- You don’t choose the stock market; it chooses you. A little bit of early trading success can have a profound effect on a person’s soul. If it does choose you, you’ll have to accept that your life and investing will become forever connected.
- Your methodology must provide an unshakeable foundation that you believe in totally, and you must have the conviction to trade based upon it. If your belief is tentative or if you don’t have complete faith in your methodology, then a few bad trades will destabilize and erode your confidence.
- A calm mindset that can focus on the execution and not on the outcome is what produces profits. It takes total emotional control. You must maintain your balance, rhythm and patience. You need all three to stay in the game.
- The markets are always conniving with ingenious techniques to get you to lose your patience, to get you frustrated or mad, to bait you to do the wrong thing when you know you shouldn’t. A champion doesn’t allow the markets to get under his skin and take him out of his game.
- Like a great painting, all good trades start with a blank canvas. Winning traders first paint the trade in their mind’s eye so that their emotional selves can reproduce it accurately with clarity and consistency, void of emotions as they play it out in the markets.
- The “here and now” is all that matters. You can’t think about the last trade or the last shot or worry about the future. You need to put on your “amnesia hat” in order to remain completely unfazed by what came before. Only by doing so can you be totally absorbed in executing your present trade.
- Being prepared and having put in the work results in the bringing together of your intuition and confidence. The two go hand in hand. Extraordinary results can be expected when you are able to see it, feel it and trust it.
Archives of “belief” tag
rss
Physics Envy and Economic Theory
Economists were seduced by physics because it made their claims seem more scientific. Their belief was in the concept of equilibrium, in which it would be impossible to profit from trading around a circle of goods or a circle of currencies without actually producing anything. Of course, that is possible, and that did happen, and that’s because you’re never really at equilibrium.
Trading Thoughts
To truly become a proactive trader, you need to believe that your trade WILL go the direction you thought. This shows that you have belief in your system that finds your trade setups in the first place. If you put your trade on and the first thing you do is mark your stop or think “I hope this goes well”, then you are bound to fail as a trader. Successful traders do not hope. They do the research and use their system to find good candidates and enter the trades. It is at that point that they manage risk. They know exactly how much they have at risk and are perfectly fine if they lose that much. Why? Because it is baked into their system, and every trade does not go the way they thought.
You need to be the same way in your trading.You need to have the courage to fail, step off the curb, and enter the trade. Expect that the trade will go your way and use the power of positive thinking. Set your target, entry and your stop and then you know, at any point during the life of the trade, where you stand. If your target gets hit and you see the stock continue to go the same direction, you can’t get mad. You simply put the positive trade aside and evaluate it in a couple weeks to figure out why it continued to go beyond your target. It is at that point that perhaps you make an adjustment to your system. Perhaps you find out that it was a news item that caused the surge and then you know that it was atypical, rather than the norm, and no adjustment is needed.
In going through this thought process, you prepare yourself emotionally and as a result remove the chance of trading on emotion once in the trade. As an example, you need to be fully prepared to lose the amount invested in a single trade if your stop is triggered. If you aren’t fully prepared to take that risk, then you need to adjust the size of your trade or move on to another trade. If you prepare and emotionally accept the fact that you could be wrong, your trading becomes more mechanical and less emotional. Take some time to role-play the different scenarios and see what your reactions would be.
Five Faiths Needed for Trading Success
- You must have faith in yourself. You must believe that you can trade as well as anyone else.. This belief arises from doing your homework and staying disciplined in your system. Understanding that it is not you, that it is your system that wins and loses based on market action will keep the negative self talk at bay.
- You must have faith in your method. You must study the historical performance of your trading method so you can see how it works on charts. Also it is possible to quantify and back test mechanical trading systems for specific historical performance in different kinds of markets.
- You must have faith in your risk management. You must manage your risk per trade so it brings you to a 0% mathematical probability of ruin. A 1% to 2% of total capital at risk per trade will give almost any system a 0% risk of ruin.
- You must have faith that you will win in the long term if you stay on course. Reading the stories of successful traders and how they did it will give you a sense that if they can do it you can to. If trading is something you are passionate about all that separates you from success is time.
- You need faith in your stock. It helps in your trading if you trade stocks, commodities, or currencies that you 100% believe in. Traders tend to have no trouble trading a bullish system with $AAPL if they believe it is the greatest company to ever exist and will go to $500 within six months. It is much easier to follow an always in trend reversal system with Gold if you believe it tends to trend strongly one way or the other. Of course you have to follow a defined system and take the signals even if it goes against your opinions but believing in your trading vehicle helps tremendously.
Beliefs of Unsuccessful Traders
1. I must be trading something all the time.
2. If I lose on a trade, I feel angry, frustrated, sad, or sick. If I win on a trade, I’m a happy camper.
3. If I don’t get on board with the hot tip of the day, I’ll miss out
. 4. The markets are out to get me.
5. I’m unwilling to take the stop-out, so I’m turning this trade into an investment.
6. If I just keep studying, looking, and reading, I’ll find the magical formula/indicator/guru to lead me to riches.
. Everything has to be perfect for me to get into a trade
8. If I win, I was skillful. If I lose, I was unlucky.
It’s only through daily assessment of convictions — and with radical honesty — that a trader grows, develops, and thrives. Diligent examination of beliefs and the courage to change them is an ongoing challenge that must be conquered if the trader is to move to higher levels of success.
Buddha says:
“Believe nothing just because a so-called wise person said it. Believe nothing just because a belief is generally held. Believe nothing just because it’s said in ancient books. Believe nothing just because it’s said to be of divine origin. Believe nothing just because someone else believes it.”
