As a trader, you have to decide what
is more important—being right or making money—because the two are not
always compatible or consistent with one another.
There Is Unlimited Potential for Profit and Loss
The most effective manner to illustrate the "unlimitedness" of the market environment is to compare it to gambling. With any gambling game you will always know exactly how much you can win or lose each time you play. You decide exactly how much you want to wager, you know exactly how much you can win as well as lose, and you may even know the mathematical odds of either possibility.
This is not the case in market environment. In any particular trade you never really know how far prices will travel from any given point. If you never really know where the market may stop, it is very easy to believe there are no limits to how much you can make on any given trade.
Prices Are in Perpetual Motion with No Defined Beginning or Ending
The markets are always in motion; they never stop, only pause. As long as there are traders who, for whatever reasons, are willing to buy higher than the last price and, as a result, bid the price up, or traders willing to sell for less than the last price and offer the marker lower, prices will remain in perpetual motion. Even when the markets are closed, prices are theoretically in motion. For example, what price traders may be willing to buy or sell at on the opening the next day does not have to be at the price level the market closed at the previous day.
What are usually thought of as three simple decisions of enter, hold, or liquidate a trade become a perpetual process of deciding how much is enough from both a profit and a loss perspective.
Greed stems from a belief that there is never enough or there won't be enough. In an unlimited environment that is in perpetual motion, isn't there always the possibility of getting more?
The appetite of true greed can never be satisfied; it will always leave the greedy ones with a feeling of lacking regardless of how much they have acquired. If you are in a losing trade, you won't want it to exist because it represents failure, so you can just act as if it doesn't, by convincing yourself that you are in a winning trade that hasn't gone in your favor yet.
The "how much is enough" question can be answered in an infinite number of ways relative to your beliefs on the value of money, what you need it for, how important it is, can you really risk it, how secure do you feel, and what is enough today may not be enough tomorrow because of other factors in your life—all relative questions that have no definitive answers and change with the changing environmental conditions.
This is why successful traders have always stated emphatically, "Only trade with money you can afford to lose," meaning money that has little or no value in your life. The less meaning the money has, the less potential there is for your personal "how much is enough" issues to contaminate your perception of market movement.
Thus, if you allow it, the market can always tempt you into thinking there may be more to be had in a winning trade and always give you something to hang on to in order to justify your hope that it will come back and make you whole, if you are in a losing trade. Succumbing to either one of these temptations subjects you to the possibility of some very negative and painful consequences.
You have the freedom to structure the game inside your mind in any particular way you please. You can get in whenever you want for whatever reasons are good enough to justify your actions. You can get out whenever you want. In fact the game only ends when you have decided that you've had enough and take the appropriate action to end it. The psychological implications to the individual confronting these conditions are staggering. Entering a trade will involve all your beliefs about opportunity in relationship to risk, missing out, needing a sure thing, and not being wrong. Exiting a trade will involve all your beliefs about loss, greed, failure, and control.
Considering the unlimited potential for profit, entering the market will be much easier for most traders than will be getting out. This is because exiting the trade will require that you confront your beliefs about greed, loss, and failure in relationship to the constant temptation of the possibility for unlimited profits.
Your beliefs about loss, being wrong, failure, and control will operate independently of your conscious intent. For example, think of the last time you perceived an opportunity to profit and the fear of being wrong, or losing, and so on, immobilized you, keeping you from putting on the trade.
To the extent that these issues exist as a component of your mental environment, they will determine the effect they have on your perception of market activity, the decisions you make, and your ability to act on what you decide.
However, one of the most significant and potentially damaging factors related to this no beginning and no ending characteristic of the market environment is that it allows you to be a passive loser. The best way to illustrate this concept is to compare the markets with any form of gambling games. For example, with blackjack, horse racing, or craps the player has to make a conscious choice to play and decide before the event exactly how much he will wager. The event begins and ends according to the rules of the game, and the risk of loss is limited to the size of the wager. Each new event is a fresh start, where the odds of winning may be determined by mathematical probabilities and the rules of the game automatically take the player out after each event. When the game ends, the player knows exactly what the outcome is and then must make a conscious decision to participate again. Therefore, the structure of the game forces the player to be an active loser. To subject himself to the possibility of losing any more money than he has already lost requires that he place a wager for a specified amount. He has to actively participate to lose and do nothing to stop losing. Obviously, if the player does nothing, he will not be subjecting his assets to the possibility of loss.
