By Sam Seiden, an experienced equities and futures trader, as well as a trading educator*
Posted: Oct 2, 2009
I have always suggested and firmly believe that learning how to become a consistently profitable market speculator is not that difficult. The logic, rules and strategy are certainly not rocket science. The challenge comes in when you actually attempt to execute a consistently profitable strategy.
The main reason for this challenge is the fact that we are humans with human emotion. From birth, we run from things that we are fearful of and gravitate toward things that make us feel good. If you take this natural action in trading, you are in for big trouble.
The consistently profitable trader buys after price has declined and just after the majority has sold (red candles), at price support (demand). Buying when everyone else has just sold is not a comfortable thing to do. When shorting properly, you have to get excited to sell after the majority has bought and after a big rally in price, but this will challenge every emotional bone in your body.
So, here are three ways to help reduce the emotional obstacles to consistently profitable trading.
Change the Candle Color
Most people use red and green candles, which makes for a nice-looking chart but may not always be the best choice for real trading. If you are selling short after a rally in price and into an objective resistance (supply) level (which is the high-probability shorting opportunity), you are likely getting ready to sell short right after a bunch of big green candles form. Selling short after a series of big green candles is not comfortable because that creates the strong illusion that price is going to keep going higher.
A trade I set up for my students exhibits a strong rally up into a pre-determined supply level, which is where the low-risk, high-reward and high-probability shorting opportunity is.
I change the color of the candles to black to take out some of the emotional challenge of shorting at the supply (resistance) level. If I were to leave the candles green and red, we would be looking to sell short after a series of green candles, which can be scary for the new trader.
Changing the color of candles is not a bad idea if you are new to trading and focus on candle color too much. Always remember: The color of the candles is not nearly as important as their location.
Set It and Forget It
The simple task of pushing the buy and sell buttons can be an emotional challenge in and of itself because many traders simply can’t get over the fear of being wrong. The good news is that you don’t have to push the buttons anymore when you enter and exit positions.
This is a huge benefit new traders have that was really not available just a few years ago. I call this "set and forget" trading. The way it’s done is through "bracket orders".
An order I might put in is an initial long entry to buy. Attached to that buy order is a protective sell stop order to manage the risk and a sell limit order for profit taking. In the trading world, this is called a "3-sided order".
Once you know where your support (demand) level is, your protective stop price and your target for profit, and you have decided that you wish to take this trading opportunity, you can use this 3-sided order to really be hands-off for the trade.
You can (and should) walk away from your computer, and the entire trade will play out without you. This is a fantastic way to reduce the emotional challenges of trading and create more free time.
Focus on Risk
Two facts of trading are not comfortable for most people. First, there is no certainty, and second, you will have losses. The key is to understand that the best traders are the ones who know how to lose properly, keeping the size of losses (not necessarily the frequency) to a minimum.
For example, when price approaches the supply level for a short entry, one can have two different thoughts, and it is these two thoughts that determine whether you are going to be successful or not.
The novice thought is to worry about price not turning lower and the dreadful outcome of being wrong. Whereas, the consistently profitable trader is actually very excited because he or she knows that the trading opportunity is very low risk because you are entering your position as close to your protective buy stop as possible.
Make sure you always adjust your position size to a level that you’re more than comfortable with, and when it’s time for entry, instead of watching the chart and fearing a potential loss, focus on how low risk the opportunity is.
*Reprinted (and modified) with permission from Online Trading Academy (www.onlinetradingacademy.com). Sam Seiden can be reached at sseiden@tradingacademy.com.
