Years ago in college, I remember reading Greek mythology. These were wondrous stories of adventure, courage, exploration and searching. Yet there is one principle that stands out from these many great tales that has served to guide my life in business and most especially trading.
The Greek word “sophrosene” or “balance.” It teaches that in all human endeavor, true success is attained when one learns to achieve the middle way.
Learning this lesson is, in my judgment, the first critical step to becoming a successful trader. It is key to overcoming a natural obstacle all traders face. I call it the “greed/fear syndrome” or the “going to the moon/going below ground” tendency.
Greed is a natural human emotion. But for traders, it can be toxic-you get in a trade, it starts going your way and you see no reason to get out. Suddenly you find yourself shooting for the moon. Greed blinds you-but, the next thing you know, the market reverses and instead of making money you are down.
Or you become consumed by greed’s opposite number: fear. The realization grips you that you really don’t ever have certainty about which direction the market is going to move. You sense that you can lose your capital if you are wrong. Indecision paralyzes you. You go below ground and huddle there trembling in despair.
The truth is that both of these extremes can destroy a beginning trader. It is equally true that both are completely natural. The key to overcoming them is to learn how to find the middle ground; how to balance greed and fear. This is probably the most valuable lesson for the trader to learn: understand that it’s not all wins and no losses. Aspire for success but know that there will also be failure. Remember that hogs get fat but pigs get slaughtered. And remember too that he who hesitates is lost.
Learning how to balance these two natural and highly dangerous human emotions is among the most important lessons I have tried to teach all my students during our Online Classes. I found that by teaching others, I constantly forced myself to remember what I knew to be true but which all traders find so hard to master: the art of balance; overcoming fear but avoiding greed.
The method I teach to accomplish this goal is the product of years of making mistakes as a trader, as well as all the successes I thankfully have had. I try to learn from the mistakes as well as the wins. And I teach my students to do the same. I found that the teaching has made me a more successful trader. Because of the Online Classes, I have had to explain and codify my methodology and rules, and thus I am now a more disciplined trader constantly in search of that middle way.
One of the lessons I have learned is that, as a trader, one does not have time to do a doctoral thesis on the true value of what you are trading. Therefore, the successful trader must assemble his or her tools and indicators in advance of the trading day and develop a comfortable method that is easy enough to answer quickly the basic question that must be asked constantly throughout the trading day: whether to be long, or short, or out of the market.
The method I teach to integrate the various elements discussed above consists of three main parts:
- Key numbers: Key numbers are price levels that most traders call support (where the market has buyers stepping in supporting the price) and resistance (where sellers are stepping in and offering the market.) These numbers help the trader in finding the balance I believe is critical to success: when to temper greed and when to overcome fear.
- Time of day: I have identified certain time zones for trading. Since the market is a combination of people’s beliefs and how they vote those beliefs (either by being a buyer or a seller), it is very important to have a good understanding of people. I have observed that people are creatures of habit, and that people generally do the same thing-whether it is for good or for bad-every day. I have observed that there are market reactions to how and when people rise in the morning, or go to lunch, or go home for the day.
In addition to developing a structured method, finding the right balance to fear and greed and becoming a successful trader also requires one to be able to take a disciplined-approach to the market. In my years of trading, another problem I have observed is traders who overtrade. When I first started in this business I spent about 90 percent of my time trading and 10 percent thinking. Over the years, the percentages have reversed. When you plan on a trade you must use a stop. It is always good to have a target or target area in mind, and the way you stay in a trade is to use a stop and then an adjustment to that stop to move it up or down as you approach your target. I have always been a firm believer in letting the market take me out of a trade instead of taking myself out. The reason I believe in this is that I have found that for my own personal trading that I do a lot better if I let the market tell me when it is time to exit a trade. Trading is an all-encompassing experience; it is a continuous process of planning, acting, and evaluating.
I’m a short-term day trader; I trade the market everyday. The goal of a new trader is to survive-to last-while they find that middle way and balance of successful trading. The industry trend is that most new traders are gone within thirty to forty days. Their failure is due to fear, mistakes, and/or a lack of understanding/training of how to trade and succumbing either to fear or greed. One of the first things we teach our students is capital preservation. My goal is to make sure that after thirty or forty days they will not only maintain their capital base, but also at the same time increase their awareness and education.
I am often asked, “what is the difference between trading the markets and gambling?”
A gambler will take risks just for the action. A speculator, on the other hand, only takes risks when the odds are in his favor. The art of successful day trading lies in learning this difference.
And the difference is defined in developing the ability to overcome the push-pull of greed and fear through balanced trading that comes from learning the markets, understanding the importance of a disciplined method that combines key numbers, trading psychology, time, and important market indicators, and managing both risk and the trade itself. Becoming a successful day trader is all about learning a balanced technique to increase the odds of being right in trade decisions and reduce the odds of being wrong.