- Are you trading without a plan? Trading without a plan makes you emotional and a gambler.
- Do you ever trade too big for your trading account size? Big trades are bad trades for the emotional engagement and risk of ruin that they entail over the long term.
- Do you risk losing more if you are wrong than you will make if you are right? The biggest driver of profitability in your trading will be big wins and small losses. Big losses and small wins is a sure path to losing your trading capital.
- Have you traded without studying charts to see what has happened historically with similiar price patterns? If you do your homework you can make money understanding possibilities and probabilities from past patterns. Trading your own opinions will usually put you on the wrong side of the market.
- Did you trade a system before you back-tested it?Or are you just trading blindly?
- Have you ever exited a trade due to fear instead of due to hitting your stop loss or trailing stop? The right exit is what determines your profitability and whether your win is a big one or your loss is a big one.
- Have you ever entered a trade becasue of greed without an entry signal? Chasing a trade after the trend is over is a great way to lose money consistently and quickly.
- Have you ever copied someone else’s trade not knowing their time frame or position size? Ultimately you have to trade your own system and your own method that matches your own personality and risk tolerance. Only you can make yourself profitable with faith in yourself and your method.
- Are you that person that loves to short during market up trends and miss a whole up move?The easy money is on the side of the trend in your time frame going against the trend is a great way to lose money.
- Are you that knife catcher that keeps going long at the worn time in a down trend? When everyone is exiting a market that is the worst time to be getting long as wave after wave of holders are leaving.
Archives of “financial markets” tag
rssPsychology & Risk Management For Traders
PSYCHOLOGY
- I keep Blue Channels turned off while trading.
- I do not care about others opinions I care only about price and chart action.
- I do not try to predict, instead I trade in accordance with the chart.
- I am not trying to prove I am right I am trying to make money.
- I am not trading for ego gratification I am trading for money.
- I am not trying to be the genius who calls a top I am the trend follower who follows a trend all the way up until it ends.
- I admit freely to my losing trades along with my winning trades.
- I do not get emotionally attached to each price movement through out the day.
- I have faith in my rules, methodology and system.
- I understand it that it is the market conditions and not me that creates profits.
RISK MANAGEMENT
- I never add to a losing positions.
- I carefully control position sizing to limit risk based on volatility.
- I attempt to never lose more than 1% of my capital on any one trade.
- I trade smaller when volatility is high.
- I sell positions with volatility stops when daily ranges double in the wrong direction.
- I have stale stops and sale positions that do not trend in four days after entry.
- I quickly sell losing trades when my stop is hit.
- I sell stocks when they close in the bottom of the days range.
- I never expose more than 6% of my capital to possible loss at any one time.
- Risk is priority #1, profits are #2.
Trader’s Emotions
The hardest thing about trading is not the math, the method, or the stock picking. It is dealing with the emotions that arise with trading itself. From the stress of actually entering a trade, to the fear of losing the paper profits that you are holding in a winning trade, how you deal with those emotions will determine your success more than any one thing.
To manage your emotions first of all you must trade a system and method you truly believe will be a winner in the long term.
You must understand that every trade is not a winner and not blame yourself for equity draw downs if you are trading with discipline.
Do not bet your entire account on any one trade, in fact risking only 1% of your total capital on any one trade is the best thing you can do for your stress levels and risk of ruin odds.
With that in place here are some examples of emotional equations to better understand why you feel certain emotions strongly in your trading:
Despair = Losing Money – Trading Better
Do not despair look at your losses as part of doing business and as paying tuition fees to the markets. (more…)
Michael Lewis’ Flash Boys: A Wall Street Revolt -A Remarkable Read
Michael Lewis has a spellbinding talent for finding emotional dramas in complex, highly technical subjects. He did it for the role of left tackle in American football in The Blind Side (2006), and for the science of picking baseball players in Moneyball (2003). In Flash Boys, he turns his gaze on high-frequency computerised trading in US stock markets.
In terms of sheer storytelling technique, Flash Boys is remarkable. High-frequency trading, although often in the news when things go wrong, as in the 2010 “flash crash”, is hard for a specialist to understand, let alone the average reader. It is as if a violinist, bored with the repertoire, opted to play Paganini right-handed as a challenge.
Lewis reaches a stark conclusion: US stock markets are now rigged by traders who go to astonishing lengths to gain a millisecond edge over their rivals. As the innocent investor presses a button to buy shares, they leap invisibly into electronic markets to profit from the order and thousands of others, siphoning off billions of dollars a year.
