The Ten Most Foolish Things a Trader Can Do

The Ten Most Foolish Things a Trader Can Do

 

In the spirit of April Fools Day here are the ‘Ten Most Foolish Things a Trader Can Do’. In no particular order of foolishness.

1. Try to predict the future movement of a stock, and stay in it no matter what.
2. Risk your entire account on one trade with no stop loss plan.
3. Have a winning trade but no exit strategy to get out, no trailing stop or exhaustion top signal.
4. Ask for and follow the advice of others instead of trading with your own trading plan, method, rules, and system.
5. Trade your emotions instead of signals: buy when you are greedy and sell when you are afraid.
6. Trade your opinions, not a quantified method.
7. Do not bother to do your homework on trading, just jump in and trade, you are smart, you will figure it out.
8. Short the best and most expensive stocks in the stock market and buy the cheapest junk stocks.
9. Put on trades you are 100% sure are winners so you do not even need a stop loss or risk management.
10. Buy more of a trade that you are losing money in and sell your winners quickly to lock in small profits.

Do not trade foolishly my friend.

1930-The Gartley Pattern -For Traders

A leading technical analyst of the 1930s created a method for trading that is still applicable today. Learn how to trade market turning points based on Fibonacci retracements and market psychology with the Gartley Pattern.

Many traders ask how a trading method that is 77 years old is applicable today. When you combine timeless tools like Fibonacci Retracements with great risk: reward ratios, it’s easy to see why this method is so popular. If those aspects of a trading method appeal to you, it’s my pleasure to introduce you to the Gartley chart pattern.

What is the Gartley Pattern?

The Gartley pattern is a powerful and multi-rule based trade set-up that takes advantage of exhaustion in the market and provides great risk: reward ratios. The pattern is also known as the “Gartley 222” because the pattern originated from page 222 of H.M. Gartley’s book, Profits in the Stock Market that was published in 1935 and reportedly sold for $1,500 at the time.

The Gartley pattern is based on major turning points or fractals in the market. This pattern plays on trend reversal exhaustion and can be applied to the time frame of your choosing. The other key that makes this pattern unique are the crucial Fibonacci retracements that come together to fulfill the plan.

There is a bullish / long / buying pattern and an equally powerful bearish / short / selling pattern. Much like you would find with a head and shoulders pattern you buy or sell based on the fulfillment of the set up.

Buy & Sell Gartley Chart Pattern

Here is a stripped down version of patterns so you can see what the look like without price and time on the chart.

The buy pattern will always look like an “M” with an elongated front let. The sell pattern will always look like a “W” with an elongated front leg.

Gartley Strategy Tools

The three important tools to use on your chart when finding a Gartley are:

Fractals – The important part about trading the Gartley pattern is that you will trace the pattern from turning points or swings in the market. One of the better indicators to trace swings is Fractals. Fractals show up as arrow above swings in price.

Fibonacci Retracements – The Fibonacci retracements will make or break the patterns validity. Below are the specific retracements that make up the pattern. Fibonacci retracement lines are horizontal lines that display support or resistance in a move.

Add Line Tool (Optional) – This tool will allow you to clearly draw connecting points like X to A, A to B, B to C, and C to D for easy measuring.

Gartley Strategy Rules

• Point B should retrace 0.618 from the XA move.
• Point D should retrace 0.786 from the XA move and create the entry zone.
• Point D should be a 1.27 or 1.618 extension of the BC move
• Point C should retrace anywhere from 0.382 – 03886
• Buy or Sell at point D depending on whether the pattern is bullish or bearish
• Place stop either below the entry for the tightest or Risk: reward ratio or below Point X.
• If the market trades through Point X, the Gartley pattern is invalid and you should exit or not take the trade.

When these rules are met, you can find yourself on the cusp of a trade at the Entry Zone. Recognizing these points in the market is truly like riding a bike. Once you get the hang of it, the levels will pop out on the chart to you.

Closing Tips on Using This Pattern

When trading the Gartley pattern, the pattern is meant to be traded at D only. If you believe a pattern is unfolding but we’re only at point B, be patient and hold off until we get to D. The power of the pattern comes from converging Fibonacci levels of all points from X to D and using the completed pattern for well-defined risk.

Lastly, this can be traded on any time frame you prefer. The reason this method has a stable track record is that it is based on unusual market positions where most traders are afraid to enter. Take advantage of the risk: reward set up available and trade with proper trade size.

This pattern occurs rather frequently. When you get comfortable with using Fibonacci retracements for support and resistance you’ll find yourself looking for the points to complete a Gartley pattern. It is very important to watch for the D point to be at 78.6% of the XA leg and to keep your stops rather tight in case the pattern is invalidated.

27 Motivational Quotes for Traders

1. IF A TRADER DOES NOT UNDERSTAND WHAT HAPPENS TO HIM PSYCHOLOGICALLY WHILE IN A TRADE, HE IS DOOMED TO LOSE UNTIL HE DOES OR HE RUNS OUT OF MONEY.
2. THE MARKET PAYS YOU TO BE DISCIPLINED.
3. BE DISCIPLINED EVERY DAY, EVERY TRADE AND THE MARKET WILL REWARD YOU.
4. ALWAYS LOWER YOUR TRADE SIZE WHEN YOURE TRADING POORLY.
5. NEVER TURN A WINNER INTO A LOSER.
6. YOU’RE BIGGEST LOSER CANNOT EXCEED YOUR BIGGEST WINNER.
7. DEVELOP A METHODOLOGY AND STICK WITH IT.
8. BE YOURSELF. DON’T TRY TO BE SOMEONE ELSE.
9. YOU ALWAYS WANT TO BE ABLE TO COME BACK AND PLAY THE NEXT DAY.
10. EARN THE RIGHT TO TRADE BIGGER.
11. GET OUT OF YOUR LOSERS.
12. THE FIRST LOSS IS THE BEST LOSS.
13. DON’T HOPE AND PRAY.
14. DON’T SPECULATE.
15. NEVER TAKE A BIG LOSS.
16. HIT SINGLES NOT HOME RUNS.
17. CONSISTENCY BUILDS CONFIDENCE.
18. LEARN TO SWEAT OUT YOUR WINNERS.
19. MAKE THE SAME TYPES OF TRADES OVER AND OVER AGAIN.
20. BE A BRICKLAYER.
21. DON’T OVER ANALYZE.
22. ALL TRADERS ARE EQUAL IN THE EYES OF THE MARKET.
23. IT’S THE MARKET ITSELF.
24. ITS BORING. ITS A JOB. PATIENCE.
25. 70% OF THE MONEY FLOWING COMES FROM INSTITUTIONAL INVESTORS.
26. STRONG VOLUME IS 150% OF NORMAL VOLUME.
27. TRADE WHAT YOU SEE, NOT WHAT YOU THINK.

Three stages of trading objectives.

Three stages of trading objectives.

 

To make money every trade. At first, I did not have the ability to make money every trade. After I had the ability to make money on most trades I realized it was a horrible objective. If you want to make money on every trade you are always waiting. You can never take that much risk and hence the rewards are very small. I was trading 1′s and 2′s to start, which was the right thing to do. I would watch my mentor take every trade, no matter how dog shit it was. As a 1 and 2 lot trader you do not have the same luxury to take dog shit trades because you can only trade one way. Because of the flexibility he had he could do more and the truth is no matter how good or bad a trade looks we don’t know until we are in it. Getting the most out of a trade is the mark of good trader. Risk is always related to reward. There is very little money in making money on every trade. This type of trading is like making 100k and keeping 80K

To make huge chunks of money. After I realized that objective did not work for me I shifted to the extreme. I started to swing for the fences whenever I had the ability. It is nice when I was right but I struck out a lot too. At this point, I did not respect trading. I did it because money made me a bad ass. Well as you know you hard to pay your bills with bad ass. This type of trading is like making 200k and keeping 80k.

