Thursday, December 11, 2014

Trading Under the Right Mental Conditions

I think anything is possible if you have the mindset and the will and desire to do it and put the time in.
Roger Clemens

Traders are similar to athletes who perform at their best, or musicians who are virtuosos. What these people have in common is that they can focus their attention on the task at hand; inadequacies, conflicts, or current life's stress does not distract them. The more you can remove stress and anxiety in your life, the more you can trade effortlessly in a focused manner. A winning approach to trading is often just a matter of approaching trading by following some basic guidelines. 


We must learn to think in probabilities, and not focus on the outcome of a single trade. When you are trading, try and think of the bigger picture. You may lose on a single trade, but if you are trading with sound principles and strategies, you will come out ahead across a series of trades (remember from the money management section we are looking to win only 1 out of 3 with a proper risk/reward ratio). It is this long-term perspective we must focus on, not our short-term outcomes. We must learn to strategically execute trade after trade in a calm and logical manner to make the law of averages work in our favor.


It's vital to control our risk. Successful traders risk only a small percentage of their trading capital on a single trade. Limiting the risk on a single trade further relieves the pressure to feel that every trade needs to be a winner. Having a detailed trading plan is equally important. When we know what we are going to do and when we are going to do it, we feel in control. Leaving parts of our trading plan unspecified will yield a sense of uneasiness. This sense of uneasiness will make our discipline falter. If however, we have a clear idea of when to enter a trade and when to exit, then, and only then can we focus easily on monitoring the trade and taking decisive action. 


There's also a psychological aspect to trading like a winner. Sometimes it's important to remember some common and I might add very normal human tendencies. There is a psychological need in most of us to avoid loss and this need comes from the need to be right (our ego). Don't be afraid to admit you are wrong. And don't think that you must capitalize on every opportunity to make a profit. If your expectations are too high, it is a psychological setup for failure. By trading under the right mental conditions, you can trade profitability and consistently in the long term.

Thursday, December 4, 2014

Climbing Out of a Rut

When you first start out trading, becoming a winning trader can seem impossible. Somehow you have to build up enough talent to trade markets that aren’t cooperative most of the time. When you are thrown off balance as a trader, it can be hard not to get in a rut. You might think, “Why bother trying again? I’ll just lose even more money. I want to give up.” If you aren’t careful, you can develop a “psychological complex.” Rather than look at the markets objectively, you can start placing too much emotional significance on setbacks and trading outcomes. Suddenly, routine setbacks are a big deal; each trade has more personal meaning than it should. When you make a trade, it’s as if your self-esteem and identity are on the line with your money. If you don’t do something fast, you may feel so anxious and overly emotional that you can no longer think logically. And then losses begin to mount.

In their book, “The Innergame of Trading,” Robert Koppel and Howard Abell outline a strategy for getting out of a slump and regaining your mental edge. A slump may reflect conflicts and issues that you have not yet resolved. It’s vital to identify these issues and find some resolution. Let’s review five major issues discussed by Koppel and Abell. First, make sure that you fully understand your motives for trading. Rather than trading for the money, it is important that you truly love the game. If you merely trade for the money, you will often feel disappointed by the endless setbacks you must overcome, but if you trade because you love the independence trading offers, and are stimulated by the intellectual side of trading, you will take setbacks in stride. Second, it’s also necessary to make sure that you trade with a trading style that suits your personality. Many traders make the mistake of trying to trade an approach that doesn’t suit their style. For example, they may have an overly anxious temperament yet take big risks on short-term trades that are inherently uneasy. This style of trading stresses them out to the point that they can’t enjoy trading. Instead, they vacillate between frustration and stagnation. In the end, you can only trade with the skills and resources you have available, and this may mean finding a trading style that suits you, rather than a style that is the most popular at the time. Third, trading should make you feel good. You should think it is fun. When you wake up in the morning, you should feel as if you can’t wait to trade. If it doesn’t make you feel good, you should wonder why you should even bother. And if you don’t wonder explicitly, it will gnaw at you and overpower you when you least expect it. Fourth, make sure that you acknowledge how difficult it is to learn to become a profitable trader. Don’t mistakenly think that trading is easy. It is not. It takes hard work to become a winning trader. People become upset when they forget how much time and effort is required to! learn t o trade. When you underestimate the difficulty of trading, you will feel frustrated when your performance does not meet your expectations. But when you remember that trading is extremely difficult, you will feel less disappointed when your hard work and effort do not always pay off. Fifth, build up a sense of confidence. You may not trade up to par at first, but it is vital that you believe that your hard work and effort will eventually pay off.


When the markets don’t cooperate with you, don’t despair. Work through personal issues that prevent you from living up to your potential. If you stay focused and cultivate a positive state of mind, you’ll recover from setbacks quickly and hone the trading skills you need to trade like a winner.


Reprint from Innerworth Newsletter March 2006

Friday, November 21, 2014

Are You a Winner ?

You were born to win, but to be a winner, you must plan to win, prepare to win, and expect to win.       Zig Ziglar

Not everyone is ready for success. Some secretly fear it. Reasons will differ from person to person. Some will not want to out-earn their parents. The fear is that if they improve their social status, friends and loved ones may no longer care for them in the same way. Other people just don't believe they deserve success. Successful people however, don't have such worries. As they are comfortable with themselves and comfortable with what they are trying to accomplish in life. No self-doubts! They have a firm commitment to their goals, and know that if they work hard enough, they'll achieve what they set out to achieve. When it comes to enduring success as a trader, the odds are against you. Every year, thousands of would-be traders try to make it, but very few realize their goals. Even those who make it,  success is short lived. Achieving and maintaining success is largely a matter of psychology. If you approach trading with the right mindset, you'll increase your odds of success. 


Many people, although they will rarely admit it, think they are just not deserving of success. To be a successful trader you must firmly believe that you are deserving. If you do not believe that you deserve success, you will give back any winnings you take out of the markets. Instead of giving back profits why not strengthen your internal attitude. Accept more success into your life, feel worthy of success, visualize yourself as a successful trader. As much as we want to become profitable traders, or stay profitable, it's often difficult to truly believe that it can be done. We are all aware of the failure rate, and all of us know that staying successful requires work. You must keep working to stay successful. Nevertheless, the first step is to truly believe you can be successful and stay that way, if you work hard enough. 


