Do you know your Art of Trading
Do you have a trading plan
Do you think in terms of probabilities
Do you know which time frame fits your psychology
Do you cut your losses
Do you define your Risk
Do you add to your losing Position (more…)
Archives of “ratios” tag
rssYou are Accountable
Traders like to think that they only need to be accountable to themselves in order to get the best out of their trading. But it has been my experience that most traders fail miserably at this task. So why are traders not able to do this?
They do not want to:
- Be wrong
- Admit that they are changing their rules
- Face up to the fact that they do not have good rules
- Realize that they need psychological help
- Realize that they do not have what it takes
If you are committed to doing whatever it takes to follow your rules to reach a higher level of profit, you should consider asking someone to help you with this task if you are not doing a good job of it yourself.
Who could take on the role of a trader’s accountability?
- A significant other
- A friend
- A trading buddy
- A teacher
- A coach
What would a person need to help you be more accountable?
- A clearly defined set of rules from you
- Your commitment to telling the truth to them
- An accounting of the trades you took
- Why you think the trades you took were good opportunities
- The risk/reward ratios before the trade
- The money management procedure you followed
- Whether or not you followed your rules
- The lessons you learned
- And at the four month periodical review, the changes you would make and why
Reward or punishment
There should be a clearly defined predetermined punishment or reward that both of you agree upon for not following your rules. Here are some examples of punishments or rewards to consider.
Punishment
- No trading the rest of the day
- Walk around the block before taking the next trade
- Twenty push ups
- Limit the size of your trades for the rest of the week
Rewards (more…)
Characteristic of losing trader
Losing traders spend a great deal of time forecasting where the market will be tomorrow. Winning traders spend most of their time thinking about how traders will react to what the market is doing now, and they plan their strategy accordingly.
CONCLUSION:
Success of a trade is much more likely to occur if a trader can predict what type of crowd reaction a particular market event will incur. Being able to respond to irrational buying or selling with a rational and well thought out plan of attack will always increase your probability of success. It can also be concluded that being a successful trader is easier than being a successful analyst since analysts must in effect forecast ultimate outcome and project ultimate profit. If one were to ask a successful trader where he thought a particular market was going to be tomorrow, the most likely response would be a shrug of the shoulders and a simple comment that he would follow the market wherever it wanted to go. By the time we have reached the end of our observations and conclusions, what may have seemed like a rather inane response may be reconsidered as a very prescient view of the market.
Losing traders focus on winning trades and high percentages of winners. Winning traders focus on losing trades, solid returns and good risk to reward ratios.
CONCLUSION:
The observation implies that it is much more important to focus on overall risk versus overall profit, rather than “wins” or “losses”. The successful trader focuses on possible money gained versus possible money lost, and cares little about the mental highs and lows associated with being “right” or “wrong”.
Five Rules for Traders
You can avoid the emotionalism, the second guessing, the wondering, the agonizing, if you have a sound trading plan (including price objectives, entry points, exit points, risk-reward ratios, stops, information about historical price levels, seasonal influences, government reports, prices of related markets, chart analysis, etc.) and follow it. Most traders don’t want to bother, they like to ‘wing it.’ Perhaps they think a plan might take the fun out of it for them. If you’re like that and trade futures for the fun of it, fine. If you’re trying to make money without a plan-forget it. Trading a sound, smart plan is the answer to cutting your losses short and letting your profits run.
Do not overstay a good market. If you do, you are bound to overstay a bad one also.
Take your lumps, just be sure they are little lumps. Very successful traders generally have more losing trades than winning trades. They don’t have any hang-ups about admitting they’re wrong, and have the ability to close out losing positions quickly.
Program your mind to accept many small losses. Program your mind to ‘sit still’ for a few large gains.
Recognize that fear, greed. ignorance, generosity, stupidity, impatience. self-delusion, etc., can cost you a lot more money than the market(s) going against you, and that there is no fundamental method to recognize these factors.
The Strategy Of John Neff
Taken from the April 26, 2013 issue of The Validea Hot List
Guru Spotlight: John Neff
Most investors wouldn’t give a fund described as “relatively prosaic, dull, conservative” a second glance. That, however, is exactly how John Neff described the Windsor Fund that he headed for more than three decades. And, while his style may not have been flashy or eye-catching, the returns he generated for clients were dazzling — so dazzling that Neff’s track record may be the greatest ever for a mutual fund manager.
By focusing on beaten down, unloved stocks, Neff was able to find value in places that most investors overlooked. And when the rest of the market caught on to his finds, he and his clients reaped the rewards. Over his 31-year tenure (1964-1995), Windsor averaged a 13.7 percent annual return, beating the market by an average of 3.1 percent per year. Looked at another way, a $10,000 investment in the fund the year Neff took the reins would have been worth more than $564,000 by the time he retired (with dividends reinvested); that same $10,000 invested in the S&P 500 (again with dividends reinvested) would have been worth less than half that after 31 years, about $233,000. That type of track record made the understated, low-key Neff a favorite manager of many other professional fund managers — an “investor’s investor”, if you will. (more…)
5 Mistakes Traders Make Again & Again
There is a big difference between bad traders and good traders, here is what I think separates one from the other:
- Bad traders continually have the desire to short the hottest stocks with the strongest momentum. What is their reasoning? “It can’t go any higher, this price is ridiculous.” Do they understand it is a bull market, no. Do they understand the technicals or fundamentals that are driving this stock? No. Bad traders just trade their beliefs good traders trade proven methods.