If the player is losing consistently, he will need to confront his beliefs about loss and failure to quit playing altogether. This could be difficult because he can always rationalize that, based on the odds, he is bound to win eventually and that he can always quit after the next game. But he does not need his own mental structure to end any particular game because it's automatic.
This is very much different from the market environment where you can be a passive loser. Once you put on a trade, you have to actively participate to end your losses. You don't need to do anything to continue to lose, and the market could go against your position indefinitely. If for any reason you choose not to act or can't act, you could lose everything you own and more. Depending on the size of your position and the volatility of the market, this could happen very quickly. The only way out is to confront your personal issues about greed, loss, and failure. What specific issues or combination of them come into play in each trade will depend on whether you are in a winning or losing position.
Since, all of us seem instinctively to avoid confronting any issue that could cause pain, such as getting out of a winning trade too soon or having to admit we were wrong to get out of a loser, the easiest way out of a situation like this is to convince ourselves (indulge ourselves in the illusion) we are in a winning trade that will never end or gather all the evidence possible to suggest that we really aren't in a losing trade.
To become a consistently successful trader your objective has to be to learn how to let the market tell you what it may do next and how much is enough.
As a trader, however, you could easily lose far more than you intended to risk, based on your inability to perceive the possible or your inability to execute a trade to get out of your position, or a combination of both.
It might not be so easy to take responsibility for losing more than what you intended to risk. This is where the revenge factor comes into play. If you don't take responsibility for what you lost, then who or what can you blame—the markets, of course. The markets took your money. If the markets took from you more than you originally intended to risk, then you will likely feel compelled to get it back.
Revenge creates an adversary relationship with yourself. If you're the one who gives your money to the market, you are also the one who gives yourself money out of the market. If you are angry with yourself for letting the last trade get so out of hand, whatever the market is offering you "now" in terms of an opportunity won't be enough. From a psychological perspective, you won't take the opportunity for a profit or otherwise because you haven't accepted the last trade as being all right. In effect, you will be denying yourself the current or next opportunity to punish yourself for the past mistake. In reality you can't get back at the market, and a belief in revenge only allows you to get back at yourself.
There Is Unlimited Potential for Profit and Loss
The most effective manner to illustrate the "unlimitedness" of the market environment is to compare it to gambling. With any gambling game you will always know exactly how much you can win or lose each time you play. You decide exactly how much you want to wager, you know exactly how much you can win as well as lose, and you may even know the mathematical odds of either possibility.
This is not the case in market environment. In any particular trade you never really know how far prices will travel from any given point. If you never really know where the market may stop, it is very easy to believe there are no limits to how much you can make on any given trade.
Prices Are in Perpetual Motion with No Defined Beginning or Ending
The markets are always in motion; they never stop, only pause. As long as there are traders who, for whatever reasons, are willing to buy higher than the last price and, as a result, bid the price up, or traders willing to sell for less than the last price and offer the marker lower, prices will remain in perpetual motion. Even when the markets are closed, prices are theoretically in motion. For example, what price traders may be willing to buy or sell at on the opening the next day does not have to be at the price level the market closed at the previous day.
What are usually thought of as three simple decisions of enter, hold, or liquidate a trade become a perpetual process of deciding how much is enough from both a profit and a loss perspective.
Greed stems from a belief that there is never enough or there won't be enough. In an unlimited environment that is in perpetual motion, isn't there always the possibility of getting more?
The appetite of true greed can never be satisfied; it will always leave the greedy ones with a feeling of lacking regardless of how much they have acquired. If you are in a losing trade, you won't want it to exist because it represents failure, so you can just act as if it doesn't, by convincing yourself that you are in a winning trade that hasn't gone in your favor yet.
The "how much is enough" question can be answered in an infinite number of ways relative to your beliefs on the value of money, what you need it for, how important it is, can you really risk it, how secure do you feel, and what is enough today may not be enough tomorrow because of other factors in your life—all relative questions that have no definitive answers and change with the changing environmental conditions.
This is why successful traders have always stated emphatically, "Only trade with money you can afford to lose," meaning money that has little or no value in your life. The less meaning the money has, the less potential there is for your personal "how much is enough" issues to contaminate your perception of market movement.
