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FEAR

  
  Education
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No, not the fear you’re thinking of, the other kind of fear, the fear of missing out.

Many people believe there are two emotions that traders feel, fear and greed, I disagree, it’s only fear.  The fear of loss and the fear of not having enough.  There’s a difference between being greedy and being fearful of not having enough, and it’s important.  Greed is defined by the excessive desire to possess wealth or goods.  Synonyms include lust and gluttony.  The fear of not having enough is very different, and I believe that is what drives market participants.

Trading is inherently a competitive exercise.  We look across the desk at the guy next to us and see that he made X amount of dollars today and we made less.  We look at the major averages as benchmarks, we listen to people taking profits on our StockTwits stream and feel both happy for them and wanting to punch them in the face for making a better trade on the same stock.  It’s only natural.  And when the market is moving well, not being involved while everyone else is, while your benchmark is climbing, traders can feel a considerable amount of fear.

I’ve felt this many times, the fear of not having enough.  And I’ve become pretty good at gauging both my own emotions regarding this and the pulse of the market as a whole.  Many times this emotion can be seen exhibited in the price action through a blow off top where price accelerates at the end of a big move and then reverses sharply.  Intermediate term swing and position trading is about staying with the trend and not getting shaken out, while managing your risk well. (more…)

Small Things Matter

  
  Education
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Ask many experienced traders to describe their most profitable trade, and you’ll hear a fantastic story. It’s usually purely chance. I know it was that way for me on a number of occasions. For example, the trader may have been going long on a large position when suddenly a report came out that shocked the market. Prices shot up as the public heard the news, and the trader made a killing. These stories are thrilling. They inspire you to sharpen your trading skills and master the markets. Who doesn’t want to be at the right place at the right time? But if you want to be a profitable, consistent trader, you can’t sit around waiting for a fantastic trading opportunity to present itself. Most of the time, trading is about making trade after trade to the point that it seems boringly routine. Rather than seek out big, exciting trades, it’s important to remember that small trades matter a lot.

As thrilling as big trades seem to be, it’s the smaller trades that keep you in business. It’s not unusual for traders to feel they have reached a plateau when trading. They make trade after trade and little seems to happen. They don’t suddenly find the Holy Grail of trading and achieve the great wealth and status they’ve dreamed about. Whether they realize it or not, however, they are still making progress. Each new observation of the market, each trade they execute, no matter how small, adds to their wealth of knowledge. They intuitively learn what to do and what not to do. They may see a slight variation in chart pattern that creates an inefficiency in price and learn just how far the pattern can deviate from the norm and still forecast the most likely movement of prices. On another day, they may learn a new way to place a protective stop so that they protect their risk, yet don’t get stopped out prematurely. These small everyday, seemingly insignificant experiences matter a lot.

Trading is challenging. Few survive trading over many years. The traders who do survive, however, know how to stay focused and patient. They don’t go for quick thrills, and unrealistically huge profit objectives. They know that losing is easy and can happen in the blink of an eye, but rebuilding capital usually takes a lot of work over a long period of time.

Instead of going for risky, exciting trades, you must seek out high probability setups, take steps to protect your capital, and execute your trades decisively, according to your trading plan. You may not have an exciting tale to brag about, but you take home steady profits–you get paid to trade. And when you make trade after trade, the small profits add up, and you end up with big profits in the end.

So when you feel that your earnings have reached a plateau, don’t get discouraged. As long as you are making profits, and staying in business, you’re continuing to develop your trading skills. You’re adding to your knowledge base. You’re developing a more intuitive feel for how the markets operate. It may not seem like you’re making the profits of a trading wizard, but if you keep at it, you’ll be one of the rare few that join the ranks of winning traders.
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Trade what you see, not what you think!

Rules for handling risk are..

  
  Education
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Image result for RISK· Gather as much information as possible before entering any risk.
· Get a toe wet first, if possible, before the final plunge.
· Risks alone are more valuable than when shoaled with others.
· During the peak moments of risk constantly evaluate and reevaluate.
· Always have a backup plan.
· Always have an exit.
· When in doubt, be bold.

Whatever your brand of risk, these guidelines will keep you afloat to take another, and another, through the discovery of self.

