How To Develop Your Trading Edge

With COVID Pandemic raging all round the world and due to Lockdown Many New Traders are entering the market and they have seen market rising only. Market will change trend and will come down also and that time traders should focus on Emotional Intelligence.

The amount of information available to traders today is mind-boggling. We have Huge number of trading system and trading strategies available, on Social Media and Youtube and we have enough Historical Data avilable to backtest those stratergies,and back-testing any number of strategies is now easier than ever.

“In one important respect we have made practically no progress at all, and that is in human nature. Regardless of the all the apparatus and all the improvements in techniques, people still want to make money very fast. They still want to be on the right side of the market. And what is most important and most dangerous, we all want to get more out of Wall Street than we deserve for the work we put in.”

Creating the Trading Stratergy and risk controls based on past information is the easy part. The hard part comes when you have to actually see that strategy through. You can’t simulate what it feels like to have to be patient and exercise your willpower. A back test doesn’t have to consider what to do when things don’t go as planned. It simply follows the systematic approach outlined by the rules you create. There’s really nothing special about most back-tested strategies aside from the fact that they are disciplined. Simulations are devoid of emotional decision-making. Humans are not. The Reason lot of Algo Trading stratergy fails as market trend changes.

Psychologist Daniel Goleman wrote the definitive book on this subject (literally – it’s called Emotional Intelligence) in the mid-1990s. Emotional intelligence is how we manage our emotions, along with our capacity to recognize our own feelings and the feelings of others. Studies show that emotional intelligence trumps IQ by a ratio of two-to-one when determining successful people.

In the book, Goleman describes basic competencies for emotional intelligence. Each one relates to trading in some way.

  • Self-Awareness is the ability to understand how emotions affect yourself and other people. You must be willing to identify your current emotional state to be self-aware so self-assessment is the key here. The market can provide a very humbling experience if you let your emotions take over. No Trader is immune to periodic losses or underperformance, so it’s best to keep a level head and never get too high or too low about your own abilities. Self-aware traders know it’s a mistake to get too overconfident after a string of gains just like it makes no sense to take losses personally.
  • Self-Regulation is the ability to control impulsive decisions. It’s thinking before you act. Impulsive moves in a tradiing rarely end well because you are allowing emotions to guide your actions. Most often the moves that feel right are the wrongs ones. As a traders we need to be Self Regulated and aviod impulsive trading at all cost.
  • Motivation is having a passion for what you do along with a curiosity for learning. The crazy thing about the financial markets is that eventually you start to realize the more you learn, the less you really know and understand. If you’re in it for the long haul, learning has to be a continuous process. It really never stops. If you don’t have a genuine interest in the markets you’ll never make it on your own.
  • Empathy is the ability to understand the emotional make-up of other people. It’s not enough to understand your own psychological tendencies. You also have to comprehend how the psychology of the crowd works. Most of the people were bearish in market during lockdown and Stock Market are up 50% in 3 months only. Market always follow path of least resistance.

Traders are always searching for ways to develop an edge and improve their performance.No two market or economic environments are ever the same. The best way to adapt to the changing nature of the financial markets is to develop your emotional intelligence and focus only on those areas of trading that are within your control.

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