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The Trading Plan- Discipline

Trying to win in the markets without a trading plan is like trying to build a house without blue prints – costly (and avoidable) mistakes are virtually inevitable. A trading plan simply requires a personal trading method with specific money management and trade entry rules.
Discipline was probably most frequent word used by the exceptional trades that I interviewed.
There are two reasons why discipline is critical. 

  • Its a prerequisite for maintaining effective risk control.
  • You need discipline to apply your methods without second guessing and choosing which trade to take.

A final word, remember that you are never immune to bad trading habits – the best you can do is to keep them latent. As soon as you get lazy or sloppy, they will return !

Ways to Increase Willpower For Traders

  • Plan in advance and operate on the basis of habit
    • You need to have a trading plan that covers all permutations that the market can possibly throw at you. You need less willpower to follow a clearly defined plan than to try adhering to broad principles in reaction to the market.
    • Keep practicing applying your trading plan, so that you can make following the rules a habit. It is like driving, the more you do the less effort it requires progressively.
  • Motivate yourself, remind yourself of the importance of what you are doing
    • You need to remind yourself of the importance of achieving good trading results, of the importance of not throwing your hard-earned money away.
    • Use visualization techniques to picture situations where you follow your trading plan successfully. Thinking that you have lots of willpower actually makes it so.
    • Think of some trader you admire that have lots of self-control and unfazed by market movements (e.g. Ed Seykota)
  • Exercise your willpower
    • Willpower is like a muscle, the more you exert your willpower in whatever tasks, the greater your capacity for self-control.
    • You can get yourself to follow rules such as sitting up straight, opening doors with your left hand, etc.
  • Have sufficient food
    • Exercising willpower uses up glucose. Being hungry means you don’t have the energy to exert willpower.
  • Have sufficient rest
    • You can replenish your ‘willpower’ stores through sleep. Get sufficient sleep every day.

42 Wisdom Points For Traders

  1. First Things First
    You sure you really want to trade ? It is common for people who think they want to trade to discover that they really don’t.
  2. Examine Your Motives
    Why do you really want to trade ? Did you say excitement ? Then don’t waste your money in market, you might be better off riding a roller coaster or taking up hand gliding.
    The market is a stern master. You need to do almost everything right to win. If parts of you are pulling in opposite directions, the game is lost before you start.
  3. Match The Trading Method To Your Personality
    It is critical to choose a method that is consistent with your your own personality and conflict level.
  4. It Is Absolutely Necessary To Have An Edge
    You cant win without an edge, even with the world’s greatest discipline and money management skills. If you don’t have an edge, all that money management and discipline will do for you is to guarantee that you will gradually bleed to death. Incidentally, if you don’t know what your edge is, you don’t have one.
  5. Derive A Method
    To have an edge, you must have a method. The type of method is not important, but having one is critical-and, of course, the method must have an edge.
  6. Developing A Method Is Hard Work
    Shortcuts rarely lead to trading success. Developing your own approach requires research, observation, and thought. Expect the process to take lots of time and hard work. Expect many dead ends and multiple failures before you find a successful trading approach that is right for you. Remember that you are playing against tens of thousands of professionals. Why should you be any better ? If it were that easy, there would be a lot more millionaire traders.
  7. Skill Versus Hard Work
    The general rule is that exceptional performance requires both natural talent and hard work to realize its potential. If the innate skill is lacking, hard work may provide proficiency, but not excellence.
    Virtually anyone can become a net profitable trader, but only a few have the inborn talent to become supertraders ! For this reason, it may be possible to teach trading success, but only upto a point. Be realistic in your goals.
  8. Good Trading Should Be Effortless
    Hard work refers to the preparatory process – the research and observation necessary to become a good trader – not to the trading itself.
    “In trading, just as in archery, whenever there is effort, force, straining, struggling, or trying, it’s wrong. You’re out of sync; you’re out of harmony with the market. The perfect trade is one that requires no effort.”
  9. Money Management and Risk Control
    Money management is even more important than the trading method. 

