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Use discipline to eliminate impulse trading

  • Have a disciplined, detailed trading plan for each trade; i.e., entry, objective, exit, with no changes unless hard data changes. Disciplined money management means intelligent trading allocation and risk management. The overall objective is end-of-year bottom line, not each individual trade.
  • When you have a successful trade, fight the natural tendency to give some of it back.
  • Use a disciplined trade selection system: an organized, systematic process to eliminate impulse or emotional trading.

  • Trade with a plan – not with hope, greed, or fear. Plan where you will get in the market, how much you will risk on the trade, and where you will take your profits.
  • Where Are You Placing Your Bet?

    Some love risk. Others avoid it till the grave. Whether you take it head on or run in the other direction it will always catch you. Risk cannot be avoided so you better know how to put the odds in your favor. Consider the following:

    You want to see life as a continuum running on a loop back and forth from risk to reward. If you want a big reward, take a big risk. If you want an average reward and an average life, take an average risk. Easier said than done, however, if you want the big reward. Our system is notorious for playing Whac-A-Mole with achievers.

    From an early age, people are conditioned by families, schools, and virtually every other shaping force in society to avoid risk. To take risks is inadvisable; to play it safe is the message. Risk can only be bad. However, winners understand risk is highly productive, and not something to avoid. Taking calculated risks is different from acting rashly. Playing it safe is the true danger. Far more often than you might realize, the real risk in life turns out to be the refusal to take a risk.2 If life is a game of risk, then to one degree or another, being comfortable with assessing odds is the only option for a fulfilling life.

    Consider trading from a “startup” business perspective. Every business is ultimately involved in assessing risk. Putting capital to work to make it grow is the goal. In that sense, all business is the same. The right decisions lead to success, and wrong ones lead to insolvency. Blunt, but true. There are ways to go in the right direction, however. Ask yourself these questions:

    • What is the market opportunity in the market niche?
    • What is your solution to the market need?
    • How big is the opportunity?
    • How do you make money?
    • How do you reach the market and sell?
    • What is the competition?
    • How are you better?
    • How will you execute and manage your business?
    • What are your risks?
    • Why will you succeed? (more…)

    4 Faiths For Traders

    While trading is a game of math, probabilities, charts, and earnings it is also a mind game. Many times a trader’s beliefs will determine their success more than anything else. All traders start out believing it is possible to make money in the markets. Many want to earn their living one day by trading. However it is perseverance, beliefs, and mental determination that will determine who wins and who just quits. Shockingly the majority of millionaire traders lost most of their accounts when they started or they experienced huge draw downs while learning lessons the hard way.

     

    1. You must have faith in yourself. You must believe that you can trade as well as anyone else.. This belief arises from doing your homework and staying disciplined in your system. Understanding that it is not you, that it is your system that wins and loses based on market action will keep the negative self talk at bay.
    2. You must have faith in your method. You must study the historical performance of your trading method so you can see how it works on charts. Also it is possible to quantify and back test mechanical trading systems for specific historical  performance in different kinds of markets.
    3. You must have faith in your risk management. You must manage your risk per trade so it brings you to a 0% mathematical probability of ruin. A 1% to 2% of total capital at risk per trade will give almost any system a 0% risk of ruin.
    4. You must have faith that you will win in the long term if you stay on course. Reading the stories of successful traders and how they did it will give you a sense that if they can do it you can to. If trading is something you are passionate about all that separates you from success is time.

    13 One Liner Trading Rules For Traders

    Trade Management

    • Let winners run. While momentum is in phase, the market can run much further than might be expected.
    • Corollary to that rule: Do not exit winners without reason!
    • Be quick to admit when wrong and get flat.
    • Sometimes a time stop is the right solution. If a position is entered, but the anticipated scenario does not develop then get out.
    • Remember: if one thing isn’t happening the other thing probably is. Historically, this has never been good for me…
    • Be careful of correlations. Several positions can often equal one large position bearing unacceptable risk. Please think.

