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5 Trading Pitfalls and how to Solve Them

  
  Education
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Pitfalls
1. Focusing on the P & L

2. Losing objectivity while in a trade

3. Becoming emotional about a trade

4. Lacking confidence: exiting early, failing to put a trade on, not sizing up

5. Difficulty adapting to a changing market

Solutions
1. Quantify success base on the caliber of the trade (i.e. high quality entries/exits).

2. Continuously ask yourself, “is my original reason WHY I entered this trade still there?”

3. While you are in a trade, ask yourself, if I had no position on right now, what would I do? Buy? Sell Short? Do nothing? Then re-evaluate your trade size and direction.

4. Confidence should always come from within. Step#1: Write bullet list of data points proving WHY you are a skilled trader. Step #2: Prime yourself each morning by reading it over to yourself. Could be the most valuable 30 seconds you spend each day.

5. Flip your perspective by keeping track of what is not working (by default this tells you what IS working).

Keep your eye on the ball and your head in the game!

Confidence: How to Apply the Goldilocks Principle as a Trader Read more

  
  Education
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An absolutely crucial characteristic all successful traders share is confidence. Success is only achieved when a trader has the confidence to execute his ideas without being overcome by emotional fears. I believe that creating a game plan and sticking to it will foster confidence in the long run because the trader defines all aspects of his trade that he can control; the rest is left to the market. Confidence based on winning trades is fleeting, but confidence based on the ability to objectively execute ideas leads to long-term, unbreakable confidence.
Yet I often see two primary psychological problems that traders experience with regard to confidence. There is overconfidence and underconfidence, both of which lead to very serious complications in one’s trading. Overconfidence occurs when the trader has had a string of winners and feels indestructible. A common statement of reflection once destruction occurs is usually something like: “I thought I knew more than the markets” or “I thought I had trading all figured out.” The trader usually begins to get sloppy in their trading and takes poor risk/reward trades, believing it will just work out for them. Hard-earned profits can disappear in a very short time if overconfidence is present — unless the trader has learned the techniques to recognize this and nip it in the bud quickly. (more…)

14 Points for Traders

  
  Education
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1. Have a profit? Forget it. Have a loss? Forget it even quicker.
2. It was never my thinking that made the big money for me. It was my sitting, my sitting tight.
3. There is only one side to the stock market and it is not the bull side or the bear side, but the right side.
4. If you don’t know what’s going on, don’t do anything.
5. Markets are never wrong, opinions often are.
6. Don’t be too curious about the reasons behind moves.
7. The smarter you are, the longer it takes.
8. When time is up, markets will reverse.
9. Don’t expect the tape to be a lecturer. It’s enough to see that something is wrong.
10. Don’t imagine that a market that once sold at 150 is cheap at 130.
11. A man does not swear eternal allegiance to either the bear or bull side.
12. People believe what it pleases them to believe.
13. Trend followers plan when they will get out before they ever get in.
14. Know every day what your portfolio is worth. Calculate what your risks are on any given day for all positions.

3 Rules to Master Risk and Uncertainties

  
  Education
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1. Overcome Fear

Great traders know that fear can choke our decision process and cause us to avoid taking risks. Fear also can paralyze you when you need to act quickly and decisively to save yourself from danger – the deer-in-the-headlights syndrome. All great traders have mastered their fears and are able to act decisively when needed.

2. Remain Flexible

As a trader, you never know which stock or which market may make a move. This is the essence of uncertainty. You don’t’ know what is going to happen. When you don’t know what is going to happen, the best strategy is be ready for anything.

3. Prepare To Be Wrong

If you don’t know what the future will bring and you choose a trade that assumes a particular outcome, you are possible going to be wrong. Depending on the type of trade, in many cases it can even be more likely that you will lose money than that you will win money. What matters in the end it the total money won and lost, not whether you are right more often than wrong. Great traders are comfortable making decision when they know they could be wrong. –

Think Like Las Vegas

  
  Education
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Do you think of each trade as an island, as the great hope, or do you think in terms of probabilities over a series of trades? Casinos make their money by keeping the odds in their favor over a large number of bets. And that’s how successful traders think too. They don’t get attached to the success or failure of any given trade. Their primary goal is to stay calm, relaxed and open to the market’s opportunities so that they can execute their edge precisely and keep the odds in their favor. Thats why I make such a big deal about emotional clearing and staying calm. The emotional clearing technique I use is literally worth tens of thousands of dollars to me in bottom line results.

