Essence of Trading

… continue from part 1

Insecurity Associated With Trading Confirmed Signals

When being stopped out, you feel a lot more painful on confirmed signals comparing to taking a relatively smaller loss should your extreme picking not going your way.

The root to this problem is the uncomfortable feeling associated with trading confirmed signals. A confirmed signal is usually quite far away from the extreme that has been established. Even though you may have learned from many sources that trading a confirmed signal is better, you do not feel better because of the comparative perception of bigger risk with confirmed signal against the smaller risk associated with extreme picking.

What our perception failed to do, however, is taking into consideration of the likelihood that the smaller losses are going to happen way more frequently than the confirmed signal. Thus, instead of having strong positive expectancies from your trade, your scalping style top and bottom picking would net you at best a weak positive expectancy if not out right losing money consistently.

Pure Top and Bottom Picking Works If You Are A Scalper

There is this old saying, "Once a scalper, always a scalper."

If you are truthful to yourself and understand that you do not really know whether the market is going to turn or not at the extremes that you picked, and simply close out the position for a small profit during the pause with very tight stop, you will be become a successful scalper. Keep in mind that you will always feel awful when you see some of those tops you pick turning into major reversals.

You do have a choice – stay being a scalper and perfect the scalping skill, or transform yourself into a trader who are comfortable with riding a move.

Notice that scalping may not be a great choice as bots are quickly overwhelming the markets doing just that. They can scalp faster and better than majority of the human traders.

Switching Over Is Difficult But Necessary

Another consideration that faces many traders is that we do grow old. As we age, our trigger fingers will not be as fast as we were 5 years ago. Maybe you can still beat the bots scalping right now, but what about 5 years down the road? Or 10 years later? Moving onto a slower and more profitable strategy is necessary and unavoidable.

It is very difficult to incorporate both scalping and riding style at the same time. It is always easier to stick to one style at a time. For example, you may choose to switch to scalping because market condition suggests tight range trading, but sudden the condition may change and you have to decide if you are going to switch to riding the moves instead. The additional decision making can be quite stressful because a mistake in identifying the market condition will cost you dearly in performance. It will not work well in the long run. Many successful traders who started out scalping eventually drop the scalping style completely because it does not worth the time and energy to switch trading styles frequently.

Start By Doing It On Sim Or A Very Small Account

If you have some success with scalping but you are convinced that it is better to trade the stronger swing based signals, then consider doing it in sim account. If you can afford it you can also trade with a separate small account to make the training experience much more intense. Due to the way swing trading off chart patterns and strong structural bias do not require that much focus all the time, it is something you can do while you are still scalping with your normal account.

You will notice by forcing yourself to not focus that much on the separate account, you will actually develop best practice in handling the riding style because you are forced to stay hands off most of the time. Eventually you will gain the confidence needed to switch over.

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All common trading techniques with positive expectancies are likely triggered on confirmed basis, meaning that there is no top and bottom picking involved. Yet, almost all traders who learn to trade on their own would do so. This behaviour of picking price extremes is actually part of the human physiology that does not work to our advantage in trading. It is important to untrain this harmful behaviour or you will have great difficulty in becoming a consistently profitable trader.

Picking Tops and Bottoms Is Our Natural Choice

Some people seek excitement from trading. Being able to sell as close to the top or buy as close to the bottom is something that makes these individuals excited and gratified. These are thrill seekers, not traders. Eventually most of these people would leave trading due to funding depletion or that they have found something more exciting to do. They are exceptions so I will not focus on them for now.

Majority of people, however, are not thrill seekers. They start out trading with fear. Feeling uneasy and uncertain when placing orders to initiate each trade. After all, they are learning to trade.

This feeling is very similar to the first times we learn to drive. You do not know how much gas is needed to move forward nor how much pressure to apply onto the brake to stop the car in front of the red light. It takes time before we gather enough experience to do that properly.

Interestingly, this similarity in the learning experience of other skills drives us to pick tops and bottoms without us knowing. Let me explain what I mean.

The Need To Be In Control

In driving, we learn to stop in front of the red light if we see a red light is already on or that it is about to change into red light, say, from the yellow light. The decision making process in our brain is trained to act on potential conditions (like yellow light) as oppose to wait until the confirmed condition of switched into red light because it would be too late to stop by then. This anticipation of change works well and is necessary when we are dealing with the traffic light signals.

As we are trained in almost all kinds of daily activities to react on anticipation of events like traffic light changes, the kind with very consistent outcome, this habitual behaviour becomes our undoing in trading. We are just accustomed to anticipation and act on the first sign of almost anything in our lives. Once we have learned the basics of something new, we jump the gun and do what we think that is necessary to deal with the expected outcome. It makes us feel like we are in control.

But trading setups and signals are not the same as our everyday tasks that have (mostly) singular outcome. There can be many alternative outcomes given the same pre-conditions in trading. Acting too quickly on anticipation does not work well at all with trading.

The Reward We Can Hardly Resist

Logically, since we know that many confirmed setups have probability on your side with good risk reward ratio for your trades, it is supposed to be a no brainer to trade on confirmed signals only. Yet, most people find it very difficult to do even though they are aware of the advantage of having the odds in their favour over fading the extremes.

When we picked an extreme, we get instant gratification and the sense of security as price moves almost immediately in our way. We get this feel good sensation. Trading confirmed signals, however, do not give us that. Comparing the two choices, it is no wonder why we are physically attracted to the high risk action of picking extremes.

In another words, habitual top and bottom picking without logical justification is often our inability to resist the temptation of seeking adrenaline high. It is similar to gambling addiction – we all know what is bad for us but when we are doing it ourselves, we cannot see the problem and all kinds of excuses are made to justify our actions.

I think I make it sounds bad enough for now.

to be continued …

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