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11 Rules For Better Trading

  
  Education
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Trading in the markets is a process, and there is always room for self improvement. So as we start the new year, here are my 11 rules that help me navigate the markets. By no means is this list exhaustive or exclusive.

Rule #1
Be data centric in your approach. Take the time and make the effort to understand what works and what doesn’t. Trading decisions should be objective and based upon the data.

Rule #2
Be disciplined. The data should guide you in your decisions. This is the only way to navigate a potentially hostile and fearful environment.

Rule #3
Be flexible. At first glance this would seem to contradict Rule #2; however, I recognize that markets change and that trading strategies cannot account for every conceivable factor. Giving yourself some wiggle room or discretion is ok, but I would not stray too far from the data or your strategies.

Rule #4
Always question the prevailing dogma. The markets love dogma. “Prices are above the 50 day moving average”, “prices are breaking out”, and “don’t fight the Fed” are some of the most often heard sayings. But what do they really mean for prices? Make your own observations and define your own rules. See Rule #1.

Rule #5
Understand your market edge. My edge is my ability to use my computer to define the price action. I level the playing field by trading markets and not companies.

Rule #6
Money management. Money management. Money management. It is so important that it is worth saying three times. There are so few factors you can control in the markets, but this is one of them. Learn to exploit it.

Rule #7
Time frame. Know the time frame you are operating on. Don’t let a trade turn into an investment and don’t trade yourself out of an investment. (more…)

Trading Discipline

  
  Education
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Discipline-TradingYou need emotional discipline or your trading will become erratic. The worst thing that can happen to a trader is that they experience a dose of ‘beginner’s luck’. An enhanced sense of confidence as the result of a few good trades (probably flukes) is a huge threat to your working capital. If you make a good trade – don’t let the adrenaline rush send you headlong into another attempt. Instead, analyse your trade – do you really understand why is went well for you ? If you do – great ! Use this knowledge towards the development of a controlled trading method. If you don’t understand why this trade was a good trade -heave a sigh of relief at your good luck – and recognise it as such.

You need discipline to develope your trading method, to stick to your trading method, to follow the rules of that method and to close down your trading platform if you cannot see a trade.

It bears repeating – if you cannot see a trade close down the trading platform and don’t open it again until the next day’s session.

Simple Formula For Performance.

  
  Education
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Potential is what everyone has inside them, it is the education, learning, development, support and time put in that enables one to continually develop their capabilities. This can increase, at least until either physical or mental limitations constrain further growth. 
Interference is what detracts from potential to reduce performance. This can be down to any number of reasons, perhaps environmental or external factors, physical or mental hurdles or limitations, poor execution of process, inadequate self-management. Many of these can be deatlt with in some way; however, the greatest threat in most cases is from attitude and mindset. Perhaps it could be something as simple as seeing yourself failing and recalling the look of an angry parent, a doubting physical education teacher or a school bully from your younger years who always told you that you did not have what it takes. – This creates that painful memory which instils that moment of hesitation or self-doubt just when you least need it. – Who hasn’t at some time during their trading had that pang of self-doubt, or lacked the self-belief or confidence just at a crucial moment, and then looked back with regret and heartache, in some cases leading to a whole cycle of self-doubt and poor decisions, execution and position sizing.

Confidence, Discipline and Consistency

  
  Education
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Consistently profitable trading comes down to just three simple things. The three are the trading psychology, the system, and the risk and money management. Trading psychology means the big 3: discipline, confidence and consistency.

The trading psychology takes precedence because it is needed to make sure that the other two are followed. When they are not followed, a good system and sound risk and money management rules are of limited value. When you have trading psychology that is not achieved through sheer will, you can have the discipline, confidence and consistency that make the most of your rules and system.

Sticking to your system for any length of time is nearly impossible without having confidence in your system. A trader may be able to focus intently on their discipline, and may even be able to stick to it for a time, but often the first handful of losing trades will kill that confidence and with it goes the discipline.

When the sting of a string of losses comes along, especially for a trader that has not established a solid confidence in their system, the temptation to deviate from the system, to second-guess it, is very strong. The natural impulse to avoid the pain is great and only grows with each subsequent loss. Faith in the system drops each time another loss occurs, even if the loss came to be from the deviation from the system. In these circumstances, doubts, fear and anxiety usually run high.

So what is a trader to do to avoid this situation, or to remedy it if this situation has already been encountered?

A great deal of trading psychology comes from expectations and reality. Frustration comes when expectations aren’t met by reality. When a person doesn’t know what to expect, then anxiety set in. When a person knows what to expect and what to do, then confidence is there. Worst case is when the primary point of reference is the recent and painful losses, and only slightly less difficult to be confident when matters feel very uncertain.

