Pressure

Sometimes I get some really strange questions in the mail. The one that follows is one of them. Although I try to be like "Rambo" when I trade, I haven't in actuality fully achieved "Rambo's" degree of "coolness."

"Is it really true that you are able to stay calm and relaxed when you trade? Are you saying you have never cracked under pressure?"

There have been times when I made mistakes under pressure, but I don't recall ever cracking under pressure. By that I mean I didn't panic, but I have come close. Being short soybeans when Chernobyl blew up was probably the closest. I've made huge errors in conduct - once I sat and lost $45,000 in a matter of minutes because I tried trading while teaching a student at the same time. Lesson learned: Never trade and teach at the same time. Stay focused on one or the other. I once woke up to a margin call of $21,000+, but it turned out in my favor. I had erroneously left a 5-lot in the market overnight - thinking I was flat - the result of sloppy housekeeping.

Nevertheless, I have learned how to make trades in a relaxed, but focused way. I don't put unnecessary pressure on myself. I don't let myself get stressed out - it's simply too costly to do that.

I don't believe that I have to be successful on any one trade; I keep my focus on the big picture. I don't believe I need to be right. I don't try to impose my will on the market. And I definitely don't try to predict the future of price movement. The market is the market - it does what it wants to do.

What I do is to closely observe market conditions and movement, and make up a detailed plan of attack. I trade what I see, allowing the market to take me where it wants to go. I make a serious effort to stay calm and relaxed, and ready to act on whatever happens next.

Once I have a trading plan, I follow it. I do not doubt or second-guess my plan. I meditate on my plan and picture myself carrying it out successfully, before I ever enter a trade. I really believe in mental imaging as being an important activity.

I enter and exit trades without worrying about the consequences. Worrying has never helped me to trade well. Worrying is wasted energy. By staying focused, I am able to see trading opportunities more easily, and that allows me to take advantage of the opportunities when they arise.

Trading is a lot like playing sports. Players must stay objective, calm, and not crack under the strain of wanting to be "the best" or "perfect." I am definitely not a perfectionist.

I recall one year when college football fans observed what happens when a team seems to be playing "so perfectly" that some say they are "unbeatable." All season long, the Oklahoma Sooners had been winning, and winning big. They were the only undefeated college football team, until the day they lost by over three touchdowns to the Kansas State Wildcats. What's surprising about this loss is not that the Sooners lost, since even the best teams can lose occasionally. It was the way they lost and how they seemed to be defeated psychologically. After making their only touchdown in the early moments of the game, they seemed to be stunned and shaken for the rest of the game. They couldn't make even a single touchdown. It was unexpected and hard to believe. One commentator said it was like the bully who had never been beaten down. They knew how to win, but when upset and knocked down, they didn't know how to get back up. Sooners' Quarterback Jason White said, "They put pressure on us and got to us a few times." And as the clock ticked away, Kansas State made another touchdown, then another, and then another. During the final minutes of the game one announcer said of the Oklahoma team, "They just want to lick their wounds and go home."

From a purely psychological perspective, one can wonder what would have happened had the Sooners lost one of their first few games. Maybe they would have learned how to recover from a setback, and when they were down by a couple of touchdowns, they could have easily come back to make the win. It's like what some hedge fund managers say about good traders: "The best traders are those who have blown out their accounts a few times. They know what it feels like, know how to recover from it, and the possibility doesn't haunt them anymore."

Although it's unpleasant to think about, it's worth considering the worst-case scenario, and making a detailed plan to recover should it happen. It's just one strategy for learning how to trade in a carefree manner so that should you face a severe financial setback, you can recover from it. So-called "trading in the zone" requires intense concentration and focus, and it's difficult to maintain this stance when the pressure is on you to perform. Thus, you must do whatever you can to reduce the perceived psychological pressure. The most obvious way to relieve such pressure is to think in terms of probabilities and carefully manage risk. It's useful to remember that you may not win on any single trade; but after a series of trades, you will have enough winners to make a profit in the long run. It's also important to manage your risk. Determine your risk up-front and risk only a small amount of trading capital on a single trade. Doing so will ease a lot of the pressure, allowing you to be more open to see the opportunities that the market offers. Don't crack under the pressure of a potentially mortal financial defeat. Consider the possibility, and be ready to recover from it.

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