Paul Tudor Jones:
“We have tested every system under the sun and, amazingly, we have found one that actually works very well. It is a very good system…(under the realm of) trend following. The basic premise of the system is that markets move sharply when they move. If there is a sudden range expansion in a market that has been trading narrowly, human nature is to try and fade that price move. When you get a range expansion, the market is sending you a very loud, clear signal that the market is getting ready to move in the direction of that expansion.”
“The most important rule of trading is to play great defense, not great offense.”
“I don’t really care about the mistakes I made three seconds ago in the market. What I care about is what I am going to do from the next moment on. I try to avoid any emotional attachment to a market.”
” I always believe that prices move first and fundamentals come second.”
Gary Bielfeldt:
“The best thing that anyone can do when starting out is to learn how a trend system works. Trading a trend system for a while will teach a new trader the principle of letting profits run and cutting losses short. If you can just learn discipline by using a trend-following system, even temporarily, it will increase your odds of being successful as a trader.”
Richard Dennis:
“You should expect the unexpected in this business; expect the extreme. Don’t think in terms of boundaries that limit what the market might do. If there is any lesson I have learned in the nearly twenty years that I’ve been in this business, it is that the unexpected and the impossible happen every now and then.”
“A good trend following system will keep you in the market until there is evidence that the trend has changed.”
“The correct approach is to say: ‘This structure is up, and this structure means no more, but never that this structure means up this much and no more’.”
“I could trade without knowing the name of the market.”
“The market being in a trend is the main thing that eventually gets us in a trade. That is a pretty simple idea. Being consistent and making sure you do that all the time is probably more important than the particular characteristics you use to define the trend. Whatever method you use to enter trades, the most critical thing is that if there is a major trend, your approach should assure that you get in that trend.”
Archives of “emotional attachment” tag
rssProbabilities vs. expectations
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…)
Letting Winners Turn in to Losers
Trading problem that I want to focus on is allowing winning trades to turn in to losers. Many of us have probably had a time when a trade was making big loot, and we started to count the profits like they were ours before we exited the trade. When the stock started to lose the ground it had gained, we avoided selling because we had built up an emotional attachment to the paper profits we had seen. Instead of selling the stock to lock in some gain, we opted to hold out for the stock to go back to where it used to be, promising to sell when it came back to the point where we felt good about the trade. The stock drifts lower, and eventually the gain turns in to a loss. We ultimately sell it at the bottom, swearing never to do it again. But without some reprogramming, we probably will.
The Solution
Like Kenny Rogers used to sing, “Don’t count your money, when you are sitting at the table, there will be time enough for counting, when the dealing’s done.” Do not calculate your profits before you lock them in. Avoiding the profit watch will help you avoid an emotional attachment to the paper profits, giving you greater clarity to take the exit door when the market tells you it is time to do so.
I hope this outline of mental problems and some solutions helps you become a better trader. The difference between those who succeed in trading and those who fail is not the system they play, but how well they play it. Your mind is a powerful thing, don’t let it beat you in the market.
King of Turtle Traders
I’m currently rereading “Complete Turtle Traders“ and if you’re not familiar with the story, I highly recommend this book. There aren’t many books that I reference often and this is one of them due to the psychological insight of trading and it’s impact on your performance. And what you’re going to read below is just a snippet from the first 27 pages of the book.
Richard Dennis is fast becoming one of my trading icons as I learn more about his attitude and methodology on trading and life. Here are a few quotes from the book that will offer some insight into what type of person and trader he was at that time:
His emotional attachment to dollars and cents appeared nonexistent.
He thought in terms of leverage.
You’re much better off going into the market on a shoestring, feeling that you can’t afford to lose.
Reacting to opportunities that others never saw was how he marched through life.
….you had to be able to accept losses both psychologically and physiologically.
I’m an empiricist through and through.
….the majority is wrong a lot of the time. The vast majority is wrong even more of the time.
He was an anti-establishment guy making a fortune leveraging the establishment.
