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Fear, Greed & Trading Profits

  
  Education
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Over the years we’ve noticed a remarkably consistent pattern. A very high percentage of our trainees can trade brilliantly in the simulation program; steady consistent profits, sharp entries and exits, excellent grasp of market conditions and a clear, rational plan for exploiting them

And then they start trading real money.

It’s like somebody turned out the lights. Almost immediately things turn sour; they jump in too soon, get scared out of good positions, hang on to losers and cut their winners short … the exact opposite of what they should be doing, and the exact opposite of what they were doing in the simulation program.

WHAT HAPPENED?

The only difference between real and imaginary – and between good and horrid – is the emotional impact on new traders of having real money at risk. They succumb to the two emotions that drive the market: greed and fear.

Nothing cranks up our emotional responses faster than money. And trading is about nothing else. But successful trading requires a kind of cold, calculating rationality, and any emotion – giddy joy as well as bitter despair – is fatal.

So we see trainees doing things they know are dumb: 

  • They jump on the long side of an uptrend because “they don’t want to miss the trade,” even as the trend is ending.
  • They cling tenaciously to losing  positions hoping the price will come back – an attempt to avoid admitting you made a dumb trade that usually turns a small loss into a big one.  
  • They pull their stops so they won’t get hit. Really! 
  • They become so traumatized by losing that they take excessive risks hoping to get back even.
  • Finally, they quit in despair, close their trading account, burn the computer, and retreat into a dark place to lick their wounds.

None of this is necessary. All of it can be avoided. Here are some things that help. (more…)

Greed & Fear

  
  Education
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Emotions, emotions and emotions, trading will always full of them, movement of the market based on them. Our rush to buy or sell sometimes overflow our plans. The common  traders question was “Why did I do this or do that?”

What is driving us to get into the market when we are not prepared and exit on completely different prices, which completely disagree with our plans? Two major factors, Greed and Fear.

Greed come when market goes as we expected then we want more! We believe it will continue for very long time. We forgot that everything changes. For successful trading you need a good strategy and discipline to execute that strategy. No matter how good it is, trading is completely useless without proper execution of the strategy.

We Fear when we afraid to miss the profitable move or to loose the money. And until fear and greed will dominate us, our results will be very unstable. And worse if our money management is not the strongest point, this is the weakest point for emotional traders, will soon will be out of money, before we even had a chance to establish ourself as a trader.

Top Trend Traders Bank Millions, Ride The Trend

  
  Education
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Famed Stanford University psychologist Leon Festinger once said, “A man with a conviction is a hard man to change. Tell him you disagree and he turns away. Show him facts or figures and he questions your sources. Appeal to logic and he fails to see your point.” 
Although trend following has been one of the most successful trading strategies for decades, some critics downplay the massive profits accumulated by trend followers, arguing there are just a few chance winners — “lucky monkeys,” they claim. 
BEAT THE AVERAGES
Not true. Large numbers of trend followers have found a way to outpace market averages. They have done so with hard work and the ability to stick with a trading plan — usually for a very long time. Some argue, “There’s no romance in trend following.” The romance is found in returns. Money is the ultimate aphrodisiac. 
PROFITS COUNT
Think of it this way: Performance data examples from the great trend followers could be the foundation of every college finance class. When you show up on the first day, instead of your teacher handing you a syllabus and telling you to buy certain books, you are handed one piece of paper that simply shows the performance histories of professional trend following traders for the last 50 years. (more…)

36 Steps To Becoming A Better Trader

  
  Education
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1. We accumulate information – buying books, going to seminars and researching.
2. We begin to trade with our ‘new’ knowledge.
3. We consistently ‘donate’ and then realise we may need more knowledge or information.
4. We accumulate more information.
5. We switch the commodities we are currently following.
6. We go back into the market and trade with our ‘updated’ knowledge.
7. We get ‘beat up’ again and begin to lose some of our confidence. Fear starts setting in.
8. We start to listen to ‘outside news’ and to other traders.
9. We go back into the market and continue to ‘donate’.
10. We switch commodities again.
11. We search for more information.
12. We go back into the market and start to see a little progress.
13. We get ‘over-confident’ and the market humbles us.
14. We start to understand that trading successfully is going to take more time and more knowledge than we anticipated.

