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G. C. Selden Trading Psychology – Hunches And Gut Feelings

  
  Education
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Recently most traders probably have spent a great deal of time managing risk and emotions. I know I have. When it comes to correctly gauging and dealing with emotions it is paramount to analyze your reactions in a detached way. The best way to get objective insight is to imagine taking a step back and then ‘watching yourself.’ It’s as if you were your own mentor or trading coach. This is not an easy task. Good results require emotional detachment, a lot of experience and the ability to honestly assess the degree of trading proficiency you have attained. Ultimately it will tell you what those gut feelings you are occasionally experiencing really are worth. That’s exactly what G.C. Selden addresses at the end of his classic trading book : ‘Psychology of the Stock Market’ which was first published in 1912. Here’s an excerpt dealing with ‘hunches and gut feelings.’ Lots of additional and valuable insight for traders is provided. Enjoy! 

An exaggerated example of “getting a notion” is seen in the so-called “hunch.” This term appears to mean, when it means anything, a sort of sudden welling up of instinct so strong as to induce the trader to follow it regardless of reason. In many cases, the “hunch” is nothing more than a strong impulse.

Almost any business man will say at times, “I have a feeling that we ought not to do this,” or “Somehow I don’t like that proposition,” without being able to explain clearly the grounds for his opposition. Likewise the “hunch” of a man who has watched the stock market for half a lifetime may not be without value. In such a case it doubtless represents an accumulation of small indications, each so trifling or so evasive that the trader cannot clearly marshal and review them even in his own mind. (more…)

What makes an expert?

  
  Education
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What makes an expert? And how can traders develop their own expertise? Three elements:

1) “Measures of general basic capacities do not predict success in a domain”
Experts cannot be distinguished by superior intellects or other cognitive talents.

2) “The superior performance of experts is often very domain specific and transfer outside their narrow area of expertise is surprisingly limited”

Being an expert in one domain does not predict expertise in others; a person can be a highly accomplished trader, but not expert in other areas. Think “niche” — the successful trader has found a particular sphere of success that expresses his skills and interests.

3) “Systematic differences between experts and less proficient individuals nearly always reflect attributes acquired by the experts during their lengthy training”

The expert is one who has undergone a structured, deliberate process of training that builds competencies, offers extensive feedback, and draws upon intensive effort over time to internalize knowledge and skills. (more…)

10 rules for Rookie Day Traders

  
  Education
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1. The three E’s: enter, exit, escape

Rule No. 1 is having an enter price, an exit price, and an escape price in case of a worst-case scenario. This is rule number one for a reason. Before you press the “Enter” key, you must know when to get in, when to get out, and what to do if the trade doesn’t work out as expected.

Escaping a trade, also known as using a stop price, is essential if you want to minimize losses. Knowing when to get in or out will help you to lock in profits, as well as save you from potential disasters. 

2. Avoid trading during the first 15 minutes of the market open

Those first 15 minutes of market action are often panic trades or market orders placed the night before. Novice day traders should avoid this time period while also looking for reversals. If you’re looking to make quick profits, it’s best to wait a while until you’re able to spot rewarding opportunities. Even many pros avoid the market open.

3. Use limit orders, not market orders

A market order simply tells your broker to buy or sell at the best available price. Unfortunately, best doesn’t necessarily mean profitable. The drawback to market orders was revealed during the May 2010 “flash crash.” When market orders were triggered on that day, many sell orders were filled at 10-, 15-, or 20 points lower than anticipated. A limit order, however, lets you control the maximum price you’ll pay or the minimum price you’ll sell. You set the parameters, which is why limit orders are recommended. (more…)

48 Trading Laws

  
  Education
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1. Never outshine the master. (You can trade better than your mentor, just don’t expect him to like it. You’ll also learn more from people who you help, than from those who you work against.)

2. Never put too much trust in friends. Learn how to use enemies. (The only one you can trust as a trader is yourself and your own decisions. When the herd is against your positions, find something that is misunderstood, overlooked, or not fully recognized in the current stock price.)

3. Conceal your intentions. (Limit orders are good for the novice and undisciplined, but the market makers will never let you pick off the bottoms and tops using these.)

