Stocks and Markets Generate Momentum…But Traders Do NOT!
In today’s Trading Community Forum, a member reminded me of an article I wrote a while ago on RealMoney.com. I think the lessons contained in that piece might hit home to you now, so I’ll post an excerpt from that piece in lieu of a trading video today:I went golfing over the weekend with three close friends of mine. As usually happens when you get a bunch of middle-aged adolescents together in a skill game, we started betting on each hole. The way the game worked was that the loser of each hole paid the winners. And if one guy scored better than the other three on any given hole, he had an exemption on the next hole and was not competing with the rest of the bunch.
I noticed an interesting tendency in my playing that also gave me some insight into my trading habits. I’d have an intense focus on every shot during those holes when I was competing with my friends. But after I had won a hole and had no real pressure on the following hole, I was surprised that I played worse … sometimes much worse!
I think the lack of pressure really took the edge off my game. I got complacent. I didn’t concentrate as much because I didn’t really care that much.
I think the same tendency could apply to trading, where a string of winners can lead you into a sense of complacency, and you no longer focus so intently on every trading decision. When you are making money in an easy market, it’s easy to lose track of the risks inherent in trading because those risks just seem so distant.
If we’re not careful, we can lose our perspective on what is at stake in every trade — our money. We fail to adhere to any type of money-management rules or methodology because we just don’t see the need. Instead, we simply expect the price action to move in the expected direction. And when it doesn’t, we quickly find ourselves deep in the woods with a bad lie and no shot at the pin.
When you find yourself enjoying a string of good trades, don’t forget about the similarities between trading and golfing. When you’re golfing, you start from scratch on each hole and add the score up at the end of the game.
Similarly, when you’re trading, each trade stands on its own merits. The outcome of the last trade has no bearing on the next. Only at the end of the day do you tally up the final score to see how you did. But if you start assuming that yesterday’s profit will translate into tomorrow’s, you are likely to find yourself spending a lot of time in the rough.
Dan