We’ve heard it a thousand times. Any book on trading that deals with trading psychology in the slightest is obligated to mention it. Without it we, as traders, are doomed to fail. Yet why do so many traders rush ahead at full speed without first acquiring it?

Answer: Pain & Ignorance.

The first factor is pain, or rather, the lack thereof. If I could walk through fire without getting burned then I most definitely would. Not only that, but I would become a fireman, go on Leno, tour the world, and amass my millions as the amazing flame-retarding-man.

While bothersome, pain is the single most important teacher that life will ever introduce us with. Just like children, in order to grow us traders must find an edge and push it, and then push it some more in order to locate and test its boundaries and limitations. Pain, or loss, is the only way of letting us know that these boundaries are being encroached upon and that something must change if we are to be allowed to push any farther. Seen in this light, pain is not an adversary to be avoided at all costs, but a business partner whose insights can teach us more about the markets than any seminar, book, or article ever will.

Yet when we first start to trade full time, we are often coming off a high from the mere thought of trading for a living or of quickly raking in some major profits. Sure we may have heard about needing to be patient a thousand times, but when you’re new you don’t have any experience with which to correctly mold your perception of what proper patience actually means. When I first started trading, it was like sitting on a bed of nails not being fully leveraged in the market 100% of the time… after all, that’s how good traders made all their money wasn’t it?

Even worse than coming into the game with no concept of what patience means, is coming into the game with a distorted belief about what patience is. This is the ignorance part of the equation. In speaking with many traders at different stages of development, when the topic of patience arises the conversation will almost immediately go to the number of trades a person makes in a day or given time period. While useful in the regards to their overall trading plan, the fact of the matter is that the absolute number of trades a person makes per hour/day/year, devoid of additional information, bears no relation to a person’s patience.

If on average person A makes 10 round trips per day and person B makes 20, then it does not necessarily follow that person A is more patient than person B. What if person A is an index futures trader who trades via the 15 & 60 minute charts while person B is an equity scalper who is constantly scanning the market for opportunities to make a quick $.05? In this case, then it is quite probable that person A is actually the LESS patient trader of the two and is subsequently more likely to be in the red than person B, all else equal.

So if the number of trades that a person makes doesn’t determine their patience, how can we tell if we or our trading buddies are in fact patient? Given the two ways of making money from the stock market: High *Risk/Reward Ratio + Low Batting Average OR a Low Risk/Reward Ratio + High Batting Average… you must first know what kind of trader you are. (If you are brand new, then you should be paper-trading anyway until you get enough trades under your belt so that you can start to calculate these two critical statistics.) I’m assuming here that you have a trading system in place that delivers some kind of edge in certain conditions.

Oftentimes people assume that the system they are using is unprofitable since they are unable to consistently make money using it. However, it is my observation that even the worst system has its bright days when market conditions and the edge that the system targets align. Therefore, it can be posited that this system does work under those given conditions. If a trader then continues to use the system unprofitably during other times or market conditions, then poor results can then be attributed to overtrading, ignorance (in not knowing the difference between optimal and non-optimal conditions), or a combination of the two.

Note here that when I say overtrading, that doesn’t mean that the person is actually placing any more trades than he or she did when they were profitable. Overtrading here is defined as placing more trades than a system, once fully understood, would warrant.

So great, assuming this system has gone through its peak period then you are now sitting on the information you need in order to determine if you are in fact impatient. First, look at the *Targeted Risk/Reward Ratio of the system during its peak performance and compare this to the Targeted Risk/Reward Ratio now. Are they the same? If they are not, then it is likely that you have found the major contributor to your inconsistency.

If they are the same, then the does the problem lie with a decrease in your system’s batting average? A sharp decrease in a system’s batting average is the # 1 symptom of impatience that I look for in my own trading. In my own case, it is usually caused by failing to wait for the market to come to me and instead pushing borderline plays that I would have otherwise avoided were I winning but whose viability does have some arguable basis. In such cases, I will coincidentally see an increase in the number of trades that I am taking.

If both your targeted Risk/Reward Ratio and your Batting Average are the same and you are still not having the same performance that you did during your system’s peak days then there are only two possible reasons. You are either:
A.) Varying your risk exposure on each trade and subsequently getting stopped out on your larger exposures which fail to make up for the winning trades you have where the exposure is less
B.) Your *Actual Risk/Reward Ratio is suffering which is a definite sign of impatience.

If A.) is your problem, then the solution is simple: Position-size your trades based on a fixed risk exposure. Problem solved.

If B.) is your problem then you likely need to take a step back and let your positions work for you instead of cutting them short. If you feel unable to do this, then this is a sign that you may be trading too rich for your blood such that you are becoming too emotionally involved with each winner & loser. This is a topic that will be dealt with in a subsequent module, but in short you likely need to reduce your position size or risk exposure.

Being patient is all about letting the market come to you and work in your favor instead of trying to combat it like a foe. Just as your charts don’t lie, neither do your statistics. Once you have a system that has undergone a period of winning, you have all the information you need to determine if you are acting impatiently in the future. Impatience is just one of the many emotional afflictions that traders must overcome but with time, effort, and a little know-how, this is one trading demon that can be eradicated.

*** Target Risk/Reward Ratio is different from Actual Risk/Reward Ratio in that Actual R/R deals with your realized profit and losses (ie: (Avg Win)/(Avg Loss). Whereas, the Target R/R ratio deals with the unrealized profit & loss targets that are established before a play is entered (ie: (Target Closing Price – Target Open Price)/(Target Open Price – Target Stop Price)