Common Mistakes for losing Money
Trading is an evolutionary process. Nobody can wake up being a Master Trader. Unfortunately there is no book or magic trick that can turn you into the highly profitable trader. Although the belief and the hope to obtain those skills instantly is still in place.
The statistics say that only the ones with the self-dedication and discipline succeed in this business.
The most common mistakes leading to losses:
-Trading against the market;
-No trade potential;
-No serious buyers or sellers in the stock;
-Wide stop-loss;
-Fear of loss.
Traders should stay calm during the trading, this helps to observe and analyze the situation on the market much better, see some small details and make a competent decision.
Panic, stress or fear, always lead to mistakes.
One of the serious problems in trading is rush and mania to be present on the market all the times, opening positions when there is no potential for a trade or where the market is either flat or going the other direction.
Tips to resolve the mistakes:
1. Always look at the market. If there is no clear picture of the market’s behavior, don’t risk your money.
2. Always look at a trade potential. If you look at the daily charts and see that the daily bars are just 20 cents long, then look for other stocks, where the potential is at least 40 cents.
3. Always look either at the Open Book or Market Maker window and Tape. If you don’t see any order flow on the Tape or the order sizes are small (less than a 1000 shares), then don’t enter the trade.
4. Always know where you are going to place you stop-loss order. If it is more than 10 cents away from your entry point, don’t enter the trade.
5. If you’re just not sure, or if the situation is uncertain, don’t enter the trade.
Following these tips requires some work and changes to our habits. It is not easy at all! We always hear sayings that the trader should be disciplined. What it actually means is changing your old habits and training yourself to have new ones. It is not comfortable, but it brings positive results, which will be noticeable on your month-end P/L report.
10 Trading Mistakes
1. Refusing to define a loss.
2. Not liquidating a losing trade, even after you have acknowledged the trade’s potential is greatly diminished.
3. Getting locked into a specific opinion or belief about market direction. From a psychological perspective this is equivalent to trying to control the market with your expectation of what it will do: “I’m right, the market is wrong.”
4. Focusing on price and the monetary value of a trade, instead of the potential for the market to move based on its behavior and structure.
5. Revenge-trading as if you were trying get back at the market for what it took away from you.
6. Not reversing your position even when you clearly sense a change in market direction.
7. Not following the rules of the trading system.
8. Planning for a move or feeling one building, but then finding yourself immobilized to hit the bid or offer, and therefore denying yourself the opportunity to profit.
9. Not acting on your instincts or intuition.
10. Establishing a consistent pattern of trading success over a period of time, and then giving your winnings back to the market in one or two trades and starting the cycle over again.
Perfectionism
Trading is not about perfection. It is about probability and progress. All charts, analyses (fundamental and technical) and trading plans are built on probabilities.
Why then, do so many traders strive for perfection? Why do so many traders miss trades, waiting for exactly the right entry and then beat up on themselves when it doesn’t come and the position runs away while they sit there scratching their heads and condemning themselves?
Why are so many traders trying to turn a game of probability into one of 100% certainty?
The answer lies in one of the cardinal sins of trading which is PERFECTIONISM.
Perfectionism can be a great help to people in many professions, but can be fatal to a trader. Perfectionists, always trying to find the Holy Grail of trading go from one service to another, from one system to another, looking for a way that they can be right all the time. YES! Now, I found it. It’s this trading room, or this service, or this indicator! Wait… something is wrong here. Not all of these trades are working and I have draw downs! How can it be that this particular method failed and I actually had to take a loss? Must be something wrong. I will try harder and look for an even better system, a more expensive service, a new and improved guru, some absolutely no-fail software so that I can have ONLY WINNING TRADES. (more…)
Reacting versus Predicting in Trading
Most of the best traders I have read about and know of personally do not predict what will happen they trade what is happening. New traders always want to predict, they want to argue about their beliefs and why something must happen or will happen. Most rich traders are rich because they are flexible, they have no strong opinions and are just looking at possibilities and ready to take a set up, buy a break out or short a break down. A new trader believes that ‘conviction’ about a trade is important, holding through an adverse move is usually a bad idea, especially if a key level is reached that is showing the trader that they are wrong. A rich trader is waiting for some price level to trigger their entry then another price level to trigger their exit. A new trader is trading off a belief and has no real exit plan most the time because they are sure that they are right.
The money I have pulled out of the market over the past 10 years has come from trading price action not predicting. I have entered at high probability moments on break outs above resistance levels. I have trailed my winning trend trades with a stop and sold when the trend reversed through key short term support. When I was wrong I stopped out for a small loss, when I was right I let the winner run up for a very big win. I am always trend hunting, always taking my high probability trades, always cutting losses short, and when not seeing a great trade doing nothing and waiting.
Winners Trade to Win
As you already know, I am not a slave to conventional wisdom. It is my belief that most popular beliefs held by the masses are not wise at all. This applies to all walks of life, not just the stock market.
The latest bit of unwise conventional wisdom is the idea that one must “focus on not losing money in order to make money”. Play it safe and protect your capital has been a popular mantra over the past month. What a load of crap.
You know what happens when you focus on not losing money? You lose it. Either that or you make meager gains (all hail consistency, as in consistently average!). It’s akin to an athlete playing not to get injured. That is when you get hurt. The team that plays not to lose rarely wins.
In trading, playing not to lose will cause you to pass up on good trades and scare you out of trading volatile, yet lucrative markets. If you have put in the blood, sweat and tears that accompany hard work and dedication, know what you are doing, and have a sound methodology and edge, don’t ever play not to lose.
Note that this doesn’t mean you throw caution to the wind. On the contrary, a trader must be vigilant about managing risk, position size and ones emotions. These three factors, along with having an edge, allow one to play to win, rather than lose, and put on winning trades.