– markets change and if a trader doesn’t adapt, he’ll be driving a cab
– becoming a successful trader is not easy, even if you’re experienced
– core competency in one endeavor, does not guarantee competency in another
– working for a living sucks
– always be prepared to trade
– markets aren’t the only thing that reverts to the mean
– never turn down an edge, no matter where you are, or what you have in your hand
– success is fleeting, losing is forever
The trader’s biggest enemy is their own EGO.
Ego: a person’s sense of self-esteem or self-importance.
1. The new traders with big egos always have but confidence in their trading ability before developing competence in trading. New traders that trade before educating themselves are ignorant of their own ignorance.
2. Ego driven traders think they are special and will beat the market, even without putting in the work. They feel this way even though there is no evidence from their past trading success.
3. Most stubbornness in traders arises from the egos refusal to change, to learn, or to accept they are wrong about something.
4. The ego will make you hold a trade that is going against you, in the hope that you can prove yourself right when it reverses.
5. The biggest cause of trading too big of a position size, is ignoring risk management in favor of confidence in an unknown outcome.
6. Arrogant traders will focus on being right about predictions more than developing a robust trading methodology.
7. Ego driven traders put being right above being profitable. Their goal is ego gratification, not profitable trading.
Successful traders trade a plan based on logic, reason, probabilities, historical prices, and risk management.
Money Management: You must make your trades as fixed as possible. Trade with the same risk, capital, units, percentage, and in the same type markets to manage risk most effectively.
Methodology: Choose a method that works for you and your personality. (Dow Theory, technical indicators, patterns, price and volume, etc) Once you have a methodology to your trading, test it in the real world, in real time, either with micro trades or paper trade. You need a sample size to judge its efficacy.
Trader Psychology: Manage your hope, greed, fear, and pain to stay in the game.
Some love risk. Others avoid it till the grave. Whether you take it head on or run in the other direction it will always catch you. Risk cannot be avoided so you better know how to put the odds in your favor. Consider the following:
You want to see life as a continuum running on a loop back and forth from risk to reward. If you want a big reward, take a big risk. If you want an average reward and an average life, take an average risk. Easier said than done, however, if you want the big reward. Our system is notorious for playing Whac-A-Mole with achievers.
From an early age, people are conditioned by families, schools, and virtually every other shaping force in society to avoid risk. To take risks is inadvisable; to play it safe is the message. Risk can only be bad. However, winners understand risk is highly productive, and not something to avoid. Taking calculated risks is different from acting rashly. Playing it safe is the true danger. Far more often than you might realize, the real risk in life turns out to be the refusal to take a risk.2 If life is a game of risk, then to one degree or another, being comfortable with assessing odds is the only option for a fulfilling life.
Consider trading from a “startup” business perspective. Every business is ultimately involved in assessing risk. Putting capital to work to make it grow is the goal. In that sense, all business is the same. The right decisions lead to success, and wrong ones lead to insolvency. Blunt, but true. There are ways to go in the right direction, however. Ask yourself these questions:
- What is the market opportunity in the market niche?
- What is your solution to the market need?
- How big is the opportunity?
- How do you make money?
- How do you reach the market and sell?
- What is the competition?
- How are you better?
- How will you execute and manage your business?
- What are your risks?
- Why will you succeed? (more…)
The stress that financial traders suffer during periods of high volatility in the markets reduces their appetite for risk, according to a study led by Cambridge university neuroscientist and former Wall Street trader John Coates. This may prolong financial crises.
The research, published in Proceedings of the National Academy of Sciences, combines field and lab work. Prof Coates and colleagues discovered that levels of the stress hormone cortisol increased by 68 per cent on average in a group of City of London traders over eight days in which market volatility increased.
The scientists took this finding to Addenbrooke’s Hospital in Cambridge where they used pharmacology – hydrocortisone tablets – to raise cortisol levels in volunteers, also by 68 per cent over eight days. Participants then played an incentivised risk-taking game. The appetite for risk collapsed, by as much as 44 per cent according to one measure, in those with raised cortisol. (The study was double-blinded with a control group taking dummy tablets.) (more…)
==== Money is secondary? What the hell? Is Alexander joking?
Well, if we take some time and analyse this quote, Mr Elder has a very important point to make. How can good trades be better than money ? Why are we indoctrinated to think that money is the primary goal?
Don’t worry I was subject to this way of thinking for a long time but realized it has huge fundamental issues. The problem is that anyone can have a great trade, a lucky trade, a momentum trade, but the question is, can you replicate this performance in the future in the long term?
I repeat, can you replicate this trade in 10 years time?
Lets think soccer, is it more important to score a goal every match or to have a system of playing the game to have high probability of scoring opportunities?
Do you prefer to have one perfect trade or many high probability trades?
If you are in this for the long term, focusing on making the highest probability trades possible is a more sustainable way for a future success. If you spend time in analyzing your entries, exits, risk management on a consistent level, you have a higher probability of achieving your goal.
People have an amazing ability to discount risks that threaten their livelihood. That’s dangerous because people who should be the most experienced experts in a field may be the least able to objectively assess their industry.
Risk has a lot to do with culture. Europeans and Canadians are generally wary of the stock market. For Americans, it’s a pastime. The French prefer raw milk. Americans are warned against it. Canadians are banned from it. Europeans are terrified of nuclear exposure. Americans couldn’t care less. Walk through an international airport and you’ll see one person wearing a face mask to prevent the spread of illness and another letting their kid crawl on the floor. Everyone wants to believe they’re thinking objectively, but most of the time you’re just reflecting the cultural norms of where you were born.
Success is an underrated risk. Jason Zweig once wrote: “Being right is the enemy of staying right — partly because it makes you overconfident, even more importantly because it leads you to forget the way the world works.”
Risk’s greatest fuels are debt, overconfidence, impatience, a lack of options, and government subsidies.
Its greatest enemies are humility, room for error, and government subsidies.
Nothing in the world can give a damn less than risk. Risk doesn’t care about your political views or your morals. It doesn’t care what your view of the market is, or what you were taught in school. It’s an indiscriminate assassin and a master at humbling ideologies.
There’s an old joke about the investor who never used any stop losses. His friend knew his big positions were getting crushed.
Out of concern, the friend asked, “How are you sleeping?”
“Like a baby” he answered.
“Really? You aren’t nervous or upset?”
“I sleep like a baby” he repeated.
“That’s amazing. I’d never be able to sleep through the night with those types of losses.”
“Who said anything about sleeping through the night? I said I slept like a baby: I wake up every two hours, wet myself and cry for 30 minutes before falling back to sleep.”
That’s why risk management is so critical: to save you from sleeping like a baby, and in the long run to save you a lot of money.
