Archives of “analogy” tag

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The beginning of real success as a trader starts with knowing yourself.

  
  Education
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“Know yourself. – You can’t improve on something you don’t understand”.
Vince Lombardi Leadership Rule#1
 
One common trait amongst nearly all successful traders is that they have a very high understanding of who they are and how they operate. As an example, leading traders realise that they are not in control of the market; they tend to view the market almost as a force of nature without a personality, and with no agendas, the only thing they can do is control their own actions, activities and emotions. In other words they understand the way they work, what drives them and their performance, how their mind operates, and their emotions. Not necessarily on a conscious level, but nonetheless they have an understanding of how it all works.  
 
As an analogy considers a competitive yachtsman, he has to take account of the conditions of the sea and the winds; however, it is his own actions and decisions that will deem how successful he is. He can not blame the sea or the wind for failure, he has to put all his efforts in to his sailing, making correct decisions and performing the correct actions. (more…)

The market is both carrot & stick

  
  Education
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Over the past year of my trading life I have identified several interwoven cycles of learning. The most obvious being that knowledge and practice combine into your overall understanding. Knowledge alone (book learning) does not equate to understanding – you also need to practice in the market. The two combined give you what we generally call experience. Experience seems to be the thing that makes the difference. Someone who has experience tends to do better over someone who has no experience, in any field. If you were having brain surgery, would you rather have a surgeon doing it who has experience or no previous experience? Yeah, enough said.

So over time, our understanding increases (our experience). But you may also notice that your ability to act on what you know seems to lag far behind, and this can be incredibly frustrating and puzzling. Don’t you wonder at it, every time you make the same stupid mistake over and over? Whats going on here?

The fact is that we have two brains (more actually, but lets stick to two for now) – an intellectual brain and an emotional brain. In the East, there is a common analogy of rider and horse. The horse (emotional brain) is stupid and only knows such things as fear, hunger, punishment and reward. The horse understands the difference between a carrot and a stick, but not much else. The rider struggles to make the horse go where he wants to go.

This is our problem in trading. Our emotional brain (the horse) understands fear and greed, and unfortunately these fight or flight level of instincts are stronger (and faster) than our intellectual brain; they have to be. If a mugger jumps out of the bushes you don’t have time to decide if its a mugger or your friend playing a trick on you, you just run.

In the market however, this mechanism is the cause of all our woes. The market provides both a carrot and a stick. A sudden break out (carrot) lures us into buying long, and then suddenly reverses and stops us out (stick). We are lead all over the charts in a random walk, one minute its carrot, the next minute its stick; we are the dumb money.

Who then is the smart money? Surely based on the above it is simply those individuals who can actually control the horse and act according to a trading plan. There is no conspiracy by the major institutions to steal your money from you – you simply hand it over to them or other traders (and they happen to be willing to take it). In the case of the smart money, the rider is in charge, but in the case of the dumb money the horse goes where ever his instincts take him, and the rider simply hangs on (until he falls off that is).

MindTraps-Great Book

  
  Education
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I read a great book on trading psychology, called MindTraps by Roland Barach. MindTraps focuses on how the average person tends to think, compared to how we need to think to make money over time in the markets.

 Here’s a summary of points that can benefit you as a trader:

  1. 1.Before entering any trade, you should consider the other side of the trade and state the reasons you’d take the other side of the trade.  This helps you objectively enter a trade with a full understanding of the major risks that involved.
  2. Analyze your behavior from the beginning to the end of the trading process (from idea generation to entry and finally to exit) – what are the areas you can improve to help your trading profitability the most?
  3. Keep a trading journal of your thoughts on open positions and new ideas – writing things down helps you objectively look back and see where you went right and wrong.
  4. Fear blinds us to opportunity; greed blinds us to danger – emotions cause “perceptual distortion” where we only see the part of the picture that our beliefs allow us to see.
  5. We are likely to continue doing things for which we are rewarded -this can cause us to get too bullish after the bulk of the uptrend has occurred, or get too bearish near the lows.
  6. Fear of regret slants stock market behavior toward inaction and conventional thinking –  the person who is afraid of losing is usually defeated by the opponent who concentrates on winning (an analogy for sports fans is the Prevent defense in football – playing “not to lose” only prevents you from winning).
  7. Can’t have a personal agenda to prove your self-worth in the markets –  the focus must be on following your plan to maximize the ability to make money.
  8. Don’t get overly attached to any one view on a stock or market – don’t talk to others about open positions; it just makes it that much harder to exit when your plan says it should.
  9. Our predictions are only as good as the information available to us – objectively look at the indicators and data you use, to get the best quality of information and focus available
  10. People prefer for gains to be taken in several pieces to maximize their feeling good about their ability, while they prefer to take all their losses in one big lump to minimize the pain they feel.
  11. People prefer a sure gain compared to a high probability of a bigger gain, so they can say they made a profit; in contrast, people will speculate on a high probability of a bigger loss over a sure smaller loss, because they don’t want to feel like a loser.  In trading, we must flip around the conventional emotions to allow us to let profits run while cutting losses shorter.

The Fallacy Of Higher Effort = Higher Returns

  
Analysis, Education
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mailEvery week I will try to dedicate some time to answering questions that readers and  members send in to me.
First off, thank you again for letting me know what is on your mind and for pointing out topics I need to discuss further. While I’m not able to answer all of the questions submitted, I have read each one submitted to me and will be looking for opportunities to share information that will be helpful to you in the coming weeks.
Today just covering one question sent by one Trader.
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Q:  The harder I try, the more money I lose. What’s going on?

 

A:  This is a fairly common phenomenon which is why we have to learn how to adapt to market conditions and be patient with our strategies. Just because you “try harder” doesn’t mean that your profits will expand equally in relation to your effort. While effort helps create and sustain an edge, at the end of the day you still need the market to cooperate with whatever you are doing.

