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15 Crucial Points From -Trading Psychology 2.0

  
  Education
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11. Discipline, while necessary for success, is never sufficient. Discipline does not substitute for skill, talent, and insight. Strict, disciplined adherence to mediocre plans can only lock in mediocre results. If it were otherwise, there would be no losing automated trading systems.

2. It is not enough to find an “edge” in financial markets; as any tech entrepreneur can attest, competitive advantages are perishable commodities. Those who sustain success continually renew themselves, uncovering fresh sources of competitive advantage. That requires processes for assessing and challenging our most basic assumptions and practices. It takes a good trader to create success, a great one to recreate it. Nothing is quite as difficult— and rewarding— as letting go of what once worked, returning to the humble status of student, and arising phoenix-like from performance ashes.

3. This productivity is readily apparent on a day-to-day, week-to-week basis: The greats simply get more done than their colleagues. They organize their time and prioritize their activities so that they are both efficient (get a lot done per unit of time) and effective (get the right things done). How much time do we typically waste as traders, staring unthinkingly at screens, chatting with people who offer little insight, and reading low-priority/ information-poor emails and reports? The successful traders invariably are workhorses, not showhorses: They get their hands dirty rooting through data and make active use of well-cultivated information networks.

4. Successful traders I’ve known work as hard on themselves as on markets. They develop routines for keeping themselves in ideal states for making trading decisions, often by optimizing their lives outside of markets.

5. This, for me as a psychologist, has been one of the greatest surprises working with professional money managers: The majority of traders fail, not because they lack needed psychological resources but because they cannot adapt to what Victor Niederhoffer refers to as “ever-changing cycles.” Their frustration is a result of their rigid trading, not the primary cause. No psychological exercises, in and of themselves, will turn business around for the big-box retailer that fails to adapt to online shopping or the gaming company that ignores virtual reality. The discipline of sticking to one’s knitting is destined for failure if it is not accompanied by equally rigorous processes that ensure adaptive change. (more…)

THREE LEGS OF SUCCESSFUL TRADING

  
  Education
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If you ever read any book on trading you would notice that every author our there talking about three most important things of successful trading and investing are:

  1. Trading edge
  2. Money management
  3. Discipline or psychology

Depending on the book one is reading one of those three are emphasized more or less. If you read book on technical analysis author will say that having edge is most important, and even if you have PhD in psychology if you don’t have proper edge you will not be able to make money.

If you read book on psychology again author will tell you that you can have best trading system on the world if you are not able to take signals you will not be successful trader and that you must make system that will suit your personality.

Finally if you read book on money management, author will tell you that even if you have best system in the world and having best discipline in the world if you risk too much of your capital on each trade you will probably ruin your account and the game will be over.

To answer I would ask you following: What is more important heart or brain? Eyes or ears? Legs or Arms?
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What is the probability of…

  
  Education
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  • A sideways market?
  • A trending market?
  • A trend continuing;
  • A trend reversal?
  • Getting stopped out of a trade?
  • Winning a trade?
  • Breaking even?
  • Losing a trade?

All questions that need to be answered if you are to have confidence in your trading system.  For it is confidence that allows you to profit from the markets.

Ridiculous notion?  Perhaps.  But true nonetheless. 

You see, despite our civilized veneer, we are still animals that react to fear, the most powerful of emotions.  And it is fear that supercedes our thoughts when we trade.

To circumvent fear, you should develop trading plans, trade according to plan, and analyze your trades in a trading journal.  As do this, you will build a database that will create statistical patterns of your trades.  This can be studied and help you to predict the outcome of future trades. (more…)

1 Thing Critical To A Trader's Success

  
  Education
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I think more than anything it has to be discipline. Because as important as finding a suitable methodology, developing a strategy, sound risk management, and position sizing is, it will be for nothing if you don’t have the discipline to consistently execute it and follow your rules.

Discipline is an integral part of all trading, whether systematic or discretionary, day trading or buy-and-hold, across all asset classes. I don’t believe you can be consistently successful without it.

