I would like to discuss getting inside the head of a winning trader and seeing how they think. Do you ever ask yourself why others seem so successful while you continue to struggle? Usually, the answers may be something like “they are just lucky, it will run out” or “they know somebody who told them the secret about the Holy Grail.”

1. Understand that there is more to trading than chart reading
2. Absorb what these winning traders are thinking
3. Practice, practice and repeat over again
1.  The Basis of Prosperous Trading

Success in trading lies in accepting that this business is about probabilities. Obviously when we place a trade, we feel that our “edge” will yield a winning trade. We must remember, though, that with probabilities, not all trades will be winners. Your trading strategy is responsible for finding the trades that give you this “edge.” That being said, I would like to remind you that in my opinion 85% of trading is psychological, 10% is money management and 5% is strategy.

I recently attended a meeting with a group of traders. From the moment the meeting began, all that the attendees wanted to talk about was what “strategies” and particular settings I use for studies. So, I asked a couple of questions to everyone about having trading plans and maximum dollar losses for the day. Not one person was interested in this very vital aspect of trading. All they wanted to talk about was that “5%” of the equation, thinking that was somehow going to turn around their trading careers.

This just served to remind me that the failure rate in futures trading is almost 90% in the first 6 months of trading. If you are one of the people focused on finding the ”perfect” trading strategy – the kind where you walk up to the ATM and punch in your pin and out comes some money every time – I can assure you that you will be searching until the end of your trading career. Just remember that prosperous trading is simply a business of probabilities. Mark Douglas has written a book called Trading in the Zone.  Toward the end of his book, he has an exercise that works to help traders see how trading the market is nothing more than probabilities. 

He asks the trader to find a simple system or strategy that they are comfortable with. Keeping it as simple as possible, yet one that uses rules to give them that edge they need. Making sure they understand all the entry and exit rules, so they will stick to it while doing this exercise. He asks that the trader take the next 20 trades in a row without any human interference, being as mechanical as possible. At the end of the exercise, he tells them to sum up the win/loss ratio.

He points out that more than likely the trades were not all winners or losers. But instead, there may have been 13 winners and 7 losers or 8 winners and 12 losers, etc. The purpose of this exercise is to get traders to think in terms of probabilities.  Once you start thinking in terms of probabilities, you will realize that if you have a losing trade that you are that much closer to a winning trade. This helps to keep a trader from having negative thoughts about losing and never winning again, possibly keeping him or her from revenge trading. I recommend you read his book.

This is an excerpt from Jul 2009 issue of Trader's Journal.