Archives of “psychology” tag

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How to become contrarian?

  
  Education
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contrarian11. Come to the market with a trading plan. Most traders don’t have a plan built around high odds trade set ups. Thus, they trade random patterns.

2. Put in the necessary work. You can’t be like most traders and just show up to the markets expecting to make big money in a short period of time. Don’t be like most traders; become contrarian. It takes hard work and study. Prepare yourself to trade well.

3. Enter on reactions, not on breakouts. Most traders see the market begin to move and then jump in. These dog-piling events are made-to-order for professional traders to act. They unload when the herd is buying, and stock up when it is selling. Adopt a professional’s attitude and look to sell into strength and buy into weakness.

4. Work on the mental side of trading, not just the technical side. Understanding how to read the chart is vital, of course. But it is not enough. Once the technical side is learned, trading becomes 100% psychological. Most traders think psychology is unimportant until it is too late. Be contrarian and put time in to learning the mental skills needed to trade well.

5. Keep learning. Not just about the markets but about your own performance, too. Most traders take a losing trade and sweep it under the rug. They try to forget about it. Likewise, they don’t bother to study their winning trades. They have little idea of why one trade worked and another didn’t. Be contrarian: review your trading and keep a journal.

Becoming contrari (more…)

Five Trading “Don’ts”

  
  Education
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Trading can be complicated to learn. Many traders spend hours every day on their charts, yet still find success elusive. Part of the difficulty can arise when little attention is paid to the mental side of the game. Developing a mental edge is just as important as possessing a technical trading edge. Here are five common mental “wrong steps” that can quickly derail your trading. These can blindside you no matter how good your technical skills. This brief discussion regarding these trading “don’ts” offers an introduction to trading psychology and some sensible solutions:

What Not to Do

  1. Have an opinion. One sure way to find yourself trading against the market is to have a market opinion. Trading with a rigid belief about what the market will do next can limit your ability to see what the market is actually telling you. 
  2. Have someone else’s opinion. Adopting some market guru’s market opinion is actually worse than having your own. Market gurus are notoriously inaccurate in their predictions.  Embracing another’s market judgment prevents you from learning to read the market on your own. Besides, it’s doubtful the guru will be texting you to let you know when his or her opinion has changed.
  3. Make your opinion public. Putting your bias into a chat room or forum thread makes it public. Making something public gives it a psychological life of its own. It’s hard to back off an opinion once you have announced it to others. 
  4. Let your ego get involved. Everyone wants to be right. In trading, learning to accept being wrong and the losses associated with being wrong is a big part of the game. This is no place for big egos.
  5. Ride a loser. Still wanting to be right? Having a bias, making it public, and getting your ego involved will cause you to hold losers far longer than you should.

What to Do

  1. Anticipate. Avoid having an inflexible bias. Identify areas where the market might turn, break out, or continue, and think through what that would look like. Anticipate the alternative ways the market may trade. When you see the market trading as anticipated, you already know what to do.
  2. Keep your own counsel. Avoid gurus. Jesse Livermore viewed trading as a “lone-wolf” business, and it is. Learn to read the market and make your own decisions.
  3. Avoid the forums while trading. Use the good ones as a source of education, but refrain from making your trades public.
  4. Check your ego. Be aware of when you want to be right. Ask yourself, “What is more important, being right or making money?” Then, make the correct decision.
  5. Cut losses short. Use hard stops and be merciless with losing trades. When the market turns against you, exit.

The Illusion of Skill

  
  Education
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“The illusion of skill is not only an individual aberration; it is deeply ingrained in the culture of the [financial] industry. Facts that challenge such basic assumptions — and thereby threaten people’s livelihood and self-esteem — are simply not absorbed. The mind does not digest them. This is particularly true of statistical studies of performance, which provide general facts that people will ignore if they conflict with their personal experience.”

I find that, unfortunately, to be terribly true.

For those of you who may be unfamiliar with Kahneman, he is a professor at Princeton and Nobel laureate. He is notable for his work on the psychology of judgment and decision-making, and behavioral economics.

Confidence, Discipline and Consistency

  
  Education
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Consistently profitable trading comes down to just three simple things. The three are the trading psychology, the system, and the risk and money management. Trading psychology means the big 3: discipline, confidence and consistency.