Risk control based on risk per trade, risk control based on sector, risk control based on total portfolio.

You must know how much you can lose on a given trade, and the maximum loss to your entire portfolio at any one time. Only then can you take the necessary measures to manage these risks.

Almost equally important is correct trading psychology. Being able to accept trades that do not work. Staying focused and strong in the complete uncertainty of trading.

Because even the best trading system will have losing periods and this is when you need to remain discipline and continue executing your trades.

A trader must have many different ingredients to be successful in trading, but what is absolutely critical is that you must love the type of trading you do.

Many people think they have a passion for trading but the reality of trading; watching charts, managing risk all day, is not as exciting as many believe. If you are a day trader then you must actively enjoy this process.

If not, you must find another form of trading (or profession) that suits your style. That might be swing trading, automated trading, systems trading, whatever. But what you must have is passion!

Greatest Challenge in Trading

  
  Education
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“One of the greatest challenges in trading is dealing with ambiguous information. The market is always sending mixed information to various degrees. We can also see this ambiguity in the commentary from the market pundits in the media. Each pundit chooses (consciously and/or subconsciously) to focus or emphasize one thing over another thing. I came across the following quote recently by Robert Gates addressing a group at the CIA in 1991: ‘the most difficult task that falls to us in intelligence is to see the world as it is, not as we – or others – would wish it to be.’ I talk about this all the time, using different words: ‘we don’t see the market as it is; we see it as we are.’ What do I mean by that? Our thoughts, feelings, hopes, expectations, and beliefs (both conscious and subconscious) create a personal filter that we see the market through. And that filter forms the basis for our entry and exit decisions. That’s just the way it is. It’s part of being human. And this filter not only impacts how you see the market, even your choice of instrument, time frame, trading style, etc, are influenced. Traders who are self-aware, who understand their own biases, their fears and hopes and what triggers them are in a better position to profit from the market. Going one step further, traders who are self-aware and who are honest with themselves are in an even better position. And taking another step, traders who are self-aware, honest, and have the courage and willingness to do the work to incorporate their own personal trading psychology into their plan are in the best position. What kind of trader are you?” 

13+1 Habits For Traders

  
  Education
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1.    Have a plan before you initiate a trade. A detailed trading plan is your blueprint to success. It will help you define you as a trader, the way you trade, will help you find, execute and manage trades with ease and most importantly will help you put the education puzzle together. 
2.    Always analyze all closed trades, winners and losers. Having a trading journal will help you identify what works for you and what not; it will funnel you in the right direction. It is by far the most helpful method of personal trading introspection. 
3.    Maintaining a positive trading attitude will improve your money management and risk management skills. A negative trading mentality will alter your thinking and mindset. Your attitude will determine whether or not you are profitable with your trading. Your attitude is more important than your market knowledge and even your level of experience. It is important how you react to the market and not what the market will do to you.
4.    Controlling Emotions. Emotional swings and emotional stresses impact your mental state of mind and will affect your trading decisions. When you trade with emotions you don’t trade clearly and rationally. Some books talk about separating your emotions from trading. But how is this possible?  To even try to separate emotions is like fighting a losing battle, taking control over them that is a different story. Trading involves the most emotional COMMODITY in the world which is….money. Money outlasts hate, love, greed and anything else you can ever imagine. The only way to control your emotions as a trader is to have a solid trading plan.
5.    Trade in the zone –Focus is key in trading. Make sure you are do not have any distractions around, no internet browsing, no phone answering, no kids playing, it should be just you and the charts. Let the charts speak to you and they will tell you what to do.  (more…)