Mark Douglas makes some great statements

  
  Education
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In the book Trading In The Zone, Mark Douglas makes some great statements that I truly believe are important.  He states:

I AM A CONSISTENT WINNER BECAUSE:

  • I objectively identify my edges
  • I predefine the risk of every trade
  • I completely ACCEPT the risk or I am willing to let go of the trade
  • I act on my edges without reservation or hesitation
  • I pay myself as the market makes money available to me
  • I continually monitor my susceptibility for making errors
  • I understand the absolute necessity of these principles of consistent success and, therefor, I always follow them with confidence and joy.

What you’ll notice about his statements is that it is he is assuming that you have already done the first set of bullets up top; that you have already created a plan and you already have a set of RULES.  Now you might ask, how do I know if my set of rules now will work next month or next year? GREAT question. The market dates back all the way into the late 1700’s.  There is literally a few HUNDRED years of data.  That’s why I say that back testing is KEY.  Now that doesn’t mean that you need to back-test 200 years of data.  Not even close.  You want to back-test a reasonable time depending on your time-frame of trading.  For example, if I plan on trading based on a daily system, then I might back-test the last 5-6 years.  If I’m going to trade based on an intra-day 3 minute chart, I would probably backtest about a year.  There is no way to KNOW what is going to happen, but trading really boils down to probabilities.  Time and time again the same things tend to repeat themselves.  Why do you think the markets tend do to the same things over and over.  Why does it seem that certain stocks that are in the same class look the same from a chart perspective?  How come a company will report great quarterly results, but still go down? It’s because there is a greater number of traders that BELIEVE that this is where an equity is too much or too little.  Why do you think there are people who are talking about a “recession” right now?  Again, it’s because the same things seem to be occurring that did prior to a previous recession and people have that BELIEF.

So what does all this mean?  What can you gather from all this?  Well, a few things actually.  One is to make sure you create, find and organize a PLAN for trading.  Think about it as if you wanted to open up a company.  Do the research and find out how some of these traders got started and what they did.  Once you’ve done that, write down your plan and look at your questions from up top.  Once you can answer ALL of them, then you are moving toward being a consistently profitable trader.  Then take a look at what Mark Douglas wrote.  You have to own these statements mentally.  You have to truly believe that you are a consistent winner because of all of the statements above.

Remember, you are starting a business, and if you want your business to succeed, you need to have a PLAN!

“Plan your trade, and trade your plan” – Anonymous

Paul Tudor Jones – 60 Minutes Interview

  
Education, Video
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Jones is considered one of the best traders in the business for one main reason: CONSISTENCY!He has produced positive returns for 25 straight years! I don’t know the exact number of years, but you get my point. The fuel behind his consistency is his discipline, specifically his ability to manage risk and cut losses.

Besides his tremendous success as a trader and a hedge fund manager, what makes Jones an even bigger hero in my view is his philanthropy. I love the phrase “The secret to living is giving” and Jones truly exemplifies this quote. In other words, what’s the point of being successful if you never give back to others? As Jones says in this 60 Minutes interview: “You find your joy in life through service and sacrifice.” Enjoy the video!

 

Three stages of trading objectives.

  
  Education
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To make money every trade. At first, I did not have the ability to make money every trade.  After I had the ability to make money on most trades I realized it was a horrible objective.  If you want to make money on every trade you are always waiting.  You can never take that much risk and hence the rewards are very small.  I was trading 1′s and 2′s to start, which was the right thing to do.  I would watch my mentor take every trade, no matter how dog shit it was.  As a 1 and 2 lot trader you do not have the same luxury to take dog shit trades because you can only trade one way.  Because of the flexibility he had he could do more and the truth is no matter how good or bad a trade looks we don’t know until we are in it. Getting the most out of a trade is the mark of good trader.  Risk is always related to reward.  There is very little money in making money on every trade.  This type of trading is like making 100k and keeping 80K

To make huge chunks of money.  After I realized that objective did not work for me I shifted to the extreme.  I started to swing for the fences whenever I had the ability.  It is nice when I was right but I struck out a lot too. At this point, I did not respect trading.  I did it because money made me a bad ass.  Well as you know you hard to pay your bills with bad ass.  This type of trading is like making 200k and keeping 80k.

