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Self-control is often the key to trading success. Masters of the market are disciplined. They don't sporadically act on a whim. They develop specific trading plans and follow them. Trading is largely a matter of capitalizing on odds. If you assume that a given trading strategy has a past performance record of 50%, for example, it's a matter of odds as to whether that particular strategy will obtain that level of profitability in the future. This expectation is not assured, however. 

Unanticipated factors, such as a change in market conditions, can go against the strategy, diminishing its expected performance record. A lack of emotional and impulse control further reduces the odds of success. The only way to take advantage of the law of large numbers, and thus, increase the odds of capitalizing on the expected performance record of the trading strategy, is to execute the strategy flawlessly on as many ideal occasions as possible. If you don't show the proper discipline, however, you increase the chances for failure.

Even though self-control is vital for trading success, many traders have problems maintaining self-control. It's a common ailment not restricted to trading. Whether it is losing weight or breaking bad habits, people have great difficulty maintaining self-control.

It is always useful to have a healthy sense of skepticism when it comes to forecasting the markets with historical data. Don't place so much confidence in your forecasts that you don't manage risk. Our mind can play tricks on us. We can scour historical data and because we put in a great deal of time and effort into the building the model, we may wrongly think that we have found the Holy Grail of regression equations, but in reality, you may be placing your trust in an invalid model. 

It's not impossible to forecast the markets, but always keep in mind potential limitations of your forecasts. You may have "unrepresentative data." Or you may be psychologically biased. There are times when everything may look rosy, but in reality things are too good to be true.

There are individual differences when it comes to self-control. We all know people who are extremely good at controlling their emotions, spending, and impulses. But most of the time, people who show such extreme control are not attracted to trading. Traders are often the kind of people who don't mind taking chances and thinking and doing outside the box. And people who don't mind taking risks usually have a little trouble controlling their impulses. That's just the way human nature tends to work. But if you are a natural born risk taker, all is not lost. According to psychologist Megan Oaten of Macquarie University, if you practice discipline, you can increase your ability to maintain self-control. Oaten has studied people who lack discipline compared to others. Initial differences in self-control between people disappear with practice. You can look at discipline like training for a marathon. At first, you have difficulty running. You can only run so far before you get tired. With practice, you increase your ability to run greater distances.

It's the same with trading. Many novice traders think they can trade by the seat of their pants, even though they don't have very much experience with the markets. They don't make a specific trading plan, and thus, put extra strain on themselves. They trade large positions and think they can make quick midcourse corrections on the spur of the moment.

But trading under these circumstances is much like running a marathon without proper preparation. You don't have enough stamina; you get tired out fast and you choke under the strain. Similarly, you may trade without the proper preparation. You may trade without a clearly defined plan. You don't know when to enter, when to exit, or how to monitor the trade. In addition, you may risk too much capital and feel the stress of taking a risk that you can't really afford to take. Under these circumstances, you've increased your chances of failure. Just like training for a marathon you should take it slow. With practice, you can build your ability to stay the course.

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Thursday, 13 June 2024

Derivative transactions, including futures, are complex and carry a high degree of risk. They are intended for sophisticated investors and are not suitable for everyone. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results, and all of which can adversely affect actual trading results. For more information, see the Risk Disclosure Statement for Futures and Options.