“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 “losses” tag
rssThoughts on Human Nature and Speculation – Humphrey B. Neil
The chapter entitled, “More Thoughts on Human Nature and Speculation”, includes some classic thinking on aspects of human psychology which prevent us from operating profitably in the markets. A passage from Neil on the dangers of greed follows this line of thought:
“…I have watched traders in brokers’ offices with deep interest, and have tried to learn the traits that crippled their profits. The desire to “make a killing”—greed—has impressed me particularly.
Perhaps this desire to squeeze the last point out of a trade is the most difficult to fight against. It is also the most dangerous. How often has it happened in your own case that you have entered a commitment with a conservatively set goal, which your judgment has told you was reasonable, only to throw over your resolutions when your stock has reached that point, because you thought “there were four more points in the move?”
The irony of it is that seemingly nine times out of ten (I know, for it has happened with me) the stock does not reach your hoped-for objective; then—to add humiliation to lost profits—it goes against you for another number of points; and, like as not, you end up with no profit at all, or a loss.
Maybe it would help you if I told you what I have done to keep me in my traces: I have opened a simple set of books, just as if I were operating with money belonging to someone else. I have set down what would be considered a fair return on speculative capital, and have opened an account for losses as well as for gains, knowing that the real secret of speculative success lies in taking losses quickly when I think my judgment has been wrong.
When a commitment is earning fair profits, and is acting as I had judged it should act, I let my profits run. But, so soon as I think that my opinion has been erroneous, I endeavor to get out quickly and not to allow my greed to force me to hold for those ephemeral, hoped-for points. Nor do I allow my pride to prevent an admission of error. I had rather, by far, accept the fact that I have been wrong than accept large losses…”
This looks like worthwhile study material, so read on and don’t mind the fact that most of the references date back to 1930. Time honored wisdom is the best, and sound practices are applicable in any age.
When does trading become gambling?
There is a very thin line. I maintain that most traders ARE gamblers. They use markets as a substitute for a casino. Here are some of the sign posts that you have crossed the line.
1. IF you enter trades without a clear trading plan, you just might be a gambler.
2. IF you trade just to be trading, you just might be a gambler.
3. IF your bored and enter a trade, you just might be a gambler.
4. IF you look at potential profit before assessing potential loses, you just might be a gambler.
5. IF you have no impulse control, you just might be a gambler.
6. IF you have no methodology, you just might be a gambler.
7. IF you rely on others for your trading decisions, you just might be a gambler.
8. IF you do not take full responsibility for your trading outcomes, you just might be a gambler.
9. IF you increase your risk due to losses, you just might be a gambler.
10. IF you do not use stop losses or do not adhere to them, you just might be a gambler.
And my all time favorite
11. IF you get an adrenaline rush when your entering trades, you just might be a gambler.
Useful Thoughts To Counter Fear
– Losses are a simple cost of doing business
– Since you always limit your lose to an amount of your account can withstand, there is nothing to fear.
– You have the courage to do whatever it takes to succeed at trading
– Each Trade is but one of many
– You keep your focus in the present because this is where the action is
– The potential profits are worth the risk
– Trading is about money, it’s not about your survival.
– Trading is only one way in which you can make money.
– You learn and grow stronger with each trading experience
– The future of your trading is bright.
Stock options are for..
- …managing risk through controlling shares with less capital.
- …putting the odds in your favor.
- …making bets on volatility or a price inside a specific time frame.
- …insuring a longer term stock holding from major losses.
- …replacement of margin.
Stock options are not for…
- …gambling.
- …going all in on one trade.
- …being used if you do not understand them completely.
- …selling and taking on unmanageable risks.
- …trading with the odds against you.
The Need To Be Right – Common Psychological Traps For Stock Traders
Some thoughts on what characterizes great and successful traders:
- Great traders graciously accept losses. They don’t need to be right all the time.
- Great traders focus on proper execution not on the outcome of a single trade.
- Great traders concentrate on good risk management. They constantly manage their open positions.
- Great traders are emotionally detached. Single trades do not affect their mood.
- Great traders don’t compare themselves to others. They isolate themselves from the opinions of others.
- Great traders are not afraid to buy high and sell low.
As you probably know by now the single biggest mistake a trader can make is to hold on to a losing position. Failing to cut losses quickly and letting them develop into huge losses is mentally and financially devastating. The underlying psychology which is responsible for this behavior is the ‘need to be right’ and the fear to sell at a loss. What aggravates the situation is adding to a losing position.Dennis Gartman says: “Do more of the things that work and less of the things that don’t.“
Conclusion:
Isolate yourself from the opinions of other people. Make trading decisions your own. Focus on proper execution. Have the courage to do the right thing because it is right.
