Jack is a trader, but not the cool, calm, collected sort of trader you would think. Yet he stills manages to be profitable by tailoring a trading strategy to suit his mindset. So how does he do it?
Our Jack is a trader. Not that you?d employ him because he is not the cool, calm, non-emotional, confident and steady-under-fire character of the job description. A highly emotional chap is our Jack. He is always scared stiff and sure every trade is going to go wrong. He hates losing and any loss wounds him deeply and stays with him for weeks. He is as greedy as hell and absolutely hates giving money back and watching his profit deteriorate. On top of all that, he?s frozen fingered and can always be relied upon to come up with some reason why he should not enter or exit a trade at the time he planned.
Our Jack?s a loser, right? Well, no he?s not because he knows himself and his emotions extremely well indeed. Our Jack has chosen to work with his emotions rather than to try to defeat them and change himself into something he is not. Not that he didn?t try – after all, most of the psychological trading gurus said that he should if he was to succeed as a trader. How he tried, but after years of effort he remained unchanged and the only benefit was that he came to know his emotions and their effects back to front. That gave him an idea; why not go with the flow? So he did. Our Jack set about listing his emotional weaknesses and building a trading plan around them. It went something like this:
Style of trading
End of day based position trading ? because he was frozen fingered Jack decided that he must rely on resting orders. This meant that he had to forsake much of the faster intraday action for something more sedate.
What to trade
Stocks and shares ? because he could not stand the pain of looking at losing trades running he needed something to give him a number of trades running concurrently in order that he could discard the chaff. Additionally, he could not cope emotionally with a losing run that might come from individual and consecutive trades.
How to trade
He had no hang-ups about the method, other than it must give him a relatively high win/lose percentage. He could not cope emotionally with a string of losers in the interests of capturing the occasional big move.
Entry: entry price to be determined before the market open and order (that frozen finger syndrome) readied. Order placed once instrument has settled down to normal spread after the open. No trade if price is already beyond the determined level.
Jack really wanted to put his orders in before the market opened but he got caught out too many times by the wide spreads that often maintain in the hurly burly of the opening minutes. Placing his orders after things have settled down creates emotional danger for him as insidious opinions begin to form and his finger begins to go cold. He has learned to discipline himself by looking at nothing else but bid and offer prices of the instruments he is interested in until he has placed his orders. He can?t trust his eyes not to wander though, so he clears his trading platform of everything bar those instruments the night before.
Initial stoploss: set at pre-determined, natural level but moved up quickly and successively if the price does not move in his favour after two days (Jack is trading from eod remember). He is unnerved by seeing losing trades on his screen and wants rid of them as soon as he can if they don?t come good. Our Jack cared not a jot when a trading friend showed him that he could have done better sticking with his original stop.
Running stop: stop moved to breakeven as soon as possible and then trailed. Timing and placement are contingent on the volatility of individual instrument. Jack?s recurring nightmare is a profit turning into a loss. He just grinned when his friend showed him he could have done better if he had been less keen to get his stop to breakeven.
Exit: target established and order placed. Jack exits on target because he hates to see the price coming back and his profit reducing. Should the price then keep on moving in his direction once he is out he relies on his method to maybe give him a re-entry. Funnily enough he does not get his knickers in a twist about the lost opportunity when the price keeps going after he has exited and his emotions barely stir when this happens. His friend could have shown him how he could have done better but had given up trying by this stage.
Jack knows his friend is right, but he ignores his siren song because it is simply not worth the emotional pain and the consequent effect on his confidence and trading. With his emotions out of the way Jack knows he could be more profitable, but he lives with his emotions and he is comfortable trading this way. A happy Jack is our Jack.
Our Jack is, of course, a fiction but I suspect that there is a bit of him lurking in most of us so far as his emotional weaknesses are concerned. The purpose of this article is to suggest that where people struggle to control their emotions it makes sense to adopt a trading strategy that, at least, minimises the potential for those emotions to wreak havoc. There is one absolutely crucial point. And that is that however much it hurts we must be absolutely honest with ourselves in identifying our weaknesses and it is no good brushing them under the carpet. If we are dishonest in this analysis we may fool ourselves but we won?t fool the market, nor will we fool the non-emotional cool cats that are waiting ready to pounce and strip us of our cash.