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Profile Of The Successful Trader

  
  Education
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Trading is being young, imperfect, and human – not old, exacting, and scientific. It is not a set of techniques, but a commitment. You are to be an information processor. Not a swami. Not a guru. An information processor.

Participating in the markets can only develop your trading skills. You need to become a part of the markets, to know the state of the markets at any given time, and most importantly, to know yourself. You need to be patient, confident, and mentally tough.

Good traders offer no excuses, make no complaints. They live willingly with the vagaries of life and the markets.

In the early stages of your trading career, pay attention not only to whether you should buy or sell but also to how you have executed your trading ideas. You will learn more from your trades this way.

Never assume that the unreasonable or the unexpected cannot happen. It can. It does. It will.

Remember, you can learn a lot about trading from your mistakes. When you make a mistake – and you will – do not dwell on the negatives. Learn from the mistake and keep going.

Never forget that markets are made up of people. Think constantly about what others are doing, what they might do in the current circumstances, or what they might do when those circumstances change. Remember that, whenever you buy and hope to sell higher, the person you sell to will have to see the same opportunity at that higher price to be induced to buy.

Traders who lose follow one of several typical patterns. Some repeatedly suffer individual large losses that wipe out earlier gains or greatly increase a small loss. Others experience brief periods during which their trading wheels fall off: they lose discipline and control and make a series of bad trades as a result.
Wise traders make many small trades, remain involved, and constantly maintain and sharpen their feel for he market. For all of their work, they hope to receive some profit, even if it is small in terms of dollars. In addition, continual participation allows them to sense and recognize the few real opportunities when they arise. These generate large rewards that make the effort of trading truly worthwhile.

At the end of the chapter he lists specific observations that have a high enough probability of reoccurring he considers them rules:

  • If you find yourself holding a winning position, adding up your profits, and confidently projecting larger gains on the horizon, you are probably better off exiting the trade. The odds are that the trade has run its course.
  • When entering a trade with a market order and your fill is clearly better than expected, odds are it will end up being a losing trade. Good fill, bad trade. Get out!
  • If all your ‘trading buddies’ agree with your expectations regarding the next big move, it probably will not work out. If everyone’s conviction level is as strong as the consensus, do the opposite.

Zweig: Questions to Ask Your Financial Adviser

  
Analysis, Education
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I hate when Jason Zweig takes an idea I had kicking around in my head, then does a better job with it than I would have.
That was my reaction to reading his The 19 Questions to Ask Your Financial Adviser.
Here are a few of his key questions — and answers — from the 19:

1. Are you always a fiduciary, and will you state that in writing? (Yes.)
2. Does anybody else ever pay you to advise me and, if so, do you earn more to recommend certain products or services? (No.)
8. Do you earn fees as adviser to a private fund or other investments that you may recommend to clients? (No.)
11. Do you earn fees for referring clients to specialists like estate attorneys or insurance agents? (No.)
12. What is your investment philosophy?
15. How often do you trade? (As seldom as possible, ideally once or twice a year at most.)
19. Who manages your money? (I do, and I invest in the same assets I recommend to clients.)

There are one or two in Jason’s full list I can find small quibbles with — e.g., I believe all similar clients should pay the same fees (#5), and intellectually, I understand why trend and technicals are worthwhile for traders (#13) but on the whole it is a very solid set of rules.
Note Zweig will be at the Evidence Based Investing conference in NYC on November 2nd; you can find out more about it here.

Trader’s Emotions

  
  Education
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The hardest thing about trading is not the math, the method, or the stock picking. It is dealing with the emotions that arise with trading itself. From the stress of actually entering a trade, to the fear of losing the paper profits that you are holding in a winning trade, how you deal with those emotions will determine your success more than any one thing.

To manage your emotions first of all you must trade a system and method you truly believe will be a winner in the long term.

You must understand that every trade is not a winner and not blame yourself for equity draw downs if you are trading with discipline.

Do not bet your entire account on any one trade, in fact risking only 1% of your total capital on any one trade is the best thing you can do for your stress levels and risk of ruin odds.

With that in place here are some examples of emotional equations to better understand why you feel certain emotions strongly in your trading:

Despair = Losing Money – Trading Better

Do not despair look at your losses as part of doing business and as paying tuition fees to the markets.

Disappointment = Expectations – Reality (more…)

Your questions -My answers

  
  Education
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questionandanswerThe Cardinal Sin Of Trading

Q:  Do you believe in the rule of not letting a winning position turn into a loser? If you do, how do you handle a situation where a stop out at the ATR would cause you to take a loss on a position that was a winner at one time?

A:  This has been called the cardinal sin of trading – to let a profitable position turn into a loser. But, it happens. And, just because it does happen, doesn’t mean that it provides you with an excuse not to take your medicine and own the loss.

When we are wrong and we do have a good trade go against us, our top priority remains capital preservation. Therefore, if when painful, we cannot let a small loss grow into a larger one. The worst thing in the world is letting a bad trade turn into an investment and being held hostage by the break-even curve. That’s why stops are important and why sticking to them, even if it requires you to exit with a loss, is mandatory.

Buy The Dippers

Q:  You sometimes refer to the “buy the dippers” in a what seems to me to be a negative tone and yet you also describe part of your style as buying on pullbacks. How do you distinguish these two ideas?

A:  That’s funny you mention this and I appreciate it especially as you say I fall well within the “buy the dip” camp. I have no problem with the buy the dippers as long as they’re present and in charge of the tape, we’ll be just fine. But, the problem is, of course, that if every dip gets bought, at some point Mr. Market will figure out a way to roll back that trade and gain back some respect for his ability to cause the most amount of frustration to the majority. This will ultimately lay the foundation for a nasty bull trap scenario where everyone is long at the wrong time and then caught with their pants down in a sizable reversal. In my experience, when any trade becomes a routine money-maker, you have to expect the market to throw you a monkey wrench. There’s no room for complacency and whenever I have something that works like clockwork and others have figured out the same, I get nervous.

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