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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…)

Random Prize

  
  Education
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I have been reading Mark Douglas’s excellent book Trading in the Zone and he hits on the most amazing point regarding the effect of random rewards. In brief, it goes like this:

If you teach a monkey to do a certain task and reward him when he does it, he will learn how to keep doing the task to get the reward over and over.

Following this, if you cease to give him the reward he will quickly cotton on and stop doing the task.

However – if you give the monkey a RANDOM reward, he falls into a sort of mesmerized state of addiction where he will keep doing the task continuously, even if no more rewards come. This is exactly why people are addicted to gambling, and if you look at your trading life it might be the same: random rewards.

This got me to thinking about how a trading plan combats this effect and once again proves itself indispensable, because in a sense you move the whole pattern over to the first scenario where if you follow the plan you get the reward. The effect will still be there of course because not every trade is a winner, but it is the only realistic antidote to this obviously primal reaction to receiving random rewards.

I’ve heard this from other sources too – in Robert Greene’s 48 Laws of Power he talks about how random patterns of reward and punishment are actually a key factor in both manipulation and brainwashing. This is known to also drive animals of all kinds mad.

You see how deep and penetrating this effect could be if you are trading without a plan? No plan means basically random trading, which means random reward and punishment dished out from the market, creating an addicted state of anxiety crossed with eurphoria – you know what it feels like I’m sure.

Three Tips to Better Handle Losses

  
  Education
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helpful_tips_imageIt is very unlikely that a medication is going to help you feel better about a trading loss. There is no simple fix to the emotional problem of losses. No one likes to lose money, and a loss can be very painful. But, being able to take losses is also a part of the trader’s job description. One of our tasks as traders is to take losses as a routine function of the trading role.

To help make losses more of a routine event rather than an event that throws us into emotional turmoil, here are three key tips to help you better handle losses:

1. Have a trading edge. Define your setups well and be sure they have an edge. By an edge I mean that these setups have a certain probability of winning over a large number of trades. In other words, based on your experience or historical testing, your trade setup should possess a positive expectancy that over, say, 100 trades some percentage (e.g., 67%) will be winners and produce a sufficient profit over loss to make the trade worthwhile. If you don’t have a trading edge, you are likely trading random patterns and you are likely to have many, many losses. (more…)

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