The most difficult challenge for many traders is suspending their set of beliefs, biases and “feelings,” and trading. Often, the biggest obstacle to profits is the trader’s own habits and actions, which can usually be traced to their inability to remain consistently objective. The key word here is consistent. Traders need to absorb tons of information from many sources, process it, analyze it, and trade with it. Often it is incomplete, and/or the data itself is contradictory to events and other market feedback. This lends itself to subjective opinions and sentiment.
The best traders are able to parse data as objectively as humanly possible. They have the ability-usually derived from experience and/or temperament-to place themselves outside their own perspective, and see things from different points of view. This enables them to reach more precise and logical opinions about the marketplace and price action-and opinions are what they are until proven by subsequent events.
Traders whom learn how to think instead of what to think, will usually be able to figure out markets and sort out how to best trade them. Of course, it’s never easy when there is real money on the line, and when markets move really fast. The inherent risks of trading add to the odds that traders will not trade objectively. Indeed, the best that traders can hope for, is that they apply some or all the principles that keep them pointed in the direction of objectivity and clarity, and the results over the long term will ensure profitable account balances. Here are a few ideas:
Keeping things straight. Just the facts. The cold, hard facts. It’s amazing how far some traders can distance themselves from those stubborn and often glaring realities, let alone the subtle nuances that traders need to keep alert for. Markets always give off signals, but traders can psyche themselves out by reading too much into news and information. Indeed, the market will send false signals that encourage false or premature breakouts, just to trap those with a bias not backed by the absolute adherence to the facts. Everything is subjective you say? Not in trading. Sure, technical indicators can be subjective, but not price action. A EUR/USD at 1.3500 is an absolute, even if it was 1.3300 the day before. Markets go up and down, and there are usually reasons for each, though traders can trick themselves into believing the most convoluted theories for why markets trade in a certain direction. Traders do come with a certain set of ideas when they trade. The key is to dissect those ideas to see if they are based more on a natural bias one way or another, or they are based strictly on the facts...which are also more fluid that some traders will acknowledge.
Staying ahead of the curve. Traders don’t need crystal balls, they just need balls. No offense to the female traders out there-whom are often better analysts than male traders since they display less tendency to let their egos interfere with objectivity (though emotions are another story), but traders need to think ahead to stay ahead. This means trading like a chess player and anticipating possible and probable outcomes, and assigning risk to them. Traders also need to followup to the nth degree, and do their homework, even when other traders or the market seems to point in one direction. The way a trader differentiates him or herself is not only by winning over the long term, but how they approach the task. Traders whom rest on the laurels will often find they lose in the long term, or at the very least, miss opportunities.
Trust what you see, not what you want. As Sigmund Freud once said, “Sometimes a cigar is just a cigar.” For traders, this translates into believing your eyes, and not your bias. Sometimes there is a match, but many times what one sees on the charts, is not what one believes to be true. This does not negate the stance of a trader whom firmly believes in his trades or setups. It only means that traders need to find a set of signals and indicators that they trust...and then confirm them, to geniuinely trust them. When combined with risk management, the odds definitely favor this type of trader.
Cutting losses sooner rather than later. The real test of real traders. Traders whom can pivot-a true sign of objectivity-are the ones whom will be in the game the longest. They will likely be the most profitable over time too. Those traders whom have something to prove, or are unable to get out of a loser, will be sidelined at some point, often with busted accounts. The trader whom takes the early loss-even when the trade turns out to be OK in the end-is the trader whom is likely freest of biases and trading the most objectively. It’s not perfect objectivity traders seek, just the desire to get as close to it as one possibly can. The objectivity itself is a way of freeing the trader from damaging emotions and habits.
Believing in one’s own judgement. The flip side to objectivity and the most difficult to balance with it, is keep the faith in one’s own trades and actions. The way to maintain this confidence as well as the objective perspective is to constantly check your trades against the markets, looking for divergences and shifts in trends and to confirm every indicator with another.
When in doubt, stay out. There are traders whom routinely stay away from the markets on certain days. Mondays and Fridays seem to be those days for some. Markets often have no particular direction, especially on the slower news days. In any case, traders should learn to opt out when markets are dithering or drifting. Even scalping a few pips can be problematic and risky, and on days or periods when the trader cannot calculate the likely direction or trend, it’s usually best to stand aside.
Markets change, so should you. As singer and songwriter Bob Dylan said, “He not busy being born, is busy dying.” In the markets, every day is an opportunity to be born, especially if the trader is open to learning and can accept that the market never stops changing, and nor should the trader.