Archives of “psychology” tag

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Successful trading is about making money…not about being right

  
  Education
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According to Mark Douglas…

In any particular trade you never really know how far prices will travel from any given point. If you never really know where the market may stop, it is very easy to believe there are no limits to how much you can make on any given trade. From a psychological perspective this characteristic will allow you to indulge yourself in the illusion that each trade has the potential of fulfilling your wildest dream of financial independence. Based on the consistency of market participants and their potential to act as a force great enough to move prices in your direction, the possibility of having your dreams fulfilled may not even remotely exist. However, if you believe it does, then you will have the tendency to gather only the kind of market information that will confirm and reinforce your belief, all the while denying vital information that may be telling you the best opportunity may be in the opposite direction.

There are several psychological factors that go into being able to assess accurately the market’s potential for movement in any given direction. One of them is releasing yourself from the notion that each trade has the potential to fulfill all your dreams. At the very least this illusion will be a major obstacle keeping you from learning how to perceive market action from an objective perspective. Otherwise, if you continually filter market information in such a way as to confirm this belief, learning to be objective won’t be a concern because you probably won’t have any money left to trade with (italics mine).

From Chapter Four of THE DISCIPLINED TRADER

Anirudh Sethi's Lessons From 2008 : Part – II

  
  Education
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1)In panics there is almost nowhere to make money without taking excessive risk
2)Timing entries and exits to oversold & overbought conditions helps achieve low-risk/high-reward entries
3)There is no such thing as a safe investment
4)Markets are dysfunctional, corrupt, and have no oversight
5)To let a stock prove itself to me, prior to jumping in based on my analysis alone (more…)

The most expensive 4 words

  
  Education
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The longer a given condition or trend persist and the more comfortable we get with it, the more dramatic the correction will be when the trend fails. This does not mean that you should try to catch tops or bottoms. Only fools believe that they can be consistently lucky in fading established trends. But when a trend ends, prices often overshoot in the opposite direction.

The crowd may be stupid, but they are stronger than you. Crowds have the power to create trends. Never fade a trend. If the trend is up, you should be long or on the sidelines. Never sell short, because “prices are too high” – never argue with the crowd. You don’t have to run with it – but you should never run against it.

The most expensive 4 words in the world are “This time is different”. The underlying reasons might be different, but the psychology behind all booms and busts is always the same.

Psychology and Gaining Confidence

  
  Education
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Hi All,

There has been a lot of talk on the  psychology of trading and getting rid of fear etc. I think that one way to help is to understand the performance parameters of your trading system and this means extensive
backtesting and changing the way you think when entering a trade.

Now whenever I have placed a trade I have assumed that I was wrong and so if the market did not immediately prove my position correct I would be taking measures to reduce my position and, if necessary,
get out. This kept my losses small and when correct I was able to do nothing and just move my stop up. This is contrary to the way most people trade in that they place a trade assuming they are right and wait
for the market to prove them wrong.

IAlso if you have backtested a system thoroughly you will know what percentage of profitable trades you can expect. From this you can also determine the number of consecutive losing trades that you can
expect for a given number of trades. The formula is quite straight forward and is:
Consecutive losses = LN(N)/-LN(S) where
N = Number of expected trades
S = (100-strike rate %)/100

Now if you place say 30 trades a month and you have a 50% success rate, you can expect to have 5 consecutive losing trades.

But the more trades you place the bigger the chance of consecutive losing runs. So if our trader has 12 x 30 trades a year = 360 they can expect to have nearly 9 consecutive losing trades.

Of course the opposite is also true in that you could expect to get 9 consecutive winning trades as well. The problem is that I have seen many systems that have only a 40% success rate and in the same
example above this would result in 12 consecutive losing trades. Psychologically this is very difficult to handle yet if you had backtested your system thoroughly it is easily seen that this is to be expected and
means that your system is operating within normal parameters.

Food for thought I hope

Book Review-Trading Beyond the Matrix-Great Book for Traders

  
  Education
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Now ,This Book in our Library

1. Trading with the use of R Multiples. Risk a set amount per trade with the goal to make a minimum of three Rs for every one risked. If the trade is does not work out cut the loss at 1R.

2. Only trade if you have an edge, which is defined by only taking the very best trading opportunities, position sizing correctly, being in control of your feelings, and having a great risk to reward ratio, etc.

3. To be a successful trader you must know what your trading objectives are, how much do you want to make in a year? What percent of return are you looking for?

4. You need defined goals of whether you want to trade for a living, make a million dollars, or just trade for capital appreciation.

5. A primary goal of this book is to make the leap from trading our opinions about the markets to trading what is actually happening in the markets.

