Trading Futures and Options on Futures involves substantial risk of loss and is not suitable for all investors. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources. You may lose all or more of your initial investment. Opinions, market data, and recommendations are subject to change at any time.
Apr 6, 2012
5 FUNDAMENTAL TRUTHS TO TRADING
Mark Douglas, a person I consider one of the pioneers of trading psychology talks about these 5 Fundamental Truths to trading along with 7 Principles of consistency in his book Trading In The Zone (A book ever trader should own). I think it’s really important to understand all of these truths and principles and believe them if you want to be consistent in your trading.
THE 5 FUNDAMENTAL TRUTHS OF TRADING:
1. Anything can happen.
=> It Ok ,that you have an edge and u have probability ,but there is something outside these which you cannot quantify. An edge is just a higher probability of one thing over another and nothing else.
2. You don’t need to know what is going to happen next to make money.
=>Just be slave of your trading plan and nothing else matter really.
3. There is a random distribution between wins and losses for any given set of
variables that define an edge.
=> In other words, based on the past performance of your edge, you may know that out of the next 20 trades, 12 will be winners and 8 will be losers. What you don’t know is the sequence of wins and losses or how much money the market is going to make available on the winning trades. This truth makes trading a probability or numbers game. When you really believe that trading is simply a probability game, concepts like ‘right’ and ‘wrong’ or ‘win’ and ‘lose’ no longer have the same significance. As a result, your expectations will be in harmony with the possibilities.
4. An edge is nothing more than an indication of a higher probability of one thing happening over another.
=>Probability will never be guaranty.
5. Every moment in the market is unique.
=>Market movement is net between Buyer and Seller.Intentions and Volume of each participant (Buyer /seller) will never be known.
THE 7 PRINCIPLES OF CONSISTENCY:
1. I objectively identify my edges.
=> There is no reason to workout the market and beat the market through analysis.What are you looking for , what is your stop loss ,where is profit taking level and predefined Ur risk.
2. I predefine the risk of every trade.
=>I am dependent on some body else to make me a winner.so stop loss is essential.
3. I completely accept the risk or I am willing to let go of the trade.
=>To whatever degree you haven’t accepted the risk, is the same degree to which you will avoid the risk. Trying to avoid something that is unavoidable will have disastrous effects on your ability to trade successfully.
4. I act on my edges without reservation or hesitation.
=>When edge present itself,there is no points analyzing the edge.Since we have done the done back testing , appearance of edge shown higher probability of market moving in your favor.
5. I pay myself as the market makes money available to me.
=>There is no point in letting winner turning up in loser. We should have profit taking regime and follow it.
6. I continually monitor my susceptibility for making errors.
=> Regular exercise
7. I understand the absolute necessity of these principles of consistent success and, therefore, I never violate them.
=> Regular exercise and practice
Trading in its simplest form, is a pattern recognition numbers game. We use market analysis to identify the patterns, define the risk, and determine when to take profits. The trade either works or it doesn't. In any case, we go on to die next trade. It's that simple.
Subscribe to:
Posts (Atom)