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Trading commandments

  
  Education
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ten_commandments1.) Respect the price action but never defer to it.

Our eyes are valuable tools when trading, but if we deferred to the flickering ticks, stocks would be “better” up and “worse” down. That’s backward logic.

2.) Discipline trumps conviction.

No matter how strongly you feel on a given position, you must defer to the principles of discipline when trading. Always try to define your risk and never believe you’re smarter than the market.

3.) Opportunities are made up easier than losses.

It’s not necessary to play every day; it’s only necessary to have a high winning percentage on the trades you choose to make. Sometimes the ability not to trade is as important as trading ability.

4.) Emotion is the enemy when trading.

Emotional decisions have a way of coming back to haunt you. If you’re personally attached to a position, your decision-making process will be flawed. Take a deep breath before risking your hard-earned coin. See related link.

5.) Zig when others zag.

Sell hope, buy despair and take the other side of emotional disconnects. If you can’t find the sheep in the herd, chances are you’re it. (more…)

The 10 trading commandments

  
  Education
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1.) Respect the price action but never defer to it.

Our eyes are valuable tools when trading, but if we deferred to the flickering ticks, stocks would be “better” up and “worse” down. That’s backward logic.

2.) Discipline trumps conviction.

No matter how strongly you feel on a given position, you must defer to the principles of discipline when trading. Always try to define your risk and never believe you’re smarter than the market.

3.) Opportunities are made up easier than losses.

It’s not necessary to play every day; it’s only necessary to have a high winning percentage on the trades you choose to make. Sometimes the ability not to trade is as important as trading ability.

4.) Emotion is the enemy when trading.

Emotional decisions have a way of coming back to haunt you. If you’re personally attached to a position, your decision-making process will be flawed. Take a deep breath before risking your hard-earned coin. See related link.

5.) Zig when others zag.

Sell hope, buy despair and take the other side of emotional disconnects. If you can’t find the sheep in the herd, chances are you’re it.

6.) Adapt your style to the market.

Different investment approaches are warranted at different junctures, and applying the right methodology is half the battle. Map a plan before stepping on the field so your time horizon and risk profile are in sync.

7.) Maximize your reward relative to your risk.

If you’re patient and pick your spots, edges will emerge that provide an advantageous risk/reward. There is usually one easy trade per session if you let it show itself.

8.) Perception is reality in the marketplace.

Identifying the prevalent psychology is necessary when assimilating the trading dynamic. It’s not what is, it’s what’s perceived to be that dictates the price action.

9.) When unsure, trade “in between.”

When in doubt, sit it out. Your risk profile should always be an extension of your thought process and when unsure, trade smaller until you establish a rhythm.

10.) Don’t let your bad trades turn into investments.

Rationalization has no place in trading. If you put on a position for a catalyst and it passes, take the risk off — win, lose or draw. Good traders know how to make money but great traders know how to take a loss.

There are obviously more rules but I’ve found these to be common threads through the years. Where you stand is a function of where you sit. So please understand that some of these guidelines may not apply to your particular approach.

As always, I share my process with hopes it adds value to yours. Find a style that works for you, always allow for a margin of error and trade to win, never trade “not to lose.”

And remember — any trader worth his or her salt has endured periods of pain but if we learn from those mistakes, they’ll morph into lessons. For if there wasn’t risk in this profession, it would be called “winning,” not “trading.”

Plan the Trade, Trade the Plan

  
  Education
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This is where all the thinking in trading comes into play, while writing your trading plan. Once you have created your rules to trade by, you become more systematic and logical in your thought process for executing successful trades. Your personal trading plan will include every step of the trade from identifying to exiting your trade. By having your setup written down in your plan, you will have a better chance of using patience and discipline to wait for your entry. Otherwise, you will use emotions to enter trades and we all know where that will get you. After entering your trade, you will have more confidence because you have back-tested your strategy and know that it has a successful track record and will give you that extra edge over your competition. Identifying your entry strategy will help you execute your strategy in an efficient manner with no hesitation. There will be no guessing or wondering what to do once your setup is identified, you just click and go. Your risk management is also pre-defined so your initial protective stop is set on entry and you know when you will be moving your protective stop to breakeven after the market moves in your direction by a certain amount. Of course, our price target is also known in advance and how we will exit the market at this target. Will we have a set price target, a trailing stop, a time stop, etc.?