3 Trading Lessons

  
  Education
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A good trade can lose money, and a bad trade can make money. Even the best trading processes will lose a certain percentage of the time. There is no way of knowing a priori which individual trade will make money. As long as a trade adhered to a process with a positive edge, it is a good trade, regardless of whether it wins or loses because if similar trades are repeated multiple times, they will come out ahead. Conversely, a trade that is taken as a gamble is a bad trade regardless of whether it wins or loses because over time such trades will lose money.

Ray Dalio, the founder of Bridgewater, the world’s largest hedge fund, strongly believes that learning from mistakes is essential to improvement and ultimate success. Each mistake, if recognized and acted upon, provides an opportunity for improving a trading approach. Most traders would benefit by writing down each mistake, the implied lesson, and the intended change in the trading process. Such a trading log can be periodically reviewed for reinforcement. Trading mistakes cannot be avoided, but repeating the same mistakes can be, and doing so is often the difference between success and failure.

For some traders, the discipline and patience to do nothing when the environment is unfavorable or opportunities are lacking is a crucial element in their success. For example, despite making minimal use of short positions, Kevin Daly, the manager of the Five Corners fund, achieved cumulative gross returns in excess of 800% during a 12-year period when the broad equity markets were essentially flat. In part, he accomplished this feat by having the discipline to remain largely in cash during negative environments, which allowed him to sidestep large drawdowns during two major bear markets. The lesson is that if conditions are not right, or the return/risk is not sufficiently favorable, don’t do anything. Beware of taking dubious trades out of impatience.

Manage Your Ego

  
  Education
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ego

“Everyone wants to feel like a winner. It’s tempting to pat ourselves on the back for making a winning trade, but it’s essential to face the facts: Many times a winning trade is a combination of an astute insight AND being at the right place at the right time. In other words, external circumstances such as plain good luck make you a winner. (more…)

How To Reduce The Effects of GREED?- 6 Points

  
  Education
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  • Trade Small: If you are a beginner, trading a small account can be a worthwhile exercise. Use small position sizes and manage risk fiercely. Many traders get into trouble when they haven’t considered risk exposure while taking positions that are too large for their accounts.
  • Expect to Lose: Be prepared to lose when you enter a trade and DEFINE how much you are ready to lose. Don’t panic and change your mind if the market reaches that point.
  • Plan to WIN: Likewise, DETERMINE the amount of profit that is enough to quench your Greed Buds.
  • Time Horizon: Trade with short time horizon. Even if you are not an intraday trader, a shorter-term viewpoint in today’s volatile market environment gives a quick feedback about your analysis and can decrease the time you are exposed to the unpredictable marketplace.
  • Scared Money Never Wins: Trade only with money you can afford to lose that is less important and not significant enough to be protected. Treat your money well and trade well.
  • Nothing Ventured, Nothing Gained:  Be a little greedy! If you don’t trade, you are engulfed by fear. Come up with a trading style that cuts down the influence of greed and fear and is easy for you.

Eight Questions That Go Bump in the Night

  
  Education
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Why do the gurus who proclaim a “feel” for the market tell us to eliminate emotions from trading?

Would 80% of traders make money instead of losing it by placing trades through “enrichers” instead of “brokers”?

Why do people who offer programs on making a living from trading make their livings from offering programs?

Why do beginners think they’d have an easier time beating professionals at trading than at golf, boxing, racecar driving, or chess?

Why are so many market newsletters bullish or bearish, when the most common market outcome is little or no change?

What happens when contrary opinion is the dominant school of thought?

Why do trend followers follow trend following once it goes out of favor?

If exchanges make more money than brokers; brokers make more money than market makers; and market makers make more money than traders, is the answer to success in the markets to always have people who are your customers?

10 Foolish Things a Trader are Doing

  
  Education
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  1. Try to predict the future movement of a stock, and stay in it no matter what.
  2. Risk your entire account on one trade with no stop loss plan.
  3. Have a winning trade but no exit strategy to get out, no trailing stop or exhaustion top signal.
  4. Ask for and follow the advice of others instead of trading with your own trading plan, method, rules, and system.
  5. Trade your emotions instead of signals: buy when you are greedy and sell when you are afraid.
  6. Trade your opinions, not a quantified method.
  7. Do not bother to do your homework on trading, just jump in and trade, you are smart, you will figure it out.
  8. Short the best and most expensive stocks in the stock market and buy the cheapest junk stocks.
  9. Put on trades you are 100% sure are winners so you do not even need a stop loss or risk management.
  10. Buy more of a trade that you are losing money in and sell your winners quickly to lock in small profits.
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