Fear, Greed & Trading Profits

Over the years we’ve noticed a remarkably consistent pattern. A very high percentage of our trainees can trade brilliantly in the simulation program; steady consistent profits, sharp entries and exits, excellent grasp of market conditions and a clear, rational plan for exploiting them

And then they start trading real money.

It’s like somebody turned out the lights. Almost immediately things turn sour; they jump in too soon, get scared out of good positions, hang on to losers and cut their winners short … the exact opposite of what they should be doing, and the exact opposite of what they were doing in the simulation program.


The only difference between real and imaginary – and between good and horrid – is the emotional impact on new traders of having real money at risk. They succumb to the two emotions that drive the market: greed and fear.

Nothing cranks up our emotional responses faster than money. And trading is about nothing else. But successful trading requires a kind of cold, calculating rationality, and any emotion – giddy joy as well as bitter despair – is fatal.

So we see trainees doing things they know are dumb: 

  • They jump on the long side of an uptrend because “they don’t want to miss the trade,” even as the trend is ending.
  • They cling tenaciously to losing  positions hoping the price will come back – an attempt to avoid admitting you made a dumb trade that usually turns a small loss into a big one.  
  • They pull their stops so they won’t get hit. Really! 
  • They become so traumatized by losing that they take excessive risks hoping to get back even.
  • Finally, they quit in despair, close their trading account, burn the computer, and retreat into a dark place to lick their wounds.

None of this is necessary. All of it can be avoided. Here are some things that help. (more…)

Sharpen Your Trading With Occam's Razor

 Would you believe that a 14th century priest, and his concepts, can help make you a better trader?  Well, English logician and Franciscan friar William of Ockham really can make you a better trader.

Ockham developed the concept commonly referred to as Occam’s Razor.  Simply put, this principle favors the simple over the complex, when there is a choice to be made, or a path to be followed.

How can this apply to trading? A few different ways.

First, if you are a system trader, perhaps your approach has too many rules, too many parameters, or too much optimizing.  While every parameter you add might make your system better historically, the more parameters you have, the less prone the system is to work going forward.  Simpler concepts and simple rules tend to be based on fundamental market principles – ones that aren’t as likely to change.

Second, if you are a discretionary trader, you might trade off of news reports from Blue Channels  and multiple other sources.  Multiple news sources might give you more data, but does it really give you more knowledge?  You might find that with multiple, conflicting pieces of information, you actually can’t trade at all – rather, you are a victim of “analysis paralysis.”

Third, maybe your trading office looks like the control room for the Space Shuttle. If you try to trade off all of the information shown on all the screens, you might just find yourself overwhelmed.  It is better to stick to a few monitors of information, and know that information very well.  The best traders don’t need a dozen monitors to trade well – usually 1 or 2 monitors is plenty.

Many new traders tend to think that that more complicated they make trading, the easier it will be to “solve” the markets.  Instead, they should be listening to William of Ockham, and making things simpler.  Simple, done correctly, can lead to more profits, and stand the test of time better than complicated approaches.

10 Mistakes

  • Never, NEVER cancel a stop loss. I know, I know, every time you have a stop loss in the market, the market moves just enough to stop you out, right? Well it might mean that you should evaluate where you place your stops (this is where good trading journals come in handy), but once you’ve done your analysis and placed the trade, you need to be committed to the trade and your plan. The only adjusting you should do is to lock in your profits.
  • Always have your broker or your trading desk number handy, even if you trade electronically. This is really important for the day trader who is trading leveraged markets. It is easy to get a little too comfortable when your trading platform and internet connection are running smoothly, but once you drop your guard that inevitable lost connection will happen…a lost minute, even seconds could be an expensive lesson!
  • Always check your open orders. This can be done a few different ways depending on your trading platform, but if your intention is to be flat in the market, always double check!  (more…)

10 Different Types Of Traders. Which One Are You?

Here are a list of ten types of traders I have observed on social media. We have all likely been more than one of these types at some time or another while trading. But we need to focus like a laser on the only real reason we should be trading: to make money and once we have made it, to keep it.

