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EXPLANATIONS OF COMMON TRADING PROBLEMS

Why Traders Naturally Cannot Follow Their Trading Plan

  • The brain automatically engages “distinct mechanisms” to handle these two scenarios differently: (i) risky situation where the probabilities are known, and (ii) ambiguous situation with incomplete information where historical probabilities provide only a clue. For the latter, there will be a “uncertainty circuit” that will raise a red flag to say “more information needed”.
  • This results in traders trying to do exactly what they planned while their brain fights them to find more information or to scramble in the face of a clear, but maybe only subconsciously perceived, threat.
  • Just because you decided on taking a long or short trading position, your “brain on uncertainty” doesn’t change how it goes about making judgment calls in uncertain circumstances. The basic process steps through the context-belief-perception cycle because it can’t help it.
  • Uncertainty means — at least to part of your neural and white matter networks — that a black bear, ready to eat all your apples (and you with them) could be just around the corner. The more uncertainty, the more you can realize how much you are relying on contextual clues in order to make sense of the situation.

Trading with the Tao

“The Tao” means different things to different people. It’s generally thought to have been introduced to the world sometime around 500 B.C. in China.  Since then, millions of interpretations have been contemplated. In modern times, everyone from the Dali Lama to Willie Nelson has offered their take on it.

What exactly is “The Tao?”

It’s usually translated directly as “the way” or “the path.”  But most who have studied it agree that it also refers to “the Source” behind everything.  The unseen force in the universe that essentially makes things happen.

A Christian theologian would probably see similarities between the Tao and the “Holy Spirit.”  Physicists likely see it represented as “energy.”  Self-help gurus often compare the Tao to “consciousness.”  Luke Skywalker called it “the Force.”  Had Michael Jordan delved into the world of metaphysics, he probably would have referred to the Tao as “the zone.”

The overriding message of the Tao is that you’re either flowing with it or against it.  You’re either in the zone or out of the zone, using the Force or blocking the Force. However you want to describe it, the point is that you feel good and peaceful when you’re flowing with the Tao and you feel bad and fearful when you’re trying to fight against it. (more…)

20 Lessons From Stock Market Wizards

3994-1Most of you have probably heard of this book and some may have read it. For the benefit of those who have not read it or heard of it, Stock Market Wizards is basically a book that consists of interviews with 15 top stock traders in America. These top traders come from a myriad of backgrounds and have varied interests- from mathematician, historian, scientist, to those with an interest in photography and even farming. But they have quite a few things in common when it comes to trading:
DISCIPLINE
LOSS CONTROL
HARD WORK

Most of the traders interviewed were quite forthcoming, but a few were reluctant to talk about their strategies (even past strategies that worked but is now no longer used) for fear that disclosure would render its effectiveness. Of the 15 traders, only Mark Cook and John Bender are options trader. By the way, Mark Cook’s story is one of my favourite and he is also the guy that likes to farm.
I am interested to read about these traders, not simply because they are top traders, but also because many of them encountered major failures and lost tons of money before they become successful in trading. The path to success is never easy and this book really keeps me inspired. I think in future if I meet with setbacks in my trading journey, This is 4th time ,I had completed reading this book.

Here’s my 20 lessons from Stock Market Wizards (more…)

3 Invaluable Quotes from Reminiscences of a Stock Operator

“A man must believe in himself and his judgment if he expects to make a living at this game. That is why I don’t believe in tips. If I buy stocks on Smith’s tip, I must sell those same stocks on Smith’s tip.” 
 

“The recognition of our own mistakes should not benefit us any more than the study of our successes. But there is a natural tendency in all men to avoid punishment. When you associate certain mistakes with a licking, you do not hanker for a second dose, and, of course, all stock-market mistakes wound you in two tender spots – your pocketbook and your vanity.”

…“One of the most helpful things that anybody can learn is to give up trying to catch the last eighth or the first. These two are the most expensive eighths in the world. They have cost stock traders, in the aggregate, enough millions of dollars to build a concrete highway across the continent.”

