Archives of “ego” tag

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5 Mistakes Traders Make Again & Again

  
  Education
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There is a big difference between bad traders and good traders, here is what I think separates one from the other:

  1. Bad traders continually have the desire to short the hottest  stocks with the strongest momentum. What is their reasoning? “It can’t go any higher, this price is ridiculous.” Do they understand it is a bull market, no. Do they understand the technicals or fundamentals that are driving this stock? No. Bad traders just trade their beliefs good traders trade proven methods.
  2. Bad traders continually believe they have found the trade “That just can’t lose.” It is a sure thing. No doubt about it. They trade BIG, they trade a HUGE position size. Unfortunately the most obvious trades are usually the losing trades, so they lose, and lose big. Good traders divide out their trades so that no one trade has too big of an impact on their account. Good traders realize EVERY trade can win or lose so they plan a quick exit for if they are wrong.
  3. Bad traders do not do the proper homework before they begin to trade. Really  Bad traders enter the markets with a mile of ego along with mud puddle deep understanding of what really works in trading. Bad traders have the belief that they are more clever than the markets and they can win based on their own intelligence. The problem is they do not do the homework of studying charts, trends, robust systems, winning methods, the right psychology for winning traders, risk/reward ratios, or the danger of the risk of ruin, or how the top performing stocks acted historically, and on and on. The good traders learn what it takes to succeed in trading, the complete story, while the bad traders learn some basics and think they are ready. They are wrong. The markets will show them.
  4. Bad traders make low probability trades, they are where the profits come from for the good traders. They go short in bull markets and long in bear markets. They sell naked puts on stocks collapsing into death spirals and sell calls on the best momentum stocks. They trade with big risks for small profits. They have a few small wins but some really huge losses. When they have a winner they take the profits quickly, but if they have a loser they let it run hoping that it will come back. They are the ones that lose the money, they are on the other side of the good traders trades.
  5. Bad traders want a good tip. They just want to be handed a winning system or a hot stock that just can’t lose. They do not even understand what all the talk of trading psychology and risk management is all about. They don’t need all that, they just want to make money. They just want the fish, they do not care about the fishing pole, bait, boat, or how to fish. Unfortunately they were to busy looking for that fish and didn’t understand the art of fishing, they will drown in the market ocean because they never learned how to swim themselves.

Great quote by Marty Schwartz which sums up where so many people go wrong in trading.

  
  Education
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“Most people think that they’re playing against the market, but the market doesn’t care. You’re really playing against yourself”. – Marty Schwartz.
 
The full quote is was from the following paragraph from Schwartz’z book – ‘The Pit Bull’s Guide To Successful Trading’. Schwartz himself was one of the original interviewees in the original ‘Market Wizards’ book.
 
– I’ve said it before, and I’m going to say it again, because it cannot be overemphasized: the most important change in my trading career occurred when I learned to divorce my ego from the trade. Trading is a psychological game. Most people think that they’re playing against the market, but the market doesn’t care. You’re really playing against yourself. You have to stop trying to will things to happen in order to prove that you’re right. Listen only to what the market is telling you now. Forget what you thought it was telling you five minutes ago. The sole objective of trading is not to prove you’re right, but to hear the cash register ring. (more…)

Keep Your EGO out of Trading.

  
  Education
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“Of all the traps and pitfalls in life ,self-disesteem is the deadliest ,adnd the hardest to overcome;for it is a pit designed and dug by our owen hands ,summed up in the phrase ,’It’s no use-I can’t do it .'” -Maxwell Maltz

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The ego had no place in trading.An unstable ego will attach  itself to anything you do.And trading is not exception.You cannot use the trading arena as an area to prove your worth or your capability.It will just bring your trading and your self-esteem to new lows.