Thus, if you allow it, the market can always tempt you into thinking there may be more to be had in a winning trade and always give you something to hang on to in order to justify your hope that it will come back and make you whole, if you are in a losing trade. Succumbing to either one of these temptations subjects you to the possibility of some very negative and painful consequences.
You have the freedom to structure the game inside your mind in any particular way you please. You can get in whenever you want for whatever reasons are good enough to justify your actions. You can get out whenever you want. In fact the game only ends when you have decided that you've had enough and take the appropriate action to end it. The psychological implications to the individual confronting these conditions are staggering. Entering a trade will involve all your beliefs about opportunity in relationship to risk, missing out, needing a sure thing, and not being wrong. Exiting a trade will involve all your beliefs about loss, greed, failure, and control.
Considering the unlimited potential for profit, entering the market will be much easier for most traders than will be getting out. This is because exiting the trade will require that you confront your beliefs about greed, loss, and failure in relationship to the constant temptation of the possibility for unlimited profits.
Your beliefs about loss, being wrong, failure, and control will operate independently of your conscious intent. For example, think of the last time you perceived an opportunity to profit and the fear of being wrong, or losing, and so on, immobilized you, keeping you from putting on the trade.
To the extent that these issues exist as a component of your mental environment, they will determine the effect they have on your perception of market activity, the decisions you make, and your ability to act on what you decide.
However, one of the most significant and potentially damaging factors related to this no beginning and no ending characteristic of the market environment is that it allows you to be a passive loser. The best way to illustrate this concept is to compare the markets with any form of gambling games. For example, with blackjack, horse racing, or craps the player has to make a conscious choice to play and decide before the event exactly how much he will wager. The event begins and ends according to the rules of the game, and the risk of loss is limited to the size of the wager. Each new event is a fresh start, where the odds of winning may be determined by mathematical probabilities and the rules of the game automatically take the player out after each event. When the game ends, the player knows exactly what the outcome is and then must make a conscious decision to participate again. Therefore, the structure of the game forces the player to be an active loser. To subject himself to the possibility of losing any more money than he has already lost requires that he place a wager for a specified amount. He has to actively participate to lose and do nothing to stop losing. Obviously, if the player does nothing, he will not be subjecting his assets to the possibility of loss.
If the player is losing consistently, he will need to confront his beliefs about loss and failure to quit playing altogether. This could be difficult because he can always rationalize that, based on the odds, he is bound to win eventually and that he can always quit after the next game. But he does not need his own mental structure to end any particular game because it's automatic.
This is very much different from the market environment where you can be a passive loser. Once you put on a trade, you have to actively participate to end your losses. You don't need to do anything to continue to lose, and the market could go against your position indefinitely. If for any reason you choose not to act or can't act, you could lose everything you own and more. Depending on the size of your position and the volatility of the market, this could happen very quickly. The only way out is to confront your personal issues about greed, loss, and failure. What specific issues or combination of them come into play in each trade will depend on whether you are in a winning or losing position.
Since, all of us seem instinctively to avoid confronting any issue that could cause pain, such as getting out of a winning trade too soon or having to admit we were wrong to get out of a loser, the easiest way out of a situation like this is to convince ourselves (indulge ourselves in the illusion) we are in a winning trade that will never end or gather all the evidence possible to suggest that we really aren't in a losing trade.
To become a consistently successful trader your objective has to be to learn how to let the market tell you what it may do next and how much is enough.
As a trader, however, you could easily lose far more than you intended to risk, based on your inability to perceive the possible or your inability to execute a trade to get out of your position, or a combination of both.
It might not be so easy to take responsibility for losing more than what you intended to risk. This is where the revenge factor comes into play. If you don't take responsibility for what you lost, then who or what can you blame—the markets, of course. The markets took your money. If the markets took from you more than you originally intended to risk, then you will likely feel compelled to get it back.
Revenge creates an adversary relationship with yourself. If you're the one who gives your money to the market, you are also the one who gives yourself money out of the market. If you are angry with yourself for letting the last trade get so out of hand, whatever the market is offering you "now" in terms of an opportunity won't be enough. From a psychological perspective, you won't take the opportunity for a profit or otherwise because you haven't accepted the last trade as being all right. In effect, you will be denying yourself the current or next opportunity to punish yourself for the past mistake. In reality you can't get back at the market, and a belief in revenge only allows you to get back at yourself.
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