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Giving Into the Markets

Giving Into the Markets

When your money is on the line, you have a strong need to be in complete control. The desire for total control is so powerful that when we aren't in control, we start to delude ourselves into thinking that we are in control. People display what psychologists call an "illusion of control" even when they are dealing with a random event. The more control we have, the easier it is to take a risk. So we want to believe that we have as much control as possible. It's a very psychologically adaptive way to cope with uncertainty and feel at ease, especially when we are waiting to see if a trading plan will produce a profit. But as much as we would like to have full control, we can't. In the markets, we must accept where the markets take us. We can't impose our will onto the markets. No matter how much we want to dominate the markets, and control prices, we can't.

In his book, "Trading to Win," Dr. Ari Kiev advises, "It's important to distinguish between the tape and your interpretations of the tape. View as neutral both the events and your inclination to impose your interpretations on them. Enter the market without expectations, surrendering to it rather than struggling with it for personal gain."

Staying objective is, indeed, a significant prerequisite for profitable trading. We aren't always objective, however. We all want to win, and even when things aren't going our way, we have a strong inclination to bias and distort things so as to see them in a positive light. But as Dr. Kiev warns, we must find a way to stay objective.

How can you stay objective? The first thing you must do is trade with money you can afford to lose and manage your risk. If your entire financial future is on the line on a single trade, you will be consumed with anxiety, self-doubt, and frustration. But if you risk relatively little on a single trade, you'll know deep down that you can live with the negative consequences should the trade be a loser. It's useful to follow the old trading adage, "Risk so little capital on a trade that you ask yourself, 'Why am I even bothering to put on this trade?'"

The second thing you must do to stay objective is to take your ego out of the trade. You cannot control the markets, so why put your ego on the line with your money? Sometimes it takes ingenuity to find a trading strategy that will produce a profit under a given set of market conditions, but other times it is a serendipitous event. And at other times, it's a matter of learning of a profitable approach from others. But in the end, it's just a matter of odds. It's just like rolling a die or flipping a coin (in some ways). One expects to make a profit over a large number of trades, but in the short term, even a winning strategy is bound to have a string of losers. That's just the nature of probability theory. A small number of flips are less than an infinite number, so it's quite likely to get a string of a 50 heads out of 50 tosses just by luck. So why make it so personal? Why put your ego on the line with each trade? Why gloat when you are lucky enough to have the odds work in your favor and sulk when the odds go against you? When you look at it from the vantage point of probability, there's no reason to take things so personally. There's little you can do but stay calm, try your best, and accept where the markets take you. Ironically, if you can identify and control what you can (such as risk management and a sound trading strategy), and accept what you cannot (the outcome of a trade), you will feel calm and be able to trade in a peak performance mindset.