Becoming a Successful Trader: Riding the Pendulum

I created the FX Trader’s EDGE Coaching Program modeled after the “10 Habits of Successful Traders”, which is the title of my newly published book. While the 10 Habits is really a model for how I was going to succeed as a trader when I left the institutional world of trading, I find that most traders who read this book also find the habits key to moving from amateur to professional trader.  It’s my thesis that traders can develop new and repeatable habits which can be applied consistently with practice, with a coach, or a trading buddy. This article discusses why I called the book The Trader’s Pendulum and why it’s important for traders to be comfortable with the pendulum swings.

Traders ride the pendulum every day. New and unseasoned traders ride the pendulum back and forth with no real idea of the power of the pendulum’s swing. Successful traders recognize that the pendulum swings and ride it mindfully and deliberately—as a result, they make better decisions and better trades.

The pendulum factors represent two situations arising from trading the markets. Often, both sides of the pendulum swings consist of opposing forces. Ideally, you, as a trader, want to remain or get back to the neutral position, because staying at either end can be unproductive. Think of the movement of a teeter totter when you were a youngster with the fulcrum balancing the board. When the board moves, the child is in motion, experiencing the greatest thrill when the board is in full motion. Now picture yourself trading the markets, and feeling the ups and downs and side to side movement of the market, financial and emotional pendulums. Please don’t call me a kill joy for spoiling your ride; rather, bear with me as I explain this concept further.

There is nothing that you can do about the swings of a pendulum, but you need to learn how to ride them—like all successful traders do. The lack of skills to weather the swings is what makes trading an emotional-psychological roller coaster ride for traders. There are three types of pendulum swings that I would like to speak about below:

  1. Market Pendulum

The market trades up and down all the time, in a series of trends and corrections.

A skillful trader know when to enter and exit a trade. They have learned how to recognize the pendulum swings in the market, and not to enter trend trades after extreme and exhaustive moves. They readily understand the market cycles, and will only enter a trend after the corrections or reverse the trade after a strong exhaustive move.

The market pendulum follows the market cycles. To trade the market pendulum, you need to have a strategy in place to trigger your trades and exit your trades. I use Elliott Wave analysis to ride the market pendulum.

  1. Financial Pendulum

Making money from trading is not a one-way street.

On one end of the pendulum swing there are times when you make money, and on the other end are times when you lose money. Both winning and losing money are part and parcel of trading. Every trader loses money, even successful traders. But it is important not to bet the ranch so that if it is a losing trade, you lose the entire account. It is all about managing the money in the account so that when you win, you win big, and when you lose, you lose small.  I certainly have a lot of stories of winning and losing during my extensive career, and I’m sure you do to. What is even more important than the story however, is learning from our mistakes and our good judgement calls as well.

  1. Emotional Pendulum

The emotional pendulum is best described as the fear and greed continuum.

On one end of the pendulum swing you have the desire to earn more money from your trades, and might be driven by greed to take larger positions irresponsibly; but on the other end, you are in fear of losing money, and your actions might be held back by fear. Some of the consequences of a fear-driven emotion is the inability to pull the trigger when necessary, or freezing when the market is running against you without a hard stop loss in the trading platform. Learning how to balance between these two factors is the focus for you as an investor/ trader.

If you agree that you want to become a trader or investor who can ride the pendulums well, then you will need to become a successful professional (entrepreneurial) trader, which is the subject of this book and the topic for next week’s article.

Excerpted with permission of the publisher John Wiley & Sons, Inc. from The Trader’s Pendulum: The 10 Habits of Highly Successful Traders.  Copyright (c) 2015 by Jody Samuels.  This book and ebook is available at all bookstores, online booksellers, and from the Wiley web site at www.wiley.com.

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