1. Buying a weak stock is like betting on a slow horse. It is retarded.
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If you wish to be a successful futures or options investor, you must learn to control your losses. No talent that you develop as a trader will ever be as important to you as this. The formula for success in futures and options trading is: X (AP) – Y (AL) = SUCCESS OR FAILURE (X) is the number of profits that you have. (AP) is your average profit per trade. (Y) is the number of losses that you have. (AL) is your average loss per trade. You multiply the number of profits you have times the average of your profits to arrive at your total profits. You multiply the number of losses that you have times the average of your losses to arrive at your total losses. X (AP) equals total profits. Y (AL) equals total losses. Total profits minus total losses equals success or failure. Of this formula, the two most important letters to you are (AL). Why is the (AL) so important in your effort to achieve success. It is important because (AL) is the only element of this formula that you can control. Think about it for a while and you will see what I mean.
1. Holding on to a position and some trashy news or major unexpected world event happens that causes the market to tank, and I do not have the stop loss in place to take money off the table. The market takes all my profits away.
2. Holding on to a losing position and sweating while it continues to either tank or move sideways.
3. Reporting to my son that I stubbornly held on to a losing trade instead of trading my plan, aka, behaving like an idiot!
My learnings to far:
1. Easy to read and talk about cut loss. Emotionally hard to do as we all want to win. Having done some major cut loss, its now easier. I guess practice makes perfect. If a trade/scalp is not going my way, I will cut loss without hesitation. Yes, it may reverse and go my way later after I cut loss. No matter because it could also go the other way! I’m learning to trade my plan. Easy to read about, talk about, very hard to do.
2. I’m working out my stop loss positions to be activated for my value stocks as well in case I don’t have time to react to market conditions
3. Trade with the trend. If trend reverses against me, I cut loss. Hard to fight the trend, and harder to keep hoping day after day that tomorrow will be better.
4. After cutting loss on a losing position, I feel better, mind feels at ease, feel calmer and can think better. Easy to talk about, hard to do.
Have you ever tried to hold a beach ball under the water?
You might be successful for few moments, however it only takes a small change in how you are holding it to make it burst up out of the water, hit you in the face and splash you all over.
Sometimes, we as traders try to hold the beach ball under the water. We want the big success, the big win, the huge profits, etc. in a short timeframe. This rarely happens.
What are your current trading traits? What do you expect of yourself? Are you open to new ideas? Are you willing to spend the time needed to build the skills and knowledge base needed to reach your goals?
1. Never, Ever, Ever, Under Any Circumstance, Add to
a Losing Position… not ever, not never! Adding to losing positions is
trading’s carcinogen; it is trading’s driving while intoxicated. It will lead to
ruin. Count on it!
2. Trade Like a Wizened Mercenary Soldier: We
must fight on the winning side, not on the side we may believe to be correct
3. Mental Capital Trumps Real Capital: Capital
comes in two types, mental and real, and the former is far more valuable than
the latter. Holding losing positions costs measurable real capital, but it costs
immeasurable mental capital.
4. This Is Not a Business of Buying Low and Selling
High; it is, however, a business of buying high and selling higher.
Strength tends to beget strength, and weakness, weakness.
5. In Bull Markets One Can Only Be Long or
Neutral, and in bear markets, one can only be short or neutral. This may
seem self-evident; few understand it however, and fewer still embrace it.
6. “Markets Can Remain Illogical Far Longer Than You
or I Can Remain Solvent.” These are Keynes’ words, and illogic does often
reign, despite what the academics would have us believe. (more…)
1) Trading is a probability game. You can’t be a perfectionist and expect to be a great trader. Your losses (that you hope will return to breakeven) will kill you.
2) Jumping in too soon or getting in too late. These mistakes come from traders not having a well-defined plan of how they will enter the market. This positions the trader as a reactive trader instead of a proactive trader, which increase the level of emotion the trader will feel in reacting to market movements. A written plan helps make a trader more systematic and objective, and reduces the risk that emotions will cause the trader to deviate from his plan.
3) Not taking profits on winners and letting winners turn to losers. Again this is a function of not having a properly thought-out plan. Entries are easy but exits are hard. You must have a plan for how you will exit the market, both on your winners and your losers. Then your job as a trader becomes to execute your plan precisely.
4) Great traders don’t place their own expectations on to the market’s behavior. Poor traders expect the market to give them something. When conditions change, a smart trader will recognize that, and take what the market gives.
5) Emotional pain comes from expectations not being realized. When you expect something, and it doesn’t deliver as expected, what occurs? Disappointment. By not having expectations of the market, you are not setting yourself up for this inner turmoil. Douglas states that the market doesn’t generate pain or pleasure inherently; the market only generates upticks and downticks. It is how we perceive and respond to these upticks and downticks that determine how we feel. This perception and feeling is a function of our beliefs. If you’re still feeling pain when taking a loss according to your plan, you are still experiencing a belief that your loss is somehow a negative reflection on you personally.
6) The Four Major Fears – fear of losing money, being wrong, missing out, leaving money on the table. All of these fears result from thinking you know what will happen next. Your trading plan must approach trading as a probabilities game, where you know in advance you will win some and lose some, but that the odds will be in your favor over time. If you approach trading thinking that you can’t take a loss, then take three losses in a row (which is to be expected in most trading methods), you will be emotionally devastated and will give up on your plan.
History has recorded many great winning streaks.
Whether they were made in business, team sports, individual sports or other areas, they all had some common characteristics. They had a strong foundation, a belief in what they were doing and they took it one step at a time.
In trading, we can develop a winning streak if we decide to not always categorize winning with profits.
Success brings about more success, however if we decide we are a failure, then failure can also bring about more failure.
1. OPPORTUNITY. There are dozens of these every day, unfortunately you can’t buy them all, so only pick the top 10 and then narrow them down to 2 to 3.
This is done by using your buying criteria which is part of your trading plan which you already have written down. (Hopefully you have one?)
2. BUYING and SELLING. I have a pre planned strategy which I have developed by trial and error; this was achieved by learning by my trading mistakes and the mistakes of others.
3. PATIENCE.This is definitely a virtue worth developing. Sometimes the market is going up in the right direction, but is not going as fast upwards as you would like. Be patient and use a “stop loss” to lock in those profits. However small they may be. Also don’t always be in a hurry to “buy that next share” just because you have that money burning a hole in your pocket. Do your homework and then you have chosen the right share for the right reasons and not just because it looked good
4. STRESS.If it is hurting! Don’t do it, cut your losses or be content with a small profit and get out. (more…)
“Many traders start out using a state of mind that focuses on “having.” Rather than focus on how to trade in concert with the markets, they are obsessed with profits, and what they can purchase with those profits.”
“The main goal is to make money, money that can be used to purchase objects of desire, such as a shiny red sports car, a spacious, luxurious home, or a large wardrobe of fine clothes. They believe that great financial success will be the solution to all their problems. Trading isn’t just a job; it’s their salvation. Although many traders are motivated by money, there’s a downside to focusing on what you can have as a result of your profits. When traders focus solely on accumulating wealth, on “having,” they tend to act greedy and may take risks in an effort to win. There is a blind and unrealistic focus on trading at a high level of performance. Unless they trade at a high level of performance, they can’t possibly “have” what they desire. But a novice trader can’t achieve a high level of performance, and so, there is a mismatch between skills and goals. (more…)