Do you think of each trade as an island, as the great hope, or do you think in terms of probabilities over a series of trades? Casinos make their money by keeping the odds in their favor over a large number of bets. And that’s how successful traders think too. They don’t get attached to the success or failure of any given trade. Their primary goal is to stay calm, relaxed and open to the market’s opportunities so that they can execute their edge precisely and keep the odds in their favor. Thats why I make such a big deal about emotional clearing and staying calm. The emotional clearing technique I use is literally worth tens of thousands of dollars to me in bottom line results.
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rssMastering the Trade, quotes by John F. Carter
The quotes below are provided by John F. Carter, master day trader; pulled directly from his new book Mastering the Trade.
This may be the best quote of all:
“The financial markets are naturally set up to take advantage of and prey upon human nature. As a result, markets initiate major intraday and swing moves with as few traders participating as possible. A trader who does not understand how this works is destined to lose money”
“The financial markets are truly the most democratic places on earth. It doesn’t matter if a trader is male or female, white or black, American or Iraqi, Republican or Democrat. It’s all based on skill.”
“A trader, once in a position, can deceive himself or herself into believing anything that helps reinforce the notion that he or she is right”
“…professional traders understand this all too well, and they set up their trade parameters to take advantage of these situations, specifically preying on the traders who haven’t figured out why they lose”
“…markets don’t move because they want to. They move because they have to.”
“After all, the money doesn’t just disappear. It simply flows into another account – an account that utilizes setups that specifically take advantage of human nature.” (more…)
Learning From Losers
Traders will typically approach a large loss in one of two ways. First is the dumb way, and that is to become a petulant whiner and throw a fit. Next is the more-constructive way, and that is to use the loss as a means of developing as a trader and to “quote” — learn from your mistakes. But there is a third way. And that is to view the loss as the cost of information.
I don’t mean the cost of doing business per se. This is not typically associated with large losses. Small losses, yes. Because to make money you have to lose some along the way, as casinos do every day. And not the cost of tuition where the market charges a fee to school us. No, I mean information.
Instead of asking yourself about where you placed your stops and getting all personal about the whole thing, ask yourself what happened. Why did the market move the way it did? If you haven’t suffered a capital depletion, you are not likely to demand an answer and more likely to throw off the question with a wave of the hand and a shrug. “Who knows, who cares. I only play odds.”
Markets are a beast and if you want to play with them, you’ll have to be careful. Wear protective goggles and gloves. If you want to tame them though, you’ll need to wrestle with them. And sometimes you lose some body parts along the way.
Uncertain Outcome, Consistent Result
Every trader knows trading is a probability game. However, very few can internalize and live by the true meaning of what it means to be a probability game.
Mark Douglas, the author of “Trading in the Zone”, explains it well. Someone who masters the probability game produces uncertain outcome but consistent result. The best example to illustrate this concept is the casino business. The casino holds on the average 4.5% probability advantage over the player. It does not know whether the next hand will be a winner or a loser against the player, but the casino is certain that they always win given enough bets. Therefore casinos do not care if a player is going through a winning streak, as long as he is not cheating.
That’s exactly how traders need to think about his trades. Market is random. Anything can happen to the current trade. A trader can increase his probability of winning either through fundamental or technical analysis but the best analysis can never produce a 100% certainty. In reality, the highest win rate that the best analysis can produce is far from 100%. However, as long as the trader has a trading plan that can produce positive expected value, he can expect consistent result over a reasonably large number of trades, just like the casino. (more…)
Learning From Losers
Traders will typically approach a large loss in one of two ways. First is the dumb way, and that is to become a petulant whiner and throw a fit. Next is the more-constructive way, and that is to use the loss as a means of developing as a trader and to “quote” — learn from your mistakes. But there is a third way. And that is to view the loss as the cost of information.
I don’t mean the cost of doing business per se. This is not typically associated with large losses. Small losses, yes. Because to make money you have to lose some along the way, as casinos do every day. And not the cost of tuition where the market charges a fee to school us. No, I mean information.
