Honesty & Experience in Trading
Honesty:
Trading
introduces you to yourself and you can’t ignore it. The mentor was just
being honest. He saw the guys impatience. The more emotionally the
guy got about the reality of the situation the more angry the guy got.
Trading is difficult because money is an imperfect feedback mechanism.
The habits you create early on you may continue to pay for throughout
your career even it if paid you in the beginning. The good habits you
create may not pay you for awhile or you may not be able to see them
paying off. It take a strong person to keep going without rewards.
Experience:
If
I have learned one thing it is never to discount others experience. If
someone has something to say I am smart enough to learn something from
it. That does not mean that all experience are created equally efficiently.
But completely discounting it is dangerous. About everything I have
ever done I started off thinking I was smarter than everyone else. It
started with my parents and continued to football and trading. Each
step I got better. However it is important to take the information and
make it work for you.
Speculation drives human progress
An excerpt from Michael’s essay:
“It is said that the desire to speculate is very strong in the American people. That is why our country has made greater progress than any other country in the world, because progress is the result of speculation. We are not referring merely to stock speculations, but to the word in its broadest sense. Every new undertaking is a speculation.
An inventor speculates on what he is going to invent. Often such speculations result in losses, because many inventors, or would-be-inventors, never accomplish very much. They spend their money, time, and efforts, and probably live years in poverty, and then if the invention is not profitable, they are heavy losers.
It is the same thing with every new business. It is purely a speculation…”
This is a great point, and one that is greatly misunderstood by some ignorant politicians, journalists, and everyday people who refer to “speculators” as wicked people who somehow conspire to drive prices of shares or commodities higher or plunge them lower.
Any human activity that requires foresight and planning and the assumption of risk (of money or labor lost) is a form of speculation. Thomas Edison speculated with his toil and sweat as he sought to perfect and market yet another invention, never knowing for sure whether it would succeed or fail in the end.
Venture capitalists speculate with their partners’ capital when they back a new technology firm or a startup that makes electric cars.
Traders may speculate with their own money (and emotional capital) that some catalysts will serve to send prices of share “x” or commodity “y” higher or lower in the days and months ahead.
In other words, we speculate when we imagine something new or create some new business or invention or vote with our dollars on future outcomes in the marketplace.
As Bernard Baruch famously pointed out, the word speculate comes from the Latin speculari, which means “to observe” or “to look (spy) out”. This is the essence of speculation, to look out towards a great distance and try to observe future developments.
However, there are differences that separate the successful speculator from the wreckless gambler. As Michael mentions in his post, most people think of all the profit to be made in a speculative venture, instead of focusing on the risk of loss:
“…It does not pay to take big risks. That is true in stock speculating the same as in any other undertaking. Most speculators are keeping their minds all the time on the possibilities of profit and not thinking about the possibilities of losing.
There is an old saying, and we believe a very true one, that a man who speculates with the idea of getting rich quickly loses all his money quickly, but that the man who speculates with the idea of making a fair return on his money usually gets rich…”
Do you speculate with an eye towards big profits? How many of us dream of returns while neglecting the discipline of adhering to sound principles of risk management? What can we do to sharpen our judgement and improve our odds of success in any form of speculation, be it a new business venture or a stock trade?
The trading curve.
Initiation- Every trader comes in thinking they will make money, in fact if they have never traded, they probably have convinced themselves fully. They spend time looking for all the answers in charts but it is in the process. It seems like easy money. It is not easy but it is probably the best way to make money. The best of anything takes more work.
Wearing off of novelty- This is a critical time for any trader. This is where the hole gets deeper or ideally the trader stops and starts to work more efficient. Process and not charts. This is the motivation to understand what trading really is and who they really are.Trough of sorrow- This is also a critical point. Now you have done some work but it has not paid off yet. Do you keep working? Do you get some help? Can you continue to improve?
Crash of ineptitude- You are starting to gain some experience and confidence. But you have a bad day and lose too much. Back to the drawing table.
Wiggles of false hope- This is where you understand what not to do so you are floating along again. The problem is you are only starting to understand what to do. You have corrected the big mistakes and now start down the path of correcting the small ones.
The promise land- Now you understand what not to do and what to do. Now it is up to you to actually do it. You are in the best position of your trading career.
Acquisition of liquidity- Now you are a self sustaining trader. You have the ability to make x amount of dollars to survive. This is what you have to lean on now. This is when trading begins to get real. You are methodically improving.
Upside of buyer- Not only do you understand what not to do and what to do, you always do it. Now the sky is the limit. You control your destiny.
The difference between trading and a start up is you are not looking to be acquired. You have to do this day in and day out, make a career. This does not stop but the process and progressions become second nature and you are seeing positive results. This is not the time to relax but the time to put the foot on the gas pedal. This is true about all of the stages except the first one.
7 Weakest Points of Trading
The
weakest part of any trading method is the trader themselves. There are
many, many, robust trading systems and methods that do make money in the
long term. The problem is the trader having the discipline and mental
toughness to trade one of them consistently. The vast majority of time
it is not a system failure but traders that fail in this game through
one of seven common errors. If you can understand these error and
overcome them you could make a lot of money in the right market
conditions.
- The trader must have the discipline to take the system’s entries and exits.
- The trader must have the discipline to take the stop loss on a losing trade when it is hit and not keep holding and start hoping.
- No matter the method the trader has to manage risk through proper position sizing, getting greedy and trading too big will blow up even the best systems.
- It is the trader that must have the perseverance to stick to the method even during losing periods, and also stick with trading until success is reached.
- If a trader can not manage their mind then the stress will break them, I have seen this happen many times. If you can’t handle losing you can’t trade.
- The trader must find a robust method, must understand why it has an edge, and must believe in their methodology.
- The trader has to know themselves and trade the method that fits their risk tolerance levels and own psychology.
The
good news is that if none of these error fit you when you lose money in
a trade then the market was just not conducive to your methodology, and
it is not your fault so don’t dwell on it.
The 10 Keys to Winning the Mental
Game of Trading
- …faith in yourself.
- …faith in your system.
- … an understanding of what trading size you can handle.
- …an understanding of the level of losses you can deal with mentally and emotionally.
- …a love and passion for trading.
- …the belief that it is possible to win in trading.
- …the belief that all your hard work will be worth it.
- …that you are a trader, that is what you do.
- …the ability to have your butt kicked over and over but keep coming back.
- …the perseverance to keep trying until you are successful.