What is the single biggest reason why most traders end up losing money in the market? It’s simple: They do too much – they think too much, they look at charts too much, they trade too much, they risk too much and on and on.
The most successful traders and investors of our time spend 99% of their time waiting for opportunities and studying the markets, rather than trading them. Approximately 1% of their trading effort is spent executing trades and managing positions. In other words, most of the time they are doing NOTHING. Can you say the same? Or, are you spending 99% of your time entering and managing trades and only 1% of your time waiting patiently?
If you have ever read my articles on What Crocodiles Can Teach us about Trading or The Sniper Trading Approach, it’s obvious that my trading style is a low-frequency, high-conviction approach. So, why should you adopt a similar approach with your trading? Read on to find out…
The ‘hunt’ involves A LOT of waiting.
Just as a Crocodile spends most of its time stalking its prey, a profitable trader spends most of his or her time stalking good trades. You want to trade like a predator, not the prey in the market, what I mean by that is, you want to be the trader who is waiting patiently in the ‘bushes’ for the ‘easy kills’. You do not want to be the masses of prey (amateur traders) who get ‘eaten’ by the professional traders every week.
How do you accomplish being the predator and not the prey? It’s simple really, waiting, waiting and more waiting.
I like to say I am in “hurry up and wait” mode for the right market conditions to present themselves. What this means is, I am actually excited to wait, because I know waiting means I am exercising self-control and being patient and disciplined, and I know this is how you make money in the markets. I have no problem waiting for the right setup to form with the perfect market confluence, sometimes for weeks or even months.
The reason is simple, because I know for a fact that trading with high frequency is how you lose money in the market and trading with low frequency is how you become a profitable trader. Every trader eventually learns this fact given enough time and experience in the market.
Warren Buffet is a master of doing ‘nothing’
My favorite concept and metaphor for teaching people how I trade is that of a sniper. The sniper trading approach as defined in my article on this topic, is basically that I wait patiently like a sniper for my predefined trade criteria to align, rather than trading or ‘shooting’ at everything like a machine-gunner.
Perhaps not surprisingly, this is also how the ‘greatest investor ever’ manages himself and his activity in the market. I’m talking about none other than the great Warren Buffet, of course. Think about how he manages billions of dollars – it isn’t by entering the market every day, that is for sure! All you need to do is read a book about him or watch the recent documentary on him, “Becoming Warren Buffet”, and you will see he is an extremely patient and precise investor.
Not only is Buffet patient and precise about the transactions he makes in the market, when he is ready he dives in, boots and all. Sometimes, he even buys the entire company! You would call Mr. Buffet a low-frequency and high-conviction investor. As traders, we can learn a great deal from Mr. Buffet. Whilst we are doing something a little different than long-term investing or ‘buy and hold’, we should indeed model our swing trading approach after Mr. Buffet.
Here is a good quote from commodity trading extraordinaire, Mr. Jim Rogers from The Market Wizards
I just wait until there is money lying in the corner, and all I have to do is go over there and pick it up. I do nothing in the meantime. Even people who lose money in the market say, “I just lost my money, now I have to do something to make it back.” No, you don’t. You should sit there until you find something.
You see? The point here is that most of the time, profitable investors and traders are doing ‘nothing’ and by nothing, I mean they are not entering trades or managing trades. They may indeed be studying or analyzing the market in the meantime, but this would count as ‘stalking’ their prey.
Change how you think about doing ‘nothing’
It is innate for us humans to want a ‘quick thrill’ in all that we do. Constantly checking social media on our phones has been proven to increase the amount of dopamine (the feel-good chemical) in our brain, for example. We are a society addicted to doing what feels good more often than doing what IS good. We are born with a gamblers or speculators brain, seeking instant rewards and thrills in life and with money.
When it comes to trading, the ramifications for such behavior can be severe.
It can lead to treating your trading account as if it is a slot machine. Many traders end up entering trades, one after another, as if they are pulling the arm of a slot machine over and over in a casino. Of course, the difference is, we typically expect to lose at a casino, so most of us don’t take money that we need. In trading, many people believe they will be profitable because of some ‘innate ability’ they have and so they often risk more than they should or trade with money they really can’t afford to lose. Of course, once they start trading and get the dopamine fix, it becomes an addiction that leads to blowing out their trading accounts.
How do you change this poisonous trading mentality?
One of the best rules anybody can learn about investing is to do nothing, absolutely nothing, unless there is something to do. Most people – not that I’m better than most people – always have to be playing; they always have to be doing something. They make a big play and say, “Boy, am I smart, I just tripled my money.” Then they rush out and have to do something else with that money. They can’t just sit there and wait for something new to develop. – Jim Rogers
The way that we circumnavigate our own flawed trading mindsets, is to simply understand, accept and then embrace the idea of doing nothing. Embrace what you consider ‘boring’ and mediate on it. Eventually, after a few big trading wins that resulted from you waiting patiently for highly confluent trades, you will start to re-align your thought processes and the dopamine rush you used to get from entering trades and messing around with them while they were live, will shift to the periods of time you are waiting and stalking the market. When you feel like you’re not doing enough, you’re in the right zone, you must master being able to do nothing and you can do this by finding something else to replace that ‘void’.
Once you realize that being patient and studying the market or simply not even looking at the market at all, will make you more money in the long-run than the opposite, your brain chemistry will begin to ‘flip’, and soon you’ll be looking forward to the ‘hunt’, even if it means waiting two weeks between trades.
The Market is slower than we imagine, and trades can take a long time to play out. Take the chart below for example: It shows that patience is needed to grab the big moves, and we must ignore the short-term ‘shake outs’ that cause most traders to over-think and exit prematurely…
The price action setups that I trade don’t appear extremely often, and when we apply my TLS filtering rule and wait for that confluence, the trading opportunities are reduced even more. My trading courses can share my trading strategy but they can’t force you to be patient and wait it out for the right opportunity to arrive. It’s one thing to be confident in spotting trades, but are you confident in your ability to not over-trade even in the face of constant temptation by the charts? If you know this is your weakness (and I assume it is for most reading this), spend MORE time getting that aspect of your trading right, and I guarantee you that your account balance will thank you.
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