Thomas Edison was asked how he was able to accomplish so much with his time. He said, "It's simple. You and I both have eighteen hours a day in which to do as we choose. You spend the eighteen hours doing a number of unrelated things. I spend it doing just one thing, and some of my work is bound to amount to something."
If you want to be successful in any field, there is one rule to observe: concentrate your efforts. Get one thing in your mind. Learn to ignore all the distractions and temptations along the way. Then, put all the power you have into forward motion.
If you've read Ralph Waldo Emerson, you'll know that he wrote two essays that apply to success, one titled "Power" and the other titled "Wealth". The main theme in each is concentration. Emerson said, "Stop all miscellaneous activities. Do away with distractions, other duties, property cares, chores, errands, diverting talents and flatteries-all are impossible." And he said elsewhere, "The one prudence in life is concentration. The one evil is dissipation."
Can you concentrate on one goal when you aren't quite sure what that goal is? Can you move forward firmly and decisively on one road without constantly looking elsewhere to see what's going on? People who know how to concentrate put all their effort into their projects, continually improving their ability to succeed.
Dissipation is the opposite. A person who dissipates is like an archer who tries to shoot several arrows at once: the arrows move with dissipated force and rarely ever hit the target (unless you're Robin Hood, maybe). People who dissipate jump from one thing to another, neither improving their abilities nor moving forward toward success.
How does this apply to trading? This can apply several ways. The most obvious is if you quit your job to trade, then find that trading might not be for you, so then you move onto something else and beyond. Perhaps your efforts in trading were not concentrated. How about continually trying to find the "holy grail"? We heard this term used so often, but surprisingly, many traders are still looking for it! Stop moving from one thing to another and concentrate your efforts in improving your core skills.
Let's take the case of two brain surgeons with equal prospects of success. One puts all his efforts into his work and all of his money into a relatively safe investment to ensure longer-term financial success. The other doctor tries to play the stock market and practice medicine on the side (or vice versa). Ultimately, the second doctor's practice suffers when the market goes up and his money when it's going down (provided that he's just another retail loser). How would you like to have brain surgery performed on you by a doctor who had just lost $100,000 in the stock market?
The point is, trying to diversify too widely will always detract from your success."Where you believe the treasure is, there will your heart be also." That is an immutable law. Can you then be a success if your heart is in three different places - or five or a dozen? No, of course not. I am having this struggle right now as I am juggling so many things at once such as my course work, fund, real estate, internet stuff like iBC and Stocktwits, and much more.
Whatever you choose to spend your time on, spend it well. Whatever your goals are, make sure they are unified. Only a person who specializes becomes truly successful these days. Word?
Showing posts with label Psychology. Show all posts
Showing posts with label Psychology. Show all posts
Thursday, October 22, 2009
Sunday, October 18, 2009
A LESSON ON THE "AS IF" PRINCIPLE
In the 1880s, the psychologist William James developed and began teaching his "As If" principle of life. This might not make any sense to some of you, but it works. For example, if you want to be courageous, try to act courageously. If you want to be a nice guy, start putting a smile on your face and be friendly. If you want to be a great trader, then think like the great traders before us. You cannot be a great trader without first thinking that you are one. You get it?
A person that constantly thinks that he or she will fail in trading, cannot learn how to trade, or just simply has feelings that he or she will "never make it", will inevitably fail. Think, act, and be like Jesse Livermore, Bernard Baruch, Nicolas Darvas, Gerald Loeb, Richard Wyckoff, William O'Neil, Jim Roppel, Steve Cohen, and many, many others. They play (played) to win and that's how you should play: play to win.
Soon, you'll find that your mental and spiritual faculties are like damn fine bartenders. They always give you exactly what you ask for and never ask questions. If you act as though you expect to be a bad trader, your mind and spirit assumes the demeanor of a nobody with little prospect of success. After all, being a nobody doesn't require much skill at all. None, in fact.
In As You Like It, Shakespeare wrote, "All the word's a stage, and all the men and women merely players...And one man in his time plays many parts". William James would tell you to pick out any part in life that you want to play and then play it with all your heart. If you are good at it, that is what you will become. If you pick trading as one of your life's primary goals, then play it with all your heart. It's as simple as that, because the "As If" concept works.
Suppose a play has been written for you in which you portray a person who is in the process of making a fortune in trading. The part requires a person of great psychological control, have a burning desire to learn, be able to make quick and informed decisions, possess strong self-discipline, develop and master a winning strategy, be willing to take risks and accept losses, adapt to the ever-changing conditions in the market, have tremendous confidence in his or her's own abilities.
Could you play that role? You could if you practiced enough, that is, if you worked on your abilities enough. You can do this successfully when you get the focus of your mind to support you and reinforce your efforts.
However, suppose you were assigned a part like this and you chose to play it by dressing up as a bum, slouchy, shiftless, and irresponsible. How about in a lazy, irresolute manner, acting as if you had no ambition, no determination, no confidence, no plan, and no faith in yourself that you could ever accomplish being who you want to be. Combine this with telling yourself, "I can't do this" or "I'm too afraid" or "I wasn't cut out to do this", then you're really in trouble. This would make a terrible performance and no one would attend!
Consider something: How long would it take a person to become a successful trader if he or she continually depreciated themselves, thinking and talking failure, dressing like failures, and always in an environment that breeds failure? The answer to this question is all too obvious, yet millions of people are trying to achieve a level that never dreamed of ever achieving but still play the part of failures. They do nothing about it, or if they are, they aren't trying hard enough.
Have you heard of the "poorhouse atmosphere"? Sometimes, you can gauge the quality of a person's outlook on life by simply looking at them. You can tell how big the streaks of pessimism are in their lives and how much they have been soured by bad experiences. That's how powerful the effects of their negative thinking have become -- it manifests itself in their outwardly appearance. This is truly a powerful force. When people believe the worst about everyone and everything, this is called the "poorhouse atmosphere". Avoid it at all costs.
The "As If" principle is a tool to get you from where you are right now to where you want to be. So how do you bring about such an extraordinary change? The laws are many, but none are difficult. One of the more important ones is to put yourself apart, letting your energy, determination, eagerness, and faith take you in one direction and one direction only. Focus your efforts through the power of this principle. Whatever you want can be yours. The end result will amaze you.
A great thing about my blog is that traders from all over the world can come here and perform. I view my comments section (and my twitter replies) as a stage. You are the actor/trader. There are many that are giving all that they have and demonstrating that they want to be great traders. I am not blind and I know who all of you are. Your efforts will be greatly rewarded as you all strive to become some of the greatest traders in the world. In fact, that's one of my goals in life and I have a long ways to go. See you on the other side.
A person that constantly thinks that he or she will fail in trading, cannot learn how to trade, or just simply has feelings that he or she will "never make it", will inevitably fail. Think, act, and be like Jesse Livermore, Bernard Baruch, Nicolas Darvas, Gerald Loeb, Richard Wyckoff, William O'Neil, Jim Roppel, Steve Cohen, and many, many others. They play (played) to win and that's how you should play: play to win.
Soon, you'll find that your mental and spiritual faculties are like damn fine bartenders. They always give you exactly what you ask for and never ask questions. If you act as though you expect to be a bad trader, your mind and spirit assumes the demeanor of a nobody with little prospect of success. After all, being a nobody doesn't require much skill at all. None, in fact.
In As You Like It, Shakespeare wrote, "All the word's a stage, and all the men and women merely players...And one man in his time plays many parts". William James would tell you to pick out any part in life that you want to play and then play it with all your heart. If you are good at it, that is what you will become. If you pick trading as one of your life's primary goals, then play it with all your heart. It's as simple as that, because the "As If" concept works.
