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Trading Decision-Making Process

  
  Education
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There is a huge difference between a wish and a decision. A wish is a negative and puts the trader in a frozen state waiting for something to happen (generally associated with trying to get even on losing trades). That is negatively charged energy. Decisions, on the other hand, are positively charged energy. It makes the trader take action. Taking action is taking responsibility. You alone are responsible for your current mental state or condition. Decisions can be both good and bad of course. The sooner the trader realized the bad decision, the sooner they can act to correct it.

The first step in the decision-making process is to realize that what you are doing is not working. Remember that falling down is a positive motions is you bounce right back. Make a list of the positive and negative things that will happen when you take action on the decision.

Don’t expect instant gratification if you make the decision. Decision-making is a process that begins with the first step but these steps are the foundation for a stronger behavioral structure. This structure will give you the confidence in your trading. Confidence plays a key role in successful trading. Having the confidence necessary for successful trading can help the trader in difficult trading environments. Whereas one trader lacking confidence and good decision-making skills may be frozen and unable to act, the trader who has taken the time to build this foundation will be prepared to take the appropriate actions.

Many times specific decisions a trader makes will not yield profits, they will result in a loss, but more importantly, it will position the trader to be able to recognize and act on the next opportunity. Practicing and applying this process will pay dividends throughout your lifetime.

Surviving Event Driven Choppy Environments: Trade YOUR System

  
  Education
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– Be careful of performance anxietyfingercross
– Don’t chase other systems
– If conditions are conducive (to your system), trade. If not, dont’.
– If you understand the market, then trade. If not, don’t.
– It’s okay to take occasional “stabs” in les-than-ideal conditions — just don’t bet the farm/get too aggressive.

– Pros woes: “It’s a sheer guessing game on a daily basis…and I will not play a guessing game.”

“If you understand the market, then trade. If not, don’t.”
I think if someone tells you that they totally ‘understand’ this market, they’re lying.

Trading Wisdom

  
  Education
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Markets are highly random and are very, very close to being efficient.

If you are a new trader, trading is probably harder than you think it can be. If you’ve been trading a while, you know this. Financial markets are one of the most competitive environments in the modern world. New information is quickly processed and incorporated into prices. This means that you cannot outsmart the market consistently. You cannot invest based on what you think makes sense or should happen because you are up against investors with superior access to information, knowledge, experience, capital and other resources. Most of the time, markets move in a more or less random fashion; you can’t make money if market movements are random. (“Efficient”, in this context, is an academic term that basically means that all available information is reflected in prices.)

It is impossible to make money trading without an edge.

There are many ways to create an edge in the markets, but one this is true—it is very, very hard to do so. Most things that people say work in the market do not actually work. Treat claims of success and performance with healthy skepticism. I can tell you, based on my experience of nearly twenty years as a trader, most people who say they are making substantial profits are not. This is a very hard business.

Every edge we have is driven by an imbalance of buying and selling pressure.

The world divides into two large groups of traders and investors: fundamental traders who base decisions off of financial analysis, understanding of the industry and a company’s competitive position, growth rates, assessment of management, etc. Technical traders base decisions off of patterns in prices, volume or related data. From a technical perspective, every edge we have is generated by a disagreement between buyers and sellers. When they are in balance (equilibrium), market movements are random.

3 Trading Lessons

  
  Education
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A good trade can lose money, and a bad trade can make money. Even the best trading processes will lose a certain percentage of the time. There is no way of knowing a priori which individual trade will make money. As long as a trade adhered to a process with a positive edge, it is a good trade, regardless of whether it wins or loses because if similar trades are repeated multiple times, they will come out ahead. Conversely, a trade that is taken as a gamble is a bad trade regardless of whether it wins or loses because over time such trades will lose money.

Ray Dalio, the founder of Bridgewater, the world’s largest hedge fund, strongly believes that learning from mistakes is essential to improvement and ultimate success. Each mistake, if recognized and acted upon, provides an opportunity for improving a trading approach. Most traders would benefit by writing down each mistake, the implied lesson, and the intended change in the trading process. Such a trading log can be periodically reviewed for reinforcement. Trading mistakes cannot be avoided, but repeating the same mistakes can be, and doing so is often the difference between success and failure.

For some traders, the discipline and patience to do nothing when the environment is unfavorable or opportunities are lacking is a crucial element in their success. For example, despite making minimal use of short positions, Kevin Daly, the manager of the Five Corners fund, achieved cumulative gross returns in excess of 800% during a 12-year period when the broad equity markets were essentially flat. In part, he accomplished this feat by having the discipline to remain largely in cash during negative environments, which allowed him to sidestep large drawdowns during two major bear markets. The lesson is that if conditions are not right, or the return/risk is not sufficiently favorable, don’t do anything. Beware of taking dubious trades out of impatience.

