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How To Trade The Markets Not The Money?

As traders, we often hear this famous saying “Cut your losses short and let your profits run”. 

What sounds so simple, however, is often very difficult for novice traders to take advantage of, and deeply understand.

Many new traders tend to fail because of their tendency to trade the money, not the market.

They are not aware of their tendency to superimpose artificial monetary profit targets onto the market, irrespective of conditions, exiting profitable trades because of monetary targets and placing stops too close to entry price because of fear of loss, irrespective of market volatility. 

Table of Contents

Why do traders cut unrealized profits short instead of letting them run?

Fear of leaving money on the table, or worse, fear of allowing a significant unrealized profit to turn into a significant realized loss.

Fear of leaving money on the table is quite debilitating to the psyche of traders because you had the opportunity to capture larger profit levels and failed to capitalize on it. 

 Many times as the market falls from its highs, traders will place their exit orders at these old highs. At this point, one of two things can happen: 

  • First, the market can plough through those previous highs, enabling the trader to minimize his regret by selling the highs but right after creating regrets for a premature exit. 
  • The other possibility is that the market fails to retest its old highs and the rigid focus on exiting at the old high prevents the trader from protecting significant unrealized profits by moving stops to logical technical support levels. It is this second scenario, in which our focus on exiting at a specific profit level blinds us to the risk of reversals that can result in allowing significant unrealized profits to turn into significant realized losses. 

In either case, we are focusing on the asset’s price, irrespective of the value.

Now, imagine what your equity curve would look like if you were able to let your profits run “enough”… Let’s fix this together. 

Forget about price. Think about the value.

You have to realize from the outset that we will almost never sell the exact highs or buy the exact lows and instead of focusing on the elusive perfect entry or exit price, shift your focus onto trading based on the market’s dynamics (as defined by support, resistance, the cycle of strength, and volatility).

Let’s study this:

Price is what your pay. Value is what you get
Warren Buffet's Quote on Value

In the short term, price and value are not always one and the same. 

Let’s assume, for example, that the approximated intrinsic worth of a security is $10.

Theoretically, the price should fluctuate between, $5 and $20, once a complete market cycle is over.

(For example, we assume that the price will be falling 50% below intrinsic worth in percentage terms and rising 100% above). 

At the same time, the intrinsic value remains comparatively constant. When we refer to intrinsic value, we think about “Absolute Value”: the one that aims to find out how much the company is truly worth by considering its intrinsic features.

With price fluctuation, the asset quality remains the same. 

The only thing that changed is the amount of money you need to pay for it: value comes at a price.

And that works for bitcoin, as long as you can accept that bitcoin has an intrinsic value simply because it’s a store of value, or a currency, depending on your opinion. 

When the market is in an uptrend, you get the same value, but a higher price…

Is this a problem for a trader? Absolutely not.

As long as the market keeps giving you an indication that the uptrend is still active, there is no reason to not be a buyer for the simple reason that someone will pay a higher price than you.

If we look at bitcoin, we can’t ignore that value is also a matter of perception.

Perceived value is completely unrelated to absolute value.

For example, the value of art or a painting totally depends on how much you will perceive it in your mind.

It’s the same for bitcoin: price reflects perception.

Here, the price and value are different and most of the time unrelated to the price.

To make it simple : 

  • If you think bitcoin is a failure, you see no value in it, so you don’t pay the price to buy one. It will always be too expensive for you. 
  • If you think bitcoin is the most profound asset that humanity has experienced, because of the tech (yeah, we are all here for tech sir), it’s easy to accept the price for a bitcoin.

Anyways, this is true only for the short run.

Over a long period of time, the price will approach the value.

But now, you get the logic: it’s not value that moves price. It’s people that move prices, based on their perception of value. 

That’s why a trader should focus on buying on strength.

Price is just the distraction of the value: Price is only a vehicle to value. Nothing more.

There isn’t too high a price or too low a price.

How high or low bitcoin’s price is, is relative to where it was previously.

It’s not the determining factor in whether it will go higher still.

There is only a fair price and a wonderful price. 

You still don’t get it?

Okay, let me tell you the well-known story of Bob and Alice. 

On the one side, Bob bought a bitcoin for 1000 dollars. Alice reacts: “Wow, what a clever man”.

Yes, but Bob bought it in 2013 right before the all-time high.

And you will tell me that is in a strong position now.

But, that’s not how this game works.

Just as surely as the price can and does temporarily defy the gravitational tug of value, in the end, the hard laws of physics trump the soft science of crowd psychology. 

The farther prices rise above or fall below their fundamental value, the greater the store of potential energy to be released in the resulting disequilibrium.

That’s the reason why Bob exited at a fair price of 200 dollars because he couldn’t stand the 2014-2015 bear market anymore.

On the other side, Alice bought a bitcoin at 3500 in 2019. And now, she records a 100% return on her trade. 

Who is the smartest in your mind?

