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Trading Should Be Effortless

  
  Education
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  • Money comes in bunches.

That one says it all. You can’t force trades. You can’t simply work harder in order to be ‘in sync’. Sometimes you are, sometimes you are not. You simply have to accept that as being part of the trading business. What you can do, is to closely monitor if your performance is in sync with the market’s performance. If the markets make new highs and your overall portfolio is going down something is wrong. You need to address that issue. Fast. The best way is to step aside and drastically reduce exposure and risk. That’s what I did.

  • Trading should be effortless.

A true piece of wisdom. In my experience when I trade well it is like shooting fish in a barrel. Almost everything works. I don’t need to be overly patient with positions. The money comes in very fast. That’s exactly how trading should be. The exact opposite was the case during the first 2 months of this year. So I did what I had to do. I recognized the situation for what it was and admitted my efforts were not leading my portfolio anywhere. It was like folding when you are dealt a bad hand in poker. So I folded. Now I am waiting for the next hand. If it is a bad one I fold again. If a series of trades start to really go my way I push it hard and increase exposure and trade aggressively.

  • When in doubt stay out.

This one is key. That’s how I interpret the adage: It doesn’t mean you don’t trust your instincts or your methodology. As a trader you should adapt to new situations. You constantly analyze the markets and your performance. Then you adjust your trading. Then you compare your expectations with the actual outcome. Then you adjust your trading. Then you repeat the process. At times things simply do not work. That’s when doubt creeps in. You know something is not ‘feeling right’. Your job is to protect your capital. Your job is not ‘to be right’. Put another way: You should be able to exit or reduce exposure without the need for explanations. The markets usually give you those explanations at some later point in time.

Trading Sins

  
  Education
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  • over-trading
  • too much leverage
  • under capitalization
  • not adhering to stops
  • trading without a plan
  • paying short thrift to proper execution
  • assuming too much risk, not respecting it
  • trading products I don’t fully understand
  • competing where I have no edge
  • becoming too emotional
  • under-valuing the need for ample liquidity
  • misaligning time-frames (the time a trade typically needs to play out, versus my expectation/need for it conclude)

Successful traders fail all the time. In fact, many even fail a majority of the time. The difference is that their failures are not a failure to execute their plan. The failure rests in the fact that the expertly chosen trade turned out to be wrong (nobody can be right 100% of the time – except Congress). And when the trade was wrong, they took their loss which resulted in minimal damage to their portfolio and moved on to the next opportunity.

Trading Rules

  
  Education
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  • The purpose – a good set of trading rules promote growth they do not create limitations.  Not trading during x period of time is not a rule, it is a limitation.  Do not get me wrong there are times when you need to limit yourself but that is not all times.  If you have a plan, you will be able to understand when you are most at risk of trading poorly.  Eventually, you can work through it.  Sometimes all it takes is being aware of it.
  • Simple- They need to be simple.  They need to hang over and direct all of your actions.  The only way you are going to remember and use them to your fullest ability is if you can understand them.  Rules are more simple than limitations.
  • Must apply– Rules or a trading plan are only as good as your ability to apply them.  Once again, you have to believe in them, you have to make them your own.
  • Cohesive- All rules needs to eventually act as one.  Each rule dependent on another.  This will make it easier to follow and understand which one you are breaking.  This also makes the application easier.

10 Common Trading Errors

  
  Education
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What are the common errors, the improprieties, the lack of attention to proper mores, the p’s and q of trading that cause so much havoc and could be rectified with a proper formal approach? Here are a few that cost one fortunes over time.10-Common Errors

1. Placing a limit order in and then leaving the screen and not canceling the limit when you wouldn’t want it to be filled later or some news might come out and get you elected when the real prices is a fortune worse for you

2. Not getting up or being in front of screen at the time when you’re supposed to trade.

3. Taking a phone call from an agitating personage, be it romantic or the service or whatever that gets you so discombobulated that you go on tilt.

4. Talking to people during the trading day when you need to watch the ticks to put your order in.

5. Not having in front of you what the market did on the corresponding day of the week or month or hour so that you’re trading for a repeat of some hopeful exuberant event which never happens twice when you want it to happen.

6. Any thoughts or actual romance during the trading day. It will make you too enervated or too ready to pull the trigger depending on what the outcome was.

7. Leaving for lunch during the day or having a heavy lunch.

8. Kibbitsing from people in the office who have noticed something that should be brought to your attention.

9. Trying to get even when you have a loss by increasing your size and risk.

10. Not having adequate capital to meet any margin calls that mite occur during the day, thereby allowing your broker to close out your position at a stop while he takes the opposite side. What others do you come up with?