Here are the major risks of having both of those objectives. The first is making small amounts of money no matter the situation. Eventually you will get in a hole because statistically you are behind. Trading every situation the same is bad. The second objective is trying to make huge amounts of money on every trade. If the first trades were the best and I stopped it was great. If the first trades were bad, I was forced to stop. It made it hard to learn.

AN 1873 LETTER ON LUCK VERSUS SKILL

We often confuse luck with skill, especially in the stock market. In fact, Michael J. Mauboussin has written a worthy read on separating the two in his newest book The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing. But long before the contemporary discussions of luck versus skill, ancient speculators were enthralled by luck’s deceptive ways of making mere mortals feel godlike. However, that sense of omniscience, just like a string of luck, is fleeting and continues to lure modern speculators into a trap today just like it did Saxon-les-Bains, a man of culture, almost 150 years ago. In a 1873 letter to The Spectator entitled “A Study in the Psychology of Gambling” Saxon-les-Bains describes his gambling experience in Monte Carlo.


And what was my experience? This chiefly, that I was distinctly conscious of partially attributing to some defect of stupidity in my own mind, every venture on an issue that proved a failure; that I groped about within me something in me like an anticipation or warning (which of course was not to be found) of what the next event was to be, and generally hit upon some vague impulse in my own mind which determined me: that when I succeeded I raked up my gains, with a half impression that I had been a clever fellow, and had made a judicious stake, just as if I had really moved skillfully as in chess; and that when I failed, I thought to myself, ‘Ah, I knew all the time I was going wrong in selecting that number, and yet I was fool enough to stick to it,’ which was, of course, a pure illusion, for all that I did know the chance was even, or much more than even, against me. But this illusion followed me throughout. I had a sense ofdeserving success when I succeeded, or of having failed through my own willfulness, or wrong-headed caprice, when I failed. When, as not infrequently happened, I put a coin on the corner between four numbers, receiving eight times my stake, if any of the four numbers turned up, I was conscious of an honest glow of self-applause…

Evidently, in spite of the clearest understanding of the chances of the game, the moral fallacy which attributes luck or ill luck to something of capacity and deficiency in the individual player, must be profoundly ingrained in us. I am convinced that the shadow of merit and demerit is thrown by the mind over multitudes of actions which have no possibility of wisdom or folly in them, granted, of course, the folly in gambling at all, as in the selection of the particular chance on which you win or lose. When you win at one time and lose at another, the mind is almost unable to realize that there was no reason accessible to yourself why you won and why you lost. And so you invent what you know perfectly well to be a fiction, the conception of some sort of inward divining rod which guided you right, when you used it properly, and failed only because you did not attend ‘adequately to its indications.’

Ah, the trader’s skill versus luck in a nutshell and so it continues to this day. Speculators often confuse luck with skill, while also attributing losses either to a deficiency in divining the true way or to some birthright prone to stupidity. We speculators, in our desire to successfully predict, forget that there is really never a reason for winning or losing; there is no certainty that can be latched on to whenever we ask fate to smile upon us with an increase in our wealth.

Although it is in our nature to long for certainty and contribute some skill to its desired outcome we must be acutely aware that in our speculating we have no control over a right that has never been granted nor shall be any time hence.

Most Common Advice is Ineffective

“Plan the trade, and trade the plan!” is perhaps the most common advice given to traders. As far as advice goes, it’s well meaning, but unfortunately falls well short of addressing the problem most traders actually face.

Looking at the advice, it has two parts. The first part says you need a plan. No argument there. But the second part, about executing the plan, that’s where the problems appear. Why?

The two parts to the advice ‘plan the trade’ and the ‘trade the plan’ require two very different skill sets. Without understanding the different skills required, it’s highly likely that you will continue to regularly veer from your plan.

Here’s the disconnect. Planning the trade depends on your intellect. And most of the time, the development of the plan does not occur in the heat of battle. It’s relatively easily to let your intellect guide you, to be the primary driver when you’re not in the heat of battle. But in the heat of battle, when we have to decide right now whether to enter or exit, an entirely different situation occurs.

At the time of execution, no longer are we cool, calm, and collected. Now, a whole slew of things enters the picture – and many of these things are subconscious to a degree. Our feelings about our P&L, our feelings about our performance, or concerns about how we appear in the eyes of others, etc.

And no matter how smart you are, how much you believe you are not an ‘emotional person’, modern brain science is telling us emotions, including subconscious emotions, are very much a part of our decision making that leads to actions whether we realize it or not. Viewed this way, you can see why the typical advice to ‘plan the trade and trade the plan’ may be well intentioned, but ineffective.

Perhaps to make matters worse, the advice typically offered to help traders stick to their plan is to be ‘more patient’, or ‘more disciplined’. But no one tells you how to become more patient or more disciplined. If you want to learn how to become disciplined and more patient, consider myAdvanced Course. It’s heavy duty and get’s to the heart of the matter.

Do You want to Win or Lose at Trading?

 

There are things that make you win in the stock market over the long term and then there are things that make you lose quickly even in the short term. The key to trading success is learning the difference quickly and doing what really works not what you emotions or opinions tell you to do.

If you want to win then you must create your own trading plan and follow it, if you want to lose just trade whatever you want whenever you want based on your own opinion.

If you want to win then you must control your risk carefully with only 1% or 2% of your capital at stake in every individual trade, if you want to lose then just trade huge position sizes, put all your chips on the table.

If you want to win plan your entries and exits before you enter a trade then follow them, if you want to lose ask for everyone’s opinion and just make decisions based on other people.

If you want to win cut your losses short and let your winners run, if you want to lose hold your losers and hope that they come back and sell your winners quickly to lock in gains.

If you want to win trade only the best high quality stocks in the market, if you want to lose trade the junk and hope for a miracle come back.

If you want to win then build complete confidence for your system through chart studies and back testing, if you want to lose trade with no idea of if what you are doing even works.

If you want to win go with the current trend of the market, if you want to lose fight the trend and trade against it.

If you want to win then go long the hottest stocks in a bull market, if you want to lose short the hottest stocks in a bull market.

Do what makes money not what you feel like doing.

The Timeless Wisdom Of Jesse Livermore

Why is stock investing hard?

Take a step back to think, and you realize that stock trading is the intersection of many realms of knowledge. Business. The economy. Finance. Innovation and technology. Government policy. The market. And don’t forget psychology.

The more an investor knows about each of these fields, the more likely he or she will excel in the task of buying and selling stocks properly.

In the field of psychology alone, you have multiple topics to ponder. The psychology of the herd is important. So is the psychology of the self.

Jesse Livermore, whose life spanned the 19th and 20th centuries, didn’t get a master’s degree in macroeconomics or a Ph.D. in cognitive behavior. But his experience, hard work, failures and successes across many bull and bear cycles make him one of the most respected stock and futures traders of all time.

Livermore grew up poor in Massachusetts. He found his calling after discovering he had a knack for numbers and for seeing price trends. Trading firms called “bucket shops” across the country kicked him out after he amassed profits despite stringent house rules in margin. He eventually became a powerful buyer and short-seller on Wall Street.

Tragically, a self-inflicted bullet ended Livermore’s life on Nov. 28, 1940. But his book “How to Trade in Stocks” remains a gem. As the following quotes from the first chapter “The Challenge of Speculation,” show, he defined genius in trading psychology.

Why not let Livermore’s wisdom help you?

. “Profits take care of themselves, but losses never do. The speculator has to insure himself against considerable losses by taking the first small loss.”

Your insurance policy: Sell a stock if it falls 8% from your purchase price. No questions, no exceptions. Nobody will care if you sold at a loss. The market surely won’t.

