“A reminder to stubborn retail traders > no matter how much you want it or how much you add to your position, you have no power over the market… ever.”
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This paragraph is in my mind one of the most influential in all the trading literature, encompassing so many lessons about trading that its almost hard to know where to start, some of the themes covered in the seven lines of this paragraph include:
- Ego getting in the way of good practice.
- Trading as a psychological game.
- Overcoming yourself rather than the market.
- Trying to prove you are right.
- Relying on hope.
- Objective assessment of signs and signals from the market.
- Maintaining an open mind.
- The objectives of trading is to win not to be right.
Traders would do well to keep a copy of this paragraph visible as a reminder to try and ward off the inevitable occasions when they succumb to their trading demons.
When I think of complacency two major things come to mind:
Often a traders biggest loss comes after a string of winners. This is well documented and suggests to me that complacency is present. The ‘every swing I take is a home run feeling’ or the ‘I can do no wrong feeling’. Sure enough when in this state the market is all too willing to smash you back down hard as a reminder of your mortality.
The other thing I think of are traders who have taken their foot off the gas. Who have decided that their approach is the only thing that works and will never need changing. You have to stay on your toes. The chances of the same approach working over and over ad infinitum are slim. It may not need a complete overhaul and rather only subtle changes but it is complacent to believe something is a sure thing.
Most traders are imminently aware of their account balance – what I think many don’t think about is their emotional balance. Trading can take a serious toll on your emotional balance. It is a competitive endeavour that requires decision making under stressful conditions. Each trade you chose to assess and then take uses up some of this emotional capital. You need to be aware of this. Not doing so leads not only to exhaustion but possible burn out.
As I said I’d love to read some examples from you on these points as they pertain to trading in the comments section. If you’d like maybe we can go into these areas in more detail in the future.
“Most people think that they’re playing against the market, but the market doesn’t care. You’re really playing against yourself”. – Marty Schwartz.
The full quote is was from the following paragraph from Schwartz’z book – ‘The Pit Bull’s Guide To Successful Trading’. Schwartz himself was one of the original interviewees in the original ‘Market Wizards’ book.
– I’ve said it before, and I’m going to say it again, because it cannot be overemphasized: the most important change in my trading career occurred when I learned to divorce my ego from the trade. Trading is a psychological game. Most people think that they’re playing against the market, but the market doesn’t care. You’re really playing against yourself. You have to stop trying to will things to happen in order to prove that you’re right. Listen only to what the market is telling you now. Forget what you thought it was telling you five minutes ago. The sole objective of trading is not to prove you’re right, but to hear the cash register ring. (more…)
Nice passage I just came across going through various trading books this weekend. The following quote is from Dean Lundell: “Sun Tzu’s Art Of War For Traders And Investors”. It is an important reminder to pay attention when to deploy capital, when to be aggressive and when it is best to do nothing. Enjoy.
Sun Tzu finishes this lesson by reminding us to act only when it is to our benefit. A kingdom once destroyed cannot be brought back, nor can the dead be restored to life. This is the way to keep a country at peace and an army intact.
It is often said that the business of a trader is to stay in business. If you are frivolous in your methods, your equity will soon be gone and you will be out of business. So act when you see an opportunity and be content to stand aside when you do not.
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.
1. Find Your Strength. It is important that the trader determine what type of market, trending or consolidating, best suits their own personality and strength. The best traders stay focused on one or the other and master it.
2. Know Your Market. You should know your market when trading. In other words, know the levels of support/resistance; know how the instrument you trade moves with the general market; know who is likely to be on the other side and what they are thinking; and “the terrain of any market includes the “long-term charts” (140).
3. Prepare Your Order. Know when to get into a trade and why and know when to get out of a trade and why. Just like a secret agent who will “never enter a room without knowing how to get out of it in a hurry” (142).
4. Placing Your Order. Once you have adequately prepared for a trade, it is then necessary to be ready to place the trade when the time is right. Here “patience is the key…you must be able to wait for the market to tell you when the moment is right. Wait for the market to generate the action; don’t force it” (143).
5. Sticking With Your Plan. This is probably the hardest part about trading. Once you enter the battlefield (enter a trade), the emotions of fear, ecstasy, greed, and sheer excitement can then take over and cause you to forget your well prepared plans for entry and exit. You must enter a “Zen-like mental state” where you remain in control of your emotions. Not doing so could spell disaster. (more…)
In high volatile environment (now), you would often be shaken out of positions, only to see them reverse back in the desired direction. This is not a reason not to honor your stop losses. It is just a reminder that either your timing was inappropriate or that you don’t have an edge in the current market environment and therefore you shouldn’t participate until things change. There are times to buy, there are times to sell, there are times to do nothing.
In bear market, honoring your stop loss will save you form disaster. It will assist you to preserve capital, so you could live to trade another day. In bull market, it will free out money for better trading opportunities.
The only reason to hold a stock in your portfolio is if you would buy it at its current level and there aren’t any better opportunities for your money.
We are experiencing a rare event of market destruction that will lay down the foundations for the greatest wealth-building opportunities in our life time.
After the darkest hour of the night, the sun will rise again.
Karen Hill: “God forbid, what would happen if you had to go to prison? Mickey said that Jeannie’s husband…”
Henry Hill: “Do you know why Jeannie’s husband went to the can? Because he wanted to get away from her.
Let me tell you something. Nobody goes to jail unless they want to. Unless they make themselves get caught. They don’t have things organized.”
This conversation from the Goodfellas film reminds me of Ed Seykota’s famous saying, that ‘Win or lose, everybody gets what they want out of the stock market. Some people seem to like to lose, so they win by losing money’. I don’t believe in the literal interpretation of Seykota’s comment but I find the quote serves as a reminder to question the motives behind my trades.
This is not going to endure me to my fellow traders but I think it is important that we all are reminded what the market promises us.I am not talking from my gold and diamond encrusted throne. I am not exactly killing it. I am not perfect; I do not make money every trade or every day. This is a reminder to me, more than a reminder to you.
It promises a playing field, not the game.
It promises to reward risk, not proportionately.
It promises opportunity, it does not promise profits.
It promises a lesson, not learning.
It promises that the quality of indicators and analysis is proportionate to quantity of participants, not quality.
Once again I am not without my struggles; this market is not easy for me or anyone I talk to regularly. I have had to make changes that I did not want to make. I thought once 2008 happened it would always be like that. It has been a rude awakening. Is there something I missed? Let me know.