Since trading is an activity where losing trades will occur, the best way to establish confidence is to have a way to know what to expect – from the trading system. What is the way to make this happen? The trader can see what can realistically be expected and what can’t through system analysis and looking at the system metrics. The metrics give one a realistic and measured look at the capabilities and limitations of a system, particularly how many losing trades might be encountered during an overall profitable period of time. The primary benefit regarding the trader’s trading psychology is in the way the numbers from the analysis put things in a perspective that fends off the anxiety and doubt and makes for much easier discipline.

Once this is achieved, then the trader should track their metrics to ensure consistency and continuous improvement. It happens quite commonly for traders to experience major breakthroughs once they put in place the habit of analyzing their system and tracking the metrics. Confidence, discipline and consistency are the natural result of this activity, and frequently initiating this practice marks the turning point in the careers of many traders. It is vital as part of trading psychology that one properly analyze the metrics and track their numbers, as backtesting alone will only help to a limited degree.

Being confident

  
  Education
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Being confident is the ultimate prize for any trader; some call it being in the “zone”, some others talk about finding the “Holy Grail”. What it really means is that, as for any performance based endeavours, trading will satisfy you only once you reached the state where “you know what you do”. Trading is not different from any other demanding undertaking, it requires mastering the different stages of the learning curve and the quality of this learning process depends on how focused and disciplined the trader is in honing his acquired skills. Once the trader has identified, through practice, what markets, methodology and timeframe he is comfortable with, he will slowly gain confidence in himself by systematically repeating all of the steps that constitute his trading plan until it becomes part of his personality. Just as for a tennis or a golf player, being confident makes the difference between winning and losing, so it is for the trader. And, just like the tennis or golf player, the trader can only gain this confidence through a well worked out set of skills, a battle plan and the continuous practice at a performance level. Losing focus or relaxing the discipline will very rapidly threaten the trader’s confidence. Hence, it is of the utmost importance to understand that this virtuous circle has to be maintained during every trade. And here we touch the challenge for any trader: only the repetitive and focused practice of his plan will ensure that he will stay confident in his trading. This can only be achieved through a balanced and healthy way of living and a sound detachment of the day to day results.

10 Minute Toughness

  
  Education
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If you’re looking for a simple program to develop the mental skills necessary to be a successful trader, then check out 10 Minute Toughness – The Mental Training Program for Winning Before the Game Begins. Jason Selk works with many of the worlds top athletes to develop the mental toughness needed for sports success and his program translates perfectly to trading. I’ve been working with the book for a few months now -its easy to read, easy to implement and the program is excellent! As the book says “No psychobabble, no self-help cliches, no touchy feely theories. 10 Minute Toughness is the simple and effective mental-training program to help you get focused, stay on target and find a competitive edge.” The program contains short impactful exercises to help you

  • calm your heart-rate and maintain a relaxed state of mind
  • stay focused on the aspects of your trading that will most help you succeed
  • build confidence
  • perform mental run-throughs that prepare you for the market day

What I particularly find helpful is the emphasis on process goals.  Many of us focus on goal setting in terms of performance goals like making so many points a week. A process goal shifts the focus to concentrate on the specific aspects of trading that will help you achieve the performance you are looking for. It helps you keep your attention each day on the one or two things that will improved your trading. The book is very consistent with what Brett Steenbarger teaches and yet somehow I found it more accessible and easy to implement.  The detailed examples of top athletes, baseball, basketball and football players makes the book fun to read and easy to get. This book will make a great addition to every traders library

Trading Wisdom

  
  Education
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Often I think we overcomplicate trading.  All this talk of risk management, money management, entries, exits etc ad nauseum can leave us not being able to see the wood for the trees.

It’s obvious that you need to cut your losses.  If you let them run or get out of control your aren’t going to be in the business for long. 

But there is another very good and often forgotten reason why you should not let your losses run that William O’Neill highlights:

O’Neill “letting your losses run is the most serious mistake made by almost all investors” simply because “if you don’t sell to cut your losses when you get into trouble, you can easily lose the confidence you’ll need to make buy and sell decisions in the future.”

But if you learn to do this then you stand some chance of doing this:

“Take your losses quickly and your profits slowly” because “your objective is not just to be right but to make big money when you are right.”

The first quote is another great one to heed.  If we do and combine it with the second well…… we might just be able to make the big money once in a while.

Beliefs of Winning Traders

  
  Education
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winner1

Winners share certain behaviors and beliefs. Check to see if you possess the traits and beliefs of winning traders !!!

