You have to be certain of the validity of your trading method.
Before you can have confidence in your method you have to know whether you are the weak link in the chain. Successful trading starts with your believe system. What you believe, be it a philosophy, an opinion on market direction, or a class of principles structured into a methodology, will be what determines if you are to have lasting success as a trader. If you have even the slightest doubts over your own ability, or the validity of the method, it is unlikely you will be able to continue to execute through even a modest drawdown, let alone month in, month out, year in, year out. If you have doubts in your own ability, the good news is a successful method can change that. And if you have doubts about your current method, a successful method can change that also. If your method is based on anything other than market generated data, it should be suspect. If it does not compliment your intuition by measuring both trending and counter-trending tactics, it should be suspect. And if it doesn’t have a mechanical framework it should be suspect.
Cause & Effect in Trading
What you need to know about markets is that no matter how they appear, markets are man-made and price action cannot be considered cause, but only effect. Price movement is the collective emotional effect brought on by the accumulation, or loss, of money. The cause of those emotions by the individuals accountable for them would be impossible to decipher given the broad variety of influential market players involved in the process. Therefore to achieve long-term, consistent success in trading you must focus on a trading methodology that analyzes price action only, and does not consider the cause of why a trader might or might not take market action. Your success or not as a trader is reliant on your believe that it is not your job to predict where price will move next; it is your job to go along with where a price is moving now. It is unlikely you will do this consistent if you are considering “why” price is reacting the way it is, or “what” might happen next to change market direction. Nobody alive knows the future with the degree of certainty with which we would want to bet our hard earned money on.
Less is More
The great news is that if you don’t get in the way of your method, and you focus on the affects of price action on the chart, and look to position yourself in the same direction as the current price pattern, you stand a better chance than the vast majority of retail account holders. It will also be important that you realize that there is no such thing as finding a trading methodology that suits your personality. Given markets tend toward disequilibrium, meaning they often go up and down in random, manic spurts, it is unlikely your personality will somehow assist you in choosing a viable trading method. In fact to follow a trading method you are going to have to learn to think differently, to simplify things. You cannot continue to base decisions on what you think you need, or what you think is influencing dynamic market players. You need to understand that trading is as simple as identifying a bullish price pattern – an uptrend -- and waiting patiently to buy a dip, or otherwise take buy signals; or identifying a bearish price pattern – a down-trend – and waiting patiently to sell a rally, or otherwise take sell signals. Try very hard not to complicate things and remind yourself often to only react to market generated information. And remember the words of Richard Dennis, the founder and backer of the original turtle traders, when asked why so few succeed in trading: “There is a lot less here than meets the eye”.
Jay Norris is the author of the soon to be released Mastering Trade Selection & Management, McGraw-Hill, 2011.
DISCLAIMER: Forex (off-exchange foreign currency futures and options or FX) trading involves substantial risk of loss and is not suitable for every investor!