The trading psychology takes precedence because it is needed to make sure that the other two are followed. When they are not followed, a good system and sound risk and money management rules are of limited value. When you have trading psychology that is not achieved through sheer will, you can have the discipline, confidence and consistency that make the most of your rules and system.

Sticking to your system for any length of time is nearly impossible without having confidence in your system. A trader may be able to focus intently on their discipline, and may even be able to stick to it for a time, but often the first handful of losing trades will kill that confidence and with it goes the discipline.

When the sting of a string of losses comes along, especially for a trader that has not established a solid confidence in their system, the temptation to deviate from the system, to second-guess it, is very strong. The natural impulse to avoid the pain is great and only grows with each subsequent loss. Faith in the system drops each time another loss occurs, even if the loss came to be from the deviation from the system. In these circumstances, doubts, fear and anxiety usually run high.

So what is a trader to do to avoid this situation, or to remedy it if this situation has already been encountered?

A great deal of trading psychology comes from expectations and reality. Frustration comes when expectations aren’t met by reality. When a person doesn’t know what to expect, then anxiety set in. When a person knows what to expect and what to do, then confidence is there. Worst case is when the primary point of reference is the recent and painful losses, and only slightly less difficult to be confident when matters feel very uncertain.

Since trading is an activity where losing trades will occur, the best way to establish confidence is to have a way to know what to expect – from the trading system. What is the way to make this happen? The trader can see what can realistically be expected and what can’t through system analysis and looking at the system metrics. The metrics give one a realistic and measured look at the capabilities and limitations of a system, particularly how many losing trades might be encountered during an overall profitable period of time. The primary benefit regarding the trader’s trading psychology is in the way the numbers from the analysis put things in a perspective that fends off the anxiety and doubt and makes for much easier discipline.

Once this is achieved, then the trader should track their metrics to ensure consistency and continuous improvement. It happens quite commonly for traders to experience major breakthroughs once they put in place the habit of analyzing their system and tracking the metrics. Confidence, discipline and consistency are the natural result of this activity, and frequently initiating this practice marks the turning point in the careers of many traders. It is vital as part of trading psychology that one properly analyze the metrics and track their numbers, as backtesting alone will only help to a limited degree.

Trading To Win

  
  Education
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One of the easiest mistakes any trader can make is not a ‘trading’ mistake at all. Rather, the mistake is complacency with his or her trading skills and knowledge. Unfortunately, trading is not like riding a bike – you can (and will) forget how. Obviously you’ll always know how to enter orders, but the efficiency and accuracy of your trading will diminish without constant renewal of your trading mindset.

The reason that most traders don’t undergo psychological self-development is a lack of time, and that’s understandable. However, a good book, DVD or Coaching Class is actually an investment in yourself, and ultimately an investment in your bottom line. Today as a primer, and a challenge, I’d like to review some self-development concepts that Ari Kiev explores in his book ‘Trading To Win, The Psychology Of Managing The Markets‘. This in no way is a substitute for his excellent book, but they are still useful ideas even in this abbreviated form. None of them are going to be new to you, but all of them will be valuable to you.

1. Plan the entire trade before you enter the trade. Have an entry strategy, and an exit point (both a winning exit point and a non-winning exit point). This will inherently force you to look at your risk/reward ratio. Write these entries and exits down in a journal.

2. Eliminate distractions. It’s difficult enough to find trading time at all if it’s not your regular job. If you’re a part-time trader who trades at work between meetings and phone calls, think about this: there are full-time professional traders who are concentrating on nothing other than taking your money. It’s not that they’re better or smarter than you – they just have the time to focus. If you must trade, set aside blocks of time to study or trade without distraction. Or it may be more feasible to do your trading on an end-of day basis, meaning you
place your orders and do your ‘homework’ the night before when you can
focus on it.

3. Choose a method or a small group of methods, and stick to them. Far too often we see a trader adopt a new indicator or signal only to see it backfire. Become a master of your favorite signals, rather than a slave to any and every signal. Understand that an indicator will fail sometimes. That’s ok. The sizable winning trades should more than offset the small losing trades initiated by an errant signal. This trading method is designed to eliminate the emotional bias of trading.

4. Choosing not to trade can also be a prudent choice. You’ll frequently hear ‘don’t fight the tape’. The same idea also applies to a flat market – you can’t make stocks do something they’re just not going to do. Wait for good entries into a developing trend rather than force a bad entry into an unclear trend. (more…)

The Secret

  
  Education
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FireWalkWhat’s the secret of successful traders and how did they make the transition from clueless learner to consistent pro?When the same tools are available to anyone, why do some people out perform others?

