- Risk of Ruin-Never risk more than 1% of your total account capital on any one trade.
- Position Sizing-Use your capital at risk to understand the right amount to trade based on the securities volatility.
- Capital at risk: Never put more than 6% of your total capital at risk at any given time on all positions.
- Trailing stops- Always have an exit strategy to lock in your winners.
Archives of “Health_Medical_Pharma” tag
rssWhat Happens in Your Brain When Your Market View Is Completely Wrong
Eric Barker has a new article (link here) on how to win every argument. The article had a point which made me think whether the same situation happens in trading.
So it quoted an experiment by psychologist Drew Westen, which showed to supporters, footage of their favorite candidates completely contradicting himself. The experiment found that as soon as the people realized that the information contradicted their world view, the parts of the brain that handle reason and logic went dormant, while the parts of the brain that handle hostile attacks – the fight-or-flight response – lit up. Essentially logic gets thrown out the window, and it just becomes a fight where you do anything to win.
A similar situation occurs in trading, when you have a certain expectation of how the market should behave. E.g. you might for various reasons, think that the market will go up. So when the market does not follow what you expect, you might initially make up excuses for it. However when the market continues to go completely in the opposite direction of what you expect, your logic and reasoning centers would shut down, your fight-or-flight response kicks in, you treat it like a hostile attack on you, and you would do anything to win (or not lose), e.g. keep averaging down. I’m sure this sequence of events led to many traders blowing up their accounts. It is pretty interesting that the experiment showed this as a ‘natural expected’ behavior.
As always, trade what you see, not what you think.
Develop yourself-Trading Mastery
“Learning any new skill involves relatively brief spurts of progress, each of which is followed by a slight decline to a plateau somewhat higher in most cases than that which preceded it…the upward spurts vary; the plateaus have their own dips and rises along the way…To take the master’s journey, you have to practice diligently, striving to hone your skills, to attain new levels of competence. But while doing so–and this is the inexorable–fact of the journey–you also have to be willing to spend most of your time on a plateau, to keep practicing even when you seem to be getting nowhere.” – George Leonard (Mastery)
As a trader, sometimes it feels as though all the efforts you are investing into trading are not paying off. This is in fact normal.
Embrace the suck and realize that the most pivotal moments of your development will be spent on a plateau.
Think of the plateau as a pullback in a stock that has just had a large run up. In this light, recognize that the plateau is just a healthy consolidation before the next leg up.
The key however is to not overextend yourself during this phase by trying to make something happen. This is where I see a lot of traders do harm to their development.
If you notice you have plateaued, keep active, stay focused, and engaged but don’t make earning a lot of money your focus. The key at this stage is to not to lose money which will undo all the positive emotional and psychological progress which will cause you to start to look for changes in all the wrong places.
Proven Model For Successful Goal Setting
Following is a proven model for successful goal setting:
- Concise – ensure that your goal statement is simple and easy for both your conscious and unconscious mind to understand and then act upon.
- Realistic – when a goal is relatively easy for you to accept and is not too much of a leap from where you are currently, the unconscious mind can work with that and start having you put things in order for this to become a reality. E.g. If you are currently losing money in the market, it could be too big a jump for your unconscious mind if your first financial target goal was to make $1 million in the next 6 weeks. It could be far more effective to set this at $10,000.
- Ecological – the execution of all goals needs to be safe to yourself and safe for others. This is just a step to ensure that what needs to happen does not include any possible harm coming to yourself, any other person, animal or the planet. I think you get the picture.
- As now – always have your goal stated as if you have already achieved it. Nothing is more powerful for your unconscious mind than to have every part of you feel that the achieving of this goal has already happened.
- Timed and toward what you want – attach a time frame to your goal statement. Think about a realistic time frame that you can expect to work with this goal and always make the statement towards what you want not away from what you don’t want. You will see in the following goal statement example how to best do this.
- End Step/Evidence – you will need to ask yourself ‘ What will I be doing when I have achieved this goal that will mean I KNOW that it has happened?’ What do you have to see, hear or feel in order to know? Again, see the example below to give you clarity on this.
So, get busy and C.R.E.A.T.E. your trading goals from the process above.