If your ego is getting in the way of your trading,you need to build up your self-esteem.One way to do this to begain to appreciate yourself.Pay attention to what you’re doing that’s good.Give yourself recognisation for the little things you do as you go through the day.Make lists of your accomplishments.Make lists of your positive attributes.Each day ask yourself ,”What did I today that I’m proud of ?”Ask yourself ,”In what way an I improving ? “

Ray Dalio Principles

  
  Education
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  • I remained wary about being overconfident, and I figured out how to effectively deal with my not knowing. I dealt with my not knowing by either continuing to gather information until I reached the point that I could be confident or by eliminating my exposure to the risks of not knowing.
  • While most others seem to believe that learning what we are taught is the path to success, I believe that figuring out for yourself what you want and how to get it is a better path.
  • How much do you let what you wish to be true stand in the way of seeing what is really true?
  • How much do you worry about looking good relative to actually being good?
  • The most important qualities for successfully diagnosing problems are logic, the ability to see multiple possibilities, and the willingness to touch people’s nerves to overcome the ego barriers that stand in the way of truth.
  • Know what you want and stick to it if you believe it’s right, even if others want to take you in another direction.
  • In a nutshell, this is the whole approach that I believe will work best for you—the best summary of what I want the people who are working with me to do in order to accomplish great things. I want you to work for yourself, to come up with independent opinions, to stress-test them, to be wary about being overconfident, and to reflect on the consequences of your decisions and constantly improve.

Expect To Be Wrong

  
  Education
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The reason I bring this up was to share with you two reactions I got when describing these recent trades and cash holdings. I had two separate conversations in July — one with a well known Trader, the other with a Fund Manager (known in the industry, but not a household name) — about our posture prior to yesterday’s drop.

The two responses were polar opposites, 180 degree apart.

The trader respected the discipline of honoring stop losses. Good traders know that opportunistic speculation is a process. Ignore any one single outcome, focus on the methodology that can consistently avoid catastrophic losses, manage risk, preserve capital. A good process can be replicated, a random spin of the wheel cannot.

The fund manager, who was having a decent year being long high vol names (at least before Wednesday), was having none of it. “Stops are for losers” is a quote I shall long remember (and email him after he blows up). Apparently, real men have the courage of their convictions.

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Rather than fight our foibles, people should admit this error stream is real, and repair the errors of our ways as soon as we discover them. I have noticed over the years the difficulty some people have in cutting losses, admitting an error, and moving on. Way back in 2005, I wrote a piece advising investors that they should Expect to Be Wrong (originally published 04/05/05). I noted that “I am rather frequently — and on occasion, quite spectacularly — wrong.” However, if we expect to be wrong, then there will be no ego tied up in admitting the error, honoring the stop loss, and selling out the loser — and preserving the capital.

This is a recipe for investing disaster. We humans make 6 billion errors per day, at the very least. The biggest one is not acknowledging this simple truism.

Probabilities vs. expectations

  
  Education
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I expect to wake up tomorrow morning and not die during the night.

I expect that I will be able to get out of bed and know how to walk to the kitchen.
I expect my car will start.
I expect the other person will stop at the red light.
I expect that I won’t get hit by lightning.
 
Seeing that expectations are what normal everyday life is founded on, is it natural to think that you can expect a stock to trade in a particular direction? Only if you want to become a loser.
The markets and stocks are not everyday life. They have the ability to do anything at any time. The only thing 100% certain is that they are 100% unpredictable.
If you have expectations, it means you have an emotional attachment or interest in an event outcome. Do you expect to make money, have a winning trade, make a right decision? When they happen are you giddy with excitement, gushing to all who will listen that you are so smart. What happens when you are wrong? How about wrong ten times in a row? If you live the highs you will be living the lows. Your expectations will destroy your confidence and thus your account. Your ego will take you back to childhood where you will throw tantrums and stomp your feet looking for a sympathetic ear. “The markets aren’t fair” you say. Well the markets don’t give a shit what your want or when you want it.
Now if instead you trade the probability of a outcome to an event, you can put a wall up between yourself as a person who is on autopilot accepting everyday expectations and you as a successful trader who is ruthless in the execution of your plan. Thinking, trusting and truly believing in probabilities will save the day for you. When you think that “based on my experience, seeing a very similiar situation before, odds are that the near future direction of this stock is this way. However since this event is unrelated in every way to my past memories, I must choose the point at which my decision will be proven wrong and set a protective stop here.”
When you think this way, it doesn’t matter whether you are right or wrong. You are simply carrying out your trading plan based on your experience/edge. Playing the averages. You don’t get hurt by losing trades. You don’t get happy over winning trades. Whatever happens, happens. Being cold and calculating brings you as a trader closer to the machines that are running the show these days. (more…)