20 Ways to Get Good Karma- Dalai Lama,Many teachings can be directly applied to trading

  
  Education
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  1. Take into account that great love and great achievements involve great risk.
  2. When you lose, don’t lose the lesson.
  3. Follow the three R’s: 
    –  Respect for self, 
    –  Respect for others and 
    –  Responsibility for all your actions.
  4. Remember that not getting what you want is sometimes a wonderful stroke of luck.
  5. Learn the rules so you know how to break them properly.
  6. Don’t let a little dispute injure a great relationship.
  7. When you realize you’ve made a mistake, take immediate steps to correct it.
  8. Spend some time alone every day.
  9. Open your arms to change, but don’t let go of your values.
  10. Remember that silence is sometimes the best answer.
  11. Live a good, honorable life. Then when you get older and 
    think back, you’ll be able to enjoy it a second time.
  12. A loving atmosphere in your home is the foundation for your life.
  13. In disagreements with loved ones, deal only with the current situation. Don’t bring up the past.
  14. Share your knowledge. It is a way to achieve immortality.
  15. Be gentle with the earth.
  16. Once a year, go someplace you’ve never been before.
  17. Remember that the best relationship is one in which your love for each other exceeds your need for each other.
  18. Judge your success by what you had to give up in order to get it.
  19. If you want others to be happy, practice compassion.
  20. If you want to be happy, practice compassion.

 

Seven Insights for Disciplined Trading

  
  Education
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I’ve always been a fan of Mark Douglas’ work, as my copy of his initial book on trading psychology, The Disciplined Trader, is thoroughly marked up thanks to Douglas’ many innovative ideas about mastering the internal challenges we all face with trading.  His newest book, Trading in the Zone, is full of more great insights. I recently finished reading his excellent follow-up work, and it sparked my review of key points I take out of Douglas’ ground-breaking insights:

1) Develop consistency.  Douglas focuses on how we can create a mindset of consistency by developing beliefs which support us in obtaining this result.  In order to develop consistency, Douglas emphasizes beliefs such as objectively identifying your edges, defining the risk in each trade in advance, accepting the risk to be able to exit a position when a defined loss level is realized, and many other key mindsets that help traders work through the issues they face in taking a trade, making the trade and executing their exit from the trade.

2) Trading is a probability game.  You can’t be a perfectionist and expect to be a great trader. Your losses (that you hope will return to breakeven) will kill you.

3) Jumping in too soon or getting in too late.  These mistakes come from traders not having a well-defined plan of how they will enter the market.  This positions the trader as a reactive trader instead of a proactive trader, which increase the level of emotion the trader will feel in reacting to market movements.  A written plan helps make a trader more systematic and objective, and reduces the risk that emotions will cause the trader to deviate from his plan.

4) Not taking profits on winners and letting winners turn to losers.  Again this is a function of not having a properly thought-out plan.  Entries are easy but exits are hard.  You must have a plan for how you will exit the market, both on your winners and your losers.  Then your job as a trader becomes to execute your plan precisely.

5) Great traders don’t place their own expectations on to the market’s behavior.  Poor traders expect the market to give them something.  When conditions change, a smart trader will recognize that, and take what the market gives. 

6) Emotional pain comes from expectations not being realized.  When you expect something, and it doesn’t deliver as expected, what occurs? Disappointment.  By not having expectations of the market, you are not setting yourself up for this inner turmoil.  Douglas states that the market doesn’t generate pain or pleasure inherently; the market only generates upticks and downticks.  It is how we perceive and respond to these upticks and downticks that determine how we feel.  This perception and feeling is a function of our beliefs.  If you’re still feeling pain when taking a loss according to your plan, you are still experiencing a belief that your loss is somehow a negative reflection on you personally. 

7) The Four Major Fears – fear of losing money, being wrong, missing out, leaving money on the table.  All of these fears result from thinking you know what will happen next. Your trading plan must approach trading as a probabilities game, where you know in advance you will win some and lose some, but that the odds will be in your favor over time.  If you approach trading thinking that you can’t take a loss, then take three losses in a row (which is to be expected in most trading methods), you will be emotionally devastated and will give up on your plan.

