Do you know your Art of Trading
Do you have a trading plan
Do you think in terms of probabilities
Do you know which time frame fits your psychology
Do you cut your losses
Do you define your Risk
Do you add to your losing Position (more…)
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rssTop Ten Reasons Traders Lose Their Discipline
Losing discipline is not a trading problem; it is the common result of a number of trading-related problems. Here are the most common sources of loss of discipline, culled from my work with traders:
10) Environmental distractions and boredom cause a lack of focus;
9) Fatigue and mental overload create a loss of concentration;
8) Overconfidence follows a string of successes;
7) Unwillingness to accept losses, leading to alterations of trade plans after the trade has gone into the red;
6) Loss of confidence in one’s trading plan/strategy because it has not been adequately tested and battle-tested;
5) Personality traits that lead to impulsivity and low frustration tolerance in stressful situations;
4) Situational performance pressures, such as trading slumps and increased personal expenses, that change how traders trade (putting P/L ahead of making good trades);
3) Trading positions that are excessive for the account size, created exaggerated P/L swings and emotional reactions;
2) Not having a clearly defined trading plan/strategy in the first place;
1) Trading a time frame, style, or market that does not match your talents, skills, risk tolerance, and personality.
Recipe for catching a reversal:
Ingredients: For this recipe you will need one (1) well-known or “classic” technical chart pattern on a daily time frame, preferably near the high or low of the mid-term price range. When your pattern of choice has been observed, you will then need to collect at least two (2) or more instances of public expressions of sentiment which confirm the prognostication of said pattern: pre- or post-market media bytes, business news website headlines, confident/fearful declarations on your favorite trading forum, or any other variety of before-the-fact assumption.
Preparation: When the above ingredients have been secured, wait for a daily close which would confirm “ripeness” of the pattern. Next morning, enter a stop order at the confirmation price in the opposite direction of pattern breakout to initiate position. If stop is triggered, immediately enter protective stop at prior low/high.
Parboiling: If market moves quickly in your favor, take profits on at least a partial portion; mentally “set aside” closed profit for re-entry if market pulls back towards initial entry price with next few days. If pullback manages to hold above prior high/low, re-enter full position at your discretion.
Cooking: Set protective stop for entire position at breakeven and let sit undisturbed for a few days or more if possible.
Presentation: Dish is ready when “failure” point of pattern is breached; serve at market or with trailing stop, whichever you prefer.
Top Ten Reasons Traders Lose Their Discipline
Losing discipline is not a trading problem; it is the common result of a number of trading-related problems. Here are the most common sources of loss of discipline, culled from my work with traders:
10) Environmental distractions and boredom cause a lack of focus;
9) Fatigue and mental overload create a loss of concentration;
8) Overconfidence follows a string of successes;
7) Unwillingness to accept losses, leading to alterations of trade plans after the trade has gone into the red;
6) Loss of confidence in one’s trading plan/strategy because it has not been adequately tested and battle-tested;
5) Personality traits that lead to impulsivity and low frustration tolerance in stressful situations;
4) Situational performance pressures, such as trading slumps and increased personal expenses, that change how traders trade (putting P/L ahead of making good trades);
3) Trading positions that are excessive for the account size, created exaggerated P/L swings and emotional reactions;
2) Not having a clearly defined trading plan/strategy in the first place;
1) Trading a time frame, style, or market that does not match your talents, skills, risk tolerance, and personality.
Eleven Rules
Rule #1
Be data centric in your approach. Take the time and make the effort to understand what works and what doesn’t. Trading decisions should be objective and based upon the data.
Rule #2
Be disciplined. The data should guide you in your decisions. This is the only way to navigate a potentially hostile and fearful environment.
Rule #3
Be flexible. At first glance this would seem to contradict Rule #2; however, I recognize that markets change and that trading strategies cannot account for every conceivable factor. Giving yourself some wiggle room or discretion is ok, but I would not stray too far from the data or your strategies.
Rule #4
Always question the prevailing dogma. The markets love dogma. “Prices are above the 50 day moving average”, “prices are breaking out”, and “don’t fight the Fed” are some of the most often heard sayings. But what do they really mean for prices? Make your own observations and define your own rules. See Rule #1.
Rule #5
Understand your market edge. My edge is my ability to use my computer to define the price action. I level the playing field by trading markets and not companies.
Rule #6
Money management. Money management. Money management. It is so important that it is worth saying three times. There are so few factors you can control in the markets, but this is one of them. Learn to exploit it.
Rule #7
Time frame. Know the time frame you are operating on. Don’t let a trade turn into an investment and don’t trade yourself out of an investment.
Rule #8
Confidence and conviction. Believe in your strategies and bet wisely but with conviction. There is nothing more frustrating than having a good strategy work as you expect, yet at the end of the day, you have very little winnings to show for your efforts.
Rule #9
Persistence. It takes persistence to operate in the markets. Success doesn’t come easy, and if it does, then I would be careful. Even the best strategies come with losses, and they always seem to come when you get the nerve to make the big bet. Stay with your plan. If you have done your home work, the winning trades will follow.
Rule #10
Passion. In the end, trading has to be about your bottom line, but you have to love what you do and no amount of money is worth it if you aren’t passionate about the process. No matter how much success you enjoy, in the markets you can never stop learning.
