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The importance of emotion in trading.

Anxious:  Am I prepared?  Can I afford to lose what I am risking?  Am I breaking my rules?  Did I drink too much caffeine?

Anger:  Have I not moved from the last trade?  Am I tired?  Is there conflict in my personal life?

Happiness:  Are psychological gains more important than monetary gain?  Am I overconfident?

Indifference:  Do I care?  Is something more important?

It is natural to feel emotion but in an appropriate and proportional way.

Anxious:

To this day, the first trade always produces a little anxiety.  That little tingle in your stomach and shallow breathing.  The same is true when I a trade I have been waiting for sets up.  Above that, I know there is something wrong.

Anger and Happiness:

I am angry after a negative outcome and happy after a positive outcome but in order to adapt more quickly I have to remove emotion from the outcome as soon as possible.  It is more important to focus on what happened and less how I feel about it. Prolonged feelings of anger or happiness causes risk blindness and impedes my learning.  Misjudging risk will prevent me from taking a trade or taking too much risk. (more…)

Trading Discipline

Trading DisciplineEmotions are probably the biggest obstacle any trader has to overcome. Many traders become losers because they can’t follow a plan. They see a couple of losses, get excited, abandoned the plan and start to take wild shots at the market.

Traders who develop a sound set of trading rules that match their financial situation with their objectives, and then stick with those rules, increase their chances of becoming big winners. Trading discipline can be more important than your trading system.

Discipline means you must become mechanical in making trades when certain price actions occur. You must shut off your emotions, and not accept one trading signal over another. Disciplined traders let profits run and keep losses short by following rigid guidelines. (more…)

Your Mails -My Answers

Q:  Can you discuss the concept of drawdowns a bit? Novice traders seem to think experienced traders become proficient to the point that they are right much more than not and thus experience very small drawdowns. But talking to experienced traders this does not seem to be the case.

A:  In my view, the biggest difference between a successful trader and one who is not is how they manage their mistakes. Note, I am of the opinion that those who trade well don’t make fewer mistakes but they simply have learned how to handle them when they occur. This opinion is based on years of experience but also more recently working closely one-on-one with other traders. The fastest way I’ve learned to be of help to others is to show them how to recognize, quickly admit, and then take aggressive action when a mistake has been made. Losers tend to make bigger mistakes out of small ones. They let their egos get in the way and double-down in losing trades and make matters worse when a mistake is made.

Ultimately, the best you can do in this business is try to be “more right than wrong,” especially at key turning points and be quick to repair and take remedial action when you are wrong as well as managing your risk through proper trading size, stop losses, and simple diversification.

Q:  I know that Alexander Elder recommends trading less often for better results. And after reading your blog for the last couple of years I know that you follow this strategy for the most part as well. What do you do in a range bound time such as what we are experiencing, have you been doing more day trading?

A:  I’ve been very inactive recently. In fact, when you see more posts at the website (especially those link posts that take so much time and energy to do), you pretty much can count on that I’m doing a lot of sideline sitting. In many ways, this blog helps me stay patient as it keeps me busy and focused without feeling the necessity to make trades that don’t offer exactly what I’m looking for. All good traders seem to have different ways to cope when the environment is not receptive and I recommend you find ways to cope as well. As for day trading, that is fine if you love doing that, but that’s never been my desire. Day trading for pennies a trade seems too much like work and I don’t need that kind of stress. I can afford to be patient and pick my spots.

To send in your question(s) for next mailbag, please send me e-mail at [email protected] Although I may not directly answer your question in these  posts, it is extremely helpful to know what topics are of interest to you so that I can find links and look for opportunities to discuss and cover your interests in the future. Thank you!

Five Rules of Wealthy Traders

1.  Wealthy traders PLAN EVERY SINGLE TRADE. “In simple terms [wealthy traders] know exactly what they want to pay, how much money they anticipate making (or losing) and a very clear idea on the probability of the trade working out.”

