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Traps and Pitfalls

  
  Education
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Realistically, there are many ways to lose money in the financial markets and, if you play this game long enough, you’ll get to know the most of them intimately. Fortunately, a survivalist plan empowers you to avoid many of the traps and pitfalls faced by other traders. Above all else, learn the five market scenarios that place you at the most risk.

  1. Bad Markets – A good pattern won’t bail you out of a bad market, so move to the sidelines when conflict and indecision take hold of the tape. Your long-term survival depends on effective trade management. The bottom line: don’t trade when you can’t measure your risk, and stand aside when you can’t find your edge.
  2. Bad Timing – It’s easy to be right but still lose money. Financial instruments are forced to negotiate a minefield of conflicting trends, each dependent on different time frames. Your positions need to align with the majority of these cycles in order to capture the profits visualized in your trade analysis.
  3. Bad Trades – There are a lot of stinkers out there, vying for your attention, so look for perfect convergence before risking capital on a questionable play, and then get out at the first sign of danger. It’s easy to go brain dead and step into a weak-handed position that makes absolutely no sense, whether it moves in your favor or not. The bottom line: it’s never too late to get out of a stupid trade.
  4. Bad Stops – Poor stops will shake you out of good positions. Stops do their best work when placed outside the market noise, while keeping risk to a minimum. Many traders believe professionals hit their stops because they have inside knowledge, but the truth is less mysterious. Most of us stick them in the same old places.
  5. Bad Action – Modern markets try to burn everyone before they launch definable trends. These shakeouts occur because most traders play popular strategies that have been deconstructed by market professionals. In a sense, the buy and sell signals found in TA books are turned against the naïve folks using them.

You might be a bad trader if……….

  
  Education
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There are young people in the market that are really bad traders and there is also old traders that are very good, but there are no old bad traders in the market because they went broke and gave up a long time ago.

You might be a bad trader if……….

…your primary method is to try to call tops and pick bottoms.

“Don’t try to buy at the bottom and sell at the top. It can’t be done except by liars.”  -Bernard Baruch

 You might be a bad trader if……….

…instead of benefiting from the 200 point run in Apple this year you actually lost money by fighting the trend.

“Cardinal Rule #1 is to sell short only during what you believe is a developing bear market, not a bull market.” -William O’Neil (more…)

Five Market Wizard Lessons

  
  Education
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“Five Market Wizard Lessons” 
Hedge Fund Market Wizards is ultimately a search for insights to be drawn from the most successful market practitioners. The last chapter distills the wisdom of the 15 skilled traders interviewed into 40 key market lessons. A sampling is provided below:

1. There Is No Holy Grail in Trading
Many traders mistakenly believe that there is some single solution to defining market behavior. Not only is there no single solution to the markets, but those solutions that do exist are continually changing. The range of the methods used by the traders interviewed in Hedge Fund Market Wizards, some of which are even polar opposites, is a testament to the diversity of possible approaches. There are a multitude of ways to be successful in the markets, albeit they are all hard to find and achieve.

2. Don’t Confuse the Concepts of Winning and Losing Trades with Good and Bad Trades
A good trade can lose money, and a bad trade can make money. Even the best trading processes will lose a certain percentage of the time. There is no way of knowing a priori which individual trade will make money. As long as a trade adhered to a process with a positive edge, it is a good trade, regardless of whether it wins or loses because if similar trades are repeated multiple times, they will come out ahead. Conversely, a trade that is taken as a gamble is a bad trade regardless of whether it wins or loses because over time such trades will lose money. (more…)

A Bad Teacher

  
  Education
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The market often rewards bad behavior. You exit a stock because your stop is hit. You are okay with this because you followed your plan. The market then immediately reverses. You begin to think, “If only I stayed with the position.” The next time the market goes against you, you decide you are not going to get tricked again. This time though, the market does not reverse and what started out as a small manageable loss is now huge.

The market will give you loss after loss forcing you to abandon a methodology right before it takes off without you. On the flip side, the market will lull you into a false sense of confidence. You trade larger and larger, taking on excessive risk. You print money until your risks become so excessive that one or two bad trades wipe you out.

Learn from the market, but realize that sometimes it can be a lousy instructor.

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.

Ed Seykota-Quotes

  
  Education
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If you can’t take a small loss, sooner or later you will take the mother of all losses.

There are old traders and there are bold traders, but there are very few old, bold traders.

Dramatic and emotional trading experiences tend to be negative. Pride is a great banana peel, as are hope, fear, and greed. My biggest slip-ups occurred shortly after I got emotionally involved with positions.

I prefer not to dwell on past situations. I tend to cut bad trades as soon as possible, forget them, and then move on to new opportunities.

The elements of good trading are: 1. Cutting losses, 2. Cutting losses, and 3. Cutting losses. If you can follow these three rules, you may have a chance.

Trying to trade during a losing streak is emotionally devastating. Trying to play “catch up” is lethal.

