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A great quote

  
  Education
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I’m sure every trader has run into some kind of negativity from know-it-all chodes who just don’t get what this subject is about – it goes something along the lines of “What good does it actually do? You are just stealing other peoples money?” blah blah *yawn* blah….

Here’s a great quote from a book I’m reading “Hedge Fund Edge” that demolishes their complaints:

“Principle 7: Develop a Love and Respect for Trading, Free Markets, and Individual Liberty and Initiative.

Profits are just the gravy. When they test a group of traders, one of the traits that almost all successful traders and investors share is a deep understanding of how trading and investing is part of the process that allows humankind to progress. Even day-traders provide critical liquidity that allows others to hedge, companies to raise capital, and investors to invest with limited risk. Stock selection allows investors to become second-level venture capital firms, with their demand helping provide access to financing in areas where the people need capital most. The more you understand the remarkable way in which freedom and free association work to produce economic gain and real progress for humankind from new innovations and technologies, the more likely you are to feel a strong sense of purpose at being a part of such an incredible system. And the stronger your sense that your efforts are creating something good that is bigger than yourself, the more committed, enriched, excited, and innovative you will become.”

… so put that in your pipe and smoke it.

Livermores Seven Trading Lessons

  
  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. (more…)

How to recognise self sabotage in your trading

  
  Education
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Self-sabotage occurs in trading in many instances:

1) When you know you should follow the ten tasks of trading, but you don’t.
2) When you know you need to determine if your system will really work, but you just trade it anyway.
3) When you know you should develop a business plan for your trading, but somehow that just seems like too much work.
4) When you know you need to put a stop loss order in on a trade, but you don’t.

Hmm, guilty as charged. 

I have yet to hear anyone say, “I don’t make money picking stocks – I make money by cutting my losses short and letting my profits run. And more importantly, I meet my investment objectives through the judicious use of position sizing.”So, less focus on the system – more focus on self and self discipline.

A GOOD Trader WILL:

  
  Education
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Excerise
(EXERCISEEEE ! 🙂 )

1. Always wait for the setup: No Setup-NO Trade.

2.Knows that THE BEST trades work almost right away.

3.Never takes a big loss. If it doesn’t ‘feel’ right. Remove it!

4.Always perfecting his craft

5.Is patient with winning trades:Impatient with trades that fight back.

6.Knows that DISCIPLINE is the key to winning at everything!

7.Never gets emotionally attached to trades, trading, losses or profits.

8.Will always trade with the size that makes him unemotional

4 Trading Fears

  
  Education
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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.

Let the market make the decisions, not your ego.

  
  Education
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The rules are not hard to understand. Recognizing a profit from a loss is simple. If the rules are easy to grasp and a profit is distinguishable from a loss, where does the problem lie? What makes it so hard to apply the rules? There is something within each of us that has a power over our minds that prevents our acting according to what we have agreed is the proper course of action. That something is present in all of us and is very powerful, more powerful than anything I know. Let’s call it ego. Until we learn to get rid of our ego, we will never make money in the market consistently. Those who haven’t identified the ego’s ways will eventually be destroyed in the market because of their ego’s tendencies. It is just that powerful. The market rewards those who have subdued their egos. Those who rid themselves of their egos are rewarded greatly. They are the superstars of their fields. In the market, rewards come in the form of profits. In the world of art, masterpieces are the results. In sports, the players are all-stars and command enormous salaries. Every pursuit has its own manifestation of victory over the ego.

Justification Mode

  
  Education
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“The ego is not your friend as a trader. The ego wants to be right, it wants to predict, and it wants to know secrets. The ego makes it much more difficult to trade well by avoiding the cognitive biases that hinder profits.” – Curtis M. Faith

 That quote came to mind this morning when having a conversation with a fellow trader who I think is in what I call “justification mode.”

Justification mode is when traders (or investors) find themselves having to justify poor performance on something that seems logical and which helps comfort and protect their ego without having to own up and face a big mistake.

In this trader’s case, like a lot of people it seems he went and stayed short when the market rolled over last month. Although he won’t admit it to you now, I know from our prior emails he was sucked in by the infamous “death cross” and, in spite of a strong reversal, has now refused to reverse his short (and losing) positions. In fact, his ego is so involved with this short-trade that he’s recently doubled down when the market refused to roll over even using lots of leverage to prove his point. Now he’s in a painful position of being trapped between owning up to the mistake and taking the painful loss or doing what so many tend to do – find a way simply to justify his actions and let a growing loss have the potential to wipe him out entirely.

In our conversation this morning, this trader kept talking about “the market is in a trading range” and “ready to roll over.” That’s fine and well as long as the price action confirms that view, but it hasn’t yet. As I asked him this morning, “Can you afford simply to stay wrong just to protect your ego?” He didn’t know how to respond. In fact, it became clear that he didn’t even realize that his ego was becoming such a strong influence over his entire market analysis. I suspect, as he does as well now after talking to me, that if this trader’s positions were different, for example aggressively long the market instead of short, this same trader would not be seeing a “trading range” or a market “ripe for reversal.” Instead, he would see nothing but more upside potential. This is why human traders, with human egos, are often at a significant disadvantage.

