Patience is the Key to Profitable Trading Systems
Let Your Trading System Work
You may have purchased or personally developed a day trading system or a longer term investment strategy
for trading stocks, commodities, or foreign currencies which is astoundingly profitable in paper trading
when using historical data. You can then take that system and paper trade it in real-time and see that
it is still profitable (just don't cheat in your paper trading -- cheating at solitaire doesn't cost a dime,
but if you risk real money in the real market based on fudged paper trading results, you are destined for
disaster). However, you will find that it is not easy to successfully implement even the best trading
system when you commit real money to it until you successfully control all of your internal demons which
work against your own success.
While the primary forces underlying market behavior are fear and greed, the primary cause of
unprofitable trading is IMPATIENCE. The only way to successfully trade using any daytrading or investment
system is to have the patience to unflinchingly trade according to the system's trading rules.
A profitable day trading system or a longer term strategy requires three
basic elements and three fundamental characteristics. The basic elements are a strategy for entering
positions, a strategy for protecting positions from unacceptably large losses, and a strategy for
exiting positions with a profit. The fundamental characteristics of a profitable trading system are
that winning trades are on average larger than losing trades, that the number of winning trades is
larger than the number of losing trades, and that the frequency of trading signals is high enough to
keep the attention of the trader focused on trading. (Of course, there can be successful variations
on these fundamentals: for example, a system that produces 95% winners could have the average win much
smaller than the average loss and still be profitable).
Once a profitable trading system is created, the trader's inability to follow the rules of the system
is the primary cause of unprofitable trading, and IMPATIENCE is one of the driving forces behind a
trader's inability to follow the rules. Impatience will manifest itself in all of the following ways:
-- A trader will follow a new trading system to the letter and begin to get good results, but will
see ways that each individual trade could have had a better outcome by bending the system rules just
a little. So, instead of being satisfied with X amount of income from the system, the trader will
decide to try to achieve 2X income by changing the system rules on the fly, which always results in
errors in judgment caused by fear and greed (which the system was designed to eliminate by its
carefully formulated rules).
-- A trader will see an entry signal forming (almost, but not quite -- it needs Y action to manifest
on the next bar before the signal becomes valid) and decide to enter a position on the supposition
that the signal will trigger soon, anyway. Of course, the system was designed with black and white
entry triggers, and violating these entry rules results in the arrival of bad behavior ruled by fear
and greed.
-- A trader will wait for hours (or days or weeks, depending upon the system's time frame) for a
proper signal to form and become frustrated by the lack of action on a slack day (or week or month . . .)
and begin to talk himself into believing that a given scenario represents a valid signal, even though all
the proper elements are not quite there, and enter positions that are doomed to failure because the
market is just not in the correct mode for the system during that time.
-- A trader will hold a winning position too long because he expects one trade to make up for the
previous losing trade (or trades) in one swift move that is outside the parameters of profitability
expected by the system.
-- A trader will take a profit too soon because the market is taking longer to reach the system's
profit objective than the trader is comfortable with.
-- A trader will take a position much larger than the system's risk parameters allow for because he
wants to make a big profit quickly (often to try to make up for serious previous losses caused by
violating other system rules), but then when the market goes against him he will panic and exit with a
loss before the system loss point is hit because the pain of holding the over-sized position is too
great to bear. Then, the trader will scream in frustration as he watches the market turn around and move back
to profitability soon after he takes her premature loss.
These are a few of the dangers posed by impatience if a trader cannot keep it under control.
Meditation, frequent breaks from the market, a clearly defined trading system and a clear set of
profitability goals can all help to keep the trader relaxed and trading within the rules, resulting in
profits instead of losses. Whether using day trading systems or longer term strategies, patience is
necessary for profitable trading results.
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