. “Successful speculation is anything but a mere guess. To be consistently successful, an investor or speculator must have rules to guide him.”

If you are new to IBD investing, read the Investor’s Corner every day for three months. In that time span, you’ll get a full course on buy rules, sell rules, and rules in selecting outstanding stocks. Some of IBD’s most successful readers say they clip the column and put them in a scrapbook for easy review.

. “Speculators in stock markets have lost money. But I believe it is a safe statement that the money lost by speculation alone is small compared with the gigantic sums lost by so-called investors who have let their investments ride.

From my viewpoint, the investors are the big gamblers. They make a bet, stay with it, and if it goes wrong, they lose it all.”

Livermore offers a few examples. On April 28, 1902, New Haven & Hartford Railroad sold at $255 a share. On Jan. 2, 1940, it traded at $0.50. Chicago Northwestern went from $240 in January 1906 to “5/16, which is about $0.31 per share” on Jan. 2, 1940. Nearly 70 years later, some of America’s biggest banks took similar paths.

. “A few thoughts should be kept uppermost in mind. One is: Never sell a stock, because it seems high-priced. You may watch the stock go from 10 to 50 and decide it is selling at too high a level. That is the time to determine what is to prevent it from starting at 50 and going to 150 under favorable earning conditions and good corporate management.”

. “One other point: It is foolhardy to make a second trade, if your first trade shows you a loss. Never average losses. Let that thought be written indelibly upon your mind.”

Enough said.

Six Rules of Michael Steinhardt

 

1. Make all your mistakes early in life: The more tough lessons you learn early on, the fewer (bigger) errors you make later. A common mistake of all young investors is to be too trusting with brokers, analysts, and newsletters who are trying to sell you something.

2. always make your living doing something you enjoy: Devote your full intensity for success over the long-term.

3. be intellectually competitive: Do constant research on subjects that make you money. Plow through the data so as to be able to sense a major change coming in the macro situation.

4. make good decisions even with incomplete information: Investors never have all the data they need before they put their money at risk. Investing is all about decision-making with imperfect information. You will never have all the info you need. What matters is what you do with the information you have. Do your homework and focus on the facts that matter most in any investing situation.

5. always trust your intuition: Intuition is more than just a hunch — it resembles a hidden supercomputer in the mind that you’re not even aware is there. It can help you do the right thing at the right time if you give it a chance. Over time, your own trading experience will help develop your intuition so that major pitfalls can be avoided.

6. don’t make small investments: You only have so much time and energy so when you put your money in play. So, if you’re going to put money at risk, make sure the reward is high enough to justify it.

Top Ten Side Effects of Greedy Trading

Top Ten Side Effects of Greedy Trading

 

1. Greed causes the trader to only look at the best case scenario for profits and ignore the worst case scenario for losses in every trade.
2. Greedy traders trade WAY to big a position size.
3. A Greedy trader’s #1 priority is getting rich quick while ignoring the risk of ruin.
4. Traders that are greedy tend to believe they can have returns bigger than the best traders in the world right at the beginning.
5. Greed makes traders have absurd targets for their trades.
6. Greedy traders tend to buy stocks that are down 50% believing they will double and go back to where they were.
7. Greed distorts a trader to focus on the money not the homework involved to make the money.
8. Traders take trades where the odds are way against them because of the greed of wanting to make huge returns on one trade. (Far out of the money options)
9. Greedy traders trade with no plan and no method they are just pursuing profits randomly.
10. Greedy traders are always looking for the easy path to money not to the real path of hard work and experience.

Loss Aversion

There’s a short Danny Kahneman interview at the Daily Beast here. He notes why your best friends may not be your best advisors:

Friends are sometimes a big help when they share your feelings. In the context of decisions, the friends who will serve you best are those who understand your feelings but are not overly impressed by them.

That’s the Kahneman I love to read, profound and interesting. But then he follows with this sentence:

For example, one important source of bad decisions is loss aversion, by which we put far more weight on what we may lose than on what we may gain.

I don’t see loss aversion as being nearly as prevalent as lottery-loving: that is, picking things with small probabilities of big gains, as opposed to avoiding things with potentially large losses. Most really bad investments, those with the lowest expected returns, are things with large potential losses (lottery tickets, horse races, highly volatile stocks, options, penny stocks, etc.) This means people don’t avoid them too much, rather, they prefer them too much.

But that’s only one class of bad investments with large losses. Then there’s picking up pennies in front of a steam roller, the kind of trade Kahneman’s good friend Nassim Taleb argues is too common, where one basically sells insurance or options too cheap, making money most of the time but then occasionally blowing up and moving on to the next sucker. Kahneman seems highly respectful of Taleb’s work, and neither try and reconcile these ideas, even though they are really at the top for both. That makes them more like interesting magazine writers (eg, Carl Zimmer, John Horgan) than scientists.

Loss aversion in practice is a curiosity, not common in its domain relative to riffs on its opposite. I think people who love quoting him merely because once you allow irrationality in equilibrium, you are no longer constrained, and Kahneman gives one the authority to do this. So, as much as I enjoy many things he says, I’d say he has been an enabler of sloppy thinking, net net. 

The Top Ten Similiarities of Winning Traders

You can read trading, books until you are red-eyed, you can spend thousands of dollars on seminars, you can try to get successful traders to give you the secret sauce of trading or the Holy Grail. But, in the end it is simply you versus the markets. You have to pick your system, your risk tolerance, and take the heat in your own account, it will be your own money you lose.

No one can tell you the right system and method for you. If you can take draw downs in equity mixed with long term capital growth then trend following may be for you. If you love playing the hottest stocks in the market then CAN-SLIM or the Darvas System may be the right systems for you. If you just have little patience and love action then you can join the few who have mastered day trading. There really is no right system for everyone, it depends on what you can handle. However here is what all winning traders must have  to win in the markets regardless of time frame and system:

Trading System

• They trade a robust system or method that wins more money over time than it loses.

• Their system gives them a reward to risk ratio that is in their favor.
• Their system or method is proven to work with a live trading record over many markets and trades or has  historical back testing.

Trading Risk

• They manage the risk of ruin to avoid blowing up their account.
• They risk no more than 1%-2% of total account equity on any one trade.
• They manage risk through proper position size so they do not risk their account on any one trade.
• They do not risk more than 6% of their capital at one time across multiple trades.

Trading Mind

• They have faith in their system or method and continue to trade it so they capture the wins.
• Almost all winning traders have come back from blowing up their accounts or losing a lot of money, they persevered while many others quit before they won.
• Most winning traders have learned to separate their trading from their self worth and ego. They treat it like a business.

The Top Ten Similiarities of Winning Traders

You can read trading, books until you are red-eyed, you can spend thousands of dollars on seminars, you can try to get successful traders to give you the secret sauce of trading or the Holy Grail. But, in the end it is simply you versus the markets. You have to pick your system, your risk tolerance, and take the heat in your own account, it will be your own money you lose.

No one can tell you the right system and method for you. If you can take draw downs in equity mixed with long term capital growth then trend following may be for you. If you love playing the hottest stocks in the market then CAN-SLIM or the Darvas System may be the right systems for you. If you just have little patience and love action then you can join the few who have mastered day trading. There really is no right system for everyone, it depends on what you can handle. However here is what all winning traders must have  to win in the markets regardless of time frame and system:

Trading System

• They trade a robust system or method that wins more money over time than it loses.

• Their system gives them a reward to risk ratio that is in their favor.
• Their system or method is proven to work with a live trading record over many markets and trades or has  historical back testing.

Trading Risk

• They manage the risk of ruin to avoid blowing up their account.
• They risk no more than 1%-2% of total account equity on any one trade.
• They manage risk through proper position size so they do not risk their account on any one trade.
• They do not risk more than 6% of their capital at one time across multiple trades.

