Is stock trading difficult? Depends on who you ask. A seasoned trader with the discipline to follow well honed principles will say “trading is not difficult. See how I take losses and let my winners run?” A battered and bruised, emotionally unstable trader will say “the market is difficult. I am getting my @ss handed to me on a platter and it hurts!” A breakeven trader will say, “compared to my broker I am not doing so bad.” Our perspective makes all the difference in our success of failure. If we can have the proper perspective then the market cannot hurt us. The proper perspective includes, but is not limited to, the following: The market will do what it wants to do when it wants to do it regardless of the technical games we play. We win some lose some, in no particular order, on any given strategy. The only trading mistake that matters is when future uncertainty is not properly considered an essential element of risk. The long-term process, not short term outcomes, builds the consistency necessary to tackle market uncertainty. Responsibility accepted before the trade becomes the disciple that carries us through the trade. The best money is oftentimes made by being a non-participating, impartial observer.
So the next time someone asks if stock trading is difficult. What will be our answer? Will it be based on the proper perspective or on the last trade we made? On emotions? On our reaction to price action? News? Compared to what? A successful bust or a skinned knee? The answer can make a difference. |
Archives of “losses” tag
rssA Bird’s Eye View of Yourself
When did position management enter my consciousness? I think it stems from experiences that gave me an appreciation for the psychology behind our behavior. Sure, I had read the classic from Edwin Lefevre, and believed in William O’Neil stop-loss rules. The image that still sticks with me comes from a tiny book I read in 1994 that doesn’t get the pub it deserves.
In his tiny 1930 classic, Fred Kelly gives the example of the farmer who had 12 chickens in a cage, and one slipped out. So he propped open the door and set food out in an attempt to lure the chicken back. Of course, 2 more chickens now escaped. Surely, he can’t accept having only 9 chickens when he just had 11. His repeated efforts to get back to “breakeven” left him panicking to salvage 2 at the end…sound familiar with anyone’s early trading efforts?
The lessons stayed personal until managing an order desk stamped those lessons as universal. Seeing these episodes play out over and over among traders led to a true appreciation of the human wiring that wreaks havoc with our trading. These observations led me in the late 90′s to step outside of myself on every trade and ask if I was that person. Am I holding a short against a wave of strength that will sweep me away tomorrow anyway? If so, why not cover now instead of panicking with my fellow (wrong) shorts later? It was in those moments that I realized the power of anticipating group emotions. I already had a respect for taking losses, but I gradually moved from exiting in panic, to exiting in fear, to exiting when the slightest bit of hope creeped in.
Remember this…if you’re hoping a position bounces back to being a winner, you’re not alone at that moment. Hope is said to be a good companion, but a poor guide. Turn that on its head by realizing that you have a chance to act in defense of your equity by taking your loss before the other “hopers” are forced by emotions to act. Sure, you’re putting yourself in a position of huge regret if the position then recovers, but you’re also preventing the possibility of acting in a panicked state later. Stops can be great teachers…if you find yourself repeatedly getting stopped out just before your idea gets recognized, then you need wider stops. Been there…I now operate with smaller positions and wider stops, giving myself room to be right but not putting my equity at undue risk.
If the image of the farmer doesn’t do it for you, consider 2 traders, Roger and Andy. Both are caught in a bad situation, hoping for the best. Andy decides to come clean and admit his mistake. Roger decides to dig in and show he’s right. Bad idea. A small lie today will be a bigger lie tomorrow…rip the band aid now. Any idea who played that trade right?
It’s OK to be wrong, not OK to stay wrong…that’s the difference between champ and chump. The longer we stay in a trading range, the more explosive the resulting trend will be, and there will be no place for hope. Be ready to trade today’s ego hit for a chance to play again tomorrow, and you give yourself a chance to replace any negative episode with your best one yet.
5 Ways to Reduce Your Losses When Trading
Trading is an evolutionary process. Nobody can wake up being a Master Trader. Unfortunately there is no book or magic trick that can turn you into the highly profitable trader . Although the belief and the hope to obtain those skills instantly is still in place.
