MENTALITY IN TRADING

There are many novice investors who do not understand how to trade the short side of the market. I have heard many novices say they can’t grasp how to sell something they don’t even own. Even if they buy futures contracts to go long, they will not own anything (except in rare cases where they may receive actual delivery of physical commodities).

Futures traders are simply speculators on how a price will move during a certain period of time for a given product. When they are right, they receive rewards; when they are wrong, they get penalized. Think about the elevator analogy. If a building has 100 floors and you are on the 50th floor, you can play a guessing game to determine if the elevator goes up or down and by how many floors. It is not necessary to own an elevator to ride it.

Though the concept of trading is very simple, we, as humans, tend to complicate it quite a bit, especially when it comes to selling short. It is as simple as getting interested parties together and speculating whether the price of a certain commodity is going to go up or down.

The price of commodity XYZ is going up, so Bill buys. Pete believes it is going down, so he sells short. One could win, one could lose. Or, you guessed it, both Bill and Pete could be right at the same time and make money. In the same way, both could also lose money by making the exact opposite trade at the same time within the same trading day. This happens all the time, volatility.

Find out what whipsaw, choppy, erratic market behavior, and other terms associated with volatility mean.

The market is a reflection of the traders’ sentiment, resulting in varying outcomes. It may at times appear chaotic; could represent exploring a hidden trove of riches or savoring an enchanting sunset. Besides, it could also be one of the most frightening and potentially ruinous experiences.

A trading experience is likely to test your emotional strength and psyche. The ultimate financial, emotional, and intellectual challenge you will ever face. Fear, doubt, complacency, greed, anxiety, excitement, false pride—all can interfere with rational and intellectual thinking. It is those emotions that create the jungle, and you may need help to overcome that jungle of emotions. When you conquer those feelings, you may find the holy grail of trading: a confident winning attitude.