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Strategies to prevent overtrading

  
  Education
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1. Before each trade, clear your mind.

As I was flipping through channels, I came upon an interview with a surfer. He was saying that he knew a big surf would come and he would go underwater. The interviewer asked, how does he handle it? He said, it is simple. If I panic, I only have 3-5 seconds of air to breathe. If I stay calm, I have 45-60 seconds of air.

What does surfing have to do with trading? Well, especially when the markets are choppy, if you overtrade, you could lose all of your capital. However, if you take a moment and think about your trades, you can have much better results.

2. Have a trading plan and stick to it.

Plans are roadmaps. You want to know where you are headed. Think about it. If you are having a surgery, you want your surgeon to know why he is performing the surgery, where he should start, and what is the expected outcome.

In order to stick to your plan, think about your plans/rules as giving your word. Usually, we associate giving our word as a contract and we do not break it with others.

However, this rule does not apply to ourselves. So treat yourself as well as you would treat your best friend, and keep your word to yourself.

3. Look at each trade as an individual transaction.

Ask yourself:

If this was the first trade of the day, would I get into it?

What would be the initial size of this trade?

Do not look at an individual trade to make up for all of your losses.

4. Create a routine that works for you.

We are creatures of habit. As Aristotle says, “We are what we repeatedly do. Therefore, excellence is not an act, but a habit.”

5. Come from abundance.

There are a lot more opportunities. You will get what you expect. You might have heard of the following:

Imagine going to the ocean and taking water from the ocean. You can use a thimble or you can use a huge tub. You can do it once or as often as you want. It does not matter to the ocean, it is up to you and what you think you deserve.

6. Be patient – look for the right opportunities.

As the saying goes, there is a lot of fish in the sea.

7. Keep a daily journal.

To start with, keep track of:

Where you got into the trade

Where you exited the trade

Why you got into the trade

Why you got out of the trade

After a while, you’ll notice your own patterns.

8. Remember, this is a process. It takes time and experience. Rome was not built in one day.

9. Reward yourself.

I know this might sound counterintuitive. A lot of us wait to celebrate and reward ourselves till we do things perfectly. We think that if we start celebrating the intermediate steps, we’ll become complacent.

The truth is, to create a new habit, we need encouragement. Imagine a baby who is just starting to walk. S/he takes his/hers first step and then falls down. What do parents do? Do they yell and punish the child, or do they encourage and celebrate his/her action? If you said the latter, you are right.

Usually, encouragement works much better than punishment. The idea of celebration is to encourage ourselves.

Trading is simple, but not easy. The greatest difficulty is to accept the simple rules and follow them with discipline.

To summarize, the 9 steps to prevent overtrading are: (more…)

Trading Psychology -Quotes

  
  Education
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  • To be a successful trader/investor, your intellect and emotion must work as a team, which is easier said than done.”

– James Dalton

  • ” Successful traders accept and expect losses. Losses are endemic to trading; they are the cost of doing business. The consistently successful trader accepts deep in his heart that his winnings will be tempered with inevitable loss. But the trader anticipates his ultimate triumph because he has structured the probabilities in his favor”.

-LBR

  • “To be a successful trader you need to trade without fear. When you use fear as a resource to limit yourself, you will create the very conditions you are trying to avoid. Or to say this another way, you will experience your fears.”

-Mark Douglas

  • “The man who insists upon seeing with perfect clearness before he decides, never decides.”

– Henri-Frederic Amiel

  • “…to be a successful trader, I must love to lose money and hate to make money…The first loss is the best loss; there is no better loss than the first loss…Trading is a discipline.”

– EEK

  • “One of the critical criteria I use in judging my traders is their ability to take a loss. If they can’t take a loss, they can’t trade.”

– John Mack

  • “If you have bad inventory, mark it down and sell it quickly.”

– Alan “Ace” Greenburg

  • “Never meet a margin call. (In other words, if the market is going against you, concede defeat quickly and liquidate before you really lose your shirt.)”

– James Grant

  • “Fail Often but never quit.”

There's nothing you can do

  
  Education
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You might be at a stage of feeling very frustrated with yourself.

I know what this feels like – you begin to marvel at your own lack of discipline and ability to do what you know. It’s like “Arrgh! Why can’t I just WAIT for the damn setup?! Why am I such a screw up at this?!”

Speaking from experience, it’s frustrating because you just want to get on. You have plans and goals and now you see that your own idiocy is preventing you from making any progress towards them. All I can say is that there’s nothing you can do about this period except keep going and wait for it to pass… It’s deeply ingrained. You have to trade through it; six months, a year, two years… Grit your teeth and plow on.

In a way, you have to relax into your own ability to seemingly pick every wrong move in the market. Just accept it. Providing you are not losing big money, you CAN relax into it. The good news is you are in fact building up a tolerance to taking losses during this period – you ARE actually developing a skill. It’s called “risk tolerance.”

