Archive for the ‘Stress’ Category
“Plans are plans until they aren’t. Don’t confuse trading ideas with prophecy. You don’t know the future. Unless you cause it.”
This morning I went in very biased about buying Apple long, my mind was clouded with the support level of the 50 week moving average holding up perfectly yesterday and in the pre-market. Looked like a perfect play off the last support level that held up for years. My love for the products did not help me think more clearly. I came in biased. I even wrote a special morning blog to explain my set up. One of the best professional money managers and a great prop trader commented on my blog post in the morning on facebook, and pretty much said I was wrong, dead wrong on that support holding. As the stock opened for trading I became flexible and aware of what happened in the past when I traded against those guys. Yes, Apple was oversold, yes it was far extended from the 5 day ema and due to return, yes it was holding at the 50 week ema, yes it has $100 per share in cash and the most innovative products in the world and a ridiculous P/E ratio of 12. But with a clear, cautious, and flexible mind ready to go long instead I shorted when it failed to make new highs of the day after opening and losing the 50 week line, then when it rallied back above it and failed again I doubled up. I used weekly in the money puts and ended up with very nice gains almost doubling my capital at risk in one hour. One thing that new traders have trouble with that seasoned traders do not is flexibility to change with the market. We have to identify a place the market can move that tells us that we are dead wrong no matter what our beliefs are.
In the markets there are many different types of traders and many motivations that drive them. Everyone has heard of different types of traders based on their trading method: Swing Traders, Day Traders, Momentum Traders, etc. But what about different types of traders based on their psychology, their purpose And motivation? Some trade for fun and excitement, others trade purely for ego. Others love the game and still others are in it only to make money. In the greatest game on earth it is surprising that many traders have different motivations, in reality the only correct motivation is to make money, that should be the real goal of any trader. Here are a list of ten types of traders I have observed on social media. We have all likely been more than one of these types at some time or another while trading. But we need to focus like a laser on the only real reason we should be trading: to make money and once we have made it, to keep it.
Greedy Traders: They trade too big and risk too much because their only goal is the easy money. They usually end up blowing up their account.
New Traders: They have no idea how the markets work so their only goal should be knowledge. New Traders do well to stay students until they have done their homework. Rushing in to make money without risk management, a winning method, the right mind set, and a trading plan will result eventually in failure 100% of the time.
Arrogant Traders: Their only goal is to prove they are right and satisfy their fragile egos. Arrogant traders will lie, delete tweets and posts, never admit when they are wrong. When they are wrong they will hide it under a cloak, when they are right they will scream it from the roof tops.
Trend Traders: Their only goal is to ride a trend and make money. Trend traders will buy high and sell much higher, they will short and cover much lower. They look like genius’ and prophets in a trending market either way it trends but they look like they can’t even trade in choppy or whipsawing markets. In the long term they do very well.
Scared Traders: Their only goal is to not lose their capital. Scared traders will immediately close losing trades and also immediately take profits. They are very stressed out in trading due to not understanding the nature of trading itself or just can not handle the uncertainty or risk. They either need to do their homework to develop their faith in or if they have done the homework trading may just no be for them.
Perma-Bull Traders: Their only goal is to go long stocks. Buy the best investment in the best stock.They have no desire to go short they always believe the next big rally is around the corner and love to buy lower and off support levels.
Perma-Bear Traders: Their only goal is to short stocks. They always think the market is on the verge of a major crash. They “know” the economy is in shambles and the markets are prone to fall. In a bull market they believe prices are too high and will reverse sharply. In a bear market they believe we will go much lower.
Prophet Traders: Their only goal is to rightly predict market movement then let everyone know they did. They always think they know the top or the bottom, they love targets and believe that charts show exactly what is going to happen next. They do not really discuss their own trading they just predict prices.
Paper Traders: They love the market and study more than anyone but never quite make the plunge into real trading. They stay in the comfy cozy world of paper trading and make it more of a hobby. They just can’t make the transition into the real markets.
Rich Traders: Their only goal is to consistently make money and grow their capital over the long term. They do not ask for tips, or advice, they did their homework and they trade their method. They maintain confidence in themselves and their methods regardless of whether they are winning or losing.
Which type of trader are you?
Lose your money,but keep your discipline.
Trading is about following a method, system, or rules that give you an advantage over other market participants in the long run. There are good bets and bad bets. There are traders who follow a trading plan with discipline and others that start trading out of fear and greed after strings of losses or wins. Just because you lost money does not mean you made a mistake. Just because you made money does not mean you did not make a mistake. The goal of trading is to make money over the long term not be right every time. Losses are a part of trading. There is a big difference between a loss after following your plan versus a loss after a loss of discipline.
