You’ve probably heard of Maslow’s hierarchy of needs.
It’s the ranking of primary human needs for psychological well-being as described by American psychologist Abraham Harold Maslow, and is usually illustrated not unlike the old-school food pyramid:
The financial blogger known only as Mister Squirrel recently shared his own version of Maslow’s hierarchy: the path to financial success.
Here’s what it looks like:
Three popular trading personality types are intuitive, data oriented, and impulsive.
The data-oriented trader focuses on concrete evidence and is often very risk averse. They seek out as much supporting data for a trading decision as possible. The trader who prefers to do extensive back-testing of a trading idea exemplifies data-oriented type. Consider incorporating elements of data oriented trader personality into your trading style regardless of your natural inclinations. Make sure you have adequate information (a reason) before executing a trade. Particularly important is to have and trade a detailed trading plan in which risk is minimized and entry and exit strategies are clearly specified. Most often however, the data-oriented trader may take things a little too far. Searching for “the perfect” knowledge that just doesn’t exit in the trading world. At some point, one must accept the fact that he or she is taking a chance and no amount of data analysis can change this fact.
The intuitive trader is the opposite of the data-oriented trader. Trading decisions are based upon hunches and impressions rather than on clearly defined data. There’s a difference between being an intuitive trader who develops this style over time and one who is naturally intuitive. The experienced intuitive trader, bases decisions on data and specific market information. But, as a seasoned trader, analyzes the data quickly and efficiently. It happens so quickly that it seems like it occurs intuitively, but it is actually based on solid information. Ideally, all traders should gain extensive experience to the point where sound decisions are made with an intuitive feel.
A third trader personality type is the impulsive trader (gambler). This is the most dangerous style. The impulsive trader allows his or her decisions to adversely influence trading decisions. Rather than looking at information logically and analytically, information is discounted completely. The impulsive trader seeks out risk and enjoys taking risky, exciting trades. Impulsive traders can often make huge profits one day and see large draw downs the next. Your personality can have a huge influence on your trading performance. Identify your assets and liabilities, and work around your personality when it is necessary.
While we can’t know where prices will go, what the next breaking news will be, or how much profit we will make in our next winning trade there are a few things we can know:
We can know how big of a position we will take on our next entry.
We have to know where price will go to prove us wrong and cause us to exit a trade. You have to know where you are getting out before you get into a trade.
We should know how much we could lose if our trade goes against us and we are stopped out.
We should know the highest probability entries that we would take.
We should know the watch list that we will be trading from and not take any wild card trades before understanding chart patterns and historical price performance.
We should know what our total portfolio risk is at any one time if all our positions turn into losers at the same time.
We should understand how the leverage works before we trade futures or option contracts.
We should understand the potential maximum draw down of a string of losers based on our position sizing and winning percentage.
We should know whether the market we are trading is in an up trend or a down trend in our time frame.
We should always have a trading plan that tells us what to do based on what the market is doing. We should know how to react to each days price action based on our current positions.
One of the most puzzling paradoxes of trading is that you have to show up every day, but most days your best move is to do nothing.
I don’t day trade, but I do look at a lot of time horizons, sometimes as short as 1 minute bars. But I’ve learned to focus my attention on shorter time horizons only when longer time horizons are at a critical juncture. My trading life became much simpler when just owning a stock was no longer a reason to look at a shorter time horizon than daily bars. I don’t even load up the quote streamer until I’ve made the decision to buy or sell a stock that day based on daily and weekly charts.
It can be more optimal to trade extremely short time horizons, but the benefits of trading very short term don’t scale linearly due to transaction costs becoming more difficult to beat.
For me, it is important to not have to grind for every dollar. I don’t want a full time job from the markets, but I do want to make high returns on my money, so I consistently reform my trading to be in line with these goals.
I start off every campaign in a stock very fickle, weak handed. As a position works for me and I pyramid into a larger position, I become a strong hand; I’m dug in.
