June 25, 2007

In this week's free newsletter, we'll discuss  Trading Survival, Part 2.

Last week we discussed The Key to Trading Survival, so if you missed it be sure to check it out and get caught up to speed!  But for those who already read it, let's dive a bit deeper into that topic this week.

How Well Do You Know Yourself?

Being able to exercise self-control, focus on making high-quality trades, and choosing not to lose is dependent upon one thing: how well you know yourself.

It's simply a fact of trading that there will be losing times, so if you've got a clear head and you can place your ego aside and cut back when you're uncertain of the market, your method, or anything else, then you should come out fine.  I'd go so far as to say that if you're able to do that, then the worst you should do over time is to spin your wheels (because you'll also have winning trades).  It is important to be able to cut back when you need to instead of press when you're down, and choosing to approach trading this way will put you ahead of 90% of the traders out there.

The concept of knowing yourself as a trader is spoken of regularly, but I think it's quickly shelved by most traders as they instead opt for finding perfect strategies or complex indicators they think will help them make it as a trader.  If you truly know yourself and you can honestly look in the mirror and know you can set your ego aside from a bad trade or bad week or bad month and exit or adjust your trading accordingly, then you're putting the highest odds of success in your favor.

Pride vs. Plan

The method of trading that works best for me is based on small losses (even though they are sometimes more frequent) and larger wins.  However, some traders will set out to follow that approach, only to override it when their ego gets in the way.  Their pride and desire to be right at all times interferes, causing them to blow stops or add more shares to trades which should instead be closed for minor losses.  They compound their errors because taking a small loss isn't good enough for them.  Needless to say, it isn't long before they're walking away from the market with that same ego bruised and a shrunken account!

In such cases, it has nothing to do with the method of trading employed.  It all boiled down to their ego and their refusal to be "wrong" in a trade.  Your trading method is important, but it is secondary to your own ability to follow your game plan.  Accepting at the beginning of the day, week, or month that you can book some small losses will allow you to still come out ahead in the end.  For me personally, accepting that was the key because I knew I was going to have some winning trades to cover my losses, and keeping them small makes them incredibly easy to cover.

Know yourself and your tendencies in different situations, and take every precaution to prevent your flaws.  If you can swallow your pride and follow your game plan, then you can make it in the trading game. 

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Jeff White
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