“Making money is easy, it is keeping it that is hard.” Keeping the profits is what successful trading is all about. It’s not about making money. It is about risk management. Good risk management translates into good profits. Great risk management translates to great profits and a long-term career. So what about the herd mentality? You have all heard about it over the years. Psychologists talk about it all the time, but how does it play out in the applied trading world? The cliché is that following the herd is dangerous – bad for trading and leads to huge losses. But my perspective is different and one that states that following the herd is bad only if it was not YOUR game plan. You see, traders don’t mind losing money. That’s right. They don’t. What they mind is losing money doing stupid things. And one of the stupidest things a trader can do is to follow someone else’s game plan instead of their own. If you are going to lose money (and you are going to about half the time) then you might as well lose it doing the right thing, which is listening to YOUR ideas. Your instincts. Your research and YOUR game plan. Trading is not complicated. We make it complicated. Simplify the process. Break your trading down to its basics and follow your plans. And if your plans happen to be in line with the herd, then so be it. And if they don’t, that is fine too. The point is to be consistent in your approach and let the market come to you. |
Archives of “game plan” tag
rssGame Plan
Creating a game plan is very easy and you can do in a matter of minutes. Here are the key steps to creating a very basic game plan:
1) Write down your reasons for buying or selling a particular market.
2) Write down your entry point for the market you’re about to trade. Why are you getting in? Did you see a technical set up?
3) Write down when you are going to exit this market. Why and when are you going exit? Was your profit target reached, or were you stopped out?
4) Do not make market decisions during trading hours. It may sound easier said than done, but watching the daily ticks can cause your emotions to go haywire. (more…)
Zen of Trading-10 Rules
1. Have a Comprehensive Plan: Whether you are an investor or active trader, you must have a plan. Too many investors have no strategy at all — they merely react to each twitch of the market on the fly. If you fail to plan, goes the saying, then you plan to fail.
Consider how Roger Clemens approaches a game. He studies his opponent, constructs his game plan and goes to work.
Investors should write up a business plan, as if they were asking a Venture Capitalist for start-up money; just because you are the angel investor doesn’t mean you should skip the planning stages.
2. Expect to Be Wrong: We’ve discussed this previously, but it is such a key aspect of successful investing that it bears repeating. You will be wrong, you will be wrong often and, occasionally, you will be spectacularly wrong.
Michael Jordan has a fabulous perspective on the subject: “I’ve missed more than 9,000 shots in my career. I’ve lost almost 300 games. Twenty six times, I’ve been trusted to take the game-winning shot and missed. I’ve failed over and over and over again in my life. And that is why I succeed.”
Jordan was the greatest ball player of all time, and not only because of his superb physical skills: He understood the nature and importance of failure, and placed it appropriately within a larger framework of the game.
The best investors have no ego tied up in a trade. Those who refuse to recognize the simple truism of “being wrong often” end up giving away unacceptable amounts of capital. Stubborn pride and lack of risk management allow egotists to stay in stocks down 30%, 40% or 50% — or worse.
3. Predetermine Stops Before Opening Any Position: Sign a “prenuptial agreement” with every stock you participate in: When it hits some point you have determined before you purchased it, that’s it, you’re out, end of story. Once you have come to understand that you will be frequently wrong, it becomes much easier to use stop-losses and sell targets.
This is true regardless of your methodology: It may be below support or beneath a moving average, or perhaps you prefer a specific percentage amount. Some people use the prior month’s low. But whatever your stop-loss method is, stick to it religiously. Why? The prenup means you are making the exit decision before you are in a trade — while you are still neutral and objective.
4. Follow Discipline Religiously: The greatest rules in the world are worthless if you do not have the personal discipline to see them through. I can recall every single time I broke a trading rule of my own, and it invariably cost me money.
RealMoney’s Chartman, Gary B. Smith, slavishly follows his discipline, and he notes that every time some hedge fund — chock full of Nobel Laureates and Ivy League whiz kids — blows up, the mea culpa is the same: If only we hadn’t overrode the system.
In Jack Schwager’s seminal book Market Wizards, the single most important theme repeated by each of the wizards was the importance of discipline.
5. Keep Your Emotion In Check: Emotion is the enemy of investors, and that’s why you must have a methodology that relies on objective data points, and not gut instinct. The purpose of Rules 1, 2 and 3 is to eliminate the impact of the natural human response to stress — fear and panic — and to avoid the flip side of the coin — greed.
Remember, we, as a species, were never “hard-wired” for the capital markets. Our instinctive “fight or flight response” did not evolve to deal with crossing moving averages or CEOs resigning or restated earnings.