10 Trading Pitfalls

  
  Education
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  • All market behavior is multifaceted, uncertain, and ever changing.
  • “I am employing a robust, positive expectancy trading model and am appropriately managing risk on each and every trade.  Losses are an inevitable and unavoidable aspect of executing all models.  Consequently, I will confidently continue trading.”
  • Denial of loss and uncertainty is extremely destructive because it prevents us from thinking in terms of probabilities, planning for the possibility of loss, and consequently from the necessity of consistently managing risk.
  • If we view markets as adversarial we cut ourselves off from emotionally tempered, objective solutions to speculation (opportunities to profit)
  • Blind faith is no substitute for research, methodical planning, stringent risk management, playing the probabilities, and unwavering discipline
  • Depression is a suboptimal emotional state because it allows past losses or missed opportunities to limit our ability to perceive information about the markets in the present
  • We are not our trades; they are merely an activity in which we are engaged
  • Greed is linked to fear of regret, which is the greatest force impeding a trader’s performance outside of fear of loss
  • Market offers limitless opportunities for abundance
  • Trading biases prevent us from objectively perceiving reality, thereby limiting our ability to capitalize on various opportunities in the markets.

Overcoming 8 of the Pains in Trading

  
  Education
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Here are 8 painful aspects of trading and what to do about them.8number

  1. The pain of losing money. (Trade smaller so it is much less painful, and just one outcome of the next 100.)
  2. The pain of being wrong about a trade you were sure about. (You lost simply because the market wasn’t conducive to your particular trade, trend followers lose money in choppy markets, swing traders lose money in trending markets, the market picks the particular winning trade not you.)
  3. Consecutive trading losses hurt. They make you doubt yourself, your method, and your system. (You need to remember your winning trades, your winning years, or your proof in back-testing, or paper trading of your method’s profitably.)
  4. The embarrassment of public losses. You told everyone who would listen about a great trade, and you were wrong. (Never be overconfident in any trade, but always be sure of your stop loss. Always be uncertain in your trade winning or losing, just follow your plan. )
  5. The pain of of admitting you were wrong. (Cut your loss and move on to the next trade, trade reality not your ego.)
  6. You are following a guru and come to realize he truly is a salesman and not a trader. (You stop following gurus and look to learn how to trade all by yourself.)
  7. You take a position that meets all your entry guidelines and then it hits your stop loss. (Follow your plan, exit the trade, and say “next”)

  8. You start trading a system that did amazing in back-testing and promptly lose 10% of your account in a draw down. (You have to double check to see if you made any mistakes in your research, if the method is valid then stick with it so it can win in the long term, you may need to make slight adjustments in position sizing or stops to account for volatility that you may have missed.)

80% of trading is behavioral

  
  Education
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80% of trading is behavioral, maybe only 20% is based on the other things that a trader does. Like much of personal finance it is not the math but the behavior that makes all the difference. Most people’s problem with being broke does not lie in their budget it is due to their behavior of spending too much money becasue they lack self control. The inability to say no to yourself in the present is what leads to most of the problems that we encounter at a future time. You can’t out earn stupid and you can’t budget away a lack of self control or work ethic. The same applies to trading.

Wanting to be a trader is only the beginning, once you make that decision you have to do the work to learn how to create a winning trading system. Having a robust trading methodology is still by far not enough it has to be expressed in a trading plan that also controls risk and fits your personalty. Even then, a trading plan is not enough you still have to follow it with discipline consistently for it to work out for you in the long term and make you profitable. But wait, there’s more…. you have to have the passion and perseverance in the market to shake off a losing streak and draw down and keep going. A great trading method is useless if you quit before you give it a chance to hit the big winning streak. (more…)

Nassim Taleb Explains The One Thing An Investor Should Never Fail To Do

  
Analysis, Education, Video
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Uncertainty should not bother you. We may not be able to forecast when a bridge will break, but we can identify which ones are faulty and poorly built. We can assess vulnerability. And today the financial bridges across the world are very vulnerable. Politicians prescribe ever larger doses of pain killer in the form of financial bailouts, which consists in curing debt with debt, like curing an addiction with an addiction, that is to say it is not a cure. This cycle will end, like it always does, spectacularly.

When it comes to investing in this environment, my colleague Mark Spitznagel articulated it well: investors are left with a simple choice between chasing stocks that have an increasing chance of a crash or missing out on continued policy effects in the short term. Incorporating a tail hedge minimizes the risk in the tail, allowing investors to remain invested over time without risking ruin. Spitznagel put together a video explaining the point.

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