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Let the market make the decisions, not your ego

The rules are not hard to understand. Recognizing a profit from a loss is simple. If the rules are easy to grasp and a profit is distinguishable from a loss, where does the problem lie? What makes it so hard to apply the rules? There is something within each of us that has a power over our minds that prevents our acting according to what we have agreed is the proper course of action. That something is present in all of us and is very powerful, more powerful than anything I know. Let’s call it ego. Until we learn to get rid of our ego, we will never make money in the market consistently. Those who haven’t identified the ego’s ways will eventually be destroyed in the market because of their ego’s tendencies. It is just that powerful. The market rewards those who have subdued their egos. Those who rid themselves of their egos are rewarded greatly. They are the superstars of their fields. In the market, rewards come in the form of profits. In the world of art, masterpieces are the results. In sports, the players are all-stars and command enormous salaries. Every pursuit has its own manifestation of victory over the ego.

Courage

Not all traders have the courage to stand up to their actions. It takes a lot of courage to deal with the fears a trader must overcome in his career. The first is the fear of success that is so common and is the most prevalent. We want success and are afraid of it at the same time too. As our account grows so does the fear of handling those amounts of money. Could you trade risking a bigger amount as the account grows? Sometimes we sabotage our own success as it puts us out of our comfort zone. Another aspect of the fear of success is the subconscious fear of not being able to sustain that success. Our ego is questioning our ability to avoid messing up and losing that prized status of a hero. Same holds true for a windfall success. We know we might be able to do it again but our ego says we will look bad if we cannot do it again. Professional Traders have developed the ability to methodically achieve success and the confidence to repeat it while reducing the odds of sabotaging themselves via their egos. Professional Traders know that trading is boring and is not full of fun and excitement. That is why they have the courage to give up the fun and excitement in exchange for trading capital preservation. They also have the courage to not become addicted to winning big all the time. They know there will be singles, doubles and losers along the way too. They have the courage to stay on the sidelines at times and miss trading opportunities. They also know when to get out of a trade bravely and have the courage to ask for help when needed. They have the courage to stick to their strategy, ask dumb questions, admit it when they are wrong and finally have the courage to trade for profit and not for pure excitement.

Your Mails -My Answers

Q:  Can you discuss the concept of drawdowns a bit? Novice traders seem to think experienced traders become proficient to the point that they are right much more than not and thus experience very small drawdowns. But talking to experienced traders this does not seem to be the case.

A:  In my view, the biggest difference between a successful trader and one who is not is how they manage their mistakes. Note, I am of the opinion that those who trade well don’t make fewer mistakes but they simply have learned how to handle them when they occur. This opinion is based on years of experience but also more recently working closely one-on-one with other traders. The fastest way I’ve learned to be of help to others is to show them how to recognize, quickly admit, and then take aggressive action when a mistake has been made. Losers tend to make bigger mistakes out of small ones. They let their egos get in the way and double-down in losing trades and make matters worse when a mistake is made.

Ultimately, the best you can do in this business is try to be “more right than wrong,” especially at key turning points and be quick to repair and take remedial action when you are wrong as well as managing your risk through proper trading size, stop losses, and simple diversification.

Q:  I know that Alexander Elder recommends trading less often for better results. And after reading your blog for the last couple of years I know that you follow this strategy for the most part as well. What do you do in a range bound time such as what we are experiencing, have you been doing more day trading?

A:  I’ve been very inactive recently. In fact, when you see more posts at the website (especially those link posts that take so much time and energy to do), you pretty much can count on that I’m doing a lot of sideline sitting. In many ways, this blog helps me stay patient as it keeps me busy and focused without feeling the necessity to make trades that don’t offer exactly what I’m looking for. All good traders seem to have different ways to cope when the environment is not receptive and I recommend you find ways to cope as well. As for day trading, that is fine if you love doing that, but that’s never been my desire. Day trading for pennies a trade seems too much like work and I don’t need that kind of stress. I can afford to be patient and pick my spots.

To send in your question(s) for next mailbag, please send me e-mail at [email protected] Although I may not directly answer your question in these  posts, it is extremely helpful to know what topics are of interest to you so that I can find links and look for opportunities to discuss and cover your interests in the future. Thank you!

Accept you will make many mistakes

Those who learn how to minimize the damage when they are wrong and who readily own up to the mistakes they make will do far better over the long haul. Making mistakes is a part of this game, but knowing how to handle them is everything. Likewise, if you attach your ego to your portfolio’s performance you are destined for failure. The market absolutely loves to kill those with big giant egos and who look for the markets as a place to prove how smart they are. Markets chew and spit out these folks routinely for good reason and they will continue to do so at every available opportunity.

You are not your Trade

Systems don’t need to be changed. The trick is for a trader to develop a system with which he is compatible. -Ed Seykota

Traders can make psychological mistakes when trading that can end a trading career very fast. Here are a few examples:

  • They take on more risk than they can deal with, stress takes over and they start making bad decisions.
  • They become married to a trade, they become stubborn and ignore their stop losses, wanting to be “right” they wait while losses mount.
  • Their egos take over their trading. They are more concerned about proving how smart or clever they are than making money. They begin to be more concerned with bragging about their winners than managing their losing trades. It becomes an ego trip that will not end well.
  • Their system does not match them, someone who likes fast paced action should not be a long term growth investor and someone who loves investing in growth stocks they believe in should not day trade.
  • A trader loses many times in a row so they change systems right before the big pay off. If you have a proven system trade it for the long term benefits.

