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Patience

PATIENCE FOR U1) If you insist on trading during unstable or volatile markets, keep your positions small.

2) If you go into cash, don’t get upset on days when we rally, it’s simply part of the game.

3) Don’t buy or sell stocks because someone else is doing it. Have your OWN plan, find a philosophy that works for YOU, and don’t blindly follow anyone!

4) Wait for the wind to be at your back. Right now, it’s swirling. No sense in forcing trades to make a few pennies when there are dollars to be made in better environments.

5) Let the market correct, let the dust settle, don’t be in such a rush to trade. I see too many people trying to bottom-fish this market and I feel like screaming: “You don’t have to trade!”

I am not saying all this to be an ass. I simply want traders to learn from my mistakes. I have lost too much money in the past by forcing trades in unfavorable environments. You are better off protecting your capital and more importantly, protecting your confidence. Wait for proper bases to form, wait for some institutional accumulation, and wait for sentiment to be “less bullish.” In other words, wait for a healthier environment…it might not be that far away. The key right now is discipline and patience.

Trade Like Michael Jordan

How does basketball exactly relate to golf and perhaps trading successfully? Well, you’re going to soon find out!

In this article, Michael provides 10 rules for maximizing competitiveness and if you’ve been trading for any period of time, you’ll instantly recognize their value to trading successfully. In fact, here’s my personal take on how Jordan’s rules directly relate to making us all better traders:

  • Focus on the little things.  It is true, if you focus on the little things (finding and exploiting attractive entry points, proper position sizing, sticking to stop loss levels, unbiased chart analysis, etc.) they’ll all add up to contribute to your big picture success and bottom line. When the pressure is on and tension and stress is high, traders must rely on the basic skills they’ve developed through constant practice to make the tough trades. That practice and constant dedication to improve oneself will make a world of difference when opportunities are the most plentiful.

  • Have total confidence in what you can do.  As Michael says “If you have 100 percent confidence that you can pull off a shot, most of the time you will.” I couldn’t agree more. While we all make trades based on imperfect information and conflicting data, at all times we must be 100% confident in the trades we make. There’s a good reason why so many traders say you must always “trade to win” instead of “trading not to lose.” There’s a huge difference. In addition, the only way to have confidence you really need in the trades you make is to actually do the work the leads up to making those trades in the first place.

  • Don’t think about the prize; think about the work.  Novice traders focus on how much money they stand to gain or lose from trading while great traders focus simply on the process of trading well and to their best of their ability. That’s a key difference. Sometimes a good trader will be very unhappy even if they make money in a particular trade because they didn’t trade it well or the trade violated their strategy and they got away with it whereas a novice trader will simply focus on the profits or losses no matter how and why they earned them. Money, and the rewards the flow from successful trading, are a low priority to the successful trader – instead trading well and trading even better the next time are the two top priorities. (more…)

Trading With A Plan

A planned trade is one that is guided consciously, filtered according to a variety of criteria that are designed to provide a positive expectancy. The opposite of a planned trade is an impulsive one, in which traders enter markets before explicitly identifying what they are doing and why. The difference between planned and unplanned trading is one of intentionality: being proactive in taking controlled risks vs. being reactive to what has already occurred in markets. Even the most intuitive and active trader can trade in a planned manner, if many of the elements of planning are achieved prior to entering positions.

So what are these elements of planning? The ideal trade identifies:

1) What you’re trading – Why are you selecting one instrument to trade (one stock, one index) versus others? Which instruments maximize reward relative to risk?

2) How much you’re trading – How much of your capital are you going to allocate to the trade idea versus other ideas?

3) Why you’re trading – What is the rationale for the trade? Why does the trade idea provide you with an “edge”?

4) What will take you out of the trade – What would lead you to determine that your trade idea is wrong? What would tell you that the trade has reached its profit potential?

5) Where you will enter the trade – Given the criteria that would take you out of the trade, where will you execute your idea to maximize the reward you’ll obtain relative to the risk you’ll be taking?

6) How you will manage the trade – What would have to happen to convince you to add to the trade, scale out of it, and/or tighten your stop loss? (more…)

You are not your Trade

Systems don’t need to be changed. The trick is for a trader to develop a system with which he is compatible. -Ed Seykota

Traders can make psychological mistakes when trading that can end a trading career very fast. Here are a few examples:

  • They take on more risk than they can deal with, stress takes over and they start making bad decisions.
  • They become married to a trade, they become stubborn and ignore their stop losses, wanting to be “right” they wait while losses mount.
  • Their egos take over their trading. They are more concerned about proving how smart or clever they are than making money. They begin to be more concerned with bragging about their winners than managing their losing trades. It becomes an ego trip that will not end well.
  • Their system does not match them, someone who likes fast paced action should not be a long term growth investor and someone who loves investing in growth stocks they believe in should not day trade.
  • A trader loses many times in a row so they change systems right before the big pay off. If you have a proven system trade it for the long term benefits.

Here are some solutions: (more…)

Believe you can win

If other traders can do well in the market, so can you. However, if you don’t have enough courage and confidence in yourself, you will never achieve success. The events over the past few years have tested many people in this way and many now believe the game is rigged against them and, even worse, that no matter what they do, in the end they will ultimately fail in the markets. In my experience, nothing could be farther from the truth and those who will win in the markets first start by believing they can do it. Of course, those who do create success also must back up that belief in themselves by working hard and show consistent determination to find, develop and exploit their trading edge.

The bigger fool theory

Cartoon inspired by this article written by Peter Tasker in the Financial Times
“The inconvenient truth is that gold is not really an investment at all. Since it generates no return and thus has no fundamental value, the same arguments can be used to justify any price – $500 an ounce or $5,000. Gold buyers are simply trusting in the bigger fool theory – that someone else will take it off their hands at a higher price. They are speculating, not investing, and like all speculators what they are speculating on is the speculations of other speculators. Packaging it in an exchange-traded fund makes no difference.

G. C. Selden Trading Psychology – Hunches And Gut Feelings

Recently most traders probably have spent a great deal of time managing risk and emotions. I know I have. When it comes to correctly gauging and dealing with emotions it is paramount to analyze your reactions in a detached way. The best way to get objective insight is to imagine taking a step back and then ‘watching yourself.’ It’s as if you were your own mentor or trading coach. This is not an easy task. Good results require emotional detachment, a lot of experience and the ability to honestly assess the degree of trading proficiency you have attained. Ultimately it will tell you what those gut feelings you are occasionally experiencing really are worth. That’s exactly what G.C. Selden addresses at the end of his classic trading book : ‘Psychology of the Stock Market’ which was first published in 1912. Here’s an excerpt dealing with ‘hunches and gut feelings.’ Lots of additional and valuable insight for traders is provided. Enjoy! 

An exaggerated example of “getting a notion” is seen in the so-called “hunch.” This term appears to mean, when it means anything, a sort of sudden welling up of instinct so strong as to induce the trader to follow it regardless of reason. In many cases, the “hunch” is nothing more than a strong impulse.

Almost any business man will say at times, “I have a feeling that we ought not to do this,” or “Somehow I don’t like that proposition,” without being able to explain clearly the grounds for his opposition. Likewise the “hunch” of a man who has watched the stock market for half a lifetime may not be without value. In such a case it doubtless represents an accumulation of small indications, each so trifling or so evasive that the trader cannot clearly marshal and review them even in his own mind. (more…)