The Way You Think

The way you think is the most important aspect of trading. It’s an old axiom, but still true, ‘Cut your losses and let your profits run’, which most traders know, but many find difficult to apply in practice. It is natural not to want to prove yourself wrong, and in a sense that’s what you’re doing when your trade doesn’t work out and you have to close out the position for a loss.

The truth about trading is that the market will do what it wants, and you are just trying to shorten the odds of picking winning trades by studying technical analysis. No one can predict just which way it will go, and therefore you have not failed if half your trades go the wrong way. You only fail if you allow those trades to decimate your account.

Successful traders focus on minimizing their losses. If you do not cut your losses early, by closing the trade when it reaches your stop loss level, just imagine how difficult it will be to close it when it drops further. Hope is not a successful trading strategy, and the many traders who hope that the price will turn around and come back up to prove them right after all are doomed.

All this assumes no previous history or emotional baggage, but things can get even more difficult if you have had a succession of losses or wins. If you have had several losses, even if you are able to resist the temptation to trade for higher stakes in order to ‘make up’ the deficit if you win, you will also be tempted to close out your winning trades quickly rather than letting them run as you should. When you close for a win you will feel much better about yourself, and it’s hard to resist that temptation.

On the other hand, if you have had several wins you may be tempted to believe that you are better at trading than you really are, and take unnecessary risks. If you want to gamble, Las Vegas may be a better place for you than the financial markets. Steady and consistent trading is the hallmark of those who make a living from the financial markets. It takes practice and willpower to develop the mental strength to trade correctly, but there is no other way to trade if you want to stay in it for the long haul.

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