Tuesday, August 21, 2012

Trend following and Trading in the Zone

Trading in the Zone, by Mark Douglas, is one of the best books out there on trading psychology, and one I would highly recommend new or inexperienced traders should read.

Reading it confirms that trading psychology is just as important (if not more important) than having a following a particular trading system or method. He states that it is the ability to follow your system that separates successful traders from the rest.

To achieve this, you need to:
  • Be able to accept and embrace risk in the market;
  • Be able to remain disciplined and consistent in your approach;
  • Above all, to have confidence in your method.
Part of the secret in being able to achieve success in to acknowledge that losses can and do occur, and to have a strong respect for risk. Therefore, having a rigid approach to risk parameters is critical to enable you to withstand periods of drawdowns and losses that can and will occur in the future.

Having confidence in your system comes both from utilising a method that is historically proven in the markets, can generate profits in differing market conditions, and also that you are able to operate and generate profits in your own account.

Particularly when it comes to trend following, being able to remain disciplined and consistent in your approach is key, as when market conditions are against us, it is easy to become disillusioned and tempted to dump the method. Consistency and discipline (along with prudent risk control) are integral parts of a trend following strategy. Period of drawdowns are frustrating, but a trend follower needs to remain patient, confident in the knowledge that when market conditions are more favourable, then profits come - fast, and in big chunks.

When you have all the above factors in place, then it allows you to operate your method in a fearless manner. When you recieve a signal or identify an opportuntiy, you are able to act upon almost without thinking. You are on auto-pilot.

When you reach that state, then you have developed the mindset of a winning trader. If you have not read Trading in the Zone, then I'd recommend you get yourself a copy.

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