Archives of “emotions” tag

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Self awareness for Traders

  
  Education
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1) the recognition that our thinking and our emotions are intertwined and both influence our perception and judgment that leads to our decisions and actions (this view also happens to be consistent what the leading brain scientists are now saying)

2) much of our motivation – the intertwined thinking/emotion that drives our behavior – is actually subconscious, e.g. we assume we are trading the market but on other levels we are also trading our P&L and our feelings about our P&L  (and what our P&L represents to us) is just one example.

3) when we understand (self-awareness) the underlying/subconscious motivation for our behavior we are in a better position to choose an alternative.

Obviously, nothing can guarantee change or improvement (contrary to many claims made by pseudo “experts”), but at least an approach that emphasizes expansion of awareness puts the odds in your favor.

And I have to play the probabilities here. Because more people tend to respond to a change process that includes an emphasis on self-awareness, I choose to use this  approach in my own trading and in my coaching….it simply has the highest probability
of actually helping.

7 Characteristics of Great Traders

  
  Education
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1. Education, education, education.

The old cliche touted by politicians when they can’t think of anything clever to say to their audience. The importance of education to success in trading cannot be placed on a high enough pedestal. You have to learn to earn, the best traders work obsessively to refine their edge further to stay ahead of the curve.

2. Adapt or Die.

Market conditions change and technology advances, thus the conditions for trading are always evolving, the rise in mechanical trading is testament to that. The very best traders through a process of education and adaptation are constantly staying ahead of the curve and creating ever new and ingenious methods to profit from the markets evolution.

3. Fail to plan, you plan to fail.

The best traders have a well documented plan; they know exactly what they are looking for and follow that plan to the letter. Their preparation for a trade starts long before the market open, it is this meticulous planning and importantly adherence to that plan that helps them avoid the biggest demons for any trader, over trading and revenge trading.

4. “Be like Machine”

As human beings emotions pay a key role in our existence, for a trader emotions can be a source of great pain. Trading psychology and the management of your emotions in a trade play a key role in overall success. Fear and greed can cut your winners short and let your losers run. Dealing with emotions follows on from your plan; the more robust your plan the less likely you are to fall into the emotional mine field. (more…)

The Power of Regret

  
  Education
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Everyone knows that chasing price is usually not beneficial, we either end up catching the move too late, or we get poor trade location, which makes it more difficult to manage the trade.

However, there are other forms of chasing that are just as common, maybe more common, and just as counter-productive.   As a trading psychologist I see these all the time.

Traders who are not profitable are often too quick to chase after new set-ups and indicators, or a different chat room, if that’s your thing.  Obviously, we need to have a trading edge, whether it is from the statistical perspective of a positive expectancy, or simply the confidence in a particular discretionary strategy such as tape reading, following order flow, market profile, etc.

Chasing a trade is the fear of missing out. The fear of missing out is associated with various emotions, including regret. In my work with traders and in my own trading, I’ve seen the incredible power of regret. There’s a lot of talk about fear and greed in trading, but the power of regret is often overlooked. Some of my own worst trades, and those of my clients, often have a ‘regret from missing a prior opportunity’ component. When I finally finish my book on the psychology of financial risk taking, I will include much about this overlooked but very powerful emotion.

Somewhat related to chasing a trade, is impulse trading.  They both have in common the underlying feeling of the fear of missing out.  It’s tempting for me to talk about impulse trading here, but it really deserves its own piece.

MindTraps-Great Book

  
  Education
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I read a great book on trading psychology, called MindTraps by Roland Barach. MindTraps focuses on how the average person tends to think, compared to how we need to think to make money over time in the markets.

 Here’s a summary of points that can benefit you as a trader:

