To trade is odd, romantic, exciting, challenging and mundane all rolled into one. Anyone wishing to partake in such a pastime will experience many different emotions.
But that is the point, emotions, as any successful trader will attest, are the thing to avoid. So how do we do that?
Firstly, let me clarify what I mean by financial trading. To me, trading is working to a structured and practised strategy and timeline. It also comes with a clear understanding of the probability of one’s method based on (losses and wins) exit rules.
A vehicle for financial trades is via derivative speculation—an account that provides leverage controlled by a tradable margin by percentage.
For example, this might be via a spot, futures, options or contracts for difference (CFD). Or, if resident in the UK it could also be via a much miss understood spread bet account. Each has their place depending on a trader’s geographical location (and therefore access), strategy, timeline, size of consideration and understanding.
But, has nothing to do with emotion. The above are groupings in which we conduct our bets. Within which we stamp our authority. If we approach these groupings with any uncertainty, lack of clarity or perspective, they will rule us. That includes not taking a blunderbuss approach.
It will seem that a derivatives trader is always on a knife-edge of emotions. For example, patient on entries but not hesitant—and precise in the loss but variable in wins.
It occurs to me that how we take away speculation and reduce emotion is to make the decisions, as far as is humanly possible, mathematically. What we are attempting to do is anticipate the loading of a market, either long or short, by a few dominant institutions.
I say a few because with major currency pairings it takes more than one institution to move the price. Moreover, trading is a zero-sum outcome, which means that there is always someone (an institution) taking the opposite side of the trade. Our job is to align our entries with the dominant few.
Computers do a more significant part of a price move. Machines construct most trades following algorithmically (unemotional) programmes of entry and exit. It behoves us, as far as is structurally possible, to (manually) do the same.
What aspects of our approach can be mathematically structured? The entry conditions, trade amount regardless of stop-loss position, method of entry, stop loss positioning, requirements for an early (manual) exit, desired outcome or automatic exit point and (more advanced) exit flexibility.
The latter is advanced as it often disrupts a trader’s results by encouraging us to inappropriately hold a bet hoping for an inordinately more significant than usual gain. Therefore, for my strategy, I’m not talking here about particularly massive changes in exit criteria.
We have to be clear in our outcome desire. (1) You only lose when you sell, so don’t have a strict exit criterion. (2) Take lots of small losses holding for a ‘black swan’ event. Or, (3) take lots of small wins with a strict exit criterion. (Number three is my method of choice).
As any ‘long term’ successful trader will attest, the first point above is a dud strategy. And the next two approaches do not, in my experience, coexist emotionally.