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Four Main Reasons Why Traders Fail

# They do not understand that the markets are a mirror of life on a chart. Markets are a living thing and reflect crowd behaviour, you , the trader are one of the crowd too.

# They fail to understand their own personality and what that means for their trading style. It can make THE difference between success and failure as a trader.

# They fail to notice how they transfer their feelings and emotions to their trading and believe that the emotions they pick up from other traders and the markets are theirs.  Feelings are unpopular with traders, big mistake!

# They have unresolved psychological blockages which they supress with superficial positive thinking and learned discipline. We all have blocks, to think that you are the one who has not is dangerous arrogance. 

And finally….

..add to this one most important point for the beginning trader: Under capitalisation due to unrealistic expectations and poor trader training. The recipe for trading failure is complete.

Risk Management For Traders

One of Sun Tzu’s most famous quotes is: “Every battle is won before it is fought.” The phrase implies that it is planning and strategy that wins wars and not the battles themselves. Similarly, successful traders commonly quote the phrase: “Plan the trade and trade the plan.” Just like in war, planning ahead can often mean the difference between success and failure.

Stop-loss (S/L) and take-profit (T/P) points represent two key ways in which traders can plan ahead when trading. Successful traders know what price they are willing to pay and at what price they are willing to sell, and they measure the resulting returns against the probability of the stock hitting their goals. If the adjusted return is high enough, then they execute the trade.

Conversely, unsuccessful traders often enter a trade without having any idea of at what points they will sell at a profit or a loss. Like gamblers on a lucky or unlucky streak, emotions begin to take over and dictate their trades. Losses often provoke people to hold on and hope to make their money back, while profits often entice traders to imprudently hold on for even more gains.

 Take-Profit Points, trading greed, trading fear, trading emotions, financial behavior 


A stop-loss point is the price at which a trader will sell a stock and take a loss on the trade. Often times, this happens when a trade does not pan out the way a trader hoped. The points are designed to prevent the “it will come back” mentality and limit losses before they escalate. For example, if a stock breaks below a key support level, traders often sell as soon as possible.

On the other side of the table, a take-profit point is the price at which a trader will sell a stock and take a profit on the trade. Often times, this is when there is limited additional upside given the risks. For example, if a stock is approaching a key resistance level after a large move upwards, traders may want to sell before a period of consolidation takes place. (more…)

Learn To Love Uncertainty

It is often said that markets hate uncertainty and it is true. We do live and trade in uncertain times. But, as traders and investors, we must all learn to love and appreciate uncertainty. With uncertainty, also brings opportunity. Understanding this concept is so very important and learning how to profit from uncertainty consistently is going to make a critical difference between your success and failure.

Traders learn through experience the importance of examining and evaluating the markets through placing percentages on various future market scenarios. For example, at the hedge fund I worked at last week, every morning traders assemble for a 30 minute premarket meeting where everyone at the firm works closely together to outline the various potential scenarios for the market that day and then place specific odds on what they think is most likely to occur and why. One trader every day is in charge of diagramming out the different market scenarios on a whiteboard which resembles a flow chart so that the firm has a structured and easy to follow game plan. That game plan is also copied and stored so that the firm can later review it to learn and prepare in future days. In fact, at the end of every trading day they have another meeting to review the game plan and what went right and wrong and why.

By having the plan in place with various market scenarios outlined and positions to profit from those scenarios, uncertainty is no longer a factor. In fact, traders learn to love uncertainty because uncertain market conditions tend to favor those who are the most prepared to handle anything and everything Mr. Market could throw their way.

When the market does something outside of that original plan (it doesn’t happen as often as you might think), there is always a Plan B, Plan C, and so on with a number of preconfigured trading ideas to profit if the market moved in a specific manner different than the most likely scenario. By having this planned structure in place, everyone can then focus on price action and trading setups as they occur instead of flying by the seat of their pants or, even worse, finding themselves held hostage or paralyzed by the ticker.

I had the distinct privilege of looking through the archive of firm’s game plans for the past year and was amazed by how well the firm positioned itself according to the plan AND more importantly how it handled itself when the market did something unusual. In fact, just reviewing past game plans would be incredibly useful as a teaching mechanism for new traders who have little understanding of how the pros plan their work and work their plan. If you’re like me, you’ll begin to respect the other side of the trade much more than you probably do already.