“Observation # 1: The greatest number of losing traders is found in the short-term and intraday ranks. This has less to do with the time frame and more to do with the fact that many of these traders lack proper preparation and a well thought-out game plan. By trading in the time frame most unforgiving of even minute error and most vulnerable to floor manipulation and general costs of trading, losses due to lack of knowledge and lack of preparedness are exponential. These traders are often undercapitalized as well. Winning traders often trade in mid-term to long-term time frames. Often they carry greater initial levels of equity as well.” Walter Downs
“The ability of banks to issue claims far in excess of their reserve position is essentially regulated counterfeiting when those claims have little or no chance of being satisfied, and it is an inherently cyclical and destabilizing process. The Fed, as US banks’ chief regulator, has not only condoned this imprudent, unsustainable (and Constitutionally-dubious) activity, it has encouraged and abetted it.” Paul Brodsky and Lee Quaintance
“He did not publish or spread any information that was false. Instead he praised the companies he had invested in to the skies, including the spreading of rumors. Does his action fall into information-based manipulation because of this? The answer is: partly. From the total gain of USD 800,000 he had to repay USD 285,000, so just over a third of the total gain.” Mark Schindler
“Runs occur when a group of traders create activity or rumors in order to drive the price of a security up.” Unknown (more…)
To lower stress levels trade less and get away from watching every single price change. Day traders could trade only the open and closing hour, swing trader and trend traders could just take opening or closing signals. You could go from every tick to just checking in every hour or so if you have options or hard stops in. Most of the days trading is random noise, and randomness will stress you out focus on your time frame and only the quotes that really manner when they manner.
Those of you who have read Reminiscences of a Stock Operator, Edwin Lefevre’s classic book reportedly based on Jesse Livermore, will know that ‘Larry Livingston’(Livermore) profited from shorting stocks immediately prior to the 1906 San Francisco earthquake. Initially the market held up, but Livermore was patient enough to sit in his positions, and the market finally succumbed to a sharp downdraft after a couple days.
In Michael Covel’s book Trend Following, there is a section devoted to major events that have occurred, which have significantly affected the markets, and that it was pointed out how often a trend follower was trading in the correct direction at that particular time. By definition, a trend follower would be trading in the correct direction when there is a major market specific event (such as the 1987 market crash, the dot.com bubble, the 2008 crash etc), but also more often than not when other major events occur, such as the collapse of Barings Bank, 9/11 etc.
Back to Livermore. While he started shorting stocks on a hunch prior to the earthquake, I follow the trend on the indices as a basis for whether I should be long or short stocks. Indeed, Livermore himself came to the same conclusions:
“I began to see more clearly – perhaps I should say more maturely – that since the entire list moves in accordance with the main current… Obviously the thing to do was to be bullish in a bull market and bearish in a bear market. Sounds silly, doesn’t it? But I had to grasp that general principle firmly before I saw that to put it into practice really meant to anticipate probabilities. It took me a long time to learn to trade on those lines.”
1. Markets tend to return to the mean over time
2. Excesses in one direction will lead to an opposite excess in the other direction
3. There are no new eras — excesses are never permanent
4. Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways
5. The public buys the most at the top and the least at the bottom
6. Fear and greed are stronger than long-term resolve
7. Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names
8. Bear markets have three stages — sharp down, reflexive rebound and a drawn-out fundamental downtrend
9. When all the experts and forecasts agree — something else is going to happen
10. Bull markets are more fun than bear markets.
If you understand that you can only control two things in the stock market, the rest is easy. This understanding simplifies decision-making processes and lightens worry…
You can control the cash you have, whether it’s on-hand or in investments.
You can control where you get in a stock or where you get out of a stock. You can control where you get in a certain stock at a certain price or where you get out of a stock if it’s falling below.
As a stock is climbing higher and higher, it’s a profit point. It’s a point where you get out.
These are the only two things you can control: your cash and your stops. It makes things easy, doesn’t it?
We can’t control the wave of the market as individual investors. We are not the operators; the operators can control much more. We don’t have billons of dollars to put into one stop to make it move.
Of course you can control where your position is on spreads, but where are you getting in and where are you getting out? Your cash and your stops are in your control.
If you focus and remember the two things you can control, the worry will subside…
