By David Popper
Is it not amazing that in America today there are more books on how to lose weight, and yet, we have more overweight people than ever. It is not the lack of knowledge that causes people to be overweight, rather it may be a medical problem or more commonly, a lack of discipline.
So to, in the markets, many people have very workable trading systems but simply lack the discipline to make that system work. Howard Abell, in his book "The Day Trader's Advantage," stated "technical analysis is very important. It is not, however, in my opinion, as important as working through the psychological and attitudinal issues of trading in general and day trading in particular." In other words, a discipline to execute your plan is of paramount importance.
The operative question is, how do I develop a plan and how do I develop a mind set for successful trading. How can I develop a winning edge? Below I would like to explore some aspects of these questions:
Understand your motive for trading: Most traders are in a constant state of conflict. They turn on CNBC in the morning and are depressed when a stock they were considering but had not yet purchased, has gapped up. They wish they were in total cash when the market goes down and somehow feel guilty that they were not clairvoyant enough to take preventative action. They feel equally as foolish when the market goes up and they are not fully invested. These type of concerns are unrealistic and detrimental. Instead of worrying about all of the could haves, should haves and would haves, a disciplined trader must be able to take the trades that are consistent with his methodology. His goal is not to maximize every trade, rather his goal is to achieve consistent positive results. Remember singles are more consistent than home runs and can easily help you achieve your overall goal.
Develop a personal strategy that works for you and fits your personality. If the system does not feel right, then you are going to lose before you even start. You must trade a system that feels comfortable even if it is less profitable than other systems. Confidence and consistency are key. Experiment with different systems and pick the one that's most comfortable. If it works, stick to it.
The system should be enjoyable. The whole purpose of trading is to either provide a living or extras for you and your family. If your trading creates needless anxiety and actually causes you to lose money on a consistent basis, then that system simply is not for you.
Hard work is essential. You simply must put in the time. Despite the myriad of self-help trading books, there is no substitute for the hard work of reading charts, knowing your stocks, fine tuning your system and implementing your buy and sell rules.
Confidence. You must believe in your analysis, your trading system and your execution of trades, whether you win or lose.
During a bull market, very little discipline is required to make money. People could almost throw a dart at the Wall Street Journal and find a winner. Times are changing. Bear markets will expose weaknesses in your discipline, weaknesses in your system and weaknesses in your execution. If you find that you are having too much difficulty at this point, sit it out. A good market will return. If you must trade at this point, it is critical that you ratchet up your focus and discipline. It is simply hard to win today.
Nevertheless, most experts will tell you to find one system that you are comfortable with. Find several stocks that you know well. Trade only those stocks and trade them only in your one system. Do not use margin in sideways markets, but instead maintain a comfortable amount of cash. This cash reserve may lead to explosive gains later when a bottom is finally reached and a rally ensues.