Here are some solutions: (more…)

10 Points for Traders

  1. Capital flows from those who fight trends to those who follow them.10 HABITS

  2. In the long term money flows to those who manage risk and are able to hold on to their profits from those who don’t manage risk. 
  3. Traders that persevere through the learning curve stick around long enough to make money from those that just trade with no understanding of what they are doing.
  4. Robust systems take money from traders with no edge over the markets.
  5. Traders that trade price action take money from those that trade opinions.
  6. Traders that enter a trade based on a reversal signal make money form those that stubbornly hold on to a losing trade and hope.
  7. Money flows to those who let winners run from those that hold losing trades and hope.
  8. Capital flows from those that trade a winning methodology from those that trade on emotions.
  9. Those with big egos pay a price to try to prove they are right by holding a losing trade those that admit they are wrong quickly keep hard earned profits.
  10. Money flows from those who do not know how to trade to those who do.

Emotion, Stress & Trading

I was recently asked by a member to share my thoughts on how I manage the high stress levels and how you keep emotion out of the mix. I will get to the the stress handling in a second, but let me start by addressing “keeping emotion” out of it.

While many traders say they can keep emotion out of their trading, I believe when it comes right down to it they’re being disingenuous. Unless those same traders really employ a completely robotic trading system which requires absolutely no supervision or control, that simply cannot be true. This is one of those things that I’ve seen many traders say to impress others, but in reality it just isn’t possible or even realistic.

When you have real money on the line and have also invested your own time and energy beyond that, emotion will play a significant role in every decision. After all, none of us are trading robots! We all have feelings and egos and therefore our trading and investment decisions will be impacted from those even in subtle ways that you may not even realize. The key is to learn how to use those emotions to your advantage. For some of you, trading completely contrary to your logical fears is an excellent way to make big money in the markets. Just look at all of the people who went short hoping for Hindenberg Omen type crash in August and who’ve been fighting it every step of the way!

As far as coping with stress, we all have to develop our own methods. But, this is what I’ve learned over time. For me, stress comes primarily from three things:

  1. Not having a plan and being out of position in a challenging market

  2. From not staying on top of my work and not sticking to my rigorous routine (usually from unforeseen events like technology issues or personal issues that all of us experience from time to time)

  3. Stress and pressure I place on myself in hitting my daily, weekly, and monthly goals especially when I’m not performing up to my expectations

So, how do I cope with these? Here are a few thoughts(more…)

Trading Without Ego

Make no mistake about it. A trader’s self concept has to be separate from the trading. Who you are as a person began before you ever thought of trading and who you will be as a person will extend beyond your trading. When personal self-worth entwines with trading, it not only damages self esteem, it sabotages the trading.

You hear about it. You read about it. Don’t be misled. Traders tell stories. They write stories. They tell how great they are. Big trades. Big numbers. Big egos. Hubris. And sooner or later, big downfalls. It goes with the territory.

Consider the outsized egos of certain traders who brought themselves and those associated with them to ruin. Nicholas Leeson brought down the Barings Bank. Victor Niederhoffer ran his fund into deficit. John Merriweather threatened the health of our banking system by betting more than fifty times his capital that his strategies were certain to work, that he could forecast with impunity the direction of various bond markets. There’s a pattern here of seeming or real success for a while and then collapse for themselves and for those caught up in blindly following them. (more…)

Avoid EGO in Trading

“Don’t be a hero. Don’t have an ego. Always question yourself and your ability. Don’t ever feel that you are very good. The second you do, you are dead.”
“At other times in the past, investors lost a good profit by holding on too long, trying to get a long-term capital gain. Some investors, even erroneously, convince themselves they can’t sell
because of taxes—strong ego, weak judgment.”
“When did you turn from a loser to a winner?When I was able to separate my ego needs from making money. When I was able to accept being wrong.Before, admitting I was wrong was more upsetting than losing the money.”
“Most traders who fail have large egos and can’t admit that they are wrong.”
“Clearly, flexibility and suppression of ego are key elements of Gelber’s success.”
“Actually, the best traders have no ego. To be a great trader, you have to have a big enough ego only in the sense that you have confidence in yourself.”
Ego can also stop you from being profitable as a trader. Maybe you only like to short because you think this economny is going to H____ and the market rallies for a month and the whole time you try shorting it when you should be buying the pullbacks. In this scenario, the stongly held belief system is affecting the traders ability to see what is really going on and costs either being stopped out, or only making a small profit and missing the big moves etc.
So, the more we can become egoless, flexible in our mind and not have a preconceived direction the market is going in, the better we will be as a trader.  (more…)

Let the market make the decisions, not your ego.

The rules are not hard to understand. Recognizing a profit from a loss is simple. If the rules are easy to grasp and a profit is distinguishable from a loss, where does the problem lie? What makes it so hard to apply the rules? There is something within each of us that has a power over our minds that prevents our acting according to what we have agreed is the proper course of action. That something is present in all of us and is very powerful, more powerful than anything I know. Let’s call it ego. Until we learn to get rid of our ego, we will never make money in the market consistently. Those who haven’t identified the ego’s ways will eventually be destroyed in the market because of their ego’s tendencies. It is just that powerful. The market rewards those who have subdued their egos. Those who rid themselves of their egos are rewarded greatly. They are the superstars of their fields. In the market, rewards come in the form of profits. In the world of art, masterpieces are the results. In sports, the players are all-stars and command enormous salaries. Every pursuit has its own manifestation of victory over the ego.