The Chain Reaction
It all starts innocently enough. You open an online trading account. You make a few winning trades, and you find it fun and exhilarating. You're hooked! You make another trade and then another, and the winning streak holds up. You get the hang of it and decide to increase your position size. It works for a few more months, but then you hit upon a slump. The method that worked so well for the past few months has now stopped working. It's a critical point in a potential chain reaction of events that spells doom. Many traders let the chain reaction happen. Their method stops working, but rather than make a careful study of what is going right and what is going wrong, they just keep going. They make losing trade after losing trade, risking money they can't afford to lose, until finally, they end up blown out. They wrongly believe that an optimistic attitude alone will allow them to return to profitability. In the end, however, all they have to show for their efforts is red ink. W hen you are at a critical point in your trading career, it's vital to know when to
go on and when to "fold 'em." Well, temporarily at least.
Art Linkletter once said, "Things turn out best for people who make the best of the way things turn out." Humans are eternal optimists, and when you trade the markets, it's hard not to want to make a fortune. It's hard to know when to be optimistic, and make the best of things, and when to be a pessimist and stand aside. One moment it all looks bleak. The next moment, the market opportunities seem endless. A pessimist is less likely to lose money, but runs the risk of watching profits go by while standing aside. A winning trader, in contrast, is always searching for, and trading, the next big opportunity. That said, winning traders are optimistic but skeptical. Sure, they may take losses in stride, but at the same time, they are constantly aware that if they are not careful, they may set off a chain reaction of events that leads to their downfall.
When your plan seems to stop working, it is sometimes necessary to evaluate its reliability. You must ask, was there something to learn here? Sometimes there is and sometimes there isn't. A good trading plan can often fail for no good reason. What winning traders don't do, though, is mull over a setback too long. They make the best of it and move on. That can mean executing the same trading plan under more favorable market conditions or it could mean searching for a new trading opportunity. Whatever they do next, though, they do not act blindly. They know what they are doing and are fully aware of the consequences of continuing to use their methods.
Self-monitoring is the key to success. A trade dairy may be particularly helpful. For example, you might record key features in your trading diary, such as the market conditions for your trades, the specific strategy, your mood, the rationale for the trade, and its outcome. It is vital to record detailed information before and after the trade so you can study it carefully later. Looking at your performance can be difficult. It is useful to set up a time and place to study your performance objectively. A careful examination of the circumstances when you perform at your worst, and your best, can be enlightening. You may find that the time of day matters. Some traders make their worst trades at the open, others find they make the most mistakes toward the close. Yet others find the break before lunch to be the most optimal time of day. The key is to discover what works and what does not in order to constantly improve your approach to trading. All traders have their talents, and w inning traders capitalize on those talents rather than waste time trying to do something they are not good at. So rather than go along on your merry way until a crisis happens, be on the lookout for a chain reaction that can spell your downfall. And if you see it coming, don't be afraid to stand aside, regroup, and tackle the markets in earnest with a winning, new approach.