Once you decide to be successful, you also need to believe you are worthy of success. For many, it is an issue of self-image. Successful people see themselves as "winners"who can do anything if they set their minds to it. If you have a low self-image, visualize yourself as a success occasionally. Imagine working hard and beating the odds to gain success and keep it. Imagine taking heroic steps to achieve the success you deserve, and the sense of accomplishment that you'll feel when you achieve success. Many people limit themselves psychologically, but if you are willing to redefine and stretch your limits, and start thinking of yourself as a winner, you'll get there and stay there.


Reprint from PrudentTrader archives


Thursday, November 13, 2014

The Best Laid Plans

If you don't design your own life plan, chances are you'll fall into someone else's plan. And guess what they have planned for you? Not much!      Jim Rohn

Many traders will say that they just cannot seem to stick with their trading plan. You may develop a viable trading plan only to abandon it impulsively. Why? What is it that goes wrong? Most often the problem is the plan is to vague, parts are missing and when a plan is incomplete it is very hard to follow and execute. Many newer traders experience additional concerns, the thoughts and emotions that are experienced when the plan is actually executed. The best plans are developed when one is calm and clear-headed, usually long before the plan is to be executed. Strategies are clearly specified, yet when the plan is executed later on, a barrage of emotions may be experienced, and these emotions, if left unchecked, can thwart the best laid plans.


Emotions can color and change our perspective. When you develop a plan during the quit evening it makes perfect logical sense. Then the market opens the next morning and everything suddenly looks different. Perspective's can change very quickly and for many reasons. Perhaps you are preoccupied about other unrelated problems or for some reason you are suddenly worried about money. Your child's tuition is due, or you need a new car, or it's hot and stuffy in your office, or you are just weary and groggy for no apparent reason. It could be that the markets are just behaving more erratically than you had anticipated. Whatever the feelings, or the reasons for them they influence your thoughts and perceptions. What should you do? That varies from trader to trader. Some will stand aside and wait for their mood to improve. Many seasoned traders, who have seen it all and aren't easily fazed, may ignore their feelings and continue on. A newer trader however may be easily shaken. It is at this time that trading errors are made or trading plans abandoned entirely. 


Fortunately there are preventative measures you can take. First and foremost, develop a clearly defined trading plan, knowing exactly when you will enter and what signals indicate that you should exit. Focus all your energy on executing the plan. I know this is easier said than done. When you are emotionally distracted your psychological resources are at their limit and you have few resources left to execute your trade. This is not the time to re-think your plan. Probably the best solution is to limit your attention to executing your trading plan as you have it outlined. Don't second guess it. Think of it as trading as if you were a soldier. When soldiers are ready to fight, they don't question their skills. They don't worry about whether they are unprepared. They are ready to fight an opponent, and need to focus only on winning, and just do it. And that's what you should do just execute your plan under the stressful conditions. There's no reason not to. You factored in the risks up front when you outlined your plan and you know deep down that you can't experience any real harm should the plan fail this time. In many ways, your fate is already determined. if you choke under the pressure, you may mess it all up. If it's a loser, there's nothing you can do. If it was meant to be a winner, however, and you let your emotions fowl up your plan, then you have lost one of the trades that may have been one of the winners across a series of trades. And from a purely statistical vantage point, you want to win on every possibility that you could have. That means executing your plan rather than abandoning it. The best-laid plans can be ruined if you don't execute them properly. But if you clearly define your plan and focus solely on executing it, you'll trade profitably in the long run.


From PrudentTrader Archives 2005

Thursday, November 6, 2014

Its All About You!

Tell me and I forget. Teach me and I remember. Involve me and I learn. 
Benjamin Franklin

As children, parents and teachers tell us whether or not we are doing well. When we get older our significant others offer praise when we met their expectations and punish us when we break the rules by going our own way. Society tends to reinforce looking to others for the standards that we should achieve. The media bombards us with images of success: Buy a sleek, new sports car and impress the neighbors. Wear the latest designer fashions and watch heads turn as you walk by. As a result of our surroundings, it becomes natural to ask yourself, "How well am I doing?" which in turn leads to asking, "How well 'should' I be doing?" When "should" and "must" enter the picture, it can place a lot of unnecessary pressure on us to perform. When the pressure is on, it is very common and we often usually choke under the strain. There's a danger when you look outward. You start to judge yourself. You start to think that you are doing well or poorly based on how others may see you. Instead look inward, and follow your own personal standards for where you want to go next. 


Comparing ourselves to others is useless, time consuming, and counterproductive. Look inward for your own personal standards instead of outward in an effort to beat out the next guy. Each trader brings his or her own knowledge, personality, trading method, and tools to the trading arena. Through a coordinated integration of these various components, the trader builds up a set of individualized trading skills that produce lasting success. This integration doesn't happen over night, but though hard work and persistence. Over time, you make trade after trade, gaining key experiences along the way, until it all comes together in the end. You need to find one's own personal talents, accentuating your strengths and working around your limitations. Every trader is on his or her own path. For some people, the path is full of many curves and is quite long. For others, the path is straight and short. Follow your own path and accept the amount of effort and time it will take to reach your goals. 


Studies of successful and creative people have shown that such people tend to work by their own standards. Even in competitive situations, creative people don't compare themselves to others. They look inward and let their internal standards guide them. They know that through persistence and determination, they will achieve success. They don't force it. They know that if they allow themselves to follow their passion, success will come naturally. If you take a similar approach to trading, you'll achieve lasting success.

Thursday, October 30, 2014

How to Take a Loss

A loss never bothers me after I take it. I forget it overnight. But being wrong - not taking the loss - that is what does damage to the pocketbook and to the soul.
Jesse Livermore

Humans are risk averse. No liking losses we will do almost anything to avoid taking them. Losses are painful, and there is a strong human need to seek out pleasure and avoid pain. Traders tend to come up with many ways of denying they have a loss, such as holding on to a losing trade and hoping it will turn around, or keeping losses on paper to avoid acknowledging them. However, you will trade more effectively and profitably if you can take losses as quickly as possible, move on and make a new trade. In his book, "The Disciplined Trader," Mark Douglas suggests that you close out losing trades immediately, the instant you perceive that a trade is a loser. The best way to do this is to have a clearly defined trading plan where you predefine where you will enter and exit a trade. Once you have a clearly defined plan, you can execute the trade without hesitation. There is nothing to consider, weigh, or judge and consequently nothing to tempt you to hesitate and be consumed with self-doubt. 


