Your questions -My answers

questionandanswerThe Cardinal Sin Of Trading

Q:  Do you believe in the rule of not letting a winning position turn into a loser? If you do, how do you handle a situation where a stop out at the ATR would cause you to take a loss on a position that was a winner at one time?

A:  This has been called the cardinal sin of trading – to let a profitable position turn into a loser. But, it happens. And, just because it does happen, doesn’t mean that it provides you with an excuse not to take your medicine and own the loss.

When we are wrong and we do have a good trade go against us, our top priority remains capital preservation. Therefore, if when painful, we cannot let a small loss grow into a larger one. The worst thing in the world is letting a bad trade turn into an investment and being held hostage by the break-even curve. That’s why stops are important and why sticking to them, even if it requires you to exit with a loss, is mandatory.

Buy The Dippers

Q:  You sometimes refer to the “buy the dippers” in a what seems to me to be a negative tone and yet you also describe part of your style as buying on pullbacks. How do you distinguish these two ideas?

A:  That’s funny you mention this and I appreciate it especially as you say I fall well within the “buy the dip” camp. I have no problem with the buy the dippers as long as they’re present and in charge of the tape, we’ll be just fine. But, the problem is, of course, that if every dip gets bought, at some point Mr. Market will figure out a way to roll back that trade and gain back some respect for his ability to cause the most amount of frustration to the majority. This will ultimately lay the foundation for a nasty bull trap scenario where everyone is long at the wrong time and then caught with their pants down in a sizable reversal. In my experience, when any trade becomes a routine money-maker, you have to expect the market to throw you a monkey wrench. There’s no room for complacency and whenever I have something that works like clockwork and others have figured out the same, I get nervous.

State of mind

“Many traders start out using a state of mind that focuses on “having.” Rather than focus on how to trade in concert with the markets, they are obsessed with profits, and what they can purchase with those profits.”

“The main goal is to make money, money that can be used to purchase objects of desire, such as a shiny red sports car, a spacious, luxurious home, or a large wardrobe of fine clothes. They believe that great financial success will be the solution to all their problems. Trading isn’t just a job; it’s their salvation. Although many traders are motivated by money, there’s a downside to focusing on what you can have as a result of your profits. When traders focus solely on accumulating wealth, on “having,” they tend to act greedy and may take risks in an effort to win. There is a blind and unrealistic focus on trading at a high level of performance. Unless they trade at a high level of performance, they can’t possibly “have” what they desire. But a novice trader can’t achieve a high level of performance, and so, there is a mismatch between skills and goals. (more…)

Confusion and Frustration for Traders

Maslow one commented that, when all you have is a hammer, you tend to treat everything as a nail. So it is with psychologists that involve themselves in markets. Lacking an understanding of actual speculative strategies and tactics–not to mention portfolio construction–they reduce performance problems to the lowest, psychological denominator. In so doing, they confuse cause and effect: they observe frustrated traders and assume that relieving frustration is the key to making money.

The professional speculator, unlike the retail daytrader, rarely falls into performance problems because of derelict discipline or runaway emotions. Rather, it is the very competence of the professional that leads to performance challenges. *It is when pros are most in sync with markets, identifying and profiting from themes and patterns, that they are most vulnerable to ever-changing patterns of direction, volatility, and correlation*. The confidence that permits healthy risk-taking under the best of speculative conditions inevitably gives way to confusion and frustration when skilled participants are no longer in sync with their markets. (more…)

How do *your* coping efforts work for you?

How about after you have a few winning trades, days, or weeks in a row? Do you trade better or worse? Breaking down your performance as a function of recent performance will tell you a great deal about how effective you are in coping with risk and reward.

The other excellent indicator of whether your coping is working for you is your emotional experience during trading. If you find that anxiety, overconfidence, frustration, and stress are pushing you into poor decisions, you know that you’re not coping well with the uncertainties of markets.

Finally, it is helpful to identify the sequences of coping behaviors that you utilize when you’re making good decisions and the sequences when you’re trading poorly. Knowing how your individual coping responses come together to form coping strategies can help you cultivate your coping strengths.

Tracking how you deal with challenges when you are at your most effective enables you to create a mental model of that coping that you can call upon during periods of high stress. We cannot avoid the stresses of trading, but those do not have to generate distress and biased decisions.Take a look at how well you trade after a position has gone against you. Do you trade better after a drawdown or worse?

Look Inside Yourself

One trader wrote in that he was in a slump and wondered if he should switch markets or find another indicator.

Do you ever find that you also want to blame something outside yourself?

One of my favorites used to be blaming ‘the system’ – the system is rigged against me: the brokers are the only ones getting rich, robbing me on these bid/asked spreads, hunting all my stops, etc.

When you blame an external situation, you are giving up control, and instead letting yourself be controlled by outside events. This converts you from a proactive trader into a reactive trader. Or a winner into a whiner.

If you are reacting after the fact in the markets, you are then letting your emotions start to control you, instead of planning how you will react to any set of circumstances.

You know how letting emotions control you turns out in the markets. You go broke.

You must believe that you control your own destiny. If you are not getting the results you expect of yourself, look inside yourself.

Start analyzing your actions and behavior. Are you hanging on to losses too long? Are you cutting profits too soon? Are you having trouble pulling the trigger only to watch in frustration as your trade wins without you?

These and other frustrations should clue you in that you need to fix some element of your trading plan. Evaluate your present situation, and if it needs to change, take decisive action and change it.

The Market Makes You Feel Bad Majority of the Time

  • Unless you nail it right exactly, you will feel frustration / regret / fear in all other outcomesTraders are always choosing among the lesser of the evils. Feeling regretful is practically inescapable.
    • When you get the trade direction wrong
    • When you got out too early
    • When you got out too late
    • When you miss a trade
  • Regret Theory says that people have the desire to avoid future regret when they make their decisions.

It's not the trade, it's the battle

Too many traders believe that their last trade is a reflection of just how good of a trader they are (but they are the only ones who feel that way about themselves). This boils down to one word – expectation. If you expect to win all the time, or even the vast majority of the time, you’re setting yourself up for a lot of heartache. That frustration, though, is the very same force that will truly make your negative perception of yourself a reality. And even a good trade can be damaging if you let it warp your disciplined approach. The fact of the matter is that this is a game of odds, and should be played over a long period of time. Focus on the war – not the battle.

Confusion Is Part Of The Learning Curve

learning_curve4Confusion and frustration is part of the learning curve. Frankly, if you’re not getting confused by the array of opinions and information out there, then you’re doing something wrong. The key is to keep working though it and continue learning as much as you can. With time and effort, the confusion you have now will be replaced with a clear understanding of key elements of trading that can’t be learned in a different way. But, it takes time

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