The statistics say that only the ones with the self-dedication and discipline succeed in this business.
The most common mistakes leading to losses:
-Trading against the market;
-No trade potential;
-No serious buyers or sellers in the stock;
-Wide stop-loss;
-Fear of loss.
Traders should stay calm during the trading, this helps to observe and analyze the situation on the market much better, see some small details and make a competent decision.
Panic, stress or fear, always lead to mistakes.
One of the serious problems in trading is rush and mania to be present on the market all the times, opening positions when there is no potential for a trade or where the market is either flat or going the other direction.
Tips to resolve the mistakes:
1. Always look at the market. If there is no clear picture of the market’s behavior, don’t risk your money.
2. Always look at a trade potential.
3. Always look either at the Open Book or Market Maker window and Tape.
4. Always know where you are going to place you stop-loss order.
5. If you’re just not sure, or if the situation is uncertain, don’t enter the trade.
Following these tips requires some work and changes to our habits. It is not easy at all! We always hear sayings that the trader should be disciplined. What it actually means is changing your old habits and training yourself to have new ones. It is not comfortable, but it brings positive results, which will be noticeable on your month-end P/L report.
Mistake
Everyone makes mistakes. Some repeat their mistakes and suffer continuously. The smart ones learn from their own mistakes and call it experience. But the geniuses are a special breed, they’re the ones that learn from the mistakes of others. Here’s what Bruce Kovner has to say about this subject: “You have to be willing to make mistakes regularly; there is nothing wrong with it. Michael [Marcus] taught me about making your best judgment, being wrong, making your next best judgment, being wrong, making your third best judgment, and then doubling your money. Whenever I enter a position, I have a predetermined stop. That is the only way I can sleep. I know where I’m getting out before I get in. The position size on a trade is determined by the stop, and the stop is determined on a technical basis. I never think about other people who may be using the same stop, because the market shouldn’t go there if I am right. Place your stops at a point that, if reached, will reasonably indicate that the trade is wrong, not at a point determined primarily by the maximum dollar amount you are willing to lose. If you personalize losses, you can’t trade.”
Trading Wisdoms
- Being wrong is acceptable, but staying wrong is totally unacceptable. Being wrong isn’t a choice, but staying wrong is.
- Understand that you will always make mistakes. The only way to prevent mistakes from turning into disasters is to accept losses while they are small and then move on
- Concentrate on mastering one style that suits your personality. Most people just cannot weather the learning curve. As soon as it gets difficult, and their approach isn’t working up to their expectations, they begin to look for something else. As a result, they become slightly efficient in many areas without ever becoming very good in any single methodology.
10 Obstacles to Success for Traders
1 Greed, the urge to make as much money as possible, and fear that he will lose it all.
2 Low confidence in himself or his strategy, which makes him enter or exit trades at the wrong time. Low self esteem is also a problem; lots of people are natural victims and believe that they will probably fail, and of course this is what they do.
3 Middle class guilt that makes the trader believe that he should not make super profits because it is morally wrong.
4 Overconfidence. Feeling that after so many winning trades he is invincible.
5 Disbelief. He believes that high rewards cannot possibly be true, and “If trading is that easy, then everyone would be doing it.” He then looks for complicated strategies in the belief that it cannot be easy.
6 Paranoia, believing that the market is conspiring against him.
7 Reward for effort, where he feels that people should be rewarded fairly for the effort that they put in. FX trading does not operate with these rules and that is confusing. The reward can be disproportionately high or can result in punishing losses, and is not dependent on just the work put in.
8 Insecurity, resulting in changing a strategy that is actually winning. All strategies must be tested and then consistently applied in order to engender confidence.
9 The urge to trade simply because he is a trader. This impatience results in entering trades when no real opportunity exists.
10 Low expectation; people with a low expectation of life tend to be less successful. Even though they may be highly intelligent, they aim for less and settle for less. (more…)
9 Trading Lessons for Traders
- You have to be able to lose in order to win.
- Always be realistic with your monthly target.