Newton’s Law of Trading Rules: Every lousy trading rule has an equal and opposite trading rule.
“Always seek out differing opinions and challenge your beliefs. Except when you know you’re right, then that other bullshit just becomes a distraction. Good luck with that.
It is very important to be flexible and open-minded. But invest with set rules and an iron discipline. Good luck with that.
Technical analysis and charts only tell you about what has already happened in the past. It’s much better to use the information from the future that we have when making decisions. Good luck with that.
Never run with the herd. It’s much better to be all alone on open ground, running in the wrong direction and wholly conspicuous to predators. Good luck with that.
Take your losses quickly. But don’t get scared out of a good position. Good luck with that.
Amateurs trade in the morning, pros trade in the afternoon, junkies trade overnight and lots of guys on TV just trade on paper. Good luck with that.
Be tactical and stay informed! But don’t try to time the market. Good luck with that.”
The 5 Fundamental Truths Of Trading
| If you hold these core trading beliefs you will tend to do well in trading: I. “Anything can happen” – the market can go up, down or sideways from any point and negate my edge; II. “You Don`t need to know what is going to happen next in order to make money” III. “To win in the markets you need an edge” – an edge is nothing more than an indication of a higher probability of one thing happening over another IV. “There is a random distribution between wins and losses for any set of variables that define an edge” V. “Every moment in the market is unique” – so the last trade is independent from the next |
10 Top Trading Commandments
Discipline trumps conviction. Don’t let your bad trades turn into investments.
Perception is reality in the market. Adapt your style to the market, and learn to accept the market as it is, not how you wish it was.
Play great defense, not great offense. Opportunities are made up easier than losses.
Don’t confine your thinking in terms of boundaries. Expect the extreme, and don’t miss major profit opportunities.
Know your companies. Hold your stock as long as it is performing properly, cut your losses fast, and don’t “hope” for a rebound.
Risk control is important. Always quantify your risk going into a trade.
Be diligent and thorough in your research. Do your homework, recap each day, and learn from your mistakes.
Don’t get caught in a situation in which you could lose a great deal of money for reasons you don’t understand.
Respect the price action, but never defer to it. When unsure, trade “in between.”
Emotion is the enemy when trading. Be greedy when others are fearful, and fearful when others are greedy.
Market changes mind like a girl changes clothes
The current market is unique. It has never been so volatile; therefore the danger and the opportunities have never been so plentiful. No one has ever traded in such market, so past knowledge and experience may only be a hinder to adopt faster in the new environment. No system is profitable all the time and traders with 20+ years of profitable track record are in the process of realizing that. In time of extreme changes survives the one, who is more flexible, not the stronger one.
Conventional wisdom will bring you only losses. You have to learn to think out of the box. Conventional wisdom says that in bear markets you should be only short or neutral. In case you absolutely have to have long positions in your portfolio, you should choose among the stocks with highest relative strength – the ones that somehow managed to weather the storm. Wrong.
Market is so volatile that it takes stops out on a regular basis, shaking out both long and short swing traders. Percentage stop losses don’t work in this environment. If you are going to survive and thrive, you need to decrease your trading horizon and the size of your trading. I remember that about a year ago, I found out that many, who were swing traders at the beginning of their careers at some point switched to day trading. I wondered why and started asking questions.
Markets are made from people. In theory everyone could be profitable if there is a continuous flow of fresh money into the market. Recently this has not been the case. Someone has to lose. In order to be profitable you need to follow a very simple rule – to buy only what you could sell later at higher price and to sell short only what you could buy later at lower price. Like the owner of a small shop, you should not buy inventory that you personally like, but stuff that could easily be sold this season. Yes, stock traders are in the retail business and their products are called stocks. I realize how unscrupulous such way of thinking may sound and that it contradicts the initial purpose the market were created, but this is the reality.
Initially markets were created:
- To offer an alternative exit strategy (therefore motivation) for entrepreneurs;
- To provide new means of cheaper financing for business’ expansion;
- To allow ordinary citizens, who don’t have the idea, the will or the necessary capital to start their own business, with the opportunity to participate effectively in the economic growth of the country/the world.
All those things don’t matter anymore. Markets have long turned into a speculation arena, where everyone tries to outsmart the other.