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The 14 Stages of Trading Psychology

  
  Education
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1. OPTIMISM – It all starts with a hunch or a positive outlook leading us to buy a stock.

2. EXCITEMENT – Things start moving our way and we get giddy inside. We start to anticipate and hope that a possible success story is in the making
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3. THRILL – The market continues to be favorable and we just can’t help but start 
to feel a little “Smart.” At this point we have complete confidence in trading system

4. EUPHORIA – This marks the point of maximum financial risk but also maximum financial gain. Our investments turn into quick and easy profits, so we begin to ignore the basic concept of risk We now start trading anything that we can get our hands on to make a buck.

5. ANXIETY – Oh no – it’s turning around! The markets start to show their first signs of taking your “hard earned” gains back. But having never seen this happen, we still remain ultra greedy and think the long-term trend is higher.

6. DENIAL – The markets don’t turn as quickly as we had hoped. There must be something wrong we think to ourselves. Our “long-term” view now shortens to a near-term hope of an improvement.

7. FEAR – Reality sets in that we are not as smart as we once thought. Instead of being confident in our trading we become confused. At this point we should get out with a small profitand move on but we don’t for some stupid reason. (more…)

Wisdom From Jason Zweig

  
  Education
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  1. There are only three kinds of investors – those who think they are geniuses, those who think they are idiots, and those who aren’t sure.

  2. One of the clearest signals that you are wrong about an investment is having the hunch that you are right about it.
  3. Investors who focus on price levels earn between five and ten times higher profits than those who pay attention to price changes.
  4. The only way to be more certain it’s true is to search harder for proof that it is false.
  5. Business value changes over time, not all the time. Stocks are like weather, altering almost continually and without warning; businesses are like the climate, changing much more gradually and predictably.
  6. When rewards are near, the brain hates to wait.
  7. The market isn’t always right, but it’s right more often than it is wrong.
  8. Often, when we are asked to judge how likely things are, we instead judge how alike they are.
  9. Most of what seem to be patterns in stock prices are just random variations.
  10. In a rising market, enough of your bad ideas will pay off so that you’ll never learn that you should have fewer ideas.
  11. The more often people watch an investment heave up and down, the more likely they are to trade in and out over the short term – and the less likely they are to earn a high return over the long term.
  12. Investing is not you versus “Them”. It’s you versus you.
  13. The single greatest challenge you face as an investor is handling the truth about yourself.
  14. Hindsight bias keeps you from feeling like an idiot as you look back – but it can make you act like an idiot as you look forward.
  15. Ignorance of our own ignorance haunts our financial judgments. (more…)

The 14 Stages Of Trading Psychology

  
  Education
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1. OPTIMISM – It all starts with a hunch or a positive outlook leading us to buy a stock.
2. EXCITEMENT – Things start moving our way and we get giddy inside. We start to anticipate and hope that a possible success story is in the making.
3. THRILL – The market continues to be favorable and we just can’t help but start to feel a little “Smart.” At this point we have complete confidence in our trading system.
4. EUPHORIA – This marks the point of maximum financial risk but also maximum financial gain. Our investments turn into quick and easy profits, so we begin to ignore the basic concept of risk. We now start trading anything that we can get our hands on to make a buck.
5. ANXIETY – Oh no – it’s turning around! The markets start to show their first signs of taking your “hard earned” gains back. But having never seen this happen, we still remain ultra greedy and think the long-term trend is higher.
6. DENIAL – The markets don’t turn as quickly as we had hoped. There must be something wrong we think to ourselves. Our “long-term” view now shortens to a near-term hope of an improvement.
7. FEAR – Reality sets in that we are not as smart as we once thought. Instead of being confident in our trading we become confused. At this point we should get out with a small profit and move on but we don’t for some stupid reason. (more…)

4 Trading Mistakes

  
  Education
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  • Don’t over-leverage yourself or have all of your money tied into one position. Keeping cash on hand is okay as a trader. These days brokers are offering extremely competitive margin requirements for day trading futures, but low margins can be a wolf in sheep’s clothing.
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  • Don’t trade to trade. Understand that there are 3 positions you can take as a trader: a long position, a short position and a position to NOT be in a position. There will be plenty of trading opportunities that will come along. Don’t give money to the markets simply because you are bored!
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  • Avoid trading a strategy without having a good understanding of how the strategy works. What is the typical winning percentage? What is the largest drawdown? In general, high winning percentage strategies have smaller average profits per trade. Lower winning percentage strategies might not have as many winners, but when you are a winner, you typically win big. If you expect your strategy to bring big profits without losses, you can also expect a check made out to “REALITY” to come your way any day.

  • The market will always go higher and it will always go lower. Don’t try to pick tops and bottoms on a hunch. This is where most new traders get burned.

    • Max Gunther set forth basic trading principles called The Zurich Axioms

      
      Education
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    On Risk:
    – Worry is not a sickness but a sign of health – if you are not worried, you are not risking enough.
    – Always play for meaningful stakes – if an amount is so small that its loss won’t make any significant difference, then it isn’t likely to bring any significant gains either.
    – Resist the allure of diversification.

    On Greed:
    – Always take your profit too soon.
    – Decide in advance what gain you want from a venture, and when you get it, get out.

    On Hope:
    – When the ship starts sinking, don’t pray. Jump.
    – Accept small losses cheerfully as a fact of life. Expect to experience several while awaiting a large gain.

    On Forecasts:
    – Human behaviour cannot be predicted. Distrust anyone who claims to know the future, however dimly.