  1. 1.Before entering any trade, you should consider the other side of the trade and state the reasons you’d take the other side of the trade.  This helps you objectively enter a trade with a full understanding of the major risks that involved.
  2. Analyze your behavior from the beginning to the end of the trading process (from idea generation to entry and finally to exit) – what are the areas you can improve to help your trading profitability the most?
  3. Keep a trading journal of your thoughts on open positions and new ideas – writing things down helps you objectively look back and see where you went right and wrong.
  4. Fear blinds us to opportunity; greed blinds us to danger – emotions cause “perceptual distortion” where we only see the part of the picture that our beliefs allow us to see.
  5. We are likely to continue doing things for which we are rewarded -this can cause us to get too bullish after the bulk of the uptrend has occurred, or get too bearish near the lows.
  6. Fear of regret slants stock market behavior toward inaction and conventional thinking –  the person who is afraid of losing is usually defeated by the opponent who concentrates on winning (an analogy for sports fans is the Prevent defense in football – playing “not to lose” only prevents you from winning).
  7. Can’t have a personal agenda to prove your self-worth in the markets –  the focus must be on following your plan to maximize the ability to make money.
  8. Don’t get overly attached to any one view on a stock or market – don’t talk to others about open positions; it just makes it that much harder to exit when your plan says it should.
  9. Our predictions are only as good as the information available to us – objectively look at the indicators and data you use, to get the best quality of information and focus available
  10. People prefer for gains to be taken in several pieces to maximize their feeling good about their ability, while they prefer to take all their losses in one big lump to minimize the pain they feel.
  11. People prefer a sure gain compared to a high probability of a bigger gain, so they can say they made a profit; in contrast, people will speculate on a high probability of a bigger loss over a sure smaller loss, because they don’t want to feel like a loser.  In trading, we must flip around the conventional emotions to allow us to let profits run while cutting losses shorter.

Psychological problems

  
  Education
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There are two parts to fixing any psychological problems:
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1. Recognizing that it exists
2. Accepting it so you can move on
In trading, this is where it’s so crucial to take responsibility for your own actions because it induces change and you can start making improvements. If you don’t recognize and accept a problem, then you won’t get anywhere!
What are some of these issues  ? Here are a few along with their causes and/or effects:
1. Anger over a losing trade – Traders usually feel as if they are victims of the market. This is usually because they either 1) care too much about the trade and/or 2) have unrealistic expectations. They seek approval from the markets, something the markets cannot provide.
2. Trading too much – Traders that do this have some personal need to “conquer” the market. The sole motivation here is greed and about “getting even” with the market. It is impossible to get “even” with the market.
3. Trading the wrong size – Traders ignore or don’t recognize the risk of each trade or do not understand money management. There is no personal responsibility here.
4. PMSing after the day is over – Traders are on a wild emotional roller coaster that is fueled by a plethora of emotions ranging throughout the spectrum. Focus is taken off of the process and is placed too heavily on the money. These people are very irritable akin to the symptoms of premenstrual syndrome. (more…)

5 Steps for Traders

  
  Education
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  1. STAY DISCIPLINED AND ONLY TRADE YOUR METHOD. If you do not have a robust system, method, or strategy do not trade again until you have one.
  2. ONLY TAKE TRADES WITH IN THE PARAMETERS OF YOUR TRADING PLAN. Trade your plan not your emotions. If you do not have a plan that defines entries, exits, and position sizing do not trade again until you have one.
  3. YOUR FIRST LOSS IS YOUR BEST LOSS. When your planned stop is first hit just get out. In trading hoping is a very expensive emotion
  4. UNDERSTAND THE MARKET ENVIRONMENT. There are times to be short, times to be long, and times to be out. Volatility is many traders kryptonite.  If the market itself is not conducive to your strategy wait until it is.
  5. CHOOSE YOUR SPOTS CAREFULLY. Do not rush trades, wait until you get the right set up, trend, or break out you are waiting for, the market isn’t going anywhere, wait for the fat pitch.

