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Mastering Reward/Risk

  
  Education
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riskrewardMost traders ignore reward/risk ratios, hoping that luck will save them when things start to go bad. 

 This is probably the main reason so many of them are destined to fail. It’s really dumb when you think about it, because reward/risk is the easiest way to  get a definable edge on the market house. 

 The reward/risk equation builds a safety net around your open positions. It’s designed to tell you how much can be won, or lost, on each trade you  take. The secondary purpose is to remove emotion so you can focus squarely on the cold, hard numbers. 

 Let’s look at 15 ways that reward/risk will improve your trading performance. 

 1. Every setup carries a directional probability that reflects a specific pattern. Always execute positions in the highest-odds direction. Exit your trades  when a price fails to respond according to your expectations. 

 2. Every setup has a price level that violates the pattern. Only take trades where price needs to move a short distance to hit this “risk target.” Look the  other way and find the “reward target” at the next support or resistance level. Trade positions with the highest reward target to risk target ratios.  (more…)

5 Ways to Reduce Your Losses When Trading

  
  Education
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Trading is an evolutionary process. Nobody can wake up being a Master Trader. Unfortunately there is no book or magic trick that can turn you into the highly profitable trader . Although the belief and the hope to obtain those skills instantly is still in place.

 The statistics say that only the ones with the self-dedication and discipline succeed in this business.

The most common mistakes leading to losses:

-Trading against the market;

-No trade potential;

-No serious buyers or sellers in the stock;

-Wide stop-loss;

-Fear of loss.

Traders should stay calm during the trading, this helps to observe and analyze the situation on the market much better, see some small details and make a competent decision.

Panic, stress or fear, always lead to mistakes.

One of the serious problems in trading is rush and mania to be present on the market all the times, opening positions when there is no potential for a trade or where the market is either flat or going the other direction.

Tips to resolve the mistakes:

1. Always look at the market. If there is no clear picture of the market’s behavior, don’t risk your money.

2. Always look at a trade potential.

3. Always look either at the Open Book or Market Maker window and Tape.

4. Always know where you are going to place you stop-loss order.

5. If you’re just not sure, or if the situation is uncertain, don’t enter the trade.

Following these tips requires some work and changes to our habits. It is not easy at all! We always hear sayings that the trader should be disciplined. What it actually means is changing your old habits and training yourself to have new ones. It is not comfortable, but it brings positive results, which will be noticeable on your month-end P/L report.

10 Obstacles to Success for Traders

  
  Education
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1        Greed, the urge to make as much money as possible, and fear that he will lose it all.

2        Low confidence in himself or his strategy, which makes him enter or exit trades at the wrong time. Low self esteem is also a problem; lots of people are natural victims and believe that they will probably fail, and of course this is what they do.

3        Middle class guilt that makes the trader believe that he should not make super profits because it is morally wrong.

4        Overconfidence. Feeling that after so many winning trades he is invincible.

5        Disbelief. He believes that high rewards cannot possibly be true, and “If trading is that easy, then everyone would be doing it.” He then looks for complicated strategies in the belief that it cannot be easy.

6        Paranoia, believing that the market is conspiring against him.

7        Reward for effort, where he feels that people should be rewarded fairly for the effort that they put in. FX trading does not operate with these rules and that is confusing. The reward can be disproportionately high or can result in punishing losses, and is not dependent on just the work put in.

8        Insecurity, resulting in changing a strategy that is actually winning. All strategies must be tested and then consistently applied in order to engender confidence.

9        The urge to trade simply because he is a trader. This impatience results in entering trades when no real opportunity exists.

10   Low expectation; people with a low expectation of life tend to be less successful. Even though they may be highly intelligent, they aim for less and settle for less. (more…)

The Ultimate Psychological Block

  
  Education
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It’s my belief that the ultimate psychological block in trading is the ability to consistently follow a set of rules for a long period of time. If you can do this, then you have the Trading Psychology part mastered (as this would also take care of the Fear and Greed aspects).

For some reason, I personally find this simple task outrageously difficult to accomplish. I can see that there are two things that cause this, which are what you might call GOAL DECAY (I just invented that term) and NEW DATA.

GOAL DECAY is when you set your goal on Monday, and it feels meaningful and purpose driven, but by Friday you’ve lost the plot. It seems stupid, pointless, wrong etc. Or else you just plain forgot… Your trading goals start off with energy, but then the energy quickly dissipates and the goal loses force. At this point you are ripe for the second issue:

NEW DATA – Once your previous goal has decayed, your then happen upon or else purposefully go looking for NEW DATA. This new data can also spring up from within your own mind as some great new idea and you set a new goal.

Then this cycle repeats. Somehow going around and around on this Ferris Wheel has to come to an end and some clearly defined goals need to be set. I guess in my previous post I alluded to this in terms of ‘sorting out’ all of the information and techniques I have acquired.

FEAR

  
  Education
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Fear has a way of making us focus on unfavorable headlines and price action. Fear impacts our ability to evaluate alternatives as it clouds objectivity. Fear is why profits are taken too quickly. Fear is a four letter word that comes in many flavors.

Fear of losing: Nobody wants to lose—doesn’t matter if it’s a spelling bee in the 5th grade or a newly entered long position in a stock that just broke through resistance. Losing sucks. Losing reminds us that perhaps we aren’t as good as we thought (hoped).

Fear of being wrong: Remember that time you blurted out the wrong answer and everyone laughed? Still sticks with you after all these years and screws with your mind. That new short position you just took is about to get squeezed—or at least that’s the thought running through your mind, right?

