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plan. He starts loosening up on stops, and avoiding plans, possibly even ignoring his vrork on the market because now he is certain that he is right. The losses start to catch up with this trader, and possibly at one time or another, he gives baok all of the money he had made previously. Now, he starts over again, with a greater respect for the market. He goes back and assumes the original plan and the cycle is oompleted.
Of all of the valid times to trade that I will give you in this book, and those that you know or will learn for yourself over time, should there come a time when you that you are not using them, but are trading just to trade, watch out. The market will have ycur money. When tradln<g seems suddenly to be so easy, where before it seemed so hard, take a good look. It is not easy, and you must do the work. Maintaining the plan, and having the patience to wait for the setup to trade from is essential to making money in the market.
From our earliest days we are taught that to be wrong, wrong in school, wrong our judgement of any situation, is undesirable-bad. The idea that being wrong is bad, which most people oarry with them forever, must not stop you from admitting that you are wrong in trading. Being wrong in trading means taking a lose, admitting defeat. We are taught in our youth that to be wrong is not aoceptable, but in the trading business, we are going to be wrong. Plan for it. Take the loes when you are wrong and make it unemotional. When you can take a loss and it is unemotional, then you have reached the stage where you oan trade sucoessfully.
One more problem that is oaused by the psychology of the individual, is having a bullish or bearish bias. I have analyzed my own trading record for this and discovered that I have a three to one tendency towards short trades. You may have a similar tendenoy, or one towards long positions, but it is important that you realize your own tendency. In a bull market, my bearishness works against me, while in a bear market, it works for me. This is just one more reaeon that I have found to trade from evidence and a plan rather than feelings about the market or stock.
The psyohology of trading is an exceptionally important part of the business, and is something that you should always be aware of. Hope, fear, a nd greed, a re ma j or facto rs, and must be conquered. Expectations are part of hope, and I would like to say something about expectations.
If I told you that this was a book on hew to play golf, and that after reading this book, you could expect to go out on the pro tour and make a living, what would you think? You would know that you would have to put in a lot of practice, you would have to play tournaments, and, if you heve ever played golf for money, you know that you oan choke on a two foot put. It is a game of mastering performance under pressure. It is psychology, as well as, knowledge, skill and practice. The same is true of trading.
In this book I am going to present you with tools, with setups or situations that are tradable. If you follow the method, taking only trades which are based on the setups, and use a good trading
plan you may well achieve eighty percent accuracy in your trading. You will see these situations or set-ups over and over again in the market, and if you are patient, you will make good trades from them. Part of what we will do in this book is to look at these situations on numerous stocks. You will see the reactions are predictable, which will give you the confidence to trade.
DISCIPLINE AND PROTECTIVE STOPS
In his last book, "45 Years on Wall Street", which Gann wrote in 1949, at the age of 72. He emphasized the same points of trading and peychology as in his first, but he placed added emphasis upon what he obviously felt were the most important ideas. He said first; and most important, was to place a stop loss order at the same time as you place a trade, and to never cancel it. If you experienced a conversation with your broker concerning whether or not to take that email loss you know that this is a difficult decision to make during that time, so you must make that decision beforehand. Gann also emphaeized that over-trading, or trying to position in too many trades was a problem that he dealt with pereonally.
You must look at trading the market as if it is a business, Howaver, you muet be sware that this businese is different than any other business. Trading is a bueinees in which losses are inevitable, and there is nothing wrong with taking a lose. Other businesses, in which you can oontrol events to some extent lead to situations where losees indicate failure. Trading, makes losses part of the business because you oannot control events in the market. There is nothing wrong with them, and taking a small loss in an unemotional way actually is a sucoess in this business, although, it is not the type of success you want to have often.
In a normal situation, you wouldnt go into a business saying, "Im going to take some losses in this business." If you did this, you would probably not enter the business to begin with. This type of thought is just not in your mind. But when you go into the business of trading, you have to acoept that losses are part of the business, and you have to learn to live with that. Not learning to live with losses, and not examining why they occur, will oause the failure of your businees of trading.
Being able to graoefully admit that you have a loss and allow the protective stop (which is part of your original trading plan) to take you out of that position is an important part of successful trading. Dont punish yourself for this type of trade, just take the loss, and remember that staying with the losing position is another form of punishment. When you have a loss, go back and analyze it. Ask yourself, " What mistake did I make, why did I take this loss?" Understand it as best you can. It may be an error in judgement of information, or it may well be because of an outside influence of situation. Onoe you are reasonably certain of
why the loss occurred, you can put it aside, and hopefully avoid a similar loss in the future. Approach it logically, not emotionally.
When you are about to put on a trade search your mind and see what thoughts are dominate, see if its fear of a loss (living in the past) or very high expectations of profits (living in the future). Remember, the only thought that should be in your mind is now, the present. Fear from the past or expectations about the future and not real. Only this position and the present are real.
Alwaya remember that eighty percent of this business is psychological. It is an art of mastering your self. The psyohology is more important that anything else I will present in this book. You must learn how to master your self, conquer or control all of the problems that you are going to face. Ive been aware of those problems that you are going to face. Ive been aware of those broblems for ten years, and Im still trying to conquer them. Its a lifetime endeavor. You have to understand what is inside of you and cope with that all the time.
Two types of oapital are involved in trading, money capital, and psychological capital. If you loose your psychological capital you are bound to loose your monetary capital. Learn to recognize the effects of fatigue. You must be in good health and have few outside pressures. If you get a letter from the IRS that says, "Were going to audit you next week," dont trade the market.
Trading is decision making. Decieion making is stressful, and you must plan to avoid other stresses. If you dont make clear headed decisions, the market will take your money away. Just as you use a etop loss In the market to protect your oapital, uee a etop lose to protect your psychological oapital. When you feel that you are tired, or stressed, searching for trades that are not there, step back from the eituation for awhile.
Finally, Gann emphaeized that knowledge, in and of itself, is very important and that you can never have too much of it.
PARTIAL POSITIONING
This section on partial positioning could have been included into almost any chapter in this book. I included it in thie chapter dealing with psychology because of the initial reason I decided to trade with partial poeitions. It was for personal, psychological reasons- an attempt to overcome an inability to etay with positions for more of the trend and thus much larger profite. This is always a continual problem as you must learn to take a profit while it is still there. Every hit is not going to be a home run. Always start with a full poeition. For purposes of illuetration, wall use 10 contracts as our position and a half hour chart as the primary focus of our analysis. If I were trading the S & P contract and went long, the first thrust in my direction, I would sell 1/4 to 1/3 of this position. Ive found the mimimum