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Day Trading Psychology - An Unspoken Rational Approach
from: Mike ReedIf you put on a trade and your heart starts pounding, you are
*not* ready to trade yet...Some people who aren't ready to trade
have other problems as well:
1. Pulling the trigger to get in
2. Staying with one trading strategy long enough to judge it
3. Letting good trades go bad
Day trading psychology plays a role in these issues, and books
have been written to help traders deal with these problems, but
most of them do not offer a practical solution.
In order to be successful at day trading support and
resistance, you must have confidence in your trading strategy.
Most traders with less than 2 or 3 years of experience, and for
those who are just starting to learn day trading...well, they
have nothing to be confident about.
If your trading strategy isn't making you money consistently,
in "real time", you can't have confidence in it. But, how can
you tell if your method is any good when you don't yet have the
nerve and discipline to trade it?
Day trading psychology involves building confidence, and
consistent, profitable results will lead to confidence. Being a
23 year veteran trader, my day trading advice for you would be
to trade your strategy in simulation mode so that you can judge
it rationally.
The inexperienced trader (and even some traders with years of
experience) has a difficult time thinking rationally when they
are afraid of losing money, so take that fear out of the
equation by utilizing simulation trading as a tool.
Some "professional" traders will tell you that simulation
trading is useless or even, "the worst thing you can do." But it
depends on why and how you utilize simulated trading. If you
choose a simulation strategy that has a defined number of
setups, a fairly specific strategy for limiting losses, and you
stick to that strategy like glue, never deviating from it - then
simulated trading is a logical way of testing your method in
real time and it will help you greatly.
Day trading psychology also involves self control. Cultivating
good habits such as self control, and developing confidence
while using a simulation method will help you when you're ready
to trade for profit. Having confidence in a method you have
traded in simulation mode is the most rational starting point
for a new trader, or any struggling trader.
So begin the successful part of your trading career with a
strategy that you personally have learned to trust through
real-time trading (preferably simulated trading).
Not all trading strategies are alike, and this is important to
understand.
1. Any strategy that loses more than 60 % of the time (such as
a trend-following system) will take enormous courage to trade,
no matter what you do. These strategies demand a certain type of
person (rich, with ice water in their veins).
2. Thousands of strategies force you to place a fixed stop and
wait to see if it gets hit. These are difficult to trade with
confidence - even IF you can find one that wins more than 65 -
70% of the time and makes money in the process. That's a big IF.
You can spend a career and thousands of dollars searching for
success with this kind of strategy, most unfortunately end in
failure.
3. My method for support and resistance trading is rarely
talked about, but aside from making money for me on a consistent
basis for more than 20 years, it just happens to have a rational
approach to day trading psychology built in. Here's what I'm
talking about...The fear of trading is associated with the lack
of control.
With most strategies you can control only a few aspects:
1. You can learn to control your entries through discipline and
strict setups.
2.You can limit the size of each loss somewhat by using fixed
hard stops.
3. You can control your overall chances of success by finding a
strategy that works for you in simulated mode BEFORE you trade
it with money.
4. You can control the days and times of day you trade.
5. You can control the number of contracts you trade, placing
more money at risk on your highest-probability setups, and less
on your lower-probability setups.
BUT...
Most traders day trading don't know how to control the overall
size of their losses. Learning how to do this is the most
rational way of dealing with fear, greed, and other problems of
day trading psychology, and it's the main key to my own success
as a trader.
Remember this simple rule that will build your trading
confidence like nothing else:
** Exit any trade that doesn't go your way immediately. **
Forget about the commission, forget about how many hours you
waited for the setup, forget everything except this rule. I know
it's radical, but just do it. Then YOU will be in control of the
one factor that most traders don't believe can be controlled -
the downside outcome of the current trade you're in.
The first rule is used in combination with the second rule...
** Every trade starts out as a scalp until proven otherwise. **
This means that if you get 2 or 3 ticks gain and the market
pauses and moves a tick in the wrong direction, you get out
immediately with 1 or 2 ticks gain.... No questions asked.
This simple rule gives you control over your gain/loss ratio,
another thing that most traders believe is beyond control.
I trade around support and resistance levels because they are
built in to every liquid market. They arise primarily from the
day trading psychology of people who are trapped in a bad trade
and want to get out at break-even as soon as possible. This
feeling does not change from year to year or from one generation
to the next, so day trading support and resistance can never
become a strategy of the past.
About the author:
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