Three things to know about Impulse trades for scalpers:There are three things:
1) Having an edge, which is some methodology for determining with reasonable accuracy the relative probability of the market price hitting your profit target before it hits your stop loss price. An edge is provided by a set of trading strategies, and a set of rules for when to use which trading strategies (briefly, when to follow a trend, when to fade a trend, and when to stay out.)
2) The discipline and emotional fortitude to follow the rules of your trading rules flawlessly.
3) Sound risk and money management rules.
Sound money management and risk control are the keys to being a profitable trader. It is not the prediction or the latest and greatest indicator that makes the profit in trading, it is how you apply sound trading discipline with superior cash management and risk control that makes the difference between success and failure. (more…)
I just completed reading a book 8 WAYS TO GREAT. It is short (114 pages) but packed with great insight on what makes great people great. I read it in a few hours and as is the case in all the books I read I highlight major points and make margin notes about what strikes me as important enough to share with others. What follows are the eight principles or “ways to great” and the quotes I found worth passing along.
First Principle: Find Your “Why?”
“The reason most people go through life with big dreams but fail to achieve them is because they ask themselves “how” before they know their “why”(9).
Second Principle: Get To Know Yourself
“The perfect trader-if such a person exists-is methodical and careful about making decisions, extremely disciplined, resilient to setbacks, with a high degree of internal confidence. He holds strong opinions but is also able to admit quickly when he is wrong, not take it personally, and view it as a learning opportunity rather than a failure. He understands the value of leaving his ego at the door. He’s willing and able to trust his gut and place big bets when the opportunity presents itself. In fact, that pretty well describes the ideal blend of characteristics of any successful person, no matter what he is doing professionally or personally” (18-19).
Third Principle: Learn To Love The Process
“The best traders don’t think about how many millions they need to make each year. They focus on making the best trading decision they can with each trade they make. And if there isn’t a good trading opportunity right now, they have the discipline to do nothing and just wait. Concentrating on one trade at a time is their process” (38).
Fourth Principle: Sharpen Your Edge
“Gaining a competitive advantage is like having a two-edged sword, and you need to keep both of them sharp. On edge is internal-knowing what unique skills you bring to the table. The other is external and comes from gathering knowledge that makes it more likely you’ll succeed” (45).
Fifth Principle: Be All That You Can Be
“The takeaway lesson for everyone wanting to optimize their own performance without regard for what others are doing is fourfold: 1) know your edge; 2) act only when you have the edge; 3) avoid taking the outcome personally because it involves factors that are beyond your control; 4) measure your success in terms of how well you performed and not only the outcome” (70).
Sixth Principle: Keep Your Cool
“Deciding when to cut your losses is one of the toughest decisions for anyone to make, but traders at the top of their game know that they always have to make the decisions they need to make, which may or may not be the ones they want to make” (77).
Seventh Principle: Get Comfortable With Being Uncomfortable
“In the trading world, you will either make money or lose money on any given trade. All that matters in the end is making more money when you’re right than you lose when you’re wrong. Knowing this, traders have learned to accept failure as part of the game, but they also use the information they acquire from their mistakes as a learning tool. Frequently, what they learn from losing money is more valuable than what they learn when they make money” (90).
Eighth Principle: Make Yourself Accountable
“Commitment, perseverance, and discipline are the characteristics that move people beyond desire to action, that differentiate mediocrity from greatness, and that separate greatness from superstardom” (95).
And to sum up: “True success begins with a state of mind. But it takes specific actions and behaviors to move from intentions into action and get results” (2)
After a year or so of trading, I found that I had standardized on about 15 rules/guidelines that have changed only slightly since then.
As requested, here are ten overriding principles that have survived the past five
years, through bull and bear markets:
Always live to fight another day
Entries must have a statistical edge
Patience and discipline
Be a jellyfish (swim with the current)
Trade only liquid securities
Focus on trying to capture the middle 80% of a move
Know your exit points when you open a position (and stick to them!)
When in doubt, reduce position size by 50%
Limit losses to 2% of total equity for any single trade
Start each day with a clean financial and emotional slate
The above list is relatively generic, but it helped provide me with a framework for
organizing how I would approach trading as a business, what strategies I should
adopt, how those strategies should be executed, and ultimately defining what success
should look like.