MOST PEOPLE WILL GIVE UP AT THIS POINT, AS THEY REALISE WORK IS INVOLVED.

15. We get serious and start concentrating on learning a ‘real’ methodology.
16. We trade our methodology with some success, but realise that something is missing.
17. We begin to understand the need for having rules to apply our methodology.
18. We take a sabbatical from trading to develop and research our trading rules.
19. We start trading again, this time with rules and find some success, but over all we still hesitate when we execute.
20. We add, subtract and modify rules as we see a need to be more proficient with our rules.
21. We feel we are very close to crossing that threshold of successful trading.
22. We start to take responsibility for our trading results as we understand that our success is in us, not the methodology.
23. We continue to trade and become more proficient with our methodology and our rules.
24. As we trade we still have a tendency to violate our rules and our results are still erratic.
25. We know we are close.
26. We go back and research our rules.
27. We build the confidence in our rules and go back into the market and trade.
28. Our trading results are getting better, but we are still hesitating in executing our rules.
29. We now see the importance of following our rules as we see the results of our trades when we don’t follow the rules.
30. We begin to see that our lack of success is within us (a lack of discipline in following the rules because of some kind of fear) and we begin to work on knowing ourselves better.
31. We continue to trade and the market teaches us more and more about ourselves.
32. We master our methodology and our trading rules.
33. We begin to consistently make money.
34. We get a little over-confident and the market humbles us.
35. We continue to learn our lessons.
36. We stop thinking and allow our rules to trade for us (trading becomes boring, but successful) and our trading account continues to grow as we increase our contract size.

Personal Strengths and Weaknesses

  
  Education
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We all have different personal strengths and weakness.  Many people focus on transforming a weakness into a strength. While that is admirable, the reality is that it’s not always possible. Although I agree with the basic idea of brain plasticity, and I whole-heartedly agree with the idea of always striving for self-improvement, I also know that as humans we have a certain degree of natural-born temperament and not everything about us can be changed.

Although we can’t always build or change every weakness into strength, the good news is that we can always leverage our strengths, if we know how. And that is mighty powerful. It’s so powerful that if you leverage the right strengths in the right way they can do an excellent job of not just counter-balancing your weaknesses, but can propel you so far ahead  that those weaknesses pale in comparison.

One of the most powerful things you can do for yourself is identifying your natural strengths and then work to see how you can build on them.

We all have different personal strengths, and knowing how to leverage them is an important part of successful trading. A major consideration here is that you try to identify and leverage your own personal strengths, and not simply copy someone else’s. All too often I see struggling traders running from one style to another style whenever they see someone else’s success. One of the primary reasons why copying someone else’s trading style doesn’t always pay off in trading is because of different personal strengths.

The Intuitive Trader -Quotes from the Book

  
  Education
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Having read Kurzban’s Why everyone (else) is a hypocrite, I am convinced that the left brain/right brain split is a gross oversimplification of the brain’s functional organization. Nonetheless, sometimes simplifications work well enough. For today’s post I’m going to share some thoughts from Robert Koppel’s 1996 book The Intuitive Trader: Developing Your Inner Trading Wisdom. It’s an extended argument for and a series of illustrations of using the right hemisphere to expand trading prowess.

The bulk of the book is a series of interviews with traders and those who worked with traders, many of whom predate my active involvement in the markets. Among the cast of characters are Bill Williams, Richard McCall, Charles Faulkner, Edward Allan Toppel, Ellen Williams, Linda Leventhal, Howard Abell, Tom Belsanti, and Peter Mulmat.

Here are a few disconnected excerpts that I thought worth passing along.

“[T]he experience of successful trading is subjective, unself-conscious, and intuitive. This state of mind, it seems to me, has more in common with the spirit of jazz—improvisational, automatic, and responsive to the riff—than with a well-articulated and analyzed process of decision making.” (p. 6)

“Some traders are still of the opinion that we ‘make’ profits and ‘take’ losses. The simple answer is: we make both. Loss has to be assumed in trading as inevitable not accidental.” (p. 19)

On the importance of ritual: The author describes one of the most successful CME floor traders who “after completing his trading card, as he puts it in his pocket, … always says, ‘Yeah.’ … [H]e developed this ritual because he sensed the feeling of letting down after he would have a loser. And he had to figure out some way within himself to be able to go on to the next trade with the same level of energy, resolve, and motivation that he would get from one good trade to the next good trade.” (p. 63)

In response to the question “Have you ever figured out what percentage of your trades are profitable?” Peter Mulmat answered: “No, I haven’t. I just look in terms of monthly performance. That’s kind of the criteria I use to gauge my performance. I find to go any shorter period of time is just frustrating for me.” (p. 188)

Three Ways to Know You Shouldn’t Trade

  
  Education
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  The question of whether someone really should not be a trader is one that’s not often brought up in discussions between market participants. It’s almost as if the baseline assumption is that the sole criteria is that you want to trade. While I’m a believer in the view that just about anyone can learn, there are limits to that. Ignoring the obviously physical and mental disabilities, here are the ones I think are most important.

Lack of Impulse Control
If you cannot keep yourself from acting on impulse – meaning making snap decisions without a plan – then you’re likely not going to do well in trading. Successful trading means applying a consistent edge. That, in turn, requires a plan that is being followed, not making random trades when the mood hits.

There is probably some confusion here when the subject of gut instinct comes into play. Here’s the deal, though. If you’ve only just started trading, you have no gut instict. That comes from long experience. If you’re a rookie making gut trades, for your own good you should stop now. Any success you’ve had to this point is almost certainly a function of luck, not skill.

A Troubled Emotional State
We all go through periods when we’re in a mixed up emotional state. It could be relationship issues, family difficulties, the death of a loved one, stress at work, or any number of other things that put you off your game. These are not good times to trade. Granted, trading can be an escape from the emotional strains in some cases, but that’s only if the trader can consistently execute their normal work and strategy without it being impacted by what’s going on in the rest of their life.

Trading has a way of really exposing emotional problems, even among the most stable of individuals. If you’ve already got some mental strains going on, trading is likely to either make it worse, or to see you feed on that emtion in destructive ways – like trading angry. It is best to stay clear of the markets when these sorts of things happen if there’s any chance of spill-over or distraction.

Looking for a Quick Buck
Trading is not a get rich quick program. Any systems or broker ads that lead you believe otherwise are being deceptive. As any trader who’s been around more than a year will tell you, trading is a marathon, not a sprint. If you come into the market looking to make a fast killing you are almost certainly going to blow your trading account up because you’ll end up taking much too much risk. Basically, you’ll be a gambler rather than a trader. (more…)

Lessons of the Legendary Traders

  
  Education
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What do the worlds best Trading masters differently than the average investor? Can the average investor learn from the Player Legends success stories and their techniques used? What do the most famous Players have in common that can be applied by the average talented trader?

Before we should give some insights on those questions lets have a look at some of the most successful Trade jockey Legends:

Nicolas Darvas turned an $ 36000 account into $ 2000000 in 18 months!!!
Ed Seykota, a Turtle Financier, turned $ 5’000 into $ 15’000’000 in 12 years!!!
Jesse Livermore made several multi-million USD fortunes in the early 1900’s
Richard Dennis, another Turtle Player, made between $ 100 and $ 200 000.000
George Soros is believed to be one of the greatest Trade jockey of all time!!!

The results are quite impressive and some different amazing Financiers should be added easily to the list above. Why do these guys have such tremendous results?