I set protective stops at the same time I enter a trade. I normally move these stops in to lock in a profit as the trend continues. (more…)

Mistaking luck for skill.

  
  Education
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good-luckAre you lucky? Napoleon was once asked whether he preferred courageous generals or brilliant generals. Supposedly, his response was “neither”, for he preferred lucky generals.
You may or may not agree, but there are some things we can’t explain (just yet), and luck is one of them. Some people have the instinct — or luck — to get out of bad trades at the right time. Others simply just don’t have it. Although some people may actually have the instinct or ability to make the right market moves; most of us probably just rely on luck to get on the winning side of a trade. So, the question here is: how lucky are you?

Tips to stop the self-destruction

  
  Education
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1. Take a Break

When you have experienced successive losses, you should quit trading for a day. Some traders even have a “punishment” that is assumed by a trading plan: had loss, no trading for a week! Market will not disappear and tomorrow have even more opportunities for you. Do not do anger trades, just take a breath and give yourself a break.

2. Shorten Size

Shorten the size of amount traded considerably. In such a way you will be able to distract your mind of trading for a while and become sensible again. Give yourself time and get back to the right size trading only when you are really ready.

3. Add Money You Didn’t Win

Put the amount equal to the winning trade you didn’t take in your forex account. When you see money in your account, it will make you feel better and take wise decisions.

4. Add Amount You Lost

If you experienced a loss, you can add to the amount you have lost back to the account. You will be surprised at how easy it can become normal again when you do not see your account with losses.

5. Use Visual Effects!

Create a poster or make a note which can remind you of not making unreasonable decisions after bad trades. The note will help you to stay sensible and take only the trades that you can completely understand and pass on all the rest.

6. Trade With Reason

Psychology is a critical factor that influences success or failure in trading. You should have the right psychological reasons to do trades.

7. Be Precise

You should be disciplined. Actually, you should become army disciplined. Bear in mind that emotions should have nothing to do with your decision taken as for the trades.

8. Confess and Talk It All Out

Confess about your losses to somebody nearby or even over the internet, a fellow trader or somebody who can understand your pain. Talking will free your mind from negative thoughts and will bring you back to real life.

Six Positive Trading Behaviors

  
  Education
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1) Fresh Ideas – I’ve yet to see a very successful trader utilize the common chart patterns and indicator functions on software (oscillators, trendline tools, etc.) as primary sources for trade ideas. Rather, they look at markets in fresh ways, interpreting shifts in supply and demand from the order book or from transacted volume; finding unique relationships among sectors and markets; uncovering historical trading patterns; etc. Looking at markets in creative ways helps provide them with a competitive edge.
2) Solid Execution – If they’re buying, they’re generally waiting for a pullback and taking advantage of weakness; if they’re selling, they patiently wait for a bounce to get a good price. On average, they don’t chase markets up or down, and they pick their price levels for entries and exits. They won’t lift a market offer if they feel there’s a reasonable opportunity to get filled on a bid.
3) Thoughtful Position Sizing – The successful traders aren’t trying to hit home runs, and they don’t double up after a losing period to try to make their money back. They trade smaller when they’re not seeing things well, and they become more aggressive when they see odds in their favor. They take reasonable levels of risk in each position to guard against scenarios in which one large loss can wipe out days worth of profits.
4) Maximizing Profits – The good traders don’t just come up with promising trade ideas; they have the conviction and fortitude to stick with those ideas. Many times, it’s leaving good trades early–not accumulating bad trades–that leads to mediocre trading results. Because successful traders understand their market edge and have demonstrated it through real trading, they have the confidence to let trades ride to their objectives.
5) Controlling Risk – The really fine traders are quick to acknowledge when they’re wrong, so that they can rapidly exit marginal trades and keep their powder dry for future opportunities. They have set amounts of money that they’re willing to risk and lose per day, week, or month and they stick with those limits. This slows them down during periods of poor performance so that they don’t accumulate losses unnecessarily and have time to review markets and figure things out afresh.
6) Self-Improvement – I’m continually impressed at how good traders sustain efforts to work on themselves–even when they’re making money. They realize that they can always get better, and they readily set goals for themselves to guide their development. In a very real sense, each trading day becomes an opportunity for honing skills and developing oneself.

Symptoms Of A Bad Stock Trader

  
  Education
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Ultimately the only sign of a bad trader that counts is if you’re losing money, but there are some individual signs and characteristics of a bad trader. See if you possess any of them.

  1. Your only news source is Blue Channels
  2. You can’t get over missed trades/opportunities. 
  3. You don’t track your trades.
  4. You’re opposed to learning new techniques.
  5. You have trouble breaking off bad trades.
  6. You put too much stock in what others think. 
  7. You panic and sell every time you see red.
  8. You only buy on green days.
  9. You blame other traders for your stock’s bad performance.
  10. You use every indicator known to analyze a stock. 
  11. You don’t know what stops are.

Let me know what you think. Are there any other symptoms of a bad trader?

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