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 stillâand always will beârun 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.
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 syndromeâthe 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 orderâbut 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 chartsâ1-minute, 5-minute, and 15-minuteâmove quickly up and down and carry your emotions right along with them. Watch the lines, not the bars!