Rule #11
Take care of yourself. No amount of money is worth it if your health is failing or you have managed to alienate yourself from family and friends in the process.
10 Secrets of Trading
A ROBUST METHOD: Much like a casino you must have an edge in your trading. Your system must be a robust one with the odds on your side either through many more wins than losses with equal capital at risk or small losses and big wins over a long period of time.
CONFIDENCE: You must have the confidence in your method that it is a winner in the long term through proper research or back testing. You also must have confidence in yourself to execute the plan.
DISCIPLINE: A trader must have the discipline to take their predetermined entries and exits. The trader is the weakest link in trading no method works with out the discipline to execute it in a live market.
TRADING PLAN: A trader has to have a plan on what they will trade, how much they will trade, the time frame they are trading on and rules that they will follow for entries and exits.
EMOTIONAL CONTROL: The winning trader must have the ability to not make decisions based on emotions. Winning traders still feel emotions but have the ability to stay on their trading plan instead of making decisions based on fear or greed in the heat of market action.
RISK/REWARD: The best trades to take have the potential to win $3 for each $1 risked. With this ratio a trader can lose on two trades our of three and still make money. This is a defined edge and keeps the trader looking for only the best instruments to trade and taking the best entry points as part of their system.
EGO CONTROL: The destruction of many traders is when they believe they do not need risk management or rules and that they are smarter than the market and begin taking trades based purely on their opinions instead of principles, price action, and chart action. Good traders are humble traders.
RISK OF RUIN: The best traders understand the best way to ensure their survival in trading is with only putting 1% of their total trading capital at risk in any one trade either through great entries with tight stop losses or trading smaller position sizes. Nothing will determine a trader’s success more than their ability to survive a string of 10-15 losses in a row.
MASTER YOUR OWN METHOD: Trader know thyself, know who you are, the trading method that fits your personality and risk tolerance and become a master of that method. Do not wander around when it gets tough, be faithful to your edge. Be the best that you can be at what you are whether you are a day trader, trend follower, option trader, momentum trader, chart reader, technical analyst, or fundamentalist. I know of traders that got reach with any of these methods but do not know any that got rich trading multiple methods. Pick one, master one.
PERSEVERANCE: Even with all the elements in place there will be rough months and even rough years for almost all traders. Sometimes right at the beginning of a new traders first plunge into the market the price action can act completely contrary to profits for that traders method. All the traders that ended up rich have one thing in common, they did not quit trading until they became rich.
Rules of Trade
Never Mix Disciplines. If you day trade then day trade and do not let a day trade turn into a swing trade. If you swing trade do not let your swing trade turn into an investment. Follow the rules based on the discipline of your time frame. Never Try To Trade Back A loser. In other words, each trade is a new one and should not be used to win back money lost in the last trade. Always trade in the present not in the past where too many emotional and psychology factors can affect the current trade. Revenge does not pay in or out of the market. |
6 Mistakes
Mistake number one: not having any knowledge of the simple visual indications for when to enter a trade based on market behavior and common sense.
Mistake number two: not being on the right time frame at the right time for the current trading opportunity.
Mistake number three: entering trades long AFTER the real entry occurred and exiting way BEFORE the exit occurs.
Mistake number four: no trading plan or direction for a consistent entry and exit strategy.
Mistake number five: following some scam Forex system they recently bought on the internet and using dozens of “proprietary” indicators.
Mistake number six: entering and exiting trades for reasons other than their own trading method. (fear, greed, etc)
Unsuccessful Traders :Make the same Common mistakes
1 .They like to use complex system, lots of indicators, where they are telling the same old story (price & volume). As I learned so far simple system is the best.
2. They spend more time in trading, then learning, we already know successful traders spend more time improving themselves & their systems then trading, they are very selective.
3. They lost their capital, before the learning process. To become an expert it takes years of right experience.
4. They think but they don’t see, they think market will go up or down so they buy or sell, but they don’t see what the chart is trying to show them.
5. They want to control the market, which is impossible.
6.The have gambling problem.
7. They don’t know when to stop.
8. They think they know every thing, they don’t take advice.
9. When they go through bad time, they change their system, time frame & market.
10.They try to get rich over night.
11. They are very risk adverse people, so when they lose, they can’t tolerate it, they start impulse trading & end up losing more.
12. They never learn their lesson.
HOW DISCIPLINE HELPS IN TRADING
“Discipline in executing each and every trade according to your trading methodology is the secret to your success. If you want to improve your trading, what you need to do is very simple. Before you enter any trade, imagine that you will have to explain this trade to a panel of your peers, by explaining to them the reason for your entry, your money, trade, and risk management guidelines, and why you exited the trade. Imagine having to explain why you chose this particular market and this particular time frame, along with how you set objectives for the trade, and how you determined where your initial protection would be. If you can truly do this, I strongly believe that you can be successful.
Just prior to entering every trade, try to imagine yourself executing the trade perfectly. Imagine how it will feel when you enjoy having made money with your trading.
Yes I know, you don’t have time to do that. Why? Because you never plan your trades ahead of time. You probably don’t have a strategy, and instead of waiting patiently for trade that meets your well-defined parameters and your thought-out plan, you just jump in the minute you think you see something that looks good.
You need to take a lesson from a spider. The spider waits patiently in his web until some unsuspecting insect flies into the spider’s trap.