Instead of asking yourself about where you placed your stops and getting all personal about the whole thing, ask yourself what happened. Why did the market move the way it did? If you haven’t suffered a capital depletion, you are not likely to demand an answer and more likely to throw off the question with a wave of the hand and a shrug. “Who knows, who cares. I only play odds.”
Markets are a beast and if you want to play with them, you’ll have to be careful. Wear protective goggles and gloves. If you want to tame them though, you’ll need to wrestle with them. And sometimes you lose some body parts along the way.
Larry Hite Insights and Wisdom
Larry Hite, who was profiled in Jack Schwager’s Market Wizards’ series, spoke recently to a group of students. An excerpt:
I believe I had to get into this business because it was simple. There are just a few questions you got to ask yourself. It’s like a checklist that you have to go through. I’m going to go through those questions, discuss them with you, and they can save you a lot of grief. I don’t know that they will make you a lot of money, but mostly they do. I mean, making money in the markets is more simple than it’s not. The trouble is that sometimes you get in the way, or if you’re working for a firm, they get in the way, because there are a lot of social implications. First I’m going to tell you a little about math. I have a guy that works for me, [who] graduated from Wharton, magna cum laude, and we were sitting around one day and we were, I don’t remember what we were doing but we had to figure out the compounded rates of return, and instead of using a calculator we were just looking at the numbers and doing it in our heads. He was young and just out of college, and he kind of felt puffed up about it. You know, it made us feel smart, which is a rare feeling for me. Then I said to him, “You know Michael, the problem with this is anybody can do this with six dollar calculator. You don’t have to be a phi beta kappa. Anybody can do this.”
Larry Hite
Later he continued:
One of the great things about the market is, the markets don’t care about you. The market doesn’t care what color you are. The markets don’t care if you are short or tall. They don’t care about anything. They don’t care whether you leave or stay…I met the guy who wrote this best seller now called, Bringing Down the House, it’s about these MIT guys who beat the blackjack tables. And part of the problem, if you’re going to be a blackjack counter is that the casinos don’t like you. They actively don’t like you. And they come and tell you in rather strong things to take your business away. Well, the beautiful thing about the markets, they don’t like you, they don’t dislike you, they just don’t care. They are there everyday. You want to play, you can play. You don’t want to play, don’t play. And you can choose. You sit, there is no penalty. You know, when you stand you know…I don’t know how many of you play baseball…when your at bat if something comes through the strike[zone], if you don’t swing you still get a strike against you. But the markets are a no penalty game. You can stand there and wait. You can go home and wait. It doesn’t matter. And that’s really a terrific thing.
Larry Hite
Many people lose sight of the main goal of trading the markets. Instead of worrying about making money, they worry about how much they are trading. Keep Hite’s words close, and don’t forget the main goal.
Learning From Losers
Traders will typically approach a large loss in one of two ways. First is the dumb way, and that is to become a petulant whiner and throw a fit. Next is the more-constructive way, and that is to use the loss as a means of developing as a trader and to “quote” — learn from your mistakes. But there is a third way. And that is to view the loss as the cost of information.
I don’t mean the cost of doing business per se. This is not typically associated with large losses. Small losses, yes. Because to make money you have to lose some along the way, as casinos do every day. And not the cost of tuition where the market charges a fee to school us. No, I mean information.
Instead of asking yourself about where you placed your stops and getting all personal about the whole thing, ask yourself what happened. Why did the market move the way it did? If you haven’t suffered a capital depletion, you are not likely to demand an answer and more likely to throw off the question with a wave of the hand and a shrug. “Who knows, who cares. I only play odds.”
Markets are a beast and if you want to play with them, you’ll have to be careful. Wear protective goggles and gloves. If you want to tame them though, you’ll need to wrestle with them. And sometimes you lose some body parts along the way.
Learning From Losers
Traders will typically approach a large loss in one of two ways. First is the dumb way, and that is to become a petulant whiner and throw a fit. Next is the more-constructive way, and that is to use the loss as a means of developing as a trader and to “quote” — learn from your mistakes. But there is a third way. And that is to view the loss as the cost of information.