This evolutionary emotional baggage is why we want to sell at the bottom and chase stocks at the top. The money-making trade — buying when there’s blood in the streets, and selling when everyone else is clamoring to buy — goes against every instinct you have. It requires a detached objectivity simply not possible when trading on emotion.
6. Take Responsibility: Many folks believe “the game is fixed.” To them, I say: get over it. Stop whining and take the proper responsibility for your trades, your losses and yourself.
Your knowledge of the game-rigging gives you an edge. So use your hard-won knowledge to make money. (more…)
Plan You’re Way to Profit
When you enter a trade you should have a figured a game plan for both the entry and exit of the trade. The plan should be definite and not subject to changes to your psychology during market hours. You should have a stop in the market at all times, because you never know when a time cycle might turn against you. You should also have a profit objective in the market. So many traders today lose because they are using computer oscillators to trade with and they never know where they are going. They usually end up on trading with rumors and tips and use hope and fear to try to make a success of the markets.
5 Characteristics of Successful Trader
Knowledge – A trader must put in the time and effort to study and learn the proper skills in order to be successful. Whether that is through technical or fundamental analysis, one must invest in their education. They must completely understand their market, and its ideal as a beginner to focus on one market and be a specialist. A part of the knowledge and education is devising a game plan or strategy for trading. Writing down your rules and sticking to your trading plan is a key to success.
Controlling your emotions – The ability to control your fear and greed is paramount to success. A successful trader will have a balanced emotional state regardless if he/she is winning or losing. Ensuring the trader has a clear head and is able to pull the trigger and take trades every time an opportunity presents itself.
Patience – A successful trader can sit on the sidelines for days waiting for the proper setup. They don’t jump into a trade just for the sake of trading. Yes there may be opportunities, but the smart trader waits for trades that meet their trading rules and system. Over trading by beginner traders is a big obstacle to overcome. A need to always be in the market will lead to taking trades that are likely too risky. Learn patience, it’s a key to success. A winning trader usually has an extraordinary amount of self control, and often the best trade is no trade.
Discipline – There are no 100% winning traders and taking losses are part of the trading profession. It is about finding high probability opportunities and managing the risks on each trade. A trader must stick to their trading plan and discipline is the key to success.
Confidence – Having the confidence in yourself and your system to make your profit or take a loss when your method tells you to is a winning trait. Confidence usually comes from experience and knowledge.
My Checklist :During and After the Trade
1. What’s your game plan if it goes against you and threatens your survival?
2. Will you be able to get out? Did you take that into account in your workout?
3. More typically, what will you do if it goes way against you and then meanders back to give you a breakeven? Or if it immediately goes for you or aginst you?
4. Would you be willing to take a ½% profit if you get it in the first 10 minutes?
5. Did you test whether taking small opportunistic profits turns a winning system into a bad one?
6. How will unexpected cardinal events affect you like the “regrettably,” or the pre-annnouncement of something you expected for the next open? And what happens if you’re trading an individual stock and the market goes up or down a few percent during the day, or what’s the impact of a related move in oil or interest rates?
7. Are you sure that you have to monitor the trade during the day? If you’re using stops, then you probably don’t have to but then your position size would have to be reduced so much that your chances of a reasonable profit taking account of vig are close to zero. If you’re using 10% of your capital on a trade, they you’ll have to monitor it for survival. But, but, but. Are you sure you won’t be called away by phone calls, or the others? (more…)
Aiming for the Right Target in Trading
When trading goes right, it can be a great feeling. When trading goes wrong it can be a nightmare. Fortunes are made in a matter of weeks and lost in a matter of minutes. This pattern repeats itself as each new generation of traders hit the market. They hurl themselves out of the night like insane insects against some sort of karmic bug-light; all thought and all existence extinguished in one final cosmic “zzzzzzt”. Obviously, for a trader to be successful he must acknowledge this pattern and then break it. This can be accomplished by asking the right questions and finding the correct answers by rational observation and logical conclusion.
This article will attempt to address one question:
“What is the difference between a winning trader and a losing trader?”
What follows are eleven observations and conclusions that I use in my own trading to help keep me on the right track. You can put these ideas into table form, and use them as a template to determine the probability of a trader being successful.
OBSERVATION #1
The greatest number of losing traders is found in the short-term and intraday ranks. This has less to do with the time frame and more to do with the fact that many of these traders lack proper preparation and a well thought-out game plan. By trading in the time frame most unforgiving of even minute error and most vulnerable to floor manipulation and general costs of trading, losses due to lack of knowledge and lack of preparedness are exponential. These traders are often undercapitalized as well. Winning traders often trade in mid-term to long-term time frames. Often they carry greater initial levels of equity as well.