2.  Wealthy traders STOPPED TRYING TO PICK TOPS AND BOTTOMS years ago.  “Simply put, 95% of the traders out there that make money are buying higher highs and selling lower lows. [Wealthy traders] do the exact opposite of nearly everyone out there because they found out long ago that picking tops and bottoms is a sucker’s bet.”

3.  Wealthy traders are PATIENT WITH WINNERS and RIDICULOUSLY IMPATIENT WITH LOSERS. “Most traders have a great deal of patience with their losers but get nervous about locking in gains and sell them to quickly – the exact opposite of what wealthy traders do.”

4.  Wealthy traders TRADE ONE MARKET. “Focus on trading one market exceptionally well rather than try to trade whatever’s hot – that’s how wealthy traders do it.”

5.  Wealthy traders gauge success on ANYTHING BUT MONEY. “The growing trading account simply becomes a nice result – a side benefit if you will – of making good decisions and reading the market well.”

What Mistakes do most people make in the market ?

No Money Managment and no trading plane and not trading the plan if they have one.Losers think how much can I win-Winners think how much can I lose.The reason this is so important is because risk is the only thing a trader can control.Losers habitually focus on how much profit they are going to make winners correctly focus on exectuing the trading plan and thinking in probabilities !

10 Mistakes

Don’t miss to Read …..

1.  Failing to follow your own rules. Here we go again with the rules!  Always rules!  The reason we have rules is because the market has none of its own.   Rules keep us focused and keep our emotions in check.  Thomsett describes the market as a “dangerous place” that is “full of temptations, promises of easy money, and artificial excitement.”  Sounds like the perfect place to have a set of rules!

2.  Forgetting your risk tolerance limits.  Risk tolerance refers to the amount of risk we can afford to take and are willing to take.  As traders, we should expose themselves only to the amount of money we can afford to lose.  What does that mean?  For me, it means if losing X amount of money in a trade can affect how I eat this week then I am overexposed.  It is the same with buying a house or a car:  will these payments negatively affect my basic lifestyle?  If the answer is yes then it may be best to suspend the pleasure of something new.

3.  Trying to make up for past losses with aggressive market decisions. If we have a string of losers or one big loser then we can be tempted to make up the loss by doubling up or going all in on a “sure thing”, exposing ourselves to much greater losses.  Keep in mind that in the market anything can happen, including losing all your money!  Losses are best made up not with home runs and grand slams but with singles, doubles, and an occasional triple.

4.  Investing on the basis of rumor or questionable advise.  Chat rooms, mail solicitations, or pop-up ads that promise sure and fast profits are for fools and are not going to make anyone rich.  “Making smart investment decisions invariably requires that you perform your own research, apply your own standards based on clearly identified risk standards, and do your homework directly.”

5.  Trusting the wrong people with your money. “As a group, analysts’ advice has led to net losses for their clients.”   Bottom line here is “anyone buying stocks and trading options should be making their own decisions and not relying on expensive advice.”

6.  Adopting beliefs that simply are not true about the markets.  “The market thrives on beliefs that, although strongly held, are simply not true.”  When we believe that the market is there to make us rich if only we can find the secret to do so then we harbor false beliefs.  When we believe that the market will always come back to make us whole, then we are working under the assumption of a faulty belief system.  When we believe that the market makes the same logical sense as the world we are used to living and working  in, then our beliefs are in direct opposition to the markets.  The list can go on and on.  Keep in mind here that the market is specifically designed to take advantage of human nature and those who trade by their emotions… human nature and emotions based on assumptions.

7.  Becoming inflexible even when conditions have changed.   We may have a great trading strategy that works in a trending market but when the market turns volatile our strategy can lose money.  The same goes with a strategy that works best in a volatile market but not in a trending one.  It is the ole’ square peg in a round hole experiment.  It just won’t fit so we should not waste our energy trying to make it work.  Know your strategy and know your market and you will know when to get in and when to stay out.

8.  Taking profits at the wrong time. When the market starts working in our favor we tend to be very quick in taking profits but when not very slow in removing losses.  On the one hand, we are afraid the market will take what little profit we have if we do not exit immediately with at least a small profit; on the other hand, we feel the market owes us something when it goes against us, therefore we hold on until it comes back.  As hard as it may be the only way we can ever make money in the stock market is to let the winners run.  Think about it this way:  reverse what has become common practice so that the winners are allowed to do what the losers have been allowed to do and let the losers get knocked out quickly just like our winners have been.  See if this makes a difference in the bottom line.