The best way to take a loss is to anticipate it. If you go into a trade expecting that it may be a loser (and you always should), you won't be as bothered should the trade go against your expectations. If, you try to avoid considering the possibility of a loss, you'll become extremely frustrated when you are in the midst of a losing trade. Accept the fact that losses are the norm and not the exception. 


Define your potential losses before you enter any trade. Define your possible loss, or risk, in comparison to your possible reward, or profit. Don't take losing personally! Traders who put their self-esteem on the line with their money are especially vulnerable to strong, unpleasant emotions when they lose. Take a more carefree approach, and think, "It is not personal; it isn't a big deal in the end," then you will be able to accept a loss and take quick, decisive action. 


Taking a loss is a fact of trading. If you trade to make profits, you will face many more losing trades than winners. Because you lose more than you win, doesn't mean that you won't trade profitably over the long run. The fact that you lose trades is not an issue. The issue is how you cope with losses. If you view them as nothing more than a minor setback, you'll get back up and make trade after trade in order to come out of it. If you are stunned and disappointed, you'll actually give the losing trade more significance than it deserves.. So practice taking losses effortlessly. You'll trade more profitably in the long run.


Reprint from Prudent Trader archives

Friday, October 24, 2014

Trust Your Intuition

The comfort zone is the great enemy to creativity; moving beyond it necessitates intuition, which in turn configures new perspectives and conquers fears.Dan Stevens

Many people who begin trading think of the markets in purely mathematical terms: If the ultimate multiple regression equation could be devised, one could simply put in the inputs and get the outputs from your computer. The working assumption seems to be that the markets can be predicted in much the same way that engineers can use equations to construct a bridge or a tall building. The markets however, are not consistent, and in some ways, they are far more complex. Many seasoned traders tend to rely on abstract feelings as much as cold hard facts. They trade intuitively. 


How do you observe the world and gather information? Do you just want the facts and the specific details? Or are you more intuitive? You don't believe in "facts." You think reality is subjective and prefer to think in theoretical and abstract terms. You should identify whether you are intuitive or data oriented. If you are data oriented, you should learn to trust your intuition. Many times I look at setups which years ago I would have considered perfect, yet now my intuition tells me something is wrong with this setup, I couldn't tell you what is wrong, just that something is wrong, and I move on. 


There are those who prefer cold, hard facts and see the world as rational, predictable, and orderly. Intuitive types however, see the world as random, theoretical, and conceptual. The hard facts type of trader may want to know the specific price level where resistance begins. He or she would prefer to follow a specific set of rules and may want to pin down exactly where an abstract value, such as resistance, begins and ends. An intuitive trader, however, views the "rules" to identify resistance as merely guidelines. For example, perhaps resistance is perceived to be a round number or a previous peak or trough. No one knows for sure; such guidelines are just possibilities, not hard and fast rules. Some look at market concepts literally, believing they are true-life entities, rather than just abstract concepts. An intuitive trader looks at the markets in a figurative sense. All signals and indicators are subjective in the end, may be a little inaccurate, and are a mere approximation of reality. There's a good chance they will be wrong and that's all right. 


When it comes to the markets, it's generally advantageous to be an intuitive trader. Reading charts and getting a feel for the markets is subjective in the end. Trading decisions are merely based on educated guesses, attempting to put the odds so-to-speak in our favor. It isn't exact, but random, unpredictable, and conceptual. It's not linear, matter of fact, and predictable. Because the markets are so complex and chaotic, it takes intuition, hunches, and a kind of creative and artful mastery to win consistently. The logical analysis of facts and figures can only go so far when you are trying to trade the markets, which have inaccurate figures and are largely inexact. So if you are a "natural" intuitive type, you've got a head start. And if you are a data-oriented, sensor, try to nurture your more intuitive side. Experience in and of itself will often help develop the intuitive, present in all of us, even if you are the cold, hard facts type of person. Become an intuitive trader, and you'll see your profits grow.


Reprint from the Prudent Trader archives

Friday, October 17, 2014

When The Coach Goes Home

Always do your best. What you plant now, you will harvest later.
Og Mandino

All external motivation is temporary. External motivation is the kind that may wake you up, but it will not keep you awake for long. External motivation is motivation that comes to you from the outside. It may, and it often does, influence you to make a change, it cannot however make the change for you. And it cannot keep you from drifting off course, when the motivator is gone. 


Many of you in your school years played sports. If you played and were fortunate enough to have an exceptional coach, you knew that he expected a lot from you but he also gave you lots of encouragement. He picked you up when you were down, he made you believe that you could win, and he let you know when you did a good job. He was a great motivator and he took your team all the way to the top. He was your friend, your ally, and your strongest supporter. You relied on him for your motivation and you got it. 


The school year is over and you graduate moving on to college or the work force and the coach goes home. What does he take home with him? Your motivation, that's what! He was your motivation. Now you must receive your motivation from somewhere else, because the motivation was external and now it is gone. All external motivation works the same way. Keep giving us motivation and we will do better, take it away and we will gradually move back to where we were before the motivation began. 


That is why so many of the hopeful at so many motivational talks get so excited, full of energy, and then slow down or stop dead in their tracks within a few days or a few weeks. The inspiration is no longer there, because the speaker has left town. It takes more than a great speech to erase and replace those internal programs, which tell us we should know better than to believe that we are powerful champions of success. 


An hour or two of someone else telling us the "we can do it!" simply does not have a chance. The intentions were great, the talk inspiring the ideas incredible. But when the coach goes home - so does the motivation. 


I am not saying, or even implying that one should not to attend those seminars, or buy the books, or listen to cassettes. They all help, they all generate ideas, and this one may begin to move you in the right direction. Just do not overestimate the outcome unless you have truly unclogged your mind of most all of your previous negative thinking.


