AFTER TWO HOURS OF TRADING, ASK YOURSELF: “DO I FEEL GOOD ABOUT MY TRADING TODAY?” Once two hours have passed, Cook says a day trader should have made at least two, or perhaps more, trades, “but enough to evaluate what you have done.” If the trader feels good about the day’s trading, continue. If not, stop trading that day.
Archives of “trades” tag
rssCharacteristic of losing trader
Losing traders spend a great deal of time forecasting where the market will be tomorrow. Winning traders spend most of their time thinking about how traders will react to what the market is doing now, and they plan their strategy accordingly.
CONCLUSION:
Success of a trade is much more likely to occur if a trader can predict what type of crowd reaction a particular market event will incur. Being able to respond to irrational buying or selling with a rational and well thought out plan of attack will always increase your probability of success. It can also be concluded that being a successful trader is easier than being a successful analyst since analysts must in effect forecast ultimate outcome and project ultimate profit. If one were to ask a successful trader where he thought a particular market was going to be tomorrow, the most likely response would be a shrug of the shoulders and a simple comment that he would follow the market wherever it wanted to go. By the time we have reached the end of our observations and conclusions, what may have seemed like a rather inane response may be reconsidered as a very prescient view of the market.
Losing traders focus on winning trades and high percentages of winners. Winning traders focus on losing trades, solid returns and good risk to reward ratios.
CONCLUSION:
The observation implies that it is much more important to focus on overall risk versus overall profit, rather than “wins” or “losses”. The successful trader focuses on possible money gained versus possible money lost, and cares little about the mental highs and lows associated with being “right” or “wrong”.
Surviving the Trading Game
Trading coach Van Tharp has a trading game he lets his students play. In a class of 20 to 30 people he will pull different color marbles out of a bag to determine whether the classes trades are winners or losers and by what multiple. There are overall more winning marbles than losers marbles in the bag making this hypothetical trading system a robust system. In the long term the traders playing the game should make money. While the class all receives the same win and loss results during the game some players blow up their account to zero very quickly and others end up with great returns during the game. What is going on? What makes the difference? Each individual traders bet size and the amount of capital at risk determines whether they win or lose even though they are all getting the same trading results in wins and losses. The traders that bet too much and lose at the beginning of the game blow up quickly, the ones that bet big and win in the beginning start in the lead but blow up their accounts later. The best risk managers in the game win primarily by simply surviving their first consecutive string of losses while others do not. The winners also are able to grow their bet size during winning streaks as their capital grows. They bet more as they win and less as they lose by defining a percent of their total capital as a risk multiple that they can expose to losses.
So you see in the trading game, after a trader has a robust system it is still the best risk managers that win in the long term. (more…)
Alexander Elder's 7 Rules for Traders
1. Decide that you want to trade for the long haul. i.e decide that you want to trade 20 years from now.
2. Learn as much as you can. Read, and listen to the experts, but keep a healthy disbelief about everything.
3. Do not be greedy and rush to trade – take your time to learn. The market will be there with many good opportunities in the months and years ahead.
4. Develop a method for analyzing the market, that is, if A happens, B is likely to happen. Markets have many dimensions – use several analytics methods to confirm trades.
5. Develop a money management plan. Your first goal should be of long term survival, second goal, a steady growth of capital and third goal, making high profits.
6. Be aware the trader is the weakest link in the system. Learn how to avoid losses and develop your method of cutting out impulsive trades.
7. Winners think, feel and act differently than loosers. You must look within yourself and strip away the illusions and change your old way of thinking, acting and being. Change is hard, but if you want to be a successful trader, you have to work on changing your personality.
4 Trading Quotes From Mark Douglas
There is a random distribution between wins and losses for any given set of variables that define an edge. In other words, based on the past performance of your edge, you may know that out of the next 20 trades, 12 will be winners and 8 will be losers. What you don’t know is the sequence of wins and losses or how much money the market is going to make available on the winning trades. This truth makes trading a probability or numbers game. When you really believe that trading is simply a probability game, concepts like ‘right’ and ‘wrong’ or ‘win’ and ‘lose’ no longer have the same significance. As a result, your expectations will be in harmony with the possibilities.
If you really believe in an uncertain outcome, then you also have to expect that virtually anything can happen. Otherwise, the moment you let your mind hold onto the notion that you know, you stop taking all of the unknown variables into consideration. Your mind won’t let you have it both ways. If you believe you know something, the moment is no longer unique.
To whatever degree you haven’t accepted the risk, is the same degree to which you will avoid the risk. Trying to avoid something that is unavoidable will have disastrous effects on your ability to trade successfully.
The less I cared about whether or not I was wrong, the clearer things became, making it much easier to move in and out of positions, cutting my losses short to make myself mentally available to take the next opportunity.