Trading rules are vitally important – as is knowing when they should be broken. Even
more important, I believe, is the process that one goes through in order to arrive at
these rules and to make sure that as new market situations unfold and new blind
spots are revealed, the rules and guidelines are enhanced to maximize the
opportunity for the trader to continue to grow and develop.
The following graphic describes two types of traders. The first (the circle on the left) describes what I believe to be the characteristics of all beginning traders, most of which end up quitting. There is a progression here from bad to worst. However, if the beginning trader can break through this cycle somewhere around undisciplined fear (#3) and paralysis of analysis (#4), the chances of his success improves exponentially.
THE LOSER’S CYCLE OF DESPERATION
Simply put, a trader enters the stock market with little if any knowledge about what to expect. How can he? No experience = no knowledge. Not only that, but his expectation of untold riches distorts his perception of reality. Once in the market he seeks the holy grail that will make him rich. When he doesn’t find it he continues his search as fear begins to shackle his feet. The fear leads to paralysis of analysis or the thinking that the more indicators and patterns and candlesticks etc. that he uses the more likely he will win. Wrong! (more…)
Why traders wins
1. Develop specific procedures.
2. Have a defined operational methodology.
3. Understand how your trading system works.
4. Be sufficiently capitalized.
5. Don’t take quick profits.
6. Begin using a system after it draws down.
7. Be willing to accept consecutive losses.
8. Don’t think too much.
9. Don’t set specific price target.
10. Don’t believe the tight stop loss myth.
11. Play your own game-avoid the news.
Why traders loses
1. Lack of defined methodology.
2. Poor self control and discipline.
3. Information overload.
4. Riding losses.
5. Taking profit quickly.
6. Poor understanding of system basics.
7. Lack of consistency.
8. Too emotional and suggestible.
9. Too close the makes.
10. Can’t accept more than a few consecutive losses.
All successful traders use methods that suit their personality; You are neither Waren Buffett nor George Soros nor Jesse Livermore; Don’t assume you can trade like them.
What the market does is beyond your control; Your reaction to the market, however, is not beyond your control. Indeed, its the ONLY thing you can control.
To be a winner, you have to be willing to take a loss; (The Stop-Loss Breakdown)
HOPE is not a word in the winning Trader’s vocabulary;
When you are on a losing streak — and you will eventually find yourself on one — reduce your position size;
Don’t underestimate the time it takes to succeed as a trader — it takes 10 years to become very good at anything; (There Are No Shortcuts)
Trading is a vocation — not a hobby
Have a business/trading plan
Identify your greatest weakness, Be honest — and DEAL with it
There are times when the best thing to do is nothing; Learn to recognize these times
(Nothing Doing)
Being a great trader is a process. It’s a race with no finish line.
Other people’s opinions are meaningless to you; Make your own trading decisions
(The Wrong Crowd)
Analyze your past trades. Study what happened to the stocks after you closed the position. Consider your P&L game tapes and go over them the way Vince Lombardi Bill Parcells reviewed past Superbowls
Excessive leverage can knock you out of the game permanently
The Best traders continue to learn — and adapt to changing conditions
Don’t just stand there and let the truck roll over you
Being wrong is acceptable — staying wrong is unforgivable
Contain your losses (Protect Your Backside)
Good traders manage the downside; They don’t worry about the upside
Wall street research reports are biased
Knowing when to get out of a position is as important as when to get in
To excel, you have to put in hard work
Discipline, Discipline, Discipline !
The essential component of the discipline of trading is that trading possesses a self-punishing feedback mechanism. If a trader breaks his or her trading rules and strays outside of the guidelines for controlled behavior, his or her edge will inevitably be lost. The punishment may be quick, as it is in the case when the opportunity for profit is sabotaged by the trader’s momentary loss of focus. Punishment may also be longer term, which occurs when the trader gradually strays from his or her trading rules. This may bring success at first, but it turns to failure the further away the trader strays from his or her established pattern. Whatever the exact circumstances, a trader who fails to exhibit the qualities associated with discipline will surely lose, whether quickly and painfully in the short term or slowly and gradually over the long term.
