The Golden Rule of Trading

Lest your trading method becomes too complex, remember the basic market paradigm runs the chart show. But the big show is still—and always will be—run by fear and greed.

Fear and greed are the base emotions that drive every market. They are instinctive to humans, and unless you use an automated computer program to trade, your goal can only be to control them and not to eliminate them.

Since economic booms, busts, and bubbles keep recurring, year after year, century after century, it is clear evolution is not going to transfer the skills learned in one generation to another and, as Santayana warned, we are doomed to repeat the past unless we learn from it.

People have short memories, and fear and greed keep returning; a hedge fund bubble was followed by the dot-com bubble, which was in turn followed by the real estate bubble in less than a decade. A second hedge fund bubble may not be far away.

These emotions cause us to mentally freeze and delay making critical decisions that would be in our own best, rational interest. Making a decision implies change and there is nothing more difficult for a human being.

One successful trade can cause overconfidence and lead to what I call the King Kong syndrome—the warm, good-all-over feeling that we can do no wrong. Conversely, a large losing trade can cause enormous self-doubt, leading us to make revolutionary changes in our trading program when, in fact, a little time away from the market and an evolutionary adjustment or tweak would put us back on track.

The late Pete Rednor, office manager at Peavey & Company, where I apprenticed as a commodity trader in the early 1970s, would wait for a trader to get the King Kong syndrome. When the trader next placed an order, Pete would go to a telephone in the back office and place the identical order—but in reverse. He usually won, and when the trader lost it all and stopped trading, Pete lamented the loss of a reliable trading system.

The key is containing the emotions of fear and greed within a relatively slight area. To do that, you must in turn be able to anticipate the onset of fear or greed, and find methods for controlling them before they affect trading decisions.

Biofeedback works for some people; meditation for others. Yoga, vigorous exercise, sedentary hobbies, and reading are other psychological health remedies. Simply taking time away is the best plan I have found. I now close up shop at noon on Fridays, take one Friday a month off, and take a full week off every three months. Nor am I afraid to walk away for a day or two if things simply do not feel right to me.

Never be afraid of the markets, but always respect them. Never be hesitant to simply walk away for a few hours or a few days. The markets will not go away; they are happy to wait for you to return. Never trade when you are emotionally distraught. I had trouble dealing with missing a good trade opportunity for many years. I eventually had the experience to see that good trades are always going to be available. We are just trading lines on a chart; that is all. If you miss a big trend, remember that there is more price movement in the aggregate (sideways markets) than there is in trend markets. As long as the markets are open, the opportunity is there. Dwell on the past, and you miss the future.

It is common for new FOREX traders to be literally mesmerized by the movement of the prices as seen on charts. The short-term charts—1-minute, 5-minute, and 15-minute—move quickly up and down and carry your emotions right along with them. Watch the lines, not the bars!

By Michael Duane Archer
Michael Duane Archer has been an active futures and FOREX trader for more than 35 years. He has worked in various advisory capacities, notably as a commodity trading advisor, registered SEC investment advisor, and branch manager for Heinold of Hawaii. He currently trades FOREX and futures and is involved in several technical analysis research projects.

Copyrighted 2016. Content published with author's permission.

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