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10 Foolish Things a Trader Can Do

  
  Education
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01. Try to predict the future movement of a stock, and stay in it no matter what.

02. Risk your entire account on one trade with no stop loss plan.

03. Have a winning trade but no exit strategy to get out, no trailing stop or exhaustion top signal.

04. Ask for and follow the advice of others instead of trading with your own trading plan, method, rules, and system.

05. Trade your emotions instead of signals: buy when you are greedy and sell when you are afraid.

06. Trade your opinions, not a quantified method. (more…)

A Bird’s Eye View of Yourself

  
  Education
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When did position management enter my consciousness?  I think it stems from experiences that gave me an appreciation for the psychology behind our behavior.  Sure, I had read the classic from Edwin Lefevre, and believed in William O’Neil stop-loss rules.  The image that still sticks with me comes from a tiny book I read in 1994 that doesn’t get the pub it deserves.

In his tiny 1930 classic, Fred Kelly gives the example of the farmer who had 12 chickens in a cage, and one slipped out.  So he propped open the door and set food out in an attempt to lure the chicken back.  Of course, 2 more chickens now escaped.  Surely, he can’t accept having only 9 chickens when he just had 11.  His repeated efforts to get back to “breakeven” left him panicking to salvage 2 at the end…sound familiar with anyone’s early trading efforts?

The lessons stayed personal until managing an order desk stamped those lessons as universal.   Seeing these episodes play out over and over among traders led to a true appreciation of the human wiring that wreaks havoc with our trading.  These observations led me in the late 90′s to step outside of myself on every trade and ask if I was that person.  Am I holding a short against a wave of strength that will sweep me away tomorrow anyway? If so, why not cover now instead of panicking with my fellow (wrong) shorts later? It was in those moments that I realized the power of anticipating group emotions.  I already had a respect for taking losses, but I gradually moved from exiting in panic, to exiting in fear, to exiting when the slightest bit of hope creeped in.

Remember this…if you’re hoping a position bounces back to being a winner, you’re not alone at that moment.  Hope is said to be a good companion, but a poor guide.  Turn that on its head by realizing that you have a chance to act in defense of your equity by taking your loss before the other “hopers” are forced by emotions to act.  Sure, you’re putting yourself in a position of huge regret if the position then recovers, but you’re also preventing the possibility of acting in a panicked state later.  Stops can be great teachers…if you find yourself repeatedly getting stopped out just before your idea gets recognized, then you need wider stops.  Been there…I now operate with smaller positions and wider stops, giving myself room to be right but not putting my equity at undue risk.

If the image of the farmer doesn’t do it for you, consider 2 traders, Roger and Andy.  Both are caught in a bad situation, hoping for the best.  Andy decides to come clean and admit his mistake.  Roger decides to dig in and show he’s right.  Bad idea.  A small lie today will be a bigger lie tomorrow…rip the band aid now.  Any idea who played that trade right?

It’s OK to be wrong, not OK to stay wrong…that’s the difference between champ and chump.  The longer we stay in a trading range, the more explosive the resulting trend will be, and there will be no place for hope.  Be ready to trade today’s ego hit for a chance to play again tomorrow, and you give yourself a chance to replace any negative episode with your best one yet.

Livermore quotes

  
  Education
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Jesse_Livermore_quotesLivermore on irationality

Trying to figure out the “why” of amarket move can often cause great emotional strife. The simple fact is, the market always precedes economic news, it does not react to economic news. The market lives and operates in future time.

 
Livermore on knowing yourself

It is my conclusion that playing the market is partly an art form, it is not just pure reason. If it were pure reason, then somebody would have figured it out long ago. That’s why I believe every speculator must analyze his own emotions to find out just what stress level he can endure. Every speculator is different, every human psyche is unique, every personality exclusive to an individual. Learn your own emotional limits before attempting to speculate, that is my advice to any one who has ever asked me what makes a successful speculator. If you can’t sleep at night, because of your stock market position than you have gone too far, if this is the case then sell your position down to the sleeping level. (more…)

The Right Side

  
  Education
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A quote from one the best traders of our time, Jesse Livermore: “It takes a man a long time to learn all the lessons of all his mistakes. They say there are two sides to everything. But there is only one side to the stock market; and it is not the bull side or the bear side, but the right side. It took me longer to get that general principle fixed firmly in my mind than it did most of the more technical phases of the game of stock speculation.”

Being a bull or a bear alone is meaningless out of the crucial context of the current market conditions. All that really matters for the great game of speculation is being on the “right side”, knowing when the markets are in a bull or a bear trend and deploying your speculative capital accordingly.