Losses are simply getting out of a trade with less capital than you entered it. The question is was the loss due to your method or your lack of discipline?
A mistake however can be many things, and mistakes can be profitable which is dangerous to the long term health of your trading account.
Trading a position size so big that your risk of ruin is inevitable is a big mistake whether your individual trades are a win or a loss.
Abandoning your method to start trading a different time frame or style than you have researched is a mistake because your edge is gone.
Adding to a losing position is a big mistake because eventually you will be in the trade that does not revert to the mean and you lose your whole account.
Believing that you are above your own trading plan and can start just trading as you wish is a death wish for your account.
Trading based on beliefs instead of reality is a dangerous place to trade and is a mistake.
Taking your entries a little sooner than they are triggered or an exit a little later than your stop loss is a mistake.
Diversifying traded markets or stocks before doing the proper research is a mistake.
Trading so big that your emotions interfere with your trading plan is a mistake.
Trading when you are very sick or going through emotional personal problems is a mistake.
Making trading decisions based solely on ego, fear, or greed is always a mistake whether you win or lose.
Like in the movie ‘Fight Club’ where there was a secret group of ‘fighters’ that loved what they did there is also a group of ‘traders’ in the market that love what they do so much that they win.
In the markets there is a club of traders that make up the 10% of winners that keep the profits over the long term that the other 90% lose in the short term. They trade differently than the majority. They use trading plans not hunches. Their #1 priority is managing risk not making profits. They trade to make money, not to impress anyone or prove they are right. They trade with passion, perseverance, and focus. They put in the time, they do the work, they can be knocked around by the market and still come back tomorrow for another trading day, knowing that all that stands between them and a lot of money is time.
1st RULE: You do not trade big position sizes against the WINNING TRADERS CLUB.
2nd RULE: You DO NOT trade big position sizes against the WINNING TRADERS CLUB.
3rd RULE: If someone “stops out” or loses more than their risk per trade, or hits their trailing stop loss the trade is over.
4th RULE: Only enter and exit a trade according to your trading plan.
5th RULE: Take it one trade at a time. (Do not get excited about the future of this trade or brood over your past trades).
6th RULE: No going all in, no predicting, just follow market action.
7th RULE: Winning trades will go on as long as they have to.
8th RULE: If you want to spend your time in the WINNING TRADERS CLUB, you HAVE to TRADE. (You have to get off the sidelines when you are ready and a great entry is there).
If you truly are serious about being a trader then there are seven things that you will have to accept.
You will have to accept that over the long term at best only 60% of your trades will be winners. It will be much less with some strategies.
Accept that the key to being a successful trader is having big wins and small losses, not big bets paying off. Big bets can lead quickly to you being out of the game after a string of losses.
Accept that the best traders are also the best risk managers, even the best traders do not have crystal balls so they ALWAYS manage their capital at risk on EVERY trade.
If you want to be a better trader then you need to accept that trading smaller and risking less is a key to your success. Risking 1% to 2% of your capital on any single trade is the first step to winning at trading. Use stops and position sizing to limit your losses and get out when your losses grow to these levels.
You must accept that you will have 10 trading losses in a row a few times each year. The question is what your account will look like when they happen.
You have to accept that you will be wrong, a lot. The sooner you accept you are wrong and change your mind the better off you will be.
If you really want to be a trader then you are going to have to accept the fact that trading is not easy money. It is a profession like any other and requires much work and effort and even years to become proficient. Expect to work for free and pay tuition to the markets through losses until you learn to trade consistently and profitably.
Trading is about math, ego control, risk management, psychology, focus, perseverance, passion, and dedication. If you are missing one, you may not make it. Trade wisely my friends.
“There is nothing more important than your emotional balance.” – Jesse Livermore
- While taking losses is always uncomfortable, Taking them based on a predetermined exit strategy takes away some of the mental pain. Cutting losses when you know you are wrong also limits the size and extent of the loss and the severe pain of watching a trade go against you for an extended period of time. The first planned loss is the best loss.
- There is a big difference between losing money and feeling like a failure and losing money and believing you will get it back. Losses are either just a planned part of doing business as part of a successful trading method or a learning experience to teach the trader that they need to get a proven trading system in place. Trading losses should be teachers not account destroyers. Always manage your risk per trade carefully.
- Trading losses that come from following a trading plan are far less painful than losses that come from a lack of discipline in trading your plan.