  1. Greedy Traders: They trade too big and risk too much because their only goal is the easy money. They usually end up blowing up their account.
  2. New Traders: They have no idea how the markets work so their only goal should be knowledge. New Traders do well to stay students until they have done their homework. Rushing in to make money without risk management, a winning method, the right mind set, and a trading plan will result eventually in failure 100% of the time.
  3. Arrogant Traders: Their only goal is to prove they are right and satisfy their fragile egos. Arrogant traders will lie, delete tweets and posts, never admit when they are wrong. When they are wrong they will hide it under a cloak, when they are right they will scream it from the roof tops.
  4. Trend Traders: Their only goal is to ride a trend and make money. Trend traders will buy high and sell much higher, they will short and cover much lower. They look like genius’ and prophets in a trending market either way it trends but they look like they can’t even trade in choppy or whipsawing markets. In the long term they do very well.
  5. Scared Traders: Their only goal is to not lose their capital. Scared traders will immediately close losing trades and also immediately take profits. They are very stressed out in trading due to not understanding the nature of trading itself or just can not handle the uncertainty or risk. They either need to do their homework to develop their faith in or if they have done the homework trading may just no be for them. (more…)

10 Mental Errors

The weakest link to any trading strategy is the trader that is suppose to be executing it. It is usually the mental and emotional errors of the trader that cause the 90% of unprofitable traders to lose money. Trading success is determined more by the mindset of the trader than their skills with math, economics, or macro knowledge.

  1. The ego takes over the trader and being right becomes the #1 priority. This causes the trader not to take losses becasue they don’t want to be proven wrong.
  2. Greed causes traders to trade too big because they want to make a huge amount of money in one trade.
  3. Fear causes a trader to exit to early with a very small profit because they are afraid it will disappear.
  4. Discouragement causes a trader to quit before they have given themselves or their systems enough time to win.
  5. Coat tailing is when a trader follows a guru’s trades instead of learning to trade correctly themselves.
  6. Style drift is when a trader changes their method instead of sticking to it and letting it play out when the right market environment emerges.
  7. Arrogance leads a trader to trade too big and take on too much risk, this usually happens after a big winning streak or outsized win. (more…)

4 Trading Fears

As Mark Douglas points out in his great book about trading psychology is that the majority of traders lose because of wrong thinking, misplaced emotions, and wanting to be right. We know fear and greed drive the market prices far more than fundamentals do. However fear makes traders do the wrong things at the wrong time. Here are four great examples of fear over ruling sound trading strategies.

Here are more thoughts about these four fears:

The fear of being wrong: Traders fear being wrong so much they will hold a small loss until it becomes a huge loss. Even adding to the loss in the hopes of it coming back and getting to even. Don’t do this, holding on to a loser after it hits your predetermined stop loss is like being a reverse trend trader. Do not be afraid of being wrong small be afraid of being wrong BIG.

The fear of losing money: New traders hate to lose money, they do not quite understand yet that they will lose 40%-60% of the time in the long term. We should come to expect the small losses and wait for the big wins patiently. Many times traders fear this so much that they have a hard time taking an entry out of fear of losing. If you can’t handle the losses as part of the business, you can’t trade.

The fear of missing out: The opposite of the fear of losing money is the fear of losing potential profits. This causes traders to watch a stock go up and up, miss the primary trend, then not being able to take it any more and get in late just in time for the trend to reverse and lose money. Trade at your systems proper entry point do not chase a stock because you are afraid to miss out on some profits.

The fear of leaving money on the table: When your trailing stop is hit get out of the trade. If your rules tell you to get out after a parabolic run up and stall then exit. You must be disciplined on taking money off the table while it is there. Being greedy for that last few dollars when your system says to sell could lead to major losses of paper profits. Let your winners run but when the runner gets to tired to continue: bank your profits.

