I’ve been writing quite a bit lately about our economy and how I think about trading.  I have also received quite a few emails requesting more charts and charting information.  Of course, I will post more charts and show both my winning and losing trades, as usual.

But the volume of mail bears out something that I think is important.  Early in my trading career I always thought about becoming an expert in chart reading.  I believed that if I could master charts, or unlock the hidden code of the market, I would become a great trader.   Back then, computers were a luxury, and not very helpful, and we used support, resistance, and pivots, along with volume numbers to time our trades.  We weren’t nearly as sophisticated in our trading as the average trader is now, but we learned to be profitable.

My trading mentor used to get quite a chuckle with my preoccupation with charts.  He would tell me that trading is 30% technical knowledge and 70% psychology, and great traders were able to sift through the information and take only quality trades because of the way they view trading.   I never gave his comments much weight on this subject until years later when I realized that the most important component in trading is my view of the market.

But how do you filter out all of those components of thinking that doom your trading success? Greed, anxiety, anticipation, overtrading, and a host of other psychological factors are the stuff of failure, not chart reading.  Really, it’s how you think that will determine your success.  For example, there is an area of trading devoted to mathematical analysis and prediction of the market generally referred to as “quant” trading.  I have a buddy who is a quant.  He has periods were he is quite profitable, and periods where his computer and mathematics betray him and loses great sums.  He is devoted to his math, his charts.  An examination of most quant traders will reveal they have a difficult time matching the index return over any five year period.

Hmmm….

I don’t ever get really hot with my trading, or go on prolonged winning streaks.  I am very consistent with my trading style and churn out impressive results consistently.  I don’t ever get into prolonged losing streaks either.  Pretty boring, I guess.

Why?

It’s how I think.  I have a view of the market and have worked hard to maintain than view, integrate it into my trading and not let outside influences or bad thinking effect my trading. (I should note that I do have the occasional slip up, or lapses in consistent thinking, I am not a computer)

The point is a simple one: Trading is a reflection on how you think, and THE MOST IMPORTANT COMPONENT OF YOUR TRADING IS YOUR THINKING.  I would also point out that it is the most difficult skill to master, and I have in no way “mastered” my own trading psychology.  Learning to trade is like being on a never ending path of learning, and only until I realized and understood the detrimental effects of my thinking on my trading did I get very consistent in my trading results.

This is a difficult post to write because emotions are impossible to quantify, and I like to quantify things…it’s my nature.  It took me years to realize what my mentor was trying to tell me when he said, trading is 30% skill and 70% “how you think.”  I’ve gotten better over the years in my trading thinking.  I still have a way to go…

There is no secret code to trading profitably, and it’s true that most traders “bust” their accounts within three months.  But some don’t, and I suspect they are the ones who innately think properly about the market, and they get better as time goes by.  For some of us, it takes years.  I understand that trading psychology is like stepping into a mud pile, not very fun…but I am convinced that the key to profits is between my ears, reading the chart is simply a variable in the trading process, along with processing the information I see on the chart in a consistent and disciplined manner.

A few posts back I listed some great trading psychology books.   Books can effect your thinking but you will have to shape your trading to your own personality.  Go to the library and see if one of those volumes isn’t there, trading psychology is too important to ignore.

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