Getting right back on track with our discussion on trading psychology, Mark Douglas says “If you’re the kind of person who likes to use their intellect to determine what’s going to happen next, you’re going to have a problem being a trader.” Now with one perspective, I would agree with this statement. How I perceive this is in two ways:
1. If you think your brain can come up with a reason why you know what direction price will go, you will be in trouble because you will look at each individual trade as opposed to focusing on a group of trades. When you lose on one trade it will hurt your ego because you believed you knew the direction of price in the first place. I believe this is true, you cannot focus too much energy on any one specific trade otherwise if you lose on the trade, you will take it personally. On the other hand…
2. If you are trying to base you decisions on fundamental reasons, you are investing time to understand economics at such a level that you have determined that it will give you an edge in your trading and therefore use it to determine your trades. I believe if you do this, you will soon find out that trading off of fundamentals is not going to work for you in the long run.
My reality of trading is that it is possible to know what price will do next, it will take many hours of work to get to this level of understanding price and market dynamics but it’s possible. With this in mind, once you achieve this level of understanding, you must then be able to not take each trade result personal. Whether it is a win or a loss, every trade is just a measure of your ability to analyze the market correctly. With every loss there must be a procedure you take to go through your trade and determine what is was you did wrong in your analysis and to not take it personally. This is the process you must take every time. Without this step, you cannot learn from your mistakes and become better.
What I see way too often is traders trade a specific system that has nothing to do with understanding how the markets truly work so therefore they put the responsibility of being profitable on the system instead of themselves. What happens from this is they never end taking ownership of their mistakes and thus never learn from each experience. It’s easy to not take responsibility for a losing trade, in fact most traders want that and this is encouraged by the creators of trading systems but in the long run, this will not work out. I know of many traders whom I looked up to at one point in time and they all traded a system. Today they are all blowing up accounts and it is very sad to see. The thing is I saw this coming. I could see that their systems were flawed because it may work in certain market conditions but eventually they would fail and the main reason would be because they were not able to determine when market conditions were about to change, and thus keep them from getting themselves in large drawdowns.
At the end of the day the problem with relying on a trading system is you subconsciously tell yourself that the system is responsible for making you money and you just have to execute on the triggers. The way I see it is a system is a tool to use to help time your entries and exits but you must be able to read the markets and understand market dynamics and learn from each and every mistake so that in the future you become a better, more consistent trader that does not get caught in drawdowns.