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How To Make Your Own Luck in Trading

  
  Education
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The only place luck has in trading is that you will hopefully be on the right side of unexpected moves due to surprises. In trading you should trade in such a way that good luck will benefit you and bad luck will not destroy you. In my trading luck has little to do with my profits. I trade when the probabilities are on my side based on what the chart is saying about the current action of buyers and sellers in a stock. New traders hoping for luck belong in Las Vegas not the stock market. Trade the trends, play the odds, manage the risk, have faith in yourself that you have the discipline to trade your winning plan.

  1. I do not trade on luck I trade with probabilities being on my side.
  2. I manage my risk carefully so bad luck on one trade does not blow up my trading account.
  3. I trade in the direction of the markets current trend to enable me to stay on the right side of strong moves.
  4. I trade in the direction of the markets current trend so the odds are on my side of being right.
  5. I buy the strongest stocks  and sell short the weakest stocks.
  6. When I am wrong I do not hope for luck I just get out of a losing trade.
  7. When I buy options I buy the in the money options with the odds in my favor not the far out of the money ones that require some luck.
  8. I primarily buy options instead of selling them so I can get big moves for small fees instead of small fees for big risks.
  9. I only risk 1% of my capital per trade so I do not blow up my account with a string of bad trades.
  10. I trade with confidence in my myself and my method not hoping for luck.

Costly Mistakes!

  
  Education
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Oops!!A system’s purpose is to ensure that we do not miss a breakout when a real trend comes, because missing a really strong trend is lethal – so lethal that we are willing to pay the price of many small losses, just in case the real one emerges.

Each entry doesn’t guarantee a profit, in fact, each entry likely becomes losses. However, the odds is that if you follow it consistently, in the long run, you come out ahead.

Don't be tempted

  
  Education
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One of the easiest things to do is to over think. There are so many possible outcomes and our little minds love to run through all of those that it encounters or can dream up and try to assign likelihoods to each of them. I agree the human mind is an amazing thing but seriously, what’s the odds that you are going to 1) identify all the variables and 2) assign proper weighting to their probable outcomes and 3) realize the implications of the interactions between them all. It just isn’t going to happen so don’t be tempted.

Sure, you can think you have it figured out and if it goes your way you’ll pat yourself on the back and reinforce the thought that you have got the answer when all you have is a tiger by the tail. It will turn on you before you know it.

All you can do is map out what you believe will happen based on qualified trends and trend trading set-ups, put your stops in and let it rip. Of course you monitor and adjust as needed but you can only control risk and once you realize that the tiger’s tail seems a lot less frightful.

Trading Wisdom by Larry Hite & Marty Schwartz

  
  Education
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Larry Hite

While the speculator doesn’t have the product knowledge or speed, he does have the advantage of not having to play. The speculator can choose to only bet when the odds are in his favor. That is an important positional advantage.

In the above quote, Larry is referring to the fact that smaller retail traders have the advantage of being able to sit out an wait patiently for the best opportunities. Bigger institutional traders have to trade more and whilst they might have a speed advantage, the retail trader has to use his advantage of being able to trade like a sniper to its fullest.

Frankly, I don’t see markets; I see risks, rewards, and money.

The above quote stresses the importance of seeing each trade as a risk reward ratio, rather than just a potential profit opportunity. Pro traders calculate their risk first and then their reward, if the risk reward ratio of a trade doesn’t make sense then they don’t trade.

Marty Schwartz

 I always laugh at people who say, “I’ve never met a rich technician.” I love that! It’s such an arrogant, nonsensical response. I used fundamentals for nine years and got rich as a technician. (more…)

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.

Jesse Livermore’s trading rules

  
  Education
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Lesson Number One: Cut your losses quickly.

As soon as a trade is contemplated, a trader must know at what point in time he’ll be proven wrong and exit a position. If a trader doesn’t know his exit before he takes the entry, he might as well go to the racetrack or casino where at least the odds can be quantified.

Lesson Number Two: Confirm your judgment before going all in.

Livermore was famous for throwing out a small position and waiting for his thesis to be confirmed. Once the stock was traveling in the direction he desired, Livermore would pile on rapidly to maximize the returns.

There are several ways to buy more in a winning position — pyramiding up, buying in thirds at predetermined prices, being 100% in no more than 5% above the initial entry — but the take home is to buy in the direction of your winning trade –  never when it goes against you.

Lesson Number Three: Watch leading stocks for the best action.