15 Points for Traders
1. Anger over a losing trade – Traders usually feel as if they are victims of the market. This is usually because they either 1) care too much about the trade and/or 2) have unrealistic expectations. They seek approval from the markets, something the markets cannot provide.
2. Trading too much – Traders that do this have some personal need to “conquer” the market. The sole motivation here is greed and about “getting even” with the market. It is impossible to get “even” with the market. Trading too much is also indicative of a lack of discipline and ignoring set rules. This is emotionally-driven.
3. Trading the wrong size – Traders ignore or don’t recognize the risk of each trade or do not understand money management. There is no personal responsibility here. Typically, aggressive position sizes are used, however if risk is not contained, then it could spiral out of control. Usually, this issue comes from traders wanting to make a huge killing. Maybe they do win, but the point is that a bad habit emerges if a trader repeats this behavior.
4. PMSing after the day is over – Traders are on a wild emotional roller coaster that is fueled by a plethora of emotions ranging throughout the spectrum. Focus is taken off of the process and is placed too heavily on the money. These people are very irritable akin to the symptoms of premenstrual syndrome (something I wouldn’t know about personally).
5. Using money you can’t afford to lose – Usually, a trader is pinning his/her last hopes to make money. Traders fear “losing” the “last best opportunity”. Self-discipline is quickly forgotten but the power of greed drives them, usually over a cliff. Here, the rewards are given more attention and overall personal financial risk is ignored.
6. Wishing, hoping, or praying – Do this in church, but leave this out of the market. Traders do not take control of their trades and cannot accept the present reality of what’s happening in the market.
7. Getting high after a huge win – These traders tie their self-worth to their success in the markets or by the value of their account. Usually, these folks have an unrealistic feeling of being “in control” of the markets. A huge loss usually sobers them up pretty quickly. It’s important to maintain emotional restraint after wins, just as you would for losses.
8. Adding to a losing position – Also known as doubling, tripling, quadrupling down, typically, this means that the trader does not want to admit the trade is wrong. The trader’s ego is at stake and #6 comes into effect as the trader is hoping the markets will “work in their favor”. If you are wrong, you have a near 0% chance of making a full recovery. (more…)
Self-Assessment
* How many of your trades today (or this week) had an explicitly defined risk and reward?
* How many of your trades today (or this week) did you execute according to the defined risk and reward?
* How many of your trades today (or this week) were based upon clear market patterns and a clear identification of how the market was trading?
* How many of your trades today (or this week) were placed out of fear of missing a move? Out of frustration following a loss? Out of boredom in a slow market?
* How many of your trades today (or this week) would you place again if you had the same circumstances?
* How many of your trades today (or this week) came from advance planning and preparation?
* How many of your trades today (or this week) were sized properly, given your level of confidence in your ideas and your desired risk management?
* What did you learn today (or this week), and how will you put that learning to work tomorrow (or next week)?
* How did you feel about your trading at the end of the day (or week)? Proud? Disgusted? Regretful? Satisfied?
* What can you do tomorrow (or next week) to feel proud of and satisfied with your trading?
11 More Trading Resolutions for 2011
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List of Mistakes by Traders
Hesitation – fear of putting on a trade where price signals an entry because of what you think could possibly happen. Hey, it’s game of probability, and you’ll miss 100% of the shots you don’t take.
Chasing – running after the trade you hesitated on because of thinking about it too much, and now you think it will go forever without you. (It may go a long way without you, but don’t worry, another train will come along in a while.)
Overleveraging, averaging down, letting a loser run, trading without protective stops – all caused by the fact you are so certain price will do a certain thing that risk management is for stupid amateurs who get shaken out of “good” positions just when price is about to finally run their way.
Trading against a strong trend – you think price has run too high or too low because you have special indicators that tell you price is “overbought” or “oversold” and therefore has to reverse, even though price is showing you otherwise.
Taking profits too soon – you think no one ever went broke taking a profit and you think that normal price action retracements are reversals, so you grab tiny profits, while allowing losing trades to hit full stop, leaving you with a very poor reward:risk ratio.
Why System Trading Is Ultimately Discretionary
Successful system trading, in spite of the financial rewards, can be frustrating. A quantified mechanical model will take many decisions off the table. Yet, various issues, particularly the psychological approach to the issues, will always be in play.
Ed Seykota in the book, “Market Wizards,” writes, “Systems trading is ultimately discretionary. The manager still has to decide how much risk to accept, which markets to play, and how aggressively to increase the trading base as a function of equity change. These decisions are quite important, often more important than trade timing.”
It seems most sophisticated traders are aware of the fact that a system needs to be properly quantified and tested before trading. The sample size of the trades needs to be large. These traders are familiar with the terms of curve fitting and optimization. I wonder, however, how many traders continue to study the model as they trade their equity. How many understand the logic behind the entries, stops, exits, and money management techniques. How many are adjusting position size to meet expanding and contracting volatility and changes in market correlation. (more…)