Practical Aspects of Trading…

  
  Education
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Successful traders examine the current market conditions to determine if they are bullish, bearish, or a trading range environment. After determining the current market environment traders can select the tools from the their trading tool box that perform best in the current conditions. When the market conditions change then traders need to adapt to the new market environment by selecting new tools that are most appropriate for the new market conditions.

In addition to adapting to the current market conditions by using the appropriate tools from the trading tool box there are several practical aspects of trading that traders need to master.

Never enter a position without having a plan for exiting the position. If you Do not know where to get out of a position you should not enter it in the first place. In swing trading time frames stocks often run to the next resistance or Support level and then stall. We have seen that stocks rarely remain outside the Bollinger bands for long, so when a position reaches the Bands it is often a good Place to look at profit taking, especially in trading range environments.

There is usually no need to rush in when the markets trend changes. Any trend worthTrading does not require you to be in on the first day, by definition. It is usually better to make sure the trend change is real and then react rather than assuming that the first Day of a potential change is something that is going to continue.

There are a lot of jobs where people get paid every Friday. Trading is not one of them. There will be profitable weeks and losing weeks as the normal statistics work out. Remember that if you make enough trades there is a reasonable probability of seeing…

 

 

 

 

ten losing trades at some point, even with good trading systems. This is part of trading and traders need to allow for it when they work out position sizing and money management techniques.

You do not have to trade every day or take trades just because they came upon the evening scan. Carefully consider the recent price and volume action in the market before taking positions. Look for the best trades, consider long trades that have not shown a lot of recent distribution and have ‘room to run’ before hitting the next resistance area or the upper Bollinger Band.

Make sure that your position sizing is such that if all your current positions were stopped out that the total loss is something that is still comfortable. This happens from time to time and wishing it did not will not change it. Be prepared by using sensible position sizes.

Review each of your positions every evening and determine if it is something you still want to be holding based on the recent market action and the price volume patterns of the position. Longs going up on declining volume are showing weakness and I generally close out those positions and put the money to work in something stronger. You are hiring a stock to do a job for you, if it is not doing the job fire it and hire another. (more…)

10 Trading Psychology Points

  
  Education
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1) We are most likely to behave in inhibited or impulsive ways, violating trading rules and plans, when we perceive events to be threatening;

2) What we perceive to be threatening is a joint function of events themselves and how we think about those events;

3) A key to gaining control over trading and maintaining consistency is to be able to reduce the threat associated with market events and process adverse outcomes in normal, routine ways;

4) We can reduce the threat associated with adverse market events through proper money management (position sizing) and through proper risk management (limits on losses per position);

5) We can reduce the threat associated with adverse market events by training ourselves to respond calmly to adverse outcomes (exposure methods) and by restructuring how we think about those outcomes (cognitive methods);

6) Optimal skill development in trading will occur in non-threatening environments in which learners can sustain concentration, optimism, and motivation;

7) A proper mindset is therefore necessary to the development of trading skills, but does not substitute for such development;

8) The cultivation of trading expertise is a function of the amount of time and effort devoted to learning and the proper structuring of that time and effort;

9) Proper structuring of learning involves the setting of specific, doable, cumulative goals and the provision of rapid feedback and correction regarding the achievement of those goals;

10) Practice does not make perfect in trading or anything else; perfect practice makes perfect. Training must gradually build competencies and correct deficiencies in a manner that sustains a positive mindset and optimal concentration and motivation.

Trading Decision

  
  Education
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There is a huge difference between a wish and a decision. A wish is a negative and puts the trader in a frozen state waiting for something to happen (generally associated with trying to get even on losing trades). That is negatively charged energy. Decisions, on the other hand, are positively charged energy. It makes the trader take action. Taking action is taking responsibility. You alone are responsible for your current mental state or condition. Decisions can be both good and bad of course. The sooner the trader realized the bad decision, the sooner they can act to correct it.

The first step in the decision-making process is to realize that what you are doing is not working. Remember that falling down is a positive motions is you bounce right back. Make a list of the positive and negative things that will happen when you take action on the decision.

Don’t expect instant gratification if you make the decision. Decision-making is a process that begins with the first step but these steps are the foundation for a stronger behavioral structure. This structure will give you the confidence in your trading. Confidence plays a key role in successful trading. Having the confidence necessary for successful trading can help the trader in difficult trading environments. Whereas one trader lacking confidence and good decision-making skills may be frozen and unable to act, the trader who has taken the time to build this foundation will be prepared to take the appropriate actions.

