Trading Psychology Explained by WD Gann

Man’s seasonal trend changes just as the market and he has his good and bad cycles.

By keeping a record of your own trades, you can determine when your trend is changing one way or the other. I have been able to make as many as 200 consecutive trades without a loss. When I started the campaign, I did not believe I could make 50 trades without a loss, but I did continue to make perfect trades and close every trade with a profit, until I had made 200 trades. This run of luck or up trend that I was in, had run for some time.

If I had no way to forecast it, what sign should I watch to tell when the tide had turned against me and I should get out and wait?

The first indication that something was wrong would be the first trade on which I made a loss.

I remember that it was a small loss, around $100.
On the next trade I had a loss of over $500. This showed that my trend was changing and turning against me, whether due to bad judgment, ill health, tired nerves, or other causes. If I had been wise, I would have quit and kept all of my profits.
I made the third trade and as most traders do, went into the market on a larger scale. This trade soon showed a loss of $5,000 and I did not take the loss quickly. The result was that I continued to make a series of losses until the banks closed in November, 1907, and I could not get any more money out of the banks.

I was forced to close out all of my commitments with my brokers and take a big loss, because I was bucking my own trend. My period of good luck had run out, and I was trading in a period which should have been for rest, recreation, and gaining knowledge instead of trying to make more money which I did not need. The banks were unable to pay currency for several months, and I could not get any money to speculate with. I put in my time studying and figuring on the market and found out what caused my mistake and the losses.

I started trading again in the Spring of 1908, and should have had some rule to tell me when my trend had turned in my favor. I began to trade in Wheat and the first three trades I made showed profits. This was a sign that luck was with me and I should press it. I then started a campaign buying Cotton and followed the market right on up, pyramiding at the same time that [legendary trad-er Jesse] Livermore made his first successful corner in July Cotton. I made a large amount of money.I could give you many more examples of my experiences of profits and losses.

One rule that every trader should watch and follow is, just as soon as he makes two or three wrong trades after a long series of profits, he should quit the market and take a rest. Get away from the market. Allow plenty of time for his judgment to clear up. Then, when he thinks he is right again, make a start on a small trade.If the first trade goes against him, he should quit again and stay away.Then, when he starts again, if his first two or three trades show profits, he can press his luck and expect a period of success until he sees another sign that the tide has turned against him, when he must again get out of the market.

I have always made the biggest profits after I have remained out of the market for a long period of time and have always made the biggest losses after I have been in a campaign in the market for a long period of time. No man can trade heavily in the market without having a strain on his nervous system, and when his nerves begin to give way and his health is below normal, his judgment gets bad and he begins to make losses.There is no use in staying in, holding on and hoping, when things start going against you. Take your loss quickly and get out. You will make money by staying out of the market and waiting for an opportunity when the market is right, your physical condition good and your mind at its best. To beat the stock market is a battle of wits.

Your mind must be active, keen and alert. You must be able to change your mind and act quickly. When you find that your mind gets sluggish and you cannot act quickly, you are in no position to be in the market.I have been connected with brokerage offices and have known the position of a large number of traders. I have seen the market go against them for days and weeks. Gradually they would start getting out, but a few would be very stubborn and hold on. I call it stubbornness; they called it nerve, but it is not nerve which makes a man hold on when the market is going against him. It is hope and stubbornness.

Nerve will not outlast a market that is going against you, and even if the nerve does last, your money will not last to continue to buck the trend. Traders usually talk with each other in the boardroom. When all but two or three have gotten out with losses, they will talk with each other and say they are going to put up more margin, stick it out until the turn comes.Finally, there is one left, and he will say that he is not going to sell out on the bottom but will see it through.

Finally, his hope gives way to despair and he puts in an order to sell at a price on a rally.The market fails to reach his selling price. Then he changes the price for several days and misses it, and the market continues to go lower. Finally, he gives an order to sell out at the market. That was my signal to buy. I would then buy at the market and invariably made profits. This shows that the trader nearly always does the wrong thing at the wrong time after he has held on for along period of time. This proves that the man who has health, money, nerve and knowledge and stays out of the market until the psychological moment can always make big profits.Some man who has made and lost a lot of money betting on the races wrote the following poem:

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