Archive for: March 2007

I think that the psychological aspect of the problem is similar to that of many gamblers. When they have winnings, they tend to view those winnings as playing with “house money”. When you make your living trading you cannot afford this view. This money is not to be viewed as winnings but earnings. Like in the sports - It is easier to get to the top, but staying on that top and defending it is not so easy. Defending your profits may not be the fun part of trading but it is the indispensable part of your activity in order to be consistently profitable.
A difficult lesson to learn is to consistently make the same trades. The mean is, that a good trade is a good trade in its own right, no matter if you are up for the day, down for the day, or merely treading water.
You have to know when and how to enter, but if you don`t know/feel how much is enough for that trade/day/etc you`re in a wrong direction yet.
Another situation linked here is always increasing the goals, when reached $300 you want to try for $500 when there - want to get to $1000. And if you choose the point to stop how will you ever grow and make more?
As wrote before:
Put aside daily financial goals for a while. If you have a goal to make $nn, or $nnn per day, the hidden mind status is that you can control the markets and the opportunities. Markets are not that cooperative in the beginnings.
This is called chasing. Chasing means an emotional exercise which allows the market to have its way with you and setting goals, increasing them are good things. But this should not be done on the fly. Consistently meeting expectations day after day is the best choice. If you don’t make your monetary goal on any single day, it is OK, don’t obsess over it. That is the downfall of most traders - trying to force trades to make a certain amount instead of waiting for the trades to come naturally.

I like one very simple exercise. Try to imagine the difference between these 2 processes:
1. taking a nice income from the market,
2. accumulating capital.

I want to tell you the truth that it took me 3 years to get on track. As hard as it is to believe, even with heavy reading of the forums, articles and books, with heavy training, I still have the tendency to keep repeating not only the same trading mistakes but also kept the same attitude that prevented me from being a consistent winner.
There are a couple of common mistakes that jump in to my fingers.
The most important ones from my own trading beginnings:

1. The number one important factor is your mindset.After reading this blog, try to read (again) the book Trading in the Zone by Mark Douglas. It explains mostly psychological issues which are the number one reason traders fail!

2. Put aside daily financial goals for a while. If you have a goal to make $nn, or $nnn per day, the hidden mind status is that you can control the markets and the opportunities. Markets are not that cooperative in the beginnings.

3. Find the reason for your lack of consistency. Most of the time its as simple as you breaking your rules on your trading setups and style. Doesn’t matter how complex are your rules, you cant achieve the results unless your rules, created for yourself, are followed.

4. Capital. You must be trading with risk capital. It is almost impossible to win if it is bread money, rent money, tuition or necessary funds. No matter what the setup, a trader betting with desperate funds is going to be too frightened to let the trade work. When it is profitable he will be so desperate for profits that a 4 point profit will make him satisfied. When the trade goes against him he will jump out so the stop doesn’t get him. A recipe for disaster.

All the time you have to consider the worst case scenario. Lets say we trade 3 times per day. And for 5 days straight take all 3 losses. It’s never happened yet but consider it. Lets say our stops are 12 points each. That is a $360.00 loss per day x 5 = $1800.00 plus $150.00 commission. You must ask yourself could you suffer through that kind of drawdown and not jump out the window. If you said yes then you at least are not playing with scared money.

And if you said “yes, I am prepared to take every signal and assume it will lose because no one knows what the market will do next”. If you give yourself a $3000.00 maximum drawdown then you can at least start to trade with discipline.

There is no advantage to stopping yourself after 2 losses or quitting for the day. Only quit for the day if you are sick, or emotionally too rattled to trade.

Do not trade that day if you feel irritated.

Your goal should be to have followed every trade. If a trade is called by your system or method, you should have been in it. Your entry should always have been 1 or 2 points near where the signal occured. If the system stopped out, then you should be too. You should never be stopped out when the system stop was not hit. Doing that says you believe you know where the market is going to go. You don’t. Neither do I. Neither does harry potter.