The art of War

Sun Tzu, the author of The Art of War, would make a great stock trader.  Although The Art of War is a 2500 year old military treatise it could just as easily be written for today’s stock trader as the principles outlined therein are as applicable in the stock market as in the theatre of war.  I read The Art of War again this past weekend and highlighted what I believe are some of the most pertinent and applicable principles for stock traders as seen through the eyes of Sun Tzu the would be stock trader.   Make sure you copy and post these in a prominent place for quick reference when in the heat of battle.

I. 17  When the market is rewarding your trading strategy, you should modify your position sizing accordingly.

I. 26  Now the successful trader prepares before he enters battle.  The unsuccessful trader makes but a few, if any, preparations before he enters battle.  Proper preparation leads to victory; a little preparation leads to defeat; and no preparation leads to ultimate destruction!  The one who is properly prepared is the one who is most likely to win.

II. 7   Appreciating the gains better helps you accept the losses.

II. 19  In trading, let your great object be a quick and decisive victory, not the slow death of a lengthy loss.

III. 18  If you know who the enemy is and you know yourself, you will never fear the next trade.  If you know yourself but not the enemy, you will win one lose one.  If you do not know the enemy or yourself, you will lose on each trade.

IV. 1  The good traders of old first put themselves beyond the possibility of defeat and then waited for the right time to defeat the enemy.

IV. 4  It is possible to know technical analysis without being able to properly apply it.

IV. 13  The successful trader wins his battles by making no mistakes.  Making no mistakes establishes the certainty of victory.

V. 13  The quality of entry is like a well-timed swoop of a falcon which enables it to strike and destroy its victim.

V. 15  Proper preparation may be likened to the bending of a crossbow; decision, to the releasing of the trigger.

VI.  5  Take advantage of opportunities such as support and resistance where the enemy must put up a strong defense; take swift action and catch the enemy off guard.

VI. 19  Be prepared for battle by knowing the exact time and place for proper trade entry.

VI. 32  Just as water retains no constant shape, so in trading know the market is constantly changing.

VII. 5  Trading with familiar stocks is advantageous; with unfamiliar most dangerous.

VII. 13  We are not properly prepared to trade a stock until we are familiar with the most likely direction of the general market.

VII. 21  Ponder and deliberate before you enter a trade.

VII. 28  Now the trader’s spirit is keenest in the pre-market; by noon day it is becoming weary; and by post market ready to relax.

VII. 32  To refrain from entering a market that is prepared to defend its current course is the art of practicing patience by studying current market conditions.

VIII. 3  There are trades which must not be taken; sectors that are not ready to be attacked; patterns that are set up for failure; positions that are to be surrendered; egotistical commands that are not to be obeyed.

IX.  28  In a mixed market when some stocks are seen advancing and some retreating, it is a trap.

IX.  41  He who does not think through his trade while making light of the situation is sure to fall victim to a loss.

X.  24  The trader who makes money without coveting fame and loses money without fearing disgrace, whose only thought is to protect his equity and ignore his ego, is considered to be a jewel of the kingdom.

XI. 17  When it is to the trader’s advantage, he will enter a trade; when otherwise he will not.

XI. 67  Trade in the path defined by rules and do not face the enemy until you feel you can trade with confidence.

XII.  15  Unhappy is the fate of the trader who tries to win his battles and succeed in his decisions without cultivating the spirit of confidence, for the result will be a waste of time and a drain on his trading account.

XII.  17  Do not trade unless you see there is an advantage in doing so; use not your money unless there is something to be gained.

XII.  22 The successful trader is heedful and full of caution.  This is the way to have peace of mind and to live to trade another day.

XIII.  4  What enables the wise and successful traders to trade and conquer, and achieve things beyond the reach of ordinary traders, is proper preparation.

