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Look Inside Yourself

One trader wrote in that he was in a slump and wondered if he should switch markets or find another indicator.

Do you ever find that you also want to blame something outside yourself?

One of my favorites used to be blaming ‘the system’ – the system is rigged against me: the brokers are the only ones getting rich, robbing me on these bid/asked spreads, hunting all my stops, etc.

When you blame an external situation, you are giving up control, and instead letting yourself be controlled by outside events. This converts you from a proactive trader into a reactive trader. Or a winner into a whiner.

If you are reacting after the fact in the markets, you are then letting your emotions start to control you, instead of planning how you will react to any set of circumstances.

You know how letting emotions control you turns out in the markets. You go broke.

You must believe that you control your own destiny. If you are not getting the results you expect of yourself, look inside yourself.

Start analyzing your actions and behavior. Are you hanging on to losses too long? Are you cutting profits too soon? Are you having trouble pulling the trigger only to watch in frustration as your trade wins without you?

These and other frustrations should clue you in that you need to fix some element of your trading plan. Evaluate your present situation, and if it needs to change, take decisive action and change it.

Victor Sperandeo -Quotes

The key to investment success is emotional discipline. Making money has nothing to do with intelligence. To be a successful investor, you have to be able to admit mistakes. I trained a guy to trade who had a 188 IQ. He was on “Jeopardy” once and answered every question correctly. That same person never made a dime in trading during 5 years!
-Victor Sperandeo

Most people lose money because of lack of emotional discipline
-the ability to keep their emotions removed from investment decisions. Dieting provides an apt analogy. Most people have the necessary knowledge to lose weight—that is they know that in order to lose weight you have to exercise and cut your intake of fats. However, despite this widespread knowledge, the vast majority of people who attempt to lose weight are unsuccessful. Why? Because they lack the emotional discipline.
-Victor Sperandeo

In my opinion, the greatest misconception about the market is the idea that if you buy and hold stocks for long periods of time, you’ll always make money. Let me give you some specific examples. Anyone who bought the stock market at any time between the 1896 low and the 1932 low would have lost money. In other words, there’s a 36 year period in which a buy-and-hold strategy would have lost money. As a more modern example, anyone who bought the market at any time between the 1962 low and the 1974 low would have lost money.
-Victor Sperandeo
-Victor Sperandeo
Once a price move exceeds its median historical age, any method you use to analyze the market, whether it be fundamental or technical, is likely to be far more accurate. For example, if a chartist interprets a particular pattern as a top formation, but the market is only up 10% from the last low, the odds are high that the projection will be incorrect. However, if the market is up 25% to 30%, then the same type of formation should be given a great deal more weight.
-Victor Sperandeo
To use a life insurance analogy, most people who become involved in the stock market don’t know the difference between a 20 year old and an 80 year old. Investing in the market without knowing what stage it is in is like selling life insurance to 20 year olds and 80 year olds at the same premium.

G. C. Selden Trading Psychology – Hunches And Gut Feelings

Recently most traders probably have spent a great deal of time managing risk and emotions. I know I have. When it comes to correctly gauging and dealing with emotions it is paramount to analyze your reactions in a detached way. The best way to get objective insight is to imagine taking a step back and then ‘watching yourself.’ It’s as if you were your own mentor or trading coach. This is not an easy task. Good results require emotional detachment, a lot of experience and the ability to honestly assess the degree of trading proficiency you have attained. Ultimately it will tell you what those gut feelings you are occasionally experiencing really are worth. That’s exactly what G.C. Selden addresses at the end of his classic trading book : ‘Psychology of the Stock Market’ which was first published in 1912. Here’s an excerpt dealing with ‘hunches and gut feelings.’ Lots of additional and valuable insight for traders is provided. Enjoy! 

An exaggerated example of “getting a notion” is seen in the so-called “hunch.” This term appears to mean, when it means anything, a sort of sudden welling up of instinct so strong as to induce the trader to follow it regardless of reason. In many cases, the “hunch” is nothing more than a strong impulse.

Almost any business man will say at times, “I have a feeling that we ought not to do this,” or “Somehow I don’t like that proposition,” without being able to explain clearly the grounds for his opposition. Likewise the “hunch” of a man who has watched the stock market for half a lifetime may not be without value. In such a case it doubtless represents an accumulation of small indications, each so trifling or so evasive that the trader cannot clearly marshal and review them even in his own mind. (more…)

Fear & Greed

When trading there are two emotions that are more common, and more dangerous, than all the rest; fear and greed.

Fear and greed can ruin even the best trading strategies

One moment of fear or greed can lead to a moment of madness and months of hard won profits going down the drain

Uncontrolled emotions should not be an excuse for losses and losses should not be an excuse for uncontrolled emotions

Remember!! Trading affects psychology as much as psychology affects trading

Greed

“You can’t feed on greed” (more…)

The Market Makes You Feel Bad Majority of the Time

  • Unless you nail it right exactly, you will feel frustration / regret / fear in all other outcomesTraders are always choosing among the lesser of the evils. Feeling regretful is practically inescapable.
    • When you get the trade direction wrong
    • When you got out too early
    • When you got out too late
    • When you miss a trade
  • Regret Theory says that people have the desire to avoid future regret when they make their decisions.

Fragile Traders vs. Anti-Fragile Traders


Reading Nassim Taleb’s newest book Anti-Fragile really got me thinking about how traders are broken.
Traders can become fragile and be broken in several ways:

  1. They can quit because they believe that trading successfully is impossible.
  2. They can lose half their account or all of their account and just give up.
  3. They can become emotionally traumatized by one huge loss or a string of losses and just not be able to trade any more due to the pain going forward.
  4. A trader can lose faith in them self as a trader.
  5. A trader can lose faith in their system.
  6. A trader can trade too big and blow up their account, they want to trade, they believe they can make it back but have no money.

