May 3: A Little Mistake That Stands Between You and Your Success in the Market

by Dave on May 3, 2006

If I gave you the perfect system with the perfect money management in place, the only thing that would stand between you and success in the Stock Market are your own thoughts and feelings. Why do I say this? Because traders often feel an increased sense of confidence when they have a way of being involved in a stock selection, either by finding the perfect indicator, or by finding the perfect entry point. They feel, quite mistakenly, that they are in control of the market.

In a fantastic book called Trade Your Way to Financial Freedom by Dr. Van Tharp, Dr. Tharp relates this misplaced sense of confidence to what`s known as the Lotto Bias. It`s the perfect illustration of the way this feeling of control works. Just look at a Lotto game.

When people play Lotto, they get to pick their own numbers, usually six or seven. If all of those numbers happen to be drawn, the player becomes an instant millionaire. People really like to play the Lotto, even logical people who understand the odds. Why? Because the prize is so big, and the risk is so small.

Dr. Tharp explains the Lotto Bias as being an illusion of control. Players get an illusion of control because they get to pick the numbers on their ticket. Choosing their own numbers makes the players feel that their odds of success are somehow improved. As a result, some people feel that if they pick the numbers of their birthday or from their anniversary, it improves their chances of winning. The truth of the matter is that any number a player chooses is as likely to win as any other number.

People can get a similar false sense of control when trading on the Stock Market. This often happens when entry signals are used as the points at which the trader chooses to enter the market, when the market is doing exactly what they want it to. This can give them the sense that they have some sort of control not over the entry, but over the market. Unfortunately, once you`re in a position in the market, the market will do whatever it wants to do. The only component you have control over is your money management and your own psychology.

If, somehow, a trader did find a perfect indicator, the one that got them in at the exact bottom and got them out at the very top of the trend even if they did find that, it`s not when you buy the stock or when you sell the stock that determines how much money you make. It`s how much you actually put into the trade.

For example, let`s say that I had a system that gave me a buy signal for a particular stock, let`s call it `XYZ`, and I received a buy signal at one dollar. After following this trade, I got a second signal to exit the trade, and I exited at two dollars.

Now, if I bought at one dollar and then sold at two dollars, I`ve made one dollar or 100 percent profit, haven`t I? But, what determines how much money I actually made on this particular trade? How much money I put into the stock.

Now, of course, we`re just talking about the long side in this example. The same principals apply to losing stocks. If I entered into a losing trade, it`s not actually when I purchased the stock or when I sold the stock that determines how much money I lost. That is determined by how much money I put into the trade.

It sounds rather elementary, doesn`t it? But many traders spend their time focusing on entry rather than on money management. It relates back to our need to be in control. It`s as if we feel we have to have the ability to manipulate the data, somehow, in a way that gives us control over the market. Some traders believe that by finding the perfect entry they will control the market.

If you ask anybody who`s studied trading for a while, they`ll tell you that a practical mind-set is the most important component to a successful trader. You need to have the common sense to know you can`t control the market, and the discipline to be able to follow the system you have in place. These two traits ensure that you will be successful in the market. Once you have these qualities, create your system and construct good money management rules. They are the only things that you have control over when trading.

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This article has been extracted from David Jenyns` Trading Secrets Revealed Course. Unfortunately this course is currently sold out. To be notified if and when extra copies are released, please send us an email and we`ll let you know when you can purchase a copy of this highly recommended course. Click Here and send us an email. and be sure to mention you want to be on the `Trading Secrets Revealed Waiting List`.

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