Archives of “period of time” tag

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The Ultimate Psychological Block

  
  Education
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It’s my belief that the ultimate psychological block in trading is the ability to consistently follow a set of rules for a long period of time. If you can do this, then you have the Trading Psychology part mastered (as this would also take care of the Fear and Greed aspects).

For some reason, I personally find this simple task outrageously difficult to accomplish. I can see that there are two things that cause this, which are what you might call GOAL DECAY (I just invented that term) and NEW DATA.

GOAL DECAY is when you set your goal on Monday, and it feels meaningful and purpose driven, but by Friday you’ve lost the plot. It seems stupid, pointless, wrong etc. Or else you just plain forgot… Your trading goals start off with energy, but then the energy quickly dissipates and the goal loses force. At this point you are ripe for the second issue:

NEW DATA – Once your previous goal has decayed, your then happen upon or else purposefully go looking for NEW DATA. This new data can also spring up from within your own mind as some great new idea and you set a new goal.

Then this cycle repeats. Somehow going around and around on this Ferris Wheel has to come to an end and some clearly defined goals need to be set. I guess in my previous post I alluded to this in terms of ‘sorting out’ all of the information and techniques I have acquired.

12 Rules to Invest

  
  Education
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1. Do not let trades become investments, but it is ok to let investments become trades.

2. Personality first. Know yourself! (The markets will exploit your weaknesses)

3. Develop your own approach.

4. Be flexible because you will be very wrong.

5. Find mentors. Today! Don’t expect anything from them.

6. START today. While learning how to invest, decide on an amount that you can invest in the markets and dollar cost average. Invest an equal amount of money once a month or quarter for a long period of time.

7. Keep your costs down.

8. Focus on your strengths, invest some profits in your weaknesses.

9. Do not ‘practice’ investing and do not call your investing money ‘Vegas’ money. Develop a routine.

10. Write it down! Start a journal.

11. Immerse yourself in the language of the markets and investing. It has never been easier.

12. Knowing when and how to sell remains the most mystical of processes. I just say do it consistently. There is no shame in leaving money on the table.

It's not the trade, it's the battle.

  
  Education
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Too many traders believe that their last trade is a reflection of just how good of a trader they are (but they are the only ones who feel that way about themselves). This boils down to one word – expectation. If you expect to win all the time, or even the vast majority of the time, you’re setting yourself up for a lot of heartache. That frustration, though, is the very same force that will truly make your negative perception of yourself a reality. And even a good trade can be damaging if you let it warp your disciplined approach. The fact of the matter is that this is a game of odds, and should be played over a long period of time. Focus on the war – not the battle.

Uncertain Outcome, Consistent Result

  
  Education
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Every trader knows trading is a probability game. However, very few can internalize and live by the true meaning of what it means to be a probability game.

Mark Douglas, the author of “Trading in the Zone”, explains it well.     Someone who masters the probability game produces uncertain outcome but consistent result.   The best example to illustrate this concept is the casino business.     The casino holds on the average 4.5% probability advantage over the player. It does not know whether the next hand will be a winner or a loser against the player, but the casino is certain that they always win given enough bets.     Therefore casinos do not care if a player is going through a winning streak, as long as he is not cheating.

That’s exactly how traders need to think about his trades.    Market is random.    Anything can happen to the current trade.   A trader can increase his probability of winning either through fundamental or technical analysis but the best analysis can never produce a 100% certainty.  In reality, the highest win rate that the best analysis can produce is far from 100%.   However,  as long as the trader has a trading plan that can produce positive expected value,  he can expect consistent result over a reasonably large number of trades,  just like the casino. (more…)

Importance of money management

  
  Education
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In Jack Schwager’s book Market Wizards, Schwager interviewed some of the world’s top traders and investors, nearly all of whom emphasised the importance of money management. Here are a few of my favourite excerpts:

‘Risk management is the most important thing to be well understood. Undertrade, undertrade, undertrade is my second piece of advice.Whatever you think your position ought to be, cut it at least in half. ’-Bruce Kovner

‘Never risk more than 1% of your total equity in any one trade. By risking 1%, I am indifferent to any individual trade. Keeping your risk small and constant is absolutely critical.’ –Larry Hite

‘You have to minimize your losses and try to preserve capital for those very few instances where you can make a lot in a very short period of time. What you can’t afford to do is throw away your capital on suboptimal trades.’ –Richard Dennis

Trading Profits in relate to Time and Accuracy

  
  Education
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The size of profits of a trading system, is related to time and accuracy. They are inter-related and it is not possible to get the best out of all 3 factors in any trading system.

 

Before I elaborate further, I shall define what these 3 factors mean.

 

Size of profits – I am referring to the average amount of profits the system will earn per trade.

 

Time – The average length of time you held on to a trade.

 

Accuracy – The percentage that the system is correct and earns you a profit.