Here are the major risks of having both of those objectives.  The first is making small amounts of money no matter the situation.  Eventually you will get in a hole because statistically you are behind.  Trading every situation the same is bad.  The second objective is trying to make huge amounts of money on every trade.  If the first trades were the best and I stopped it was great.  If the first trades were bad, I was forced to stop.  It made it hard to learn.

Top Ten Side Effects of Greedy Trading

  
  Education
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  1. Greed causes the trader to only look at the best case scenario for profits and ignore the worst case scenario for losses in every trade.
  2. Greedy traders trade WAY to big a position size.
  3. A Greedy trader’s #1 priority is getting rich quick while ignoring the risk of ruin.
  4. Traders that are greedy tend to believe they can have returns bigger than the best traders in the world right at the beginning.
  5. Greed makes traders have absurd targets for their trades.
  6. Greedy traders tend to buy stocks that are down 50% believing they will double and go back to where they were.
  7. Greed distorts a trader to focus on the money not the homework involved to make the money.
  8. Traders take trades where the odds are way against them because of the greed of wanting to make huge returns on one trade. (Far out of the money options)
  9. Greedy traders trade with no plan and no method they are just pursuing profits randomly.
  10. Greedy traders are always looking for the easy path to money not to the real path of hard work and experience.

Ten Side Effects of Greedy Trading

  
  Education
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  1. Greed causes the trader to only look at the best case scenario for profits and ignore the worst case scenario for losses in every trade.
  2. Greedy traders trade WAY to big a position size.
  3. A Greedy trader’s #1 priority is getting rich quick while ignoring the risk of ruin.
  4. Traders that are greedy tend to believe they can have returns bigger than the best traders in the world right at the beginning.
  5. Greed makes traders have absurd targets for their trades.
  6. Greedy traders tend to buy stocks that are down 50% believing they will double and go back to where they were.
  7. Greed distorts a trader to focus on the money not the homework involved to make the money.
  8. Traders take trades where the odds are way against them becasue of the greed of wanting to make huge returns on one trade. (Far out of the money options)
  9. Greedy traders trade with no plan and no method they are just pursuing profits randomly.
  10. Greedy traders are always looking for the easy path to money to the real path of hard work and experience.

Six Rules of Michael Steinhardt

  
  Education
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1. Make all your mistakes early in life: The more tough lessons you learn early on, the fewer (bigger) errors you make later. A common mistake of all young investors is to be too trusting with brokers, analysts, and newsletters who are trying to sell you something.

2. always make your living doing something you enjoy: Devote your full intensity for success over the long-term.

3. be intellectually competitive: Do constant research on subjects that make you money. Plow through the data so as to be able to sense a major change coming in the macro situation.

4. make good decisions even with incomplete information: Investors never have all the data they need before they put their money at risk. Investing is all about decision-making with imperfect information. You will never have all the info you need. What matters is what you do with the information you have. Do your homework and focus on the facts that matter most in any investing situation.

5. always trust your intuition:  Intuition is more than just a hunch — it resembles a hidden supercomputer in the mind that you’re not even aware is there. It can help you do the right thing at the right time if you give it a chance. Over time, your own trading experience will help develop your intuition so that major pitfalls can be avoided.

6. don’t make small investments: You only have so much time and energy so when you put your money in play. So, if you’re going to put money at risk, make sure the reward is high enough to justify it.

Trading Wisdom – Larry Hite

  
  Education
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Larry Hite – Turned a $2 million managed account into $800 million in 8 years.
LarryHite

Throughout my financial career, I have continually witnessed examples of other people that I have known being ruined by a failure to respect risk. If you don’t take a hard look at risk, it will take you. If you argue with the market, you will lose. It is incredible how rich you can get by not being perfect. Never risk more than 1% of your total equity in any one trade. By risking 1%, I am indifferent to any individual trade. Keeping your risk small and constant is absolutely critical. I have two basic rules about winning in trading as well as in life:

  1. If you don’t bet, you can’t win. 
  2. If you lose all your chips, you can’t bet. Frankly, I don’t see markets. I see risks, rewards, and money.

 

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