Suppose a play has been written for you in which you portray a person who is in the process of making a fortune in trading. The part requires a person of great psychological control, have a burning desire to learn, be able to make quick and informed decisions, possess strong self-discipline, develop and master a winning strategy, be willing to take risks and accept losses, adapt to the ever-changing conditions in the market, have tremendous confidence in his or her's own abilities.
Could you play that role? You could if you practiced enough, that is, if you worked on your abilities enough. You can do this successfully when you get the focus of your mind to support you and reinforce your efforts.
However, suppose you were assigned a part like this and you chose to play it by dressing up as a bum, slouchy, shiftless, and irresponsible. How about in a lazy, irresolute manner, acting as if you had no ambition, no determination, no confidence, no plan, and no faith in yourself that you could ever accomplish being who you want to be. Combine this with telling yourself, "I can't do this" or "I'm too afraid" or "I wasn't cut out to do this", then you're really in trouble. This would make a terrible performance and no one would attend!
Consider something: How long would it take a person to become a successful trader if he or she continually depreciated themselves, thinking and talking failure, dressing like failures, and always in an environment that breeds failure? The answer to this question is all too obvious, yet millions of people are trying to achieve a level that never dreamed of ever achieving but still play the part of failures. They do nothing about it, or if they are, they aren't trying hard enough.
Have you heard of the "poorhouse atmosphere"? Sometimes, you can gauge the quality of a person's outlook on life by simply looking at them. You can tell how big the streaks of pessimism are in their lives and how much they have been soured by bad experiences. That's how powerful the effects of their negative thinking have become -- it manifests itself in their outwardly appearance. This is truly a powerful force. When people believe the worst about everyone and everything, this is called the "poorhouse atmosphere". Avoid it at all costs.
The "As If" principle is a tool to get you from where you are right now to where you want to be. So how do you bring about such an extraordinary change? The laws are many, but none are difficult. One of the more important ones is to put yourself apart, letting your energy, determination, eagerness, and faith take you in one direction and one direction only. Focus your efforts through the power of this principle. Whatever you want can be yours. The end result will amaze you.
A great thing about my blog is that traders from all over the world can come here and perform. I view my comments section (and my twitter replies) as a stage. You are the actor/trader. There are many that are giving all that they have and demonstrating that they want to be great traders. I am not blind and I know who all of you are. Your efforts will be greatly rewarded as you all strive to become some of the greatest traders in the world. In fact, that's one of my goals in life and I have a long ways to go. See you on the other side.
Saturday, March 28, 2009
ADD-ON TO MY FIRST ARTICLE ON TRADING PSYCHOLOGY
Apparently, the "handcuff" idea is catching on like wildfire. I'm getting e-mails from random people, tweets from all over and all sorts of shit from people from everywhere. If you haven't read the article on the 4 Stages of Learning, you should.
I'm not joking. People are actually doing it, but they don't know when it's appropriate to do so. If a trade is going against you, that does not automatically mean handcuff yourself (or walk away from the computer). You have to do it under the right circumstances, or you will suffer substantial losses for no good reason. You will subject yourself to unnecessary, avoidable, and unforgiving pain.
What are these "right" circumstances? Here they are (I didn't think people would actually be doing this, so I have to write this article to put out a warning):
1) The trade must be working the moment you put it on. If a trade goes against you immediately, then your timing was off. Re-evaluate the situation. If you have to close the position, then close it and re-enter on a better set up, long or short.
2) The trade must be a swing trade. My "handcuff strategy", if you want to call it that, cannot be used for day trades. The buffer just isn't there. And, when I say handcuffing, I'm talking about walking away from the computer as well. After the trade is working, then the handcuffing prevents you from prematurely walking away from a trending trade.
3) I don't want to call it a strategy, so I'll just call it a disciplinary method. This method works when you take advantage of a trend, and helps you withstand countertrend reactionary rallies. Everyone hates seeing paper profits disappear, but if the technical trend is intact, then you need to take the pain to realize the gain that comes after it.
4) It is highly likely that if you "fail and fold", then you would be doing so immediately before your gains are realized. It's not a mystery that sometimes the moment you sell or cover, the trend reverses back in your favor. The trend changes under the maximum pain threshold.
5) I do not encourage handcuffing yourself to a metal pipe, or in real-life examples e-mailed to me: your bedpost, your table, your bookcase, your doorknob, lock yourself in the closet, etc. How is it possible to do some of these things? Did you cut a hole in one of the bookshelves? Goodlord. I suggest walking away from the computer with a stop loss set in place due to the extreme dynamics of the market's volatility and MUI - market under the influence (of news).
6) Make sure the set up is right. If the set up is right, then #1 is taken care of, and you don't have to read the rest of this. If it is an impulse trade without a proper entry or exit plan, then you deserve a large loss. Don't think that the market is your friend and she'll just give you money whenever you want it. Trust yourself, not the market, not any one else.
Let me tell you something. I only administer the handcuffs under the most appropriate and dire circumstances. Yes, my methods are extreme and unconventional, but under the most dire circumstances where a person cannot control his behavior on his own, then there must be intervention. We all have habits, some people have really weird ones, but we all have habits and we all know how hard they are to break.
Psychologically, I believe that trading is the most difficult profession in the world. Trading goes against every natural human emotion. Oh, how difficult it is to remain unbiased and neutral when on a winning streak and to hold fear, anger, and sadness at the gates during a losing streak. I know it's tough, and we've all been there. You may be there right now. Let me offer you a story.
6 years ago when I was 18, I remember losing over $10,000 (don't know the exact amount) in a stock I can't remember. It was a stupid mistake and I don't remember what mistake I made from the long list of mistakes I made, but it was big. Maybe I just blanked it out because the pain was too great. It was the worst day of my life (at that time). I became reckless, tried to drink everyday, didn't want to see any friends, and it affected my school work at the military academy that first semester.
Lucky for me, the discipline and other virtues I picked up there along the way strengthened me and allowed me to continue on. I was at the 'make it or break it' stage where you either continue on or quit. If I did not go there, I think I would have quit, honestly. The money was a big deal, but the psychological damage was extremely devastating. The experience still leaves chills in me and I have to pause as I write because the effects have been so great on me. I don't remember the stock or the price, but I will never forget how I felt.
It seemed like I changed into another person. I was devastated. Now that I think about it, I fell into the death spiral. It was a hellish nightmare. I hated myself for being so stupid. How could this have happened to me? Well, it's simple. I was human. I did the humanly thing and I made every mistake that traders made. I don't produce double-digit monthly gains (on most months) because I'm "good". I came from a road full of disappointment, regret, and losses, and that paved the way for me to improve myself. I made the choice to become a professional trader long before I became one.
I was talking to a friend one day and he thought I never lost any money and was full of shit. Fucking wrong son. I lose money all the time. You can't make money without losing money in this business. You will never win 100% of the time. You will lose. Accept it. If you hate losing, then you should quit trading immediately. Sorry, but it's not for you. I learned to embrace my losses. I view it as Ms. Market warning me that I'm doing something wrong. If I don't follow what she says, then I will be disciplined with God knows what.
Ms. Market loves to give you warnings, but she also helps you out and gives you hints. These "hints" are the high probability trading set ups you should be looking for. She's trying to give you some free money. Are you listening to her or are you distracted by something else? We want to accept her gifts, but sometimes our emotions get in the way. We may not see the hints, or we may be afraid to take action.
