Everything in this world involves risk but by far the greatest risk is staying in your comfort zone because this involves the risks of lost opportunities. The secret to risk lies in knowing how to minimise its impacts on you. If you want to be a successful trader you must become passionate about the learning process. You must become totally focused on trading well as opposed to making money. You must learn from someone who can show you how to trade successfully rather than rely on machines and promises of “golden eggs”. You must become absolutely disciplined in the activity of trading. |
Archives of “risk” tag
rssBlind and Calculated Risk
An excerpt from Trend Commandments:
There are two kinds of risk: blind and calculated. The first one, blind risk, is always suspect. Blind risk is the calling card of laziness: the irrational hope, something for nothing, the cold twist of fate, winning the lottery, etc. Blind risk is the pointless gamble, the emotional decision, or the sucker play. The man who embraces blind risk never wins in the long run. However, calculated risk can build fortunes, nations, and empires. Calculated risk and bold vision go hand in hand. To see the possibilities, work things out logically, and to move forward in strength and confidence is how you win. Calculated risk lies at the heart of every great achievement and achiever since the dawn of time. Trend followers thrive on taking calculated risks. Like the original Karate Kid movie: Wax on, wax off. Risk on, risk off.
3 TRADING COMMANDMENTS
You Learn More From Your Enemies Than You Do From Your Friends. Make sure you take the criticism’s of others and use them to your advantage by recognizing that the more others criticize the more you value your own beliefs, trading or otherwise.
Be Careful Who You Get Into Bed With. Although not a trading rule per se, keeping good, solid company outside the charts, can help you be the best trader inside the charts. “Trust and integrity between two people are the most important variables in life and in business”
Never Operate From a Position of Fear. “If you are fearful in the markets, either as a result of taking a recent loss or some other mistake, or even as a result of being nervous about the level of risk you are taking, then you are putting yourself in the position of making and unclear and hence incorrect decision”
Black Belt Trading
Just like you shouldn’t practice your basic martial-arts forms in the ring where your mind is more focused on pain avoidance then executing the tactic correctly, a novice shouldn’t begin trading with real money and real consequences. Only once you’ve amassed significant practice in a safe environment where you can conduct your technical and fundamental analysis without being emotionally distracted should you begin to trade with real money. And when you finally start, don’t jump straight into the ring with Bruce Lee. Begin tentatively, gradually, slowly increasing your trading exposure over time as you become accustomed to the increasing levels of risk. How do you know you’ve moved too far, too fast? If you are finding it’s becoming harder to sleep at night, either because you are worrying about your trades or you are excited about your gains, then you have moved into the realm where your emotions are going to have too strong an effect. You are going to start making poor, emotionally-clouded decisions and so it is time to scale back.
No Patience on Entry
Anticipating a signal that never comes is common for traders monitoring the market closely and eager to get some money working. For example, a good buying opportunity arises when a stock breaks from an ascending triangle. Jumping in ahead of the breakout is not an ideal situation because the probability of success buying an ascending triangle is not as good as buying a breakout from one. What causes this mistake? I think a fear of missing out on the maximum amount of profit or the fear of too much risk in buying a stock are the two most common mistakes. Essentially, the two guiding forces of the stock market are at work here; fear and greed. By buying early, we can realize a greater profit when the stock does breakout since we will have a lower average cost. Or, by buying early we can reduce risk since a breakout followed by a pull back through our stop will result in a smaller loss as we have a lower average cost. What tends to happen, however, is that the stock does not break out when expected and instead pulls back. This either leads to an unnecessary loss or an opportunity cost of the capital being tied up while other opportunities arise.
The Solution
The simple and obvious solution is to wait for the entry signal, but there are also some things you can do to help yourself stay disciplined. Rather than watch potentially good stocks tick by tick, use an alarm feature to alert you to when they actually make the break. Watching stocks constantly is somewhat hypnotic, and I think the charts can talk you in to making a trade. However, letting the computer watch the stock may help you avoid the stock’s evil trance. Another good solution is to focus on different thoughts when considering a stock. Don’t think about potential profits, don’t think about minimizing losses. Instead, focus in on the desire to execute high probability trades. It takes time to reprogram yourself, so persevere.