Learn To Lose

Unfortunately, it is the sad reality that the majority of people reading this are not profitable traders. If I could single out the most common culprit for sabotaging your trading it would have to be not being able to take a loss. This is especially prevalent amongst new traders, but I’ve seen this single trading mistake cripple even more experienced traders. In fact, I’ve run across countless traders that are generally successful if not for a few outsized losses. The problem is that these outsized losses are what cripple your account and push you into the negative column. You will never be a successful trader, EVER, until you learn how to take a loss.

3 most critical aspects of trading

  1. Discipline
  2. Timing
  3. Stock selection

Discipline alway is on top. Be accountable to yourself. Treat your money as if it was entrusted to you by whomever you most love, respect, fear… whatever works.

Have a reason to make every trade. Be able to verbalize that reason. As importantly, have a reason to exit a trade. You hear “cut your loses and let your winners run”….That is so true. I so often have seen traders get our of good positions because they have achieved their “target price” “target of profit”….I say this is bad thinking. If the trade REMAINS a trade you would put ON at the time you “achieve target”, why in the world would you take it off? To me, it is as important to have a reason to get out of a trade as to get in. Anyone can say to themselves they have a reason to exit a losing trade…”cut your losses”..Why then is it so hard for so many to have a real reason to get our of a winner?

It should be, and is, easy. It just takes DISCIPLINE. If you give back X% of your profit; if the market changes, if the group starts to get weak, whatever. You have to have your disciplines and stick to them. Make your own rules, and stay consistant to them.

I hope that all this typing can result in just one positive thought to just one person here. I have gone to so many “brainstorming” meetings in my career. I have listened to a million opinions, statements and arguments. I go though because I KNOW that if I pick up one single constructive thought I will have spent my time wisely. and believe me, they are few and far between. But I can remember single sentences said years ago in long boring meetings. Those senteces have added up to serve me well.

Timing should be easier for new traders to learn. Just be patient and buy or short at the price you pre-determine. Don’t chase.

Stock selection…this is a bit tougher. I could write a hundred pages on this issue. But not being so inclined, have standards. Volume, percent of average volume, relative strength, news, whatever you are comfortable with. Know what your quote provider can tell you other than quotes alone. Look for trades, but don’t be impulsive. Sometimes not making a trade is a great trade.


Most new traders overtrade.

Overtrading is when you (hoping to receive the maximum possible profit) opens a huge position consisting of multiple lots.

Considering the typical market activity, it’s easy to lose half or even all your trading capital.

This problem is sometimes directly connected to insufficient trading capital.

But it’s more likely due to the trader lacking knowledge of money management principles, which means lack of competence to control their trading capital properly.

Your trading capital is used to earn money. You should treat each rupee is like a newborn baby.

Your first and foremost responsibility is to protect it. If you lose it, you have less to help you earn money.

Why do 90% get washed out?

They say that 90% or more of new traders get washed out of the market in six months – why would that be? I just had an insight into my own current state and the implications of it long term if it were left as an unconscious process…

The fact is that learning to trade is hard; very hard – but on top of that, it is a zero feedback learning curve. You don’t get marked or a pat on the back for your efforts; the only feedback you get is:

You lose…
You lose…
You lose…

You think you are building up knowledge and skill in your conscious mind, but unbeknownst to you, in the dark invisible depths of your subconscious, you are slowly training yourself to HATE TRADING…

It is like constantly sticking your hand in the fire and going “Ouch! Ouch! Ouch!”

Your interest and passion for it is being quietly eroded. There eventually comes a day where you would rather do something else than trade that day; your instincts are telling you to avoid the pain.

It eventually becomes a DRAG

Attracted by more pleasurable pursuits you realize one day that you haven’t traded for a week or two, but the very thought of it gives you a pain in the solar plexus… You brush the whole thing aside as an old hobby that was a large expensive waste of time.

You’ve been washed out. You are a statistic, but by now you couldn’t care less!

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