As you might imagine, the process of formulating a game plan based on setting percentage odds for various scenarios was very interesting and useful for me to watch and participate in. It also stressed how important it is to have a plan, but at the same time be flexible enough to adjust as market conditions change. I usually spend at least an hour of prep time before every trading day, but after last week’s experience I will be doing more prep than before. That’s how important I think this kind of exercise can be!

So, the question becomes, are you adequately prepared every trading day? In working with many traders over the years, most are not as prepared as I saw with my very own eyes last week. In fact, given the firm’s results compared with other traders I know, I have good reason to think that kind of high-level preparation frequently can separate the winners from the losers.

Yes, it is true that we call can get lucky (every trade in theory has a 50% chance of working out, correct?), but over time the market will remove that luck factor and your success will be determined primarily on consistency and how you plan and deal with uncertainty in the markets. If you spend time every morning engaged in developing your own plan, I think you’re bound to see steady and significant improvement. As Sun Tzu once said, “every battle is won before it is ever fought” and that’s true for those who engage in doing battle with the market in such uncertain times.

What Kind of Person is Best Suited to Trading?

Great traders have a few personality traits that do give them a natural advantage.  That’s not to say you can’t succeed without them, just that it’ll be an uphill battle and a greater degree of reflection and self-correction will be required.  The trader with the best chance of success will be –

Independent.  Being happy with a good deal of autonomy will allow you to confidently execute your plan without needing 25 people to concur with your analysis.  Trading is a solitary game, and you need to be able to thrive on your own, to a large extent.  Support is great but when it comes down to it, it’s all up to you.

Decisive.  If you take hours to do something simple like choose a burger off a menu, the odds of you being able to see a trade set-up and coolly pull the trigger are greatly diminished.  Especially if you trade short time-frames that can be the difference between success and failure.

Insightful.  If a trader can honestly look at their skills, motivations and short-comings and actively work to rectify them, they have the tools to over-come nearly anything the market throws their way. (more…)

3 Trading Lessons

A good trade can lose money, and a bad trade can make money. Even the best trading processes will lose a certain percentage of the time. There is no way of knowing a priori which individual trade will make money. As long as a trade adhered to a process with a positive edge, it is a good trade, regardless of whether it wins or loses because if similar trades are repeated multiple times, they will come out ahead. Conversely, a trade that is taken as a gamble is a bad trade regardless of whether it wins or loses because over time such trades will lose money.

Ray Dalio, the founder of Bridgewater, the world’s largest hedge fund, strongly believes that learning from mistakes is essential to improvement and ultimate success. Each mistake, if recognized and acted upon, provides an opportunity for improving a trading approach. Most traders would benefit by writing down each mistake, the implied lesson, and the intended change in the trading process. Such a trading log can be periodically reviewed for reinforcement. Trading mistakes cannot be avoided, but repeating the same mistakes can be, and doing so is often the difference between success and failure.

For some traders, the discipline and patience to do nothing when the environment is unfavorable or opportunities are lacking is a crucial element in their success. For example, despite making minimal use of short positions, Kevin Daly, the manager of the Five Corners fund, achieved cumulative gross returns in excess of 800% during a 12-year period when the broad equity markets were essentially flat. In part, he accomplished this feat by having the discipline to remain largely in cash during negative environments, which allowed him to sidestep large drawdowns during two major bear markets. The lesson is that if conditions are not right, or the return/risk is not sufficiently favorable, don’t do anything. Beware of taking dubious trades out of impatience.

The Optimal Mental State For Trading

One of the most important skills a professional trader needs to develop is being able to manage his or her psychological state. Effective psychological maintenance can make all the difference between trading success and failure.

In my own trading, I have found the essential state of mind I must be in to trade at an optimal level. I call it the “zero-state.”
For me, the zero-state represents an emotionally neutral condition that is neither happy nor sad, neither overconfident nor fearful. The adjective “calm” starts to come close to what I mean but the term lacks an important distinction. “Calm” is part of an adjective pair, whose partner has precisely the opposite meaning. “Stormy” is usually given as the antonym to “calm.”

The term “serenity” describes a state that comes even closer to describing the zero-state than calm. Serenity suggests a timeless eternity of “no-emotion,” where I am not connected to the outcome in a personal, meaningful way.

No conventional adjective, however, can fully describe the zero-state. An adjective describes a particular condition. I associate one adjective or condition as one half of a pair of opposites. Both words of the pair form poles on a continuum where I think of the exact center as “zero,” just as on a number line. Conceptually, the Japanese term “mu” comes fairly close to this concept of center. “Mu” has been variously described as neither yes or no, a state in-between that does not acknowledge the question being asked as one that may be answered by either yes or no, with the answer existing in a different plane of reality.

