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False Beliefs About Trading the Markets

  
  Education
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1) What goes up must come down and vice versa.

That’s Newton’s law, not the law of trading. And even if the market does eventully self-correct, you have no idea when it will happen. In short, there’s no point blowing up your account fighthing the tape.

2) You have to be smart to make money.

No, what you have to be is disciplined. If you want to be smart, write a book or teach at a university. If you want to make money, listen to what the market is telling you and trade to make money — not to be “right.”

3) Making money is hard.

Nope. Sorry. Making money is actually easy. Statistically, you’re going to do it about half the time. Keeping it, now that’s the hard part.

4) I have to have a high winning percentage to be profitable.

Not true. How often you are right on a trade is only half of the equation. The other half is how much do you make when you’re right and how much you lose when you’re wrong. You can remember that with this formula:

Probability (odds of it going up or down) x Magnitude (how much it goes up or down) = Profitability

5) To be successful, I have to trade without emotions.

That is both wrong and impossible. You are human so you have emotions. Emotions can be a powerful motivator to your trading.

When you feel angry or scared in trading, take that emotion and translate it into something more productive. For example, if you’re feeling angry because you just got run over by the market, view that anger as a reason to be more focused and disciplined in your entry and exit levels on the next trade.

Do Stocks Fall Faster than They Rise?

  
  Education
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Think about it1) Markets fall faster than they rise — and options traders know this. Otherwise, arbitraging this difference would be a meal for a lifetime.

2) Market participants perhaps anticipate that the realized volatility during a bear market is greater than a bull market. However, the problem with this analysis is one might expect to see an upward sloping volatility yield curve in out-of-the-money puts (during bull markets), and yet that does not usually occur based on my tests. Conversely, right now have a downward sloping yield curve in out of the money calls — which confirms the hypothesis that market participants anticipate slower price rises in the future. [Note to quants: I am not confusing delta, gamma and vega. I’m using options to predict terminal price at expiration.]

3) For most humans, fear of loss is a stronger emotion/motivator than the pleasure of gain (greed). This is well documented in the psychology and behavioral finance literature. Hence, ceterus paribus, capital market participants (who have a net long position) will, as a group, pull their rip cord faster — to flee from risk — than they will embrace the possibility of profit.

5-False Beliefs About Trading the Markets

  
  Education
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1) What goes up must come down and vice versa.

That’s Newton’s law, not the law of trading. And even if the market does eventully self-correct, you have no idea when it will happen. In short, there’s no point blowing up your account fighthing the tape.

2) You have to be smart to make money.

No, what you have to be is disciplined. If you want to be smart, write a book or teach at a university. If you want to make money, listen to what the market is telling you and trade to make money — not to be “right.”

3) Making money is hard.

Nope. Sorry. Making money is actually easy. Statistically, you’re going to do it about half the time. Keeping it, now that’s the hard part.

4) I have to have a high winning percentage to be profitable.

Not true. How often you are right on a trade is only half of the equation. The other half is how much do you make when you’re right and how much you lose when you’re wrong. You can remember that with this formula:

Probability (odds of it going up or down) x Magnitude (how much it goes up or down) = Profitability

5) To be successful, I have to trade without emotions.

That is both wrong and impossible. You are human so you have emotions. Emotions can be a powerful motivator to your trading.

When you feel angry or scared in trading, take that emotion and translate it into something more productive. For example, if you’re feeling angry because you just got run over by the market, view that anger as a reason to be more focused and disciplined in your entry and exit levels on the next trade.

Trading Psychology: Watch out for that dopamine

  
  Education
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The market is not your enemy. You are. Well not you, but some of your innate biochemistry is. Not to make this article a major lesson on biology but I want to point out one of the major buggers that messes with your head: Dopamine. It’s a neurotransmitter chemical that drives so much of our motivations and behavior. Call it nature’s motivator drug. Vegas casinos know all about it. In fact, the gambling industry’s entire business model is designed around how to maximize how much fun dopamine is having in people’s brains to extract value from the gullible millions. Scientists have studied the effects of dopamine in detail and came up with some surprising results:

We all know when something nice happens to us we experience feelings of bliss and joy. Gamblers get excited when the lights go off at a slot machine and coins fall into the slot below. Traders experience giddiness when they have a nice winning trade. So far so good, but here comes the wicked revelation: Studies show that the ‘near-miss’ effect triggers dopamine levels not only as equal but they even grow stronger over time versus a winning experience. (more…)

False Beliefs About Trading the Markets

  
  Education
#  #  #  #  #  #  #  #  #  #  #  #  #

1) What goes up must come down and vice versa.

That’s Newton’s law, not the law of trading. And even if the market does eventully self-correct, you have no idea when it will happen. In short, there’s no point blowing up your account fighthing the tape.

2) You have to be smart to make money.

No, what you have to be is disciplined. If you want to be smart, write a book or teach at a university. If you want to make money, listen to what the market is telling you and trade to make money — not to be “right.”

3) Making money is hard.

Nope. Sorry. Making money is actually easy. Statistically, you’re going to do it about half the time. Keeping it, now that’s the hard part. (more…)

New Formula For Day Traders

  
  Education
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Most people enter trading with the idea that they are going to make a lot of money. In other words, they have high expectations.  There is nothing inherently wrong with that idea. In fact, we need motivation, and making a lot of money can be a great a motivator. Unfortunately, many traders also have low self-confidence. And are not profitable or not trading at the level they desire or are capable of.

This is a fairly common condition that can be expressed in the simple equation:  High Expectations + Low Self-Confidence = Poor or Inconsistent Performance.

The new formula becomes: Focus on Process Goals + High Self-Confidence = Better and More Consistent Performance. (more…)

False Beliefs About Trading the Markets

  
  Education
#  #  #  #  #  #  #  #  #  #  #  #  #  #

1) What goes up must come down and vice versa.

That’s Newton’s law, not the law of trading. And even if the market does eventully self-correct, you have no idea when it will happen. In short, there’s no point blowing up your account fighthing the tape.

2) You have to be smart to make money.

No, what you have to be is disciplined. If you want to be smart, write a book or teach at a university. If you want to make money, listen to what the market is telling you and trade to make money — not to be “right.”

3) Making money is hard.

Nope. Sorry. Making money is actually easy. Statistically, you’re going to do it about half the time. Keeping it, now that’s the hard part.

4) I have to have a high winning percentage to be profitable.

Not true. How often you are right on a trade is only half of the equation. The other half is how much do you make when you’re right and how much you lose when you’re wrong. You can remember that with this formula:

Probability (odds of it going up or down) x Magnitude (how much it goes up or down) = Profitability

5) To be successful, I have to trade without emotions.

That is both wrong and impossible. You are human so you have emotions. Emotions can be a powerful motivator to your trading.

When you feel angry or scared in trading, take that emotion and translate it into something more productive. For example, if you’re feeling angry because you just got run over by the market, view that anger as a reason to be more focused and disciplined in your entry and exit levels on the next trade.

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