16 Trading Quotes -Must Read & Take Print Out

“The obvious rarely happens, the unexpected constantly occurs.” – Jesse Livermore

“A speculator is a man who observes the future, and acts before it occurs.” – Bernard Baruch

“What seems too high and risky to the majority generally goes higher and what seems low and cheap generally goes lower.” – William O’Neil

“Successful speculation implies taking risks when the odds are in your favor.” – Victor Sperandeo

“Stocks are bought not in fear but in hope. They are typically sold out of fear.” – Justin Mamis

“Accepting losses is the most important single investment device to insure safety of capital.” –Gerald M. Loeb

“To me, the “tape” is the final arbiter of any investment decision. I have a cardinal rule: Never fight the tape!” – Martin Zweig

“You have to master your ego & realize that being profitable is more important than being right.” – Martin Schwartz

“Losing a position is aggravating, whereas losing your nerve is devastating.” – Ed Seykota (more…)

The Need To Be Right – Common Psychological Traps For Stock Traders

Some thoughts on what characterizes great and successful traders:

  • Great traders graciously accept losses. They don’t need to be right all the time.
  • 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.Dennis Gartman says: “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.

Market changes mind like a girl changes clothes

changingcloth

The current market is unique. It has never been so volatile; therefore the danger and the opportunities have never been so plentiful. No one has ever traded in such market, so past knowledge and experience may only be a hinder to adopt faster in the new environment. No system is profitable all the time and traders with 20+ years of profitable track record are in the process of realizing that. In time of extreme changes survives the one, who is more flexible, not the stronger one.

Conventional wisdom will bring you only losses. You have to learn to think out of the box. Conventional wisdom says that in bear markets you should be only short or neutral. In case you absolutely have to have long positions in your portfolio, you should choose among the stocks with highest relative strength – the ones that somehow managed to weather the storm. Wrong.

Market is so volatile that it takes stops out on a regular basis, shaking out both long and short swing traders. Percentage stop losses don’t work in this environment. If you are going to survive and thrive, you need to decrease your trading horizon and the size of your trading. I remember that about a year ago, I found out that many, who were swing traders at the beginning of their careers at some point switched to day trading. I wondered why and started asking questions.

Markets are made from people. In theory everyone could be profitable if there is a continuous flow of fresh money into the market. Recently this has not been the case. Someone has to lose. In order to be profitable you need to follow a very simple rule – to buy only what you could sell later at higher price and to sell short only what you could buy later at lower price. Like the owner of a small shop, you should not buy inventory that you personally like, but stuff that could easily be sold this season. Yes, stock traders are in the retail business and their products are called stocks. I realize how unscrupulous such way of thinking may sound and that it contradicts the initial purpose the market were created, but this is the reality.
Initially markets were created:

  • To offer an alternative exit strategy (therefore motivation) for entrepreneurs;
  • To provide new means of cheaper financing for business’ expansion;
  • To allow ordinary citizens, who don’t have the idea, the will or the necessary capital to start their own business, with the opportunity to participate effectively in the economic growth of the country/the world.

All those things don’t matter anymore. Markets have long turned into a speculation arena, where everyone tries to outsmart the other.

DENIALISM: A STOCK TRADER’S DISEASE

Stock traders are the world’s worse at making poor trading decisions while denying that poor decisions were made in the first place.  It is a disease called denialism and it starts when a trader abandons his rules (or worse yet has none), and trades whatever feels or looks right whenever it feels or looks right  Once the trade is entered, denialism begins to spread like a cancer looking for its next body part to attack.  The disease grows in stages, with each successive stage sucking more life out of its victim.

TEN WAYS TO LOSE MONEY

After many hours of toil and deep thought I have compiled a dependable guide for stock traders: Ten Ways to Lose Money on Wall Street. I shall not attempt to explain or qualify these precepts, realizing that my readers will doubtless follow them regardless of any advice, from any source, to the contrary.

1. Put your trust in boardroom gossip.
2. Believe everything you hear, especially tips.
3. If you don’t know—guess.
4. Follow the public.
5. Be impatient.
6. Greedily hang on for the top eighth.
7. Trade on thin margins.
8. Hold to your own opinion, right or wrong.
9. Never stay out of the market.
10. Accept small profits and large losses.