    Other thoughts

    • I am responsible for risk management, money management, trade management, doing the analytical work and putting on every trade that comes.
    • I am not responsible for the outcome of any one trade. Markets are highly random. I do not have a crystal ball. I am not as smart as I think I am.
    • Risk management is the first and last responsibility. I can make almost any mistake and be ok as long as I do not violate my risk management parameters.
    • Opportunity comes every day. Do not neglect the work. Must do analysis every day.
    • Opportunity comes every day. Get out of poor positions. Move on.
    • I am a better countertrend trader than a trend trader. Sometimes the crowd is right, and they will run me over at those times if I’m not quick to admit I’m wrong.
    • If you’re going to do something stupid, at least do it on smaller size.

    Discretionary & Systematic Traders

    Discretionary Traders…

    • …trade information flow.
    • …are trying to anticipate what the market will do.
    • …are subjective; they read their own opinions and past experiences into the current market action.
    • …trade what they want and have rules to govern their trading.
    • …are usually very emotional in their trading and taking their losses personally because their opinion was wrong and their ego is hurt.
    • …use many different indicators to trade at different times. Sometimes it may be macro economic indicators, chart patterns, or even macroeconomic news. Many discretionary traders are trying to game what they believe the majority of other traders will be doing based on market psychology as if it is one big poker game.. They are trying to form an opinion on what the market will do.
    • … generally have a very small watch list of stocks and markets to trade based on their expertise of the markets they trade.

    Systematic Traders…

    • …trade price flow.
    • …are participating in what the market is doing.
    • …are objective. They have no opinion about the market and are following what the market is actually doing, i.e. following that trend.
    • …have few but very strict and defined rules to govern their entries and exits, risk management, and position size.
    • …are unemotional because when they lose it is simply that the market was not conducive to their system. They know that they will win over the long term.
    • …always use the exact same technical indicators for their entries and exits. They never change them.
    • …trade many markets and are trading their technical system based on prices and trends so they do not need to be an expert on the fundamentals. (more…)

    15 Crucial Points for Traders

    1. You don’t have a crystal ball, and therefore accept you cannot predict a non-existent future. All you can do is can place your bets, control your risk, and then sit back and watch what happens.
    2. Price can only do one of three things: go up, go down, or go sideways. Ultimately, it is only when price moves that a profit or loss is generated. Therefore, as a trend follower it makes sense to focus your attention on price.
    3. Accept that you can only control the things you can control – namely when to enter or exit a trade, which markets to trade, how much equity to risk etc. All these elements should be part of your trading plan. Your entry parameters should be designed to identify when a trend may start developing, and your exit parameters when a trend has finished.
    4. Equally, accept that once you are in a trade you are no longer in control. You cannot control the market – to make money you have to let the trades play themselves out.
    5. Acknowledge that you can lose money even when all your criteria are met. You need to accept that you are playing an odds game, and there are no “can’t lose” trades out there.
    6. Being very conservative in the amount of equity you risk on each position means that you can have an emotional indifference towards each individual profit or loss generated.
    7. You MUST take full responsibility for your trading decisions, and adherence to your system rules.
    8. If things go against you do not blame anyone else, or any other external factor. You make all your trading decisions off your own back.
    9. Accept that luck (good or bad) may play a part on any one individual trade, however over the long run luck plays no part in your success or failure.
    10. Using a system with positive expectancy, allied to good risk control, and having control over your emotions will mean that, in the long term you will make money. However, there is a complete randomness about which trade will produce a profit or a loss. All you do is look for a set up which matches your own criteria, and then open the trade once the desired entry price level is reached.
    11. Once in a trade, your only concern is controlling your open risk, by cutting losses aggressively, By the same token, you need to let profits run. Providing the trend is still intact, then you should remain in the trade. Correct placing of your stops will keep the trade open until that happens.
    12. If done properly, trend following can take up very little of your normal day. Other than placing orders to open new trades, or to update stops on existing positions, there is very little to do in market hours. The process of identifying potential new setups can be done when the markets are closed, in the evening or at weekends.
    13. You only ever get taken out of a trade when price breaches your stop level. Do not close a position simply because price has moved a reasonable amount in your favour. Do not fear an open profit evaporating.
    14. Once a trade is closed, review the trade. Did you enter when you should have done? Was your initial stop correctly placed, and consequently were your position size and equity risk correct as per your trading plan? Was the trailing stop placed properly? If you can answer yes to all these questions, then it was a good trade, irrespective of whether you ended up with a profit or a loss.
    15. You know that, if you have a high level of trading efficiency, then it proves you are able to follow your trading rules, both emotionally and operationally. If the system you are using is proven to have a positive expectancy, then you will make money.