- Trade the right size for you and your trading account. Always trade at your present comfort level. If it makes you sick to lose $300 on a trade then you may need to risk $200 per trade. If you are okay with losing $200 on a single trade then you can step up and risk $300 on a trade. If you risk $1000 on a trade and your real comfort level is $200 in risk then your emotions and stress levels are likely to pour into your trade and cause you to exit because of fear or stress and not a trading plan. You have to trade what you can handle regardless of your belief about the certainty of any one trade.
- No one trade should ever make or break your whole trading account. If you risk only 1% or 2% of your total trading capital on any one trade then you can focus on the odds of the next 50 to 100 trades not obsess over the current one. This turns down the volume on your emotions a great deal.
“Ninety-five percent of the trading errors you are likely to make—causing the money to just evaporate before your eyes—will stem from your attitudes about being wrong, losing money, missing out, and leaving money on the table. What I call the four primary trading fears.” -Mark Douglas (Trading int he Zone)
What Mark Douglas points out in his great book about trading psychology is that the majority of traders lose because of wrong thinking, misplaced emotions, and wanting to be right. We know fear and greed drive the market prices far more than fundamentals do. The emotions of fear and greed are the key reasons traders do the wrong things at times. Fear makes traders not take entries and miss trends, fear also cause traders to sell winners early scared of giving back paper profits only to miss out on big profits when they were right. Greed is the driver behind traders taking positions far too big and risky for their account size and then greed keeps traders holding losing positions wanting their losses back instead of just accepting their losses and looking for a better potential profit. One of the most powerful things a trader can do to improve their trading is to overcome fear and greed by becoming disciplined and focused on their trading plan and move far away from their emotions while trading.
Here are four great examples of fear over ruling sound trading strategies.
The fear of being wrong: Traders fear being wrong so much they will hold a small loss until it becomes a huge loss. Even adding to the loss in the hopes of it coming back and getting to even. Don’t do this, holding on to a loser after it hits your predetermined stop loss is like being a reverse trend trader. Do not be afraid of being wrong small be afraid of being wrong in a BIG way by not cutting the loss.
The fear of losing money: New traders hate to lose money, they do not quite understand yet that they will lose 40%-60% of the time in the long term. We should come to expect the small losses and wait for the big wins patiently. Many times traders fear this so much that they have a hard time taking an entry out of fear of losing. If you can’t handle the losses as part of the business, you can’t trade.
The fear of missing out: The opposite of the fear of losing money is the fear of losing potential profits. This causes traders to watch a stock go up and up, miss the primary trend, then not being able to take it any more and get in late just in time for the trend to reverse and lose money. Trade at your systems proper entry point do not chase a stock because you are afraid to miss out on some profits.
The fear of leaving money on the table: When your trailing stop is hit get out of the trade. If your rules tell you to get out after a parabolic run up and stall then exit. You must be disciplined on taking money off the table while it is there. Being greedy for that last few dollars when your system says to sell could lead to major losses of paper profits. Let your winners run but when the runner gets to tired to continue: bank your profits
What is the most important part of your trading? The chart? Managing the risk? Finding the Holy Grail of trading that can’t lose? (I have bad news for you about the Holy Grail).
I am convinced how a trader emotionally reacts to the markets while trading will determine their success more than anything else.
Mark Douglas is a trader and author of Trading in the Zone and The Disciplined Trader two great trading books for traders at all levels that deal primarily with how to develop the correct mindset to be a successful trader.
My favorite Mark Douglas quotes.
“There is a random distribution between wins and losses for any given set of variables that define an edge. In other words, based on the past performance of your edge, you may know that out of the next 20 trades, 12 will be winners and 8 will be losers. what you don’t know is the sequence of wins and losses or how much money the market is going to make available on the winning trades. This truth makes trading a probability or numbers game. when you really believe that trading is simply a probability game, concepts like ‘right’ and ‘wrong’ or ‘win’ and ‘lose’ no longer have the same significance. As a result, your expectations will be in harmony with the possibilities.” -Mark Douglas
“The less I cared about whether or not I was wrong, the clearer things became, making it much easier to move in and out of positions, cutting my losses short to make myself mentally available to take the next opportunity.” -Mark Douglas
“You need to ‘change your thinking’. The goal is to reach a ‘care-free state of mind’. When a pattern presents itself, don’t think. There’s nothing to think about. Take the trade because you have an edge. Then odds, probability and your risk control mechanisms will take care of everything. In the end, the key is to learn more about yourself. The most important lesson though is the importance of viewing every single trade as being part of a series of trades.” -Mark Douglas
Mark Douglas’ 5 fundamental truths:
- Anything can happen
- You can make money without knowing what is going to happen next
- There is a random distribution of wins and losses that define an edge
- An edge is just the greater probability of one thing happening over another
- Every moment in the market is unique
Part 7 is just 20 seconds long.
