Interview with Jim Wyckoff - Part 3
** Trading Mindset ** Q. Equally, profits and losses can have a significant psychological impact on traders. How do you deal with them? Indeed. It's all about the psychology of trading. The following are some valuable 'nuggets' regarding trading psychology that I gleaned from a trading workshop I attended several years ago. It's my hope that one or more of these "nuggets" will help you better understand your own trading psychology and the importance of psychology in trading markets. - Remember that becoming a profitable trader is a journey, not just a destination. The perfect trader does not yet exist. Try to become a better trader each day and enjoy the progress you make. Concentrate on learning the craft of technical analysis and on improving your trading skills, rather than focusing solely on the amount of profit or losses in your trading. - Congratulate yourself and feel good about a trade when you have done what you were supposed to do, according to your trading plan--regardless of the profit or loss on the trade. - Don't get overly excited about the winning trades or too depressed about the losing trades. Try to maintain an even keel and a professional outlook regarding your trading. - Do not expect certainty in a trade. You are looking for a preponderance of evidence, not proof beyond the shadow of a doubt. - The pain of standing aside and missing a good trade that your method told you to take is much worse than the pain of losing on a trade that you entered and exited properly and according to your trading plan. - Your own life experiences shape how you think about trading. If your first experience with trading was a negative one, the odds are high that you will not trade in that particular market again for a long time--and maybe never. The psychological impact of loss and defeat can be much greater and last much longer than the effects of physical pain. If you were not defeated psychologically by a negative trading experience, then the loss does not have such a negative and lasting impact. - Education plays an important role in shaping the way traders think about trading. A formal business education can give you an edge in understanding the economy and the market in general--but it is no guarantee of success in trading. Most of the information you learned in a formal college setting will not give you the specific knowledge necessary to be a successful trader. To succeed in trading, you must learn to perceive opportunity where most others see none--and you must seek out the information which gives you the knowledge necessary for success. - Your ego and winning can make you broke. Winning can create powerful emotions that distort reality. The more you win, the better you feel, and your ego takes over. The joy of winning is what gamblers seek. A gambler will lose as many times as necessary just for the thrill of winning once. - Always remember this: You are the sole person responsible for winning or losing in trading. Don't blame the market or your broker. Losses are an opportunity to focus on whatever problem occurred during the trade. Don't get caught up in personal denial. - A successful trader quantifies, analyzes and truly understands and accepts risk. Emotional and psychological acceptance of risk is what determines your mental state in each trade. Individual risk tolerance and preferred trading timeframe make each trader unique. Select a trading methodology that reflects your preferred timeframe and risk tolerance. - The market is not physical. It's an amalgamation of the mindset of all trading participants. The daily tug-of-war between the bulls and the bears reveals what they are thinking on a daily basis. Make sure to look at the market's close in relation to the session high and low. - Never buy just because the price is low, or sell just because the price is high. Never average a losing trade. Don't become impatient with the market. Always have a good reason for initiating every trade. Remember, the markets are always right. - Traders need to listen to the market. To listen effectively to the market, traders need to know and pay attention to their trading methods, but also pay just as much attention to themselves as they pay to their charts and the market. The trader's challenge is this: Learn who you actually are, and then consistently and consciously develop the qualities that allow you to trade well. - As traders, the more we can detach ourselves from the emotions of hope, greed and fear, the better our chances for trading success. Why are there hundreds of good technical analysts but few good traders? Because they need to spend more time on their personal psychology than their analytical methodology. - "If I had eight hours to chop down a tree, I'd spend six hours sharpening my axe." - Abraham Lincoln. I like this maxim, because it is similar to trading: Research and learning are very important. Preparation for trading takes much longer than executing and watching the trade. - The market has far more patience than the majority of traders. There is an old saying that the market will do whatever it takes to drive the largest amount of traders crazy. Trends can persist as long as there are traders fighting them. Don't fight the tape. Q. Isabelle, 36 is a mother of two children and stays at home with them during the day. Her husband works full time and his salary meets all their financial obligations comfortably. Isabelle arranges an appointment with you to discuss trading – she has never traded before but knows you can help her get started with some initial guidance. What will be the 3 most important things you tell her in the appointment? 1. Don't have unrealistic early expectations. You don't become a successful doctor, lawyer or dentist, or any other skilled worker in a matter of weeks or months. It takes experience and continuing education to have success at any challenging endeavor. 2. Don't spend money trading that you cannot afford to lose. That puts a huge psychological burden on you that is virtually impossible to overcome. 3. Sound money management is paramount in trading markets. Use protective buy and sell stops. Q. Jack, 58 is a very successful business owner who wants to start trading as he slowly moves into retirement and away from work. He has arranged a similar appointment to Isabelle – would your advice to him be identical to Isabelle’s or different? It would be nearly the same as above. Q. Is trading as difficult as many people appear to make it seem? Much more difficult. Q. What are the 5 most important character traits of successful traders? Please feel free to briefly explain them. 1. Having a properly sized trading account - one that is not too small. Q. Trading can be a very solitary existence – especially in the early days when you are learning, and often feel as though you have no idea what you are doing. Do you find trading a lonely experience? Does this sit well with you? If not, how do you deal with the loneliness? Find a trading peer if you experience loneliness. Read books on trading. Surf the internet. There are many others at your same trading experience level. Seek them out. Q. What would be or has been your most significant weakness in trading? Have you learned to overcome it or do you continue to work on it? Probably setting protective stops that are too tight, and then getting stopped out of a trade, only to see the market then turn in my desired direction. I am a very conservative trader, sometimes too conservative. But, I have survived and have been successful with this approach--even if I have missed some bigger price moves and winning trades because of my conservative approach. Q. Assuming you are now consistently profitable, do you still have times when you experience self doubt over your ability to trade? If yes, how does this make you feel and how do you overcome it? Not much any more. But I know the markets very well. They are unforgiving. That's why when I do have a string of losses, they are manageable because I set tight protective stops. Q. Ideally, we would like to be emotionless when we trade – we would certainly make more sound trading decisions more often. How do you control your emotions when assessing potential trading opportunities or open positions? Do you get very emotional at times? Most traders do experience at least a little joy when a winning trade is accomplished, and at least a bit of dread when a loser is absorbed. That's human nature. Same with me. But I don't get overly emotional. I move on. Q. If you experience a large profitable trade, do you reward yourself in any way? No. Q. In your entire trading career, what are the biggest lessons you’ve learnt and how did you learn them? I've learned that I do not "know" what the markets will do at any given time - and I admit it. Anyone who says they "know" what a market will do, and exactly when, is doomed to eventual failure. The best any trader can do is make prudent trading decisions based on his trading experience, on past price history, on knowledge of the human psychology of trading, and knowledge of market fundamentals and technicals. I don't "know" exactly what a market will do and when it will do it, but I can prudently react to market action, including placing protective stops. Q. To finish off, if you were to start trading all over again now, what would you do differently to what you did originally? I am proud to say that I would not change anything. I have been so fortunate to have started out as a journalist, being able to talk to the best traders and analysts in the world, to attend trading and market seminars and workshops - usually for free - because I was a journalist who would report on the event for the news wires. I read many books and still enjoy seeking out knowledge of markets and trading.
Jim Wyckoff is the proprietor of the "Jim Wyckoff on the Markets" trading advisory, educational and analytical service. Return to the Index of Interviews ... |