    What characterizes great and successful traders

  • Great traders graciously accept mistakes. They don’t need to be right all the time. Thoughts-Trading
  • Great traders focus on proper execution not on the outcome of a single trade.
  • Great traders concentrate on good risk management. They constantly manage their open positions.
  • Great traders are emotionally detached. Single trades do not affect their mood.
  • Great traders don’t compare themselves to others. They isolate themselves from the opinions of others.
  • Great traders are not afraid to buy high and sell low.  As you probably know by now the single biggest mistake a trader can make is to hold on to a losing position. Failing to cut losses quickly and letting them develop into huge losses is mentally and financially devastating. The underlying psychology which is responsible for this behavior is the ‘need to be right’ and the fear to sell at a loss. What aggravates the situation is adding to a losing position.  “Do more of the things that work and less of the things that don’t.“
  • Conclusion:Isolate yourself from the opinions of other people. Make trading decisions your own. Focus on proper execution. Have the courage to do the right thing because it is right.

  • 16 Points for Day Traders

    Accepting risk may cause losses, but accepting unfunded liabilities and negative skew can bankrupt us.

    Use models not to predict, but to create a range of possible outcomes for which we can plan.

    Markets follow cycles based on the perceptions and actions of its players, and one can gain alpha by using these cycles to manage risk and reward.

    Markets SEEK efficiency, but offer tremendous opportunities while traveling from inefficiency to efficiency.

    Both people and machines have flaws, so use the best attributes of each for peak performance.

    Forecasting is necessary but should be timid in nature, while action is not always necessary but should be BOLD on the occasions when conditions dictate it.

    Risk management is made more complete by searching for information that differs from your analysis rather than by that which confirms it.

    Successful practitioners turn mistakes into assets by generating learning experiences and continuous improvement.

    Remember to distinguish between clues that are necessary, vs. a complete picture revealing a group of necessary AND sufficient measures.

    Markets can be generally explained 95% of the time, but extreme events happen much more than a bell curve would indicate…using options guarantees that we’ll survive fat tails and grab positive skew.

    We are certain we DON’T know what will happen, so the best approach is to figure out what WON’T happen and blueprint accordingly.

    Diversification reduces risk most of the time, but we assume all assets are linked and eventually correlate.

    It is critical to have both a brain and a gut; the ability to find an edge, and the fortitude to trade it aggressively.

    Profitable opportunities are best entered in the earliest stage of latent power being converted to energy. Too soon is a waste of capital, too late involves too much risk.

    Virtually all long-term strategies are positioned to simply ride the tailwinds of rising prices. It is imperative to have methods to protect us from both headwinds and crosswinds to avert disaster.

    Treat volatility as a psychological risk to be managed into an ally, not as a financial measure of risk to obsess over.

    Sviokla & Cohen, The Self-Made Billionaire Effect- Book Review

    self

    Becoming a millionaire, even a multimillionaire is not all that extraordinary, becoming a billionaire is. What do self-made billionaires (and there are about 800 of them in the world) have that the rest of us don’t? John Sviokla and Mitch Cohen tackle this question in The Self-Made Billionaire Effect: How Extreme Producers Create Massive Value (Portfolio / Penguin, 2014).

    These billionaires (or Producers, as the authors call them) may be wired differently. They certainly think differently. They balance judgment and imaginative vision, a daunting mental task since “for most people, judgment and imagination sit on opposite ends of a mental spectrum. The more skilled one is at seeing things as they are (judgment) the harder it is to see things as they might be (imagination).“ (p. 4) Not only do they “revel in bringing clashing elements together,” “they seamlessly hold on to multiple ideas, multiple perspectives, and multiple scales.” (pp. 16, 15)

    Since they “cannot predict the exact time to make an investment, … they are willing to operate simultaneously at multiple speeds and time frames. They accept that timing is not under their control, and so they work fast, slow, super slow, or in all these modes at the same time. They urgently prepare to seize an opportunity but patiently wait for that opportunity to fully emerge.” (p. 19)

    (more…)