My Trading Resolutions for next 3 months

  
  Education
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  • Think for myself
  • Stay focused on the reasons why I bought a stock and sell when those reasons are no longer compelling
  • Don’t let successful trades turn into losses
  • Be ruled less by emotion and fear and more by logic and knowledge
  • Read some good books on trading
  • To avoid being whipsawed, I will give myself more room for the trade to work
  • Follow my own rules
  • Be easier on myself when I screw up and don’t let my ego inflate when I’m right
  • Don’t force trades – there will always be another opportunity
  • Honor thy stops!
  • Stop chasing hot and popular stocks
  • Do my own research
  • Keep learning
  • Learn to be less nervous and take more risks
  • Remember that lost opportunity is better than lost capital
  • Trade less – don’t overtrade
  • To try and limit the number of opinions I allow to affect my trading. Paralysis by analysis has hurt me
  • Avoid any trade where I use the word “hope” in my reasoning process
  • To follow my logical, well-conceived, long-term game plan, without making irrational changes due to short-term market conditions
  • Tune out the daily noise and useless banter
  • Reduce the number of positions currently held
  • Have more faith in my own abilities
  • In trading, learn to be fearless
  • Don’t be too greedy
  • Slow down!
  • Incorporate the use of smart trailing stops
  • Use ETFs to properly diversify
  • Remove my ego from my trading decisions
  • Avoid getting easily frustrated or impatient
  • Control and limit my losses
  • Focus on making the next trade, instead of the last one
  • I will not average down into losing positions
  • Create more careful and detailed records with a commitment to review them regularly
  • Learn to incorporate a systematic screening method like you
  • Use emotions (both personal and market) to my own advantage
  • Know my exits before making any trade
  • Don’t be swayed by the latest and greatest strategy I hear about
  • Keep it simple. Complex strategies are no better
  • Avoid crowded trades
  • Take time to look for reasons NOT to buy
  • Let profits run longer. take losses quicker
  • Trade what I see, not what I want to see
  • Be more proactive and react faster to situations I find
  • Make bigger, but less frequent trades
  • Stay patient
  • Focus on value of companies and not on the temporary market emotions
  • Be more nimble
  • Keep better notes
  • Adopt an opportunistic versus a rigid bull or bear bias toward the market
  • Enjoy the game more
  • To quit counting the value of my account on a daily basis
  • Stop looking for the holy grail
  • Figure out what trade related information to consume on a daily basis and keep what is useful and leave out that which is not
  • Avoid information overload by limiting what I read
  • Don’t read stock blogs
  • Turn off the TV and dedicate more of my time to become a better trader
  • Set up a lazy portfolio
  • Focus on proper asset allocation
  • Never forget that “when you are through learning you are through”
  • Recognize mistakes early, exit, and move on
  • Take partial profits routinely, but keep money on high-performing stocks
  • Follow my system
  • To screen & scan my watchlist in a consistent manner each and every time
  • Take routine breaks away from the market to refresh and gain more perspective
  • Add more fundamental research to my technical research
  • Concentrate on finding just one really good idea per year like Warren Buffett
  • Stop searching for shortcuts or quick fixes – take baby steps
  • Read at least 3 more trading books in next 3 months
  • Focus, focus, focus – ignore all outside distractions
  • When a strategy works, have the courage to follow it through, when it does not work, to have the wisdom to stop trading
  • Find and exploit long-range sector themes
  • Open my ears and keep my mouth shut
  • Never panic
  • Be humble

Clear your mind

  
  Education
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Surfer--Someone asked a surfer what he does when a big surf comes along, and he goes underwater. The surfer said it was simple. “If I panic, I only have 3-5 seconds of air to breathe. If I stay calm, I have 45-60 seconds of air.“

Trading Lesson: If you let your emotions get the better of you, you could lose all of your capital. However, if you take a moment and think about your trades, you can have much better results.

Ignore Your Guts

  
  Education
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In my studies I have often found something that is rather interesting and maybe different than most would suspect. The most successful traders I have studied don’t rely on gut calls or feels, but rather adhere to a disciplined set of rules or guidelines and are humbled enough to admit that their emotional decisions aren’t consistent enough to hold up during the heat of the moment.

Ironically, most would think just the opposite that the more successful a trader is, the more ‘feel’ he or she has or the more ‘instinct.’ Sure, it looks macho to make calls or predictions and when proven correct a person is often praised and viewed as having some superior knowledge, but in reality these people are one step below those that have already moved through this stage and left it behind.

As an individual trader it is simply impossible to remain emotionless, making the proper trading decisions at all times, when the action is heated. Even when there is a lull, our emotions kick in and we feel a change is needed or something should be done, when in reality our rules may say to stay put or do nothing.

Trading psychology

  
  Education
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  • Trading psychologyStop trying to outsmart the market. NO ONE knows exactly where it will go.
  • With each decision you make comes stress:
    • The more decisions you make, the more likely you are to be wrong.
    • The more decisions you are used to making, the more pressure you’ll put on yourself to make even more decisions.
    • No one can be that right.
  • Forget about the “whys’ of the market. After all is said and done, the reasons will be known.
  • Don’t apply logic. Markets move on emotions — period!
  • Plan your trade and trade your plan.
  • Reduce the amount of decisions you make.
  • Make decisions and live with them (also a life lesson!).
    • Good decisions come from experience.
    • Experience comes from bad decisions.
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