Trading Mind

• They have faith in their system or method and continue to trade it so they capture the wins.
• Almost all winning traders have come back from blowing up their accounts or losing a lot of money, they persevered while many others quit before they won.
• Most winning traders have learned to separate their trading from their self worth and ego. They treat it like a business.

Federer’s Loss is Our Gain

 

Always something to learn when Federer is clearly beaten which can be applied to markets, especially in a market like today:

1. He was out of position, or better put, poorly positioned for all of the match.
2. Up early in the opening of the match, he failed to hold and close his early lead when he had clear opportunities.
3. He made errors in pivot points early in the second and third sets – giving away every chance to get back into the match.
4. He was a consummate professional in defeat in the post match – the opponent was better, played better, and deserved to win.

The pundits will like to call this another sign of his decline, etc. I’m not so sure. Particular in that his inability to hoist another championship trophy is now nearly fully priced in. 

The Probability of Self-awareness

The Probability of Self-awareness

With 20 years of trying different things and hearing from others I made an important discovery that has shaped me as a trader and a coach. What I found is that more people will improve using an approach to change that emphasizes expanding self-awareness and emotional intelligence.

(With so many different approaches advertised as a ‘change process’, I think its important to share what I’ve found to work. That’s really what we have to do, right? Doing more of what works and less of what doesn’t.)

Very briefly, what I mean by expanded self-awareness is:

1) the recognition that our thinking and our emotions are intertwined and both influence our perception and judgment that leads to our decisions and actions (this view also happens to be consistent what the leading brain scientists are now saying)

2) much of our motivation – the intertwined thinking/emotion that drives our behavior – is actually subconscious, e.g. we assume we are trading the market but on other levels we are also trading our P&L and our feelings about our P&L (and what our P&L represents to us) is just one example.

3) when we understand (self-awareness) the underlying/subconscious motivation for our behavior we are in a better position to choose an alternative.

Obviously, nothing can guarantee change or improvement (contrary to many claims made by pseudo “experts”), but at least an approach that emphasizes expansion of awareness puts the odds in your favor.

And I have to play the probabilities here. Because more people tend to respond to a change process that includes an emphasis on self-awareness, I choose to use this approach in my own trading and in my coaching….it simply has the highest probability
of actually helping. 

7 Deadly Sins of Trading

Perfectionism: There is no perfection in trading as far as making money on every trade or having a perfect system. All you can hope to be perfect at, is following your system, rules, and trading plan. A winning trade should be measured as one in which you followed all your preset guidelines. Even the best traders only average about a 50%-60% win rate at best over long periods of time. The key is having bigger winners than losers, not being perfect. Like in baseball where a .300 hitter can get into the hall of fame. A .500 trader in the market can become wealthy if his wins are much bigger than his losses.

Fear: Faith in your system is the only way to overcome your fear of trading. You must complete enough back testing on your system until you know that you have a valid edge over the market in the long term. You must see opportunity in trading and just accept that there will be possible losses. You must take your systems trade signals each time and if you can’t overcome your fear of loss and failure then perhaps trading is just not for you. Traders are entrepreneurs not employes they get paid only when successful there is no guaranteed paycheck.

Pride: We are not our trading account and staring at our profit and loss too much is a major detriment in one’s trading. Traders must cut losses at their predetermined stop, not pridefully hang on trying to prove they are right. We must separate ourselves from the trading. A person’s value is not tied to a trade or performance record. If we followed our system then we can’t view that as a personal loss. The market was just not conducive to our system that we followed with discipline.

Impatience: Wait, take your entry signal when it is time and not a tick before your system triggers the trade. It’s important to let our profits run as far as they will go and not prematurely take them until the trend has run it’s course. We need to give our trades room to breathe and not cut our loss until the system confirms we are wrong and it is time.

Greed: Traders should not chase a trade when it is to late. We must take our profits off the table when it is time and we should never allow a winner to turn into a loser. If this happens you have nobody else to blame but your greed. Over trading and trying to make more money when our system does not say it is time is born of greed and usually ends with a negative p&l statement.

Anger: Do not get mad at yourself. Learn from your mistakes and move on. Every mistake gets you closer to learning what you need to do to become consistently profitable. Do not get mad at the “market” it is a voting machine and not an entity. Accept your losses and begin again.

Recklessness: Trading too big of a position size is risky, reckless, and completely unnecessary. Only enter appropriate sized trades with preplanned stop losses and then trailing stops to lock in profits while they are there. Follow your system and rules and if you find yourself hoping and wishing the market would stop moving against you instead of making decisions based on facts, you should exit that trade immediately.

We need to first realize what trading “sins” we are guilty of, then we can decide to repent and no longer commit them.

The good trader will realize that any single trade is only one in a long string of other trades and will move on to the next trade knowing that his system will outperform in the long term. He will have complete faith in his trading methodology and risk management. He walks by faith in his systems edge not by the last trade that lost, but by the knowing that he’s back tested his system enough to know the long term outcome.

The good trader is humble and knows that he can not out smart the whole market and that trying to do so is futile. His system simply gives him one small advantage that he can exploit time and time again if he’s patient and waits for the right entry signal. He is happy with the profits he earns and has no desire to put on a huge trade and swing for the fences. He does not get angry because he has no one to get angry at. He is very careful in his trading and follows his trading plan 100%. The stock market giveth and the stock market taketh away, he loves every minute he gets to participate in the financial system that is the stock market.

The Greatest Investment Book Ever Written

No, I’m not talking about Security Analysis or Intelligent Investor by Benjamin Graham or even Greenblatt’s You Can Be a Stock Market Genius.  I’m talking about Doyle Brunson’s Super System: A Course in Power Poker.  

