Common sense can be a rare and peculiar beast in today’s digital age.
I’m sure you’ve seen those stories of people driving into canals and lakes because the sat-nav in their car told them to ‘turn right!’
Well, it can be a similar case when less responsible traders go after the huge opportunities the markets present.
One example is the trader who becomes blind-sided to the bigger picture developing in the market by only focusing on very small timeframes…
His automated system tells him to buy on a signal from the 5 minute chart.
But it didn’t take into account the huge level of resistance looming overhead on the daily chart which is, of course, a much more powerful feature in the market.
He then sits scratching his head (or blames the ‘broken system’) when his trade takes an immediate nose-dive.
Horrible, grinding noises
Another example is the trader who expects a strategy to continue working year after year without adjustment for changes in market conditions.
He wouldn’t expect his car to run for years on end without taking it in to be serviced, would he?
Even a kid’s bike will need the tires replacing or brake cables adjusting at some point.
So is it reasonable to expect a trading strategy to run without a bit of ‘service and maintenance’ along the way?
I’ll bet many trading systems (the ones that had a positive edge in the first place, anyway) now tossed aside as junk could easily be resurrected with a bit of fine-tuning to match current market conditions.
I mean, look at the very low levels of market volatility we sometimes see in the summer months…
The responsible trader would take notice and be prepared to adapt accordingly. He’d perhaps rein-in his profit targets a bit.
Just the same as he’d sit up, take notice, and get his car’s gearbox looked at if it started to make horrible grinding noises.
But let’s leave the narrow minded traders to do their thing and focus on our own wellbeing.
Let’s see how we can take five old-fashioned ‘common-sense’ qualities to check we’ve got a well-rounded trader’s outlook in place.
5 Qualities of Common Sense Trading
1) Truth: Does your strategy or trading approach have a logical basis? Does it take into account the ‘truth’ of real-time trading?
I’m a big believer in Price-Action trading (trading without indicators) because it lays the market completely bare.
You’re letting the market reveal to you what it is thinking.
But make sure you’re not trying to force your own will on the market by expecting a fixed amount of profit every day, or a set amount of trades per week…
Let the market show you when you should trade and when you should rake-in your profits.
2) Trust: Do you have complete trust in your trading system? Are you willing to accept a random distribution of winning and losing trades knowing you’ll make money over the long term?
Can you pull the trigger on your trades without hesitation? Having trust in your system, and your abilities to trade it, are the essential building blocks of trading with discipline.
3) Discretion: ‘The freedom to decide what should be done in a particular situation’. Do you have a ‘safety-catch’ built into your strategy; do you know exactly when you shouldn’t trade?
Perhaps you should avoid trading when an economic report is due out or extreme volatility hits the market and you don’t know the reason why (it could be some geo-political event yet to hit the news – bombings, political assassinations etc…) Make sure you know when to stand aside and let the dust settle.
4) Responsibility: You simply must be willing to take responsibility for your actions as a trader.
And there’s no shame in making mistakes, it’s the ability to learn from them that can give you your biggest breakthroughs.
We’ve all placed trades the wrong way around – buying instead of selling – or entered a typo on the price and missed a good trade, or any of a hundred other ways you can trip yourself up.
Keep a daily journal of your trading adventures and read back through in from time to time. You’ll be surprised at how far and how quickly you make progress without even noticing.
5) Reason: You must be able to think things through, and ‘reason’ with yourself over your decisions.
If you’re at the start of your trading journey you will need to build-up your working knowledge of the markets.
The best way to do that? Do a bit of background reading, get a proven strategy to follow, and then jump straight in and get some experience!
You’ll soon begin to understand what’s going on when you look at a chart. And you can then arrive at your trading decisions in a logical way.
In short: in a world slowly going tech-drunk be sure to keep your feet on the ground and use a bit of common sense!
Especially when it comes to trading. It’s how you’ll rise above the rest.
Until next time…