Overtrading is also the result of improper trade preparation. It’s difficult to overtrade when you begin the day fully prepared. Trade what you see not what you hear or feel during the day. Plan your trades and trade your plan. Prior planning can prevent and severely limit these problems. Overtrading as I see it is the essence of trading frustration. Trying to “catch” a good trade regardless of risk involved is the ultimate in trading suicide. Overtrading will greatly reduce your probability of success because you are trading without a plan.
Archives of “risk” tag
rssNew Formula For Day Traders
Most people enter trading with the idea that they are going to make a lot of money. In other words, they have high expectations. There is nothing inherently wrong with that idea. In fact, we need motivation, and making a lot of money can be a great a motivator. Unfortunately, many traders also have low self-confidence. And are not profitable or not trading at the level they desire or are capable of.
This is a fairly common condition that can be expressed in the simple equation: High Expectations + Low Self-Confidence = Poor or Inconsistent Performance.
The new formula becomes: Focus on Process Goals + High Self-Confidence = Better and More Consistent Performance. (more…)
Expectancy
Expectancy along with position sizing are probably the two most important factors in trading/investing success. Sadly most people have never even heard of the concept.
Expectancy is the average amount you can expect to win (or lose) per rupee at risk.
Here’s the formula for expectancy:
Expectancy = (Probability of Win * Average Win) – (Probability of Loss * Average Loss)
As an example let’s say that a trader has a system that produces winning trades 30% of the time. That trader’s average winning trade nets 10% while losing trades lose 3%.
Expectancy, position-sizing and other aspects of money management are far more important than discovering the holy grail entry system or indicator(s). Unfortunately entry techniques are where the vast majority of books and talking heads focus their attention. You could have the greatest stock picking system in the world but unless you take these money management issue into consideration you may not have any money left to trade the system. Having a system that gives you a positive expectancy should be in the forefront of your mind when putting together a trading plan.
“The goal of a successful trader is to make the best trades. Money is secondary.”
==== Money is secondary? What the hell? Is Alexander joking?
Well, if we take some time and analyse this quote, Mr Elder has a very important point to make. How can good trades be better than money ? Why are we indoctrinated to think that money is the primary goal?
Don’t worry I was subject to this way of thinking for a long time but realized it has huge fundamental issues. The problem is that anyone can have a great trade, a lucky trade, a momentum trade, but the question is, can you replicate this performance in the future in the long term?
I repeat, can you replicate this trade in 10 years time?
Lets think soccer, is it more important to score a goal every match or to have a system of playing the game to have high probability of scoring opportunities?
Do you prefer to have one perfect trade or many high probability trades?
If you are in this for the long term, focusing on making the highest probability trades possible is a more sustainable way for a future success. If you spend time in analyzing your entries, exits, risk management on a consistent level, you have a higher probability of achieving your goal.
Typical trading errors
Don’t define the risk in advance of putting on a trade.
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Six Questions Worth Asking at the End of the Trading Day
What opportunities did I miss and what could have alerted me to those opportunities?
* What kind of trades are making me money? Where am I losing my money? What can I do about that?
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* When I took heat on trades, what could I have done to enter at better prices?
* Was the level of risk that I took in trades commensurate with my conviction in the trade ideas?
* What were the themes and markets driving prices today that I should be alert for tomorrow?
* What are the themes, economic reports, and markets that might drive prices overnight that I should be alert for in the morning?
PSYCHOLOGY & RISK for New Traders
The issues faced by the New Trader are greed, stress, impatience, fear, and lack of desire to learn. “When a new trader enters the stock market with money but no experience, the odds are he will quickly gain experience by losing money.” RISK The New Trader must make managing money a priority, run trading like a business, control trading size, admit when he is wrong, and lock in strategy driven profits. “When you go to your computer to trade, you should approach it as if you are entering an auction, not a casino.” |
50 Trading Mistakes
1. Many futures traders trade without a plan. They do not define specific risk and profit objectives before trading. Even if they establish a plan, they “second guess” it and don’t stick to it, particularly if the trade is a loss. Consequently, they overtrade and use their equity to the limit (are undercapitalized), which puts them in a squeeze and forces them to liquidate positions.
Usually, they liquidate the good trades and keep the bad ones.
2. Many traders don’t realize the news they hear and read has already been discounted by the market.
3. After several profitable trades, many speculators become wild and aggressive. They base their trades on hunches and long shots, rather than sound fundamental and technical reasoning, or put their money into one deal that “can’t fail.”
4. Traders often try to carry too big a position with too little capital, and trade too frequently for the size of the account.
5. Some traders try to “beat the market” by day trading, nervous scalping, and getting greedy.
6. They fail to pre-define risk, add to a losing position, and fail to use stops.
7 .They frequently have a directional bias; for example, always wanting to be long.
