Look for an Excuse Not to Trade

In an earlier chapter, I mentioned the importance of trading defensively. I made comparisons to how we live our lives, always in defense of what we own, possess and love. Lets put this concept under the microscope and take a close look at how we can use this mindset in trading.

As we discover our trading abilities with the use of indicators, candlestick formations, news etc, we naturally begin looking for signs and signals that could prompt an entry into a potentially profitable trade. We set up our dashboard with the latest technologies, state of the art charting software and expensive subscriptions for the fastest data and news feeds. We do anything and almost everything to get that “edge” on the market so that we can “beat” the rest and get a jump on the next big mover.

That’s all fine and good. But in the heat of trading, amidst all that technology and information, we tend to forget that one basic principle in which we live our lives …. Defense. The illusion of power we get from technology and information always blinds us from the obvious.

So we take the trade. Good if we don’t lose money. Better if we make some. But more often than not, even the best technology is not going to save your trade if it moves against you. It can be argued that the system will have automated stops to prevent such losses. Playing the “numbers game” as the system is designed to do, will ensure your losses never outweighs the gains. That’s all fine and good.

But as you take in these losses, what good can that possibly do to your confidence and state of mind? As humans, we will not be as cool as our machines to trade without emotion. We can console ourselves that the system will work out in the end and when it does, we will feel better about what we’re doing. But as this constant battle with our emotions goes on, we will begin to look for something better to reduce the margin of losses and increase the margin of profitability.

This is where defensive trading comes to the fore.

Whether you’re a system trader or the conventional click action trader, why not, from the very start, begin by trading defensively? The formula is quite simple: “Look for an excuse NOT to trade.”

We have all these indicators and technical stuff in front of us. Some of us even have the aforementioned state of the art softwares and subscriptions. Rather than look for entries or opportunities, lets instead look for reasons why we shouldn’t trade. Find spots of imperfections, irregularities and weakness rather than look for positives that we so often want to see.

The need to see opportunities almost always gives an excited trader the illusion that there is indeed an entry. For greed’s sake and to avoid having to chase the trade later, the trader will make the mistake of taking that entry without first assessing all the risks. The realization of this rash to rush in often comes too late and the familiar chorus of “Why didn’t I …” will ring out like an old broken record.

So just how do we trade defensively?

Look for an excuse not to trade.

Let’s say we have Support, Resistance, Trendlines, 4 Technical Indicators, Candlestick Patterns, Market Sentiment and News to help us in our trade. All we need is one of those 10 things to tell us that its not right or that its not perfect … in other words, “the stars are not aligned” to make an entry. By always looking for an excuse NOT to trade instead of looking for entry signals, we will change our language from the time we begin our research right up to the time we make our exit.

Offensive Trader:

“Looks like I have entry signals today!”
“I think its okay. I don’t think there’ll be any problems.”
“It looks quite safe to take an entry now.”

Defensive Trader:

“Let’s see if there’s anything to stop me from taking a trade today.”
“I don’t see why I shouldn’t enter the trade today.”
“There is absolutely no reason why an entry would be risky now.”

Notice how the Offensive (Attacking) Trader tends to use emotion in his language more than the Defensive Trader? The excitement of seeing entry signals is a clear emotional state and never the best way to make decisions. “Thinking” in such a state is no different than Hoping.

The Defensive Trader’s language, however, is more objective. Rather than emotion, observation is the key factor. “Seeing” in an unemotional state allows the trader to be calm and rational in his objective. This gives control of the situation to the trader who will not rush in or chase the trade because the Defensive Trader is always going to find a reason NOT to trade.

This mindset also gives the Defensive Trader the initiative to trade according to his plan while the Offensive Trader is always in the habit of breaking any plan he may have conceived, whether in a winning or losing trade. Again, the Offensive Trader’s decision will be based on emotion;

Offensive Trader:

“I think I’ll let it run and make some more money.”
“I hope it comes back.”
“I’m sure it will work out as planned.”

Defensive Trader:

I still don’t have a reason to exit yet.
Looks like I have a reason NOT to stay in this trade any longer.
Not going to plan. I’m out of here.

So before you put on that next trade, take a step back and take a long hard look at all your sophisticated systems and ask it, “Will you please show me a reason NOT to trade?” Ingrain that pattern of thinking into your head and see if it doesn’t make a difference in your trades.

Food for though:

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