Take the losses early on and learn from them. I like the whole blog idea or keeping a trading journal because it allows you to document what happens in the market and in yourself every day. If you don't keep any record of some sort, then you are guaranteed to make the same mistakes over and over again. Keep a journal or writing in a blog should part of every trader's after-hours review process.
The turning point came when I overcame a very disappointing beginning. I made it a goal to improve myself. People find it a surprise that I read over 100 books a year, but it's not a surprise. Sometimes fear can come in handy. I feared the worst, which was a total wipeout and probably quitting. Improving yourself slowly bridges the gap between making trading a hobby vs. making trading a professional career and a business. It's a process that develops over many years.
The rest is history. I went on to kill the market every year after that, producing triple-digit gains for the past 3 years. Once you have a strong foundation, the market cannot stop you. Only you can stop yourself. Building that foundation comes only with self-improvement.
I'm not joking. People are actually doing it, but they don't know when it's appropriate to do so. If a trade is going against you, that does not automatically mean handcuff yourself (or walk away from the computer). You have to do it under the right circumstances, or you will suffer substantial losses for no good reason. You will subject yourself to unnecessary, avoidable, and unforgiving pain.
What are these "right" circumstances? Here they are (I didn't think people would actually be doing this, so I have to write this article to put out a warning):
1) The trade must be working the moment you put it on. If a trade goes against you immediately, then your timing was off. Re-evaluate the situation. If you have to close the position, then close it and re-enter on a better set up, long or short.
2) The trade must be a swing trade. My "handcuff strategy", if you want to call it that, cannot be used for day trades. The buffer just isn't there. And, when I say handcuffing, I'm talking about walking away from the computer as well. After the trade is working, then the handcuffing prevents you from prematurely walking away from a trending trade.
3) I don't want to call it a strategy, so I'll just call it a disciplinary method. This method works when you take advantage of a trend, and helps you withstand countertrend reactionary rallies. Everyone hates seeing paper profits disappear, but if the technical trend is intact, then you need to take the pain to realize the gain that comes after it.
4) It is highly likely that if you "fail and fold", then you would be doing so immediately before your gains are realized. It's not a mystery that sometimes the moment you sell or cover, the trend reverses back in your favor. The trend changes under the maximum pain threshold.
5) I do not encourage handcuffing yourself to a metal pipe, or in real-life examples e-mailed to me: your bedpost, your table, your bookcase, your doorknob, lock yourself in the closet, etc. How is it possible to do some of these things? Did you cut a hole in one of the bookshelves? Goodlord. I suggest walking away from the computer with a stop loss set in place due to the extreme dynamics of the market's volatility and MUI - market under the influence (of news).
6) Make sure the set up is right. If the set up is right, then #1 is taken care of, and you don't have to read the rest of this. If it is an impulse trade without a proper entry or exit plan, then you deserve a large loss. Don't think that the market is your friend and she'll just give you money whenever you want it. Trust yourself, not the market, not any one else.
Let me tell you something. I only administer the handcuffs under the most appropriate and dire circumstances. Yes, my methods are extreme and unconventional, but under the most dire circumstances where a person cannot control his behavior on his own, then there must be intervention. We all have habits, some people have really weird ones, but we all have habits and we all know how hard they are to break.
Psychologically, I believe that trading is the most difficult profession in the world. Trading goes against every natural human emotion. Oh, how difficult it is to remain unbiased and neutral when on a winning streak and to hold fear, anger, and sadness at the gates during a losing streak. I know it's tough, and we've all been there. You may be there right now. Let me offer you a story.
6 years ago when I was 18, I remember losing over $10,000 (don't know the exact amount) in a stock I can't remember. It was a stupid mistake and I don't remember what mistake I made from the long list of mistakes I made, but it was big. Maybe I just blanked it out because the pain was too great. It was the worst day of my life (at that time). I became reckless, tried to drink everyday, didn't want to see any friends, and it affected my school work at the military academy that first semester.
Lucky for me, the discipline and other virtues I picked up there along the way strengthened me and allowed me to continue on. I was at the 'make it or break it' stage where you either continue on or quit. If I did not go there, I think I would have quit, honestly. The money was a big deal, but the psychological damage was extremely devastating. The experience still leaves chills in me and I have to pause as I write because the effects have been so great on me. I don't remember the stock or the price, but I will never forget how I felt.
It seemed like I changed into another person. I was devastated. Now that I think about it, I fell into the death spiral. It was a hellish nightmare. I hated myself for being so stupid. How could this have happened to me? Well, it's simple. I was human. I did the humanly thing and I made every mistake that traders made. I don't produce double-digit monthly gains (on most months) because I'm "good". I came from a road full of disappointment, regret, and losses, and that paved the way for me to improve myself. I made the choice to become a professional trader long before I became one.
I was talking to a friend one day and he thought I never lost any money and was full of shit. Fucking wrong son. I lose money all the time. You can't make money without losing money in this business. You will never win 100% of the time. You will lose. Accept it. If you hate losing, then you should quit trading immediately. Sorry, but it's not for you. I learned to embrace my losses. I view it as Ms. Market warning me that I'm doing something wrong. If I don't follow what she says, then I will be disciplined with God knows what.
Ms. Market loves to give you warnings, but she also helps you out and gives you hints. These "hints" are the high probability trading set ups you should be looking for. She's trying to give you some free money. Are you listening to her or are you distracted by something else? We want to accept her gifts, but sometimes our emotions get in the way. We may not see the hints, or we may be afraid to take action.
Take the losses early on and learn from them. I like the whole blog idea or keeping a trading journal because it allows you to document what happens in the market and in yourself every day. If you don't keep any record of some sort, then you are guaranteed to make the same mistakes over and over again. Keep a journal or writing in a blog should part of every trader's after-hours review process.
The turning point came when I overcame a very disappointing beginning. I made it a goal to improve myself. People find it a surprise that I read over 100 books a year, but it's not a surprise. Sometimes fear can come in handy. I feared the worst, which was a total wipeout and probably quitting. Improving yourself slowly bridges the gap between making trading a hobby vs. making trading a professional career and a business. It's a process that develops over many years.
The rest is history. I went on to kill the market every year after that, producing triple-digit gains for the past 3 years. Once you have a strong foundation, the market cannot stop you. Only you can stop yourself. Building that foundation comes only with self-improvement.
Friday, March 20, 2009
TRADING PLAN & TIMING RULES (FULLY UPDATED)
This article continues the weekly educational series, primarily dealing with psychology and methodology. Here are the previous articles: 4 Stages of Learning, The Trading Death Spiral, and the Trader's Mindset /w Common Psychological Issues.
I get over 100 e-mails per week and people asked me more questions about the trading plan and some ground rules, so I'm going to combine both topics into one article.
I like to ask myself several questions when constructing the plan. I'll give you 20 of them here and you can brainstorm the rest. The plan is your defense against emotional trading (if you actually follow it). Without a plan, you will be all over the place. The plan must be clear and concise and written down. If you do so, you'll be in the top 3% of individuals who have a plan, immediately giving you an edge over the other 97%. Here are the questions (in no particular order):
1) WHY are you trading? - The simple answer is "to make money", but that's really not a specific answer that describes you. Perhaps I can change the emphasis: "why are YOU trading"? Every person has their own reasons, such as quitting their full-time job, spend more time with their kids, increase their quality of life, take control of their financial future, etc. Why are YOU trading?
2) How will you enter & exit trades? The best entries are when the trades that you put on are lower risk compared to a much higher reward. This requires a through understanding and rationale of WHY you enter the trades in the first place. You can exit trades in many ways, such as setting initial and secondary stops, trailing stops, scaling out of positions. Do what makes you the most comfortable.
