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Realism and Flexibility

Eternal optimists often make the best traders. The winning trader engages in a constant search for innovative ways to take profits out of the markets. It takes a positive attitude to persist in the face of almost endless setbacks. If you are an optimist, you will pick yourself up gracefully after a loss. When you can't seem to find a high probability setup, you'll keep searching until you find one. An upbeat, optimistic attitude is an essential ingredient for success. But traders are infamous for their unrealistic optimism. They tend to look at the world through rose-colored glasses at times. It's easy to understand why. Most traders are attracted to the markets for the money they can make. They can't wait to get rich. Unfortunately, you have to risk money to make money, and when your hard-earned cash is on the line, it's hard to stay objective. You want to see endless possibilities. But if trading were that easy, everyone would make millions. Oftentimes, optimism is merely a defense mechanism.

An experiment by psychologists highlights the downside of defensive, inflexible optimism. Study participants were identified as realistic optimists or unrealistic optimists. They were asked to estimate the odds of experiencing an adverse outcome, in which a reasonable estimate of the actual probability was known. Unrealistic optimists underestimated the odds of the adverse event compared to realistic optimists. They also allowed their unrealistic optimism to bias their judgment. When presented with information regarding how they could reduce the probability of the adverse event, they did not review it closely, compared to realistic optimists. They did not show proper concern and did not take necessary steps to protect themselves from the adverse event.

During the excitement of the past month, it's easy to feel optimistic about the markets, but if you have watched closely, you have also seen that it is quite possible for an adverse event to intermittently turn things around, even if it is just for a short time. The winning trader is flexible and cautiously optimistic. As hard as it may be to consider all possible adverse events that may thwart your trade, it's vital to consider all possibilities. Don't let your enthusiasm cloud your judgment. The more flexible you are, the more likely you will see an adverse coming and take precautions.

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Thursday, 25 April 2024

Derivative transactions, including futures, are complex and carry a high degree of risk. They are intended for sophisticated investors and are not suitable for everyone. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results, and all of which can adversely affect actual trading results. For more information, see the Risk Disclosure Statement for Futures and Options.