Reprint from Prudent Trader Archives

Friday, October 10, 2014

Are You Open to All Possibilities?

The possibilities are numerous once we decide to act and not react.        George Bernard Shaw

Winning traders are flexible. They look at a trade from different angles and they are not afraid to explore alternatives. Good traders know and understand they may be wrong, but being wrong doesn't bother them. It is crucial to be flexible when examining all the possibilities. If you rigidly adhere to one course of action, you may pay the price for it in terms of losses. Try to be as flexible as possible, and you'll see more profits. 


The greatest obstacle to being flexible and open to different possibilities is fear. When we think we are about to experience harm, it is so very important for our survival, that we mobilize our resources and focus our energy, on the source of harm. It is the same with trading when we experience fear and potential harm. When we unconsciously perceive something may be wrong, we instinctively focus our attention on the harmful agent. Rather than scanning and considering a variety of options, we restrict our attention. 


Fear can sometimes play a role as we devise a trading plan. Some traders secretly fear that their plan is unlikely to succeed. Rather than carefully consider all possible adverse conditions, this trader focuses on only one possibility and develops no alternative plan of attack should an unwanted event thwart the trading plan. For example, one may anticipate a stock rising, yet secretly doubt whether the move will pan out. Out of fear, this trader may be afraid to consider and account for possible adverse events, such as earnings reports, a possible interest rate hike, or a sudden change in general market sentiment. The flexible trader, in contrast, has no fear of looking at all these possibilities, and determining which are likely. Openness to all possibilities allows the flexible trader to change his or her plans if required, and recover from a potential setback. 


People are the most inflexible when they are afraid, so the best antidote is to reduce fear. Fear can be reduced by managing risk. If you know that you can survive the worst-case scenario, then you'll feel calm and relaxed. Similarly, if you trade with money you can afford to lose, you'll have little to fear and you can more easily examine all possible alternative factors that may impact your trading plan. By cultivating a relaxed mindset, you will be less fearful and more open to looking at all the possibilities. And the more flexible you are, the more profitably you'll trade.


Reprint from Prudent Trader Archives

Friday, September 19, 2014

Knowing When to Stand Aside

You gotta know when to hold 'em, know when to fold 'em, know when to walk away, know when to run.
Kenny Rogers
In addition to knowing when to buy and when to sell it's equally important to know when to stay out of the markets and in cash. When market conditions aren't conducive to profitable tradition, just stand aside. Even seasoned professionals frequently step back and reevaluate their methods. Old market cliche' when in doubt, stay out! Do not be afraid to acknowledge your limitations, do not force trades, take a rest, and enter the markets when you're ready. There are many practical reasons for standing aside.
You may feel tired, down, or just not feeling at your best. At times like these it is best to stand aside until you are rested and can return to the positive objective mindset you need for trading. If your psychological resources are depleted you may act emotionally and or impulsively. If you are tempted to trade when your psychological resources are depleted you risk putting on bad trade after bad trade, not only will your account balance be hit so will your ego.
Another good reason to stay out of the markets is when your method seems to cease to have its winning edge. No trading method works indefinitely. When market conditions change, even a "foolproof" method can stop working. Don't make this situation even worse by continuing to trade. When a method stops working, it can really stop working. Your account balance will decline with each trade.
Most professionals often say that they are at their best when their old method starts to falter and they have to devise a new one. They view the situation as a puzzle they must solve. They step away from the markets, and take a close look at their methods. They try to identify what went wrong with the method, and look forward to tweaking it until it works again. They search for market factors that may have changed, and when they think they have found the solution, they put on a few small trades to test out their new, revised method. So when your method stops working, don't continue trading at the same level of activity. Step back, look things over, and wait until conditions are just right before entering.
Trading profitably requires that you keep track of the market moods and your psychological moods. When either one is not conducive to trading, it's best to stand aside and wait for the situation to change. By staying out of the markets, you can survive to trade another day, when you're in a peak performance mental state and the market conditions are optimal.
Reprint from Prudent Trader Archives 2005

Friday, September 12, 2014

Sticking To Your Plan

Every fighter has to go in there with a game plan. 
Rau'Shee Warren

New traders often say they have difficulty sticking with their trading plan. There are many possible reasons. A common issue is not having a clearly defined plan. When a trading plan is not clearly defined, it becomes hard to follow, easy to abandon. You may be prone to over-thinking your plan or you may become easily consumed with self-doubt. When you clearly define a plan, in contrast, you can implement it more automatically. You can enter and exit more effortlessly. Many traders say, however, that even when they painstakingly outline a trading plan, they still have difficulty following it. This may have much more to do with your personality, than your particular plan.

People who are disciplined in everyday life, ironically, tend to have the most trouble sticking with trading plans. Disciplined people are rule followers, and research studies have shown that rule followers prefer certainty. Anyone who has traded the markets for a few months soon realizes that the markets are not certain, and conventional wisdom is not consistently valid. Oddly enough, people who are impulsive in everyday life have less difficulty following a trading plan. They view trading the markets as a "game", they enjoy the risk. They have a natural, carefree attitude when it comes to trading as with the rest of life. They can easily think, "Why not follow a plan? It doesn't matter if it goes awry."

Most traders have trouble approaching trading with a carefree attitude. As an example, you see the price rise initially then it stalls before reaching your objective. You begin to think, "How much longer can it go up? I can't wait. I've got to sell and lock in my profits right now." You start thinking, "Don't be greedy can it be a bad thing to get out early and get a profit?" Now it becomes extremely difficult stay. All of a sudden you have abandoned your plan when economic success depends upon your staying the course. It's simple mathematics. Although there may be several profitable trade setups out there, finding a really good one is relatively rare. You'll see many more setups that don't pan out than actually do. When you hit upon one, you must capitalize on it, and maximize your profits, getting as much out of the trade as possible.

If you are a natural born risk taker, sticking with your plan is less difficult. Risk takers get a rush from the trade and can't wait to see what happens. The psychological rush is more enjoyable, in some ways, than the outcome. But most of us are naturally worried about the outcome and a little cautious voice nags us to get out of a trade before it comes to fruition.

