Active trading is a different beast versus buy and hold investing. It requires a completely different mindset and approach.
How to adjust your mindset for active trading
Your emotions can easily swing from one end of the spectrum to the other each trading day. The excitement of banking a winning trade is a jubilant high similar to your horse winning the Kentucky Derby. But those highs do not occur all day, every day.
Active trading is a rather quiet and boring endeavor. Sometimes, you’ll watch the minutes tick away just waiting for the next trading day to arrive. It can be tempting to just “do” something, but that can lead to unnecessary trading that drains your accounts.
You have to learn how to manage the emotional swings and stay in control of your trading. I’m here to tell you it is not easy.
Trading is a “random walk”
Each day is different, and you can find yourself on the right or wrong side of the trade at anytime. Trading is a “random walk”, a theory proven by Burton Malkiel in his book “A Random Walk Down Wall Street.”
The book establishes the idea of a random walk as it relates to the efficient market hypothesis. This hypothesis states that prices adjust immediately to all available information. Malkiel references both technical and fundamental analysis in his book, yet he uncovers flaws in both approaches that can produce inferior results to buy and hold.
How to adjust your trading approach
During those quiet, boring days, you have to resist making trades just so you have something to do. Instead:
- Study your past successful trades
- Read books and articles and listen to podcasts to to become a better trader
- Analyze the technicals
- Make adjustments when you need to
- Sell losing trades
If you’re prepared and can trade without letting your ego get in the way, you can be successful. This goes for stocks, options, future or commodities.
And it’s especially important to learn not to flinch at the sign of trouble – unless there is a monumental shift in trend. Riding out a trend is often the best approach.
