Become a Better Trader: Know Thyself

Editor’s Note:

It may not seem like it at first glance but the stock market is one place where profitability is tied directly to your performance. If you do your analysis correctly and don’t get scared out at the first blip in the market you can develop winning strategies. But the converse is also true. Trading the market will also bring out your biggest weaknesses. The key to increased profitability is to get to know your weaknesses and learn to control them. In this article, veteran trader Jeffrey Kennedy shows you how to “know thyself”.  Tim McMahon~editor

How to Become a Better Trader: Know Thyself

EWJ Editor Jeffrey Kennedy offers wisdom to guide your search for trading success.

By Elliott Wave International

Jeffrey Kennedy has more than 20 years of experience as an Elliottician and trader. As editor of our new Elliott Wave Junctures service, he helps traders and investors improve their trading skills — which includes expanding their own self-knowledge.

“If you are serious about trading, I strongly recommend that you spend as much time examining your emotions while you are in a trade as you do your charts before you place one.”

“Success in trading comes from the consistent application of a proven methodology. If you don’t define your methodology, then your trading style could change with each new issue of Stocks and Commodities magazine. Trying a variety of analytical techniques rather than consistently following one is a problem for traders, and it’s also a great way to lose your trading account.”

Jeff trades with the trend, and specifically likes to “buy pullbacks in uptrends and sell bounces in downtrends.” He prefers a three to five day time frame. And he keeps his emotions in check, avoiding what he calls the “Lottery Syndrome,” the too-common bad habit among traders who let small profits slip away by pursuing the statistically elusive jackpot.

Can you define your own trading style as easily, or do you continue to struggle with major pitfalls from Jeff’s list below?

3 Key Weaknesses in a Trader

1. Inability to Admit Failure Have you ever held on to a losing position, because you ‘felt’ that the market was going to come back in your favor? This behavior is the ‘Inability to Admit Failure.’ No one likes being wrong, and for traders, being wrong usually costs money. What I find interesting is that many of us would rather lose money than admit failure. I now know that being wrong is much less expensive than being hopeful.”

2. Fear of Missing the Party This one is responsible for more losing trades than any other. Besides encouraging overtrading, this pitfall also causes you to get in too early. How many of us have gone short after a five-wave rally just to watch wave five extend?
The solution is to use a time filter, which is a fancy way of saying, wait a few bars before you start to dance. If a trade is worth taking, waiting for prices to confirm your analysis will not affect your profit that much. I would much rather miss an opportunity than suffer a loss, because there will always be another opportunity.”

3. Systems Junkie My own biggest, baddest emotional monster was being the ‘Systems Junkie.’ Early in my career, I believed that I could make my millions if I had just the right system. I bought every newsletter, book and tape series that I could find. None of them worked.
I even went as far as becoming a professional analyst – guaranteed success, or so I thought. Well, it didn’t guarantee anything really. Analysis and trading are two separate skills; one is a skill of observation, the other is a skill of emotional control. Being an expert auto mechanic does not mean you can drive like an expert, much less win the Daytona 500.

Jeffrey Kennedy shares his 20 years of wisdom in analysis and trading — to help you decide when to act — in a new FREE report, 6 Lessons to Help You Find Trading Opportunities in Any Market.

This report includes 6 different lessons that you can apply to your charts immediately. Learn how to spot and act on trading opportunities in the markets you follow.

Get Your Free Trading Lessons Now >>

This article was syndicated by Elliott Wave International and was originally published under the headline How to Become a Better Trader: Know Thyself. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.