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Control in Trading

  
  Education
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New traders may get lucky for awhile and bad traders may win big in the short term but in the long term the market gives every trader exactly what they have earned. While traders can win in the long term with many different types of robust trading methods a trader with no self control will not even survive long, they will not be able to make a plan and follow it, they will let fear and greed over take their mind and end up with large losses and the belief  “trading is just too hard” but trading is not hard what is hard is self control, discipline, focus, and keeping the ego in check.

What a trader can control:

  1. Their entry.
  2. Their exit.
  3. Their trading plan.
  4. Their emotions.
  5. Their ego.
  6. Their method.
  7. Their position size.
  8. Whether to trade or not to trade.
  9. How much you are willing to risk per trade.
  10. Themselves.

What a trader can not control.

  1. Market movements.
  2. Volatility.
  3. The trend.
  4. Whip saws.
  5. Political decisions.
  6. News Headlines.
  7. Macro economics.
  8. Every other traders decisions.
  9. The future.
  10. The past.

One  key to trading is to only focus on what you can control, do not worry and stress about what you can not control, and most importantly, be able to know the difference.

CHARLES T. MUNGER AND THE PRESCRIPTION FOR A LIFE OF MISERY

  
  Education
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On June 13, 1986 Charles T. Munger delivered the commencement address at Harvard University.

In it, Munger borrows from an earlier commencement address by the late night host Johnny Carson.  Carson shared with the  graduating class that although he could not not tell them how to be happy, he could share with them from personal experience how to be miserable.

Carson’s prescription for a life of misery?

  1. ingestion of  chemicals to alter mood or perception
  2. envy
  3. resentment

Munger adds to Carson’s prescription with four more ways to guarantee a life of misery:

  1. be unreliable: do not faithfully do what you have promised yourself or others
  2. learn everything you possibly can from your own personal experience, minimizing what you can learn from the good and bad experience of others, living and dead
  3. go down and stay down when you get your first, second, and third severe reverse in the battle of life (i.e., if at first you do not succeed then do not try again)
  4. ignore evidence contrary to your opinion by remaining certain in your views

(more…)

Acting On Impulse

  
  Education
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Why do so many traders abandon their trading plan? Is it their personality, an inherent pitfall of the trading profession, or temporary insanity? A host of factors may contribute to a lack of discipline. Depending on your personality, background, training, and experience with the markets, you may have trouble reigning in your tendency to act on impulse.

For some people, impulsivity is in their nature. They have trouble focusing their attention. They are easily bored. Seeking out quick thrills relieves the tedium of life. For others, impulsivity is related to emotionality. Some people have so much trouble controlling their emotions that they react impulsively out of frustration. Minor setbacks are inevitable in the trading arena. When the extremely emotional trader encounters one of these setbacks, he or she becomes overly agitated, and may close a position early, or in a fit of confusion, make a major trading blunder that can only be remedied by closing the position.

That said, any trader can act impulsively at times. There are many situational factors that contribute to impulsivity. Research has shown, for example, that when people are tired, they have difficulty focusing their attention. As much as part of your conscious mind cares about sticking with your trading plan, your unconscious mind thinks, “Who cares? I want to take a break.” Psychological resources are limited. When you push yourself to the limits, you will have trouble focusing on your ongoing experience, concentrating on your trading plan, and sticking to it. (more…)

Visualizing The World's Greatest Fears

  
  Education
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What are the greatest fears by country? Throughout the world, people are concerned about very different things – from inequality to AIDS and from nuclear war to religious hatred…

By region, North Americans and Europeans are generally most fearful of inequality. However, each other region had their own number one perceived fear. Africans, not surprisingly, were most afraid of AIDS and other diseases. South Americans were most afraid of nuclear warfare and Asians were most afraid of pollution and environmental concerns. Lastly, people in the Middle East were most concerned about religious and ethnic hatred.

Culture and history also makes the fears of specific countries to be more heightened. More than half of Lebanese people (58%) fear religious and ethnic hatred the most. 49% of Japanese people most fear nuclear weapons. In Spain, where 51.4% of youth are unemployed, it is not surprising that 54% of Spanish people fear inequality the most. Spain is also where the fear of inequality has grown the fastest – it has increased 27% in the last seven years.  (more…)

The Secret

  
  Education
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FireWalkWhat’s the secret of successful traders and how did they make the transition from clueless learner to consistent pro?When the same tools are available to anyone, why do some people out perform others?

 

The successful traders have discovered The Secret.

 

It is not the latest indicator, program or hot tipster. It is something that everyone has inside them already.

 

The Secret is believing in your method and trading it. Believing to the point of having it ingrained into your brain so that it becomes as automatic as breathing. If the charts do this, then I will do that. Trading your plan means cutting losers, riding winners, managing money and risk well. When you arrive at the point of realizing that your self-discipline can only get you so far and that the next step should be reflex trading then you will have found The Secret.