Other Useful Mental States

Other traders I know have found different mental states useful. After all, trading from an emotion-free state (like the zero-state) may not be the best mental state for you. Consider the following options for your optimal mental state in your journey of self discovery and trading mastery.

I know traders who find it necessary and useful to achieve a state of emotional alpha male competitiveness in order to enter the “ring of combat.” These traders perceive the trading environment as combative and they interpret their role accordingly. They anticipate combat, they mentally prepare for it, and they experience trading in combative terms. (more…)

The MASTER TRADER

The MASTER TRADER…
…is rational.  He does not trade for egotistical reasons.
…is skilled in self-mastery thus able to deal with market reality.
…is able to see through the noise in the markets and find low-risk, high reward trade opportunities.
…is hard working and has the discipline to follow through with well thought out plans.
…is committed to his methodology and able to cut losses when called upon to do so.
…is humbled by his need to rely on the support of others.
…is adaptable to market changes.
…is up to the challenge of the trading game.  Enjoys profits and endures losses.
…is able to handle both success and failure without self-destructing. 

What makes a trader consistently profitable?

There are three things:
 
1) Having an edge, which is some methodology for determining with reasonable accuracy the relative probability of the market price hitting your profit target before it hits your stop loss price.  An edge is provided by a set of trading strategies, and a set of rules for when to use which trading strategies (briefly, when to follow a trend, when to fade a trend, and when to stay out.)
 
2) The discipline and emotional fortitude to follow the rules of your trading rules flawlessly.
 
3) Sound risk and money management rules.  
 
Sound money management and risk control are the keys to being a profitable trader. It is not the prediction or the latest and greatest indicator that makes the profit in trading, it is how you apply sound trading discipline with superior cash management and risk control that makes the difference between success and failure.  (more…)

Weekend -Trading Quotes

Trading Journal

Show me a trader with good records, and I’ll show you a good trader.”

– Dr. Alexander Elder


“The fruits of your trading or investment success will be in direct ratio to the honesty and sincerity of your own effort in keeping your own records, doing your own thinking, and reaching your own conclusions. You cannot wisely read a book on ‘ how to keep fit’ and leave the physical exercise to another. “

– Jesse Livermore


Risk Management

“Risk comes from not knowing what you’re doing.”

– Warren Buffet

 

Money Management

“It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.”

– George Soros


“If you have an approach that makes money, then money management can make the difference between success and failure… … I try to be conservative in my risk management. I want to make sure I’ll be around to play tomorrow. Risk control is essential. “

– Monroe Trout


“Every winner needs to master three essential components of trading; a sound individual psychology, a logical trading system and good money management. These essentials are like three legs of a stool – remove one and the stool will fall, together with the person who sits on it. Losers try to build a stool with only one leg, or two at the most. They usually focus exclusively on trading systems. Your trades must be based on clearly defined rules. You have to analyze your feelings as you trade, to make sure that your decisions are intellectually sound. You have to structure your money management so that no string of losses can kick you out of the game.”

– Dr. Alexander Elder


“The most important advice is to never let a loser get out of hand. You want to be sure that you can be wrong twenty or thirty times in a row and still have money in your account. When I trade, I’ll risk perhaps 5 to 10 percent of the money in my account. If I lose on that trade, no matter how strongly I feel, on my next trade I’ll risk no more than about 4 percent of my account. If I lose again, I’ll drop the trading size down to about 2 percent. I’ll keep on reducing my trading size as long as I’m losing. I’ve gone from trading as many as three thousand contracts per trade to as few as ten. “

– Randy McKay


“All traders make mistakes, great traders, however, limit the damage.”

– Unknown


“My trading style blends both the risk-oriented and conservative personality of my personality. I take the risk-oriented part of my personality and put it where it belongs to : trading. And, I take the conservative part of my personality and put it where it belongs to money management. My money management techniques are extremely conservative. I never risk anything approaching the total amount of money in my account, let alone my total funds. “

– Randy McKay


“I’m more concerned about controlling the downside. Learn to take the losses. The most important thing about making money is not to let your losses get out of hand. “

– Marty Schwartz


“I’m always thinking about losing money as opposed to making money. Don’t focus on making money, focus on protecting what you have.”

– Paul Tudor Jones (more…)