The Two Realities of Trading

There are two realities every trader must understand and accept before she/he can actually start trading for a living!

1) It Is Impossible to Predict Market Turns

It has become very common in the financial markets for analysts or "experts" to offer their "outlook", or predictions for various markets. In fact, it has become so common that many traders just assume that if so many people claim to be able to predict the future action of the markets, then it must be possible. Nothing could be further from the truth.

There are two great emotions at work in the markets - fear and greed. However, contrary to conventional thinking, greed is not always manifested as a lustful longing or need to make money. Quite often it is manifested in the form of "hope". And what could give a trader more "hope" than the belief that he may be able to know in advance what a given market is going to do? But, think about it for a moment. Can you think of any other endeavor where people can actually predict the future?

In order to be a successful futures trader, you must learn not to rely on predictions and forecasts. It is possible to find a person or committee or indicator or wave count which will occasionally offer a prediction which actually comes true. However, the fact of the matter is that there is no person, committee, indicator, or wave count, etc. which can consistently and accurately predict tops and bottoms in any market. It is simply not possible to do so on a regular basis.

Once you free yourself of this notion, you open up your mind to the more important task of determining the current trend in a given market. In the long run, such knowledge will be much more useful than a thousand forecasts.

2) Losing Trades are a Natural Part of Trading

Novice traders have a great deal of trouble accepting the notion that losing trades are a "natural" part of trading. Yet, if you are actively "cutting your losses" on trades that don't go in your favor, a losing trade can actually be thought of as a positive step, because it is the act of consistently limiting your losses to a manageable amount which allows you to keep coming back to trade another day. While losing money on a given trade is not in itself a good thing, the very act of keeping each individual loss to a minimum is a necessary step in trading profitably over the long run.

When starting out, traders often shoot for a high percentage of winning trades, even though that generally means taking profits quickly and missing some big winners. More experienced traders come to realize that the percentage of trades which are winners is often a meaningless statistic. In the end, the only thing that counts is if the amount earned on winning trades exceed the amount lost on losing trades. As long as that is the case, it matters little if 3 out of 10 trades are profitable or if 7 out of 10 trades are profitable. The key is to make alot when you win and to lose a little when you lose.