Every trader goes through certain stages of development. Part of the first stage is to find a good trading system that fits the trader who also commits to fully following its rules. Learning and internalizing the rules of the system, the trader will need to build extensive experience trading the system. In this phase, the trader will become able to discriminate between the components of a good setup and be able to spot a high quality pattern (this typically takes about 1-3 months). The trader then enters into the second stage in which he starts to make money in the markets. However, the trading profits in this phase are usually inconsistent! At this point, the trader has entered the Boom and Bust Cycle of trader development.
This article will explain this phase and how to overcome this phase through three steps:
- establish a more adaptive approach to trading,
- develop a natural attitude of humility, and
- determine a good mental state for trading.
The Boom & Bust Cycle
This phase is characterized by wild swings (pronounced ups and downs) in the equity curve. Days of multiple R winners are followed by days during which the trader gives away the prior profits — and sometimes more than that. From a psychological perspective, this is the most challenging stage of all. Traders experience a mix of diverse emotions ranging from euphoria to frustration, anger and fear. As traders’ buttons get pushed, psychological issues surface: beliefs, conditioning, automatic reactions, strengths, weaknesses and many more.
The emotional swings and the equity curve volatility undermine confidence and can make for a rough time. It is very easy to get sucked into a period of multiple trade opportunities and become euphoric. It also occurs that traders try to squeeze trade opportunities out of the market when there are just none. Most traders go through this phase for some weeks or a few months while some get stuck here, even for several years.
In this stage, the trader tries to force limited views and specific trading strategies onto the market. As a newer trader’s thinking process tends to be rigid, trading performance is very volatile. The trader can make good money, but has not yet learned to keep the gains or add consistently to profits. The trader is not yet playing the Trading Game according to his personal rules. The markets push the trader around which creates confusion, stress and loss of confidence. The trader has not yet become the “Captain” of his or her own trading.
Imagine a cruise ship captain who receives differing weather forecasts on the command bridge. Without sufficient experience, he might become stressed and react in strange ways: losing confidence about what to do and in consequence, giving orders on one forecast, then new orders on another forecast. Reacting like a bio-robot, he acts out his inner conditioning and beliefs. Even worse, asking for the expert opinions of nearby ships will only add to his insecurity and confusion. Would you put your trust in such hands for your vacation? Would you be able to relax and sleep in the deep waters on this ship?
In similar circumstances, novice traders can find they are playing other peoples’ games in the markets – price traps, ambushes and breakout failures. Clearly, this situation leads to poor results. Good trading requires more balance and stability which involves more than just preparation. Even after building some experience, traders need to develop a strong “Awareness of the Market.” Once you become aware of what is going on around you, then you can develop a better plan and improve confidence.
A More Adaptive Approach to Trading Through Awareness
Visual trading patterns have the tendency to come in swarms — like giant squids. Once they appear, you can find them in many symbols and even in different timeframes. These are the best times for high quality patterns to develop. As with many natural phenomenons, markets move in cycles. Market cycles typically last from a couple of days to a few weeks. Sometimes the market provides easy profits and at other times even good quality patterns result in disappointing trading results. It is important to know and be aware of the cycle the market currently is in — strong vs. weak market.
Listen to the market feedback you receive as a trader and act accordingly! There are times to be aggressive, i.e. to “put the pedal to the metal”. There are other times when you should take a much more careful approach to trading.
As a general rule, when the market is weak and not “respecting” the patterns you trade, then take a step back. Slow down and do not force the next trade. As the market is not performing well, only trade the highest quality setups. These trades will provide excellent potential for a strong follow-through that is counter-balancing a weak market situation. Avoid trading low quality setups in a weak market. Once the market becomes “strong” again, meaning that it produces good results even for average quality patterns, then the time has come to “put the pedal to the metal” again. Reap profits by trading every pattern that comes up as long as they are available.
Humility as a Natural Attitude to Trading
Another important ingredient to pass through the Boom & Bust phase is “Humility.” In the real world outside of trading, trying harder often leads to success. Trying harder in trading, however, has some very detrimental effects and leads to revenge trading — a recipe for failure.
The best traders have a natural attitude of humility towards the markets. They show an attitude of being students of the market. As such, you can see that the market is always right. The market provides trading patterns, trading profits, and normal trading losses (losing trades as part of any system). When the market does not provide positive results, then the natural behavior of a trader should actually be to calm down & relax (practice of humility)! This approach allows traders to keep control of their ability to spot high-quality setups and maintain the awareness of the strength towards these patterns in the market.
Once a trader completely lets go of the “wanting to control,” then trading will become much easier. Going with the flow while following the path of least resistance, as well as, perceiving the market as your friend (and no longer your enemy) are clear signs of a good, natural attitude to trading.
A Good Mental State for Trading
A trader who has moved beyond the Boom and Bust Cycle has established a mental state that is independent of trading results. This trader focuses on the flawless execution of good trading setups in favorable market situations.
If you can enter the trade without a single doubt while not caring about a 1R loss outcome at the same time, then you are in a proper mental trading state. Even if the trade had an immediate stop-out, would you still feel good about the trade? A very good mental trading state is calmness and confident in-difference (like a cat sitting in front of a mouse-hole). Wanting to try out a new trading idea out of curiosity and see if it develops into a winner is usually not a good plan.
The best trades are those that the trader “feels passionate about.” While analyzing a trade, think about its main edge(s). Is there something that really stands out about the trade which you feel passionate about? What is the strength, soundness and beauty of the trade? Here, I am not referring to any thoughts about how rich the trade might make you. Passion comes from a relaxed state of consciousness — from a stillness within.
Where Are You?
If you are a brand new trader, be ready for your own Boom and Bust Cycle which will come after you gain some experience. If you are in this phase right now, then be patient and follow the advice above. If you have moved past this phase, then congratulations for sticking through it.
Wonderful article! Thanks Gabriel.