The rise of high-frequency trading (HFT) was encouraged by a regulation passed in 2005, which aimed to open large exchanges such as the New York Stock Exchange and Nasdaq to stiffer competition. The idea was to make trading fairer; it instead unleashed, in Lewis’s view and that of other critics, a tidal wave of algorithmic front-running by traders whose superfast connections to stock exchanges allow them to react to buying and selling before others can. (more…)
When Your Trading Plan is the Boss…
1. Creating a trading plan forces the trader to select a trading style. Will you be a day trader, position trader, or long term trend follower? You have to choose.
2. You will have no choice but to do your homework, study charts, and read the books of other traders who made money in the markets, and discover what works.
3. Entries will become crystal clear when you see them because you will know exactly what you are looking for.
4. You will learn to look for what the market is offering, and not become overly obsessed with one stock, commodity, currency, or market direction.
5. You will know exactly when it is time to get out of a trade whether you are stopped out or use a trailing stop. (You may even have a price target).
6. A trading plan should stop you from over trading because it will limit you in your entries by giving you specific parameters.
7. You will easily be able to keep track of your trades and understand why they win or lose.
8. It will enable you to focus like a laser on trading.
9. A good trading plan will convert you from a gambler to a casino operator with the odds on your side.
10. The only way to be a great trader is to have a great trading plan.
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10 Cruel Rules of Traders
I) You will not buy low or sell high.
II) You will cut your winners and let your losers run.
III) You will wish you owned more of what’s going up and less of what’s going down.
IV) You will be fearful when others are fearful.
V) You will fight the trend.
VI) You will not buy when there is blood in the streets.
VII) You will spend too much time worrying about low probability outcomes.
VII) You will invest for the long-term, or until we get a ten percent correction, whichever comes first.
IX) You will go broke taking small profits.
X) You will not just sit there, you’ll do something.
Risk And Reward
- Risk and reward are not necessarily correlated. After all, if riskier assets could always be counted on to generate higher returns, then they wouldn’t be riskier. Therefore, volatility can’t be “risk.” This is why so many academic models of the financial markets end up leading us astray. Instead, Marks says that risk means there is a high probability of more uncertain outcomes. You might have seen the chart below from Marks depicting this concept that basically shows that the distribution of uncertain outcomes increases as you take more risk. This is a vast improvement on the idea of the efficient frontier that simply implies that more risk will generate more return, which often leads people to think that they’ll do better simply by owning stocks “for the long run” or something like that.
Oaktree Capital
Marks notes that making predictions is incredibly difficult. Instead, it’s better to focus on ways in which we can improve our probabilities of good outcomes. Many times in the financial markets we’re better off knowing what we don’t know.
- We’re all going to be wrong a significant amount. One of the keys is ensuring that we don’t make significant mistakes.
- You have to learn second-level thinking, which involves thinking differently and better.
6 One Liners For Traders
- Its psychologically comforting to construct a system that looks good in the past
- Learn from your losses
- Emotions do nothing for your trading
- It’s just another trade out of the next 1000
- System->Risk Management/Volatility Control->Trading Psychology
- “You have to enjoy trading, because if trading is a source of negative emotions, you have probably already lost the game, even if you make money.”
5 Vital Sins of Trading
Hubris: A foolish amount of pride or overconfidence. No matter how good of a trader you think you are, the market is always bigger. You will not win an argument with its price action no matter what.
Fear: Cutting winners short because of unwarranted fear eliminates all the big wins. Being afraid to take a good entry creates loss of a potential profit. Thorough trading methodology study is required to trade confidently.
Ego: The desire to be right more than the desire to make money leads to losing a lot of money. The ego causes traders to hold losers far too long. The best traders are slaves to the market’s price action.
Laziness: Seeking to be given trades instead of doing the work to develop a system leads to failure. Trades only have meaning when they are executed within a robust system complimented by discipline and risk management.
Greed: The greedier a new trader is, the higher the probability and speed at which they lose their whole trading account. There is significant risk in going for trades with big position sizes, because the losses can be huge if when wrong.
Money is made in the market through self-discipline and trade management. If a trader does not manage risk and position sizing, their winning trades are meaningless because they will eventually give it all back. Without overcoming the sins of hubris, fear, ego, laziness, and greed, a trader is unlikely to make it at a professional level.
5 BASIC STEPS TO BECOMING A SUCCESSFUL TRADER
There are five basic steps to becoming a successful trader:
First, focus on trading vehicles, strategies, and time horizons that suit your personality.
Second, identify nonrandom price behavior, while recognizing that markets are random most of the time.
Third, absolutely convince yourself that what you have found is statistically valid.
Fourth, set up trading rules.
Fifth, follow the rules.
In a nutshell, it all comes down to: Do your own thing (independence); and do the right thing (discipline).