THE TWELVE HABITUDES
A successful trader:
- Has a commitment to trading and comes prepared to trade.
- Is detached from the results. He thinks in terms of process and believes in the validity of the process.
- Is willing to accept loss.
- Is at ease with controlled risk.
- Thinks in terms of probabilities.
- Is comfortable with uncertainty.
- Takes the long term view.
- Has an attitude of abundance.
- Is optimistic.
- Has an attitude of open-mindedness and clarity of thought and perception.
- Has an attitude of courage. She is willing to act in the face of uncertainty and possible loss.
- Is disciplined. Discipline is putting into action those behaviors which need to be done to get you to your goals.
Habitude 1: Preparedness
- A successful trader trains his mind for high power trading. If he needs a coach or mentor, he gets one. He takes the time for meditation, self-suggestion and positive visualization. He learns helpful questions to ask himself. He does whatever it takes to prepare himself mentally to trade.
- Set goals
- Put your goal into words. Form a sentence that is specific, simple, short, positive, in the present tense, and achievable.
- Make a mental movie of yourself with the goal achieved.
- Step into the movie and live it and feel it as if it is already true.
- Design the steps necessary to take to get to the goal.
- Commit yourself to doing the steps and make a timetable to do them. (more…)
Four Common Emotion Pitfalls Traders’ Experience
Peak performance in trading is frequently hindered because of the emotions a trader feels, and more importantly how their trading behaviors change based on those emotions. I have found that the following four emotional experiences have the greatest, direct impact on a trader’s ability to achieve higher levels of success.
1) Fear of Missing Out
2) Focusing on the Money and Not the Trade
3) Losing Objectivity in a Trade
4) Taking Risk Because you are Up (or down) Money
Fear of missing out occurs when a trader is more afraid of missing an opportunity than they are of losing money. As a result, traders tend to overtrade in a desperate effort to ensure that they do not miss out on money-making situations. This overtrading can then potentially trigger an undertrading response if the traders experience a “trading injury” such as a big loss along the way. The way to solve this is first to accept the reality that you’re always going to miss out on something, somewhere. The second step is to establish game plans on paper and hold yourself accountable to executing those plans.
Focusing on the money and not the trade limits performance because the trader quantifies their success based on their profit and loss data. As a result, when he or she is up or down a certain amount of money that they view as significant, they alter their trading behaviors regardless of what the actual, real trading opportunity is that is presented to them. The way to solve this is to quantify your success based on HOW you traded not HOW much you made on the trade. Did you have edge? Was it your pitch? Did you make a high-quality trade?
Losing objectivity in a trade occurs because traders develop emotional ties to their previous entry levels. The trader is no longer making trading decisions based on the trade, but rather based on how much they are up or down in the trade. The key to overcoming this is for the trader to continually ask him/herself, “Why am I in this trade?” and “If I was not in this trade right now, would I enter this trade long, short or do nothing?”
Taking bad risk because you are up or down money
People do not like to lose – especially money. Normal solid risk/reward thinking becomes skewed once a trader is up a large sum of money. They begin to experience something called “mental accounting” and they treat money differently based on how they made money or how quickly they earned it. On the flip side, when traders are down money, they tend to be consumed with trading for revenge and trying to make it back, oftentimes as quickly as they lost it. As a result, they may take “shots” or do the “screw it” trade because they feel helpless. To solve this destructive behavior, the trader should use their trading journal to document their emotional highs and lows and what triggered it so they can be in tune with when they are feeling over-confident or angry/frustrated. Once they recognize these emotions, they should immediately call a time out and step away from the computer or reduce the risk they are taking until they can bring themselves back to center court.
Overtrading: A Common Mistake
Over trading is one of the biggest causes why traders never make it in the financial markets. With a click of a button, a trader can place a trade anytime he wants. It takes tremendous discipline to hold yourself back from over trading. There are many reasons why one may choose to over trade.
1. Traders without a plan
Traders without a plan are my favorite type of traders because they will always lose. Without a plan, how would one know when to take a trade and when not to? Having a trading plan is a necessity. I can not trade if I do not have a plan for the day. I feel lost without one.