3) What type of orders will you use? There is a vast array of orders. I like to use market orders 99% of the time. Others like limit orders, and of course, there are stop limit orders and trailing stop orders. Make sure you know when to use what.
4) What broker, software, hardware will you use? Compare brokers and see what you like. Don't make the mistake of simply going to the cheapest broker. You get what you pay for. Instead, aim for a balance of reasonable fees, fast execution, excellent service, etc. You can choose what software and platform you want to use as well. Try out a couple. Finally, I'm not very knowledgeable in the hardware field, so just get a fast computer with lots of memory.
5) How much capital will you need to reach your goals? I think the absolute minimum to feel safe and without most restrictions is $25,000. To be adequately capitalized, I suggest a min. of $50,000. If you suffer a large drawdown in a small account, then you will have some problems. A larger account ensures flexibility and the ability for you to remain in the game, provided that you don't go crazy in your trading. If you hold a smaller account, limit the downside risk.
6) What ARE your goals? This goes with #1. Make sure your goals are 1) written, 2) believable, 3) challenging, 4) measurable, 5) specific, and 6) with deadlines.
7) What's your % allocation of capital per position? On average, I like to use 10% per position or side. Depending on my conviction level and the probability, I can go up to 20% per position and up to 100% per side (a rare occurrence). For people that are starting out, I'd say start with 5% per position, and move up as you build a tolerance. There are many ways to allocate capital.
8) What is your pre-market trading preparation process? This is your plan of action in the morning. You definitely want to check the futures in the morning for any gaps and their implications and location vs. the previous day's close. I like to check different news outlets/sites (there are hundreds of links on the sidebar for you to explore). I also check analyst upgrades/downgrades, economic reports, and earnings reports that may move the market. Be aware of what's happening.
9) What is your after-hours review process? Besides taking a nap sometimes, your end-of-day routine is key. Use this time to think about what happened during the day and what you did. It's good to keep a journal or blog to record your thoughts and observations. Keep a daily log.
10) How many positions are you able to focus on at once? I personally do not like to have many positions open. 10 is the limit for me. Having a portfolio with dozens and dozens of positions will create a distraction and you may miss exit points. The good thing is that the more positions you have and capital allocated per position, then the risk level per position is minuscule. I prefer larger, concentrated positions initiated through directional timing.
11) What type of trader are you (day, swing, position, etc.)? If you don't know this yet, then you shouldn't even be trading at all. Know yourself. Figure out what style suits you the best. What is your psyche most comfortable with and able to tolerate. Just because I do "X" doesn't mean X is appropriate for you. This is also why many people to follow other people become losers automatically by default.
12) Are you purely fundamental, technical or a hybrid of both? There is no wrong answer to this. It all depends on what you like and it's your choice. I am 100% technical and could care less about fundamentals (except earnings).
13) What will you use (exch-listed, OTC, futures, options, etc.)? Again, your choice.
14) When will you trade (all day, set time, every few days, etc.)? This depends on your available time, schedule, strategy, and personal preference. If you set a certain time, don't violate it. Commit to your scheduled and allotted time, or risk impulse trading.
15) What are your guidelines for using stops? This is your choice, but you have to adapt to market conditions when making your decision. Presently, wider stops are the norm due to high volatility constantly triggering tighter stops resulting in many losses. I personally do not use a hard stop unless I have to step out. I can use a mental stop and monitor the situation throughout the day. If you have a 9-5 full-time job, then you should use stops. Stop use is on a case-by-case basis.
16) What are your guidelines on losing positions? Specifically, how will you identify a serious loss vs. a temporary drawdown? How will you deal with the loss. Some traders simply stop trading for a few days to screw their head back on straight. This accompanies your strategy for exiting trades, but on the losing side. If you have 3 consecutive losses, seriously, take a break. Go ride some horses.
17) How much will you risk on every trade? Typically, a common rule is to risk no more than 2% per trade. Your risk depends on your allocation, exposure, and your loss limit. If you allocate 20% per position, you may risk up to 10% per position using th 2% rule. If you allocate 10% per position, you may risk up to 20% per position using the same rule.
18) Will you go both long and short? You should learn both skills. If you do not know how to short in a bear market, you will left with a severe disadvantage. Learn to take profits on both sides of the market. I recommend 4 main books on short selling (the first 2 are fundamental and the last 2 are technical): The Art of Short Selling by Kathryn Staley, Sold Short by Manuel Asensio, How to Make Money Selling Stocks Short by William O'Neil, and Sell & Sell Short by Dr. Alexander Elder. Get reading.
19) Are you going to trade the open? If the gap exceeds the high of the previous day after a day long consolidation, then the gap will run in the direction of the gap's open. An area gap that opens within the previous day's range is subject to fading/filling. What is your gap strategy? What is your strategy if the market opens unchanged?
20) Do you have a list of sites to visit, resources to read on a daily basis? If not, then check the sidebar for hundreds of links to every resource you need as a trader.
There are many more questions to ask yourself, but here are basics. Meditate on them.
As for the rules, there are plenty of them. We all forget about them once in a while. In fact, I always catch myself in the act of breaking them. The key is to be aware of your mistake and to get out of it as quickly as possible. Right the wrong. If you are not aware, then you won't know, and then you will be finished. Here are some rules, or little tidbits, that should aid you as a short-term trader. Some are obvious, some are not, just mind them all.
1) Buy on the 1st pullback from a new high & sell the first pullback from a new low. The first pullback and subsequent continuation move will confirm the strength of the rally or sell-off. Don't be the trader they buys right before an upside pullback and shorts right before a downside pullback.
2) Enter during quiet times & exit during crazy times. Then the markets are quiet, or trading in a tight range, that indicates that an explosive move is imminent. Use the chart to determine if it will most likely be a breakout or breakdown. Get out when everyone in the world is trying to get in at the same time, usually indicating a blow off exhaustion top.
3) Equalize time to opportunity. You must know how long you're going to hold the stock before you enter the trade. If you have to keep asking me or anyone else, "Are you still in?", "When are you getting out?" (of such and such stock), then clearly, you have no idea WTF you are doing. My timeframe may or may not be the same as yours.
4) Sell the 2nd high, buy the 2nd low. By default, the 1st high becomes resistance and the 1st low becomes support after major pullbacks. When a high or low gets tested more than 2x, then the likelihood of a break is extremely high.
5) Don't trade the exact open (in most cases). I like to wait a full 30-mins prior to pulling the rigger, unless #19 shows up (in the Trading Plan section above).
6) Short the weak rallies and not the sell-off (in most cases). Shorts are looking to cover since they are finally making money on the breakdown. There are times where the market just sells, sells, and sells, however, I'm talking about the majority of times when it doesn't cascade.
7) Do not short strong rallies & do not buy strong weakness. If a rally continues, corrects, continues, corrects, etc., then the rally is strong and sustained for whatever reason. Shorts will continue to cover in the face of it, adding fuel to the fire. Likewise, don't buy when a stock is selling off like there is no tomorrow. Something is terribly wrong and traders, for whatever reason, are willing to sell at any price they can get. Just remember why you are buying or shorting.
8) Keep the charts in mind & ditch the news. News moves the markets, but news is immediately priced in, and it shows in the chart immediately. First, determine if the news item is valid, trustworthy, relevant, and important. Second, measure the impact of the item. New items of all sorts are responsible for the vast majority of the breakouts and breakdowns that occur, but charts already tell you that.
9) Keep support & resistance and MA's in mind. Prices have memory, because humans have memory. People buy at support and sell at resistance. That's how it is. Use trend lines, channels, and moving averages to guide you. They are NOT just some stupid lines on a chart.
10) Trends test the last point of support or resistance (in most cases). Combine this with #9 above.
11) Use the TICK, VWAP and/or VIX, and other indicators to verify moves. They are your friends.
12) Stop chasing stocks, long or short, if you don't have a valid reason to do so. Don't be a sucker. Stop wondering why the market reverses everytime you buy or short. It's probably because you were chasing whatever you were chasing and that's your fault, not the market's. Afraid of "missing out"? Too bad, wait for the next opportunity.
13) The 200-day MA is the strongest MA, followed by the 50-day MA. The 200-day MA is not only the strongest, but the most important long-term MA. These MA's guide the trend of the market for years, and even decades. The 50-day MA is the strongest and most important intermediate-term MA, guiding the market for months to years. Always know where they are located in relation to the market.
14) Therefore, don't be buying toward or short into an MA. (includes the 20/30-day MAs). They are strong and reliable points of support or resistance. For the short-term, you want to focus on the 20 and 30-day MA's. Additionally, add the 10 and 15-day MA's if you are long and the 5-day MA if you are short. Many stocks use their own "custom" MA's, but many stocks follow the ones listed here.
15) Track the pivot points. Make note of prior highs and lows because there is a force at these points that caused at least a short-term reversal against the prevailing trend. If you are constantly wondering why a stock bounces at a certain point and pulls back at another, then you might want to note the pivot points. Pivots don't happen just because a stock "feels like doing it".
16) Make note of every gap and identify them (area, breakaway, continuation, exhaustion, etc.). Learn what all the gaps are, how to identify them, how to trade them. Gaps also mark major support and resistance levels, especially force gaps on Spikers™.
17) Massive volume at a pivot will kill the existing trend...and it will start a completely new one. Volume shows conviction, enthusiasm, and in most cases, institutional support. Don't trade against money that immediately stopped the existing trend and broke away to form a new one.
18) Bottoms take longer to form than tops because accumulation takes long than distribution. Classic greed vs. fear. People have a tendency to sell out of fear faster than buy into greed. This is why shorting stock yields profits 40-70% faster than if you were going long.
19) Stop rapidly trading during consolidation periods. What is the hell is the matter with you? The "Chop Zone" is specifically designed to chop up suckers.
20) Use multiple time frames for entry & exit signals. I like to use the 1-min, 5-min, 1-day, 5 day, 10-day, 1-month, and 4-6-month time frames on a single stock. Your reason for entering and staying in a trade will be confirmed on all time frames if the trade is still working.
I get over 100 e-mails per week and people asked me more questions about the trading plan and some ground rules, so I'm going to combine both topics into one article.
I like to ask myself several questions when constructing the plan. I'll give you 20 of them here and you can brainstorm the rest. The plan is your defense against emotional trading (if you actually follow it). Without a plan, you will be all over the place. The plan must be clear and concise and written down. If you do so, you'll be in the top 3% of individuals who have a plan, immediately giving you an edge over the other 97%. Here are the questions (in no particular order):
1) WHY are you trading? - The simple answer is "to make money", but that's really not a specific answer that describes you. Perhaps I can change the emphasis: "why are YOU trading"? Every person has their own reasons, such as quitting their full-time job, spend more time with their kids, increase their quality of life, take control of their financial future, etc. Why are YOU trading?
2) How will you enter & exit trades? The best entries are when the trades that you put on are lower risk compared to a much higher reward. This requires a through understanding and rationale of WHY you enter the trades in the first place. You can exit trades in many ways, such as setting initial and secondary stops, trailing stops, scaling out of positions. Do what makes you the most comfortable.
3) What type of orders will you use? There is a vast array of orders. I like to use market orders 99% of the time. Others like limit orders, and of course, there are stop limit orders and trailing stop orders. Make sure you know when to use what.
4) What broker, software, hardware will you use? Compare brokers and see what you like. Don't make the mistake of simply going to the cheapest broker. You get what you pay for. Instead, aim for a balance of reasonable fees, fast execution, excellent service, etc. You can choose what software and platform you want to use as well. Try out a couple. Finally, I'm not very knowledgeable in the hardware field, so just get a fast computer with lots of memory.
5) How much capital will you need to reach your goals? I think the absolute minimum to feel safe and without most restrictions is $25,000. To be adequately capitalized, I suggest a min. of $50,000. If you suffer a large drawdown in a small account, then you will have some problems. A larger account ensures flexibility and the ability for you to remain in the game, provided that you don't go crazy in your trading. If you hold a smaller account, limit the downside risk.
6) What ARE your goals? This goes with #1. Make sure your goals are 1) written, 2) believable, 3) challenging, 4) measurable, 5) specific, and 6) with deadlines.
7) What's your % allocation of capital per position? On average, I like to use 10% per position or side. Depending on my conviction level and the probability, I can go up to 20% per position and up to 100% per side (a rare occurrence). For people that are starting out, I'd say start with 5% per position, and move up as you build a tolerance. There are many ways to allocate capital.
8) What is your pre-market trading preparation process? This is your plan of action in the morning. You definitely want to check the futures in the morning for any gaps and their implications and location vs. the previous day's close. I like to check different news outlets/sites (there are hundreds of links on the sidebar for you to explore). I also check analyst upgrades/downgrades, economic reports, and earnings reports that may move the market. Be aware of what's happening.
9) What is your after-hours review process? Besides taking a nap sometimes, your end-of-day routine is key. Use this time to think about what happened during the day and what you did. It's good to keep a journal or blog to record your thoughts and observations. Keep a daily log.
10) How many positions are you able to focus on at once? I personally do not like to have many positions open. 10 is the limit for me. Having a portfolio with dozens and dozens of positions will create a distraction and you may miss exit points. The good thing is that the more positions you have and capital allocated per position, then the risk level per position is minuscule. I prefer larger, concentrated positions initiated through directional timing.
11) What type of trader are you (day, swing, position, etc.)? If you don't know this yet, then you shouldn't even be trading at all. Know yourself. Figure out what style suits you the best. What is your psyche most comfortable with and able to tolerate. Just because I do "X" doesn't mean X is appropriate for you. This is also why many people to follow other people become losers automatically by default.
12) Are you purely fundamental, technical or a hybrid of both? There is no wrong answer to this. It all depends on what you like and it's your choice. I am 100% technical and could care less about fundamentals (except earnings).
13) What will you use (exch-listed, OTC, futures, options, etc.)? Again, your choice.
14) When will you trade (all day, set time, every few days, etc.)? This depends on your available time, schedule, strategy, and personal preference. If you set a certain time, don't violate it. Commit to your scheduled and allotted time, or risk impulse trading.
15) What are your guidelines for using stops? This is your choice, but you have to adapt to market conditions when making your decision. Presently, wider stops are the norm due to high volatility constantly triggering tighter stops resulting in many losses. I personally do not use a hard stop unless I have to step out. I can use a mental stop and monitor the situation throughout the day. If you have a 9-5 full-time job, then you should use stops. Stop use is on a case-by-case basis.
16) What are your guidelines on losing positions? Specifically, how will you identify a serious loss vs. a temporary drawdown? How will you deal with the loss. Some traders simply stop trading for a few days to screw their head back on straight. This accompanies your strategy for exiting trades, but on the losing side. If you have 3 consecutive losses, seriously, take a break. Go ride some horses.
