When I first began trading I felt that I needed to have an opinion on a market or stock before I took a position. I then needed to accumulate as much information and other analyses that supported my opinion. Even if the market moved against my position, I needed to continue to justify my original opinion and average down into my losing position.
This strategy of generating market opinions and supporting that opinion with a mountain of confirmation bias wasn’t very effective. It led to a few spectacular disasters and a lot of emotional disturbance. I was making the classic mistake of mixing up my opinions with trading positions, then making things worse by believing that I had to be “right”.
Poor results and an overall sense of unhappiness is powerful feedback that whatever you’re doing is not working and it’s time for a change. Years later, I learned that there is a distinction between an opinion and a trading position. I could make trades in companies that I didn’t necessarily have a strong fundamental opinion on, but could discern which way the money was flowing. Alternatively, I could have a very strong opinion on the value of a company, yet I didn’t put on a trading position because the chart wasn’t confirming my analysis or the risk/reward in the trade wasn’t favorable.
This was a monumental revelation that transformed my trading, both in terms of results and mindset. I was free because I didn’t need to have an opinion on everything. I could make trades and enter/exit based upon technical factors that had nothing to do with macroeconomics, sector outlook, or fundamental equity valuations. I became a surfer that times his ride on waves and rode them to shore. Sometimes the waves didn’t reach shore, sometimes they weren’t that big, and sometimes I didn’t surf well and fell off the wave. But my mindset had changed, I was no longer attached to an opinion of what had to happen. I was just a surfer, not a part of the ocean. I respected that the ocean was much bigger than I am, and sometimes the ocean did unexpected things that I had no control over.
This mindset change not only improved my trading results, but enabled me to have a sense of peace that had been conspicuously absent during the years that I needed to have an opinion about all my trades, then prove that I was right about my opinion.
A well-known futures trader Peter L. Brandt is fond of an expression that sums up my mindset in trading: “Strong opinions weakly held."
I analyze charts, company fundamentals, macroeconomic trends, and market sentiment all with the aim of identifying attractive trade setups. Once I take a position, one could definitely say that I am expressing an opinion about the market in question. However, I am always ready to change that opinion when presented with new information. That information is usually in the form of price action.
Technical analysis helps to keep me out of trouble during times when my fundamental opinions would get me into deeper trouble.
A trade has a finite time period, not an indefinite one. Staying in a losing trade that continues to move against you will not only drain your trading account balance, but it will weigh on your mindset, reducing your ability to be objective.
There is also an opportunity cost of holding a losing trade. What else could you be doing with that equity? What other opportunities are you missing because you are stuck trying to be right in a losing trade?
A trade is not an opinion, and an opinion is not a trade. When we are able to detach from the need to be right and having an opinion on everything in markets, we embrace a greater level of freedom and open up new possibilities for our trading.
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