    On Patterns:
    – Chaos is not dangerous until it starts to look orderly. (more…)

    Ego and Fear

      
      Education
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    But of course “ego” in trading reveals itself in subtler ways. I came to realize that after watching any chart for a while I would form an confident opinion about where the price was headed. “Okay, that’s a bottom there.” “Now the price is going to reverse and test that last support level.” Thinking I could predict the market was clearly egotistical.

     

    So one big change has been to no longer guess where the price is going. I wait for trends where ANYBODY can see the price is going somewhere, and trade that trend. Makes for a lot more quiet periods of no trades but more successful trades when they do occur.

     

    “Fear” is another big issue for traders and for me the issue is “not having enough of it”. I’ve been willing to bet the bank on a hunch and have been working to change that. Now when I enter a trade I use mental imagery to escalate my fears so that I trade more responsibly. Have you seen the iMax films “Everest” or “The Alps”. Currently I imagine I am high up the sheer face of a rock cliff and the only thing keeping me alive is my attention to the security of the pitons and the condition of the ropes. This helps me be more selective in my entries and in placing my stops.

    How do fear and ego enter into your trading? Are you still trying to guess where price is going? Are you imagining yourself on the edge of a cliff, or are you already spending the profits you haven’t yet banked? 

    Investment Wisdom

      
      Education
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    • There are only three kinds of investors – those who think they are geniuses, those who think they are idiots, and those who aren’t sure.
    • One of the clearest signals that you are wrong about an investment is having the hunch that you are right about it.
    • Investors who focus on price levels earn between five and ten times higher profits than those who pay attention to price changes.
    • The only way to be more certain it’s true is to search harder for proof that it is false.
    • Business value changes over time, not all the time. Stocks are like weather, altering almost continually and without warning; businesses are like the climate, changing much more gradually and predictably.
    • When rewards are near, the brain hates to wait.
    • The market isn’t always right, but it’s right more often than it is wrong.
    • Often, when we are asked to judge how likely things are, we instead judge how alike they are.
    • Most of what seem to be patterns in stock prices are just random variations.
    • In a rising market, enough of your bad ideas will pay off so that you’ll never learn that you should have fewer ideas.

    Chess and Trading

      
      Education
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    As an avid fan of the game of the KINGS, I have never paid attention before between the amazing similarities between chess and trading, until I read a BRUCE PANDOLFINI book called “Every move must have it’s purpose”

    This is an amazing game that is not fully devoted to trading but to the concepts of business and chess and how they look alike.

    Understanding the concepts is basic in chess or trading. Concepts are more important than theory.

    Let me do a quick lecture about those concepts.

     

    The first concepts he points is “Play the board not the opponent”. This is an amazing concept and clearly fits any trader and their psychology. The board is the chart and the opponent in this case is our own emotions. A player must focus on the board and his game only. Same the trader.

     

    The second concepts is “ Don’t ignore a good hunch” This can clearly applies to the traders especially like me, who trades intuitive. Many times You do not have an entry setup that fits your rule but it doesn’t violate either but You know there is a big move coming, I can not explain it butyou feel the move and you take it and voila clink$$.You may not understand it because we try to rationalize but our right side of the brain is telling us “this is correct”. Go for it.

     

    Third concept “Play with a plan”.We need to have an edge, a methodology and stay with it. In chess if you do not have a strategy you are going to be massacred. Same in the markets. Move your pieces in a nonsensical way and you are out of the game in less than 12 moves. (more…)

    Six Rules of Michael Steinhardt

      
      Education
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    1. Make all your mistakes early in life: The more tough lessons you learn early on, the fewer (bigger) errors you make later. A common mistake of all young investors is to be too trusting with brokers, analysts, and newsletters who are trying to sell you something.

    2. always make your living doing something you enjoy: Devote your full intensity for success over the long-term.

    3. be intellectually competitive: Do constant research on subjects that make you money. Plow through the data so as to be able to sense a major change coming in the macro situation.

    4. make good decisions even with incomplete information: Investors never have all the data they need before they put their money at risk. Investing is all about decision-making with imperfect information. You will never have all the info you need. What matters is what you do with the information you have. Do your homework and focus on the facts that matter most in any investing situation.

    5. always trust your intuition:  Intuition is more than just a hunch — it resembles a hidden supercomputer in the mind that you’re not even aware is there. It can help you do the right thing at the right time if you give it a chance. Over time, your own trading experience will help develop your intuition so that major pitfalls can be avoided.

    6. don’t make small investments: You only have so much time and energy so when you put your money in play. So, if you’re going to put money at risk, make sure the reward is high enough to justify it.

    Clip from -Robert D. Edwards and John Magee, Technical Analysis of Stock Trends, first published in 1948.

      
      Education
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    “Few human activities have been exhaustively studied during the past fifty years, from so many angles and by so many different sorts of people, as has the buying and selling of corporate securities.  The rewards which the stock market holds out to those who read it right are enormous; the penalties it exacts from careless, dozing, or “unlucky” investors are calamitous-no wonder it has attracted some of the world’s most astute accountants, analysts, and researchers, along with a motley crew of eccentrics, mystics and “hunch players,” and a multitude of just ordinary hopeful citizens.

    Able brains have sought, and continue constantly to seek, for safe and sure methods of appraising the state and trend of the market, of discovering the right stock to buy and the right time to buy it.  This intensive research has not been fruitless-far from it.  There are a great may successful investors and speculators (using the word in its true sense which is without opprobrium) who, by one road or another, have acquired the necessary insight into the forces with which they deal and the judgment, the forethought and the all-important self-discipline to deal with them profitably.”

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