A trader can become anti-fragile they can benefit from adversity at times by:

  1. Having 100% confidence that they will be in the 10% percentile of  consistently winning trades, it is just a matter of time.
  2. They do not give up after losing the majority of their very first account  they just accept it as paying tuition and start again this time with faith they will win.
  3. The anti-fragile trader trades small, their emotions do not bleed into their trades, each trade is just 1 of the next 100. They risk 1% of capital per trade.
  4. The successful trader identifies themselves as a successful trader, losing trades do not change who they are.
  5. The trader believes that time is on their side and draw downs are just temporary, short term losses do not change the trader’s belief in long term success.
  6. Successful traders know that their trading account is their life blood, guarding  it against big losses is their #1 priority.

Fragile traders are inevitably  broken, anti-fragile traders are not only not broken but benefit from circumstances by learning, growing, and becoming more resolved to win. Adversity makes them stronger.

10 Trading Lessons

  1. Trading affects psychology as much as psychology affects trading.
  2. Emotional disruption is present even among the most successful traders.
  3. Winning disrupts the trader’s emotions as much as losing.
  4. Size kills.
  5. Training is the path to expertise.
  6. Successful traders possess rich mental maps.
  7. Markets change.
  8. Even the best traders have periods of drawdown.
  9. The market you’re in counts as much toward performance as your trading method.
  10. Execution and trade management count.

Jesse Livermore’s Money Management Rules

If you haven’t read this book “Reminiscences of a Stock Operator” written in 1923, read it! It is purpordetly the unofficial biography of one of the greates traders ever; Jesse Livermore.  The rules Jesse followed back at the turn of the last century are still very much applicable today.

1) Don’t lose money. Don’t lose your stake. A speculator without cash is like a store-owner with no inventory. Cash is your inventory, your lifeline, and your best friend. Without cash, you are out of business. Don’t lose your line. There is no place in speculating for hoping, for guessing, for fear, for greed, for emotions. The tape tells the truth.

2) Always establish a stop. A successful speculator must set a firm stop before making a trade and must never sustain a loss of more than 10 percent of invested capital. I have also learned that when your broker calls you and tells you he needs more money for a margin requirement on a stock that is declining; tell him to sell out the position. When you buy a stock at 50 and it goes to 45, do not buy more in order to average out your price. The stock has not done what you predicted; that is enough of an indication that your judgment was wrong. Take sour losses quickly and get out. Remember, never meet a margin call, and never average losses. Many times I would close out a position before suffering a 10 percent loss. I did this simply because the stock was not acting right from the start. Often my instincts would whisper to me: “J.L., this stock has a malaise, it is a lagging dullard. It just does not feel right,” and I would sell out of my position in the blink of an eye. I absolutely believe that price movement patterns are repeated and appear over and over with slight variations. This is because humans drive the stocks, and human nature never changes. Take your losses quickly. Easy to say, but hard to do. (more…)

The three stages to becoming a successful trader

  • Your ability to execute your trades is a function of the amount of fear you generate or the lack of it.  Fear is always the result of your beliefs about the threating nature of the environment.
  • Essentially, what you fear is not the markets but rather your inability to do what you need to do, when you need to do it, without the hesitation.
  • If you can’t execute your trades properly, even when you perceive the most perfect opportunity, it is because you have not released yourself from the pain contained in the memories of past trading experiences and because you still don’t trust yourself to act appropriately in any given set of conditions.
  • You were either immobilized by the fear of failure or you are struggling with a belief (value) system that say you don’t deserve the money.  Otherwise, you would have acted on your perception.

6 Trading Rules for Traders

  • Devise a trading plan and follow it. I believe the best trading strategy is the one you’ve been able to review, back test and fits your trading style and risk tolerance. It is important that you know all vitals of the trade (the entries, possible exit targets, and where your stops may be prior to placing your trade orders.) By having a concrete plan, you assist in removing the emotion out of the equation.
  • Stick with the trend!There’s a reason why the cliché “The trend is your friend” exists. It’s because it’s true! Successful traders will always tend to follow the trend when trading. Remember, if you trade with the trend, you have the majority of the market on your side.
  • Control your emotions.This by far is the hardest thing for any trader to do. After all, it has been said that emotional control is 90‐95% of trading and the rest is your strategy. Therefore, I can’t say it enough times… Figure out a way to trade without emotions. To help with this matter, I believe it’s vital that you trade only with capital you can afford to lose. If you are using money that you need to pay your bills, you will almost certainly get emotional about every trade you make. In addition, I found that the more confident you are about your trading strategy, the better the chances are that you can trade with little emotional stress.
  • Record your trades in a trade journal.When I first started trading, I was a bit lax about this concept. But once I started doing recording my actions, I found that I was able to identify my strengths and weaknesses. I take about 30‐45 minutes each day after I’m finished trading for the day to review my trades and to analyze any disconnect from my original plan. This helps me strengthen my conviction of my plan.
  • Never trade unless the signal is clear.There are times when the market can confuse you. For me, confusion is a clear cut signal to keep out of the market. I always want my trades to be high probability signals. My signal has generated a winning percentage of more than 70%. So if I’m uncertain about a signal why would I want to take it, knowing that the chance of it winning is more like a coin toss or less? To me, that is gambling… and I do not consider myself a gambler.
  • Never make trades because you are bored. Sitting on the sidelines waiting for your next trade signal to line up can be very unsettling. Many traders have learned that trading out of boredom can blow out your account in a hurry. For me, trading out of boredom while failing to follow your trading signal is gambling.