“Trend following is a form of technical analysis. However, it is not predictive technical analysis, but rather it is reactive technical analysis. This is key to understand.” – Michael Covel
All that matters for a trader is what they are doing right now in the current moment. Their potential entry set ups, their stop losses, and what they should do about their current open positions. A trader has to focus on what is happening, not what they want to happen, think should happen, predict will happen, or hope will happen next. The past is over and the future does not exist yet, all that is left is the present moment and the actions that will be taken here. A lot of the stress a trader experiences is the intrusion of emotions that belong in a different space in time. No amount of regret brings back lost money and is a waste of precious energy and time. All that can be salvaged from past losses and mistakes is the lesson you paid the tuition to possess. You paid good money to learn these lessons and they should be quantified as rules in your trading plan so they are not repeated. Past emotional pain can be a great teacher if you are open to the lessons and willing to learn and change instead of repeating them.
No manner how much gurus want you to believe they can forecast the future, they can’t, why? Accurate predictions are not possible because the future does not exist. If a prediction is accurate it is more due to coincidence and chance than crystal balls or time travel. All that ever exists at any given time is the ever present moment of now. All that we can ever trade is the present price action and how it is acting based on our quantified methodology of entries and exits. Back testing of past price history and price targets for projected trends to key levels have their limitations as still the present price action is always moving and evolving in real time regardless of beliefs based on previous patterns or future potential.
I do believe in the study of past price history to observe emotional and technical trading patterns that repeat. I also believe that we can set potential targets to previous support or resistance on charts to give us a basis for risk/reward ratios and the probabilities for success. However I believe strongly that the keys to trading profitably is not found primarily in the back tests or the chart pattern projections but in our process. Successful trading is the process of flowing and reacting to current price action to capture trends, cut losses, and take trades with great risk/reward ratios with your stop loss close and your profit potential open ended. No matter the process we use for trading the market profitability only occurs in real time by following a robust process for entries, exits, and position sizing. There are many ways to develop a winning trading system but they all happen in the present moment of now.
There are two aspects of trading in the now. While the first is to react to price action as it occurs in the present moment taking entry signals without trying to predict what will happen next. When you enter a trade you do not know if your stop loss will be hit first or your trailing stop after a long profitable trade, your profitability lies in your flexibility to follow the price. The second crucial aspect of trading in the now is the dynamic of present moment mindfulness with a focus on how you feel, what you are thinking, and how that could affect your ability to make the right decisions for entries, exits, and position sizing. The ability to do the right things now is what makes all the difference not theory, or opinion, or predictions about the future.
What traders do to themselves is emotionally time travel to the past or future and experience feelings in the present moment that should have been resolved in the past or waited to be experienced until an imagined event really happens. The emotions of regret and dread should be experienced and decisions made on how to accept and manage them. You do not want unmanaged and unchecked emotions showing up in your trading and playing out as unresolved drama from your past. The future is great for goal setting and knowing the path you need to travel on to reach your destination but you can’t allow hope and fear about what will happen influence your current trading decisions. Your trading decisions have to be based on the right signals, position sizing, and trade management not your hope for a really big winning trade or your fear that you will lose stop you from even taking the entry when it is time.
The ability to follow your trading plan comes from the ability to act in the current moment and do what you planned to do regardless of how you feel. Present moment awareness allows you to overcome your emotions and trade in a disciplined manner. The more you focus your attention to being mindful of your thoughts and emotions in the present moment the better you will be able to execute your trading plan without internal obstacles.
This is an excerpt from my book Calm Trader.