  • Is it Bob who paid the lower price? 
  • Is it Alice who paid the higher price?
Alice and Bob buy bitcoin
Alice and Bob buy bitcoin
Answering this question is exactly what your job as a trader looks like: Your only objective as a trader is to pay the fair price in order that someone else will pay your wonderful price to make you profits. 

Simply be Alice guys. Forget about Bob. 

Forget about the profits while you are in an open trade

Have you ever said to yourself within a trade :

  • wow, i don’t want to give back any of these massive gains”?
  • Have you ever dreamt about what you would buy with your open profits?

To be honest, it’s totally natural for speculators to translate unrealized profits into monetary terms since we all entered the business of trading to make money. Do remember that: 

  • What is psychologically natural and comfortable, leads the more often to failure. 
  • What is unnatural and uncomfortable leads to success. 

Every year, the market offers examples of large trends morphing into monster trends.

Yet year after year inexperienced traders continue to think about the money and settle for small gains despite huge profit opportunities.

Indeed, looking at their profits stirs up powerful feelings placing the trader at the mercy of the emotional storm. 

Please, do yourself a favor, starting now. 

As long as you are seated at the table, (in an open trade), don’t look at the money in your account.

It’s only once the war is over that we count the dead. Not before.

Does it sound logical to count the dead while the fight is still running?

No. The same logic applies to open trades. 

Stated more simply, thinking about the money is like poisoning yourself, it’s making you a slave of money. 

Free your mind of money’s involuntary thoughts. 

You need to understand that thinking about money interferes directly with decision making. 

Imagine the surgeon who operates on your child, and who, while the operation is still in progress, allows himself to think about what he will be able to do with his fees:

  • Do you honestly think that this simple thought makes his gestures more meticulous? 
  • Wouldn’t you think that this distraction of the mind could lead him to make mistakes? 

The answers are obvious, right.

That’s why you should only focus on managing your trade. Only.

Don’t allow yourself to be distracted by the money.

You have to be like a surgeon. Operate.

Be as meticulously as you can.

And don’t have any expectations.

As the surgeon can lose a patient although his gestures have been perfect, a trader can take a loss on a perfectly executed trade. 

If you fall for thinking about money and profits, it can be fixed by realizing that a gain is simply a gain.

There is no such thing as a huge gain or a small gain.

According to a successful trader, there is no money but only good trades or bad trades, judged on the quality of their execution.

The goal is to reach your personal best.

You can notice that it’s just a matter of perspective.

Spinning dancer: dans quel sens vois-tu la danseuse tourner? Quid si tu regardes la danseuse de gauche ? Quid si tu regardes celle de droite?
Spinning dancer: which way do you see the dancer spinning? What if you look at the dancer on the left? What if you look at the one on the right?

From a marketer’s perspective: The market does not know what a “huge” gain is and it does not care about your big losses or your big winners. 

From a trader’s perspective: A huge gain only exists in your own mind. A big gain for you can be a small one for me, and reciprocally. If you have big gains at hand, and the market is whispering to you it wants to go higher, you have absolutely no reason to close this trade. Allow yourself to think big by not being too conservative with profits and just listening to the tone of the market.

Rebrand your trading system with dynamic rules

Since the fear of leaving money on the table leads you to the premature exit of profitable positions, you could “rethink” your trading system to fit your bias.

Why not design exit rules based on the dynamics of market action instead of artificial monetary price targets? 

A good strategy could be to have a look at ADX. If you are not familiar with it, ADX is an indicator that identifies trend strength.

A rising ADX above the objective level of 25, indicates that the market is trending. 

From a trader’s perspective, managing risk and taking profits could be answered by this kind of logic:

  • As long as ADX rises and stays above 25, the trader should be patient and expect a large profit.
  • As soon as ADX (above 25) starts to decline, the trader should now look to lock in these big profits. 
  • And if ADX is under 25, the trader should only look for small profits.

The same logic can now help with your stop management.

If the fear of allowing a significant unrealized profit to turn into a significant realized loss forces you to exit profitable positions prematurely, you can simply incorporate a rule for moving stops to breakeven using dynamic ideas.

Psychologically, placing and managing a stoploss materializes your acceptance that anything is possible in the market.

At the exact moment you place a stoploss, you acknowledge that certain possible prices would result in your trading account blowing up. 

If you admit that any price is possible and that certain prices would result in the termination of our careers as traders, isn’t it illogical to simultaneously dismiss the possibility of prices that could catapult your trading careers to new levels of success? 

Of course, just as your account would blow up long before the market reached its ultimate high or low, by the same token, you will never capture the ultimate high or low when exiting on profitable positions.

You can make a heck of a lot of money by being less than perfect. 

But, simply, the logic explained right above based on ADX is also a good one for stop management:

– As long as ADX keeps rising, your stop loss should be large to let the market run, and avoid being caught in the noise.

– As soon as ADX starts to decline, you should tighten your stoploss.

