Whitney Tilson: How to Avoid — And Profit From — Manias, Bubbles and Investor Irrationality-8!18!11
Archives of “emotions” tag
rssCommon Mistakes to Avoid while Trading:
- Failure to cut losses: Pride, ego, or stubbornness prevents the trader from selling.
- Not knowing “how much” to trade on each position: Overtrading positions can kill your account and take you out for good (risk of ruin).
- Average down in price: Placing good money after bad is a loser’s game.
- Listening to rumors: Forget the talking heads, rumors and tips as they are nothing but garbage and a sure way to substantial losses
- Lack of patience: It takes years to master trading as an advanced skill; even then, you are never done learning or adapting
- Not knowing when to sell: Determine your price objectives and risk-to-reward ratios prior to entering the trade; never allow emotions to make this decision. (more…)
10 Trading Lessons for 2011
1)You can’t succeed overnight. Most retail/aspiring traders get hooked on trading because they want money and they want it NOW! Over-trading, scalping, over-leveraging, random decisions, greed and the mirage of getting rich quick will turn trading into gambling.
A common sense rule says that – in order to make a lot of money fast, you either 1) steal, 2) you are a genius inventing or discovering something new, something that everyone will use or buy from you (like Google, Facebook, Angry Birds) or 3) gamble, if you are really lucky.
Learn from your own mistakes, don’t repeat them, practice and persevere. It doesn’t matter if you count Elliott waves better than anyone else or if you anticipate a rate hike 6 months in advance. It only matters how you control your emotions and your money.
2) Focus your efforts on the things that work best for you. If there is one trading strategy that works for you, then stick to it as long as it works. Don’t waste time testing everything you find on the Internet and don’t listen to everything you hear or read. Too much information can lead to confusion, difficult choices and failure – eventually.
3)Losing is part of the game but recovering is not an easy task and requires smarter trading decisions.
Have you ever been on a diet?
Common sense rule, again: if you have gained 40 lbs. (18 kg) in 1 year, don’t expect to lose 40 lbs. in 2 weeks. It takes a lot of work to get rid of them.
So if your trading account is down 50% after 2 months, you’ll have to double your remaining equity to break even. Will that be easy? I doubt.
4)Making mistakes is normal but rather than give up, try to learn something from your own trading mistakes, bad strategies, emotions etc.
If you don’t succeed, you aren’t out of the game.
Make a list of things that didn’t work – check it regularly so you don’t forget them. Avoid them in the future.
5)If you keep doing the same thing and you are constantly losing, it’s obvious that you are doing something wrong. Is your trading strategy constantly giving poor results? Change it. Are you always predicting the wrong market direction? Stop predicting – trade what you see, not what you think or expect.
If you want to achieve different results, then you must change your actions. (more…)
5 Characteristics of Successful Trader
Knowledge – A trader must put in the time and effort to study and learn the proper skills in order to be successful. Whether that is through technical or fundamental analysis, one must invest in their education. They must completely understand their market, and its ideal as a beginner to focus on one market and be a specialist. A part of the knowledge and education is devising a game plan or strategy for trading. Writing down your rules and sticking to your trading plan is a key to success.
Controlling your emotions – The ability to control your fear and greed is paramount to success. A successful trader will have a balanced emotional state regardless if he/she is winning or losing. Ensuring the trader has a clear head and is able to pull the trigger and take trades every time an opportunity presents itself.
Patience – A successful trader can sit on the sidelines for days waiting for the proper setup. They don’t jump into a trade just for the sake of trading. Yes there may be opportunities, but the smart trader waits for trades that meet their trading rules and system. Over trading by beginner traders is a big obstacle to overcome. A need to always be in the market will lead to taking trades that are likely too risky. Learn patience, it’s a key to success. A winning trader usually has an extraordinary amount of self control, and often the best trade is no trade.
Discipline – There are no 100% winning traders and taking losses are part of the trading profession. It is about finding high probability opportunities and managing the risks on each trade. A trader must stick to their trading plan and discipline is the key to success.
Confidence – Having the confidence in yourself and your system to make your profit or take a loss when your method tells you to is a winning trait. Confidence usually comes from experience and knowledge.
Conquering Your Negative Trading Emotions
The trader has two emotions that must be controlled in order to become successful. I call them ‘the two sides of a coin’ and they are commonly known as FEAR & GREED.
The beginning or new trader will first encounter FEAR. There are two types of FEAR. The fear of losing money and the fear of being wrong.
The fear of losing money usually derives from a trader risking money that should be used for the rent, food, children’s education etc. ‘Scared money’ will render one incapable of pulling the trigger when a trade setup comes along. The only way to overcome this paralysis is to be well capitalized with funds that you can risk.
The fear of being wrong is simply that part of all of us that feels that to make a wrong decision is reflective on our personal competency. The cure for this is to simply realize and accept that losses are part of this game. Think about this? A baseball player needs to hit the ball once for every three times at the plate and this will get him into the Hall Of Fame. Whenever you feel the fear of being wrong, just remind yourself that… “My approach for trading has both historically and real-time produced over (number)% winning trades.” This will give you the confidence to step up to the plate and keep swinging. Also tell yourself that the only way to earn the big money is to get into the game. Have confidence in your trading system that when properly executed, it will make much more money than it loses.