How do you quiet this voice of caution? Not easily that's for sure. I think the best thing you can do is to manage risk. If the outcome of the trade truly doesn't matter, then you won't worry as much and can stick with your trading plan. Winning traders view trading as a game, they think, "I'm just trading for fun." They look at a trade and think, I want to see if it reaches my objective or not. They are a student of the markets. The learning experience is more important than the outcome. Winning traders are not only players of the game, but observers. If you can cultivate such an attitude, you'll be able to follow your trading plan, and silence the voice of self-doubt that often thwarts your trading efforts.


Reprint from Prudent Trader Archives 2005

Thursday, September 4, 2014

Disconnect Yourelf

Every single day the world seems like it is on the brink of falling apart. But then I look outside my window, and things look about the same as they did a week ago. It's almost a form of cognitive dissonance....Moby
When your self-esteem is not on the line, odds are you are trading objectively. All that is on the line then is mere money. There is an old cliché that states "Don't let your net worth define your self worth." This is not to say that making money is not important but it must be put in its proper perspective. Your overall trading over time is not dependent upon your next trade alone. The fact that your last trade was very profitable does not in and of itself make you a genius, therefore the converse becomes true, if your last trade was a loss or even part of a series of losses, it does not make you dumb or a loser. To the extent that you can trade with a logical and unemotional mindset the more effortlessly and profitably you will trade, most of the time.


This is much easier said than done. Although you will find performance is best when the outcome truly does not matter, it is very difficult to set up such circumstances. Outcomes often do indeed matter and disconnecting yourself from trading outcomes is emotionally difficult. In several research studies, it has been demonstrated that performance is hampered when outcomes are tied to your sense of self, or your ability to satisfy basic psychological or emotional needs. For example, when the outcome of a trade impacts your sense of security or identity, the pressure is on, and it will be hard to perform under the pressure. Relieving the pressure will improve your ability to perform.


The ideal situation, for example, is a multi-millionaire who can afford to make several losing trades and lose $5,000 a day with relatively few scars. Most of us, however, are not that fortunate. Perhaps the next best scenario is the trader who has a relatively small trading account and uses the profits from it to pay monthly leisure expenses, such as gourmet dinners or extra luxury items. If the losses really don't matter, the pressure will be lessened. Most traders however are not in one of those positions.


When traders become interested in trading for a living, that's when trading becomes really difficult. Be it the lone trader trying to support a family or the professional hedge fund manager trading clients' money. The outcomes of trades do matter. If too much money is lost, you do not survive economically. The psychological impact can be substantial. Your identity is usually closely linked to being a good provider, a successful member of society. When you lose a lot of money, your sense of self and self-esteem is diminished. In the back of your mind, you always know that should losses mount too drastically, you can actually be harmed financially and psychologically.


So how do you disconnect yourself from trading outcomes? Preventative measures can be taken. First, one can manage risk. If you know that it is unlikely that the outcome of a series of losing trades can hurt you, you'll feel more at ease and be able to remain calm and objective. Second, you must have a sense of self that is defined in many different ways. For example, don't just define yourself as "a trader." View yourself from multiple perspectives: a good friend, a loving spouse, a caring parent, and an upstanding citizen. Multiple views of oneself will lessen the importance of maintaining the view of oneself as "the winning trader," and will ease some of the psychological pressure. The more you can disconnect your trading performance from your sense of self, the more you can trade logically, effortlessly, and profitably.
Reprint from Prudent Trader Archives (2005)

Thursday, August 28, 2014

Increasing Your Odds

When something is important enough, you do it even if the odds are not in your favor.Elon Musk

Trading is a profession where you can often times find yourself working against the prevailing odds. It's not like anyone can walk in off the street and start making profits on a consistent basis. Unless you take evasive action against adverse market forces, you may fall victim to overwhelming odds. Skilled traders, however, know how to put the odds in their favor, and you can too.


Trading brings out two emotions, self-doubt and overconfidence, you need to balance these two emotions carefully. Newer traders are usually optimistic at first, that is quite normal, but soon find out that trading is difficult. The markets are in many respects unpredictable and winning streaks often turn into losing streaks. The original overconfidence easily turns to disappointment and self-doubt. Avoid becoming too pessimistic or you'll never be able to pick yourself up and try again. What usually happens, though, is that you become overly arrogant to protect your ego. You may try to psych yourself up and try to beat the odds. Thinking optimistically is good, use your optimism effectively. Do not arrogantly think you know how to trade before you've built up the necessary skills. Do not take unnecessary risks and think that you can beat the markets with shear will. Persistence without the proper amount of skill will get you nowhere. Study, practice, and learn in order to build up the necessary level of skill to trade consistently. Set learning goals rather than performance goals. In other words, reward yourself for learning techniques at first, and when you are ready, you can set an overall profit goal.


Acknowledge your risks up front. Trading involves risk, learn to admit it. Traders try for the big profits, and they are ready to take the risk and the responsibility. The difference between the professionals and the amateurs is that risk is carefully managed. Since you are trying to capitalize on winning odds, your survival depends on your anticipation of a string of losing trades. That means looking at the risk to reward ratio before entering a trade, making sure that you have a large enough account to take the risk, and if you do not, reduce your position size to suit your account or stand aside and wait for a trade you can take. Risk management is a trader's secret weapon, use is to survive over the long haul.


Finally, you must use reliable trading strategies. This is so much easier said than done. You can not expect to profit if your trading strategy is flawed. But it is hard to know when it's flawed or just not working because of less than optimal market conditions for that strategy. All the trading books and experts warn "Do not abandon a trading strategy prematurely." It is not wise to jump from strategy to strategy, but what is "prematurely"? Based on probability theory, even a winning strategy can produce a string of losers and a severe drawdown, so sticking with a sound strategy too long when it's not working is going to wipe out your trading account. The best you can do is decide how much of your trading capital you will risk on the strategy up front, and if you lose that predetermined stake, move on. Trading is challenging and unless you are prepared, there are forces that put the odds against you. With the right mindset and proper risk control, however, you can move the odds in your favor, and achieve consistent profitability.


Reprint from the Prudent Trader archives

Tuesday, August 26, 2014

Index Pivot Points - 3 Time Frames

There are several different methods for calculating pivot points, the most common of which is the five point system; two support and two resistance levels.  The calculation utilize today's high, low, and close and offsets the data by one day on the chart.


If you are chomping at the bit to go short, why not wait until a pivot in your time frame gives way. What's your time frame of reference?

Thursday, August 21, 2014

Risk Aversion: The Trader's Handicap

Whatever failures I have known, whatever errors I have committed, whatever follies I have witnessed in private and public life have been the consequence of action without thought.
Bernard Baruch

You have often heard the sage advice, "Cut your losses short, let your winners run." Do you have trouble following it? Based on experience, you may think letting your winners run is easier said than done. It is not a good idea to let a losing trade mount losses to the point that the entire position is wiped out, but it's often not easy to hit upon a winning trade, and then, just sit back and let it ride. There's a strong temptation to take profits. You also are aware of the old cliché, "No one ever got hurt taking a profit?" Why you can not just let this winning trade run just a little longer. An analysis of your trade diary entries shows that if you could have held out a little longer, you would have made substantially more profits. Many traders hate to lose, and when they see a winning trade materialize, they want to lock in the profits and insure a win. Whatever you call it, it is still risk aversion. For some strange reason we are quite willing to gamble with losses, but when it comes to wins, we will take a sure thing over a gamble any day. Risk aversion is surely a weakness of many traders. If it can be beaten, traders can make significantly greater profits.

Why is risk aversion a problem? Why not just take small profits across a series of trades? It all depends on how successful your methods are. If you have methods that works 90% of the time, then you can take small profits and come out profitably overall. Unfortunately, most traders have a track record that is much lower than 90%. Obviously then for your economic survival, you must make larger profits on your winning trades. 

The sting of several losing trades can impact your pride and your ego. Losing even greater amounts of money by letting a winning trade turn into a losing trade is even harder to accept. Your conscience often tells you, "Sell now before it is too late." There isn't a simple solution to this problem. Profits can be hard to come by in the trading world; it's hard for many to risk losing a profit once they see they can lock it in by selling early. It may be hard to swallow, but winning traders tend to be those kinds of people who actually enjoy risk. They are happy to see they have hit upon a winning set of circumstances and they can't wait to see what happens. They want to push the limits and see if they can squeeze out as much profit as possible. If you aren't a natural born risk taker, it may be difficult for you to hold out and avoid selling early. If you are the kind of person who feels uneasy while a position is in motion, you may have to make an extra effort to let your profits run. One strategy is to sell off increments of the position as it rises in value so that you can ease some of the psychological pressure gradually. By taking a little bit of profits at a time, you can feel an ever-increasing sense of safety.

It is essential that you trade with money you can afford to lose. The reason most traders are risk averse is that they are trading with money they need for basic living expenses. Thus, they are risking their safety and security, and this puts added pressure on them to perform. It isn't surprising that under these circumstances, one has trouble taking risks once a position starts to increase in value. You can come up with all the rationalizations you want, but if you trade with money you deeply care about, you'll have trouble risking it, and "to make money, you must risk money." You must manage risk, and that's hard to do if you don't have a large trading account. An large trading account allows the trader to risk as little as 1, 2, or3% on a single trade and still make a substantial profit. Risk aversion is a handicap. It's hard to beat it, but many do. If you are one of the few lucky ones, you will realize substantial profits and trade consistently and profitably.


Reprint from 2005 PrudentTrader Newsletter

Tuesday, August 19, 2014

Zweig Breadth Thrust

A "Breadth Thrust" occurs when, during a 10-day period, the Breadth Thrust indicator rises from below 40% to above 61.5%. A "Thrust" indicates that the stock market has rapidly changed from an oversold condition to one of strength, but has not yet become overbought. According to Dr. Zweig, there have only been fourteen Breadth Thrusts since 1945. The average gain following these fourteen Thrusts was 24.6% in an average time-frame of eleven months. Dr. Zweig also points out that most bull markets begin with a Breadth Thrust.
According to RSInvestor Market Research the Zweig Breadth Thrust  triggers very infrequently. The idea behind the indicator is that stocks turn up sharply from oversold, but are not yet overbought. Dr. Zweig found that anytime the value goes from below 40 to above 60.5 within 10 days, the likelihood of a new bull market is quite high.  It doesn't happen very often, (only 15 times since 1945) but when it does, he claims that the average return over the next 11 months is 24.6%.
The calculation are as follows:
  • Find the number of advancing stocks
  • Find the number of declining stocks
  • Calculate the 10-day, exponential moving average (MA) of each
  • Zweig Breadth Thrust = (MA of Advancing) / (MA of Advancing + MA of Declining)
Chart from Last Night


Not quite, However, see that second dip below 40? That could trigger another count. In that case we have another day or two to make it. Stay Tuned!

Friday, August 15, 2014

The Right Mindset

I think anything is possible
if you have the mindset
and the will and desire
to do it and put the time in.
Roger Clemens

Trading requires cultivating the right mindset. You must be relaxed, logical, perceptive, and ready to tackle anything the market throws at you. Unfortunately, this sounds much easier than it actually is. Trading is a difficult profession with unique issues that other professionals do not deal with. If you can identify these issues, address them, and halt their influence, you can cultivate the mindset of a winning trader.

Why is trading more difficult than other occupations? In many professions, a group of scholars have clearly defined foolproof ways to gain success. And the leaders of a particular profession argue that if one follows these well-proven pearls of wisdom, success will surely follow. In most professions, these claims are somewhat supported, but when it comes to trading not so. Many so-called trading gurus claim to have discovered the Holy Grail, but oftentimes these claims only offer false hope to those seeking easy money. Think for a moment, I read an advertisement recently claiming 900% in 5 years. That is 180% per year. Take $10,000 at 180% per year and using the rule of 72 your money doubles approximately every 3 months. That means in 5 years your $10,000 is equal to $1,721,036, why are you working? Why are you promoting and selling this system? Think!

