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Wednesday, November 01, 2006

Applying 90/10 Principle To Trading

I recently received an email from a family member on 90/10 principle by Stephen Covey, author of bestseller "The 7 Habits of Highly Effective People". I found it very inspirational and that this rule can apply to any aspect of our lives, including trading. Here's an abstract:


"10% of life is made up of what happens to you. 90% of life is decided by how you react.

What does this mean?

We really have no control over 10% of what happens to us. We cannot stop the car from breaking down. The plane may be late arriving, which throws our whole schedule off. A driver may cut us off in traffic. We have no control over this 10%. The other 90% is different. You determine the other 90%!

How?

By your reaction - You cannot control a red light, but you can control your reaction. Don't let people fool you; YOU can control how you react!"


And I can see how this applies to trading. Here's an example:

You made a losing tade. How do you react?

A) Curse & swear. Do revenge trading. Go back to the same stock to trade immediately because you can't believe you lost money on this great set-up. You want to make the money back from this sucker stock.

B) Go into a crazy mood & start trading any setups that comes along, ignoring your trading rules.

C) Lose hope & despair. Lose confidence in your trading rules or system. Start trading with negative mindset. Loses again. Sink into depression. Don't know what's wrong

D) Take the losing trade in your stride. You know that having losses is part & parcel of trading. You do a thorough trade review to identify what went wrong and learnt a lesson from there. The mistake helped you to improve one step in your trading journey

Can you see how your reaction (which you have ultimate control) affects your next trade? The results for (A), (B) & (C) will most likely be negative and it becomes a spiral. If we react in a positive manner like in (D), take a step back (stop trading for awhile if need be) to identify the issues, our trading psychology will be greatly improved, not to mention the actual trading itself.

I take a lesson away from reading this: Manage your reaction and you can manage your trade!


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