  1. If you have the belief that you will win, you increase your chances of trading to win. In order to have this level of conviction, you must have a thoroughly-tested plan. You also must have a clear vision of how you will proceed with your plan to reach your goal. The more detailed you can visualize your goals being achieved, the more you will strengthen your internal belief and confidence that you will reach your goals.
  2. I’m sure you’ve heard the saying “I didn’t plan to fail; I failed to plan.” Without a plan, your results will tend to be mixed and uninspiring. Commit to writing down your trading plan, and make sure you can answer the questions found in a recent TrendWatch on creating your trading plan. (more…)

Lifestyle & Improvement

  
Education, Life
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  • 63 ways to build more confidence (LifeHack)

  • Ways to live forever (James Altucher)

  • What not to say when pulled over by a cop (Chris Rock)

  • How to simplify your life (Frugal Zeitgeist)

  • The minimalist’s guide to cultivating passion (Zen Habits)

  • How great leaders inspire action (Ted)

  • Success in most arenas of life is thus not a reflection of innate skill but rather devoted effort (Peter Orszag)

Learning through Failure

  
  Education
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Very often we learn more from our failures than from our successes. The path to success travels inevitably through certain failures.

A look at successful traders and entrepreneurs shows that they have been able to survive failure as many times as they have had to. They use failure as feedback. They learn from it and make changes and go on. Many super traders have experienced crushing loss in their early trading years. All of them picked themselves up, made adjustments, and with the sure belief that they could make it back through better trading, did just that.

Successful traders are able to ride through periods of drawdown easily because they believe the drawdown to be only temporary. They distinguish the difference between simple losses and loss that comes from mistakes. Their confidence in their methods and their ability and their vision of what the markets can provide reassures them about their future success. Any period of loss is viewed as transitory.

Fear of failure keeps many traders from the success they so dearly want. They are afraid to fail and therefore either afraid to trade or to admit the failure and learn from it. I’m not saying you should like loss. Winning traders don’t want to punish themselves, but successful traders don’t dread loss either because they know that whatever happens, they can make it back. And they can learn.

Strangely enough, failure is often a necessary stepping stone to success. Those who are too fearful of failure may never get to the success they long for. Fear can lead us not only away from the thing we fear but also away from the thing we seek. Ironically, fear can also lead us directly into the thing we fear. My thesis is that underneath fear of failure is a sense of scarcity.

Confronted with a drawdown, a trader who fears failure will often stop trading or change methods or systems only to junk the new methods or systems at the next drawdown.

The winning trader will not inflexibly keep doing what doesn’t work. His open mindedness allows him to recognize the difference between market conditions and methodologies that do or don’t have a probability of success. A trader with a sense of abundance and a verified method for trading won’t crumble under temporary loss because he’ll know he’s simply passing through a difficult time that will end. He distinguishes between loss and inept or error prone trading.

The flexible trader with the willingness to admit mistakes will learn from the failure, honor that failure as feedback; make corrections, and proceed with the improvements. The winning trader, just as the winning athlete, is in a constant and never ending process of development and growth.

Look at the history of your trading and write down several major failures. As you study each failure, look for similarities and differences between them. Look for the lessons. Identify and define the problems. Look for valid solutions.

As you trade each day, do the same thing with individual mistakes. Write them down as they occur along with the lesson learned. Look for repetitions. Commit to your own development and growth as you learn through experience. Remember, if you can’t make a mistake, you can’t make anything, including money. 

Confronted with a drawdown, a trader who fears failure will often stop trading or change methods or systems only to junk the new methods or systems at the next drawdown.

The winning trader will not inflexibly keep doing what doesn’t work. His open mindedness allows him to recognize the difference between market conditions and methodologies that do or don’t have a probability of success. A trader with a sense of abundance and a verified method for trading won’t crumble under temporary loss because he’ll know he’s simply passing through a difficult time that will end. He distinguishes between loss and inept or error prone trading.

The flexible trader with the willingness to admit mistakes will learn from the failure, honor that failure as feedback; make corrections, and proceed with the improvements. The winning trader, just as the winning athlete, is in a constant and never ending process of development and growth.

Look at the history of your trading and write down several major failures. As you study each failure, look for similarities and differences between them. Look for the lessons. Identify and define the problems. Look for valid solutions.

As you trade each day, do the same thing with individual mistakes. Write them down as they occur along with the lesson learned. Look for repetitions. Commit to your own development and growth as you learn through experience. Remember, if you can’t make a mistake, you can’t make anything, including money.

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