Seasoned traders warn, for example, "Do not trust anything you read or anything you hear." The general consensus is that most of the information out there about how to trade is suspect, and that the only way you'll ever separate the truth from the fiction is to try it all out and find out for yourself just what works and what does not. Seasoned traders also warn, "There are no universal rules for traders to follow." Conventional wisdom is only correct when it is correct. History only repeats itself when it does. Lack of consistency in the rules of the market and in how the market behaves can be disheartening. Many seasoned traders warn, "Trading is a profession where you should go in assuming you'll lose more money than you'll make." Considering this advice, it is no wonder that novice traders have difficulty cultivating the right mindset. Trading consistently seems difficult if not impossible.

The good news -> It is still possible to overcome these limitations. First, it's vital to remember that there are indeed actual traders who have studied the markets over years, made efforts to build up trading skills, and became profitable. You can't turn a $5,000 online investor account into a fortune, but with the proper trading plan, the proper attitude, and with a few simple trading rules designed by you and for you, you can become a very successful trader. Again, it's just a matter of having realistic expectations, the proper training and mentorship, and the necessary experience to trade under a variety of market conditions.

Second, the right attitude is also essential. Once you face the fact that trading is not easy money, or that you won't become rich overnight, you'll be able to prepare yourself mentally. It is merely accepting a few disconcerting facts about trading. If you know that you need a sufficient amount of capital to survive the learning curve and the draw downs, you'll manage risk properly in order to have as much trading capital as possible to invest. If you expect more losing trades than winners, you won't be disappointed when you face losing trade upon losing trade. When you know that your seemingly foolproof trading strategy is bound to fail when the market conditions change, you won't be very upset when it does indeed start to fail. By facing the cold, hard facts about the pitfalls of trading, you'll neutralize them.

Trading is a challenging profession, but there are many traders who have met the challenge and have the winning track record to show for it. By meeting the challenge through hard work and dedication, you can also be a member of this small, elite group of winning traders.


Reprint from Prudent Trader August 2005

Wednesday, August 13, 2014

Investor Scorecard

The theory behind this idea was to run a series of back tests against various instruments, looking only for, or at expectancy.  Not the amount of profit, just that fact that a profit was produced.
I ran the backtests against 6 criteria:
  • Relative Strength as measured against the Total Stock Market.
  • Relative Strength as measured against a fixed return of 10% per annum.
  • Linear regression slope of the moving average of $ weighted Advancing minus declining volume.
  • Relative position of my Dollar weighted buying power.
  • Linear regression slope of the moving average of the A/D line of the sector or index (as opposed to the NYSE or NASDAQ A/D line).
  • Finally a Linear regression slope of the moving average of the McClellan Summation index, again calculated on the sector or index.
The plus and minus signs below describe the state of that indicator, positive or negative.  A composite score of all the tests is calculated and printed. The last four columns are an estimate of the Hurst Cycles. The scorecard is run against Morningstar sectors and industry groups, and 19 indexes.  A modified version against selected ETFs by asset class.

This is run weekly for members. If you would like to compare today’s run against the 19 indexes values on April 16 of this year, click HERE! 

Friday, August 8, 2014

Becoming A Highly Motivated Trader

Our greatest weakness lies in giving up. The most certain way to succeed is always to try just one more time.Thomas A. Edison

Are you a relatively new to trading?  Are you frustrated and ready to give up? You have read many of the trading books, followed all the trading "gurus," and worked tirelessly. Yet, despite all your efforts, your account is lagging badly. 

Save heart, your experience is common. When you start out, new traders are excited. They dream of success, the recognition that huge profits will bring. Some indeed achieve early success, but many soon discover that achieving success consistently can be elusive. Many people are drawn to trading, but few can trade profitability. The winning trader is a special breed, a person who is highly motivated, but at the same time is realistic and able to persist in the face of adversity, this describes, I am quit sure, most many of you.


It's easy to get yourself "psyched up" when you first start out: You merely convince yourself, "All I have to do is apply myself and I'll achieve high profitability." This is a good positive attitude, but the "power of positive thinking" doesn't usually go very far in terms of achieving trading success. It makes you feel good, but then you find that hard work and persistence does not necessarily pay off. You need sound trading strategies you need to expose yourself to a variety of market conditions, and you must hone your trading skills. Successful trading requires talent, and there's no way to develop one's talents without extensive practice. Just think of your favorite sports hero, how often and for how long have they trained and practiced to develop their talent?


While a positive attitude is very good, a healthy skepticism is paramount. When it comes to trading, you can't believe anything your read or hear. The only time you actually know that you've stumbled upon a profitable trading strategy is when it, indeed, produces a profit. Just convincing yourself you can master the markets with sheer determination and willpower will not get you very far. You must accept the fact that, in the end, trading is like a game, a game of probabilities. Obviously you must take it seriously on one hand, but you must also learn to enjoy the process. Experienced traders take the game seriously, they acknowledge that real money is on the line and it is likely that real losses can wipe out one's account. They address this issue utilizing money and risk management (money management on your total account and risk management on individual trades). No trading strategy is foolproof.


Realize that despite all your efforts, it is quite possible that some unforeseen adverse event can go against your trade, or that current market conditions may just not be conducive to your trading plan. That's where a happy-go-lucky attitude comes in. I believe it's important to view trading like a sport. If you score the winning point, fine. But if you miss it, don't get too bogged down. Just pick yourself up and try again. Eventually, with enough practice and experience, you will move into the realm of the seasoned professional. It is not going to happen over night. It will take time and practice. And that's where the motivation comes in. It is easy to stay motivated for a short time, if you think the payoff will be large and relatively immediate. Trading is a profession where you can go through long periods with little progress. Over the years, a great deal of money will be spent on commissions, losses, apparatus, and instructional materials. 

The would-be professional trader isn't fazed by it all. He or she views the money spent on trading as similar to what any professional spends on college tuition. He or she believes that eventually, his or her time and effort will pay off. The winning trader is highly motivated. He or she admits that trading is a challenge and that success is far from assured. Despite this harsh reality, the winning trader persists until he or she achieves consistent profitability.