17) How much will you risk on every trade? Typically, a common rule is to risk no more than 2% per trade. Your risk depends on your allocation, exposure, and your loss limit. If you allocate 20% per position, you may risk up to 10% per position using th 2% rule. If you allocate 10% per position, you may risk up to 20% per position using the same rule.
18) Will you go both long and short? You should learn both skills. If you do not know how to short in a bear market, you will left with a severe disadvantage. Learn to take profits on both sides of the market. I recommend 4 main books on short selling (the first 2 are fundamental and the last 2 are technical): The Art of Short Selling by Kathryn Staley, Sold Short by Manuel Asensio, How to Make Money Selling Stocks Short by William O'Neil, and Sell & Sell Short by Dr. Alexander Elder. Get reading.
19) Are you going to trade the open? If the gap exceeds the high of the previous day after a day long consolidation, then the gap will run in the direction of the gap's open. An area gap that opens within the previous day's range is subject to fading/filling. What is your gap strategy? What is your strategy if the market opens unchanged?
20) Do you have a list of sites to visit, resources to read on a daily basis? If not, then check the sidebar for hundreds of links to every resource you need as a trader.
There are many more questions to ask yourself, but here are basics. Meditate on them.
As for the rules, there are plenty of them. We all forget about them once in a while. In fact, I always catch myself in the act of breaking them. The key is to be aware of your mistake and to get out of it as quickly as possible. Right the wrong. If you are not aware, then you won't know, and then you will be finished. Here are some rules, or little tidbits, that should aid you as a short-term trader. Some are obvious, some are not, just mind them all.
1) Buy on the 1st pullback from a new high & sell the first pullback from a new low. The first pullback and subsequent continuation move will confirm the strength of the rally or sell-off. Don't be the trader they buys right before an upside pullback and shorts right before a downside pullback.
2) Enter during quiet times & exit during crazy times. Then the markets are quiet, or trading in a tight range, that indicates that an explosive move is imminent. Use the chart to determine if it will most likely be a breakout or breakdown. Get out when everyone in the world is trying to get in at the same time, usually indicating a blow off exhaustion top.
3) Equalize time to opportunity. You must know how long you're going to hold the stock before you enter the trade. If you have to keep asking me or anyone else, "Are you still in?", "When are you getting out?" (of such and such stock), then clearly, you have no idea WTF you are doing. My timeframe may or may not be the same as yours.
4) Sell the 2nd high, buy the 2nd low. By default, the 1st high becomes resistance and the 1st low becomes support after major pullbacks. When a high or low gets tested more than 2x, then the likelihood of a break is extremely high.
5) Don't trade the exact open (in most cases). I like to wait a full 30-mins prior to pulling the rigger, unless #19 shows up (in the Trading Plan section above).
6) Short the weak rallies and not the sell-off (in most cases). Shorts are looking to cover since they are finally making money on the breakdown. There are times where the market just sells, sells, and sells, however, I'm talking about the majority of times when it doesn't cascade.
7) Do not short strong rallies & do not buy strong weakness. If a rally continues, corrects, continues, corrects, etc., then the rally is strong and sustained for whatever reason. Shorts will continue to cover in the face of it, adding fuel to the fire. Likewise, don't buy when a stock is selling off like there is no tomorrow. Something is terribly wrong and traders, for whatever reason, are willing to sell at any price they can get. Just remember why you are buying or shorting.
8) Keep the charts in mind & ditch the news. News moves the markets, but news is immediately priced in, and it shows in the chart immediately. First, determine if the news item is valid, trustworthy, relevant, and important. Second, measure the impact of the item. New items of all sorts are responsible for the vast majority of the breakouts and breakdowns that occur, but charts already tell you that.
9) Keep support & resistance and MA's in mind. Prices have memory, because humans have memory. People buy at support and sell at resistance. That's how it is. Use trend lines, channels, and moving averages to guide you. They are NOT just some stupid lines on a chart.
10) Trends test the last point of support or resistance (in most cases). Combine this with #9 above.
11) Use the TICK, VWAP and/or VIX, and other indicators to verify moves. They are your friends.
12) Stop chasing stocks, long or short, if you don't have a valid reason to do so. Don't be a sucker. Stop wondering why the market reverses everytime you buy or short. It's probably because you were chasing whatever you were chasing and that's your fault, not the market's. Afraid of "missing out"? Too bad, wait for the next opportunity.
13) The 200-day MA is the strongest MA, followed by the 50-day MA. The 200-day MA is not only the strongest, but the most important long-term MA. These MA's guide the trend of the market for years, and even decades. The 50-day MA is the strongest and most important intermediate-term MA, guiding the market for months to years. Always know where they are located in relation to the market.
14) Therefore, don't be buying toward or short into an MA. (includes the 20/30-day MAs). They are strong and reliable points of support or resistance. For the short-term, you want to focus on the 20 and 30-day MA's. Additionally, add the 10 and 15-day MA's if you are long and the 5-day MA if you are short. Many stocks use their own "custom" MA's, but many stocks follow the ones listed here.
15) Track the pivot points. Make note of prior highs and lows because there is a force at these points that caused at least a short-term reversal against the prevailing trend. If you are constantly wondering why a stock bounces at a certain point and pulls back at another, then you might want to note the pivot points. Pivots don't happen just because a stock "feels like doing it".
16) Make note of every gap and identify them (area, breakaway, continuation, exhaustion, etc.). Learn what all the gaps are, how to identify them, how to trade them. Gaps also mark major support and resistance levels, especially force gaps on Spikers™.
17) Massive volume at a pivot will kill the existing trend...and it will start a completely new one. Volume shows conviction, enthusiasm, and in most cases, institutional support. Don't trade against money that immediately stopped the existing trend and broke away to form a new one.
18) Bottoms take longer to form than tops because accumulation takes long than distribution. Classic greed vs. fear. People have a tendency to sell out of fear faster than buy into greed. This is why shorting stock yields profits 40-70% faster than if you were going long.
19) Stop rapidly trading during consolidation periods. What is the hell is the matter with you? The "Chop Zone" is specifically designed to chop up suckers.
20) Use multiple time frames for entry & exit signals. I like to use the 1-min, 5-min, 1-day, 5 day, 10-day, 1-month, and 4-6-month time frames on a single stock. Your reason for entering and staying in a trade will be confirmed on all time frames if the trade is still working.
Sunday, March 15, 2009
THE TRADER'S MINDSET & COMMON PSYCHOLOGICAL ISSUES
Plutchik's Wheel of EmotionsAs you know by now, psychology is a secondary interest of mine, after reading charts and tarot cards, of course. For this week, I decided to cover the "trader's mindset" and the most common psychological issues that all traders deal with.
How does someone know that they reached the trader's mindset? Here are a few characteristics:
1. No anger whatsoever.
2. Confidence and being in control of the self
3. A sense of not forcing the markets
4. An absence of feeling victimized by the markets
5. Trading with money you can afford to risk
6. Trading using a chosen approach or system
7. Not influenced by others
8. Trading is enjoyable
9. Accepting both winning and losing trades equally
10. An open mind approach at all times
11. Equity curve grows as skills improve
12. Constantly learning on a daily basis
13. Consistently aligning trades with the market's direction
14. Ability to focus on the present reality
15. Taking full responsibility for your actions
Developing the trader's mindset takes time. It usually takes traders 2-5 years before they can read through the above list and honestly say that it describes themselves.