 

The successful traders have discovered The Secret.

 

It is not the latest indicator, program or hot tipster. It is something that everyone has inside them already.

 

The Secret is believing in your method and trading it. Believing to the point of having it ingrained into your brain so that it becomes as automatic as breathing. If the charts do this, then I will do that. Trading your plan means cutting losers, riding winners, managing money and risk well. When you arrive at the point of realizing that your self-discipline can only get you so far and that the next step should be reflex trading then you will have found The Secret.

 

Having to exercise self- discipline to me means that there is still something inside you that you must fight to control. If emotions are still in control of your trading then you must find a way to turn that fear and greed into a move productive energy. Trading your method as a reflex means that there is no struggle to control wayward thoughts. (more…)

A Trading Psychology Checklist

  
  Education
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How do you know if your trading psychology problem is really just about trading or is a sign of larger problems? Here is a quick checklist:
A) Does your problem occur outside of trading? For instance, do you have temper and self-control problems at home or in other areas of life, such as gambling or excessive spending?
B) Has your problem predated your trading? Did you have similar emotional symptoms when you were young or before you began your trading career?
C) Does your problem spill over to other areas of your life? Does it affect your feelings about yourself, your overall motivation and happiness in life, and your effectiveness in your work and social lives?
D) Does your problem affect other people? Do you feel as though others with whom you work or live are impacted adversely by your problem? Have others asked you to get help?
E) Do you have a family history of emotional problems and/or substance use problems? Have others, particularly in your immediate family, had treated or untreated emotional problems?
If you answered “yes” to two or more of the above items, consider that you may not be alone. More than 10% of the population qualifies with a diagnosable problem of anxiety, depression, or substance abuse. Tweaking your trading will be of little help if the problem has a medical or psychological root. A professional consultation if you answered “yes” to two or more checklist items might be your best money management strategy.

On Psychology

  
  Education
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  • Stop trying to outsmart the market. NO ONE knows exactly where it will go. Psychology
  • 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.

Trading Psychology Observations

  
  Education
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-From working with developing traders, I’d say that 90% don’t/can’t sustain the process of keeping a substantive journal. Among the group that does journal, well over 90% of the entries are about themselves and their P/L. I almost never see journal entries devoted to figuring out markets.

-A sizable proportion of traders who have been having problems are trading methods and patterns that used to work, but are no longer operative. The inability to change with changing markets affects traders intraday (when volume/volatility/trend patterns shift) and over longer time frames (when intermarket patterns shift).

-Some traders habitually look for tops in a rising market and bottoms in a falling one. There’s much to be said for countertrend methods, but not when the need to be right exceeds the need to make money.

-An underrated element in trading success is mental flexibility: the ability to shift views and perceptions as new data enter the marketplace. It takes a certain lack of ego to form a strong view and then modify it in the face of new evidence.

-Many traders fail because they’re focused on what the market *should* be doing, rather than on what it *is* doing. The stock market leads, not follows, economic fundamentals. Some of the best investment opportunities occur when markets are looking past news, positive or negative.

Weakest Part of Trading

  
  Education
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The weakest part of any trading method is the trader themselves. There are many, many, robust trading systems and methods that do make money in the long term. The problem is the trader having the discipline and mental toughness to trade one of them consistently. The vast majority of time it is not a system failure but traders that fail in this game through one of seven common errors. If you can understand these error and overcome them you could make a lot of money in the right market conditions.

  1. The trader must have the discipline to take the system’s entries and exits.
  2. The trader must have the discipline to take the stop loss on a losing trade when it is hit and not keep holding and start hoping.
  3. No matter the method the trader has to manage risk through proper position sizing, getting greedy and trading too big will blow up even the best systems.
  4. It is the trader that must have the perseverance to stick to the method even during losing periods, and also stick with trading until success is reached.
  5. If a trader can not manage their mind then the stress will break them, I have seen this happen many times. If you can’t handle losing you can’t trade.
  6. The trader must find a robust method, must understand why it has an edge, and must believe in their methodology.
  7. The trader has to know themselves and trade the method that fits their risk tolerance levels and own psychology.

The good news is that if none of these error fit you when you lose money in a trade then the market was just not conducive to your methodology, and it is not your fault so don’t dwell on it.

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