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Psychology & Risk Management For Traders

  
  Education
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PSYCHOLOGY

  1. I keep Blue Channels turned off while trading.
  2. I do not care about others opinions I care only about price and chart action.
  3. I do not try to predict, instead I trade in accordance with the chart.
  4. I am not trying to prove I am right I am trying to make money.
  5. I am not trading for ego gratification I am trading for money.
  6. 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.
  7. I admit freely to my losing trades along with my winning trades.
  8. I do not get emotionally attached to each price movement through out the day.
  9. I have faith in my rules, methodology and system.
  10. I understand it that it is the market conditions and not me that creates profits.

RISK MANAGEMENT

  1. I never add to a losing positions.
  2. I carefully control position sizing to limit risk based on volatility.
  3. I attempt to never lose  more than 1% of my capital on any one trade.
  4. I trade smaller when volatility is high.
  5. I sell positions with volatility stops when daily ranges double in the wrong direction.
  6. I have stale stops and sale positions that do not trend in four days after entry.
  7. I quickly sell losing trades when my stop is hit.
  8. I sell stocks when they close in the bottom of the days range.
  9. I never expose more than 6% of my capital to possible loss at any one time.
  10. Risk is priority #1, profits are #2.

Trader’s Emotions

  
  Education
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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…)

When Your Trading Plan is the Boss…

  
  Education
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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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5 Vital Sins of Trading

  
  Education
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Image result for 5 sinsHubris: 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.

21 One Liners For Traders

  
  Education
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  1. It is possible to see that a market is dramatically overbought and prepare for, and then capture, huge gains after the sell off.
  2. Risk small amounts to make big profits.
  3. Bet against times when numerous leaders must agree.
  4. Long hours and a strong work ethic are keys to being a successful trader.
  5. While it is good to trade any market that will turn a profit, specializing in a market can lead to great success.
  6. The markets go down faster than they go up.
  7. If the market will not go down during bad news, it will likely go higher.
  8. The stock market moves in patterns and in cycles. Past price patterns repeat themselves due to human emotions.
  9. Many times traders think a big position order size means that a whale knows something, most times they do not. 
  10. It is okay to skip a trade if you can’t get your entry price.
  11. A momentum move does not just stop, it takes time to roll over.
  12. It is possible to trade successfully by gaming the actions of other traders.
  13. Be aggressive at high probability moments.
  14. Always stay in control of your trading and manage risk.
  15. Focus on risk management as the #1 priority in trading.
  16. Having the right mindset during a big loss that it is just temporary, is the key to coming back and being successful.
  17. Letting profits run is sometimes a great plan.
  18. Being long at all time highs in the indexes is a great strategy.
  19. Great money managers trade with passion.
  20. Even Market Wizards have doubts about winning when entering a trade. 
  21. When the top in a market is reached,  there is a lot of money to be  made shorting as panic selling sets in. 

The Legendary Turtle Traders

  
  Education
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Have you ever heard of the legendary Turtle traders? Millionaire trader Richard Dennis set off to find out if traders were just born to trade, or if they could be trained to be successful in the markets from scratch. The answer? If they could follow rules they could be successful.

“I always say that you could publish my trading rules in the newspaper and no one would follow them. The key is consistency and discipline. Almost anybody can make up a list of rules that are 80% as good as what we taught our people. What they couldn’t do is give them the confidence to stick to those rules even when things are going bad.” –Richard Dennis: Founder of the ‘Turtle Traders’ quoted from the book Market Wizards:

The Turtle system proved that the traders that followed the rules went on to be millionaires and to manage money professionally.

Markets – What to buy or sell

  • The Turtles traded all major futures contracts, metals, currencies, and commodities.
  • The turtles traded multiple markets to diversify risk.

Position Sizing – How much to buy or sell

  • Turtle position sizing was based on a markets volatility using the 20 day exponential moving average of the true range.
  • The Turtles were taught to trade in increments of 1% of total account equity,

Entries – When to buy or sell (more…)

Three Principles of Trading Psychology

  
  Education
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Principle #1: Trading is a performance activity – Like the playing of a concert instrument or the playing of a sport, trading entails the application of knowledge and skills to real time performances. Success at trading, as with other performances, depends upon a developmental process in which intensive, structured practice and experience over an extended time yield competence and expertise. Many trading problems are attributable to attempts to succeed at trading prior to undergoing this learning process. My research suggests that professional traders account for well over three-quarters of all share and futures contract volume. It is impossible to sustain success against these professionals without honing one’s performance–and by making sure that you don’t lose your capital in the learning process. Confidence in one’s trading comes from the mastery conferred by one’s learning and development, not from psychological exercises or insights.
 
