The Need to Control

Date: September 16, 2009

by Edmund Seow, Technical Analyst of SIAS Research

Most of us traders have an independent streak. That’s why, after all, we become traders in the first place. It is the reason why we can work an unconventional profession and thrive in a chaotic environment.

However, this need to control, when not managed right, becomes an impediment to trading, rather than an asset. In seeking to “control” the market, all too often we end up jumping the gun, or deviating from our systems, and end up taking devastating losses.

The markets are, by their very nature, chaotic. That means that while we can use patterns, analysis and systems to attempt to put the odds of trading on our side when we trade, we must live with the possibility that even the best trading systems in the world will never be 100% accurate, and there will be times where we will have losses.

A million different things can suddenly affect the markets and our trading results in the real life. Terrorism, sudden news, interest rate fluctuations, and sudden professional and institutional buys and sells can affect market prices. Fluctuations in our own emotional states, like anger, frustration and euphoria, or even opinions of other people too can affect how we view signals given by the market.

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How then do we maintain emotional and trading discipline?

First, accept that you are unable to control the markets. Just because you take a position does not mean that the market MUST take your direction, no matter what your system or intuition says. Be ready to cut your losses and walk away. Attempting to control prices and events in the stock market is like holding back the sea. You’ll get frustrated, wet and catch a cold, and the sea frankly doesn’t care. When you’re angry, you will tend to make decisions that you’ll regret later.

Second, develop detailed trading plans that are simple to follow, then INGRAIN these plans into your habit. When you do this, you impose a sense of order and structure onto unstructured reality. This should give you a sense of well being and control, even in times where there is a vast amount of uncertainty in the market. Clear entry and exit strategies and defining your own target profit levels in various situations can give you a sense of security that allow you to better control your emotions.

The more structure you impose and follow, the more powerful you tend to feel even in situations of uncertainty. This allows you a greater control of your trading and emotions, and consequently your profit and portfolio.

Seeking out complete control when your money on the line is understandable, but there’s only so much you can do.

The winning trader tries to gain as much control as possible by managing risk and trading a detailed trading plan but at the same time, he or she knows that nothing in the markets is certain and that all you can do is change the things you can and accept the things you cannot.

To find out more relevant investment & trading information, click here.