Ed Seykota, first featured in the book Market Wizards has one of the best records of all time for any trader. Ed Seykota’s returns on capital compares to those achieved by Warren Buffett, George Soros or William J. O’Neil. He is among the trading gods with no doubt. What does he find important in trading success? Mr. Seykota has a keen focus on trader psychology above all other trading dynamics. Seykota’s website Trading Tribe spends more time advising it’s readers on proper trading psychology than anything else. Most traders are not concerned with their own psychology and instead focus on entries and exits, with trading systems and making money, not their mind and emotions. This is generally their undoing. The longer you trade and the bigger your account grows the more I see the crucial importance of mindset in the trader’s success or failure. When a losing streak sets in the trader finds out what his underlying issues are and how he handles losing is the key to his long term success. The traders ego management determines his success as much as his trading system and risk management. An an ego can cause you to let losers run and bet far too much on any one trade. An unchecked ego can destroy your account. The market is a terrible place to learn about internal issues by losing money. Here are some quotes that changed how I thought about trading early on and have kept me on the right path to consistent profits. (more…)
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rss1 Thing Critical To A Trader's Success
I think more than anything it has to be discipline. Because as important as finding a suitable methodology, developing a strategy, sound risk management, and position sizing is, it will be for nothing if you don’t have the discipline to consistently execute it and follow your rules.
Discipline is an integral part of all trading, whether systematic or discretionary, day trading or buy-and-hold, across all asset classes. I don’t believe you can be consistently successful without it.
Risk control based on risk per trade, risk control based on sector, risk control based on total portfolio.
You must know how much you can lose on a given trade, and the maximum loss to your entire portfolio at any one time. Only then can you take the necessary measures to manage these risks.
Almost equally important is correct trading psychology. Being able to accept trades that do not work. Staying focused and strong in the complete uncertainty of trading.
Because even the best trading system will have losing periods and this is when you need to remain discipline and continue executing your trades.
A trader must have many different ingredients to be successful in trading, but what is absolutely critical is that you must love the type of trading you do.
Many people think they have a passion for trading but the reality of trading; watching charts, managing risk all day, is not as exciting as many believe. If you are a day trader then you must actively enjoy this process.
If not, you must find another form of trading (or profession) that suits your style. That might be swing trading, automated trading, systems trading, whatever. But what you must have is passion!
3 Mistakes -Traders are Doing (101% It's All Mindset )
If you agree with me that not a lot changes in the markets you won’t mind that I site an old study and will see the benefit of this little reminder of mine.
In 1974 Blair Stewart completes a study of 8,922 brokerage customer accounts.
The following mistakes are found:
1) Speculators showed a clear tendency to cut profits short, while letting their losses run.
2) Speculators were more likely to be long than short, even though prices generally declined during the 9 years of the study.
3) Longs bought on weakness, and shorts sold on strength, indicating they were price-level rather than price-movement traders.
If you are currently struggling in your trading you might like to consider these three well repeated mistakes and develop a plan that you can follow so as not to fall foul of them.
Hope & Fear
In trading most new traders allow hope and fear to dictate their trading. They have a losing trade and instead of selling it and getting out they instead hope it will come back to even allowing the loss to grow. Another error for new traders is that when they have a winning trade they fear that the profit will disappear so they sell for a small gain and miss the big trend in their favor. When hope and fear controls the trader they end up with big losses and small gains. A formula for ruin.
Instead the rich trader is fearful of losses getting bigger so they sell quickly when losing, risking a maximum of 1% of their capital on any one trade. Rich traders are able to think clearly and trade rationally knowing exactly what they are risking, when their stop is hit, they get out. This enables them to keep all their losses small.
When a trade is immediately a winner for a rich trader they hope it will run 100 points in their favor. Rich traders enable this to be possible with a trailing stop, they do not get out of a winning trade until a key price reversal has happened that tells them that the trend is actually reversing.
Rich traders are fearful of losses growing bigger and hope that their winners will continue on a monster trend. This mindset allows them to be on the right side of trends and avoid any huge losses. This is why the best traders in the world are trend followers and win consistently. Do you want to join their club? Then do not let fear and hope dictate your trading decisions use them correctly.
Greatest Challenge in Trading
“One of the greatest challenges in trading is dealing with ambiguous information. The market is always sending mixed information to various degrees. We can also see this ambiguity in the commentary from the market pundits in the media. Each pundit chooses (consciously and/or subconsciously) to focus or emphasize one thing over another thing. I came across the following quote recently by Robert Gates addressing a group at the CIA in 1991: ‘the most difficult task that falls to us in intelligence is to see the world as it is, not as we – or others – would wish it to be.’ I talk about this all the time, using different words: ‘we don’t see the market as it is; we see it as we are.’ What do I mean by that? Our thoughts, feelings, hopes, expectations, and beliefs (both conscious and subconscious) create a personal filter that we see the market through. And that filter forms the basis for our entry and exit decisions. That’s just the way it is. It’s part of being human. And this filter not only impacts how you see the market, even your choice of instrument, time frame, trading style, etc, are influenced. Traders who are self-aware, who understand their own biases, their fears and hopes and what triggers them are in a better position to profit from the market. Going one step further, traders who are self-aware and who are honest with themselves are in an even better position. And taking another step, traders who are self-aware, honest, and have the courage and willingness to do the work to incorporate their own personal trading psychology into their plan are in the best position. What kind of trader are you?”
