Profitable ETF Trading Strategies: the Problem of “Maybe”
A lot of professional traders manage the complexity of the human psychological dimension of trading by removing their emotional judgment as much as possible from the system by using a mechanical system. In other articles I have described how even mechanical traders will have to address psychological issues that are a natural consequence of trading in any form. Clearly though, discretionary traders or blended style traders will see it more often and with greater intensity.
The question of maybe will often arise when you are in a position and you wonder “Maybe I should exit this trade?” when you see it moving against you, or stalling, but it has not yet reached either a profit target or your capital preservation stop.
Where does it come from? Maybe from our pattern-making brain which anticipates the near future and combines it with vivid imagery skills, is connected to our emotional brain center and our sense of risk. Maybe it just comes from a deep-seated sense that we are trading at too high of a level of risk for the volatility that’s associated with the current trade.
Our imagination will tend to exaggerate the potential future outcomes in both directions, expecting greater gains or greater failures than are likely to emerge. The more we think about the decision to be made, the more fuel we throw on the fire. We act as if our imagination carries the same force as the objective facts of current price action, and we are moved towards action, propelled by emotions and not facts.
What can you do about the “Maybes”?
1. Trade at a lower level of risk so that you can let your rules work as designed
2. Invest in the effort and energy to establish the validity and value of your trading rules.
3. Analyze the quality of your decisions in the moment by comparing the results of the action you took with the action that would have occurred if your original trading plan were followed.
It should not surprise you to find that your memory of the individual trades turns out to be quite a bit different than the actual results when you analyze them. We will tend to remember those instances that confirm our opinions and forget all the times when it worked out the other way.
Armed with facts and analysis, and trading at a level of risk that you are comfortable with, you may be equipped with what you need to bring more discipline to your trading.