OK, so the title of this post is a bit of an exaggeration and yes, there are probably tons of better poker books out there now post-extended-poker-boom.  The first edition of this book was published in 1978.  The connection between poker and trading is nothing new.  Just google “poker and trading” and there’s a lot of stuff out there; how poker guys started hedge funds, how a hedge fund guy became a poker guy, how they are similar/different, what can be learned from one or the other etc.   And the connection between gambling and trading was well documented in Fortune’s Formula.
But I just wanted to make a post about this book because I’m starting to reread it again (don’t ask).  I am not a poker player, but I remember reading this book a few years ago having borrowed it from a poker-playing friend.  Knowing that many traders and investors are very good poker players, I wanted to see what I can learn from reading about poker. 
I remember falling out of my chair at the similiarites between poker and investing.  I come from more of a trading background than an investing one and what was written in this book, particularly the early chapter “General Poker Strategy”,  has great advice that applies to traders and investors too.   I would make that chapter required reading along with the other investment “must reads”.
Anyway, here are some comments about what Brunson talks about in this chapter by sections.  I only comment on some of the stuff so this isn’t a summary of the chapter by any means. 
Pay Attention… and it will pay you Here Brunson talks about paying attention to other players during a poker game.  Watch and listen carefully even if you are not playing for the pot and you will pick things up.  
He also suggests bluffing to see what someone does to learn more about him.  We might think we can’t do that in the markets, but bigger hedge fund managers actually do test the market.  They can try to buy a big lot of bonds or sell it to get a sense of where the weakness might be; they are probing the path of least resistance.  But most of us can’t do that, and long term investors would have no interest in such market operations. 
But the advice, to pay attention, is applicable to all of us in the markets.  We have to pay attention to what’s going on in the market.  We always like to say, ignore Mr. Market, or ignore the macro, but we have to pay attention to what’s going on.  Maybe if I paid more attention, I would have bought some Liberty Media in late 2008.   OK, enough of that.  Get over it. 
But it’s true.  We have to pay attention.  There might be a tendency, when we own positions we are happy with to get lazy and ride it out.  But then what do you do when things get to fair value or above?   Or there might be better things out there even if we are happy with what we own. 
So we must pay attention. 
Brunson also says, “A man’s true feelings come out in a Poker game”.   He says you’ll learn a lot about a person’s temperament by watching a ballgame he has bet a lot of money on; how well he can take disappointment etc.  He says it’s the same in poker, and it’s the same in trading and investing too.  
Talk to people at the height of a bull market or at the lows of a bear market and you will really know what kind of temperament the person has.   I’m sure all of us with professional experience have anecdotes about traders and investors on their big up and down days.    I tend to trust the guys where you talk to them on any given day and you have no idea if they are up or down on the day.  The ones you can tell from across the room are the ones I would tend not to trust… (well, there are overly emotional, screaming/yelling, phone-breaking-monitor-throwing great traders, and then the quiet people who just blow up with no early signs, I suppose but…)
You can really learn a lot about yourself, too.  You can’t really observe other people in the investing world, so you can just observe yourself and learn a lot about yourself and who you really are and what you might or might not be cut out for. 
Play Aggressively It’s the Winning Way Here he talks about the difference between a “tight” player and a “solid” player and how many people seem to be confused about it.  In poker, a tight player is a conservative one and won’t play too many hands.  A “loose” player is the opposite; like a drunk player that plays every hand, calls every bet.  But a “solid” player is not the same as a “tight” player.   A “tight” player is a conservative player that will play tight all the time, but a solid player will play tight, but when he plays, he will play aggressively. 
There is “tight” and “loose” in investing too.  We’ve all met someone who will buy almost any stock on any tip (loose), and others who won’t buy anything, or will rarely buy anything.  When I first started investing for myself, I was very tight too.  I read a few Buffett books and figured, OK, I’ll just by Coke in the next bear market at 8x P/E.  It’s a great idea, but the only problem is, Coke doesn’t get to 8x P/E, ever (and when it does, you may not want to own it!). 
I just figured if I had a Buffett-like stock (high ROE, high-moat business) and bought it for really cheap, I can’t lose.  Well, this is correct in theory, but that’s like wanting to wait for a royal flush before ever betting.  It didn’t take me long to realize that this approach won’t work.
Now I like to see myself as a “solid” investor.
I would put people like Buffett, Greenblatt, and any of the great traders/investors as “solid”.  They will pick their shots and not play too many hands, but when a good hand comes along, they will go in big.
Brunson says, “Timid players don’t win in high-stakes Poker”.  This is true in the markets too.  But that doesn’t mean you have to be “loose” or that you should ignore risk. 
I think there are a lot of smart and competent investors and traders that don’t do well because they don’t have this sort of killer instinct.  They are way too timid.   They love a stock and they have 2% of their AUM in that stock, for example.  I read a decent book on investing not too long ago and was impressed, but when I looked at the author’s portfolio (no names!), it looked more or less like an index.  There is no way this portfolio is going to outperform the index by more than a percent or two with that sort of diversification in the largest cap stocks. (Yes, Peter Lynch and others have been known to have a large number of names in their portfolios but my impression is that those portfolios contained smaller and midcap names, not the largest companies.  This is why they were able to outperform despite the high degree of diversification). 
We know how focused Buffett is (and was during the partnership years), and many of the other great investors/traders. 
I remember talking about Soros once and someone who was close to him said something to the effect that Soros is not that different in terms of analyzing markets and finding trade ideas than others, but he had the ability to put on huge size.  In other words, he was no smarter than anyone else, but he had the biggest balls (more on courage later). 
And the great thing about the markets is that the markets can’t fold on you.  If you go “all in” in a poker game, you might scare people away.  But not in the markets. 
Art and Science: Playing Great Poker Takes Both Brunson says poker is more art than science, and that’s why it’s difficult.  Knowing what to do, the science, he says is 10% of the game, and the art (knowing how to do it) is 90%.  He says in the introduction that a computer can be programmed to play blackjack well, but not poker (even though I hear that bots win a lot of money playing poker online these days). 
It’s similar to the world of investing/trading.  People have used computers for years to create trading models, and many of them do make money.  But the models are programmed by humans, reprogrammed, recalibrated, adjusted etc. according to market conditions.  I don’t think there is a self-learning/improving computer trader/investor out there (yet). 
Money Management In this section, there’s an interesting comment: 

“Any time you extend your bankroll so far that if you lost, it would really distress you, you probably will lose.  It’s tough to play your best under that much pressure.”

This is exactly what Joel Greenblatt said in an essay soon after the financial crisis.  He was talking about how many people thought the error in their investment was that they didn’t foresee the crisis and so didn’t sell stocks before the collapse.  Greenblatt insisted that this couldn’t be done anyway and that the real error was that these people simply owned too much stocks.  If you own so much stock that a 50% decline is going to scare you and make you sell out at precisely the wrong moment (and as Greenblatt says, and Brunson says in this book, you are almost guaranteed to sell out at the bottom), then you owned too much stock to begin with.  Greenblatt said the mistake wasn’t that they didn’t sell before the crisis, but that they sold in panic at the bottom.  This was the error. 
So the key defense against inevitable (and unpredictable) bear markets is to not extend yourself so much that it will distress you when the markets do fall (and they will).  Buffett says that if it would upset you if a stock you bought declined by 50%, then you simply shouldn’t be investing in stocks.  As I like to say all the time, more money is probably lost every year in trying to avoid losing money in the stock market than actual losses in the stock market!
Brunson also suggests thinking about chips as units and not as money.  This is so very true in trading and investing too.  If you think about money as money, then it may impact the way you invest.  If you think of a loss as real money, it might upset you.  For example, if a stock tanked and you lost money on it, it’s easy to think, “gee, I could’ve bought a Porsche with that money…”.  Or if a loss is thought of as next month’s rent, you won’t be able to focus on the process; you will be distracted by the reality of the money. 
Courage: The Heart of the Matter Brunson says, “I’m asking you to walk a very thin line between wisdom and courage, and keep a tight rein on both”.  He says that courage is “one of the outstanding characteristics of a really top player”.  He points out that some people play really badly after losing a big pot while others play much harder. 
He says that one of the elements of courage is realizing that money you already bet is no longer yours regardless of how much you put in.  This is similar to investing where people do tend to get caught up in their cost (I’ll get out when it gets back to break even, etc…).  If it doesn’t make sense to call, then one shouldn’t call.  People probably tend to look at what they put in the pot and they might call not wanting to lose what they already bet.  Similarly in a stock, if you buy something and it’s no longer a good idea, it’s not good to wait for break even or even buy more just to get the average cost down so you can break even sooner. 
As I said in the above about being aggressive, I think that one of the big differences between OK investors/traders and great ones is courage, or balls (is this appropriate blog language? I don’t know).
But Brunson, in the section on being aggressive, distinguishes between being aggressive and being stupid.  He sites an example of a player trying to bluff someone out of his money with a losing hand, and he calls that stupid, not aggressive. 
There is sometimes a fine line, maybe, between stupid and aggressive in the investing world too.  I’m sure to insurance company executives (in charge of investments), Buffett’s backing up the truck on American Express during the salad oil scandal might have looked stupid or reckless at best.
There is a tendency to assume that “diversified” equals “safe” and “focused” equals “risky”, just as there is a misconception that “beta” (or stock price volatility) equals “risk”.  This is not true at all.  As Howard Marks says in his great book, The Most Important Thing, risk is not a function of these things.  Overpaying for high quality companies can sometimes be riskier than paying a very low price for a mediocre company etc.
The Important Twins of Poker – Patience and Staying Power This is very obvious too in the world of trading and investing.  You have to have patience.  Ian Cummings at the last LUK annual meeting (in 2012) put it like this:   You should sit on a porch, watch the world go by and then if you see something succulent, jump on it. 
Buffett talks about his 10-hole punch card, or waiting for the perfect pitch (there are no strikes in investing. There are no antes either so it doesn’t cost you anything to fold right away).
Discipline Brunson talks about not drinking here; hopefully nobody reading this makes investment decisions while drinking.
There are a few other pieces of good advice (look for weaknesses in your play and fix them etc…) but an interesting point here he says, 

“Maintaining confidence is your strongest defense against ‘going bad’. When you start to go bad or just start to think you’re going bad, you become hesitant…  Allowing your confidence to be shaken can turn a simple losing streak into a terrible case of going bad“. 