Don’t force any trades for money

Alice is walking the streets on a sunny day, thinking of her bitcoin profits and how she’s going to spend them. Suddenly, she hears a couple talking loudly through a window :

I don’t mind your going out for an evening occasion with your friends to play poker, dear,” the wife said to her husband. “You work hard all day and need some recreation, but do you think we can afford to lose money just now?  Baby needs a new pair of shoes, and – ”

Oh, I can’t lose any money to speak of,” he interrupted. “It’s just a friendly little game for amusement, you know.  It’s limited to two dollars.”

Oh, if your loss is limited to two dollars during the evening it is not a serious matter. I thought, perhaps, you might lose more.

No, it’s a two-dollar-limit game,” he replied, looking fixedly at a picture on the wall, “just a little game for amusement, you know.

Actually, “Baby needs a new pair of shoes” originated in the casinos, not in a couple’s argument.

This expression is the mantra of dice-tossing craps players.

In Robert De Niro’s film, A Bronx Tale, a gambler yells, “Baby needs a new pair of shoes!” before rolling the dice. 

The truth is that trading is not gambling.

You can’t force or “press” a trade in order to buy yourself something, simply because you can’t make opportunities happen. 

Forcing a trade does not only come from gambling-trading.

It can take the form of trading too large, or too often.

It’s the syndrome of the obsessed trader that conceptualizes trading as a “get rich quick scheme”. 

You are not in control of this.

Only the market can give you opportunities and your job is to wait for them and act on them. 

You have to trade selectively, only when the odds are with you. 

Your job as a trader is not to anticipate what may happen but to identify what is happening in order to participate.

When we’re pressing to make money, the need to put on a trade violates our rules.

The frustration leads us to try to create opportunities rather than respond to those presented by markets.

Be responsible and let the market come to you and wait as long as it’s required for your opportunity. Patience is key.

Remember that you don’t have to trade often, you only have to trade well.

Quote by Steve Burns
Quote by Steve Burns

Monetary goal is a trap

Entering a trade with no other concern than reaching a monetary goal will lead your account to full blowing-up.

It could be like $50, $1000, 1btc, $10.000 or anything you want – what you are doing is superimposing an artificial goal upon market activity and dynamics. 

A successful trader is trading in the now, being in tune with the market, in an emotionally neutral condition that is neither happy nor sad, neither overconfident nor fearful.

His emotions are under control and he has no thinking about money.

First of all, the market does not know or care whether you need to make $100 or $1 million, and your thinking about the market in these artificial terms will blind you from the market dynamics and opportunities. 

It is probably even more common to trade the money after a loss or series of losses. 

We suddenly abandon market dynamics and probabilities in hopes of regaining the breakeven level in account equity.

This particular irrational attitude toward trading is especially dangerous to speculators because we now not only trade the money but also abandon the goal of winning in favor of trading not to lose. 

How to fix this force-trading attitude?

You should start installing rules in your logic – because it looks like you have none – and accept your greed.

Once you set up rules related to entering the market, exiting the market, position size, stoploss level, you will start to energize a new belief system that will slowly take over your old and obsolete belief system. 

Once your rules are installed, and they are repeated and followed over time, they are internalized and become mechanisms of self-control.

Just look at children.

When they are constantly told to respect their elders, their behavior when they come in contact with old people becomes automated over time. 

That’s how winning trading starts: It starts as rules and evolves into habits. 

These automated behaviors are important because they don’t require effort and dedication of mental resources.

At some point in our lives, “brush your teeth in the morning” might have been a rule that our parents had to impose on us. 

With repetition, it became a habit.

By repeating your rules many times, in many ways, you gradually internalize them and turn them into habits.

Most of us need no reminder of the rule or special motivation to follow the rule.

This is the kind of discipline we aim for in trading: where our rules become so much a part of us that they require no special attention or effort.

To internalize rules, you need rules first. Here is a list of trading rules you should follow as an example to help you get rid of your old bad habits : 

  • Entry rules
  • Invalidation rules with stoploss placement
  • Exit rules
  • Stoploss management while in a trade
  • Maximal drawdown
  • Maximal loss for a trading day
  • Taking a break after large or multiple losses
  • Avoid trading while red flag announcements can occur
  • Routine for preparation of the trading day
  • Use the rules as the end of the day for a complete review

It will be impossible to internalize all these rules at once.

Start with the most important ones: entry setup, stoploss, position size, and exit rules.

Do some mental rehearsal on them.

Once they are a complete part of your trading, add others.  

Visualize yourself respecting the rules. Feel the pleasure. 

Visualize yourself breaking them. Feel the pain.

To sum up, all speculators can benefit from understanding the pitfalls in trading the money instead of the market, especially as it relates to managing risk.

Do you often fall for money?

Did you find your antidote over time? 

We are Subverto Trading Club, a group of professional traders from around the globe who were drawn together under a common objective: To seek out students who are determined to empower themselves with the skills needed to be successful in trading. Whether you want to supplement your primary career or make your way as a professional trader, we have the tools and expertise to show you the way.

Come check out our discord with a free 3-day trial: ask questions, peruse chat history, and observe us at work. We look forward to seeing you there! 🚀

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