13+1 Habits For Traders
1. Have a plan before you initiate a trade. A detailed trading plan is your blueprint to success. It will help you define you as a trader, the way you trade, will help you find, execute and manage trades with ease and most importantly will help you put the education puzzle together.
2. Always analyze all closed trades, winners and losers. Having a trading journal will help you identify what works for you and what not; it will funnel you in the right direction. It is by far the most helpful method of personal trading introspection.
3. Maintaining a positive trading attitude will improve your money management and risk management skills. A negative trading mentality will alter your thinking and mindset. Your attitude will determine whether or not you are profitable with your trading. Your attitude is more important than your market knowledge and even your level of experience. It is important how you react to the market and not what the market will do to you.
4. Controlling Emotions. Emotional swings and emotional stresses impact your mental state of mind and will affect your trading decisions. When you trade with emotions you don’t trade clearly and rationally. Some books talk about separating your emotions from trading. But how is this possible? To even try to separate emotions is like fighting a losing battle, taking control over them that is a different story. Trading involves the most emotional COMMODITY in the world which is….money. Money outlasts hate, love, greed and anything else you can ever imagine. The only way to control your emotions as a trader is to have a solid trading plan.
5. Trade in the zone –Focus is key in trading. Make sure you are do not have any distractions around, no internet browsing, no phone answering, no kids playing, it should be just you and the charts. Let the charts speak to you and they will tell you what to do. (more…)
80% of trading is behavioral
80% of trading is behavioral, maybe only 20% is based on the other things that a trader does. Like much of personal finance it is not the math but the behavior that makes all the difference. Most people’s problem with being broke does not lie in their budget it is due to their behavior of spending too much money becasue they lack self control. The inability to say no to yourself in the present is what leads to most of the problems that we encounter at a future time. You can’t out earn stupid and you can’t budget away a lack of self control or work ethic. The same applies to trading.
Wanting to be a trader is only the beginning, once you make that decision you have to do the work to learn how to create a winning trading system. Having a robust trading methodology is still by far not enough it has to be expressed in a trading plan that also controls risk and fits your personalty. Even then, a trading plan is not enough you still have to follow it with discipline consistently for it to work out for you in the long term and make you profitable. But wait, there’s more…. you have to have the passion and perseverance in the market to shake off a losing streak and draw down and keep going. A great trading method is useless if you quit before you give it a chance to hit the big winning streak. (more…)
Uncoupling your EGO
“If you think that you are God and you go into the financial markets ,you are going to come out broke.The fact that Iam not broke proves that I don’t think Iam God “-George Soros on Sixty Minutes.
Make no mistake about it.A traders’s self concept has to be separate from his trading.Who you are as a person began before you ever thought of trading and who you will be as person will extend beyond your trading.When personal self -worth entwines with trading ,it not only damages self-esteem ,it sabotages the trading.
“Authentic freedom cannnot be experienced untill one learns to tame the ego and move out of self-absorption.”
10 Reasons Trading is So Difficult ,Why Only 5% Traders Across Globe Mint Money
- You can back test a system as much as you want but when you start trading it the profitability will be determined by the market conditions not past price history. What looks great on paper can lose on a lot of consecutive trades right at the start.
- Your stop can be hit and then the market go in the direction you were positioned for.
- Sometimes that pullback that you are waiting for to buy never comes until the trend is over.
- Sometimes every momentum signal you buy will be a loser for a long time.
- Many times the market whipsaws you in a position for absolutely no reason you can understand.
- Sometimes your biggest position sizes are losing trades and your smallest position sizes are the winners.
- There is no ‘market’ you are trading against a herd of people all making decisions for many different reasons, and they are not predictable.
- You can feel foolish under performing buy and holders during straight up bull markets when you’re trading in and out.
- Some trading lessons can’t be learned they have to be experienced with real money.
- Money is made and kept based on the math of probabilities, risk, and reward not because a trader is the smartest but because they are the most flexible and adaptable.
Don’t Marry Hot stocks, Just Date Them
- Hot stocks are only good when they are in up trends, when the party is over you have to break up with them.
- Hot stocks are great to trade in and out of but you don’t want to turn them into a life long investment.
- A good stock might look great on the outside with it’s price action but it may not have the best fundamentals for getting serious with.
- Hot stocks are great for the short term but for the long term you want a solid investment.
- Be careful with hot stocks they may look great on the outside but they can break your heart at any moment.
- A hot stock can be a lot of fun for awhile but they can be a lot of drama when no one wants them anymore.
- As long as a hot girlfriend is very popular she will be happy but when no one wants to date her she goes into a downward spiral. This applies to hot stocks as well.