The S&P has been stuck in a 300-point range, from 700 to 1,000, since last October. There are seven reasons traders fail to make money in range-bound markets.
1.) They forget to look at bigger picture and adjust style as markets adjust. Some traders think using the same investment approach for trending markets and range-bound markets is being “consistent.” But in range-bound markets, you have to be more mindful of when things are at the top of that range or falling towards the bottom.
2.) Overcomplicate things rather than just keeping it simple. In short, dummy it up a bit. Accept the fact that trading is really a game of up, down, and sideways and you can inprove your trading profits.
3.) Fear of missing out on that home-run trade. Trading is really about making small money on a lot of trades rather than hitting that $1 million trade. All traders miss out on a great trade somewhere in the world. In fact, the home run trade could actually turn out to be a whiff. Remember, sometimes the best trade is the one you don't make.
4.) Think “I have to be right on a lot of trades to make money.” Wrong! Some of the best traders in the world have winning percentages lower than 50 percent. Success in trading really is about how much you make when you're right, and how much you lose when you're wrong. Keep that spread wide, and you're on your way to success.
5.) Believe they have to trade without emotions. First of all, it's impossible because all humans have emotions. What you need to do is learn how to control or compartmentalize them so they don’t end up making decisions for you. Keep your emotions in a bottle and you're on your way to success.
6.) If I lose money, I stink. Sometimes, you make money on bad trades and lose money on good trades. More important is the caliber of your trades. Do they have edge? Are they high-caliber trades? Judge your success based on that information, rather than your P&L.
7.) They take losses “personal.” The market is not out to get you or anyone else. We're just operating within its context. If you treat it like a business, you're much more likely to have success in range-bound markets.
Doug Hirschhorn is the chief executive officer of Edge Consulting, a firm specializing in “Peak Performance Coaching.” He holds a Ph.D. in Psychology with a specialization in sport psychology, and has offices in New York and South Florida. His client list includes elite athletes as well as many of the largest banks, hedge funds and financial institutions in the world. Doug is presently at work on his new book, 8 Ways to Great (Putnam, 2010).
Have a question for Doug? You can reach him through his Web site, DrDoug.com
Disclaimer: Doug Hirschhorn's expertise is in the psychology of achieving peak performance. He is not a financial advisor and does not make trading or investment recommendations or provide trading or investment advice. He is an expert on the mental game. Although Doug Hirschhorn has a Ph.D. in Psychology with a specialization in sport psychology, he is not a licensed psychologist and does not provide therapeutic, clinical or counseling services.