Archive for category: Trading Psychology

Trading Expectations: Keep It Real

24 Nov
November 24, 2014

 

 

Unfortunately, the retail trading world is full of false promises.  No other industry has as many snake oil salesmen, promising to make traders rich for a fee. The more a newsletter writer or trading system seller tells you how easy trading is, the more cautious you should be.

Consistently profitable trading requires a winning system that fits a traders personality, and they must have the discipline to follow it Implicitly.

Here are a few things that a new trader needs to understand:

  1. No trader wins on every trade. The best traders in the world only have a 50%-80% success rate. 
  2. Trying to get rich quick requires so much risk, that the probabilities of ending up poor is far greater than your chances of becoming rich. 
  3. Consistent 15% – 20% annual returns are what world class traders and portfolio managers make.
  4. Some of the best traders’ best years were 50% – 100% annual returns, in specific market conditions, that were conducive to their strategy.
  5. Market conditions will have a huge impact on your returns each year, regardless of how you trade.
  6. The higher returns you aim for, the more risk will be required, and the larger draw down you will have getting those returns. 
  7. If you risk 5% t0 10% of your trading capital on every trade, your risk of ruin is 100% in the long term.
  8. If you think that the above percentages are just too small, then it is very likely that your trading account is too small to make those percentages meaningful.
  9. To trade for a living, you likely need a multiple six figure account, and a minimum of one years worth of living expenses to avoid the unrealistic expectations of small returns and the accompanying stress.
  10. Trading is a profession like any other, and requires the same level of discipline and dedication to be successful.
  11. All your profits comes from other trader’s losses. You must beat other traders to be profitable.
  12. Trading is the hardest easy money you will ever make.

 

The Unstoppable Trader

11 Nov
November 11, 2014

 

This is a guest post by Brian C. @TraderVancouver on Twitter and Stock Twits. Brian blogs at www.TraderVancouver.com

“Victorious warriors win first and then go to war, while defeated warriors go to war and then seek to win.” ~Sun Tzu

 
Newer traders like to focus on the trade set-up, the entry point. They’re looking for the next big stock, and they want in at just the right price. That seems logical. The entry price is an obvious place to start; the beginning of a trade!

Or is it?

The hard truth is that the entry signal is about a dozen steps into the trading process, not the first one. Traders tend to become preoccupied with it because it’s the most hopeful stage of the trade cycle.

In the book The Complete Turtle Trader, Michael Covel recounts how the famed trader Richard Dennis drove this home to his students:

“Our research indicated that liquidations are vastly more important than initiations. If you initiate purely randomly, you do surprisingly well with a good liquidation criterion.

Dennis actually challenged the Turtles to randomly enter the market and then manage their trades after getting in. That was a real Zen moment for the Turtles. If they applied appropriate risk management, they could handle the worst that came down the pike once they were in any trade.

Profit or loss is determined at the trade exit, not entry. Too many traders fixate on finding The ‘Great Set-Up’, instead of all the steps that come before clicking buy.

Where should a trader focus his time and energy?

Trade performance is impacted more by the development of an exit strategy and a risk management process than by picking the perfect entry point. A robust entry signal will give an added edge, but it’s only that – an edge. If a trader has all the elements of a trading plan in place before he enters a trade, then he has won before going to war. The trader with a plan, patience and discipline is unstoppable.

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The New Trading for a Living: Review

10 Nov
November 10, 2014

 

The New Trading for a living

I first read the original version of this book over eight years ago, and it was the book that finally gave me the overall structure I needed to understand all the dynamics of trading. I have read hundreds of trading books, and this one still stands head and shoulders above the rest. It explains how to  manage the risk, overcome negative psychology, and the importance of developing and following a trading method.

I especially like the clarity of the charts in this new edition. Dr. Elder used charts from the StockCharts.com website, and I rely on these charts everyday.

If you read and follow the principles in this book, you will make enough money on your trades to pay for this book many times over. I have been an active participate in the markets for over 20 years, as both a trader and investor, and I agree with Dr. Elder completely, having experienced the greed, fear, and mistakes that he illustrates. Read this book and save yourself a lot of unnecessary losses of both financial and mental capital.

The first section of this book teaches you the psychology of successful trading:

1) You must be committed to being a trader for the long haul.

2) Learn all that you can, but be skeptical, go with what works.

3) Develop a method for analyzing the market.

4) Develop a money management plan.

5) Do not get greedy and rush into trades.

6) Understand that you can be your own worst enemy through greed, fear, and emotions.

7) You must change to be a profitable trader.

Dr. Elder explains, in great detail, his own trading tactics and methodology. For example, in the Risk Management section, he covers the most important strategy of when to exit. He suggests setting a stop-loss on every trade so you keep losses small. He also emphasizes the importance of protecting profits with trailing stops, and never risking more than 2% of your account on any one trade. He also warns against losing more than 6-8% of your account in any one month.

A critical point made by Dr. Elder, is that professionals in any field do not count their money daily. Traders should focus on their trading, and not their daily, paper profits. Traders should focus on following their trading plan and let the profits take care of themselves. Dr. Elder’s background in psychology makes him the perfect person to explain the pitfalls of trading emotionally and without discipline.

Buy this book. Dr. Elder has written one of the most all-encompassing trading books on the market today. You will profit from it, whether you are a beginner or an advanced trader. It will make you more professional and logical, and it will show you that traders are only profitable by trading a winning method, using risk management, and psychological discipline.

 

The Beatitudes For Traders

06 Nov
November 6, 2014

 

 

Blessed are the humble traders,
    for they will cut their losses.
Blessed are those who hate to lose capital,
    for they will be not become too greedy.
Blessed are the disciplined traders,
    for they will be profitable.
 Blessed are those who hunger and thirst for trading knowledge,
    for they will learn what really works in trading.
 Blessed are the traders with the right risk management,
    for they will not blow up their trading accounts.
 Blessed are the logical traders,
    for they will trade actual price reality.
Blessed are the neutral traders,
    for they will follow the trend.
Blessed are those who are persecuted because of their trade entries,
    for theirs is usually the right side of the market.

 

7 Habits Of Highly Destructive Traders

29 Oct
October 29, 2014

 

 

As traders, we try to do constructive things that build faith in ourselves, and confidence in our trading systems. We want to stay on the right path and not wander into the wilderness of destruction. Here are the seven things that we must be cautious of for the sake of profitability.

  1. Blaming outside forces for poor trading results is an incredibly destructive behavior. High frequency traders, market makers, and irrational markets, give an undisciplined trader license to make reckless trades. The less responsibility taken for results, the more destructive they can be with an account.
  2. Trading with no plan and making decisions based on feelings, is a really bad idea. Letting opinions and predictions be a guide to entries, and emotions be a guide to exits, guarantees maximum destruction of trading capital.
  3. Trade first and learn how to trade later. Traders who don’t spend time educating themselves before trading will learn the hard way, and give their trading capital to other traders as tuition.
  4. Focusing on ego and the desire to be right, instead of profitability and big losses, will quickly destroy a trader’s account.
  5. Traders that fight the trend and disagree with the actual price action will give their trading capital to those that follow the trend.
  6. Trade without discipline and risk management and a trader will be destroyed regardless of their trading system or method.
  7. If a trader doesn’t diversify their life with strong relationships, fun, peace, and health, their trading results become too entangled with their self worth. This can lead to mental and emotional ruin.

The path to profitability leads away from these seven habits. In the end, traders are consistently rewarded for their good habits, and punished financially for their destructive habits. This is our stop list.

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