- It is absolutely OK, and most of time, helpful to shutdown all social networking such as twitter, stocktwits, facebook. Think about it, if your friend is affecting your work, tell him to come back later. Trading is about concentration, and definitely a personal and lonely business. To be a successful trader, we must walk alone in our days and do it alone.
- If you are really seriously addicted to twitter, try to challenge tweets who call trade, instead of following them.
- When your position is right, you have to do nothing instead of doing nothing when you are wrong! [constantly taking early profit will do you more harm than good]
- You must keep your losses small and take more small losses than small winners to come out ahead. You will become the best trader you can be by being wrong small, not right small.
- It is your job to know your are wrong and not the market’s job.
- You have to press your winners if you really consider yourself to have the ability to make a living or extra income from trading.
- When you place a trade, don’t ever think this is the only trade to make. There are thousands of trades you can make. You aren’t going to miss a move for long if you trade correctly. You aren’t going to chase markets if you trade correctly. You must have a plan to enter positions based on each market’s criteria.
The art of War
Sun Tzu, the author of The Art of War, would make a great stock trader. Although The Art of War is a 2500 year old military treatise it could just as easily be written for today’s stock trader as the principles outlined therein are as applicable in the stock market as in the theatre of war. I read The Art of War again this past weekend and highlighted what I believe are some of the most pertinent and applicable principles for stock traders as seen through the eyes of Sun Tzu the would be stock trader. Make sure you copy and post these in a prominent place for quick reference when in the heat of battle.
I. 17 When the market is rewarding your trading strategy, you should modify your position sizing accordingly.
I. 26 Now the successful trader prepares before he enters battle. The unsuccessful trader makes but a few, if any, preparations before he enters battle. Proper preparation leads to victory; a little preparation leads to defeat; and no preparation leads to ultimate destruction! The one who is properly prepared is the one who is most likely to win.
II. 7 Appreciating the gains better helps you accept the losses.
II. 19 In trading, let your great object be a quick and decisive victory, not the slow death of a lengthy loss.
III. 18 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.
IV. 1 The good traders of old first put themselves beyond the possibility of defeat and then waited for the right time to defeat the enemy.
IV. 4 It is possible to know technical analysis without being able to properly apply it.
IV. 13 The successful trader wins his battles by making no mistakes. Making no mistakes establishes the certainty of victory.
V. 13 The quality of entry is like a well-timed swoop of a falcon which enables it to strike and destroy its victim.
V. 15 Proper preparation may be likened to the bending of a crossbow; decision, to the releasing of the trigger.
VI. 5 Take advantage of opportunities such as support and resistance where the enemy must put up a strong defense; take swift action and catch the enemy off guard.
VI. 19 Be prepared for battle by knowing the exact time and place for proper trade entry.
VI. 32 Just as water retains no constant shape, so in trading know the market is constantly changing.
VII. 5 Trading with familiar stocks is advantageous; with unfamiliar most dangerous.
VII. 13 We are not properly prepared to trade a stock until we are familiar with the most likely direction of the general market.
VII. 21 Ponder and deliberate before you enter a trade.
VII. 28 Now the trader’s spirit is keenest in the pre-market; by noon day it is becoming weary; and by post market ready to relax.
VII. 32 To refrain from entering a market that is prepared to defend its current course is the art of practicing patience by studying current market conditions.
VIII. 3 There are trades which must not be taken; sectors that are not ready to be attacked; patterns that are set up for failure; positions that are to be surrendered; egotistical commands that are not to be obeyed.
IX. 28 In a mixed market when some stocks are seen advancing and some retreating, it is a trap.
IX. 41 He who does not think through his trade while making light of the situation is sure to fall victim to a loss.
X. 24 The trader who makes money without coveting fame and loses money without fearing disgrace, whose only thought is to protect his equity and ignore his ego, is considered to be a jewel of the kingdom.
XI. 17 When it is to the trader’s advantage, he will enter a trade; when otherwise he will not.
XI. 67 Trade in the path defined by rules and do not face the enemy until you feel you can trade with confidence.
XII. 15 Unhappy is the fate of the trader who tries to win his battles and succeed in his decisions without cultivating the spirit of confidence, for the result will be a waste of time and a drain on his trading account.