Dennis read Psychology Today to keep his emotions in check and to remind him of how overrated intuition was in trading.
I think it’s far more important to know what Freud thinks about death wishes than what
Milton Friedman thinks about deficit spending.You have to have mentally gone through the process of failure.
He has the ability under tremendous pressure to stand there with his own money and pull the trigger when other people wilted.
When he was wrong, he could turn on a dime.
One man’s volatility is another man’s profit.
SUBJECT: What makes a frustrating market?
I wanted to end with a quote from one of the most famous Turtle Traders of all, Curtis Faith, that very much resonates with my methodology of zentrading. This comes from “Inside the Mind of the Turtles”which is another book I recommend. Do not buy his second book “Way of the Turtle”. It was absolutely horrible and very poorly written. I’m still reading his new book (very promising) and I’ll let you know how that one goes. Anyhow…here’s the quote and pay special attention to the phase in italics and if you found this post especially useful please retweet and share with your networks. I look forward to reading your comments and any particular insight you may have.
Winning traders think in the present and avoid thinking too much in the future. They look at the future as unknowable in specifics, but foreseeable in character. To win you need to free yourself and your thinking of outcome bias. It does not matter what happens with any particular trade.
10 losing trades + sticking to your plan = bad luck.
8 Skill Every Traders must have
- Passion. The best investors I’ve seen truly love what they do. It’s the only way they are able to put in the time needed to become great.
- Experience. The pros have seen it all. They’ve been through all sorts of market cycles. Long periods of sideways choppiness, uptrends, and downtrends. And not just the short term 15-20% corrections but the big 50% corrections too.
- Adaptability. Markets change. And the strategies that were working in one market may eventually deteriorate. Good traders will change their methodology to match the new market conditions.
- No ego. None. If you go into trading with an ego the market will eat you alive. The elite investors are able to admit when they’re wrong. They even embrace it. Being wrong quickly means they can move on to being right faster.
- Emotionless. This goes hand in hand with ego. Along with pride, investors face a daily trio of emotions of hope, fear, and greed. The worst investors allow their emotions to control their trading; the best avoid any emotional attachment at all. (more…)
Everyone has a plan, until they get punched in the mouth
I heard Mike Tyson say this years ago, and it immediately stuck with me because of so many ties it has to trading your trading plan with focus, discipline, and repetition.
Our main focus in training new and veteran traders is to build a belief in the system through repetition. After seeing the performance of a trade over 150 times within a 2 month period, it becomes evident that you begin to move away from a fear-based internal dialogue regarding your trade. You already know the system is consistently profitable, so the only X-factor in the entire process is that little 6-inch universe between your ears. Now, the focus of accuracy has everything to do with you, the trader, following your rules with consistency and repetition and nothing to do with the system.
Now back to my original point. We have seen the trades. We know the system is profitable. We have simulated the system and are showing a profit. We are ready to trade live hard earned cash that we have an emotional attachment to. Every dollar we are trading equals a loaf of bread, so to speak. Our hard earned trading capital is now taking the INEVITABLE equity draw-down, as dictated by the system. We WILL lose trades, traders, this is a fact that we must embrace on all levels. But remember, contraction leads to expansion. Your draw-down will inevitably lead to a run-up. The KEY is NOT TO MISS IT!
Now, we’ve had the draw-down, and to put it bluntly we’ve “Been punched in the mouth”. THIS is where the magic happens. At this very moment what will you do? Will you let the fear and painful associations of the market dictate your trading executions? Or will you draw upon your training, having fully accepted that this equity swing is nothing more than another step to consistent profitability?
Will you continue to place those next trades with consistency? Will you remove all mpulsive trades from your trading style? Will you follow the trading plan that you’ve put so much thought and process into developing for yourself?
If you have a pen, WRITE THIS DOWN and tape it to your Monitor:
“WHEN I TRADE MY PLAN WITH CONSISTENCY AND REPETITION THE MONEY WILL FOLLOW.”
Remember, every trader gets punched in the mouth. The magic is how you apply
your trading when this happens.