Fear of missing out: This is where we can really let our imperfections shine as we buy at the top and sell at the bottom. But hey, we didn’t miss out on the action!  Succumbing to the fear of missing a potential move and jumping in mid-stream trumps any good trading plan or preparation. This is a lack of self-discipline and causes much of the psychological damage seen in the markets.

Fear impedes our ability to be creative. Fear suffocates, debilitates, and causes many to wonder “what if…” rather than “why not…” Hope is used as a remedy by the fearful, but often gets smashed and is soon replaced with self-help books, talk therapy and medication.

Courage is what’s needed—the courage to fail.  With proper planning, risk can be managed and success can be found. Having the courage to step off the curb lends itself nicely to creating who you are as a market participant. Define your risk, adhere to your trading plan and fear becomes a fleeting thought rather than a debilitating one.

It’s OK to lose.  Just make sure that it’s within your defined risk/reward and move on.

It’s OK to be wrong. What’s not OK is to be stubborn and stick with a losing
position.

It’s OK to miss out. There are thousands of other names out there, find your trade.

If you want to become a better trader you need to realize that fear cannot be eliminated. It can, however, be used as an edge in your market participation. For me, one of my favorite times to sell premium is after a large, quick move—puts for fear and calls for greed.

“To conquer fear is the beginning of wisdom.” ~ Bertrand Russell

Livermore on speculation

  
  Education
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Just remember, without a discipline, a clear strategy and a concise plan, the speculator will fall into all the emotional pitfalls of the market and jump from one stock to another, hold a losing position too long, cut-out of a winner too soon and for no reason other than fear of losing the profit. Greed, fear, impatience, ignorance and hope, will all fight for mental dominance over the speculator. Then after a few failures and catastrophes, the speculator may become demoralized, depressed, despondent, and abondon the market and the chance to make a fortune of what the market has to offer.

Develop your own strategy, discipline and approach to the market. I offer my suggestions as one, who has traveled the road before you. Perhaps I can act as a guide for you and save from falling in some of the pitfalls that befell me. But in the end the decisions must be your own”.

The Need To Be Right – Common Psychological Traps For Stock Traders

  
  Education
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Some thoughts on what characterizes great and successful traders:

  • Great traders graciously accept losses. They don’t need to be right all the time.
  • Great traders focus on proper execution not on the outcome of a single trade.
  • Great traders concentrate on good risk management. They constantly manage their open positions.
  • Great traders are emotionally detached. Single trades do not affect their mood.
  • Great traders don’t compare themselves to others. They isolate themselves from the opinions of others. 
  • Great traders are not afraid to buy high and sell low. 

As you probably know by now the single biggest mistake a trader can make is to hold on to a losing position. Failing to cut losses quickly and letting them develop into huge losses is mentally and financially devastating. The underlying psychology which is responsible for this behavior is the ‘need to be right’ and the fear to sell at a loss. What aggravates the situation is adding to a losing position.Dennis Gartman says: “Do more of the things that work and less of the things that don’t.“

Conclusion:
Isolate yourself from the opinions of other people. Make trading decisions your own. Focus on proper execution. Have the courage to do the right thing because it is right.

3 TRADING COMMANDMENTS

  
  Education
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You Learn More From Your Enemies Than You Do From Your Friends.  Make sure you take the criticism’s of others and use them to your advantage by recognizing that the more others criticize the more you value your own beliefs, trading or otherwise.

Be Careful Who You Get Into Bed With.  Although not a trading rule per se, keeping good, solid company outside the charts, can help you be the best trader inside the charts.  “Trust and integrity between two people are the most important variables in life and in business” 

Never Operate From a Position of Fear.  “If you are fearful in the markets, either as a result of taking a recent loss or some other mistake, or even as a result of being nervous about the level of risk you are taking, then you are putting yourself in the position of making and unclear and hence incorrect decision”

4 Rules from Great Traders

  
  Education
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Overcome Fear :Great  traders know that fear can choke our decision process and cause us to avoid taking risks.Fear also can paralyze you when you need to act quickly and decisively to save yourself from danger-the deer-in -the-headlights syndrome.All great traders have mastered their fears and are able to act decisively when needed.

Remain Flexible :As a trader ,you never know which stock or which market may make a move.This is the essence of uncertainty.Your don’t know what is going to happen.When you don’t know what is going to happen ,the best strategy is to be ready for anything.

Prepare to be wrong :If you don’t know what the future will bring and you choose a trade that assumes a particular outcome,you are possibly going to be wrong.Depending on the type of trade,in many cases it can even be more likely that you will lose money then that you will win money.What matters in the end is total money won and lost ,not whether you are right more ofthen then wrong.Great Traders are comfortable making decisions when they know they could be wrong .

Focus on decisions ,not out comes :One of the reasons that great raders can so easily reverse course is that they have a more sophisticated view of the meaning of error for decisions made under uncertainty.They understand that the face that things did not turn out the way they had hoped does not necessarily mean that taking the trade was a mistake.They know that many times good ideas dont’t work out.The very presence of uncertanity ensures that you will be wrong some of the time.All great traders put trades on for a particular reason ,and they take them off for a particular reason too.Great traders focus on the reasons for the trades instead of the outcomes for few given trades.

10 Life Lessons

  
Education, Life
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This is a better talk than I imagined. Robert L. Joss, Professor of Finance and Dean Emeritus of the Stanford Graduate School of Business, offers 10 life lessons.

10. Life is like cricket
9. Life is too short to deal with “bad” people
8. Run it like you own it
7. Don’t forget to manage side-ways
6. Don’t take yourself too seriously
5. Without fear — there is no courage
4. Life is full of “character building experiences”
3. Find the words
2. Use CAT and GSB learning throughout your life
1. Don’t forget to renew yourself

 

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