In The Markets :Less = More. Less positions, risk, decisions, hours at the screen and opinions of others = More Money
"Governments Control Markets; There Is No Price Discovery Anymore"-Must Watch Video
In this 38 minute interview Lars Schall, for Matterhorn Asset Management, speaks with Dr Pippa Malmgren, a US financial advisor and policy expert based in London. Dr Malmgren has been a member of the U.S. President’s Working Group on Financial Markets (a.k.a. the “Plunge Protection Team”). They address, inter alia:
- Malmgren’s recent book “Signals: the breakdown of the social contract and the rise of geopolitics”;
- the “inflation vs deflation” debate
- the closer ties between Russia and China
- the future of the Euro
- Germany’s gold reserves
- and the phenomenon of “financial repression”
- Moreover, Dr Malmgren explains what she foresees as the endgame of the financial crisis.
Successful, positive people have different brain connections
Scientists have for the first time observed a connection between particular brain centers and the presence of talent, success and positive lifestyle choices in people. The fMRI technique opens the door to extensive research which could improving human cognition.
The research was undertaken by the University of Oxford’s Centre for Functional MRI of the Brain (FMRIB). It took a large sample of 461 individuals, and crossed them with 280 behavioral traits, as well as demographic, traits – including language, vocabulary, education, income and others.
Strong correspondence between a set of brain links and positive lifestyle/ behaviour traits http://t.co/T6uPlytCfc pic.twitter.com/X7fUZvSZkI
— Oxford University (@UniofOxford) September 29, 2015
The initiative was part of the $30 million Human Connectome Project (HCP), funded by the US National Institutes of Health, aimed at studying the neural pathways of the brain. In this particular study, the Oxford team wished to create an average map of the brain’s processes.
“You can think of it as a population-average map of 200 regions across the brain that are functionally distinct from each other,” Professor Stephen Smith of Oxford University, said.
“Then, we looked at how much all of those regions communicated with each other, in every participant.”
The resulting maps, which the scientists called connectomes, included 280 behavioral and demographic traits for each subject. Compiling all data, a ‘canonical correlation analysis’ was able to establish correlations between the two data sets.
STOP TRADING until you can answer YES to all QUESTIONS
Managing Risk as a trader is the most important consideration and if you answer NO to any of the following questions, then STOP TRADING until you can answer YES to all of them:
- Do you have a written trading plan that deals with risk management?
- Have you calculated the risk that you are comfortable with in every trade?
- Will you not place a trade, even though you have a healthy balance in your trading account, when you know that your risk exposure goes beyond the risk outlined in your trading plan?
- Have you identified what your maximum position size will be?
- Do you have a stop in place every time you trade?
- Are you aware that risk management is not just about where you place your stop?
- Will you be able to stick to your risk management rules under ALL trading conditions?
There are many ways to manage your risk but until you have a risk management process written into your trading plan and you stick to these risk management rules on EVERY occasion, then you have more work to do until you are on your way to being a successful trader. (more…)
James Montier's 7 Immutable Laws Of Investing
1. Always insist on a margin of safety
2. This time is never different
3. Be patient and wait for the fat pitch
4. Be contrarian
5. Risk is the permanent loss of capital, never a number
6. Be leery of leverage
7. Never invest in something you don’t understand
Overcoming the Fear of Loss in Trading
The fear of “pulling the trigger” stems mainly from the fear of loss. That same fear is responsible for 3 major actions or inactions that destroy traders:
- Cutting winners short. You take what you can and fear that if you don’t grab whatever small gains you have now, they would disappear.
- Keeping losers. You don’t dare to actualize your losses and hope that the trade will turn around.
- Unable to take every valid trade setup. You don’t dare to pull the trigger because you have associated the intense negative emotions of losing or the possibility of losing with being in a trade, so you escape from experiencing those feelings by not entering into a trade.
Psychology was never an issue when I was swing trading stocks, but has now become a major stumbling block when I am trading intraday futures. Hence I have just started to look into this.
All three psychologists mentioned the need to trade small. Other advice include doing visualization exercises, mindfulness exercises, and looking at the bigger picture.
I also found two resources with mindfulness training and a related webinar, links below.
Dr Brett Steenbarger
- If it is due to lack of confidence in the system, back test and/or paper trade the system.
- If it is due to fear of loss (Steenbarger calls it performance anxiety), do visualization exercises where you picture yourself in the stressful situation but doing the right thing and keeping yourself in the right frame of mind. Also paper trade and trade small. (more…)