 

Having to exercise self- discipline to me means that there is still something inside you that you must fight to control. If emotions are still in control of your trading then you must find a way to turn that fear and greed into a move productive energy. Trading your method as a reflex means that there is no struggle to control wayward thoughts. (more…)

TRADING EMOTIONS

  
  Education
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The hardest thing to master as a trader once you understand Market Rhythm is not the market, it is YOU. Emotional trading will break you fast.

Trading is not hard, it is mastering your emotions that is. Trading will teach you more about your human short coming than visiting a psychiatrist. As a trader, you must learn the discipline of waiting for proper market set-ups. That is hard!

Your EMOTIONS are screaming for you to jump in or you will miss out. NOT TRUE!! If you miss one trade set-up, the market is generous and will give you another. Learn to trade in harmony with your trend and with proper signals.

The emotions that are deadly to your trading success.

REVENGE, we all know it and have done it. It happens when you are tricked by the market and decide to take another trade before looking at the big picture, then BAM you are on the wrong side of the trade again. Pissed off and refusing to move while your money is going further down the drain. Scared to let go for fear that you are going to get tricked again.

PANIC, that is when you lack the confidence to enter or ride a profitable trade. This happens when you have taken some hits and now you lack the confidence to trade profitably.

IMPATIENCE, this happens when you can’t wait for a proper trade set-up and jump on a price hiccup/retracement, often finding yourself on the wrong side of the trade.

ANGER, you know that feeling that comes over you when you have taken a hit or two and you want to kill your computer. (more…)

10 Points For Successful Trading

  
  Education
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Trading Methodology:

  1. Winning system-Only trade tested systems with a positive expectancy in the long term.
  2. Faith– Your system has to allow you to trade your beliefs about the market.
  3. Risk/Reward-Never trade unless your profit expectations are greater than your capital at risk.

Trader Psychology:

  1. Discipline-You have to keep trading your method even when it doesn’t work for a given time period.
  2. Ego-Admit when you are wrong.
  3. Emotions-Trade the math not your emotions.

Risk Management:

  1.  Risk of Ruin-Never risk more than 1% of your total account capital on any one trade.
  2. Position Sizing-Use your capital at risk to understand the right amount to trade based on the securities volatility.
  3. Capital at risk: Never put more than 6% of your total capital at risk at any given time on all positions.
  4. Trailing stops- Always have an exit strategy to lock in your winners.

Discipline-Risk Managment-Passion for Traders

  
  Education
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  1. DISCIPLINE: The trader must have the ability to control themselves and follow a plan. Discipline is a required skill in trading without it there is no edge, you are either a gambler or simply trading off fear and greed. You will not be successful, instead you will be gamed by those in control of their emotions.
  2. RISK MANAGEMENT: Risk management must be a top skill for a trader to even survive in the markets. You must structure your risk per trade to be no more than risking 1% or 2% of your trading capital. You have to be able to survive 10 losses in a row. These strings of losses come around more often than a new trader would suspect. If you lose just 5% of your trading capital in each of ten trades you will be down almost 50% and need a 100% return just to get back to even. At this point you are ruined.
  3. PASSION: A trader must love to trade, without a passion for the markets and trading the new trader will not survive the learning process because anyone with common sense would believe that it was not worth the struggle. Passion will be needed to bring a trader through the learning curve and later the losing streak.

Stop It

  
  Education
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There’s an old joke about the investor who never used any stop losses. His friend knew his big positions were getting crushed.
Out of concern, the friend asked, “How are you sleeping?”
“Like a baby” he answered.
“Really? You aren’t nervous or upset?”
“I sleep like a baby” he repeated.
“That’s amazing. I’d never be able to sleep through the night with those types of losses.”
“Who said anything about sleeping through the night? I said I slept like a baby: I wake up every two hours, wet myself and cry for 30 minutes before falling back to sleep.”
That’s why risk management is so critical: to save you from sleeping like a baby, and in the long run to save you a lot of money.
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There’s a reason flight attendants show you where the emergency exits are before takeoff. The same thinking should apply to investors. Prudent investors have a sell strategy in place beforethey get involved with a stock. Using any of these stop strategies helps keep your emotions out of the process when an investing emergency arises.

This explains almost everything…

  
  Education
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Are we addicted to being right? Is being thought of as being right more important to us than actually being right?

You tell me…

From the Harvard Business Review:

In situations of high stress, fear or distrust, the hormone and neurotransmitter cortisol floods the brain. Executive functions that help us with advanced thought processes like strategy, trust building, and compassion shut down. And the amygdala, our instinctive brain, takes over. The body makes a chemical choice about how best to protect itself — in this case from the shame and loss of power associated with being wrong — and as a result is unable to regulate its emotions or handle the gaps between expectations and reality. So we default to one of four responses: fight (keep arguing the point), flight (revert to, and hide behind, group consensus), freeze (disengage from the argument by shutting up) or appease (make nice with your adversary by simply agreeing with him).

All are harmful because they prevent the honest and productive sharing of information and opinion. But, as a consultant who has spent decades working with executives on their communication skills, I can tell you that the fight response is by far the most damaging to work relationships. It is also, unfortunately, the most common.

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