You’ve surely heard that to succeed in trading you have to be mentally flexible and be able to quickly change your views when the market changes. i.e. You have to have dynamic trading. But how do you do that exactly? It’s one thing to tell you to be flexible and dynamic, but it’s quite another thing to actually be able to do it. Once again, we can draw inspiration and direction from a great quote:
The test of first rate intelligence is the ability to hold two opposing ideas in the mind at the same time and still retain the ability to function. – F Scott Fitzgerald
Think about that for a minute. Not from the point of view of intelligence, but from that of mental flexibility and dynamic trading. If you do, you’ll realize that the reason it’s hard to be flexible is that most traders tend to look at the market in terms of absolutes. “My indicators say that the market is bullish so I expect it to go up.” Or “This is a bearish pattern so the market should go down.” This type of thinking makes it very hard to be dynamic and fluid in your trading. You expect something, and if it doesn’t occur you’re taken off guard. “How could this have happened?” you think to yourself.
The good trader, on the other hand, will think more in line with the above quote. He or she will hold two (or more) opposing ideas in mind, while being okay with that. Instead of desperately seeking certainty, scenarios are developed. It’s all about if/then thinking. If the market does this, then this will likely happen. If it stays above this level, it means this, if it breaks below it, it means that. There’s no thought that ever says “this has to happen”. It’s always about entertaining opposing ideas and being comfortable with never having a concrete answer. That’s what makes trading so tough, and so incredibly interesting at the same time.
But what’s the benefit of being mentally flexible and dynamic in your thinking? It’s two-fold. First, because you don’t hold a fixed view about the market, you are able to read its signs more objectively. You aren’t threatened by being proven wrong because you’re always entertaining different scenarios. You may feel one scenario has much higher odds than another one of course, but just by having another one in mind you are telling your mind that it is a possibility. And that leaves you much less susceptible to blocking out key information. You see, we all have built in filters. When we believe something (for example, the market is going to go down), our minds will automatically filter out information that is not consistent with this belief. This has been proven by countless scientific studies. So even if the market starts showing signs of moving in the opposite direction, our filters will either cause us to not notice this information, or to misinterpret it in support of our belief. That’s just the nature of the mind. But there is a way to counteract this nature. And that’s to always be holding opposing ideas in mind. Think in if/then statements while constantly creating scenarios and you’ll be able to read the market more objectively.
As for the second benefit? The great traders not only cut their losses, but they are able to easily flip their position and in an instant trade in the opposite direction. You may have heard that before but didn’t know how they could do it. Well now you do. Since they’re always entertaining opposing scenarios, they’re not caught off guard if the market quickly reverses. And their egos aren’t hurt if their more dominant view is proven wrong. After all, they knew that the opposing view was a distinct possibility. And having no ego attachment is a key to being able to quickly trade in the other direction. There is nothing to prove, and you’re not trying to be right. You’re simply thinking of scenarios and seeing which one is likely playing out. And that can make all the difference in whether you end up with a loss, or you quickly make up your loss and end up with a big winner. Do that a few times a month and that can be the difference between being a winning and losing trader.