Last week we looked at trading fears that can keep you from making the profits that experienced market timers consistently realize.
It is not the timing strategies that keep timers from being profitable, it is the fears, which we all have at one time or another, that keep us from making the trades. In Part 2 we look at more "fears" which must be overcome to be successful in the markets.
Fear of Letting a Profit Turn into a Loss
Unfortunately, most market timers (and traders) do the opposite of "let your profits run and cut your losses short." Instead, they take quick profits while letting losers get out of control.
Why would a timer do this? Too many traders tend to equate their net worth with their self-worth. They want to lock in a quick profit to guarantee that they feel like a winner.
How should you take profits? At FibTimer we trade trends. Once a trend begins, we stay with that trade until we have enough evidence that the trend has reversed. Only then do we exit the position. This could be days if the trend signal fails, or months if it is a successful trend.
Does this sometimes result in small losses? Yes. If we have a false signal to start with it can. But we must look at market history to understand this trading concept. History tells us that while there are times when the markets trade sideways or make failed moves, once a real trend begins, it usually lasts much longer than anyone expects it to.
That means for the few failed trends, the real ones last a very long time, and generate huge profits. But because no one knows ahead of time which signal is the start of the next big trend, we must trade them all.
What happens in the short term can be accepted because we are assured of profits in the long term as long as we stay with our timing strategy. We do not try to quickly lock in profits. We stay with the trend until the trend changes.
This way we obtain every bit of profit that the markets will give us. And... we do not have to worry about locking in gains. We let the markets themselves tell us when to do it.
Fear of Not Being Right
Too many market timers care too much about being proven right in their analysis on each trade, as opposed to looking at timing as a probability game in which they will be both right and wrong on individual trades.
In other words, by following the timing strategy we create positive results over time.
The desire to focus on being right instead of making money is a function of the individual's ego, and to be successful you must trade without ego at all costs.
Ego leads to equating the timer's net worth with his self-worth, which results in the desire to take winners too quickly and sit on losers in often-misguided hopes of exiting at a breakeven.
Timing results are often a mirror for where you are in your life. If you feel any sort of conflict internally with making money or feel the need to be perfect in everything you do, you will not be able to stay with the timing strategy, but instead will allow your emotions to step into the timing process.
The ego's need to protect its version of the self must be let go in order to rid ourselves of the potential for self-sabotage.
If you have a perfectionist mentality when trading you are really setting yourself up for failure because it is a given that you will experience losses along the way in timing as in any trading.
You can't be a perfectionist and expect to be a great market timer. If you cannot take a loss when it is small because of the need to be perfect, then the loss will often times grow to a much larger loss, causing further pain.
The objective should be excellence in timing, not perfection. You should strive for excellence over a sustained period, as opposed to judging that each buy or sell signal must be perfect.
The great timers make losing trades, but they are able to keep the impact of those losses small. For the market timer who is dealing with excessive ego challenges, this is one of the strongest arguments for mechanical systems. With mechanical systems you grade yourself not on whether your trade analysis was right or wrong. Instead you judge yourself based on how effectively you execute your system's entry and exit signals.
Mechanical systems are all that we use at FibTimer. Years of trading experience has taught us that there is no way to keep emotions from affecting trading, except by following unemotional, non-discretionary strategies.
As a market timer, you must move from a fearful mind set to a mental state of confidence. You have to believe in your ability to execute every trade, regardless of the current market sentiment (which is often at odds with the trade).
Knowing that the timing strategy you are following will be profitable over time builds the confidence needed to take all of the trades. It also makes it easier to continue to execute new trades after a string of small losing ones.
Psychologically, this is the critical point where many individuals will pull the plug, because they are too reactive to emotions as opposed to the longer-term mechanics of their timing strategy.
And typically, when trader's pull the plug and exit their strategy, it is exactly at that time that the next profitable trend begins.
Too many investors have an "all-or-none" mentality. They're either going to get rich quick or blow out trying. You want to take the opposite mentality - one that signals that you are in this for the longer haul.
As you focus on the execution of your timing strategy, while managing fear, you realize that giving up is the only way you can truly lose. You will win as you conquer the four major fears, gain confidence in your timing strategy, and over time become a successful (profitable) market timer.