Livermore knew that trending issues were where the big money would be made, and to fight this reality was a loser’s game.

Lesson Number Four: Let profits ride until price action dictates otherwise.

“It never was my thinking that made the big money for me. It always was my sitting.”

One method that satisfies the desire for profit and subdues the fear of a losing trade is to take one half of your profit off at a predetermined level, put a stop at breakeven on the rest, and let it play out without micromanaging the position. (more…)

Solution focused approach

  
  Education
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focusedWhat did we do differently on those successful occasions?

* I have planned the trade well in advance with research; it is not a spontaneous trade, so I’ve had time to think clearly about what I want to do.
* I have a clear profit target in mind based on research and refuse to waver from that target unless the market takes me out with a predefined stop. I consider myself a person of integrity, so I tell myself that I have to show integrity and loyalty to my trade idea and target;
* I don’t follow the position tick for tick. Either the trade will hit my target or it will hit my stop. I make a conscious effort to let go and not micromanage the trade;
* I keep myself calm and clearly focused by purposely getting up from my chair, doing some stretches, breathing deeply, and getting away from the screen. I keep myself in a state that is incompatible with anxiety;
* I rehearse constructive self-talk during the trade. I tell myself that I’ve done my preparation and established my edge. Any individual trade can go against me, but if I take all the good trades I can, eventually I’ll benefit from good odds and a good risk-reward ratio. If I lose money on the trade, I’ll figure out why and what that might be telling me about the current market. (more…)

Decisiveness

  
  Education
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“It’s better to be boldly decisive and risk being wrong than to agonize at length and be right too late” – Anonymous

“Procrastination in the name of reducing risk actually increases risk” – Colin Powell

“Take time to deliberate, but when the time for action has arrived, stop thinking and go in” – Napoleon Bonaparte

“In any moment of decision, the best thing you can do is the right thing, the next best thing you can do is the wrong thing, and the worst thing you can do is nothing” – Theodore Roosevelt

If you have the patience to wait for your setup then you better have the decisiveness to GET IN THE TRADE once price comes to you and your entry parameters are present. How many people wait for the trade to come and then when it arrives start analyzing if they should take it? When the trade has arrived it is time for action, not analyzation. This is what preparation is for. If you have done your homework there is no need for hesitation – you already know what to do. At the same time trading is not static. There are times when the odds are high that the market will reverse before your final target is hit. Do you have the decisiveness to reverse the position or flatten when this situation is present? It has been said that the number one ingredient to being a great trader is the trading guts to pull the trigger as soon as a reverse is anticipated. Be decisive.

Coach Yourself as a Trader

  
  Education
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What are the three things (i.e. courses of action, strategies, resources) that you’ve found most helpful in mentoring/coaching yourself as a trader?

coach

And here is how I answered:

  • 1. Understand me. The most powerful tool I have found in life and in this specific case, the market, is what I, as a person, am capable of doing as a trader. I finally understand that personal characteristics that are engrained in my DNA will only allow me to trade successfully under specific circumstances. For example, I am much more consistent and profitable as a medium term and longer term trend trader than as a day trader (even more so on the long side). I don’t need to be everything, all the time as long as I continue to focus on the areas that bring me the greatest success. Understanding “me” has been my holy grail of understanding how to trade the market with some type of consistency and profitability.
  • 2. Learning to cut losses. It’s almost cliché but not many people can do it (in any aspect of life). I have learned to cut losses in my trading, my career, my hobby of competitive poker and everything else in life where the rule applies. Without this rule, there wouldn’t be a third rule. (more…)

Ten Questions to ask Yourself Before Every Trade

  
  Education
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If you are just randomly trading what you like with no real underlying system, method or planning then unfortunately your odds of success in the long term are slim. Trading a winning methodology is what creates an edge in trading.

Consistently trading a robust system or methodology enables you to trade in a way that historically wins, controls risk, and does not bring your ego and your emotions into your trading in a destructive way.

Ten questions to ask yourself before every trade:

  1. Does this trade fit my chosen trading style? Whether it is:  swing trading, momentum, break out, trend following, reversion to the mean, or day trading?
  2. How big of a position do I want to trade? How much capital am I going to risk? Am I limiting my risk to 1% or 2% of my trading capital?
  3. What is my risk of ruin based on my capital at risk?
  4. Why am I entering the trade here? What is the trigger to trade?
  5. How will I exit with a profit? A price target or trailing stop? (more…)
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