The power of this book is in the psychology and spiritual insights shared by both the author and many successful traders that share their journey with the reader with the chapters they wrote for this book. (more…)

5 Qualities essential to the equipment of the speculator

  
  Education
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  1. Self-Reliance. A man must think for himself, must follow his own convictions. George MacDonald says: “A man cannot have another man’s ideas any more than he can another man’s soul or another man’s body.” Self-trust is the foundation of successful effort.
  2. Judgment. That equipoise, that nice adjustment of the faculties one to the other, which is called good judgment, is an essential to the speculator.
  3. Courage. That is, confidence to act on the decisions of the mind. In speculation there is value in Mirabeau’s dictum: “Be bold, still be bold; always be bold.”
  4. Prudence. The power of measuring the danger, together with a certain alertness and watchfulness, is very important. There should be a balance of these two, Prudence and Courage; Prudence in contemplation, Courage in execution. Lord Bacon says: “In meditation all dangers should be seen; in execution one, unless very formidable.” Connected with these qualities, properly an outgrowth of them, is a third, viz: promptness. The mind convinced, the act should follow. In the words of Macbeth; “Henceforth the very firstlings of my heart shall be the firstlings of my hand.” Think, act, promptly.
  5. Pliability the ability to change an opinion, the power of revision. “He who observes,” says Emerson, “and observes again, is always formidable.”

My 10 Favorite Nicolas Darvas Quotes

  
  Education
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My favorite Nicolas Darvas quotes from the book on the subject of:
Discipline:
“I knew now that I had to keep rigidly to the system I had carved out for myself.”
Risk/Reward:
“I was successful in taking larger profits than losses in proportion to the amounts invested.”
Exiting profitable trades:
“I decided to let my stop-loss decide.”(Speaking on when to exit an up trending stock)
Bear Markets
“I also learned to stay out of bear markets unless my individual stocks remain in their boxes or advance.”
Technical Analysis versus Predictions
“I believe in analysis and not forecasting.”
Trading Psychology
“I became over-confident, and that is the most dangerous state of mind anyone can develop in the stock market.”
Risk Management

“I decided never again to risk more money than I could afford to lose without ruining myself.”
Fundamental Analysis

“All a company report and balance sheet can tell you is the past and the present. They cannot tell future.”
Trend Following
“I made up my mind to buy high and sell higher.”
The Market tells its own story best

I accepted everything for what it was-not what I wanted it to be.”

Book Review :Sell & Sell Short

  
Analysis, Education
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Sell and Sell Short (Wiley Trading) by Alexander Elder

If you are searching for a book on trading stocks then look no further, this is it. I have been a successful trader for years and read over 160 books on trading,and in my opinion this is one of the very best. Alexander Elder actually read the change in the market from bull to bear in late 2007 and was able to get this books first edition released in early 2008 when it was needed most.

While as the title suggests it teaches when to sell your stocks for profits, and also does the best job I have seen on explaining short selling and when technical indicators show to short. This book is a complete book for any trader. The main lessons of this book is when to lock in profits and exit a trade using a target, and how to double your potential for profits by not only buying stocks, but also selling stocks short and buying them back at a lower price for profit. Professionals sell short because while overall the stock market drifts upward, when a stock falls it falls over
twice as fast as it rises. I sell short and it is a powerful tool when used correctly. This book will show you when it is appropriate to short.

Dr. Alexander Elder is the only author I am aware of that integrates trading psychology, money management, technical analysis and keeping a trading journal into one book. These four factors will determine whether you are successful in the market or not, even more than the trading method you choose.

You will learn the three great divides in trading:

technical vs. fundamental
trend vs. counter trend
discretionary vs systematic
The author follows a discretionary, technical approach trading counter trend for the most part. However what you learn in this book can be applied to any type of trading. The authors own technical approach uses prices, volume, exponential moving averages (13 day, 26 day), envelopes, MACD, and force index. Limit your tools to no more than five, more is less, any more just causes confusion. The main method you will learn in this book is using the moving averages as a technical base for agreed upon value and buying at the lower edge of the envelope and selling at the high edge of the envelope when you have favorable MACD and force index agreement, or buying at value between the EXP MAs.

If you are going to be a trader you must follow the money management suggestions
in this book. NEVER risk more than 2% of your total equity on a trade, and if you lose 6% of your equity in a month you must stop, clear your head and start back next month. If you follow the 2% rule from the book, it will be a major life lesson in your trading and save you a ton in equity draw downs and will almost completely eliminate your risk of ruin. (more…)

A lesson on Ego and Risk

  
  Education
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ego-riskMost traders drawn to risk management focus on the external “how to” aspect of trading, vs. the inner aspect of emotions and psychology. This is where trouble begins.
• In the school model, one’s self-esteem is tied to being right. Avoiding mistakes, especially public mistakes becomes paramount. But in trading, one can be wrong in most choices and experience regular “outlier” events in the course of trading the markets. Traders must somehow learn that they will miss out or be incorrect regularly and still have a shot at great success. 
• Traders need to have a survival plan. Know when you will get out of a trade before you get in.
• If you don’t take the small loss today, your capital and trading career may not survive tomorrow.
• The most successful traders surrender their egos to not knowing the frequency or magnitude of any trend. They quiet their mind and follow their inner voice.
• Most of the world can’t keep their losses small. Professional traders and investors who’ve been around for decades are usually those who play the best defense. 

Four Trading Fears

  
  Education
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“Ninety-five percent of the trading errors you are likely to make—causing the money to just evaporate before your eyes—will stem from your attitudes about being wrong, losing money, missing out, and leaving money on the table. What I call the four primary trading fears.” -Mark Douglas (Trading int he Zone)

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.

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