Series: The Pendulum of Traders Emotions
8. Proactive vs. Reactive
Pen*du*lum: Something that swings back and forth from one course, opinion, or condition to another.
Proactive: Tending to initiate change rather than reacting to events.
Reactive: Reacting to a stimulus. Waiting for something to happen before acting.
During my trading lifetime, I have experienced most of the emotions that traders face. And these emotions behave like a pendulum - they swing from one extreme to another, unless moderated. I view extreme emotions as part of a continuum, where the ideal balance is somewhere in the middle, for example, at the fulcrum of a teeter totter. Fred and Farah learned a lot from their fellow entrepreneurial traders, Steve and Sally, including how to moderate their emotions. (See 10 Habits of Successful Traders Series) Let's try and understand these pairs of emotions and how they impact a trader's bottom line and modus operandi.
When the market is quiet and appears that not much is going on, it is possible to be lulled into a false sense that nothing is really going on, when in fact it is. It's when the market is quiet or correcting, that we need to get prepared for the next onslaught or major move. The preparation and analysis during quiet times is what distinguishes the proactive from the reactive or passive trader. This week Farah fell asleep while Sally was busy preparing for the next major move.
Proactive Scenario: Trader Sally understands that markets move in cycles and she knows when to stay out of the market and when to be in. She has a few different trading methodologies she uses to trade both trend markets and sideways markets. When the market is in a trend, she executes her high probability trading setups and risks more then when the market is trading sideways. When in a trend, for example, she uses the Fibonacci tool to calculate the retracement move in order to get into the trend. That way I am positioned at the best possible entry point for when the market resumes its trend!
Sally will survive during all market cycles. She will wait patiently to execute her more profitable high probability trade setups and be proactive rather than reactive. That way, her mind will be wired for adding to the position when it moves her way.
Reactive Scenario: Trader Farah waits for the market to move before getting interested in taking a trade. She figures that nothing much is going on unless price is moving. Then, when the market does show its hand, she jumps in to join the crowd. But she wings it. She doesn't have a plan so she doesn't know when to exit that trade or when to add on to a position. During a major trend move, she will also look to pick a bottom in a downtrend, or sell a top in an uptrend. In short, her trading decisions are reactive, rather than proactive. After a very emotional day Farah exclaims, Tomorrow I will do my analysis first before taking a trade!
Farah is advised to do her planning at the beginning of the trading day or the night before, especially for swing trades. Without it she trades impulsively and is reactive vs. proactive. It would serve Farah well if she traded her trade plan. She might even take fewer trades, but higher probability setups. (As a start, Farah develops a routine to analyze the market on a daily basis.)
Tips to Temper the Emotions:
1. Complete the Analysis before taking a trade.
a. Pre-plan the amount of capital at risk before taking a trade.
b. Determine which part of the market cycle the currency pair traded is in. Once the trade is planned, stick to the stop loss and profit targets.
c. In the long run, if trading is run as a business, the profits will come. It's time to temper those emotions!
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Forex Trading Strategist