So, why is GREED the flip side of fear?
Greed is caused by the fear of not making enough money. Traders who are greedy are often the exact opposite of the ones who are fearful. They have no fear and usually are very aggressive traders, which can get them into big trouble fast. Greed will usually lead to overtrading, failure to follow the trading rules, and not applying the system consistently. One of the biggest problems when greed sets in is the inability to know when to take profits. These traders are so bent on making a killing that they are never satisfied. If they have significant profits they don’t even think about cashing out, as they want more. This often leads to the inability to see the trade turning against them and they will allow winning trades to turn into big losing ones. (more…)
Book Review-Trading Beyond the Matrix-Great Book for Traders
Now ,This Book in our Library
1. Trading with the use of R Multiples. Risk a set amount per trade with the goal to make a minimum of three Rs for every one risked. If the trade is does not work out cut the loss at 1R.
2. Only trade if you have an edge, which is defined by only taking the very best trading opportunities, position sizing correctly, being in control of your feelings, and having a great risk to reward ratio, etc.
3. To be a successful trader you must know what your trading objectives are, how much do you want to make in a year? What percent of return are you looking for?
4. You need defined goals of whether you want to trade for a living, make a million dollars, or just trade for capital appreciation.
5. A primary goal of this book is to make the leap from trading our opinions about the markets to trading what is actually happening in the markets.
The power of this book is in the psychology and spiritual insights shared by both the author and many successful traders that share their journey with the reader with the chapters they wrote for this book. (more…)
5-False Beliefs About Trading the Markets
1) What goes up must come down and vice versa.
That’s Newton’s law, not the law of trading. And even if the market does eventully self-correct, you have no idea when it will happen. In short, there’s no point blowing up your account fighthing the tape.
2) You have to be smart to make money.
No, what you have to be is disciplined. If you want to be smart, write a book or teach at a university. If you want to make money, listen to what the market is telling you and trade to make money — not to be “right.”
3) Making money is hard.
Nope. Sorry. Making money is actually easy. Statistically, you’re going to do it about half the time. Keeping it, now that’s the hard part.
4) I have to have a high winning percentage to be profitable.
Not true. How often you are right on a trade is only half of the equation. The other half is how much do you make when you’re right and how much you lose when you’re wrong. You can remember that with this formula:
Probability (odds of it going up or down) x Magnitude (how much it goes up or down) = Profitability
5) To be successful, I have to trade without emotions.
That is both wrong and impossible. You are human so you have emotions. Emotions can be a powerful motivator to your trading.
When you feel angry or scared in trading, take that emotion and translate it into something more productive. For example, if you’re feeling angry because you just got run over by the market, view that anger as a reason to be more focused and disciplined in your entry and exit levels on the next trade.
Personality Traits
The research of Costa and McCrae suggests that personality traits fall into five broad categories, with each category displaying a number of facets. Their NEO-PI personality trait inventory labels these categories and facets as follows:
* Neuroticism – Anxiety, Angry Hostility, Depression, Self-Consciousness, Impulsiveness, and Vulnerability;
* Extraversion – Warmth, Gregariousness, Assertiveness, Activity, Excitement-Seeking, Positive Emotions;
* Openness – Fantasy, Aesthetics, Feelings, Actions, Ideas, Values;
* Agreeableness – Trust, Straightforwardness, Altruism, Compliance, Modesty, and Tender-Mindedness;
* Conscientiousness – Competence, Order, Dutifulness, Achievement Striving, Self-Discipline, and Deliberation.
The importance of emotion in trading.
Anxious: Am I prepared? Can I afford to lose what I am risking? Am I breaking my rules? Did I drink too much caffeine?
Anger: Have I not moved from the last trade? Am I tired? Is there conflict in my personal life?
Happiness: Are psychological gains more important than monetary gain? Am I overconfident?
Indifference: Do I care? Is something more important?
It is natural to feel emotion but in an appropriate and proportional way.
Anxious:
To this day, the first trade always produces a little anxiety. That little tingle in your stomach and shallow breathing. The same is true when I a trade I have been waiting for sets up. Above that, I know there is something wrong.
Anger and Happiness:
I am angry after a negative outcome and happy after a positive outcome but in order to adapt more quickly I have to remove emotion from the outcome as soon as possible. It is more important to focus on what happened and less how I feel about it. Prolonged feelings of anger or happiness causes risk blindness and impedes my learning. Misjudging risk will prevent me from taking a trade or taking too much risk. (more…)
Does Failure Motivate you ?
I’ve been reading a wondeful book by Jerry Stocking titled Laighing with God.In that book the following dilemma is broght up ,and I’m going to rewrite the conversation a little to make it pertinent to trading/investing.
God :Do you want to win without losing ?
Trader :Of course.
God :If you win ,you must lose as well.But you weren’t honest with me.Your saud that you’d like to just win.If that were the case ,you’d win much more often.
The possibility of failure motivates you much more than the possibility of success.your whole society thrices on failure or at least the fear of lossing.If there were not the possibility of losing you could not take any credit for success.Making money in the markets would seen meaningless for you. (more…)