- Do you want trading success bad enough to read one hundred quality trading books?
- Do you want it bad enough to review charts for hours? EVERY day?
- Do you want it bad enough to find the right mentor to help you in your trading quest?
- Will you attend the right seminars if you need to?
- Will you learn from the greatest traders in history? Will you study them with focus? Will you really listen to their lessons?
- Will you take your losses when it is time? Will you accept that you were wrong about a trade?
- Will you get back in the game after 10 straight losses?
- Can you accept it may take years to be a successful trader but still put in those years?
- Are you willing to understand what holds you back as a successful trader and fix it? The checklist is THE RIGHT METHOD, THE RIGHT MINDSET, with the RIGHT RISK MANAGEMENT. Your success in the markets rests on this trifecta of trading.
- Will you make up your mind that you will pay the price that is needed to be a successful trader? If you have made up your mind to never quit until you succeed at trading then all that separates you from your goal is TIME.
In trading your mind may be the ultimate technical indicator that determines whether you persevere and win in the markets or get broken in half by fear, greed, ego, stress, and uncertainty. No matter whether you are a an investor, retail trader, prop trader, or professional money manger your success will still be determined on the management of your mind. Never underestimate the importance of keeping a cool head in rough times.
Here are ten of the best quotes from Mark Douglas, an author who verbalizes the real nature of trading as well as I have ever seen it captured. If you can absorb these teachings it will help you get through that rough period when you have 10 losing trades in a row or experience a 10% draw down in your trading capital. If you are not matching risk correctly you may have to come back from a complete wipe out of your account like many other have had to do. But do not give up, you can do this if you really want to.
“I know it may sound strange to many readers, but there is an inverse relationship between analysis and trading results. More analysis or being able to make distinctions in the market’s behavior will not produce better trading results. There are many traders who find themselves caught in this exasperating loop, thinking that more or better analysis is going to give them the confidence they need to do what needs to be done to achieve success. It’s what I call a trading paradox that most traders find difficult, if not impossible to reconcile, until they realize you can’t use analysis to overcome fear of being wrong or losing money. It just doesn’t work!”
“There is a random distribution between wins and losses for any given set of variables that defines an edge. In other words, based on the past performance of your edge, you may know that out of the next 20 trades, 12 will be winners and 8 will be losers. What you don’t know is the sequence of wins and losses or how much money the market is going to make available on the winning trades. This truth makes trading a probability or numbers game. When you really believe that trading is simply a probability game, concepts like “right” and “wrong” or “win” and “lose” no longer have the same significance. As a result, your expectations will be in harmony with the possibilities.”
The less I cared about whether or not I was wrong, the clearer
things became, making it much easier to move in and out of positions,
cutting my losses short to make myself mentally available to take the next opportunity.
– Mark Douglas
The best traders stay in the flow because they don’t try to get anything from the market; they simply make themselves available so they can take advantage of whatever the market is offering at any given moment. -Mark Douglas
Learning to accept the risk is a trading skill—the most important skill you can learn. -Mark Douglas
The best traders aren’t afraid. They aren’t afraid because they have developed attitudes that give them the greatest degree of mental flexibility to flow in and out of trades based on what the market is telling them about the possibilities from its perspective. At the same time, the best traders have developed attitudes that prevent them from getting reckless. -Mark Douglas
We have to be rigid in our rules and flexible in our expectations. We need to be rigid in our rules so that we gain a sense of self-trust that can, and will always, protect us in an environment that has few, if any, boundaries. We need to be flexible in our expectations so we can perceive, with the greatest degree of clarity and objectivity, what the market is communicating to us from its perspective. -Mark Douglas
The winners have attained a mind-set—a unique set of attitudes—that allows them to remain disciplined, focused, and, above all, confident in spite of the adverse conditions. As a result, they are no longer susceptible to the common fears and trading errors that plague everyone else. -Mark Douglas
If there is such a thing as a secret to the nature of trading, this is it: At the very core of one’s ability 1) to trade without fear or overconfidence, 2) perceive what the market is offering from its perspective, 3) stay completely focused in the “now moment opportunity flow,” and 4) spontaneously enter the “zone,” it is a strong virtually unshakeable belief in an uncertain outcome with an edge in your favor. -Market Douglas
As a trader, you have to decide what is more important—being right or making money—because the two are not always compatible or consistent with one another.-Mark Douglas
Here are links to Mark Douglas’s two books on Amazon: