To Trade or Not to Trade, That is the Question. Make Hard Decisions
“Life is a sum of all your choices” – Albert Camus (French Nobel Prize-winning author, journalist and philosopher)
It is true that all our choices affect us in some way and to some extent. Some have little impact on our life; others have a big one and affect us for years to come. Of course, choosing a double espresso over a latte macchiato will not have such a big impact on our lives as choosing a two-room apartment in a busy city over a country house with a nice lawn, a dog and a white fence. This type of decision has a stand-alone impact, meaning that one decision will generate the consequence. But there are other types of decisions: many small decisions will lead to the consequences. Take smoking, for example, it’s bad for your health, but smoking as a whole is composed of thousands of small decisions taken over the course of the years. Each time you open your pack and smoke a cigarette, you made a decision, but that single event will only affect you if it’s part of a whole – one cigarette doesn’t affect your health so much but being a regular smoker does.
In case you’re wondering – no, I’m not going to talk the whole article about smoking or about the purpose of life or how The Matrix should have ended. But keeping in mind the smoking example, think about your online trading account: one loss will probably not affect it so much (assuming you apply at least a primitive form of money management), but what about 50 losses? Yep, that will do it; that will wipe it out probably. Even if you don’t care so much about a bad trade, you must understand that it acts as a part of a bigger event which will eventually lead to your account’s demise. That’s why it’s important to treat each trade with the importance it requires and sometimes to make hard decisions.
Be A Trader Not A Gambler. How Hard Can It Be?
A loss instinctively triggers emotions. It’s built into your DNA so don’t fight it, instead, learn to control it. If the market just took 100 bucks from you, you will probably feel the need to make it back – it’s a mixture of revenge, wanting to prove you are right, greed and financial concern. The difference between the trader and the gambler is that the latter will yield to those emotions and will open another trade… or roll the dice one more time, it’s the same for him. So if you stick to to a predetermined plan, you are treating trading as a business, but if you are trading just based on emotions, without controlling them, you are just a gambler and your place is in the casino, not on the trading floor.
I talked about trading according to a plan. That plan should be laid out before you start trading because that’s when your mind is free of emotions and the analytical part of your brain can prevail. Once emotions kick in, it’s a lot harder to think straight. You need to have a plan, no doubt, but the more difficult part is following that plan and knowing it’s the tool that helps you manage your money and risk. A basic form of a trading plan is deciding when to stop trading, even if you are winning and especially if you are losing. For example, you may decide to stop trading for the day after three losses or after three winners. Doing that, you limit the risk you are taking and you know the worst that can happen is to lose three trades in a day. It’s tough to stop trading, I know, but after three losses you are probably angrier than you were before, so your chances of winning are slimmer than they were before the three losses.
Almost the same applies to winning: after three profitable trades, there’s a chance you will get cocky or at least more confident and that’s when mistakes start to happen. So you don’t pay much attention to your analysis or to your strategy and rush in, looking for more profit because it’s fun and it pays off – the perfect combo. Hmm, but gamblers are doing it for fun and traders are working when they trade. If you are at work, then stop after reaching your daily goal. Close the office and head home or drink a beer with friends or do whatever is fun for you… because work is now over.
The best approach to trading is to have a system. Systems are based on strategy, analysis, money management, and patience. You have to know what to trade, how to trade and most importantly when to trade. Signals are one indication of when to take a trade, but they are not the only ones. You must also take underlying conditions into consideration as well as trends, news, events and other market conditions. Not only do you have to be able to know yourself. You need to know when you are making clear decisions and when your judgment is being clouded by emotion.
Know When To Say When And Don’t “Manufacture” Reasons To Trade
Trading is all about hard decisions. What to trade, when to trade, how much to trade. Simply being able to analyze a chart and predict a direction is one of the hardest things I have ever done. What makes it harder is the addition of emotion. Greed and fear are two of the most powerful emotions and the reason why many people who try to trade for a living fail. For some, pulling the trigger on a trade is the hardest thing in the world to do. The fear of losing is almost enough to keep them out of the market. For others, trading is like a drug. Some do it for fun and enjoy the high trading brings them, some trade because they have to. If there is one thing that sets the really successful traders apart from all the rest is knowing when to say when.
The signals, that’s what we are all after. Signals that indicate when to buy and when to sell. Learning to read the signals is a lifetime pursuit. Trying to weed out the false signals from the good, picking the ones that will result in profits and not losses. At face value, it seems like a no brainer to say “trade when there is a signal and don’t when there isn’t.” Unfortunately for some, the compulsion to enter the market and trade is so strong that they will manufacture a signal. This can be done simply by talking yourself into it. Sitting there thinking to yourself I just know the market is going down in the next ten minutes. Some call it a gut feeling, others intuition. Usually, it’s just indigestion, not a reason to trade.
Another way that some people manufacture signals is to adjust their indicators. Sometimes the indicators don’t tell them what they want to hear. Then they adjust their indicators, or maybe even switch to a different indicator, with the idea that they are “fine-tuning” their strategy. Eventually, any indicator can be adjusted into telling you what you want to hear. There is an old computer programmer’s saying; “Torture the data long enough and it will confess to anything”. This is a big mistake. If you are not getting a good, solid, valid signal, don’t trade. Take a break, go for a bike ride or get some errands done. A signal will come eventually and that is when you should trade.
Market condition is another thing to take into consideration when deciding on a trade. Sometimes the market is calm and getting down to business as usual. Sometimes it is being bombarded by news, events or political activity which can cause a lot of volatility. Some strategies work well under one set of conditions and not in others. If you are using a long term strategy you may not want to trade when the market is volatile, if you are using a short term strategy that could be the perfect time for you. Knowing how your strategy works and what conditions are best is another tip to help you know when to say when.
Plan the Trade and Trade the Plan
Many people start trading Binary Options to achieve financial freedom and quit their regular jobs. Not having a boss is great, but if you want to become a trader, you will have a boss – You. It’s the “You” who is capable of thinking logically and coldly, not the “You” who is acting crazy trying to immediately recoup all the losses. Making decisions is tough, but you have to do it; you have to stop trading if you are losing in order to avoid further loss and you have to stop trading when you have reached a predetermined daily limit of wins. This will keep you from giving back the money you just made. Decisions are part of your everyday life and of your trading life – go with the trend, go against it, invest $200 or maybe $1K, stop trading, don’t stop trading… Yep, it’s hard, but somebody’s gotta do it and if you want to make money, that “somebody” has to be you.