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EDUCATIONAL REPORT LAST UPDATED:-  

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PAST ISSUE

The Need to be Right

If you are in the stages of learning to trade, you will become a compilation of all those from whom you learned. You will become your own unique breed of trader. We all come to the table with certain expectations and beliefs. We all come with some emotional baggage. We all learn from reading, studying web sites, and other traders. Some learn informally and some learn by paying for education in the form of Trading Rooms, Seminars and Mentors. Every time you learn something, it adds to your experience as a trader. Eventually you become the sum of all you have learned. Even if you have a mentor you have tried to emulate, you will never be like your mentor. You will be unique.

However, while no two traders are identical, most successful traders do share some common characteristics. Most have learned the value of a trading plan. Most have learned the need for stops. Most have learned many other disciplines that have been addressed in previous "Lessons of the Week." It takes many a long time to understand the subject of this article: The need to be right.

The topic is a simple one, yet it eludes many traders. It seems only obvious that if we want to be successful, we need to be right in our underlying assumptions. If we want to trade stocks, we should focus on being 'right' about the direction stocks are going. Correct? Well, not really.

Most traders focus too much on their need to be right. This can be detrimental and needs to be addressed. The truth of it is, we are dealing in the stock market. There is not a system, method or pattern that can produce accurate results all the time. If there were, it would be known to all. All would be using it. Ironically, if this was the case, when all started using the system, it could no longer work. A 'catch 22' of sorts, but it just goes to show that it is obvious that there will never be a perfect system or indicator.

The best we can do is to study each situation, collect the evidence, and make a high probability decision at the proper moment. What is of primary importance is how the situation is handled when the trader is right, how the situation is handled when the trader is wrong. What is the most common reason traders fail? The answer is not following stops. What is another top reason traders fail? The answer is not letting winners run.

Not following a stop is an example of handling the situation improperly when a trader is wrong about the trade. Not letting a trade hit a target is an example of handling the situation improperly when a trader is right about the trade. What good is being 'right' if you don't get paid for it? Good traders assume from the beginning that the trade may go bust. They know how much money they have risked. They know when they will get out, and they will analyze other options, such as profiting from the stock, which is now moving 'against the odds'.

Good traders also know how to balance being 'right' and being timely. I know of an advisory service that is taking credit for predicting the fall of the Dow. The only problem is that they began that prediction when the Dow hit 6000. Quite a hollow victory. Waiting for too much information may make you 'right' more often, but to what avail? It is like the trader that finally decides the NASDAQ is going higher intra-day, because it broke the high of the day. The only problem is that the NASDAQ rallied 30 points to come back to break the high of the day; it is so extended, there is no room left for profit. The trader may be 'right', but his late decision awards him no money.

Yes, we need to be 'right' a fair amount when we trade. However, if your average winner is three times your average loser, you only need to be right 25 percent of the time to be breaking even gross. Accept that this is not an exact science, and never will be. We are reading people's emotions. Accept that you will be wrong a certain amount of the time and accept that graciously. Focus on how you handle your winner and loser. Make timely, high probability decisions when you have sufficient evidence, and do so consistently and objectively.

Good Trading.


Dr.Neelima More
Real Time Analyest