Recently I read through an article written by Bennett McDowell
published on TradersLog.com
which touched on a thought provoking topic, the different ways traders see the
market and the way in which they respond to their mind set they have in place. McDowell explains that markets
should be seen as a nonlinear
entity comparable to space, time, reality and oneness, a non-systematic
mechanism in which output is disproportional to its input, where natural order
is the determining factor and logic doesn't apply.
McDowell
goes further on to say that most traders use linear thinking when participating
in the market which could possibly explain why they have a difficult time
interacting with the market over different periods of time.
Think about it for a while, it took me some time to wrap it
around my mind. We all experience it in our trading; we dedicate a fair number
of hours staring in front of screens sifting out opportunities from a universe
of securities with endless possibilities. The process is laborious in times
when no opportunities seem present and pleasant when they are bountiful. Although we perceive both times in a
different light, we attempt to apply the same consistency to each situation so
that our results do not deviate from our expectant outcome.
Our mental prowess is tested to the maximum when we are
suddenly confronted with chaotic transitional market conditions which no longer
conform to our rigid trading strategies which were set in place with the
previous condition. If we are unable to initiate our ability to become more
malleable and adaptable to new conditions we are then faced with emotional
responses, most notably fear and greed which have tremendous impact on our
trading process.
Herein lies the contradictions, we as human have advanced to
a point where we use the process of logic as a tool to assist us in
understanding all facets of life, including trading. However if we were to accept what McDowell was saying we would
see that there is a clear conflict between the nonlinearity of the markets and
the linearity of our trading mindset.
We introduce logic to the process so that we are able to
assess the probability of a trade working out. We apply different techniques
such as technical analysis so that we create an edge which aids us to enhance
our chances of profitability. However we need to be mindful that although our
expectations on the market are fixed it doesn’t stop the market from exceeding or
even coming close to our expectation. Markets are nonlinear and although we use
logical processes to predict their direction they can work in the opposite way
which leads me to the second reason why we use logic.
The markets can be both rewarding and punishing when we
ignore the rules we set out. How many times have you observed in your own
trading a situation where your profit target was exceeded and you chose to
greedily stay in the trade regardless of your rule to exit or the time the
price gapped below your stop loss and you fearfully hoped the price would retrace
to a more tolerable loss?
Logical process prevents our emotions from entering our
minds. We need to be aware of the
nonlinearity of the markets as they can cause confusion. The markets can lead
us on and mistakenly believe that if we were stopped out we have done something
wrong and if we’ve profited more than expected that we've done something right.
This is not the case; it’s simply our edge
working for or against us. Our edge may have 50%+ probability which gives us
the advantage but we should not forget the other side of the probability which
can lead to us being wrong. Our success as traders cannot be measured by our
highest winning trade but by the manner in which we execute and follow the
plan.
If you would like to contact me you can through my email at cadetrader@gmail.com or if you wish to
follow me on twitter and get the latest updates of news, interesting commentary
and general trends in the market, my twitter handle is @CadeTradeR if you
follow this link it’ll take you directly to my twitter timeline: https://twitter.com/CadeTradeR
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