Three Motivations for Traders

  
  Education
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There are three motivations behind taking a trade: monetary reward, educational reward, and/or psychological reward. The first pays the bills, the second will pay the bills, and the last will prevent you from paying the bills.

Whenever I feel the pull of psychological reward, I have the voice saying “do you want to be a trader?” Letting go of the psychological need to take a trade or be right, is hard. Our brain does not know what money is. It listens in terms of chemical releases. Letting go of psychological reward is not easy. It is the most instantaneous form of reward.

The best way I know to give psychological power to money is to make a habit of seeing money as opportunity. Opportunity for financial freedom and opportunity to make another trade. The brain understands opportunity. This needs to be in balance as well.

If you are feeling the psychological pull, take a few seconds and answer the following.

Do I want to be a trader?
Did my last trade affect the thought process in an irrational way for this trade? (Need to be right, need to make my money back, I am invincible, etc.)
Can I get a better price or is this my best opportunity?
Am I seeing the whole picture?
As always, am I willing to accept the consequences of my action or inaction?

7 Different common emotional mistakes:

  
  Education
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7emotion

1. Emotional bias: the tendency to believe the things that make you feel good and to disregard things that make you feel bad. In trading terms, this means ignoring the bad news and focusing on the good news. It’s called losing objectivity; you don’t recognise when things go wrong because you don’t want to.

2. Expectation bias: the tendency to believe in things that you expect. In financial terms this means not bothering to analyse, test, measure or doubt the conclusion you expect or hope for. It is also known as the law of small numbers – believing in something with little real evidence.

3. The disposition effect: the tendency to cut your profits and let your losses run – the opposite of what a trader should be doing. Making small profits and big losses is a recipe for disaster.

4. Loss aversion: the tendency to value the avoidance of loss more highly than the making of gain. (more…)

Trading Commandments

  
  Education
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Respect the price action but never defer to it. 
Our eyes are valuable tools when trading but if we deferred to the flickering ticks, stocks would be “better” up and “worse” down and that’s a losing proposition. 
Discipline trumps conviction. 
No matter how strongly you feel on a given position, you must defer to the principles of discipline when trading. Always attempt to define your risk and never believe that you’re smarter than the market. 
Opportunities are made up easier than losses. 
It’s not necessary to play every day; it’s only necessary to have a high winning percentage on the trades you choose to make. Sometimes the ability not to trade is as important as trading ability. 
Emotion is the enemy when trading. 
Emotional decisions have a way of coming back to haunt you. If you’re personally attached to a position, your decision making process will be flawed. Take a deep breath before risking your hard earned coin. 
Zig when others Zag. 
Sell hope, buy despair and take the other side of emotional disconnects (in the context of controlled risk). If you can’t find the sheep in the herd, chances are that you’re it. 
Adapt your style to the market. 
Different investment approaches are warranted at different junctures and applying the right methodology is half the battle. Identify your time horizon and employ a risk profile that allows the market to work for you. 
Maximize your reward relative to your risk. 
If you’re patient and pick your spots, edges will emerge that provide an advantageous risk/reward profile. Proactive patience is a virtue. 
Perception is reality in the marketplace. 
Identifying the prevalent psychology is a necessary process when trading. It’s not “what is,” it’s what’s perceived to be that dictates supply and demand. 
When unsure, trade “in between.” 
Your risk profile should always be an extension of your thought process. If you’re unsure, trade smaller until you identify your comfort zone. 
Don’t let your bad trades turn into investments. 
Rationalization has no place in trading. If you put a position on for a catalyst and it passes, take the risk off—win, lose or draw. 