9.  Selling low and buying high. “A worthwhile piece of market wisdom states that bulls and bears are often overruled by pigs and chickens.”   In other words, we will never get anywhere in our trading is we are ruled by fear (at the bottom) and greed (at the top).  Selling low and buying high is where the emotions step back in and where the market takes advantage of our human nature.  Unfortunately, retail investors get the short end of the stick here as they are the last to get in (at the top) and the first to get out (at the bottom).

10.  Following the trend instead of thinking independently. “Crowd mentality is most likely to be wrong. Crowds don’t think. They react.”   This takes us all the way back to rule number one: have rules.  One of the rules should be to follow our own thinking and not that of the crowd.  By the time the crowd jumps on board, the move is usually over anyway!  Hence, reaction instead of action.

Some really good lessons here as an old adage continues the provide the best lesson of all: learn from your mistakes!

9 Steps for Traders

1- When you see a trade setup you like, pull the trigger without hesitation

It looks so simple but it isn’t! If your mind is not 100% ready to take the trades when they present themselves to you, you’ll miss them, you’ll be just watching and will let them go without any apparent reason why, and then when you realize what you just did, your reaction is to get angry! Just to make you jump into an unplanned trade and lose… Prepare in advance, market is like playing chess, you have to look ahead for the next move.

2 – Always use STOPs

In case you don’t like to use physical stops, make sure you’ll be able to stop in case it breaks the limits you’ve set for that trade

 

3 – Anything can happen

Try to start the morning with a free state of mind so that you’ll be able “to listen” to the market.

4 – Always lower your trade size when you’re losing

If you make two losing trades in a row, lower trade size until you get in tune with the market again.

5 – Never turn a winning trade into a loser

That’s the reason why I like to take small portions of profit when market makes it available to me, I hate to see a winner turn into a loser, manage your trades well.

6 – Buy or develop a system and stick to it, don’t change it from day to day

Find a trading system that fits your personality and once you have it, if it gives you an edge, stick to it, don’t change it because it didn’t work on one or two days, otherwise you’ll keep changing systems forever and that means: losing money.

7 – Get out of losers

One of the most known market adages is: “Cut your losses and let your profits run.” Much easier said than done, but it’s very important that you do it, usually it’s much easier to do exactly the opposite… make sure you bear that in mind.

8 – Don’t worry about news

This one I like very much, the only thing news will do is to accelerate the targets, nothing else, most of the time, I completely trash the news and just follow what I see on my map.

9 – Monitor your progress, create your own trading journal

It is very important that you have a trading journal to track your success, so that you’ll be able to stop what you’re doing wrong and keep your strong strategies. I’ll talk about this in detail on my next post.

Hope this helps, happy trading!

Technically Yours

ASR TEAM


10 Lessons for Traders

1. Trading affects psychology as much as psychology affects trading – This was really the motivating factor behind my writing the new book. Many traders experience stress and frustration because they are trading poorly and lack a true edge in the marketplace. Working on your emotions will be of limited help if you are putting your money at risk and don’t truly have an edge.

2. Emotional disruption is present even among the most successful traders – A trading method that produces 60% winners will experience four consecutive losses 2-3% of the time and as much time in flat performance as in an uptrending P/L curve. Strings of events (including losers) occur more often by chance than traders are prepared for.

3. Winning disrupts the trader’s emotions as much as losing – We are disrupted when we experience events outside our expectation. The method that is 60% accurate will experience four consecutive winners about 13% of the time. Traders are just as susceptible to overconfidence during profitable runs as underconfidence during strings of losers.

4. Size kills – The surest path toward emotional damage is to trade size that is too large for one’s portfolio. We experience P/L in relation to our portfolio value. When we trade too large, we create exaggerated swings of winning and losing, which in turn create exaggerated emotional swings. (more…)