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10 Trading Lessons for 2011

1)You can’t succeed overnight. Most retail/aspiring traders get hooked on trading because they want money and they want it NOW! Over-trading, scalping, over-leveraging, random decisions, greed and the mirage of getting rich quick will turn trading into gambling.

A common sense rule says that – in order to make a lot of money fast, you either 1) steal, 2) you are a genius inventing or discovering something new, something that everyone will use or buy from you (like Google, Facebook, Angry Birds) or 3) gamble, if you are really lucky.

Learn from your own mistakes, don’t repeat them, practice and persevere. It doesn’t matter if you count Elliott waves better than anyone else or if you anticipate a rate hike 6 months in advance. It only matters how you control your emotions and your money.

2) Focus your efforts on the things that work best for you. If there is one trading strategy that works for you, then stick to it as long as it works. Don’t waste time testing everything you find on the Internet and don’t listen to everything you hear or read. Too much information can lead to confusion, difficult choices and failure – eventually.

3)Losing is part of the game but recovering is not an easy task and requires smarter trading decisions.

Have you ever been on a diet?
Common sense rule, again: if you have gained 40 lbs. (18 kg) in 1 year, don’t expect to lose 40 lbs. in 2 weeks. It takes a lot of work to get rid of them.
So if your trading account is down 50% after 2 months, you’ll have to double your remaining equity to break even. Will that be easy? I doubt.

4)Making mistakes is normal but rather than give up, try to learn something from your own trading mistakes, bad strategies, emotions etc.
If you don’t succeed, you aren’t out of the game.

Make a list of things that didn’t work – check it regularly so you don’t forget them. Avoid them in the future.

5)If you keep doing the same thing and you are constantly losing, it’s obvious that you are doing something wrong. Is your trading strategy constantly giving poor results? Change it. Are you always predicting the wrong market direction? Stop predicting – trade what you see, not what you think or expect.

If you want to achieve different results, then you must change your actions. (more…)

Never Break Rule

It seems like there has been a steady stream of information and opinion flowing on breaking rules. Originally I had planned to talk about the pros and cons of breaking rules. I realized that would be a disservice.  The following is not negotiable.

Day trader vs professional trader.

Rules are what separate a day trader from a professional trader. The only good time to break a rule is never. Barriers are made to be broken not rules, you can have one or the other not both. If you break a rule, what power does anyone of the other rules have? Do you have a rule for breaking rules and what if you break those rules? It adds unnecessary levels of complication.

The most important rule.

Eventually I will back traders assuming there is not some horrible tax or regulation that makes it a stupid risk. A trader must create their own rules. They know themselves the best. The rule that cannot ever be broken is losing more than limit down. I will fire them that day. I do not even like to take clients who break that rule. They are destined to fail. (more…)

The Hidden Variable in Your Trading Success

Most traders realize that trading involves a lot of psychology. And most traders readily admit that a significant portion of their trading losses, or lack of performance, is due to “psychology”.  Although the term ‘psychology’ isn’t always mentioned as an explanation, you can see it easily enough in the following statements ……”I froze just as I was about to pull the trigger”….. ”I hesitated and missed that trade and was so pissed that I got myself into an impulse trade right after”…..  “That large loss was not what I wanted, I held it thinking it would come back because last time I bailed out of this type of trade I got stopped out right before it reversed”….. “I was really nervous about losing money again so I got out of my winning trade way before my target”

Those are four common examples of trading psychology issues manifesting in one’s trading.  Do you recognize yourself in the above statements?

All four of those statements have in common one thing, fear. Whether it’s the fear of not being perfect, the fear of being wrong, fear of losing money, fear of missing out, the fear of not being approved by others, or some other fear, the common theme is fear.  Most trading mistakes are a maladaptive attempt to deal with fear or anxiety. (more…)

Day Trading Mistakes

There are some major day trading mistakes that just about every new trader will make early on in their career.  The ones who survive are those who can recognize these mistakes and take corrective action.

The first mistake many day traders make is to skip the planning phase of the day or a trade.  Every day you sit down in front of your monitors you should have a general plan for the day.  You should understand the major trends and support/resistance of the major indices, and the stocks you plan on trading.  In addition to that, once you see your stock setting up for a trade you should have a plan that includes an entry, a target and a stop-loss before you even pull the trigger on the trade.

Another mistake that we often see in day trading is the inability to exit on a losing trade.  If you have issues with getting out of the market when your pre-planned loss has been hit on your own, try using stop-loss orders.  Never. Never ever ever move a stop loss order once it’s been placed.  This requires some discipline but it will save you tons of money in the long run.  You should never be hoping that your stock will turn around, and go where you expected.  You should be executing your plan to the letter.

On a similar note, you also never want to move your targets.  If you keep moving your target away from the stock’s current price, you’re never going to take your profits.  A typical day trading exit strategy is to take profits at predetermined levels as you proceed into green territory.  This means that before you’ve entered the trade you’ve chosen two or more targets.  You exit a portion of your trade at each target.  Now, if you think your stock is going to trend for the day, you can plan for that too.  This is called a trade-to-hold.  It doesn’t mean you move your target, but rather you try to stay in the trend by setting a trailing stop.  A trailing stop can either be automatically set at a certain percentage or point value behind the stock price, or you can mechanically keep moving your stop loss up to obvious points of resistance or support behind your trending stock. (more…)

5-Costly Trading Mistakes

1.  Undercapitalized.  If the trader does not have the adequate capital to trade with, then money, not learning how to trade, will be the primary focus.  Few, if any, ever succeed trading scared money.