There are common factors, that can be observed through most of the successful Pitbull Legends:

They have a Strategy that they strictly follow.
Most of them have a trend-following average trading style.
Most of them have a mid- to long-term approach. Some of them burned their fingers over the preceding 3 years and some even lost a fortune. Here are some examples of observed behaviour patterns:

Losses are not slice early enough.
Investment with a short-term horizon become long-term horizon in hope of raising asking prices.
People listen to the advise of their invested $ Trade facilitators and Analysts.
People risk coin in hot issues recommended by colleagues of their colleagues.
People have no plan for their investments.
Money Management is not considered at all.
Greed and fear is omnipresent.

What can average talented trading insiders learn from the above and how can the mistakes listed above be avoided? The after key notches can be learned from some of the most successful Trading expert Legends:

Each investor has its own personality. Some of the investor have a very aggressive paper trading style and are stockmarket trading very frequently. Some prefer shares as different are increased risk oriented and speculate in contracts. Other players want only spend a minimum of effort. An investor need to reflect on his outline and choose a note trading approach that fits his personality.

A trade needs to be completely planned in advance. g. when they go on holiday, when they move house etc. But do they have a plan when they invest? An investor needs to have a method that helps him to be prepared for all scenarios of a exchange. One needs to know in advance when to buy, how much to buy, when to exit. Once a buy / sell is executed the bottom line of the instrument (stock, promise note, fixed interest paper etc.

The most important component of a stock trading method is Cash Management? Surprised? Lots of pitbulls and super traders spend most of their time developing a very advanced trade entry strategy. But the entry methodology contributes only approximately 15% to the success of a Note trading Method based on academic studies.
The most important question of a Paper trading Technique is how much to risk bucks and how many deals to trade at the same time.

A can do attitude is required to buy / sell successfully. Why? Because with phrases like it should be great, but I cant or one day perhaps I should succeed in the lottery, but until then I must work hard they have already lost.

Trading Decision-Making Process

  
  Education
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There is a huge difference between a wish and a decision. A wish is a negative and puts the trader in a frozen state waiting for something to happen (generally associated with trying to get even on losing trades). That is negatively charged energy. Decisions, on the other hand, are positively charged energy. It makes the trader take action. Taking action is taking responsibility. You alone are responsible for your current mental state or condition. Decisions can be both good and bad of course. The sooner the trader realized the bad decision, the sooner they can act to correct it.

The first step in the decision-making process is to realize that what you are doing is not working. Remember that falling down is a positive motions is you bounce right back. Make a list of the positive and negative things that will happen when you take action on the decision.

Don’t expect instant gratification if you make the decision. Decision-making is a process that begins with the first step but these steps are the foundation for a stronger behavioral structure. This structure will give you the confidence in your trading. Confidence plays a key role in successful trading. Having the confidence necessary for successful trading can help the trader in difficult trading environments. Whereas one trader lacking confidence and good decision-making skills may be frozen and unable to act, the trader who has taken the time to build this foundation will be prepared to take the appropriate actions.

Many times specific decisions a trader makes will not yield profits, they will result in a loss, but more importantly, it will position the trader to be able to recognize and act on the next opportunity. Practicing and applying this process will pay dividends throughout your lifetime.

Emotions and Behaviors in Trading

  
  Education
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Successful trading requires the individual to have more than a certain amount of control over emotions and behaviors.
Emotions may include, but not be limited to, the following items:
1. Anger, anxiety, confusion, depression, disappointment, exhilaration, frustration, insecurity, passion, satisfaction, etc.
Behaviors may include, but not be limited to, the following items:
2. Arrogant, consistent, controlling, denial, following through, [im]patient, [ir]rational, letting go, perseverance, stubbornness, tenacity, etc.
Having control over these and other emotions and behaviors will allow for the trader to execute trades objectively, and more importantly, according to a strategic plan.

Sounds easy enough, does it not? “Execute trades objectively, and more importantly, according to a strategic plan.” Being that traders are human, it is not such an easy task to accomplish. It is not easy to be objective and diligent about sticking to a strategic plan day after day after day – especially with the constant volatility and erratic dynamics of the market tempting and enticing you at every turn to take actions that are NOT necessarily objective and NOT necessarily part of the strategic plan.

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