Posts Tagged ‘strategy


Mental Exercise

Trading isn’t easy. Markets are not intuitive. If they were, we would all quit our jobs and trade full time. Obvious to some, but not to all. While trading I watch the financial news shows with the volume muted. Their market commentary has nothing to do with trading in real-time. It is about capturing that microslice of attention span. Forget the “24-news cycle”. We’re in the sub-hour cycle, if not sub-minute.

Scream the loudest, have over-the-top emphatic ways of projecting your viewpoint and you “win”. I don’t understand that kind of presentation, nor why it has become the prevalent method financial networks present their “debates” over current issues. I could replace a talking head commentator with a air-horn connected to a random timer and it would be the same result. My odious honking would prevail over the rest of the conversation – and I win!

But let’s circle back to my main point. Mental exercises – have to keep limber while trading! No, not some new-age poofery where I ask you to rub an oversized quartz crystal while humming your mantra – just a simple mental trick I use to keep my trading mind flexible.

I try to visualize the absolute worst thing the market could do to me while holding a position. This has two objectives – first, it allows me to see the other side of the trade (what if I am wrong) and second, it allows me to understand why I may need to hang in there if my main trading thesis is correct.

I’m sure we’d all love to put a trade on and have it go our way immediately – Sold the top! Bought the bottom! Drinks are on me! This rarely happens, however. What is more common is after researching a trade using your preferred analysis method, you consider your entry point and pull the trigger. Then the market goes immediately against you. Now what?

Once you’ve crossed that event horizon of decision-making, now the real fun starts. Part psychology, part strategy. The worst enemy you face isn’t the market, it is yourself. Period. That is why picturing precisely what the market would have to do to absolutely make you back out of a carefully considered trade is so useful.

It is the mental equivalent to annealing, a process used to increase the strength and hardness of metals. You’ve pictured the worst path the market can take, and how your strategy would be applied to contain the loss. Even if you’ve accounted for “X %” loss factor, or however you calculate it – by actually applying this to market action you make it coalesce out of abstraction into trading reality.

There is stark contrast between “I will only tolerate a 5% loss” to “I bought at 10,000 – based on today’s action the worst thing the market could do is trade down to 9,500 bounce to 9,850 and then go lower.”

Picture the path, and you’ll be more prepared for the emotional minefield that accompanies adverse conditions.

Good Trading!

Trader Tim