 

He reminds us that we still have to be open to the idea that something may be wrong with our play.  

This is very interesting because watching value investors during the crisis, it feels like a lot of people lost confidence.  One investor who was a focused investor decided to diversify more after taking big losses only to go back to a focused approach after the markets recovered. 
Many other value investors seemed to question the idea of value investing itself and sound these days more like macro investors.  Many seem to have lost their faith in the stock market overall. 
Controlling Your Emotions Brunson advises, “never play when you’re upset”.  We all know that the biggest detriment to successful investing is our own emotions.  But I saw it over and over again during the crisis; people throwing in the towel at the worst possible moment because they lose faith.  Too many ‘bad’ bankers and corrupt politicians etc.  It sounded like people were selling stock not only out of fear, but out of anger.  Brunson would tell these people, “don’t make investment decisions when you’re upset!”. 
The Other Similarity There are many similarities and I don’t intend to list them all up, but the other thing that struck me about poker and investing (and this is not from the Brunson book) is that in both, there are two types of participants;

• perpetual loser
• improving / studying winner

That’s kind of a sloppy way to put it, but I notice that in the stock market, many participants (particularly individual investors) often don’t put too much effort in trying to learn about how to become a good investor or trader; they just punt / speculate.  When they make money, they are smart and brilliant and when they lose, the Fed screwed them.  Or the greedy banks caused a great recession and that’s why they lost money.  They were unlucky.  In other words, it’s not their fault. 

This is similar to what people say about poker players.  Many of them do no work to improve, but they take pride in their wins, and when they lose, it was just bad luck.  
Both poker and investing have enough of an element of luck for people to keep fooling themselves in this way (nobody would lose a chess game and say it was bad luck, for example).  And there is enough element of luck such that people will tend to win every now and then with no preparation, and this gives them enough to sustain their ‘hope’.  And this is what they lean on, not any serious work. 
And there’s enough luck involved that many believe that it’s all luck (efficient market folks thinks it’s impossible to beat the market etc…).  So therefore there is no attempt by these folks to work on their game.  
And this is why it’s possible to win; this is why the pros constantly walk away with the money, whether at the poker table or the stock market. 
Conclusion Anyway, none of this stuff is new to experienced traders and investors (and of course poker-playing traders/investors). 
But I wanted to highlight some of the things that really struck me (actually, it struck me the first time I read it a few years ago, but…).  Also, it’s interesting to look at what we do through sort of a different lense.  Am I playing too tight?  Too loose?  Am I being aggressive enough?  Am I really a solid player or just tight?  Or am I being timid? 
Looking at your portfolio this way may tell you a lot about yourself and may even suggest ways to improve your investment performance.

The importance of emotion in trading.

Anxious: Am I prepared? Can I afford to lose what I am risking? Am I breaking my rules? Did I drink too much caffeine?

Anger: Have I not moved from the last trade? Am I tired? Is there conflict in my personal life?

Happiness: Are psychological gains more important than monetary gain? Am I overconfident?

Indifference: Do I care? Is something more important?

It is natural to feel emotion but in an appropriate and proportional way.

Anxious:

To this day, the first trade always produces a little anxiety. That little tingle in your stomach and shallow breathing. The same is true when I a trade I have been waiting for sets up. Above that, I know there is something wrong.

Anger and Happiness:

I am angry after a negative outcome and happy after a positive outcome but in order to adapt more quickly I have to remove emotion from the outcome as soon as possible. It is more important to focus on what happened and less how I feel about it. Prolonged feelings of anger or happiness causes risk blindness and impedes my learning. Misjudging risk will prevent me from taking a trade or taking too much risk.

Indifference:

I have already talked about the worst thing that can happen to a trader. No emotion can be a warning sign too. Emotions should not last forever but they should exist.

Emotional Delay

The other issue is emotional delay. This plays out in two ways. If I am exhausted after a trading day it is because I bottled it up and was able to repress it. This happens when I made money doing things that aren’t repeatable, I found the natural winners before the losers. I should have lost money. The other occurs when I turned a good day into a bad day but it happened so fast I never reacted to it.

Conclusion

Emotions are an important feedback mechanism. Always take inventory of who you are that day and who you are after each trade. Just like every trade is not the same and you are not the same person every trade. Once you find the right combination of evaluation and action you have to fight to keep it.

It is not important to perfect it right away just continue to move forward. There will be set backs; a new you, a new market, and a new interaction between the two.

10 signs you’re a narcissistic investor

Some amount of narcissism (a strong belief in yourself) can be helpful in giving you the confidence to apply for a new job or ask for a raise but sometimes these same traits can become too extreme and you can find yourself part of the “narcissism epidemic” that psychologist Jean Twnege and Keith Campbell coined in their book of the same name.

The more you identify with these characteristics, the more likely you are to be a narcissistic investor.

1. You always know what you’re doing.
   1. “I know I’m good because everybody keeps telling me so.”
2. Everybody likes to hear your stories and you often boast about your latest or greatest winning trade during conversations.
   1. “Seeking admiration is like a drug for narcissists”, said Mitja Back a psychologist at Johannes Gutenberg University in Mainz Germany. “In the long run it becomes difficult because others won’t applaud them so they always have to search for new acquaintances from whom they get the next fix.”
3. If an investment loses money it’s because someone else made a mistake, not you.
   1. I almost always hear how my broker sold me this (name a losing investment) vs. I bought this (name a winning investment).
4. You’re a workaholic.You get upset when people don’t notice how well you’re doing financially.
   1. Workaholics also tend to be impatient and compulsive.
5. 
   
6. When talking with someone you make exaggerated hand movements, talk loudly and show disinterest when others speak.
7. Rules don’t apply to you.
   1. Psychologist Joshua Foster and Keith Campbell found in a study that narcissists are more likely to cheat in a relationship once they feel their partner is committed to them.
   2. In his autobiography about his time as a highly paid hedge fund trader, Turney Duff recounts a phrase he used while bypassing entrance lines at nightclubs, “We don’t wait in lines, we snort them.”
8. You really hate having your investment ideas criticized.
   1. Narcissists typically have inflated visions of their own importance yet are quick to feel deflated by negative feedback.
   2. “Your criticisms about my investment ideas are taken as a personal attack on me and not merely a concern about the investment.”
9. You seek admiration by devaluing other people’s investment ideas.
   1. Instead of listening in order to be responsive, narcissists listen in order to dismiss, negate, ignore or minimize.
10. What you perceive to be important is all that matters.
    1. It doesn’t matter what the debate or discussion is about, your opinion and your conclusions are more relevant than someone else’s.

    Four Keys to Understanding Uncertainty

     
    1) Uncertainty is always subjective. It is a state of mind that is derived from a mix of objective data, emotions and personal experience. To say that the market is always equally uncertain is to say that mood is always the same. It is not. It constantly changes.
    
    If the perceived uncertainty is always the same, earnings reports would not have such huge impact on prices. We all know that this is not the case. In many cases, earnings reports provide new data that changes market expectations and therefore prices. Options premium is higher before earnings exactly because uncertainty is higher.
    