The best analogy I can provide here is one that many golfers are familiar with. If you’ve ever golfed in high winds, you know that your score will often be higher. Some of this, obviously is due directly to the windy conditions (which you have no control over). (more…)

The Virtue of Patience

  
  Education
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The Virtue of PatienceWaiting for the right opportunity increases the probability of success. You don’t always have to be in the market. As Edwin Lefevre put it in his classic Reminiscences of a Stock Operator, “There is the plain fool who does the wrong thing at all times anywhere, but there is the Wall Street fool who thinks he must trade all the time.”
One of the more colorful descriptions of patience in trading was offered by Jim Rogers in Market Wizards: “I just wait until there is money lying in the comer, and all I have to do is go over there and pick it up.” In other words, until he is so sure of a trade that it seems as easy as picking money off the floor, he does nothing.

Mark Weinstein (also interviewed in Market Wizards) provided the following apt analogy: “Although the cheetah is the fastest animal in the world and can catch any animal on the plains, it will wait until it is absolutely sure it can catch its prey. It may hide in the bush for a week, waiting for Just the right moment. It will wait for a baby antelope, and not Just any baby antelope, but preferably one that is also sick or lame. Only then, when there is no chance it can lose its prey, does it attack. That, to me, is the epitome of professional trading.” (more…)

TRADING IS SIMPLE. IT’S JUST NOT EASY

  
  Education
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How could two phrases sound so similar, but yet be so different?

I think we need to look differences between the context of each phrase.

When I describe the idea of trading being simple, what I really mean is that itshould be effortless. The word effortless is defined by Merriam-Webster Dictionary as:

showing or requiring little or no effort <effortlesspower>

I believe that good traders are able to trade the markets effortlessly – it’s simple to them. But getting to the point of doing anything effortlessly is noteasy. In fact, it’s really hard. A good analogy would be describing an athletes ability to perform his or her skill. If we took two people – one being a person who runs two miles everyday versus a person who hasn’t ran for the past two months, who will have the easier time running one mile? The answer is simple of course. The person who runs everyday will be able to run one mile easily – it will be effortless to them. However, the person who hasn’t ran in two months will find it extremely hard to and likely have to take breaks in-between so that he or she can finish. (more…)

Principles of Peak Performance

  
  Education
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peak-performanceThe first principle of peak performance is to put fun and passion first. Get the performance pressures out of your head. Forget about statistics, percentage returns, win/loss ratios, etc. Floor-traders scratch dozens of trades during the course of a day, but all that matters is whether they’re up at the end of the month.

Don’t think about TRYING to win the game – that goes for any sport or performance-oriented discipline. Stay involved in the process, the technique, the moment, the proverbial here and now.! A trader must concentrate on the present price action of the market. A good analogy is a professional tennis player who focuses only on the point at hand. He’ll probably lose half the points he plays, but he doesn’t allow himself to worry about whether or not he’s down a set. He must have confidence that by concentrating on the techniques he’s worked on in practice, the strengths in his game will prevail and he will be able to outlast his opponent.

The second principle of peak performance is confidence. in yourself, your methodology, and your ability to succeed. Some people are naturally born confident. Other people are able to translate success from another area in their life. Perhaps they were good in sports, music, or academics growing up. There’s also the old-fashioned “hard work” way of getting confidence. Begin by researching and developing different systems or methodologies. Put in the hours of backtesting. Tweak and modify the systems so as to make them your own. Study the charts until you’ve memorized every significant swing high or low. Self-confidence comes from developing a methodology that YOU believe in. (more…)

9 Trading Option Books from our Library

  
  Education
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Get Rich With Options While the publisher choose an aggressive title for this book it does lay out four good option trading strategies. Selling puts on stocks that you want to own at lower prices anyway, option credit spreads, selling covered calls or income on long term holdings, and my personal favorite: deep-in-the-money call options. Very few ever discuss the power of buying DITM call options where you control the full upside of a stock for less risk and with far less capital.

The Bible of Option Strategies This is the encyclopedia of option strategies covering everyone that I know of. You get a description of each strategy along with specific metrics for each one on the steps in creating it, the rationale to trade it, if it is net debit or credit, the effect of time decay on the strategy, appropriate time period, selecting the right stocks and options, risk profile, the Greeks, the advantages and disadvantages and how to best exit the trade. This book is meant as a reference book but I read it through cover to cover.

Trading Stock Options Complete reverse from the above book, this is like the Cliff’s Notes of complex trading strategies. The author shows how he trading real option trades for big profits and a few some smaller losses. He simplifies many strategies to make the understandable especially playing long strangles and straddles through earnings by betting on actual post earnings volatility being greater than the volatility that is priced in to the options through Vega.

Trading On Corporate Earnings This is a great book on how to best play holding through earnings announcements by using options instead of stock. (more…)

Mental Toughness

  
  Education
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MENTALTOUGHNESSYou must eliminate “Human Emotion” as much as possible in this business. It is paramount to success.  Unless you are adapt at predicting the future, your mind is a far weaker ally than all the tools in your toolbox.

Using a Star Wars analogy: the Jedi were superior in mind control and were able to play tricks with weaker minds. Humans are emotional bunches who are not fully prepared for the forex market.

Really once you overcome fear, self-doubt, emotions, and attachment to money you, will be on your way to long term success. Depending on how much power those words have over you, will determine amount of time needed to develop needed skills for growth.

Remember you will learn how to control fear, self-doubt, emotions, and attachment to money as those are human emotions buried inside each of us since birth. Abundance is our birthright, yet many never reach full potential. (more…)

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