2. Revenge trading
Many new traders become tilted after a loss or a string of losses. This causes them to revenge trade just to break even. This often leads to reckless trading forcing a trade when opportunity is low.
3. Chasing the markets
Alot of new traders feel more pain when they have missed a move than an actual loss. This is why new traders love to chase the markets. If price has moved away from your projected entry point, let it go. There are plenty of more opportunities. Chasing is one of the worst habits a trader can have. Not only does it offer you low rewards, it also gives you a horrible entry and alters your stop loss placement. Always think about the risk before the profits.
When you have a plan to follow, it is easy to filter out bad trades from good one. This keeps you discipline and selective in your trades. I personally do not like trading more than 5 round trips a day. Patience is a virtue. There are always good high probability trading opportunities everyday. Just sit tight and don’t jump the gun.
One way to control a loss is by reducing your size. The problem with gamblers is that they will often double up their stake so they can get even quicker. This usually leads to a greater loss and devastation. Having the strength to grind your way back from a loss is important in trading. Whenever I am having a losing streak, I will trade small and gradually recover. This also gives me the confidence I need after a string of losses.
Trading Errors
1. Trying to catch a falling knife. 2. Picking Tops 3. Failure to wait for confirmation. 4. Lack of patience. 5. Lack of a clear strategy. 6. Failure to assume responsibility. 7. Failure to quantify risk. |
Lessons Learned
“So far in 2009, what are the the most important thing I had learned about investing, trading, and/or the markets?”
Success takes longer than expected
- That you must learn to trade and trust yourself and not to become so dependent on the opinions of others, which ultimately keeps you from becoming the best you can be
- Keep it simple
- The very best profit opportunities occur in the midst of extreme emotional sentiment
- Always think opportunistic verses too bullish or bearish
- Persistence and dedication to a daily routine is key
- Developing an edge is the first step for trading successfully. Without that, disciplined trading will only make sure you gradually losing money
- The market is one unforgiving bitch!
- It is challenging to find non-correlated markets
- You have to respect the market even if you think it is under some kind of manipulation
- Keep your eyes open and powder dry
- If you fall in love with a stock keep 100 shares and let the rest go
- I’ve learned to be patient in waiting for my patterns to appear
- The value of ETFs
- The importance of finding special situations that will be profitable no matter what the market does
- Stay away from light volume when the only thing trading is the black boxes
- The importance of focusing only on one technical setup in order to improve one’s skill set
- I now think that buy and hold is a serious mistake
- Think big and think long term
- Don’t try to predict the markets
- Don’t be afraid in bear markets, just another opportunity
- The odds are stacked against the retail investor
- There’s no such thing as a sure thing
- The harder I work at it the more likely I am to succeed
- Conserving one’s capital is vital
- I know the rules – I just need to notch-up my discipline
- Smaller entry positions can be helpful
- Opportunities are everywhere
- The market is primarily psychologically driven
- Trade with the trend instead of trying to pick tops and bottoms
- Know where and when to get out before you get in
- As Johny Cash put it “You got to walk that lonesome valley, you got walk it by yourself. Nobody else can walk it for you. You got to walk it by yourself.”
- The difficulty of avoiding over-optimization/curve fitting
- Overtrading can be, and often is, a recipe for disaster
- To breathe before executing a trade
- Trading is not a profession for pessimists
- Never feel confident even when winning. Humility is a good thing
- You need to be quick and brutal with the trading decisions
- It is okay to sit out a potential move – risk management over reward chasing
- Don’t bet the farm in either direction
- There is no consistent logic to trading the market
- Some trades need to be taken when they appear, not just when you are ready
- There’s no rule that quality stocks must go up
- Don’t chase any overbought stocks
- When a sector (like financials) look so hopeless as it did in March there is potential to make a lot of money if things turn around even just a little
- Hope is a four-letter word and has no place in a trading strategy
- Patience. It is ok to sit out once in awhile
- Wait until you have an proven strategy supported by data before trading for keeps
Anything can happen. Trading is all about probabilities
Technically Yours-ANIRUDH SETHI ,BARODA ,INDIA