CONCLUSION:
Trading in mid-term and long-term time frames offers greater probability of success from a statistical point of view. The same can be said for level of capitalization. The greater the initial equity, the greater the probability of survival.
OBSERVATION #2
Losing traders often use complex systems or methodologies or rely entirely on outside recommendations from gurus or black boxes. Winning traders often use very simple techniques. Invariably they use either a highly modified version of an existing technique or else they have invented their own.
CONCLUSION
This seems to fit in with the mistaken belief that “complex” is synonymous with “better”. Such is not necessarily the case. Logically one could argue that simplistic market approaches tend to be more practical and less prone to false interpretation. In truth, even the terms “simple” or “complex” have no relevance. All that really matters is what makes money and what doesn’t. From the observations, we might also conclude that maintaining a major stake in the trading process via our own thoughts and analyses is important to being successful as a trader. This may also explain why a trader who possesses no other qualities than patience and persistence often outperforms those with advanced education, superior intellect or even true genius.
OBSERVATION #3
Losing traders often rely heavily on computer-generated systems and indicators. They do not take the time to study the mathematical construction of such tools nor do they consider variable usage other than the most popular interpretation. Winning traders often take advantage of the use of computers because of their speed in analyzing large amounts of data and many markets. However, they also tend to be accomplished chartists who are quite happy to sit down with a paper chart, a pencil, protractor and calculator. Very often you will find that they have taken the time to learn the actual mathematical construction of averages and oscillators and can construct them manually if need be. They have taken the time to understand the mechanics of market machinery right down to the last nut and bolt.
CONCLUSION:
If you want to be successful at anything, you need to have a strong understanding of the tools involved. Using a hammer to drive a nut in to a threaded hole might work, but it isn’t pretty or practical.
OBSERVATION #4
Losing traders spend a great deal of time forecasting where the market will be tomorrow. Winning traders spend most of their time thinking about how traders will react to what the market is doing now, and they plan their strategy accordingly.
CONCLUSION:
Success of a trade is much more likely to occur if a trader can predict what type of crowd reaction a particular market event will incur. Being able to respond to irrational buying or selling with a rational and well thought out plan of attack will always increase your probability of success. It can also be concluded that being a successful trader is easier than being a successful analyst since analysts must in effect forecast ultimate outcome and project ultimate profit. If one were to ask a successful trader where he thought a particular market was going to be tomorrow, the most likely response would be a shrug of the shoulders and a simple comment that he would follow the market wherever it wanted to go. By the time we have reached the end of our observations and conclusions, what may have seemed like a rather inane response may be reconsidered as a very prescient view of the market. (more…)
CONCENTRATE ON EXECUTION
Trade execution is very important. It is the same in sports – you can have a good team, a very talented team that you put on the field. But if they don’t execute the plays like they’re trained to, the team will probably not win. It’s a simple fact of life. You’ve got to be able to execute. Tiger Woods can have a game plan when he hits that course, but if he doesn’t execute and follow through his game plan, no matter how talented he is, the competition is going to beat him. This is a very important factor in trading a portfolio of technical or priced based strategies that is grossly overlooked. You need to get the execution of trades correctly day in and day out, because there’s just one or two missed opportunities which get away that could have made your month or there can be mistakes that can take away weeks and weeks of profitable work. This is where the use of good automated trading software can control some of these variables. |
Knowledge & Patience
Knowledge – A trader must put in the time and effort to study and learn the proper skills in order to be successful. Whether that is through technical or fundamental analysis, one must invest in their education. They must completely understand their market, and its ideal as a beginner to focus on one market and be a specialist. A part of the knowledge and education is devising a game plan or strategy for trading. Writing down your rules and sticking to your trading plan is a key to success. Patience – A successful trader can sit on the sidelines for days waiting for the proper setup. They don’t jump into a trade just for the sake of trading. Yes there may be opportunities, but the smart trader waits for trades that meet their trading rules and system. Over trading by beginner traders is a big obstacle to overcome. A need to always be in the market will lead to taking trades that are likely too risky. Learn patience, it’s a key to success. A winning trader usually has an extraordinary amount of self control, and often the best trade is no trade. |
TRADER’S AWARENESS ZONES
If you know who the enemy is and you know yourself, you will never fear the next trade. If you know yourself but not the enemy, you will win one lose one. If you do not know the enemy or yourself, you will lose on each trade. Sun Tzu Trader
The very best traders develop market awareness zones as a form of checks and balances for unbridled behavior. In other words, no sound trading strategy should be based solely on an indicator but on several carefully designed tactics that form a strategic whole, much like a successful football or basketball team relies on a game plan carried out by several players working together, not one player acting alone. In military terms, all branches working together to defeat a common foe.