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Strategic Trading

Successful trading is part reliable method and part mental edge. Without a sound set of methods and financial resources, it is impossible to trade profitably. Your method should also have a good track record, and it is essential to have enough capital to allow your method to work in terms of realistic position sizes and the number of losing trades you can afford to take before you hit upon a winning streak. But method is only part of the equation. You also need to approach trading with the proper mindset.

Trading can be a matter of probabilities. Even when you have accounted for all possibilities, there are times when the circumstances don't match up with your trading plan and you end up with a losing trade. For example, a company may miss earnings expectations, and from studying the products of the competition, you can arrive at the astute conclusion that the company's stock price is destined to decline. You buy to cover. But what you didn't account for was a popular media analyst talking up the stock and claiming that it was bound to hit new highs in the next quarter. The masses act on the report and the price goes up. What can you do? Rather than kick yourself for being wrong, it is prudent to take it in stride and move on. Trading the markets with assurance can be a matter of probabilities. You have to go where the markets take you and accept what happens. You cannot impose your will onto the markets, and when things don't go your way, you cannot take it personally.

Why do we take setbacks personally? Many times, it is how we look at the situation that dictates how we will feel about it. When we believe a setback happens because it was our fault, and circumstances cannot be changed, we will take the setback personally. A trader might think, for example, "I don't have the natural ability to make it as a trader. It's not the markets, it is me, and I will never master the markets." Psychologists call this kind of thinking "helpless prone." When we make a failure a big deal, we cannot help but feel pessimistic and helpless. Instead of falling prey to a sense of hopelessness, you need to develop an action-based, realistic plan for overcoming obstacles. You must work under the assumption that you can achieve your goals if you put in enough time and effort. What is wonderful about the trading profession is that it is only about the markets and you. There is no supervisors or customers to please. It's not about overcoming interpersonal or institutional factors.

Accept personal responsibility when appropriate. The method you use to trade the markets is your responsibility. You must decide to use a sound method. You must decide to carefully manage risk to ensure your long-term survival. You must decide to put in the necessary effort to find high probability setups. But you can't control the market action. You can't control how much public interest there will be in the market you are trading. You can't control the extent that unexpected news or unexpected world events may influence prices. Assuming you can control everything will make you "helpless prone." Once you have taken every precaution and trade with a sound method, you can limit the amount of risk on each trade and make a profit across a series of trades. Rather than mull over the outcome of a single trade, you can coolly move on to the next trade. And when you take losses and setbacks in stride, you will be more likely to trade freely, creatively, and profitably.

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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.