    2) Uncertainty has become a synonym for bad mood in our everyday life.
    
    The future is always uncertain, but our perceptions of the future vary. And perceptions define actions. Actions (supply and demand) define prices. Somehow uncertainty is used with a highly negative connotation in our everyday life. It is a game of words. Just like the weather people always say that there is a 30% chance of rain and never that there is 70% chance of sun.
    
    3) Uncertainty is basically another word for market sentiment. High levels of perceived uncertainty (bad mood) and high levels of perceived certainty (good mood) have historically been good contrarian indicators, IF your investing horizon is long enough.
    
    4) There are different types of uncertainty.
    
    There is an economic uncertainty. Uncertainty leads to a decline in economic activity. Less people are hired. Old machines and software licences are used longer. Investments are cut. This is what it has been happening in Europe for 2 years. 

 

An Interview with a Modern Day Nicolas Darvas

An Interview with a Modern Day Nicolas Darvas

Don’t Miss to Watch 3 VIDEO’s

Who is Dan Zanger?

Dan Zanger is the modern day version of Nicolas Darvas.

His mother Elaine loved the stock market and Dan would often watch the business channel with her. One day in 1978 Dan saw a stock explode across the ticker tape at the bottom of the screen hitting $1. He made his first purchase and sold the stock a few weeks later at over $3. From that sale on, he was hooked on the action of the market tape, usually carrying a quotetrek with him to stay up on stock prices on his jobs in Beverly Hills as an independent contractor building swimming pools.

He attended a seminar led by William J. O’Neil and this was a major turning point in his ability to select winning stocks. Dan studied chart patterns 25 to 30 hours per week learning to select stocks that would make big moves, before they moved. As technology and internet stocks took center stage in the stock market in 1997, Dan began to see powerful moves underway. He sold his Porsche for approximately $11,000 to have the necessary capital to jump fully into the market. Over the next year, he parlayed the 11,000 dollars into 18 million with the knowledge acquired over two decades playing the market and re-reading the works of William O’Neil. With this success, Dan was able to become a full time trader and leave contracting behind.

He recommended Darvas’ strategy and told traders that the Darvas System is, “widely used and followed today by the best traders in the world, and still this breakout method is little understood by most…”

Dan Zanger is still a big advocate of Darvas’ teachings and he tells traders that applying the Darvas method will “yield fortunes beyond the reader’s wildest dreams.”

Dan Zanger holds the world record for one-year stock market portfolio appreciation, gaining over 29,000%. In about two years, he turned$11,000 into $42 million.

Zanger was listed by Trader Monthly magazine as one of the top 100 traders in the world with an annual income of $25 million!

Here are some great videos where he discusses his methods:

 

Ed Seykota Interview

 

Van Tharp:

Have you played around with any other significant ideas in terms of position sizing besides market’s money? If so, what are they?

If you could give me ten rules to consider with respect to position sizing what would they be?

Ed Seykota:

“Playing around” with “when market money becomes your money” seems to be an exercise in math-turbation.

I don’t know what you mean by playing around with ideas. I feel you either think things through or you don’t.

Ten rules for position sizing:

1. Bet high enough to make meaningful profits when you win.

2. Bet low enough so you are ok financially and psychologically when you lose.

3. If (1) and (2) don’t overlap, don’t trade.

4. Don’t go adding a bunch of rules that don’t work, just so you have ten rules.

Life Wisdom – Jim Rohn

Success is both a journey and a destination.

It’s the steady, measured progress toward a goal and the achievement of a goal.

Success is both an accomplishment and a wisdom that comes to those who understand the potential power of life.

It’s an awarenesss of value and the cultivation of worthwhile values through discipline.

It’s both material and spiritual, practical and mystical.

Success is a process of turning away from something in order to turn toward something better – from lethargy to exercise, from candy to fruit, from spending to investing.

Success is responding to an invitation to change, to grow, to develop, and to become – an invitation to move up to a better place in oder to gain a better vantage point.

But most of all, success is making your life what you want it to be. Considering all the possibilities, considering all the examples of others whose lives you admire, what do want from your life? That is the big question!

Remember, success is not a set of standards from our culture but rather a collection of personal values clearly defined and ultimately achieved.

What is Hope ?What is Regret ?

What is Hope?

Hope is a feeling of expectation and desire for a certain thing to happen. It’s an individual’s desire to want or wish for a desired event to happen.

Hope may be the most dangerous of all human emotions when it comes to trading. Hope is what keeps a trader in a losing trade after it has hit the stop. Greed and hope are what often prevent a trader from taking profits on a winning trade. When a stock is going up, traders will often remain in the trade in the “hope” of recouping past losses. Every swing trader hopes that a losing trade will somehow become a winning trade, but stock markets are not a charity. This type of thinking is dangerous because the group (stock market) could not care less about what you hope for, or what is in your best interest. Rest assured, when your thinking slips into hope mode, the market will punish you by taking your money.
 

What is regret?

Regret is defined as a feeling of sadness or disappointment over something that has happened or been done, especially when it involves a loss or a missed opportunity.

The negative implications of this emotion are obvious. It is only natural for a stock trader to regret taking on a losing trade or missing a winning trade. But what is important as a trader is not to hyper focus on losing trades or missed opportunities. If you lose money on a trade, then you should simply evaluate what went wrong and move forward. Other than the lessons that can be gained from evaluating each trade, there is no point to spending further time regretting the decision to enter the trade. It is also human nature to feel regret when an opportunity is missed. If you miss a winning trade, then you must move on to the next potential trading opportunity.

When technical traders allow regret to rule their thinking, they tend to “chase trades” in the hopes of still being able to make money on the position by entering it well above the trigger price. The problem with this thinking is that the reward/risk of the trade no longer meets the parameters of good trade management. For instance, by entering a trade 1 point higher than the trigger, the potential reward may be 1 point, but the potential loss may also be 1 point. This sets the reward/risk ratio at 1 to 1. Recall that we prefer trades to have at least a 2 to 1 reward/risk ratio. However, if the trade had been entered at the appropriate trigger price, the reward/risk ratio would have been 2 to 1. Successful and profitable online traders learn to discipline their mind to eliminate regretful thinking.

