Stop trying to outsmart the market. NO ONE knows exactly where it will go. - With each decision you make comes stress:
- The more decisions you make, the more likely you are to be wrong.
- The more decisions you are used to making, the more pressure you’ll put on yourself to make even more decisions.
- No one can be that right.
- Forget about the “whys’ of the market. After all is said and done, the reasons will be known.
- Don’t apply logic. Markets move on emotions — period!
- Plan your trade and trade your plan.
- Reduce the amount of decisions you make.
- Make decisions and live with them (also a life lesson!).
- Good decisions come from experience.
- Experience comes from bad decisions.
Archives of “psychology” tag
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Stop trying to outsmart the market. NO ONE knows exactly where it will go. Do Stocks Fall Faster than They Rise?
1) Markets fall faster than they rise — and options traders know this. Otherwise, arbitraging this difference would be a meal for a lifetime.
2) Market participants perhaps anticipate that the realized volatility during a bear market is greater than a bull market. However, the problem with this analysis is one might expect to see an upward sloping volatility yield curve in out-of-the-money puts (during bull markets), and yet that does not usually occur based on my tests. Conversely, right now have a downward sloping yield curve in out of the money calls — which confirms the hypothesis that market participants anticipate slower price rises in the future. [Note to quants: I am not confusing delta, gamma and vega. I’m using options to predict terminal price at expiration.]
3) For most humans, fear of loss is a stronger emotion/motivator than the pleasure of gain (greed). This is well documented in the psychology and behavioral finance literature. Hence, ceterus paribus, capital market participants (who have a net long position) will, as a group, pull their rip cord faster — to flee from risk — than they will embrace the possibility of profit.
Consecutive Loses
You go long and the market immediately goes down – you go short and the market immediately goes up. That’s 2 consecutive losses AND you are getting a little ‘anxious’ so you don’t take the ‘next’ trade and it of course works. BUT to make the situation worse you then ‘chase’ the entry and it immediately reverses – another loss AND this is 3 in a row. Ok 1 more try – this can’t happen on every trade can it – pray mode?
This time though you will be real clever. You have at least noticed that the market is in a range AND it’s the bounce from the low/retrace from the high that is causing all the problems. So this time the next trade you take will be a range extreme fade AND the hell with your trading method. The market is at the range low AND per your new ‘on the fly’ plan you go long AND the range immediately breaks out giving you consecutive loser #4 – trading against a method trade that is going far enough to pay for the previous 3 losers and make you net ahead.
Now what are you supposed to do – QUIT? AND to be sure that there is no more temptation – your throw your computer out the window and dive out right behind it. You are in a trading psychology spiral.
4 Trading Fears
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.
Count down 3, 2, 1 to develop as a trader
Count down 3, 2, 1 to be a trader!
3) Focus on the psychology and mental skills that are necessary to succeed in the market. Learn to read the market charts in terms of the pscychology of the other traders.
2) Learn about risk control in depth. What this really means, options available to you, how you can marry it up with your financial objectives in the market place etc.
1) Only when you have the above dialled in should you investigate ways of putting trades on in the most advantageous positions to generate the returns you are looking for.
I think if people were to count down 3, 2, 1 there would be many more successful traders.
Rules of Trade
Never Mix Disciplines. If you day trade then day trade and do not let a day trade turn into a swing trade. If you swing trade do not let your swing trade turn into an investment. Follow the rules based on the discipline of your time frame. Never Try To Trade Back A loser. In other words, each trade is a new one and should not be used to win back money lost in the last trade. Always trade in the present not in the past where too many emotional and psychology factors can affect the current trade. Revenge does not pay in or out of the market. |
8 Rules For Traders
- Don’t Fight the Tape – the trend is your friend, go with Mo (Momentum that is)
- Beware of the Crowd at Extremes – psychology and liquidity are linked, relative relationships revert, valuation = long-term extremes in psychology, general crowd psychology impacts the markets
- Rely on Objective Indicators – indicators are not perfect but objectively give you consistency, use observable evidence not theoretical
- Be Disciplined – anchor exposure to facts not gut reaction
- Practice Risk Management – being right is very difficult…thus, making money needs risk management
- Remain Flexible – adapt to changes in data, the environment, and the markets
- Money Management Rules – be humble and flexible – be able to turn emotions upside down, let profits run and cut losses short, think in terms of risk including opportunity risk of missing a bull market, buy the rumor and sell the news
- Those Who Do Not Study History Are Condemned to Repeat Its Mistakes
You’ll notice that nothing is profound among the 8. You likely have heard some version of each of them before. But when the voices get loud and volatility picks up, it’s nice to have a reminder in what’s important and why we do what we do.
On Trading Psychology
From “Reminiscences of a Stock Operator” by Edwin Lefevre, the 1923 classic pseudo-autobiography of legendary trader Jesse Livermore:
… I didn’t always win. My plan of trading was sound enough and won oftener than it lost. If I had stuck to it I’d have been right perhaps as often as seven out of ten times. In fact, I always made money when I was sure I was right before I began. What beat me was not having brains enough to stick to my own game — that is, to play the market only when I was satisfied that precedents favored my play. There is a time for all things, but I didn’t know it. And that is precisely what beats so many men in Wall Street who are very far from being in the main sucker class. There is the plain fool, who does the wrong thing at all times everywhere, but there is the Wall Street fool, who thinks he must trade all the time. No man can always have adequate reasons for buying or selling stocks daily — or sufficient knowledge to make his play an intelligent play.
Sometimes the best play is to not play at all. When playing the market, you have to let the opportunities come to you, and take advantage of them when the odds are in your favor. If you don’t, you’ll get very frustrated — and you’ll lose money.
‘Trading To Win – The Psychology of Mastering the Markets’
1. Learn to function in a tense, unstructured, and unpredictable environment.
2. Be an independent thinker versus a conventional thinker.
3. Work out a way to handle your emotions and maintain objectivity.
4. Don’t rely on hope and fear in the conventional sense.
5. Work continuously to improve yourself, giving importance to self-examination and recognizing that your personality and way of responding to events are a critical part of the game. This requires continuous coaching.
6. Modify your normal responses to certain events.
7. Be willing to face problems, understand them, and recognize that they are in some way related to your behavior.
8. Know when problems can be resolved and then apply methods to solve them. That may mean giving up some control in order to gain a different control. It may mean changes in your personality, learning self-reliance, or giving up independence and ego to become part of a trading team.
9. Understand the larger framework in which trading occurs—how the complexity of the marketplace and your personality both must be taken into account in order to develop the mastery of trading.
10. Develop the right mind-set for trading—a willingness to commit to the kinds of changes in personal habits and beliefs that will drastically alter your life. To do this requires a willingness to surrender to the forces of the game. In order to be able to play at a maximum level, you have to let go of your ego and your need to have things your way.
10 Points for Traders
- Understand the psychology of the trade: never believe you are smarter than the markets as the markets will always win.
- Acquire the knowledge on how the markets truly work then test and retest your ideas and concepts until you feel confident.
- Develop a working knowledge of what types of entry and exit orders work best.
- Understand how to manage risk by employing the use of options strategies.
- Pick a strategy that matches the market conditions.
- Manage the strategy. You should always know what your next reaction point will be and what prompts you to take it.
- Watch what moves. To be successful, you have to become a media hound.
- Integrate fundamental, technical, and sentiment analysis into a real world trading approach that enables you to best understand market performance.
- Specialize in one sector and one strategy at a time.
- Give yourself the winner’s edge by always continuing to actively pursue the learning process.
