Trading Psychology Explained by WD Gann

Man’s seasonal trend changes just as the market and he has his good  and bad cycles.

By keeping a record of your own trades, you can determine  when your trend is changing one way or the other. I have been able to make as  many as 200 consecutive trades without a loss. When I started the campaign, I  did not believe I could make 50 trades without a loss, but I did continue to  make perfect trades and close every trade with a profit, until I had made 200  trades. This run of luck or up trend that I was in, had run for some time.

If I  had no way to forecast it, what sign should I watch to tell when the tide had  turned against me and I should get out and wait?

The first indication that  something was wrong would be the first trade on which I made a loss.

  • I  remember that it was a small loss, around $100. 
  • On the next trade I had a loss of over $500. This showed that my trend  was changing and turning against me, whether due to bad judgment, ill health, tired nerves, or other causes. If I had been wise, I would have quit and kept all of my profits.
  • I made the third trade and as most traders do, went into the market on a larger scale. This trade soon showed a loss of $5,000 and I did not take the loss quickly. The result was that I continued to make a series of losses until the banks closed in November, 1907, and I could not get any more money out of the banks.

I was forced to close out all of my commitments with my brokers and take a big loss, because I was bucking my own trend. My period of good luck had run out, and I was trading in a period which should have been for rest, recreation, and gaining knowledge instead of trying to make more money which I did not need. The banks were unable to pay currency for several months, and I could not get any money to speculate with. I put in my time studying and figuring on the market and found out what caused my mistake and the losses.

I started trading again in the Spring of 1908, and should have had some rule to tell me when my trend had turned in my favor. I began to trade in Wheat and the first three trades I made showed profits. This was a sign that luck was with me and I should press it. I then started a campaign buying Cotton and followed the market right on up, pyramiding at the same time that [legendary trad-er Jesse] Livermore made his first successful corner in July Cotton. I made a large amount of money.I could give you many more examples of my experiences of profits and losses.

One rule that every trader should watch and follow is, just as soon as he makes two or three wrong trades after a long series of profits, he should quit the market and take a rest. Get away from the market. Allow plenty of time for his judgment to clear up. Then, when he thinks he is right again, make a start on a small trade.If the first trade goes against him, he should quit again and stay away.Then, when he starts again, if his first two or three trades show profits, he can press his luck and expect a period of success until he sees another sign that the tide has turned against him, when he must again get out of the market.

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