4. Always say less than necessary. (Talk is cheap and being concise is a good thing. It’s ok to keep some things you learn and strategies you create all to yourself.)

5. So much depends on reputation – guard it with your life. (Wall Street watches where the smart money is going at all times and herd-like patterns typically follow. Find those with the best reputation and figure out what they’re doing now. It will help unlock some secrets to their success.)

6. Court attention at all cost. (The key is to be ahead of the tape before Wall Street takes notice. Find stocks that few are looking at which offer tremendous growth prospects. They’ll be tomorrow’s winners, not the stocks you hear so much about right now.)

7. Get others to do the work for you, but always take the credit.(It’s ok to use others’ research and opinions, but realize that none of these can serve as a substitution for common sense and developing your own edge in the market. What is already known and published by others has already been acted upon no matter what you may think or have been told. Assume you’re always the last to know.)

8. Make other people come to you – use bait if necessary.(Success breeds popularity. If others think that they can learn or profit from you, you’ll never be lonely. However, with respect also comes responsibility to act in the best interests of others, many times before your own.)

9. Win through your actions, never through argument. (Don’t waste time convincing others on message boards how good or bad a stock is and/or telling people how smart you were because of good calls you’ve made in the past. Instead, trade the stock and make your profit. Talk will never pay your bills. Show others by demonstration, not by time wasting chatter.)

10. Infection: avoid the unhappy and unlucky. (This is right on the money. I couldn’t have said this better myself. Who you surround yourself with will ultimately determine your destiny. Marry for love, choose your friends carefully, and spend time with people who’ve been more successful and who are much smarter than you. Good and bad emotional states are as infectious as a disease.)

11. Learn to keep people dependent on you. (If you tell everyone everything you know, they’ll end up knowing more than you know. Having others dependent on you will also serve as great motivation, especially when times are tough and you need a reason to work harder than ever before.)

12. Win through your actions, never through argument. (At the end of the day, all that matters is that you make good trades or investment decisions. There’s lots of hype in this business and you should run, not walk, from anyone who spends more time talking than learning.)

13. Use selective honesty and generosity to disarm your victim.(Sorry, I’m not in agreement with this. In my view, you have to be honest with yourself and others at all times. In addition, generosity is always a good thing, especially when it is done without the desire of getting something in return. Having good Karma through generous acts also go a long way in keeping the trading gods on your side!)

14. When asking for help, appeal to people’s self-interest, never to their mercy or gratitude. (Sad, but true. If you can help others, they’ll be far more likely to help you. I know I always make a tremendous effort to help those who’ve helped me in the past.)

15. Pose as a friend, work as a spy. (You can find out more about people and companies you invest in by having friends who have specialized knowledge about certain industries. Their unique insight can be a powerful edge if you can get it. Sometimes a simple phone call or email to someone who works in the business will tell you much more than any chart or balance sheet.)

16. Crush your enemy totally. (When you’re right in a trade or investment and things are going well, don’t back off UNTIL you have good reason to sell.)

17. Use absence to increase respect and honor. (Knowing when not to trade is a skill few possess. Take vacations and breaks away from the market. It will only empower you to return refreshed, relaxed, and well-motivated. Remember, we trade to live, not live to trade. Achieving balance in your work and personal life will lay the foundation for long-term success.)

18. Keep others in suspended terror: cultivate an air of unpredictability. (It’s good to mix it up from time to time to relieve trading/investing boredom. If you think you’re in a rut, make some changes and go find something you can get excited about again.)

19. Do not build fortresses to protect yourself – isolation is dangerous. (Take time to bounce ideas off of people who are smarter than you. At all times, seek out opinions that are against you instead of with you – you’ll learn a great deal more. And, remember, no one is right all of the time. But some people are more right than others.)

20. Know who you’re dealing with – do not offend the wrong person. (As a small investor, it is best to avoid picking fights with market elephants (i.e. institutions, hedge funds) who think they know your stock better than you do. They have the power to move the market and your stock for longer than you have time or money to fight it.) (more…)

Trading Expert

  
  Education
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What makes an expert? And how can traders develop their own expertise? Three elements:

1) “Measures of general basic capacities do not predict success in a domain”
Experts cannot be distinguished by superior intellects or other cognitive talents.