I don’t mean the cost of doing business per se. This is not typically associated with large losses. Small losses, yes. Because to make money you have to lose some along the way, as casinos do every day. And not the cost of tuition where the market charges a fee to school us. No, I mean information.
Instead of asking yourself about where you placed your stops and getting all personal about the whole thing, ask yourself what happened. Why did the market move the way it did? If you haven’t suffered a capital depletion, you are not likely to demand an answer and more likely to throw off the question with a wave of the hand and a shrug. “Who knows, who cares. I only play odds.”
Markets are a beast and if you want to play with them, you’ll have to be careful. Wear protective goggles and gloves. If you want to tame them though, you’ll need to wrestle with them. And sometimes you lose some body parts along the way.
Trade Like A Casino, Not A Gambler
Trade Like a Casino: Find Your Edge, Manage Risk, and Win Like the House
Any quick drive through Las Vegas makes it pretty clear who is rolling in the money – the Casinos! Why do gamblers keep going back despite losing most of the time? Misplaced hope, fantasies about the big win, promising themselves they will walk away when they are up and still winning, and probably the inability to calculate probabilities. These symptoms may sound familiar to new traders who have lost money in the stock market, especially when we were new to trading and had delusions of grandeur about trading theirway to prosperity quickly and easily.
In gambling there are really only two sides to choose to be on, either you are a gambler or you are the house. The gamblers have the long term odds stacked against them. The more they gamble, the more the odds are that they will inevitably lose. The casino has stacked the odds on their side over the long haul. The more the gambler keeps gambling, the more the odds shift in favor of the casino operator. The more they gamble the greater the chance the gambler will leave empty-handed.
The book featured in this blog post explains the winning principles of trading by using the casino paradigm. Profitable traders operate like casinos, with the odds in their favor over the long term. They have learned to trade with historically, back-tested trading systems that put the odds on their side. Much like casino operators, they risk small amounts of equity per trade (around 1% – 2% of their accounts), so no one trade can hurt them financially and mentally for that matter.
Most unseasoned traders behave like gamblers, with no real advantage. They plunge large bets on stocks so haphazardly that they just have a 50-50 shot like a roulette wheel – red or black. Many times these traders hurt themselves even worse by buying into the market in a downtrend and shorting into a rally, believing that they can pick the bottom or top. Some new traders would love to have a 50/50 win ratio, many actually to all the wrong things and are no where near a 50% win rate. (more…)
ARE YOU A GAMBLER?
1) The Gambler Trades Through Earnings Reports: If you are a trader (as opposed to an investor) and decide to hold a stock/option position through earnings you are gambling. Due to the very nature of earnings reports your position could gap down or up; therefore, you are choosing to take a big chance (e.g., gamble) on what that stock will do post earnings. Sure, you could get lucky and win big, but you could also lose big. Long term success in the stock market is not about luck, but about skill. There will always be another trade on another day. Think before you trade making sure the odds (i.e. the probabilities) are with you, not against you.
2) The Gambler Trades Without A Plan: If you make your trading decisions based on the morning news, on the latest BLUE CHANNELS story, on a new strategy not yet tested, or on a market that you have never traded, then you are gambling. The successful trader has an army of stocks to trade, the weapons suited for that army, and a time tested trading strategy in place before a position is considered. When everything is going according to plan then and only then will it be time to pull the trigger.
3) The Gambler Goes ALL IN and Risks Losing It All: If you trade ALL IN, believing your trading edge is 100% foolproof, then you are a gambler. There is no sure thing in the stock market. There are just too many variables and too many traders who can and will disagree with your perfect signal. The disciplined trader trades a small percentage of his account balance and believes in probabilities, not a sure thing, knowing that trading is not about being right but about making money.
It is best to leave gambling to the casinos where the house has the advantage. In trading, the trader who has the focus, patience, and discipline to follow a strategy will have the advantage over those who don’t every time. We trade the trader, not the market and when we make money it is usually when we trade against the gambling trader.