Let's take 100 traders using the same trading system or approach. It is highly likely that no two of them will trade it exactly the same way in all aspects. Why is this? Because our mindsets, beliefs, and understandings are unique. It is no surprise that most traders fail and the reason why is because they lack the trader's mindset. This article covers those in Stage III and IV within the 4 Stages of Learning. More importantly, it applies to those that survived Stage II.
There are two parts to fixing any psychological problems:
1. Recognizing that it exists
2. Accepting it so you can move on
In trading, this is where it's so crucial to take responsibility for your own actions because it induces change and you can start making improvements. If you don't recognize and accept a problem, then you won't get anywhere!
What are some of these issues that I speak of? Here are a few along with their causes and/or effects:
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.
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.
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.
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.
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.
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".
9. Compulsive trading - Similar to #2, except these traders have an addiction to trading and quite possibly gambling issues. They need to constantly be trading, even if there is no rational reason to do so. They are always excited whether they win or lose.
10. Afraid of "pulling the trigger" - This usually means that the trader does not have a system or approach already in place. They have not calculated risk/reward and many times, these trades are unplanned. This also comes after a string of losses. They don't want to be "wrong again". There is no trust from within.
11. Over-thinking or second guessing - Similar to #10, but these people are usually looking for a "sure thing", when they clearly don't exist. Losing is not recognized a normal part of trading and the risks and unknowns of trading are not fully accepted.
12. Limiting profit or getting out too early - These traders have poor self-esteem. This is a direct effect of believing that the profits were undeserved. Usually a trader is stressed over a trade for some reason and closing the position quickly eliminates the anxiety. Usually, there is a fear of "giving back" those gains.
13. Fear of being stopped out - Traders fear failure and the pain from taking losses is great. Here is another instance where the ego is at risk. They must always be correct or suffer a feeling of "let down".
14. Not following your system - This is a trust and follow-through issue. Perhaps the trader didn't test it enough, or it recently produced a string of losses, casing some doubt. Your faith in the system is broken. Not only do you not trust the system, you can't even trust yourself with picking one that works for you.
15. Following other traders (indiscriminately) - These traders do not have a system. They are also limited in trading knowledge. They feel that they will become winners if they simply "follow" someone. These trades are usually impulsive.
The key to all things is creating balance. This means that if you are winning or losing, you should not care. When you finally recognize and accept each of these common pitfalls, you'll be well on your way to acquiring the trader's mindset. Good luck.
Friday, February 27, 2009
THE TRADING DEATH SPIRAL - How to Identify it and Pull Yourself Out
This article is designed to be an add-on to my previous article on trading psychology. There was a lot of interest in the Four Stages of Learning, which can be applied to almost anything in life. I know this because a fellow bodybuilder told me so. This next article highlights what happens during Stage II and even Stage III. It is one of the darkest moments in a trader's career. It's a time where you either "make it or break it" and there is no in between.
What is the trading "death spiral"?
Imagine for a moment: You went short Friday morning (2/27) but the market immediately rallied from the open. Then, you decided to go long, only to see the market head back down. You just took 2 consecutive losses. In your eagerness to "make it back up" or "break even", you start to get frustrated and have feelings of despair.
Later during the day, you see the market is about to breakdown, but you don't go short because you've already been burned twice in the same day. Naturally, you would have made a killing if you took this trade. You then proceed to either literally or figuratively bash your head into the wall. Perhaps you even want to throw your computer out of your window. So you don't wait any further, you then "chase" the stock and short it at ridiculously oversold levels and catch a furious bounce, forcing you to cover. There goes loss #3.
At this moment, you are dazed and confused as to what just happened in such a short period of time. You became poorer in a matter of minutes and you are feeling hopeless and you may even be experiencing shivers, shortness of breath, sweating, and of course you may be cussing and maybe even throwing objects across the room. Your choices are either 1) to calm yourself down and move on or 2) to quit, indefinitely. You are now in a death spiral.
You go through this shift or transition from accepting and embracing losses and correcting the mistakes, into a massive pit of emotions that becomes so convoluted and built up to a point where you lose total confidence and acceptance in anything and everything. This transition can occur within minutes, or even seconds. Emotional responses replace your tactical trading method and plan (if you even have one). The death spiral is simply you digging yourself deeper and deeper into this pit. It's an abyss that you must get out of immediately. If not, you may experience permanent psychological damage that prevents you from trading ever again.
You must learn to control your emotions or you will not be able to trade. All the programs, books, people, and anything else out there will do you no good if you do not master your emotions. Do you understand that? What I am telling you is important. Even if quitting was the only viable choice, most traders that do quit do not do so until the death spiral causes an emotional response that creates a situation so desperate that the trader cannot take it anymore and must quit. You hear of stories about how traders commit suicide, right? Well, most likely, what I said above is the reason why. You want to be aware of your emotions and catch yourself before you visit the depths of hell.
Contrary to some people's thinking, this doesn't apply to only Stage II's and III's. This happens to everyone, even professionals, because we are all human beings. The difference between a pro and a novice is that the pro can quickly identify if he/she is entering the spiral and get out quickly and with only a scratch. A novice has no clue what he/she is getting him/herself into, and as a result, suffers massive losses. You can read my pretty little charts all day long, but they won't save you once you spiral out of control. Your emotions take full control over you as if you were possessed by a demon. You become irrational.
Consider a few a things:
- The first time a spiral happens, you should correct and learn from it. The most important skill you can master here is to control yourself before the spiral controls you. However, every time this spiral occurs and the more you go out of control, the quicker and more devastating the next spiral(s) will be. You will lose control even faster. The pain will shut you down and you will no longer be willing to trade anymore. Correct the problem now.
- Instead of quitting, take the time to re-build your confidence and to strengthen your emotional resolve. Quitting is taking the easy road. It is the most convenient thing to do because you don't want to get burned again. You know the story about the little boy touching a hot stove, right? Or how about the one that got bitten by a dog? Quitting doesn't provide any solution, and will only feed your reservoir of painful thoughts.
- How many traders start the day winning, only to lose those gains (plus more) at the end of the day? Who's fault is it, the market or the trader? Did the market change or did the trader change? It's always the traders fault and the trader always changes. You NEVER blame the market under any circumstance. The emotions start coming in before the trader even starts to lose. Excitement from winning will cause the trader to lose control. The gains turn into losses. You have started another version of the death spiral.
Let's become self-aware right now. Get an index card and write the following statements on it:
- After consecutive losses, I may be losing control of my emotions
- Many consecutive losses usually result from trading within neutral ranges or doji days, such as 2/26*.
- Are you following your trading method or are you overtrading?
- Trading method losses are acceptable. All other losses are not.
- If unsure about the market, remain neutral. Making no money is better than losing money.
I'm sure you get the idea, and I know that there are more statements that could be added. I will welcome suggestions in the comments section for traders who need them. The card means nothing if you don't use it. Go ahead and tape it to the bottom of your monitor. Don't leave it on your desk as it tends to be swept aside. This visual reminder will help you more than you can imagine.
Now, get another card, and label it as "Symptoms of a Death Spiral". I am not bullshitting you. Now, write the following:
- Self-unawareness may lead to "shortness of breath", "sweating", "squirming in your chair", "nervousness/anxiety attacks", "shaking/restlessness", "feelings of hopelessness", "confusion", and finally, "anger".
- When I reach the "anger" stage of the death spiral, I may "cuss" (more than you would on a normal day), "scream", "throw objects", "break objects", "jump up and down", "bang my head into the wall", "kick myself repeatedly", "direct anger towards other people" (who have nothing to do with trading), "lose full normal emotional function".
