Temporary Insanity

Have you ever had a moment or moments where you simply do not know how to react or interpret what you see on your charts? . . . or what action to take?

This feeling of disorientation can be attributed to lack of a thorough preparation and a complete trade plan. Your trade plan must include a variety of responses that can be applied rapidly and consistently. It must take into account the various market conditions so that we can be prepared for all scenarios.

How prepared are you? Your true advantage or “edge” will include your ability to respond confidently when other traders are experiencing this confusion and doubt.

No matter what other traders do, we must put ourselves in a position of success by having a strategy for every situation. This does not mean getting caught up in information overload or acting anxiously. It means being able to calmly recognize the current status of the market and confidently and purposefully prepare for action or inaction.

Here’s a secret . . . most of the time, our best position is to do nothing. If a trade does not meet our rules, we do nothing. If we are a trend trader and see a counter trend set-up, we do nothing. If we enter the market and have set our stops and profit targets, from there, we do nothing. Trading is a game of patience and that patience is lucratively rewarded.

The problem with most traders is that psychologically most have been conditioned that inaction is a trait of failure or laziness. They feel compelled to act or deviate from their rules simply because they can not accept inaction – especially when they have devoted a specific amount of time to sit down with their charts. They feel like they must place a trade regardless of the rules of their trade plan. “If I’m here, I’m going to trade!”

This behavior reinforces the possibility of disorientation because the action is based on emotion, not logic. We all know that emotion based trading is a costly lesson. When capital is at risk, remember it is always better to not trade if doubt or confusion is present. There will always be another opportunity and another trade. It is our job to be patient and let the market invite us to trade with a valid signal based on our plan and rules.

If you find yourself disoriented on confused, do nothing – that is, do not place any trades. Try to evaluate why that emotional state exists when you encounter it. Have you done your back testing? Have you performed adequate repetitions of your trade signal? Does your trade plan account for all market conditions? Have you thoroughly prepared for each trade session by performing your top down analysis? What is causing your anxiety and confusion?

That fact is that in trading, we will spend most of our time doing nothing and simply waiting for the right moment to engage. This is counter-intuitive to most of our experiences where we have come to believe that activity is equal to productivity and/or output. Because the amount trading activity has little correlation to productivity (or profit in our case), the importance of preparation and patience are greatly magnified. Large sums can be made with only a few trades. More trading does not equal more profits.

As we have said many times before, the market rewards preparation and patience. We also know from experience that the market punishes emotion and being over-zealous.

The key is balance. Disorientation and confusion are the signs of imbalance and spontaneity. Make sure you have done the work to engage the market prepared and purposeful – and remember that doing nothing is better than doing something arbitrary and costly.

Rick

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