Zen of Trading-10 Rules

  
  Education
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1. Have a Comprehensive Plan: Whether you are an investor or active trader, you must have a plan. Too many investors have no strategy at all — they merely react to each twitch of the market on the fly. If you fail to plan, goes the saying, then you plan to fail.
Consider how Roger Clemens approaches a game. He studies his opponent, constructs his game plan and goes to work.

Investors should write up a business plan, as if they were asking a Venture Capitalist for start-up money; just because you are the angel investor doesn’t mean you should skip the planning stages.

2. Expect to Be Wrong: We’ve discussed this previously, but it is such a key aspect of successful investing that it bears repeating. You will be wrong, you will be wrong often and, occasionally, you will be spectacularly wrong.
Michael Jordan has a fabulous perspective on the subject: “I’ve missed more than 9,000 shots in my career. I’ve lost almost 300 games. Twenty six times, I’ve been trusted to take the game-winning shot and missed. I’ve failed over and over and over again in my life. And that is why I succeed.”

Jordan was the greatest ball player of all time, and not only because of his superb physical skills: He understood the nature and importance of failure, and placed it appropriately within a larger framework of the game.

The best investors have no ego tied up in a trade. Those who refuse to recognize the simple truism of “being wrong often” end up giving away unacceptable amounts of capital. Stubborn pride and lack of risk management allow egotists to stay in stocks down 30%, 40% or 50% — or worse.

 

3. Predetermine Stops Before Opening Any Position: Sign a “prenuptial agreement” with every stock you participate in: When it hits some point you have determined before you purchased it, that’s it, you’re out, end of story. Once you have come to understand that you will be frequently wrong, it becomes much easier to use stop-losses and sell targets.
This is true regardless of your methodology: It may be below support or beneath a moving average, or perhaps you prefer a specific percentage amount. Some people use the prior month’s low. But whatever your stop-loss method is, stick to it religiously. Why? The prenup means you are making the exit decision before you are in a trade — while you are still neutral and objective.

4. Follow Discipline Religiously: The greatest rules in the world are worthless if you do not have the personal discipline to see them through. I can recall every single time I broke a trading rule of my own, and it invariably cost me money.
RealMoney’s Chartman, Gary B. Smith, slavishly follows his discipline, and he notes that every time some hedge fund — chock full of Nobel Laureates and Ivy League whiz kids — blows up, the mea culpa is the same: If only we hadn’t overrode the system.

In Jack Schwager’s seminal book Market Wizards, the single most important theme repeated by each of the wizards was the importance of discipline.

5. Keep Your Emotion In Check: Emotion is the enemy of investors, and that’s why you must have a methodology that relies on objective data points, and not gut instinct. The purpose of Rules 1, 2 and 3 is to eliminate the impact of the natural human response to stress — fear and panic — and to avoid the flip side of the coin — greed.
Remember, we, as a species, were never “hard-wired” for the capital markets. Our instinctive “fight or flight response” did not evolve to deal with crossing moving averages or CEOs resigning or restated earnings.