Trust me, at one point or the other, we’ve all done this. I know I have been in justification mode many times even when I didn’t even realize it until much later on. However, over time, I’ve learned to spot to tell tale signs that I’ve fallen trap to this and then have learned to take immediate corrective steps to right the ship. Moreover, as many of you also know, at all times I also trade in a way that makes sure that when I do make mistakes (which are often) that they NEVER have the potential to wipe me out. When your ego gets so involved in your trading, the potential for catastrophic losses are tremendous which is why we’ve all have to learn and know when we’ve fallen into justification mode. (more…)

8 Steps for Traders

  
  Education
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1. Find Your Strength.  It is important that the trader determine what type of market, trending or consolidating, best suits their own personality and strength.  The best traders stay focused on one or the other and master it.

2. Know Your Market.  You should know your market when trading.  In other words, know the levels of support/resistance;  know how the instrument you trade moves with the general market; know who is likely to be on the other side and what they are thinking; and “the terrain of any market includes the “long-term charts”

3.  Prepare Your Order.  Know when to get into a trade and why and know when to get out of a trade and why.  Just like a secret agent who will “never enter a room without knowing how to get out of it in a hurry”

4.  Placing Your Order.  Once you have adequately prepared for a trade, it is then necessary to be ready to place the trade when the time is right.  Here “patience is the key…you must be able to wait for the market to tell you when the moment is right.  Wait for the market to generate the action; don’t force it”

5.  Sticking With Your Plan.  This is probably the hardest part about trading.  Once you enter the battlefield (enter a trade), the emotions of fear, ecstasy, greed, and sheer excitement can then take over and cause you to forget your well prepared plans for entry and exit.  You must enter a “Zen-like mental state” where you remain in control of your emotions.  Not doing so could spell disaster.

6. Identify When You Are Wrong.  “It is crucial to your survival to identify in advance whether your view might be wrong and to determine what price level, when broken, would be in support of the consensus view; therefore, you are building up your ability to defend the occasional probes against you”

7.  Holding On To Your Winning Positions.  Set a trailing stop when your trade is moving in your direction thereby locking in profits while allowing the trade to work toward its maximum potential.  “A trailing stop loss keeps you in the war, keeps you in tune with the war, and, most important, leaves you in full readiness to instantly strike again”

8.  Focus On Your Next Trade.  This is the most important step and is saved for last.  This step simply says to start anew with each new trade.  No matter if you won, lost, or broke even on the last trade, the next trade is a new one.  “You do indeed need to be starting every single trade fresh and alert without any baggage from the previous encounter”

Wall Street Its Mysteries Revealed Its Secrets Exposed By William C Moore 1921 – Greed

  
  Education
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It’s been a while since I last posted an excerpt or quoted from one of the trading books I own. Tonight’s small excerpt is from the book: ‘Wall Street. Its Mysteries Revealed: Its Secrets Exposed’ published in New York, 1921 by William C. Moore. The book contains short and to the point chapters like: ‘The crowd mind’, ‘How the public speculates’, ‘Mental suggestion’ and ‘Market advice’ to name but a few. I chose the one on ‘Greed’ as I consider it great advice and timeless wisdom. Enjoy.

Greed p. 123-124

An avaricious or keen desire for profits is one of the most prevalent causes of failure in speculation. This weakness is general among traders. They desire “just a little more ” profit. If the stock or commodity bought advances, then that’s proof to them that it will advance further and so they hang on. They usually overstay and thus miss their market. If they fail to obtain the top price and it reacts, then they assure or console themselves by the expression: “Oh, it will come back.” It may “come back” but often it does not, and instead, declines to below the purchase price and frequently results in a loss. The same observations apply to a short sale for a further anticipated decline. It is a good policy to be satisfied with a reasonable profit and be willing to leave some for the other fellow. The market is always there and other opportunities for making profits will present themselves while the greedy trader is waiting to get the last eighth.

Greed leads to disaster in another way. A speculator has started in to buy at the inception of a bull movement. He makes money. The more he makes, the more avaricious he becomes as the market moves forward. His confidence in himself increases until he develops a mental state known in the vernacular as “big head” or “swelled head”. He now has unbounded confidence in himself and “plays the limit”. Soon thereafter the market culminates at the top and the trend reverses, but Mr. Swelled Head is ignorant of this, so continues to buy on set-backs instead of selling on rallies. A drastic slump follows and Mr. B.H. goes to the scrap pile – BUSTED.

Greed is a bottomless pit which exhausts the person in an endless effort to satisfy the need without ever reaching satisfaction. – Erich Fromm

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