Mechanical Trading Systems: Pairing Trader Psychology with Technical Analysis

KNOWING OURSELVES

Trading offers us a tremendous opportunity to learn about ourselves. This is why I strongly encourage traders to keep a journal. It serves as an objective record of our emotions and prejudices regarding market behavior. Once we can make an accurate assessment of these biases and emotional pitfalls, we can work on changing our intellectual attitudes and emotional responses to the market.

For many, trading is an endless cycle of manias and depressions. Because the market is an ever-changing objective truth, emotions such as euphoria after gains or despair following losses merely drain us of our ability to perform effectively in the future. Instead, utilization of mechanical trading systems trains us to practice even-mindedness and nonattachment to the results of our actions. Eventually, consistent adherence to the entry and exit signals generated by our trading models frees us from the emotional roller-coaster of undisciplined trading and replaces it with feelings of satisfaction after achieving a profit and (assuming we correctly executed our system) acceptance and emotional resiliency following a loss.

One concept that I personally find useful in assisting me to remain even-minded following a loss is to remember that I am in the market for the long haul and that the result of a single trade is virtually inconsequential when compared with the next 300 trades. Instead of profit or loss on a particular trade, success as a systems trader should be measured by how ...