Fear and greed are the two basic emotions that drive the markets. Fear causes the markets to fall whereas greed pushes the markets up. The very fact that 90% of traders consistently lose money in the markets points to the fact that markets are driven primarily by emotions.
What causes these emotions and the pain of losses thereafter?
- A faulty trading system, non-adherence to a good trading system, or the absence of a trading system completely.
- A faulty trading system prevents one from entering the trade at the most opportune time. A late entry causes one to miss out on a sizeable amount of profit.
- Not adhering to a trading system compels one to continue staying in a trade way past its time thereby giving back to the market a sizeable amount of profit which could have been locked otherwise.
- Not having a trading system is like gambling with a no-limit account.
Thus, it is extremely important to formulate a trading strategy and see it through to the very end of the trade, irrespective of the outcome. Once the trading system is tried and tested and found to fulfil all the required criteria, it should be strictly adhered to.
A good trading system is one that allows early entry and the latest possible exit. Besides this, it also has a strict point of exit with a minimum loss should the trade not go in the desired direction (stop loss). A good system allows one to lock profits at regular intervals without getting stopped out. It also allows room for re-entering the trade should one get stopped out.
Trading systematically results in minimizing losses and maximizing profits and a good trader is one who always puts the potential loss before the potential gain.
By thus trading correctly with a good system, one can overcome both greed and fear and becomes a part of that 10 % who earn consistent profits from the markets.