What we think about before we put on a trade helps determine our mindset during the life of the trade. When I am trading well, my thinking before the trade focuses on two topics:
1) What will tell me the trade is wrong? – Knowing *exactly* what will tell me I’m wrong and where I would exit is essential to sound risk management of the position. I am constantly updating my views on what would tell me I’m wrong. For example, on Friday I put on a trade where I bought the ES futures early in the morning and the position quickly went in my favor. I immediately told myself that, if I’m right, we should not see a reversal to the prior low. We did indeed reverse and I got out with a small loss. That experience helped me see that the market could not sustain buying and was one of the data points that got me into a nicely profitable short position a little later. Because I am mentally rehearsing being wrong, I am accepting the possibility of loss and taking the psychological threat out of that possibility. My best trading is not with confidence and optimism. My best trading is with open-mindedness to the possibility of being wrong.
2) What will tell me the trade is working out? – If I’m trading well, I am open to the intuition that this trade is working. Perhaps I see volume coming into my direction; perhaps I’m seeing a move triggered by a catalyst; perhaps I’m seeing a breakout of a key level. At some point, I get the sense, “This is working”. My best trading occurs when I’m prepared for that possibility and can add to the trade, particularly when I’ve identified the trade as a medium-term opportunity. In Friday’s trade, we broke to new lows in the NYSE TICK, which told me fresh institutional selling was coming into the market. Using the next bounce in TICK to add to the position helped me make the most of the opportunity.
The combination of knowing where you’re wrong and identifying when you’re right allows you to keep losses small and maximize gains. Notice that both questions keep a trader market-focused and not focused on previous wins, losses, P/L, fear of missing, etc. The right trading psychology is not positive or negative; it’s focused.
Image and article originally from traderfeed.blogspot.com. Read the original article here.