10
2024/05
Take control of your trading: Avoid the gambler's mindset trap
Trading is like a regulated gamble in a market of random fluctuations, where profit and loss are merely probability events.
Whoever masters the rules holds the initiative to win. Traders without rules are like gamblers, ultimately destined for bankruptcy. The traders who adeptly use rules in the market are undoubtedly the ultimate winners.
They transform random probability issues into human nature problems and then control human nature by formulating trading rules to gain a more significant edge.
The trading process reflects human qualities. If you have rules in your heart, you see the whole world. If you rely on luck, then you only see yourself forever.
So, becoming a successful trader is difficult, but falling into a gambler’s trap is easy because many trading rules conducive to success usually contradict human nature.
Whenever rules are needed to constrain human behavior, it often touches on human nature’s deepest-rooted greed and fear.
People instinctively fear and avoid this painful contradiction of human nature. In gamblers, trading equals getting rich, always thinking of a single trade that determines everything, believing that countless wealth can be obtained without effort. This is a self-deception used by gamblers to delude themselves.
The entry and exit issue has always been the core issue in trading, and the trading rules we formulate are centered around this issue.
Learning to break even is the most important for traders because only traders who remain in the market have the qualification and opportunity to enjoy compound growth and the dividend of time.
The most painful thing in trading is identifying a trend yet failing to profit much from it. Either hesitating to take action, resulting in missed opportunities, being washed out by the market, or stubbornly holding positions only to watch ample profits vanish.
“Reading gains from books is shallow; one knows the truth only when one practices it.” This should be the only way to solve this embarrassing situation.
Such cases where one knows but cannot do are usually caused by theory outweighing practice. Trading is a job that requires a lot of practical experience, and many masters emphasize that in trading, one must achieve “unity of knowledge and action” to achieve stable profitability. Below are the main techniques for formulating entry and exit rules:
1. Entry and exit signals should be clear
Firstly, we must have our trading system and adhere to our trading principles, not casually following others’ opinions.
When formulating our trading rules, the first principle is to make the entry and exit signals clear without ambiguity. If the entry and exit are not apparent during trading, your trades cannot be executed perfectly, and various situations may arise, causing you to miss significant profit opportunities.
2. Entry and exit signals should be simple
Entry and exit signals need to be clear and straightforward. The simpler something is, the better it can be executed in the trading process.
At the same time, complex entry and exit signals will increase the uncertainty of trading, leaving you unsure of what to do when signals conflict.
For example, using a composite indicator system for entry and exit signals, where the MACD indicates a bullish market, and you enter a long position.
However, the KD indicator shows that the price is still in a bearish trend. The RSI indicator is in a neutral oscillating state. What should you do in this situation?
Each indicator has its lagging moments; more indicators and signals will make it easier to decide. Therefore, when building your trading system, keep it as simple as possible, as simplicity enables better execution of trading rules.
3. Entry and exit rules should be executable
When your entry and exit rules are simple, the next question is whether your system is executable. That is, your rules should offer operational opportunities.
Day traders need opportunities every day, while swing traders focus more on finding opportunities weekly or monthly. Using large timeframes to formulate entry and exit trading rules for day trading is not realistic.
4. Entry and exit rules need to have an error margin
In market trading, no set of rules can achieve 100% profitability. Therefore, entry signal failures and exit signal failures are indispensable parts of the trading process.
However, the error margin should be reasonable; otherwise, the market will have already cleared you out before you can make any money. The success rate of entry signals should be reasonable but not too low either; otherwise, the rules will fail.
5. Entry and exit rules need backup plans
Since every entry rule can fail, what should you do after a failed entry? Should you wait for the next opportunity or reverse the position?
These are all things we need to consider. Every criterion is worth considering carefully to develop entry and exit rules that suit you.