Step Outside Of Your Comfort Zone

  
  Education
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Each of us has a comfort zone. That area where everything seems to work like we desire, stress is almost non-existent and we can basically move forward with our eyes closed and not worry.

This might sound like the best way to trade, however, if we never strive to grow, to adjust, to refine to get better, we will actually fade away and regress instead of remaining comfortable.

It is a challenge to try new things because once we step outside of the area where we know 100% what we are doing, we will experience nervousness, mistakes, criticism, stress and more.

There is also a great amount of success awaiting those who will step forward and grow. Once we move outside of our comfort zone and enhance our trading skills, increase our trading, add to our strategies, etc. we will soon grow into these new skills and environments and in a very short amount of time, this will be our new comfort zone which will be the reward for moving forward instead of sitting still.

Remember… everything is difficult before it becomes easy.

Ten Core Ideas of Trading Psychology

  
  Education
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1) We are most likely to behave in inhibited or impulsive ways, violating trading rules and plans, when we perceive events to be threatening;

2) What we perceive to be threatening is a joint function of events themselves and how we think about those events;

3) A key to gaining control over trading and maintaining consistency is to be able to reduce the threat associated with market events and process adverse outcomes in normal, routine ways;

4) We can reduce the threat associated with adverse market events through proper money management (position sizing) and through proper risk management (limits on losses per position);

5) We can reduce the threat associated with adverse market events by training ourselves to respond calmly to adverse outcomes (exposure methods) and by restructuring how we think about those outcomes (cognitive methods);

6) Optimal skill development in trading will occur in non-threatening environments in which learners can sustain concentration, optimism, and motivation;

7) A proper mindset is therefore necessary to the development of trading skills, but does not substitute for such development;

8) The cultivation of trading expertise is a function of the amount of time and effort devoted to learning and the proper structuring of that time and effort;

9) Proper structuring of learning involves the setting of specific, doable, cumulative goals and the provision of rapid feedback and correction regarding the achievement of those goals;

10) Practice does not make perfect in trading or anything else; perfect practice makes perfect. Training must gradually build competencies and correct deficiencies in a manner that sustains a positive mindset and optimal concentration and motivation.

Preserving Psychological Capital

  
  Education
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Estimates are that 75-95% of all traders lose all their trading capital in the first year, and only about 5-10% of those that get into trading are able to stay profitable on a consistent basis after 5 years. This is not encouraging. However, since the majority of people tend to be overconfident, most believe that they are not going to be among the casualties.

What is behind this overconfidence?

Some of the most highly educated professionals such as doctors, lawyers and engineers who are used to being first in their class–the best of breed in whatever they do– fail miserably as traders and investors. The reason is that the process of trading and investing is completely different from activities and ways of thinking that bring success outside of the markets. Trading is a counterintuitive to what we are taught growing up. As we grow and develop, we acquire levels of control. We learn to control our bodies, movements, environments, who we chose as friends, lovers and mates, our educational goals, where and how we live. We get cozy and comfortable in our little worlds where we make the rules, and live out our lives in accord with them. Yes, there is a lot going on in the world, but it really doesn’t mean all that much unless it affects us directly. When external challenges face us in our personal lives, we take control, problem solve, and get done what needs to be done.

In the markets things are quite different. There is no way to control the market forces. Markets are larger than life, yet they are life. Millions of people from every part of the world are there making decisions that affect you in either a positive or a negative fashion. Millions of nameless and faceless people are trying to take your money before you take theirs. There is no situation in the life of most people that compares with this. That is why successful trading and investing requires one to adopt an entirely new brain-set.

The majority of people are simply not neurologically flexible enough adapt to this new environment. They insist on adapting the markets to their own worldview, and they fail—sometimes miserably so.

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Small losses almost always become larger and larger losses, leading to every manner of emotional distress as you are holding and hoping, or in complete denial that the position could possibly turn against you. Holding and hoping leads to larger losses and more emotional carnage until you are a financial and neuropsychiatric basket case and you just want out at any cost. Desperation, anxiety or depression set in and remind you of every time in your life you were told that you were not good enough, that you would never amount to anything or that you didn’t deserve to win or be successful. You are now in a state where both financial and psychological capital are depleted–all because you didn’t take a small loss.

How do you preserve your financial and psychological capital? You learn to embrace risk by using rigorous risk management techniques. The most important of these are position sizing, stops and money management. You take small losses. You take small losses! You let winning positions run and take profits and trail stops as they are running. Please memorize this until it is burned into the connections in your brain: The single biggest reason for failure as a trader or investor is the inability to take small losses and letting them grow into larger losses.

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