Think of it this way. If you were a pro baseball player your first job at spring training would be to work out to get back into shape, not hit home runs. Same with trading.

Open 1.9494
Target 1.9428
SL 1.9519

RR ratio 1 / 2.7

The test of 1.9420, this week ~open price is probable, in my humble opinion, and have to confirm the establishing of a medium term up trend if tested.

Of paramount importance to the trader is fear.
Fear is a powerful, unpleasant feeling of risk or danger, either real or imagined.

I am convinced that it is necessary to “run scared”. Only an exaggerated emotion can generate the concentration necessary to survive as a trader. This is not necessarily for all traders. Some traders are pretty laid-back and relaxed when they trade.
In general, trading is a stressful business. In many areas of activity we see constant demonstrations of performing under stress. Actors of stage and screen; sports figures; cold-call sales people… It is the ability to thrive under stress that sets the best in their fields apart from the other participants.
An effective trader handles stress on a survival basis. His natural instinct of self-preservation emerges whenever he is in a stressful situation. His behavior is reduced to pure selfishness and self-survival. He fights for what is his or what he wants to be his in the in a most greedy way. He flees from danger in a most cowardly way.
There is no thought about pride or style or personal grace or honor or bravery.
Survive somehow.
Win somehow is his only purpose.
As a trader, you must get in touch with your baser instincts and learn to accept yourself in that way.

Trading is a battle against human survival instinct.
It takes a long time to have a person’s brain rewire to the point where trying to survive doesn’t override what that person does during the middle of it when the heat gets turned up. Everyone loses accounts their first year, many will lose accounts next years, no matter how well they were consistently doing demo trading because when emotions start happening it literally stops a person from being able to press the button out of pure fear.

Longs hope, Shorts fear

You go long. The pair tanks. You hold. You hope it goes up. Human nature is to have hope.
You short a Pair. Tat pair goes up. Fear is in your heart. There is no hope. You don’t hope it will come down, you fear it will continue to go up.

It is easier to cut your losses on hope or fear?

I think its greed and fear. Tanking pair create fear. Pair up big on news create greed. Fear is stronger then greed.
In my humble opinion it’s neither, fear & hope is a losing proposition over time. A trader that utilizes these emotions & expects to have good results is remote, a more likely scenario is a short lived trading career.
You are attributing two different emotions to the same phenomenon: specifically, experiencing a drawdown. I don’t see a lot of sense in that. I go short to make money & I go long to make money. When it doesn’t work out, regardless of the directionality of the trade, I’m not all that satisfied. Hope? Fear? I would’ve thought that proper risk management had pretty much removed them from the equation.
Money management isn’t going to help you feel much better if you get 10 losing trades in a row, even small ones. After a while you question the efficacy of your system, assuming you have one, and that’s when despair sets in. It’s not necessarily about the money, in which case position size or stops won’t help. Sometimes it’s about being right and having the self-confidence and faith in your system to keep trading.
If you do more research on a stock after you own it, to keep convincing yourself its a good position, than before you bought it, that’s when you should get out.
Mastering your emotions. It wasn’t until I shorted a stock and began to respect fear that I was able to learn to cut my losses earlier. The trend of the market is up so there was always hope from a loss if you have enough time, that was the monkey.

As i wrote here we need them, otherwise we are just a waste of time and funds…

11. Never do Cancel for the stop loss order after you have placed it!
12. Place the stop before or at the time you make your trade.
13. Never get into the market because you are anxious because of waiting.
14. Avoid getting in or out of the market too often.
15. Losses make the trader studious - not profits. Take advantage of every loss to improve your knowledge of market action.
16. In markets speculation The most difficult task is not prediction but self-control. Successful trading is difficult and frustrating. You are the most important element in the equation for success.
17. Always discipline yourself by following a pre-determined set of rules.
18. A bear market will give back in one month what a bull market has taken a three months to build.
19. Don’t ever allow a big winning trade to turn into a loser. Stop yourself out if the market moves against you 20% from your peak profit point.
20. You must have a program, you must know your program, and you must follow your program.

to be continued…