2.  Overtrading.  The idea is to make money and keep it, not give it all back because of recklessness.  There is no such thing as being perfect when it comes to trading. Overtrading will easily prove just how imperfect you are. 

3.  Trading Too Many Markets.  Learn to be a specialist because in trading it is best to put all your eggs in one basket while knowing how best to watch and protect that basket very closely.

4.  Believing You Are Invincible.  Few activities teach humility as well as trading.  Seasoned traders respect the risk while novice traders treat success as their birthright.

5.  Lack of Dicipline.  You have to have a game plan when trading.  Failure to have a plan betrays your lack of discipline and feeds your desire to trade off the cuff.  Trading this way is a recipe for disaster.  Just ask someone who has tried it.

The Hidden Variable in Your Trading Success

Most traders realize that trading involves a lot of psychology. And most traders readily admit that a significant portion of their trading losses, or lack of performance, is due to “psychology”. Although the term ‘psychology’ isn’t always mentioned as an explanation, you can see it easily enough in the following statements ……”I froze just as I was about to pull the trigger”….. ”I hesitated and missed that trade and was so pissed that I got myself into an impulse trade right after”….. “That large loss was not what I wanted, I held it thinking it would come back because last time I bailed out of this type of trade I got stopped out right before it reversed”….. “I was really nervous about losing money again so I got out of my winning trade way before my target”

Those are four common examples of trading psychology issues manifesting in one’s trading. Do you recognize yourself in the above statements?

All four of those statements have in common one thing, fear. Whether it’s the fear of not being perfect, the fear of being wrong, fear of losing money, fear of missing out, the fear of not being approved by others, or some other fear, the common theme is fear. Most trading mistakes are a maladaptive attempt to deal with fear or anxiety.

Emotions like fear and anxiety cannot be eliminated; it is part of the human experience. But how you respond (your behavior, the action you take in response) to anxiety and fear will determine how successful you are as a trader. Some traders recognize this and do something about it; they learn to work with the fear and anxiety to reduce the chance that they’ll continue to fall into the same old behavioral response pattern to fear and anxiety.

Fear will never disappear. Yes, maybe some days you feel more ‘in the zone’ and fear is less of an issue, but most days you’re probably not in the zone; and on those days the fear is unavoidable. Most likely, those are the days when you have your largest losses. The question is, what are YOU going to do to work with the fear? If you cannot eliminate fear, you must learn to work with it, use it to your advantage. Emotions are a form of self-communication; you need to learn what the message is (e.g. If this trade loses I won’t succeed as a trader) in order to begin to learn how to control your actions in response to the fear and anxiety. Your performance will not change until you learn to manage yourself differently when experiencing fear and anxiety.

7 Ways to Become an Unsuccessful Trader

If you’d prefer to become an unsuccessful trader, you can start by making the following common trading mistakes.

-The first big mistake is the flawed logic of extrapolation. Many traders and investors assume that a trend will remain in force until an “event” comes along to change it. But market trends are not like billiard balls on a pool table. This false assumption will put you on the wrong side of the market more times than not, especially at major turning points.

-The second big mistake is to suppose that news events drive market trends. In fact, the opposite is true: economic, political and social events lag market trends.

-One common mistake is to buy puts or calls that are way “out of the money,” with no other transactions to compliment them. Unless your timing is absolutely perfect — and who has perfect timing? — your chance of success is low. It’s like buying a lottery ticket.

-Another common mistake is to buy options with too little time left to expiration. With less than one month to expiration, the time decay begins to accelerate and the chances of success diminish.

-In the middle of a corrective pattern, it’s common to run out of patience while waiting for confirmation of a trend change. You have to give corrective patterns time to unfold before you jump in. This requires discipline, and a solid understanding of the many ways corrective patterns can unfold.

-Too many traders think Elliott wave is a trading system that tells you exactly where to enter and exit a particular market. That’s the biggest misconception. The reality is that it’s an analytical and forecasting tool, which helps you develop and use your own trading system, based on your own personal risk tolerance.

-Traders tend to over-rely on momentum indicators such as RSI, Stochastics and MACD to precisely spot turning points. But to paraphrase Mark Twain, markets can stay overbought or oversold a lot longer than either you or I can remain solvent.

3 Key Lessons For All Traders

Don’t Confuse the Concepts of Winning and Losing Trades with Good and Bad Trades
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.
If You Are Out of Sync with the Markets, Trying Harder Won’t Help
When trading is going badly, trying harder is often likely to make matters even worse. If you are in a losing streak, the best action may be to step away from the markets. Clark advises that the best way to handle a losing streak is to liquidate everything and take a vacation. A physical break can serve to interrupt the downward spiral and loss of confidence that can develop during losing periods. Clark further advises that when trading is resumed, the size should be kept small until confidence is regained.
The Road to Success Is Paved with Mistakes
Ray Dalio, the founder of 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.