Once again Livermore ties speculation back into the speculator’s own internal emotions. He points out that it makes no sense to be bullish or bearish as a rule, but to carefully watch the market conditions in order to be on “the right side” at any given moment. Most speculators are burdened with an innate emotional bias to be bullish that is dangerous and must be eradicated if they wish to succeed in speculation. (more…)

Trading From Your Gut, by Curtis Faith

  
  Education
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CHAPTER 1

The Power of the Gut

“The intuitive mind is a sacred gift and the rational mind is a faithful servant. We have created a society that honors the servant and has forgotten the gift.”
—Albert Einstein

George Soros, one of the greatest traders alive, trades from the gut. He has widely remarked on the correlation between his backaches and trading choices. In the autobiographical Soros on Soros, he wrote:

 I rely a great deal on animal instincts. When I was actively running the fund, I suffered from backache. I used the onset of acute pain as a signal that there was something wrong in my portfolio. The backache didn’t tell me what was wrong—you know, lower back for short positions, left shoulder for currencies—but it did prompt me to look for something amiss when I might not have done so otherwise.

Some traders might scoff at the idea of making decisions based on “feelings” or intuition. They see the trader’s role as one who remains calm and collected, rationally choosing the right course while those around them are tossed about by their emotions. They believe that Soros is either lying or fooling himself. They don’t see how gut instinct can help. Yet many successful traders feel otherwise. Who is right? Is one approach better than the other?

If you are one of those traders who doesn’t believe that gut instinct or intuition has any place in trading, I invite you to keep an open mind. I, too, once felt as you did. After all, I was trained to take a very systematic and logical approach to trading as a Turtle. I believed that it was important to keep your emotions in check. I ­didn’t believe in trading from the gut.

Trading from your gut is a way of tapping into the extra power of the right hemisphere of the brain.

What I didn’t realize at the time, however, is that there is a big difference between trading emotionally and trading from your gut. Trading emotionally means reacting to fear and hope, which can destroy your trading decisions. Trading from your gut is different. It is a way of tapping into the extra power of the right hemisphere of the brain, which can be a powerful, effective, and entirely rational addition to any trader’s repertoire. (more…)

Minimize The Impact Of A Setback!

  
  Education
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SportFirst, minimize its symbolic importance. Many people over interpret setbacks by imbuing them with more emotions than are warranted. They view setbacks as a form of punishment, as if a teacher or parent is punishing them for doing something wrong. Take the setback in stride and move on to the next winning trade.
Second, don’t confuse trading outcomes with personal significance. If you lose big, for example, the loss may have great financial significance but it doesn’t need to have great personal significance. You can wipe out your entire account, but that doesn’t mean you are diminished in the eyes of friends and family. You don’t need to let a loss or setback make you feel less worthy as a person.
Ironically, when you psychologically minimize the impact of a setback, and treat it as if it isn’t important, you’ll stay calm, free, and objective. And when you feel this way, you’ll trade profitably.

Money Management

  
  Education
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The overwhelming reason that traders win or lose is not because of their entry method, but because of their money management skills.

By “money management” it simply mean keeping losses and drawdowns to an absolute minimum while making the most of opportunities for profit.Good Trader must keep his losses to a minimum to ensure his survival. If you keep your losses to a minimum on every trade, you will have 80 percent of the battle won.

Important‑if the market starts to move parabolically or has a rangeexpansion move, take profits on the entire position. This is very likely climax!
‘When the ducks quack, feed them.” In other words, when everybody wants something, that’s probably the perfect spot to sell it to them. The price has already been bid way up. Emotions drive the markets to extremes, and these extremes are the ideal spot to exit our trades.

Black Belt Trading

  
  Education
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Black BeltJust like you shouldn’t practice your basic martial-arts forms in the ring where your mind is more focused on pain avoidance then executing the tactic correctly, a novice shouldn’t begin trading with real money and real consequences. Only once you’ve amassed significant practice in a safe environment where you can conduct your technical and fundamental analysis without being emotionally distracted should you begin to trade with real money. And when you finally start, don’t jump straight into the ring with Bruce Lee. Begin tentatively, gradually, slowly increasing your trading exposure over time as you become accustomed to the increasing levels of risk. How do you know you’ve moved too far, too fast? If you are finding it’s becoming harder to sleep at night, either because you are worrying about your trades or you are excited about your gains, then you have moved into the realm where your emotions are going to have too strong an effect. You are going to start making poor, emotionally-clouded decisions and so it is time to scale back.

Game Plan

  
  Education
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gameplanCreating a game plan is very easy and you can do in a matter of minutes. Here are the key steps to creating a very basic game plan:

1) Write down your reasons for buying or selling a particular market.

2) Write down your entry point for the market you’re about to trade. Why are you getting in? Did you see a technical set up?

3) Write down when you are going to exit this market. Why and when are you going exit? Was your profit target reached, or were you stopped out?

4) Do not make market decisions during trading hours. It may sound easier said than done, but watching the daily ticks can cause your emotions to go haywire. (more…)

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