 

Big Profits = Long Time = Low Accuracy

 

For systems that aim for big profits, they must allow a greater range of fluctuations for the trade. By having a large trading range will in turn prevent you from getting stopped out so soon. Hence, you will be in a trade for a longer period of time. Besides having a larger profits, it will also serve you losses that are bigger, because your stop loss limit has to be further from your entry point. It is more difficult to grasp for the relationship with accuracy.

 

Small Profits = Short Time = High Accuracy (more…)

10 Trading Mistakes

  
  Education
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10 Trading Mistakes1. Refusing to define a loss.

2. Not liquidating a losing trade, even after you have acknowledged the trade’s potential is greatly diminished.

3. Getting locked into a specific opinion or belief about market direction. From a psychological perspective this is equivalent to trying to control the market with your expectation of what it will do: “I’m right, the market is wrong.”

4. Focusing on price and the monetary value of a trade, instead of the potential for the market to move based on its behavior and structure.

5. Revenge-trading as if you were trying get back at the market for what it took away from you.

6. Not reversing your position even when you clearly sense a change in market direction.

7. Not following the rules of the trading system.

8. Planning for a move or feeling one building, but then finding yourself immobilized to hit the bid or offer, and therefore denying yourself the opportunity to profit.

9. Not acting on your instincts or intuition.

10. Establishing a consistent pattern of trading success over a period of time, and then giving your winnings back to the market in one or two trades and starting the cycle over again.

5 Points for Traders

  
  Education
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  • Concentrate on what is important. The most important thing when I am trading is profit and education, to some extent.  You can get to profit many ways but your actions need to all bend towards that one objective.  Me talking about my position takes me away from analyzing the position.  Also, for me, it makes me less flexible. Now I am thinking about what the market is doing and how I look to other people.  Also, if you are going to talk your book the most effective way is to get out into it, albeit the most unethical.
  • Start with a logical thesis. For example, leave out the fact that you said the following about the company “offers a useful, attractively priced service to customers, is growing like wildfire, is very well managed, and has a strong balance sheet,” but still decided to short the company anyways.  I realize this statement does not always mean a stock price is going to rise but the next logical step does not mean the stock is going down.
  • Follow your plan. Do not make reference to your strategy as the following “outright frauds (our very favorite), industries in decline or facing major headwinds, weak or faddish business models, bad balance sheets, and incompetent,excessively promotional and/or crooked management”  and not follow it.  See above statement.
  • Do your research before you make a trade. Don’t use anything with the word “monkey” in it for research purposes and tell someone about it.  Also, 500 people is not a very big sample size.
  • And finally, don’t act like a loss is the end of the world or a win. If you are doing the right things, your best and worst days are always ahead of you. After the trade is over the next trade is the most important, once again assuming you are doing the right things.

Nothing is ever going to prevent you from losing but there are several things that can prevent you from winning over a long period of time.

How can you enhance perceived self efficacy

  
  Education
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Self efficacy is built through four processes:
Mastery experience
Role modelling
verbal persuasion
psychological cues.
These four are in order of importance. Most critical way to build self efficacy is through a mastery experience.

Mastery experience is basically a successful experience of mastering a task. Mastery experiences happen when the learner has reached the point where they understand the content knowledge enough to perform a task on their own or masters the task. It happens if the learner goes in to sufficient depth on material he trying to learn. It happens as a result of immersion in a particular field or task. It happens with plenty of prior exposure to the content.

At some stage the learners are able to interpret the results of their actions and use those results to develop their own capability to engage in future actions or tasks. Then the learner become auto learners. They are able to participate in tasks on a first hand basis with little or no assistance from outside influences. When you experience a intense mastery experience you get a feedback on your own capabilities. Long and sustained efforts are required for mastery experience.  (more…)

Trading Profits in relations to Time and Accuracy

  
  Education
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The size of profits of a trading system, is related to time and accuracy. They are inter-related and it is not possible to get the best out of all 3 factors in any trading system.

Before I elaborate further, I shall define what these 3 factors mean.

Size of profits – I am referring to the average amount of profits the system will earn per trade.

Time – The average length of time you held on to a trade.

Accuracy – The percentage that the system is correct and earns you a profit.

Big Profits = Long Time = Low Accuracy

For systems that aim for big profits, they must allow a greater range of fluctuations for the trade. By having a large trading range will in turn prevent you from getting stopped out so soon. Hence, you will be in a trade for a longer period of time. Besides having a larger profits, it will also serve you losses that are bigger, because your stop loss limit has to be further from your entry point. It is more difficult to grasp for the relationship with accuracy.

Small Profits = Short Time = High Accuracy

On the contrary, a highly accurate trading system allows you to be right most of the time but each time when you are right, you take very small profits. This is possible by making very tight stops in your trades such that you lock in profits as soon as you make them. Hence, you will be in and out of the trades very fast and frequently. This is typical to intraday trading or mean reversion models or even band trading. (more…)

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