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7 -Market Wisdom

  1. First Things First
    You sure you really want to trade ? It is common for people who think they want to trade to discover that they really don’t.
  2. Examine Your Motives
    Why do you really want to trade ? Did you say excitement ? Then don’t waste your money in market, you might be better off riding a roller coaster or taking up hand gliding.
    The market is a stern master. You need to do almost everything right to win. If parts of you are pulling in opposite directions, the game is lost before you start.
  3. Match The Trading Method To Your Personality
    It is critical to choose a method that is consistent with your your own personality and conflict level.
  4. It Is Absolutely Necessary To Have An Edge
    You cant win without an edge, even with the world’s greatest discipline and money management skills. If you don’t have an edge, all that money management and discipline will do for you is to guarantee that you will gradually bleed to death. Incidentally, if you don’t know what your edge is, you don’t have one.
  5. Derive A Method
    To have an edge, you must have a method. The type of method is not important, but having one is critical-and, of course, the method must have an edge.
  6. Developing A Method Is Hard Work
    Shortcuts rarely lead to trading success. Developing your own approach requires research, observation, and thought. Expect the process to take lots of time and hard work. Expect many dead ends and multiple failures before you find a successful trading approach that is right for you. Remember that you are playing against tens of thousands of professionals. Why should you be any better ? If it were that easy, there would be a lot more millionaire traders.
  7. Skill Versus Hard Work
    The general rule is that exceptional performance requires both natural talent and hard work to realize its potential. If the innate skill is lacking, hard work may provide proficiency, but not excellence.
    Virtually anyone can become a net profitable trader, but only a few have the inborn talent to become supertraders ! For this reason, it may be possible to teach trading success, but only upto a point. Be realistic in your goals.

The Power of Habit-Book Review

A new year is right around the corner, and with it will come the usual host of resolutions—sadly, rarely kept. To be more precise, more than 40% of Americans make New Year’s resolutions and just 8% achieve their goals. Sometimes the goals they set are too daunting, sometimes too vague. And, perhaps the biggest problem with the whole resolution business is that people focus on goals rather than processes.
In 2012 Charles Duhigg, a Pulitzer Prize-winning journalist for The New York Times, wrote The Power of Habit, which spent 62 weeks on the paper’s best seller lists and was named one of the best books of the year by The Wall Street Journal and theFinancial Times. It is now being reissued with an afterword by the author.
I reviewed the book when it first came out and thought I would write a new post now that I have the reissued edition. But then I reread my original piece and decided that I probably couldn’t improve on it. So instead I’ll republish it here.
* * *
“All our life, so far as it has definite form, is but a mass of habits,” William James wrote in 1892. Well, that might be a bit of an overstatement: a researcher in 2006 knocked that “mass” down to “over 40 percent.” Whatever the percentage, we are creatures of habit. In The Power of Habit: Why We Do What We Do and How to Change It (Random House, 2012) Charles Duhigg explores the work that neurologists, psychologists, sociologists, and marketers have done over the past two decades to figure out how habits work and how they change. It’s a fascinating tale. (more…)

4 Types of Trade

Type One:

The first type of trade is when you execute on your edge, your thesis, or your plan and the outcome is positive – you make money. The trade is in synch with the market – or as one of my clients says, “The market cooperated”. Everyone’s favorite type!

Type Two:

The second type of trade is where you execute on your edge, your thesis, stick to your plan and the outcome is negative, you lose money. For whatever reason, the market did not cooperate. We know there will always be a number of these type two trades. Good traders not only know this, they accept it as part of the business.

Type Three: (more…)

4 Types of Trade

Type One:

The first type of trade is when you execute on your edge, your thesis, or your plan and the outcome is positive – you make money. The trade is in synch with the market – or as one of my clients says, “The market cooperated”. Everyone’s favorite type!

Type Two:

The second type of trade is where you execute on your edge, your thesis, stick to your plan and the outcome is negative, you lose money. For whatever reason, the market did not cooperate. We know there will always be a number of these type two trades. Good traders not only know this, they accept it as part of the business.

Type Three:

The third type of trade is when you do the wrong thing – you veer from your edge, forget your thesis, or ignore your plan and the outcome is negative – losing money. This is the trade we look back on after the fact and say, “Why did I do that again”! And often you can see pretty clearly, after the fact, what you ignored or minimized during the trade, when you were caught up in trading your P&L more than the market.

Many traders experience this type of trade, but the better traders have much fewer. The better traders learn from their type three trades. They learn about the market and they learn about themselves. (more…)

Light, Taming the Beast

Larry Light’s Taming the Beast: Wall Street’s Imperfect Answers to Making Money (Wiley, 2011) is perfect summer reading fare. The author, a financial reporter and editor, is a skilled storyteller. In this book he explores a range of investment strategies and instruments, traces their development, and in the process profiles some of the best-known investors and academics.

He covers value investing (Benjamin Graham and Warren Buffett), stocks (Jeremy Siegel), indexes (John Bogle), bonds (Bill Gross), growth investing (Thomas Rowe Price), international investing (John Templeton), real estate (Donald Trump), alternatives, asset allocation, short selling (James Chanos), hedge funds (Alfred Winslow Jones and Steve Cohen), and behaviorism (Daniel Kahneman and his followers).

Light’s thesis is that “investing success does not come in one flavor” and that “the trick is to be sufficiently flexible to dip into any or all of [the approaches he describes], but by the same token, to know their limitations.” (p. 254) He does a good job of spelling out these limitations. Even for more experienced investors who are well aware of many of these limitations, Little’s prose is so quick-paced that the book should be read, not skimmed. (more…)