Principle #2: Success in trading is a function of talents and skills – Trading, in this sense, is no different from chess, Olympic events, or acting. Inborn abilities (talents) and developed competencies (skills) determine one’s level of success. From rock bands to ballet dancers and golfers, only a small percentage of participants in any performance activity are good enough to sustain a living from their performances. The key to success is finding a seamless fit between one’s talents/skills and the specific opportunities available in a performance field. For traders, this means finding a superior fit between your abilities and the specific markets and strategies you will be trading. Many performance problems are the result of a suboptimal fit between what the trader is good at and how the trader is trading.
 
The core skill of trading is pattern recognition – Whether the trader is visually inspecting charts or analyzing signals statistically, pattern recognition lies at the heart of trading. The trader is trying to identify shifts in demand and supply in real time and is responding to patterns that are indicative of such shifts. Most of the different approaches to trading–technical and fundamental analysis, cycles, econometrics, quantitative historical analysis, Market Profile–are simply methods for conceptualizing patterns at different time frames. Traders will benefit most from those methods that fit well with their cognitive styles and strengths. A person adept at visual processing, with superior visual memory, might benefit from the use of charts in framing patterns. Someone who is highly analytical might benefit from statistical studies and mechanical signals. 

9 Secrets for Successful Speculation

  
  Education
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As you read the list below, think about how you can learn more about each secret and adapt it to your own most effective use.

Secret #1: Contrarianism takes courage.

Everyone knows the essential investment formula: “Buy low, sell high,” but it is so much easier said than done, it might as well be a secret formula.

The way to really make it work is to invest in an asset or commodity that people want and need but that for reasons of market cyclicality or other temporary factors, no one else is buying. When the vast majority thinks something necessary is a bad investment, you want to be a buyer—that’s what it means to be a contrarian.

Obviously, if this were easy, everyone would do it, and there would be no such thing as a contrarian opportunity. But it is very hard for most people to think independently enough to risk hard-won cash in ways others think is mistaken or too dangerous. Hence, fortune favors the bold.

Secret #2: Success takes discipline.

It’s not just a matter of courage, of course; you can bravely follow a path right off a cliff if you’re not careful. So you have to have a game plan for risk mitigation. You have to expect market volatility and turn it to your advantage. And you’ll need an exit strategy.

The ways a successful speculator needs discipline are endless, but the most critical of all is to employ smart buying and selling tactics, so you don’t get goaded into paying too much or spooked into selling for too little.

Secret #3: Analysis over emotion. (more…)

A Theorem of Winning and Losing

  
  Education
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I just read the book Contrary Opinion by R. Earl Hadady. Aside from his point on bullish consensus, I found the following very interesting (I call it theorem of winning and losing). We all know that the majority lose trading futures. So, say 80% traders lose, and let T denote the total number of traders, NW the average number of contracts held by winning traders, and NL the average number of contracts held by losing traders, then the following equation holds:

0.2 * T * NW = 0.8 * T * NL

From the above we get: NW = 4 * NL

Which mean the average number of contracts by winning traders is 4 times the average number of contracts by losing traders.

If 90% traders lose, then we have

NW = 9 * NL

So, the theorem says the deep pocket traders have a natural advantage to win. It begs the question of how traders with not so deep pocket can survive and win. What are the good strategies? I wonder if this also implies that one may increase the chance of winning by not diversifying funds.

Perseverance is one of the Best Traits to Have When Trend Following

  
  Education
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It is never easy…and those that promise you that are not telling you the truth.

Perseverance is one of the Best Traits to Have When Trend Following!
Trend following is a marathon. There will always be those that say it is over!

It takes losses in the stock market to make future great traders and learning from mistakes is one of the best teachers.

Have a trading plan….and more importantly…Make sure you follow your own rules!

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