2) “The superior performance of experts is often very domain specific and transfer outside their narrow area of expertise is surprisingly limited”

Being an expert in one domain does not predict expertise in others; a person can be a highly accomplished trader, but not expert in other areas. Think “niche” — the successful trader has found a particular sphere of success that expresses his skills and interests.

3) “Systematic differences between experts and less proficient individuals nearly always reflect attributes acquired by the experts during their lengthy training”

The expert is one who has undergone a structured, deliberate process of training that builds competencies, offers extensive feedback, and draws upon intensive effort over time to internalize knowledge and skills.

So what might this mean? Here are the good  conclusions:

1) The majority of traders are looking for expertise in all (more…)

Black Belt Trading

  
  Education
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Black BeltJust like you shouldn’t practice your basic martial-arts forms in the ring where your mind is more focused on pain avoidance then executing the tactic correctly, a novice shouldn’t begin trading with real money and real consequences. Only once you’ve amassed significant practice in a safe environment where you can conduct your technical and fundamental analysis without being emotionally distracted should you begin to trade with real money. And when you finally start, don’t jump straight into the ring with Bruce Lee. Begin tentatively, gradually, slowly increasing your trading exposure over time as you become accustomed to the increasing levels of risk. How do you know you’ve moved too far, too fast? If you are finding it’s becoming harder to sleep at night, either because you are worrying about your trades or you are excited about your gains, then you have moved into the realm where your emotions are going to have too strong an effect. You are going to start making poor, emotionally-clouded decisions and so it is time to scale back.

Dalton, Jones, & Dalton, Mind Over Markets

  
  Education
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Mind Over Markets, the book that popularized (and expanded on) Peter Steidlmayer’s Market Profile, was first published in 1990. Anyone who bought the book expecting a self-help manual would have been sorely disappointed because what they got instead was a pretty complicated alphabetic model for organizing the distribution of market data along price and time axes. Twenty-three years later James F. Dalton, Eric T. Jones, and Robert B. Dalton are back with an updated edition of their text, Mind Over Markets: Power Trading with Market Generated Information (Wiley, 2013).

The book itself is organized according to the Market Profile trader’s achievement level—novice, advanced beginner, competent, proficient, and expert—with the greatest time spent on the competent level. The expert trader gets a mere two pages. (more…)

Book Review -The Risk of Trading by Michael Toma

  
  Education
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 Michael Toma’s The Risk of Trading: Mastering the Most Important Element in Financial Speculation (Wiley, 2012)

If I had to choose the two key sentences in this book they would be: “Risk management is not limiting losses. It is the art of maximizing profits for a given optimal risk.” (p. 173) That is, contrary to commonly-held views, risk management goes far beyond placing stops or calculating position size. It also goes beyond the purely mathematical, even though it would still behoove traders to be familiar with the seminal works of Ralph Vince (The Mathematics of Money Management, 1992) and the many books and papers that followed in a similar vein.

Toma, a corporate risk manager and the author of Trading with Confluence, offers a simple, math-free analysis. (Well, here and there a spreadsheet comes in handy.) He is at his best when discussing how to track performance.

One recommendation that I consider especially sound is that the trader track opportunity risk. “Auditing ‘opportunity risk’ is equally as important as measuring your actual trades. … In all the risks associated with trading, I find opportunity risk, whether in the form of unexecuted trades or pretarget exits, to be the difference between traders who reach that much-talked-about top 10 percent in the profession and those who remain in the novice pool, struggling to keep their heads (and P&L) above water.” (p. 126) If you were presented with a valid trade setup in your plan and you sat on your hands, track that trade. Are you actually skilled at overriding your system or should you, as Toma argues, take advantage of every opportunity that your plan presents?

