TRADING PSYCHOLOGY
Outtrade, Outlast
What It Takes To Survive
by Adrienne Toghraie
As a trader, you need to be a winner and you also need to be a survivor. Here's why.No matter how good a trader is, he will experience a shattering loss some time in his career. There is almost no way to avoid such an event because no system is completely infallible and the markets are like heat-seeking missiles that sense vulnerability and do not give up until they hit their target. The professional trader must, therefore, learn not only how to be a winner but how to be a survivor as well.
Traders can learn a lot about the art of survival from the human response to a great natural disaster. Hurricane Katrina, the deadly category 5 hurricane that bore down on the southeastern region of the US in late August 2005, was responsible for the deaths of more than 1,000 people. One of the cities hit, New Orleans, LA, sits in a bowl-shaped region below sea level, protected by a system of levees that were designed to withstand a less powerful hurricane than Katrina. An emergency plan for the evacuation of the city was in place, but in the end, for one reason or another, was neither consulted nor followed. When the call to evacuate finally came, a significant portion of the population did not leave, leading to a level of unprecedented calamity. Why?
If you travel north to another American city, Fairbanks, AK, you will find a population that lives just as close to the deadly forces of nature, but in a very different way. A normal Alaskan winter holds the potential to kill all human inhabitants foolish enough to live in the region, but Alaskans do not take their winters lightly; they've seen what can happen. They plan and prepare for them every year, and as a result, most survive these deadly assaults. What is it that creates the difference? What does it take to survive?
PREPARATION
Traders who survive a challenge to their lives and livelihood are most likely to be those who prepare for their survival.
Motivation-understand the risk. Preparation needs motivation. No one prepares without a reason or an incentive, or an urgent need to do so. It is harder for the average person to plan for the 8.5 earthquake that might come sometime in the future than it would be for them to plan for the tornadoes that come each and every spring. For that reason, a necessary part of preparation is to comprehend the level of risk involved.
Traders can better prepare for losses by first acknowledging the facts of life for traders, the first of which is that loss is an inevitable part of making money in the markets. The second fact is that a single major loss that is large enough or a series of small losses that go on long enough can end a trading career. Loss must be managed and that means preparation, which is what survival is all about for a trader. Knowing that should help motivate a trader. A long winning streak can take the edge off your survival instincts. But periodic losses are a good source of motivation because losses hurt, and pain motivates.
...Continued in the April issue of Technical Analysis of STOCKS & COMMODITIES
Excerpted from an article originally published in the April 2006 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2006, Technical Analysis, Inc.
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