do it. I also strongly recommend you review the article written by Judy MacKeigan, Steps to Learn to Trade Profitably.

I hope this helps with your trading.

Article by Jay West