If you’re still in that “God dammit!” phase then do this: just keep losing and losing, but begin to try to take the losses without any emotional reaction what so ever and move immediately to the next trade.

Once you can do this, you then move on to learning to let go of your need to have success NOW. This combines with learning to do nothing in the market – learning to wait. Why not wait, you’re gonna lose anyway right? So you might as well wait…

Now you’re building up patience. This is a foundation that leads to a little magic further down the track, when you get to the point where you see that you could take any system and trade it properly to discover its true potential. All those millions of methods you tried for 3 days and abandoned in disgust now sit there like a pile of spare parts in the bike shed. You become interested in them again – there could actually be a few decent ideas amongst that lot.

So learn to lose.
Then learn to wait to lose.

You will be building risk tollerance and patience. There are more steps after that, but there is no way to skip this process, it has to be gone through by all.

Six Insights for Disciplined Trading

  
  Education
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1) Trading is a probability game.  You can’t be a perfectionist and expect to be a great trader. Your losses (that you hope will return to breakeven) will kill you.

2) Jumping in too soon or getting in too late.  These mistakes come from traders not having a well-defined plan of how they will enter the market.  This positions the trader as a reactive trader instead of a proactive trader, which increase the level of emotion the trader will feel in reacting to market movements.  A written plan helps make a trader more systematic and objective, and reduces the risk that emotions will cause the trader to deviate from his plan.

3) Not taking profits on winners and letting winners turn to losers.  Again this is a function of not having a properly thought-out plan.  Entries are easy but exits are hard.  You must have a plan for how you will exit the market, both on your winners and your losers.  Then your job as a trader becomes to execute your plan precisely.

4) Great traders don’t place their own expectations on to the market’s behavior.  Poor traders expect the market to give them something.  When conditions change, a smart trader will recognize that, and take what the market gives. 

5) Emotional pain comes from expectations not being realized.  When you expect something, and it doesn’t deliver as expected, what occurs? Disappointment.  By not having expectations of the market, you are not setting yourself up for this inner turmoil.  Douglas states that the market doesn’t generate pain or pleasure inherently; the market only generates upticks and downticks.  It is how we perceive and respond to these upticks and downticks that determine how we feel.  This perception and feeling is a function of our beliefs.  If you’re still feeling pain when taking a loss according to your plan, you are still experiencing a belief that your loss is somehow a negative reflection on you personally. 

6) The Four Major Fears – fear of losing money, being wrong, missing out, leaving money on the table.  All of these fears result from thinking you know what will happen next. Your trading plan must approach trading as a probabilities game, where you know in advance you will win some and lose some, but that the odds will be in your favor over time.  If you approach trading thinking that you can’t take a loss, then take three losses in a row (which is to be expected in most trading methods), you will be emotionally devastated and will give up on your plan.

15 Common Sense Rules For Traders

  
  Education
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Common sense can be brutally honest sometimes. As traders we get so focused on the little inconsequential detaisl sometimes that we miss the world around us. I have had this discussion with too many people over the last two months that told me they were bearish on the market and were taking a beating on the “high probability” that the market would reverse. Who sets those odds by the way? Are trends more likely to reverse than persist? If so, why the hell are we studying technical analysis?

Take a look over these trading rules I stumbled across last year and see if there are any realities that surface from them. Each time I look these over it reminds me of the realities of what we do here.

1. No matter what you read about trading, until you use an approach and test it with your money on the line you will never learn how to trade. Paper Trading is NOT Trading!

2. If it were really possible to “Buy Low Sell High” or “Cut your Losses and Let your Winners Run”, then almost everyone would be making money rather than losing it.

3. Remember that there is ALWAYS someone on the other side of your trade who is using a trading technique exactly the opposite of yours who hopes to make money with his system.

4. If 90% of all traders lose money, they must be following generally accepted trading rules. The 10% who win do not!

5. You trade your beliefs and your beliefs about your system. If you have a problem with yourself, fix yourself first.

6. Impatience, Fear and Greed will make you poor. Any need to trade is rooted in greed and impatience.

7. If you really understand the markets then YOU KNOW that there is the same opportunity on every time frame, in every market, every single day.

8. Waiting for the perfect trade is “chickening out”, and caused by your lack of faith in yourself or your system.

9. Any hardwired, automated trading system sold that truly works 70 or 80 or 90 percent of the time in every market would be worth hundreds of millions of dollars and would not be for sale at any price. (more…)

Trading Hints and Tips

  
  Education
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 tips-1

1. OPPORTUNITY. There are dozens of these every day, unfortunately you can’t buy them all, so only pick the top 10 and then narrow them down to 2 to 3.
 This is done by using your buying criteria which is part of your trading plan which you already have written down. (Hopefully you have one?)