8. Lack of experience in the market causes many traders to become emotionally and/or financially committed to one trade, and unwilling or unable to take a loss. They may be unable to admit they have made a mistake, or they look at the market on too short a time frame.
9. They overtrade.
10. Many traders can’t (or don’t) take the small losses. They often stick with a loser until it really hurts, then take the loss. This is an undisciplined approach…a trader needs to develop and stick with a system. (more…)
25 Golden Rules
#25-3/4. Do as I do – not as I say – but do it without delay! (NB: 13F-HR’s are too late!)
#25-1/2. The trend is your friend….errrr….ummm…..except when its not.
#25-1/4. Whatever kind of metaphorical market animal you are (bull, coq, chicken, weasel, whatever), always remember that Pigs Get Slaughtered.
#25. Buy “The Best of Breed” companies…..unless they are priced at levels preceding the moment when Pigs Get Slaughtered, or when the trend is not your friend, or I am saying the opposite of what I am doing.
#24. NEVER short “Best of Breed” companies…except when Pigs Are Getting Systematically Slaughtered in other “Best of Breed” companies (but don’t get piggy puking out the pigs).
#23. Cut your losses short and let your winners ride – but not when pigs are getting slaughtered
#22. No one ever made a dime by panicking … unless apparently you’re following the previous rule #23 which says you should cut your losses short and let your winners ride.
#21. NEVER double-down (except when you have material non-public information and deep pockets) or if you’re Ed Thorp, or if you’re playing at The Martingale Room.
#20. “Systems” always stop working (Even if they DID actually work at one point). So forget about asking about their “system”: what you really want to know about is their Plans B&C for when it DOES stop working (and why they’re not using them NOW).
#19. Diversify to control risk – except if you are Eddie Lampert
#18. Don’t own too many names – unless you’re Ed Thorp or diversifying to control risk per the above rule
#17. Invest in what you know – unless you don’t know a whole lot about those things.
#16. Buy when others are (almost finished being) fearful.
#15. Buy when there is blood in the streets – but only after it has dried a little bit. (more…)
Keys to Trader Self-Talk
“And the talk slid north, and the talk slid south . . .” Rudyard Kipling
What do you say to yourself when you trade? Now some of you may be thinking, “Talk to myself? I don’t talk to myself.” But of course you do. You’re talking to yourself when you think that. That’s how we think. We think in words (and sounds, pictures and feelings). But most precisely we think in words; therefore, we talk to ourselves.
When you’re considering entering a market, what are you saying to yourself? Are you saying, “What if I lose? “What if I’m wrong?” If you hesitate before entering and have trouble pulling the trigger, I guarantee you’re saying something similar to that.
Since good trading is very much about controlling the risk, often the first consideration is where to put our stops. You might first ask yourself,”What is my risk?” This is better than asking, “What if I lose?” However, it still takes your thoughts to risk and loss rather than reward and profit. If you’re hesitating when you should be entering the market, you could change your comment to something like, “How much can I make?”or, “What if this trade is a big winner?”
Of course, not everybody hesitates to enter a trade: some jump the gun and some overtrade. These people are anticipating large profits. If you hear yourself saying, “This is going to be a big move!” or “This is going to the moon!”, you’ll need to activate caution. Remember, gamblers often think they’ve got a sure thing. When you hear yourself promoting a trade, it would be wise to ask yourself, “What is my risk?” and “What would have to happen to know that I’m wrong or no longer right?” Our self-talk reveals our biases. If you’re talking up your trade or talking it down, you have a good clue that you’ve lost your neutrality. In such an instance it would be advisable to ask yourself, “What is the market showing me now? What does the market want? What do I know for certain? Have my rules for entry been met?”
If you hear yourself saying, “I don’t believe this!” Look out. You’re warning yourself that you’re not taking the market action at its face value; an extremely dangerous thing to do. Remember price is your predominant reality when you trade.
Some traders demean themselves when they trade. They speak to themselves in negative ways they would never let another person talk to them. They call themselves stupid idiots, failures, fools, losers, and so forth. While their intention in so speaking might be to motivate themselves to better behavior, it seldom does. Self-denigration rarely produces good results. Have you ever noticed that the more you scold yourself, the more your behavior reproduces itself? The strangest secret is that we become what we say. I tell my clients that I won’t allow anybody to speak unkindly to my clients, including themselves.
Much better to encourage yourself. “You can do better than this.” “You don’t need to do that again.” “I’ll do better tomorrow.”
Start writing down the words you say at critical junctures in your trading. You’ll begin to understand where your thinking is helpful and harmful, and you’ll be able to change the direction of your thoughts by shifting your words. There’s an article on my website discussing the critical importance of questions. Check it out. What if you could learn to direct your words and thoughts in such a way that you truly support your success in trading?