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.

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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