 2. BUYING and SELLING. I have a pre planned strategy which I have developed by trial and error; this was achieved by learning by my trading mistakes  and the mistakes of others.
 3. PATIENCE.This is definitely a virtue worth developing. Sometimes the market is going up in the right direction, but is not going as fast upwards as you  would like.  Be patient and use a “stop loss” to lock in those profits. However small they may be.  Also don’t always be in a hurry to “buy that next share” just because you have that money burning a hole in your pocket.  Do your homework and then you have chosen the right share for the right reasons and not just because it looked good 

 4. STRESS.If it is hurting! Don’t do it, cut your losses or be content with a small profit and get out. (more…)

Trade with Discipline

  
  Education
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1. never EVER add to a losing position. EVER! If it’s not working, why add good money to bad? At this point, you are in damage control mode. It’s another thing if you are trying to pyramid into a position. For example: You go into a trade with 1/3 size, add another 1/3 and add the final 1/3 in an attempt to build a full position in a stock you feel strongly about. I do not mind that. But adding money to a full position which is not working is a BIG NO in my book! You never want any ONE trade to ruin your entire week or month folks. DISCIPLINE!

2. NEVER ever compromise your stop loss. I know a nice ran away bull market makes everyone think that’s okay to remove the stop loss or lower the stop loss to much lower levels because eventually the stock will bottom and rebound. BE EXTREMELY CAREFUL guys! This is absolutely NOT what we are trying to do as traders. This is basically turning your trades into investments just because you cannot handle the pain of a small loss. It is much easier to dig yourself back form a 2-3% loss than a 10-15% loss. Hindsight is always 20-20 and most of you will say “gosh, i shoulda stuck to the original stop”. Trust me, life will be much less stressful taking occasional small stop losses along the way then being stuck in “hold and hope” mode.

Trading Wisdoms

  
  Education
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That enormous profits should have turned into still more colossal losses, that new theories should have been developed and later discredited, that unlimited optimism should have been succeeded by the deepest despair, are all in strict accord with age-old tradition.

Benjamin Graham

A trading philosophy is something that cannot just be transferred from one person to another; it’s something that you have to acquire yourself through time and effort. 

Richard Driehaus

The essential element is that the markets are ultimately based on human psychology, and by charting the markets you’re merely converting human psychology into graphic representations. I believe that the human mind is more powerful than any computer in analyzing the implications of these price graphs. 

Al Weiss

Opportunities change, strategies change, but people and psychology do not change. If trend-following systems don’t work well, something else will. There’s always money being lost, so someone out there has to win. 

Gil Blake, New Market Wizards

Discipline-Risk Management-Passion

  
  Education
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DISCIPLINE: The trader must have the ability to control themselves and follow a plan. Discipline is a required skill in trading without it there is no edge, you are either a gambler or simply trading off fear and greed. You will not be successful, instead you will be gamed by those in control of their emotions.
RISK MANAGEMENT: Risk management must be a top skill for a trader to even survive in the markets. You must structure your risk per trade to be no more than risking 1% or 2% of your trading capital. You have to be able to survive 10 losses in a row. These strings of losses come around more often than a new trader would suspect. If you lose just 5% of your trading capital in each of ten trades you will be down almost 50% and need a 100% return just to get back to even. At this point you are ruined.
PASSION: A trader must love to trade, without a passion for the markets and trading the new trader will not survive the learning process because anyone with common sense would believe that it was not worth the struggle. Passion will be needed to bring a trader through the learning curve and later the losing streak.

10 Thoughts for Traders

  
  Education
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  1. Managing your risk, you will not be around to win if you do not control your risk per trade. How many losses in a row can you survive? Surviving the market is magic at times.
  2. Trading a consistent methodology is magical because you will be consistent enough to make money when a market environment rolls around that it works in, single trades by themselves mean nothing outside the context of a method.
  3. Trading a methodology you believe in will enable you to trade it through draw downs instead of giving up.
  4. Understanding your edge will enable you to have the mental toughness to trade knowing eventually you will get the pay off.
  5. Trading price action versus your own opinion will help you magically be on the side of the majority most the time.
  6. Trading in the direction of the trend will enable you to be right more times than wrong most of the time.
  7. Cutting losses short and letting winners run will make you profitable. Now that is the magic of asymmetry.
  8. Only trading in markets and trading vehicles you understand will keep you safe from many big mistakes.
  9. Doing nothing when you do not know what to do is a plan that will save you much money.
  10. Spending thousands of hours studying charts, reading books from successful traders, and doing the right homework will make you successful eventually so all your friends can tell yo how lucky you are. Then you can tell them that is isn’t magic, trading is a lot of hard work.
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