Tuesday, August 5, 2014

S&P + Morningstar Sector Watch

For members, I maintain rankings of Fidelity Select Funds by relative strength. The performance over the last 25 years or so has been exemplary with risk adjusted annual returns in excess of 12% and 13% (depending upon the number of funds rotated). The problem with this method is the draw downs can be quite severe at times, and I am aware of the public's propensity to panic at bottoms. Attempting to utilize a market timing technique based upon a major market average actually worsened performance; reducing the returns with even larger draw downs. 

Reason: markets top and bottom Sector by sector.  A sell signal may have occurred on a major average but our sector long position did not top, even advanced for awhile longer. That gain was lost due to the major average sell. A buy signal and buying the top ranked found that they had already moved a bit. Conclusion follow sectors and not the major averages.

Sector Watch: I have found over the years that stocks in an Overweight position surprises tend to the positive side. Those with underweight the reverse. If you are a bull look to buy the over weights, a bear look to short the under weights.






Thursday, July 31, 2014

The Big Win

The will to win, the desire to succeed, the urge to reach your full potential... these are the keys that will unlock the door to personal excellence.Confucius

Most new traders dream of making the ultimate trade, the big win that will set them up for life. Perhaps by chance, you just happen to hold a large position in a company that the masses have decided is going to go through the roof, and the price shoots up for no sound reason. 

Whatever the circumstances we all dream of making that big, exciting trade, the killing. Ask many seasoned traders about their biggest winning trades, and they will recount those few times where luck was on their side. Although no story is the same, many of the tales of success concern holding a huge position and being at the right place at the right time. As fun and exciting as these stories are to hear, you must put them in proper perspective. Planning on making a few lucky trades is much like hoping to win the lottery; it may happen, but it isn't something that you should count on. The most prudent way to make money trading is to work at it consistently, and through hard work and persistence, make steady profits.

Profitable trading is carefully planning your entry and exit strategies, your risk control, your money management skills. These strategies will not make you rich overnight, but they will help you make small steady progress over time. Some trades will be winners and some will be losers. Once you develop rock-solid trading skills, you will make steady profits and the odds of hitting that big one will increase with your skills. Eventually you'll see your profits begin to grow exponentially, but none of this will happen if you continue to fantasize about making the big winning miracle trade.


It may be fun to daydream of how the markets will move in your favor and make you a millionaire from a single trade, but that's unlikely to happen. In addition, hoping for such a lucky event is bound to distract you from what you actually need to do to become a consistently profitable trader: You need to learn to trade systematically, objectively, and consciously. Only then will you make the profits you desire.

Tuesday, July 29, 2014

Ranking the World by Relative Strength - 4 Time Frames

Relative strength is an important and often misunderstood investment thesis. In 1998 UCLA professors Narisimhan Jegadeesh and Sheridan Titman did some tests utilizing relative strength over several different time frames. They found a direct statistically significant correlation between relative strength and later price performance up to 12 months later. The most consistent period for defining the initial relative strength was six months.
There are numerous academic and research papers out there, do a little research to find them. Other proponents of relative strength include but are not limited to: Bill O'Neal (I B D), James P O'Shaughnessy (What Works on Wall Street), and Charles Kirkpatrick (CMT) and author of several technical analysis and trading books.
Today I'll rank International markets by relative strength over 4 time frames. Compare to the last time I ran this screen April 10 of this year.  HERE!  The sort is by 3 month relative strength.

Monday, July 21, 2014

Sector Watch

While everyone seems to be concentrating on the S&P 500, the NASDAQ 100, or one of the Russell Indices. These major averages consist of many market sectors and it is the sector rotation that often keeps them moving in one direction or the other. Major averages also top and bottom, sector by sector, not all at once.

Using our relative strength analysis to define over and under weights along with market perform here is how the Morningstar sectors look at the moment:


Ask yourself if you are bullish would you be better off with a major average or a sector ETF representing one of the overweight sectors? And of course vice versa if you are bearish? 

Friday, July 18, 2014

Comparing Yourself to Other Traders

When you are content to be simply yourself and don't compare or compete, everybody will respect you. Lao Tzu
You have been trading for only a short while, let us say two years or less. Perhaps your performance isn't spectacular, but it isn't too bad either. You've made a decent return. Are you satisfied? Or have you been reading "Market Wizards" and reading posts on trading websites, and you can't understand why your performance isn't better. "Why are my profits so small compared to everyone else? I must really be a loser," you think. You have just made an understandable, but fundamental mistake. You have compared yourself to other traders, noted that you aren't doing as well, and have concluded that you are inadequate. Although comparing ourselves to others can help motivate us to do better, it can also be very discouraging in that it tends to be more detrimental than beneficial. Avoid making such comparisons.


Why do we compare ourselves to others? There are a variety of possible reasons. Perhaps because our parents or teachers taught us that we should do better than our peers, and gauging the relative performance of others is the best way to do that. It could be that many times, we don't know what "good" performance is and it makes sense to see how others are doing so as to get an accurate picture of what is acceptable. It makes sense to wonder about other trader's performance. Most novice traders quit within a year. Many are curious as to whether it is even possible to achieve profitability. (It is possible, but it is extremely important to understand the conditions under which consistent profitability occurs). If you are "new" you should know that some traders are able to maintain a consistent level of profitability only after years of hard work and skill building. Knowing that trading consistently is feasible will motivate you. If you know that it is possible to make a profit, you'll work hard because you know that there is a certain payoff in the end. Often, however, comparing ourselves to others can do more harm than good.


Each trader has his or her own personal history that he / she brings into trading. People differ in terms of personality, investment capital, life experiences, and the market conditions under which they trade. Any or all of these factors can influence one's trading performance. It makes no sense to beat yourself up because you haven't achieved a level of performance equal to someone else who may have had advantages that you didn't have. The only person you can compare yourself to is you. If you make any comparisons at all, it should be against your own past performance, not someone else's. You should only examine your past performance in relation to similar market conditions. If you made a 30% profit in the up trending market of the past year, for example, you shouldn't berate yourself for performing less well in prior not so trending markets.


Successful people in all fields avoid making comparisons to others. In the end, the only person's opinion that matters is your own. If you believe you are doing well, then that is all that matters. So when you find yourself comparing yourself to others, stop. Look inward. It is just you, the markets, and no one else. The more you can focus on your own standards, the more profitable you'll be.