Like a pilot, a police officer, or a trapeze artist, a professional trader knows he must follow the rules just to stay alive. Usually, this thought is enough to focus the mind. But occasionally, the realization is lost. Mistakes follow. Losses mount. An otherwise great trader succumbs. A great trader goes bad.
TRADING PSYCHOLOGY
How Great Traders Go Bad
by John A. Sarkett
As traders achieve success and higher levels of profitability, they become more at risk for failure. The problem? Their egos get in the way of their success. Here's how to stay the course.
How to avoid that tragic circumstance was the subject of a recent Futures Industry Association (FIA) presentation in Chicago by professional trader and trading coach Ray Kelly. "Large traders trade more zeroes than small traders, but the process is the same," he opined.
"The catalyst for destruction," Kelly says, "is most often ego." Ego is the Ebola virus to the active trader. There is an antidote, however: humility. At the onset of paralyzing ego, humility must be administered at once, or results can be fatal. It is even more effective if administered in advance, not unlike a vaccine.
Can you or I become infected? Of course. What can be done to protect against ego and its devastating effects?
Kelly suggests paying close attention to the following four areas: self-knowledge, market knowledge, trading strategy, and risk management. Answer the hard questions for yourself before the market does it for you. Like meditation or exercise, attention must be paid each day for maximum effectiveness.
SELF-KNOWLEDGE
First, when you come in the door to your trading room, leave your ego outside. Kelly defines ego as the sense of who we believe we are: a trader, a religious person, a parent, a spouse.
When the overinflated ego gains the throne, rules go out the door. Egotism consumes natural and healthy caution, replacing it with an illusion of invincibility. An overdeveloped ego fells even the most successful, sometimes especially the most successful trader.
The trapeze artist, expecting occasional failure, practices with a net. He knows that he is not more durable than the concrete below. He knows that he can only exist in the high-flying environment by following the rules.
John A. Sarkett writes on and trades in the financial markets. Developer of Option Wizard software, https://option-wizard.com, he can be reached at jas@option-wizard.com.Excerpted from an article originally published in the July 1999 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 1999, Technical Analysis, Inc.
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