50 Trading Rules

1. Plan your trades. Trade your plan. 2. Keep records of your trading results. 3. Keep a positive attitude, no matter how much you lose. 4. Don’t take the market home. 5. Continually set higher trading goals. 6. Successful traders buy into bad news and sell into good news. 7. Successful traders are not afraid to buy high and sell low. 8. Successful traders have a well-scheduled planned time for studying the markets. 9. Successful traders isolate themselves from the opinions of others. 10. Continually strive for patience, perseverance, determination, and rational action. 11. Limit your losses – use stops! 12. Never cancel a stop loss order after you have placed it! 13. Place the stop at the time you make your trade. 14. Never get into the market because you are anxious because of waiting. 15. Avoid getting in or out of the market too often. 16. Losses make the trader studious – not profits. Take advantage of every loss to improve your knowledge of market action. 17. The most difficult task in speculation is not prediction but self-control. Successful trading is difficult and frustrating. You are the most important element in the equation for success. 18. Always discipline yourself by following a pre-determined set of rules. 19. Remember that a bear market will give back in one month what a bull market has taken three months to build. 20. 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. 21. You must have a program, you must know your program, and you must follow your program. 22. Expect and accept losses gracefully. Those who brood over losses always miss the next opportunity, which more than likely will be profitable. 23. Split your profits right down the middle and never risk more than 50% of them again in the market. 24. The key to successful trading is knowing yourself and your stress point. 25. The difference between winners and losers isn’t so much native ability as it is discipline exercised in avoiding mistakes. 26. In trading as in fencing there are the quick and the dead. 27. Speech may be silver but silence is golden. Traders with the golden touch do not talk about their success. 28. Dream big dreams and think tall. Very few people set goals too high. A man becomes what he thinks about all day long. 29. Accept failure as a step towards victory. 30. Have you taken a loss? Forget it quickly. Have you taken a profit? Forget it even quicker! Don’t let ego and greed inhibit clear thinking and hard work. 31. One cannot do anything about yesterday. When one door closes, another door opens. The greater opportunity always lies through the open door. 32. The deepest secret for the trader is to subordinate his will to the will of the market. The market is truth as it reflects all forces that bear upon it. As long as he recognizes this he is safe. When he ignores this, he is lost and doomed. 33. It’s much easier to put on a trade than to take it off. 34. If a market doesn’t do what you think it should do, get out. 35. Beware of large positions that can control your emotions. Don’t be overly aggressive with the market. Treat it gently by allowing your equity to grow steadily rather than in bursts. 36. Never add to a losing position. 37. Beware of trying to pick tops or bottoms. 38. You must believe in yourself and your judgement if you expect to make a living at this game. 39. In a narrow market there is no sense in trying to anticipate what the next big movement is going to be – up or down. 40. A loss never bothers me after I take it. I forget it overnight. But being wrong and not taking the loss – that is what does the damage to the pocket book and to the soul. 41. Never volunteer advice and never brag of your winnings. 42. Of all speculative blunders, there are few greater than selling what shows a profit and keeping what shows a loss. 43. Standing aside is a position. 44. It is better to be more interested in the market’s reaction to new information than in the piece of news itself. 45. If you don’t know who you are, the markets are an expensive place to find out. 46. In the world of money, which is a world shaped by human behavior, nobody has the foggiest notion of what will happen in the future. Mark that word – Nobody! Thus the successful trader does not base moves on what supposedly will happen but reacts instead to what does happen. 47. Except in unusual circumstances, get in the habit of taking your profit too soon. Don’t torment yourself if a trade continues winning without you. Chances are it won’t continue long. If it does, console yourself by thinking of all the times when liquidating early reserved gains that you would have otherwise lost. 48. When the ship starts to sink, don’t pray – jump! 49. Lose your opinion – not your money. 50. Assimilate into your very bones a set of trading rules that works for you.

Observation and Analysis

 

“Do not believe in anything simply because you have heard it. Do not believe in anything simply because it is spoken and rumored by many. Do not believe in anything simply because it is found written in your religious books. Do not believe in anything merely on the authority of your teachers and elders. Do not believe in traditions because they have been handed down for many generations. But after observation and analysis, when you find that anything agrees with reason, and is conducive to the good and benefit of one and all, then accept it and live up to it.”

- Siddhārtha Gautama (Buddha)

A commitment to reason, observation and analysis (of the self-reliant empirical variety) has been a winning trade for thousands of years.

Why don’t more people practice this, in markets and in life?

Common Characteristics between 

Successful Gamblers and Successful Speculators

On a warm summer’s evenin’ on a train bound for nowhere,
I met up with the gambler; we were both too tired to sleep.
So we took turns a starin’ out the window at the darkness
‘Til boredom overtook us, and he began to speak.

He said, “Son, I’ve made my life out of readin’ people’s faces,
And knowin’ what their cards were by the way they held their eyes.
So if you don’t mind my sayin’, I can see you’re out of aces.
For a taste of your whiskey I’ll give you some advice.”

So I handed him my bottle and he drank down my last swallow.
Then he bummed a cigarette and asked me for a light.
And the night got deathly quiet, and his face lost all expression.
Said, “If you’re gonna play the game, boy, ya gotta learn to play it right.

You got to know when to hold ‘em, know when to fold ‘em,
Know when to walk away and know when to run.
You never count your money when you’re sittin’ at the table.
There’ll be time enough for countin’ when the dealin’s done.

Now Ev’ry gambler knows that the secret to survivin’
Is knowin’ what to throw away and knowing what to keep.
‘Cause ev’ry hand’s a winner and ev’ry hand’s a loser,
And the best that you can hope for is to die in your sleep.”

So when he’d finished speakin’, he turned back towards the window,
Crushed out his cigarette and faded off to sleep.
And somewhere in the darkness the gambler, he broke even.
But in his final words I found an ace that I could keep.

You got to know when to hold ‘em, know when to fold ‘em,
Know when to walk away and know when to run.
You never count your money when you’re sittin’ at the table.
There’ll be time enough for countin’ when the dealin’s done.

The 7 Habits of Highly Successful Traders

 

1. Traders must have the perseverance to stick to trading until they break through to success. Many of the best traders are just the ones that had the strength to go through the pain, learn, and keep at it until they learned to be a success. 
2. Great traders cut losing trades short. The ability to accept that you are wrong when a price goes to a place that you were not expecting is the skill to push the ego aside and admit you are wrong.
3. Letting a winning trade run as far as it can go in your time frame is crucial to having big enough winners to pay for all your small losing trades. 
4. Avoiding the risk of ruin by risking only a small portion of your capital on each trade is a skill to not get arrogant and trade too big, if you risk it all enough times you will lose it all eventually. 
5. Being reactive to actual price action instead of predictive of what price action will be  is a winning principle I have seen in many rich traders. Letting price action give you signals is trading reality, trading your beliefs about what price should be is wishful thinking.
6. Great traders are bullish in bull markets and bearish in bear markets, until the end when then trend bends. 
7. Great traders care more about making money more than any other thing. Proving they are right, showing off, or predicting the future is not as important as hearing the register ring.
   
   
   
   

   Shut Up and Listen

    

Being reactive to actual price action instead of predictive of what price action will be is a winning principle I have seen in many rich traders. Letting price action give you signals is trading reality, trading your beliefs about what price ‘should be’ is wishful thinking.

Great traders are bullish in bull markets and bearish in bear markets, until the end when the trend bends.

These two rules or habits simply aren’t being utilised, either because people don’t know them, or think they’re better than them.

Let me tell you this – no-one is better than the rules. And the traders that have been ignoring them are feeling this right now where it hurts.

I know of professionals who are quitting over what the market has been doing recently. I know of professionals who are at breaking point – literally a nervous wreck because they cannot fathom that the market will go higher….and yet it does.

If you don’t follow these two rules, you will never flow with the market. You will constantly be in conflict; constantly fighting and stubbornly protecting your ‘rightness’, and you will never be in tune with what the market is saying.

These two rules can be neatly summed up in one sentence.

Shut Up and Listen.

Stop talking. Stop thinking. Just listen to what the market is telling you.

A Winning Trading Method is Really All About this…..

Successful trading is the attempt to be on the right side of the flow of capital. Each change in price happens with a new agreement between the current buyer and seller. Buyers and sellers are always equal for a transaction to take place, the cause of movement is determined by whether the buyers want in more than the sellers want out. Prices moves when capital flows into and out of a market, and inflow pushes up prices because demand becomes more than supply, price discovery happens to find out what sellers are willing to take to sell their position.

Many crazy over bought or over sold trends occur because one side has little pressure on it, position holders, shorts, or buyers sit tight as a trend accelerates. Equity markets rise when new money has to enter to be put to work but there is little interest at selling due to position holders sitting on winning positions.

Price resistance on a chart is caused by simply being the place that current holders are taking their profits. Price support happens at the price that people on the sidelines are ready to get back in at. These are simply spots where capital flows in and out.

Growth stocks trend higher due to the demand on it from institutional money managers, it is the flow of capital into the stock in pursuit of owning the future earnings growth that drives a stock upwards, not P/E ratios or opinions.

Finding ways to quantify and trade the flow of capital is what a winning trading method is really all about.