If you are in a death spiral or have recently experienced one, then you may want to do the following:
- Stop trading immediately. You cannot trade when your emotions have you under control. Go exercise, read a book, play with the dog, do something to clear your head.
- You may want to start paper trading until you become profitable on paper. I tell people all the time, "If you can't make fake money, how in the hell are you going to make real money"? Makes sense, doesn't it? Get your trading methodology in order.
- Start trading again, but only in small lots. If you used 10% per allocation, then start off with something smaller. The less money that you have at stake, the less emotional you'll become. If you had $2,500 at stake, then you wouldn't care much if your normal position sizes are $10,000. The death spiral will come after you the moment you try to make an "unplanned killing" motivated by your own greed.
- As you become more comfortable, gain more confidence, and start turning a profit, then you may increase your position sizes.
- Don't forget this article and the two index cards. Read them daily in your trading.
I hope this helps you all. Have a great weekend!
Saturday, February 21, 2009
TYING YOURSELF DOWN - A PERSONAL EXPERIENCE & THE 4 STAGES OF LEARNING
Back in mid-2008, I had a friend who lost over 60%. I offered to sit next to him for one afternoon while he was trading and I made sure he was free all day. This was in early September. I told him to initiate short positions and "leave them alone for a few days". He closed out the positions within minutes. He started freaking out because aswing trade was going 5-6% against him.
I told him to re-add all the short positions. I then told him to come over to the window where a large metal pipe was running, and I handcuffed him. You can imagine how berserk he went, calling me all sorts of shit while at the same time feeling hopeless. I uncuffed him after the close. If you're thinking "What the hell am I doing with handcuffs in some dude's room", well, chill the fuck out and keep reading.
This is sort of extreme, but it's also a personal experience. Many years ago, I used to handcuff myself during trading hours to avoid impulse trading and succumbing to my emotions. If I had to go to the bathroom or eat, I had to call my neighbor to unlock me. I did this for two full weeks and it was one of my most profound experiences in my trading career. Psychologically, I had no choice but to withstand the pain and I forced it upon myself like a madman.
Now that I have students, I can't cuff them, but I tell them to completely walk away from the computer if they get urges. Since I am primarily a swing trader, I can withstand bounces and giving up large gains in anticipation of closing out trades for 20%, 30%, even 50% or more. In fact, I could be eating a sandwich and watching Youtube videos while my gains fade away because I have my trade's purpose and goal always in mind with the end result in focus. The psychological aspect of trading must be your foundation, for without it, you will not succeed as a trader.
It doesn't matter what system you trade, what programs you use, or what you subscribe to in your search for the holy grail, or "THE" answer to trading. I found that keeping it simple was the best way for me. If you notice on my daily charts, I hardly ever use technical indicators and only rely on candle charting, price action, volume, and moving averages to make an informed decision. That is really all you need to find the best set-ups that produce highly successful and high probability trades with the greatest time value of employed capital.
I use the most unconventional methods in my trading as well. Many times, I do go 100% all-in, but in the best of circumstances. I believe I will be all-in this week, switched around from long then to short, mid-week. What I do may be risky, but I am so conditioned to take calculated risks that it is second nature to me. In addition, I don't involve myself in conventional portfolio theory or asset allocation. That is a waste of time for my resources. I trade to get the biggest bang for my money in the shortest amount of time. I don't fool around with 1-2% movers. That's a waste of my day.
Everything I said above may or may not apply to you. What someone might do may not be appropriate for you and your tolerances. Most people are conservative and cannot or or are unwilling to employ the strategies that I use, all of which are 100% discretionary and technical and for some, proprietary. It is important for you to figure out what kind of trader you are, what your style is, how your personality fits, etc. This will not come overnight, but rather over months and maybe even years. You must know yourself before throwing your hard earned money in the market.
With that said, there are 4 stages of Learning:
- Stage I - Unconscious Incompetence: You have no idea what you know or don't know.
- Stage II - Conscious Incompetence: You admit that you don't know, and you want to know how.
- Stage III - Conscious Competence: You finally know how, but only if you think things through.
- Stage IV - Unconscious Competence: You fully know how and you instinctively take action.
During Stage I or Unconscious Incompetence, the trader doesn't know what's going on, and doesn't know much about trading except for the fact that you could make millions! Also, these traders have no trading plan whatsoever. In fact, they don't even know that they need one! Finally, the trader is unaware of the important aspect of trading psychology. We've all been here, done that.
During Stage II or Conscious Incompetence, the trader is all pumped up and excited about the potentials of trading. These traders look at charts all day long and flip through research reports. Finally, they open up a brokerage account anticipating great riches. This group probably reads 1 or 2 books, gets some kind of newsletter subscription, and they think they're ready to run circles around the Market Makers. Not so fast. Unfortunately, these traders lose a lot of money and they realize that all the services and subscriptions and advice they got are no use to them This is also where the individual trader gets a taste of the emotions that come with trading (fear & greed).
This is also where traders test various strategies. Stage II is especially difficult because the trader suffers disastrous losses and may become depressed or overwhelmed. His personal life may be severely affected. It is at this point that they decide to either move forward or quit trading. This is also where positive and negative judgments and thoughts are formed ("Am I too stupid to trade?, "Trading is too hard for me"). The trader has lost money, is afraid and confused, and has jumped into a financial and emotional abyss. You hear the statement, "90% of traders lose money", right? This is the stage where it happens. Even if they can afford to take the financial losses, the psychological losses are excruciatingly painful for the new trader.
When the trader makes a conscious decision to take his losses and move forward, then they have reached Stage III or Conscious Competence. Usually, traders look into the abyss and somehow make it out alive. Whatever their motivation, they decided to pull themselves out. In the process, they have also accepted a few things:
- Trading is learned until the day you die. You never stop learning.
- Whatever they did in life, how well they did in their past occupation, and their previous successes do not equate to success in trading.
- Being wealthy or being really smart also does not equate to success in trading. In fact, some of the biggest losers are doctors, lawyers, engineers, scientists, programmers, analysts, business owners, CEOs, retirees, etc. Why? Because typically, these people have this desire to always be right and for some reason, they refuse to take losses until they are annihilated.
- They cannot control the markets or "will" it to do whatever they want. More importantly, they accept that they don't need to "control the markets" to become successful in trading.
- They must have a trading plan. Seriously though, seeking advice from traders/websites/brokers/programs/ etc. as a primary method to trade is like trying to drive to Cali from DC without a map by stopping along the entire way asking all sorts of people for directions. You might end up at Sir Stanford's gf's house in Fredericksburg, VA.
- They must be psychologically prepared to trade.
Knowing where you are is important, because you now know where you need to be. Once Stage IV is reached, you must do several things:
- Create a trading plan. Goddammit. Would you start a business without a business plan? I didn't think so.
- Test out the various strategies and see what "fits". Are you a day trader, swing trader, position trader, a zombie buy-and-hold investor?
- Do not abandon any plans just because they don't work. There's always a time and place for everything in such a fluid market.
- Increase recognition and repetition. Practice, practice, and practice some more. Don't bullshit yourself.
- Accept the fact that taking losses, is part of the game. If you don't like losing, stop trading immediately. I mean it. You 'll thank me later.
- Do whatever is necessary to condition your psyche. Whatever is necessary, even handcuffing yourself.
After a while, you'll be able to understand odds and probabilities, differentiate for market conditions, learn to capture the meat of profits, scale in-and-out of positions, accept multiple & consecutive losses, learn to hold positions during heavy pressure, develop the "trader's intuition", place trades without hesitation and finally, become consistently profitable, week after week, month after month.
Hope this helps some of you out there.
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