The Secret to Success in Trading

  
  Education
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People that are more likely to find success in trading, or any endeavor, tend to be those who take the initiative. Without that belief in your own ability to take action to insure progress, i.e.: initiative, you will never transition from having a vision — hope –to implementation of a plan to achieve that vision – goal. Your belief and confidence need to get stronger with each step toward the goal. This is what will feed your thought process and attitude.

The most difficult part of the journey to successful trading is learning the basics thoroughly. You will know you are on your way when each step starts to get easier. 

The real secret is understanding how simple trading is. The hard part is getting out of your own way to get to that point.

Trading art

Metaphors and Similes

  
  Education
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Similes and metaphors play an important role in both the internal thought-process of a day trader as well as in communication between two traders.  To describe the emotional reactions coupled to the movement of a stock in likeness to a rollercoaster, or to compare averaging down in hopes of breaking even to digging one’s self out of a hole is to use simile to quickly illustrate a particular situation as clearly and succinctly as possible.  Every trader uses these analogies, each having his own favorites, and they are used to add structure to an environment that often lacks useful tools for explaining particular occurrences. 

Sports metaphors also play an important role in quickly passing information to another trader with a small chance for confusion.  Traders use base-hit as a metaphor to describe a solid but ultimately small-scale win in the market, and home run for when a trade is “out of the park”.  

Ultimately, metaphors and similes can be used by a trader to keep his mind in the right place, and maintain emotional control.  By metaphorically comparing trading to baseball or basketball, the Michael Jordan truism about never missing a shot he didn’t take or Babe Ruth’s statistical record for strikeouts helps the trader keep in the back of his mind the inalienable reality that he won’t get a hit every time he swings the bat. 

Some traders choose to relate trading to fighting a war, conducting scientific research, or any number of analogous endeavors.  The best metaphors and similes are those with which the trader can most easily identify.  These easily identified intellectual aids, when utilized to enhance trading and the trader’s sense of control, in the end, will increasable productivity, and most importantly, profitability.  

What you WILL DO vs. NOT DO is what it comes down to

  
  Education
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In trading you MUST take action and control.  It’s not the market makers, or the talking heads, or your neighbor, or any of the experts or people you entrust with your money that are causing your losses or your poor investing performance.  You are making the decisions, directly or indirectly.   Any trading and investing decisions made in your accounts are all DOWNSTREAM from you and your initial decisions, so you can make different ones in the future.

But you must take measurements.  You must have a plan.  You must assess, then make DECISIONS to GET you to your FINANCIAL, HEALTH and RELATIONSHIP goals.

In trading we teach a very simple and effective way to make consistent profits in the markets.  There is a learning curve and much of that curve is you getting to know you.  It’s understanding the psychological aspects of trading profitably with consistency and making those thought process changes that are necessary to get you in a winner’s trading mindset.

For many people this is a challenge.  The actual steps and actions you must take are not laborious or physically draining, they are simple things that need to be done but will go against the natural instinct to just want to go through each day on ‘autopilot’.

And this is why many a trader who is struggling slips into the ‘blame’ or ‘victim’ game.  Being aware of this is important and we are all human and capable of slipping off track……but the key is to catch it early, forgive yourself for it, and then learn and ‘zig zag’ your way back onto the path that will get you to your goals.

Analysing yourself

  
  Education
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“At the end of each trading day (week) you shouldn’t focus solely on your P/L. Instead, focus on your thought process during the day and how well you executed your plan. If you consistently execute your trades according to plan and still lose money, then you need to reevaluate your approach. While there is definitely a cyclical rhythm to the market, no strategy will always work. You need to constantly  and objectively  review what is working and what is not so you can make necessary adjustments to you plan.”

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