​Taking the Plunge

The experienced private trader doesn't have to trade all day, every day. Market conditions change, and it is wise to stand aside until your trading methods, your risk tolerance, and your objectives match market conditions.

At other times you might be feeling "off," and it might be better to watch the market than to trade it. Trading is a matter of moving from studying and observing to actively participating. For the novice trader, or the trader in a severe slump, jumping in can be scary. Trading outcomes aren't a certainty. If you knew you could just put on a trade to take home a sure profit, you couldn't wait to put on trade after trade. (Actually, this is why most amateur online traders overtrade. They are unrealistically optimistic and put on a trade even if it has a poor chance of making a profit.)

The trading industry is loaded with half-truths with regard to losing. Let's take a look at what is commonly taught:

"Getting actively involved in trading requires resolute implementation of a combination of cognitive and behavioral strategies."

Now wasn't that a mouthful? I read it somewhere, and wrote it down so I could use it some day to impress you. Let's continue, because these wise words come from the talking heads of the industry, many, if not most, of whom are failed traders.

"On the cognitive side, you have to examine your thinking strategies and change them. If you are hesitant about putting on trades, it's because you are afraid. You're afraid to lose, to be wrong, and to face your limitations, etc."

"However, if you arm yourself with thinking strategies, you'll be able to put together enough courage to take the trade."

Should you follow the sage advice of the trading industry?

"Expect to lose! Winning traders take losses in stride, and that's what you are going to have to do."

I don't agree with the assumption that you should expect to lose, especially if you have devised a strategy that makes losing a rare event. I have done that with my Money Master Strategies. However, let's continue with the wisdom of the industry. What follows contains some half-truths:

"Look at your assumptions and change the internal dialog you have while getting ready to trade. You may think, 'If I lose, it will mean I can't trade.'"

True.

"But what you should think is, 'A loss is just feedback. It doesn't mean anything about me. I can still learn how to trade. I'm not going to set my expectations unrealistically high. I'm just going to see what happens, and no matter what happens, I'm not going to draw the conclusion that I'll never become an experienced trader. Even if I blow out my account, it will be a learning experience. It will be money I spent on tuition to learn how to master the game.'"

There is some truth to the above. You will find it in the first two sentences. The rest is hogwash.

"Once you are armed with these cognitive strategies, you can face potential losses more easily. Some traders have even found it helpful to write down an upbeat passage, like the one above, and read it over and over before a trade and after a loss to restore a courageous, optimistic outlook." That is pure, unadulterated nonsense.

"On the behavioral side of things, it's vital for survival to control risk. Make small trades and wait for high probability setups. There's no such thing as a guaranteed trade. Unless you manage risk, you'll surely blow out (especially if you are a novice trader), so you must risk relatively little on a single trade or set of trades." True.

"That said, you must bite your lip and take the plunge. If you are afraid to take the plunge, you might consider easing into it. Start out making extremely small practice trades. The trades can be so small that the commissions on them are more than any possible profit you can make. It's worth the costs. It will get your feet wet. It will take the mystery out of the whole process. People have a natural inclination to believe that a feared or dreaded event is more hurtful than it actually is. We tend to exaggerate the potential harm. Once we jump into the activity, however, we see that it isn't so bad. Our worst fears are usually never realized. Once you make a series of small trades successfully, you can increase your position size until you reach a position size consistent with your account size. The trick is to take gradual steps. It's like building up physical stamina. Don't try to do too much all at once. Work up to it." True, this is certainly an acceptable way to start out or even for testing a new strategy by an experienced trader.

"Taking the plunge into trading actively can be scary, but we often think it's easier to avoid fears than to face them head on. If you examine the assumptions underlying your fear of losses, and then make actual trades to break out of your imposed psychological shell, you can master the markets and become a seasoned, winning trader." This sometimes works, but not for everyone. Some people are not cut out to be traders. There are simply too many hang-ups that can derive from events happening even before birth.

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