Trading Wisdom-One Liners

  
  Education
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  • Look at your trading as a series of probabilities, don’t focus on any single profit or loss.LOP1
  • Want what the market wants.
  • Do your homework. Come prepared to each day’s trading.
  • Never take a trade on the open in the direction of a that day’s gap.
  • Don’t risk too much of your trading capital on any single idea.
  • Remain flexible.
  • Believe what you see. If the market’s going up or down, it’s going up or down.
  • Anything can happen. The wildness lies in wait.
  • Verify your trading methods or systems.
  • Caveat emptor (“Let the buyer beware.”) when buying a trading system or hiring a mentor.
  • Your own personal psychology will express itself regardless of your chosen method.
  • An opinion isn’t worth much, your own or someone else’s.
  • Watch how the markets react to the news.
  • Learn from your mistakes.
  • Stay in the now. Don’t trade yesterday, today. Don’t trade tomorrow, today.
  • Don’t worry about a missed opportunity. Another one is on the way. Besides there were several that just passed of which you were totally unaware.
  • If you don’t risk, you can’t make money. If you lose all your trading capital, you can’t trade. Find balance.
  • Markets don’t go in a single direction. The trend will wobble on it’s way to its destination.
  • The trend is your friend. Unless you’re a counter trend trader, and then only it’s end is your friend.
  • Tomorrow’s another day, a whole new trading opportunity. Be optimistic.
  • Forgive yourself. Take the lesson, and move on.

Position Size Can Be More Important Than the Entry Price

  
  Education
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Too many traders focus only on the entry price and pay insufficient attention to the size of the position. Trading too large can result in good trades being liquidated at a loss because of fear.

On the other hand, trading larger than normal when the profit potential appears to be much greater than the risk is one of the key ways in which many of the Market Wizards achieve superior returns. Trading smaller, or not at all, for lower probability trades and larger for higher probability trades can even transform a losing strategy into a winning one.

For example, Edward Thorp, who started out devising strategies to win at casino games before achieving an extraordinary return/risk record as a hedge fund manager, discovered that by varying the bet size based on perceived probabilities, he could transform the negative edge in Blackjack into a positive edge. An analogous principal would apply to a trading strategy in which it was possible to identify higher and lower probability trades.

Five Market Scenarios

  
  Education
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  1. Bad Markets – A good pattern won’t bail you out of a bad market, so move to the sidelines when conflict and indecision take hold of the tape. Your long-term survival depends on effective trade management. The bottom line: don’t trade when you can’t measure your risk, and stand aside when you can’t find your edge.
  2. Bad Timing – It’s easy to be right but still lose money. Financial instruments are forced to negotiate a minefield of conflicting trends, each dependent on different time frames. Your positions need to align with the majority of these cycles in order to capture the profits visualized in your trade analysis.
  3. Bad Trades – There are a lot of stinkers out there, vying for your attention, so look for perfect convergence before risking capital on a questionable play, and then get out at the first sign of danger. It’s easy to go brain dead and step into a weak-handed position that makes absolutely no sense, whether it moves in your favor or not. The bottom line: it’s never too late to get out of a stupid trade.
  4. Bad Stops – Poor stops will shake you out of good positions. Stops do their best work when placed outside the market noise, while keeping risk to a minimum. Many traders believe professionals hit their stops because they have inside knowledge, but the truth is less mysterious. Most of us stick them in the same old places.
  5. Bad Action – Modern markets try to burn everyone before they launch definable trends. These shakeouts occur because most traders play popular strategies that have been deconstructed by market professionals. In a sense, the buy and sell signals found in TA books are turned against the naïve folks using them.

Characteristic of losing trader

  
Analysis, Education
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Losing traders spend a great deal of time forecasting where the market will be tomorrow. Winning traders spend most of their time thinking about how traders will react to what the market is doing now, and they plan their strategy accordingly.

CONCLUSION:

Success of a trade is much more likely to occur if a trader can predict what type of crowd reaction a particular market event will incur. Being able to respond to irrational buying or selling with a rational and well thought out plan of attack will always increase your probability of success. It can also be concluded that being a successful trader is easier than being a successful analyst since analysts must in effect forecast ultimate outcome and project ultimate profit. If one were to ask a successful trader where he thought a particular market was going to be tomorrow, the most likely response would be a shrug of the shoulders and a simple comment that he would follow the market wherever it wanted to go. By the time we have reached the end of our observations and conclusions, what may have seemed like a rather inane response may be reconsidered as a very prescient view of the market.

Losing traders focus on winning trades and high percentages of winners. Winning traders focus on losing trades, solid returns and good risk to reward ratios.

CONCLUSION:

The observation implies that it is much more important to focus on overall risk versus overall profit, rather than “wins” or “losses”. The successful trader focuses on possible money gained versus possible money lost, and cares little about the mental highs and lows associated with being “right” or “wrong”.

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