XII. 17 Do not trade unless you see there is an advantage in doing so; use not your money unless there is something to be gained.
XII. 22 The successful trader is heedful and full of caution. This is the way to have peace of mind and to live to trade another day.
XIII. 4 What enables the wise and successful traders to trade and conquer, and achieve things beyond the reach of ordinary traders, is proper preparation.
Trading Thought
| If you cannot lose cheerfully,do not trade in the market !It is no business for the person who is easily discouraged.Countless losses must be accepted :The problem is to limit the losses.No one may ever hope to become so expert that he never takes a loss |
Trading Errors
Error: Confusing trading with investing. Many traders justify taking trades because they think they have to keep their money working. While this may be true of money with which you invest, it is not at all true concerning money with which you speculate. Unless you own the underlying commodity, for instance, selling short is speculation, and speculation is not investment. Although it is possible, you generally do not invest in futures. A trader does not have to be concerned with making his money work for him. A trader’s concern is making a wise and timely speculation, keeping his losses small by being quick to get out, and maximizing profits by not staying in too long, i.e., to a point where he is giving back more than a small percent of what he has already gained.
Error: Copying other people’s trading strategies. A floor trader I know tells about the time he tried to copy the actions of one of the bigger, more experienced floor traders. While the floor trader won, my friend lost. Trading copycats rarely come out ahead. You may have a different set of goals than the person you are copying. You may not be able to mentally or emotionally tolerate the losses his strategy will encounter. You may not have the depth of trading capital the person you are copying has. This is why following a futures trading (not investing) advisory while at the same time not using your own good judgment seldom works in the long run. Some of the best traders have had advisories, but their subscribers usually fail. Trading futures is so personalized that it is almost impossible for two people to trade the same way.
Error: Ignoring the downside of a trade. Most traders, when entering a trade, look only at the money they think they will make by taking the trade. They rarely consider that the trade may go against them and that they could lose. The reality is that whenever someone buys a futures contract, someone else is selling that same futures contract. The buyer is convinced that the market will go up. The seller is convinced that the market has finished going up. If you look at your trades that way, you will become a more conservative and realistic trader.
Error: Expecting each trade to be the one that will make you rich. When we tell people that trading is speculative, they argue that they must trade because the next trade they take may be the one that will make them a ton of money. What people forget is that to be a winner, you can’t wait for the big trade that comes along every now and then to make you rich. Even when it does come along, there is no guarantee that you will be in that particular trade. You will earn more and be able to keep more if you trade with objectives and are satisfied with regular small to medium size wins. A trader makes his money by getting his share of the day-to-day price action of the markets. That doesn’t mean you have to trade every day. It means that when you do trade, be quick to get out if the trade doesn’t go your way within a period of time that you set beforehand. If the trade does go your way, protect it with a stop and hang on for the ride.
Error: Taking a trade because it seems like the right thing to do now. Some of the saddest calls we get come from traders who do not know how to manage a trade. By the time they call, they are deep in trouble. They have entered a trade because, in their opinion or someone else’s opinion, it was the right thing to do. They thought that following the dictates of opinion was shrewd. They haven’t planned the trade, and worse, they haven’t planned their actions in the event the trade went against them. Just because a market is hot and making a major move is no reason for you to enter a trade. Sometimes, when you don’t fully understand what is happening, the wisest choice is to do nothing at all. There will always be another trading opportunity. You do NOT have to trade.
Error: Taking too much risk. With all the warnings about risk contained in the forms with which you open your account, and with all the required warnings in books, magazines, and many other forms of literature you receive as a trader, why is it so hard to believe that trading carries with it a tremendous amount of risk? It’s as though you know on an intellectual basis that trading futures is risky, but you don’t really take it to heart and live it until you find yourself caught up in the sheer terror of a major losing trade. Greed drives traders to accept too much risk. They get into too many trades. They put their stop too far away. They trade with too little capital. We’re not advising you to avoid trading futures. What we’re saying is that you should embark on a sound, disciplined trading plan based on knowledge of the futures markets in which you trade, coupled with good common sense.