- Bad traders continually believe they have found the trade “That just can’t lose.” It is a sure thing. No doubt about it. They trade BIG, they trade a HUGE position size. Unfortunately the most obvious trades are usually the losing trades, so they lose, and lose big. Good traders divide out their trades so that no one trade has too big of an impact on their account. Good traders realize EVERY trade can win or lose so they plan a quick exit for if they are wrong.
- Bad traders do not do the proper homework before they begin to trade. Really Bad traders enter the markets with a mile of ego along with mud puddle deep understanding of what really works in trading. Bad traders have the belief that they are more clever than the markets and they can win based on their own intelligence. The problem is they do not do the homework of studying charts, trends, robust systems, winning methods, the right psychology for winning traders, risk/reward ratios, or the danger of the risk of ruin, or how the top performing stocks acted historically, and on and on. The good traders learn what it takes to succeed in trading, the complete story, while the bad traders learn some basics and think they are ready. They are wrong. The markets will show them.
- Bad traders make low probability trades, they are where the profits come from for the good traders. They go short in bull markets and long in bear markets. They sell naked puts on stocks collapsing into death spirals and sell calls on the best momentum stocks. They trade with big risks for small profits. They have a few small wins but some really huge losses. When they have a winner they take the profits quickly, but if they have a loser they let it run hoping that it will come back. They are the ones that lose the money, they are on the other side of the good traders trades.
- Bad traders want a good tip. They just want to be handed a winning system or a hot stock that just can’t lose. They do not even understand what all the talk of trading psychology and risk management is all about. They don’t need all that, they just want to make money. They just want the fish, they do not care about the fishing pole, bait, boat, or how to fish. Unfortunately they were to busy looking for that fish and didn’t understand the art of fishing, they will drown in the market ocean because they never learned how to swim themselves.
A Winning Trading Method is Really All About this…..
Successful trading is the attempt to be on the right side of the flow of capital. Each change in price happens with a new agreement between the current buyer and seller. Buyers and sellers are always equal for a transaction to take place, the cause of movement is determined by whether the buyers want in more than the sellers want out. Prices moves when capital flows into and out of a market, and inflow pushes up prices because demand becomes more than supply, price discovery happens to find out what sellers are willing to take to sell their position.
Many crazy over bought or over sold trends occur because one side has little pressure on it, position holders, shorts, or buyers sit tight as a trend accelerates. Equity markets rise when new money has to enter to be put to work but there is little interest at selling due to position holders sitting on winning positions.
Price resistance on a chart is caused by simply being the place that current holders are taking their profits. Price support happens at the price that people on the sidelines are ready to get back in at. These are simply spots where capital flows in and out. (more…)
Common Mistakes to Avoid while Trading:
- Failure to cut losses: Pride, ego, or stubbornness prevents the trader from selling.
- Not knowing “how much” to trade on each position: Overtrading positions can kill your account and take you out for good (risk of ruin).
- Average down in price: Placing good money after bad is a loser’s game.
- Listening to rumors: Forget the talking heads, rumors and tips as they are nothing but garbage and a sure way to substantial losses
- Lack of patience: It takes years to master trading as an advanced skill; even then, you are never done learning or adapting
- Not knowing when to sell: Determine your price objectives and risk-to-reward ratios prior to entering the trade; never allow emotions to make this decision. (more…)
Risk:Reward
The typical trader is not profitable, and I suggest that one must learn to operate differently than the typical trader. One example is how the typical trader looks at risk versus reward. I’m not talking about probabilities or risk:reward ratios, I’m referring to something entirely different. One of the things I do in my work with traders is teach them to look at it the following way: The trader determines the risk, but any potential reward is determined by the market. Thinking about risk versus reward in this fashion has a number of benefits.
It helps operationalize what I mean when I talk about focusing on what we can control and letting go of the rest. It is also a good example of one of my rules in action, that we must be rigid with risk but flexible with expectations. This is part of the bigger picture of focusing on doing the right thing versus focusing on being right. And as I talked about in my recent webinar, a specific technique is for a trader to continually ask the following question at each point during the trading process when a decision or action is about to made: “Am I acting in my own best interest right now”.
Trading well over time requires that we control the risk and must be flexible with expectations by accepting the fact that we must adapt to what the market is doing regardless of our wishes. It also serves as a reminder that upon entry, a trader is essentially assuming that if they go long/short they believe (and need) other buyers/sellers are going to step in afterword and move the market even further by paying worse prices.
More on this extremely important idea of accepting risk and managing expectations in future posts.
10 Investment Lessons
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