Toma recommends that every trader construct his own key performance indicator (KPI) dashboard. Keep it simple, sticking to five to eight measurable items initially. And keep it balanced in scope. “The indicators should represent a balanced monitoring synopsis of performance, compliance, and business metrics. A common gap in KPI programs is that it is completely dominant in trade result metrics. A measure that detects rule breaking is far more indicative of trading success than a KPI that measures current win percentage over a small time period.” (p. 133)

(more…)

Successful trader needs five essentials

  
  Education
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goodtrader1. A Method

You must have a method that is objectively definable. This method should be thought out to the extent that if someone asks how you make decisions to trade, you can quickly and easily explain. Possibly even more important, if the same question is asked again in six months, your answer will be the same. This is not to say that the method cannot be altered or improved; it must, however, be developed as a totality before implementing it.

2. The Discipline to Follow Your Method

‘Discipline to follow the method’ is so widely understood by true professionals that among them it almost sounds like a cliché. Nevertheless, it is such an important cliché that it cannot be ignored. Without discipline, you really have no method in the first place. And this is precisely why many consistently successful traders have military experience – the epitome of discipline.

3. Experience

It takes experience to succeed. Now, some people advocate “paper trading” as a learning tool. Paper trading is useful for testing methodologies, but it has no real value in learning about trading. In fact, it can be detrimental, because it imbues the novice with a false sense of security. “Knowing” that he has successfully paper-traded during the past six months, he believes that the next six months trading with real money will be no different. In fact, nothing could be farther from the truth. Why? Because the markets are not merely an intellectual exercise, they are an emotional one as well. Think about it, just because you are mechanically inclined and like to drive fast doesn’t mean you have the necessary skills to win the Daytona 500. (more…)

Focus on You

  
  Education
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It is never the system or author writing the trading book that fails.
It is YOU! It is your lack of focus.
Focus on yourself and then you can focus on trading successfully.

Trading is at least 98% psychological. It’s a mental state of mind based upon your beliefs of what may happen. Books, systems and technical indicators can only take you so far! You must accept and understand that the market is all in your head. It is you versus the other trader. If you don’t understand YOU, how will you ever understand other traders; thus taking advantage of market moves based on their mental state of mind and their underlying beliefs.

Many investors, both novice and experienced, drift from book to book to book and system to system to system, never understanding why they produce inconsistent profits. They are confused, looking at too many things, complicating the entire process while ignoring the essentials to success.

Keep it simple.

Why complicate things when simplicity works; especially when it comes to trading? We know that trading may be the most difficult endeavor that any human may attempt to undertake.

Thousands of different systems work in the stock market so we can conclude that it is the user that ultimately fails because of lack of concentration and motivation to stay the course. Wall Street is not for drifters and most people can’t play the game profitably because they never sharpen their own mental skills while applying basic money management techniques. They focus on the wrong set of skills.

We all see people come and go every day: rags to riches to rags. They are motivated for weeks, months and sometimes years but most fizzle away after they fail and can’t figure out what they are doing wrong. Some investors copy a system from a so-called guru and may find success for a while but they don’t tailor it to their personality, integrate it with their investing style and focus on their mental state of mind, therefore, it will become obsolete and they will fail. Working hard to become successful in the market is fine but understand that working smarter will always take you further.

Our goal as traders and investors is to understand the crowd and anticipate how they will act and react based on the thoughts we had, prior to focusuing on the proper skills, when we were just one of the sheep (waiting to be slaughtered)!

Focus on what is important and the success will follow.

Stop focusing on iffy stochastics, Bollinger bands, MACD, ADX, earnings releases and bogus news stories. Yes they can aid you to success but the main focus is on you!

Personally speaking, I require specific fundamentals, price, volume and basic daily and weekly charts to succeed but they are secondary tools. They can help me make money as long as I am focusing on the overall picture which is my mental focus and my emotional balance.

I know I am getting all “Dr. Perruna” on you but it is true.

Once your conscious mind understands how the beliefs of the crowd work, your subconscious mind takes over and intuition kicks in and you start making some of the best decisions of your life by flawlessly following your system.

As Jesse Livermore said:

“Wall Street never changes, the pockets change, the stocks change, but Wall Street never changes, because human nature never changes”

Why? Because humans never change!

Once you understand this and learn to trade other humans, you will become successful. Yes, you will need some of the tools mentioned above but don’t focus your attention in this area. Focus when investing by mastering the beliefs of the crowd and you will always be one step ahead.

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