This evolutionary emotional baggage is why we want to sell at the bottom and chase stocks at the top. The money-making trade — buying when there’s blood in the streets, and selling when everyone else is clamoring to buy — goes against every instinct you have. It requires a detached objectivity simply not possible when trading on emotion.

6. Take Responsibility: Many folks believe “the game is fixed.” To them, I say: get over it. Stop whining and take the proper responsibility for your trades, your losses and yourself.
Your knowledge of the game-rigging gives you an edge. So use your hard-won knowledge to make money. (more…)

The 7 Habits of Highly Successful Traders

  
  Education
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  1. Traders must have the perseverance to stick to trading until they break through to success. Many of the best traders are just the ones that had the strength to go through the pain, learn, and keep at it until they learned to be a success. number7-asr

  2. Great traders cut losing trades short. The ability to accept that you are wrong when a price goes to a place that you were not expecting is the skill to push the ego aside and admit you are wrong.
  3. Letting a winning trade run as far as it can go in your time frame is crucial to having big enough winners to pay for all your small losing trades. 
  4. Avoiding the risk of ruin by risking only a small portion of your capital on each trade is a skill to not get arrogant and trade too big, if you risk it all enough times you will lose it all eventually. 
  5. Being reactive to actual price action instead of predictive of what price action will be  is a winning principle I have seen in many rich traders. Letting price action give you signals is trading reality, trading your beliefs about what price should be is wishful thinking.
  6. Great traders are bullish in bull markets and bearish in bear markets, until the end when then trend bends. 

  7. Great traders care more about making money more than any other thing. Proving they are right, showing off, or predicting the future is not as important as hearing the register ring.

Are You A Subjective or Objective Trader?

  
  Education
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Subjective: Based on or influenced by personal feelings, tastes, or opinions.Proceeding from or taking place in a person’s mind rather than the external world.

Subjective traders they are intertwined with their trades.Their signals are generally entering out of greed and exiting based on their own internal fear. The believe in their opinions more than the actually price action. They base trades off of whether they are feeling good or bad about a particular trade. A subjective trade comes out of the imagination of the trader, from their own beliefs, opinions, and what “should” happen in their view. Many times reality is not even cross checked as a reference, and if it is the subjective traders sees what they want to see instead of what is really going on. Their compass is their emotions and they have internal goals other than making money.

Objective: (Of a person or their judgment) not influenced by personal feelings or opinions in considering and representing facts. Having actual existence or reality. (more…)

Discipline

  
  Education
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Learning to accept losses as part of the game and cutting them short is the single most important step towards becoming consistently profitable. It sounds simple, but in reality is extremely difficult for everybody. Why? Because we’ve been taught that giving up is for losers and we should fight till last breath. I certainly agree that you should not give up quickly, but only if you can influence the end result. Let me be clear, the stock doesn’t know that you own it and it doesn’t care that you cannot afford to lose the money. The market will strip your last cloth if you don’t know how to manage risk. You have to understand and accept your power. You cannot move the market. You cannot tell him where to go and how fast. This is why so many people, who are successful as entrepreneurs and engineers, have troubles breaking even in the capital markets. It takes a special kind of person. Someone, who can forget his ego and concentrate on what actually works. Very few people are able to reach that level and to distinguish their trading life from their personal life.

Trading or investing is a skill that can be learned. There are two ways to learn a new skill in general. Through the school of hard knocks and through the mentorship of others that have the gift of teaching. To become a successful trader, you need to somehow implement both approaches. Nothing can replace personal experience. You can hire the best mentors in the world to teach you and purchase the most expensive equipment and trading software, but this is not going to help you to build a new skill. Skill building is subdued to eternal physical laws. There are a hundred billion neurons in your brain. For every skill that you possess (speaking a language or driving a car), there is a certain combination of connections between some of your neurons. To build a new skill, you need to build a new net of connections. This is why every beginning is hard, this is why big changes do not happen overnight. You have to establish new connections, which takes hard work via repetition and visualization. (more…)

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