Thursday, September 24, 2015

Don't Quit

Quitting is the easiest thing to do.
Robert Kiyosaki
A few years ago I copied down a poem called "Don't Quit". One of the lines; "stick to the fight when you're hardest hit - It's when things seem worst that you mustn't quit.

Most often when plans go awry, all we can think of is our conditions worsening. However, it is usually at this time that our greatest growth can occur, if we see the moment as a growth opportunity. If we see it as a time to learn how to control our thoughts towards the ends we desire.

With the market volatility and whipsawing accounts many are experiencing these days I thought it apropos: 

Don't Quite

When things go wrong as they sometimes will, 
When the road you're trudging seems all uphill. 
When the funds are low and the debts are high, 
And you want to smile, but you have to sigh. 
When care is pressing you down a bit, 
Rest if you must, but don't you quit.

Life is queer with its twists and turns,
As everyone of us sometimes learns. 
And many a fellow turns about, 
When he might have won had he stuck it out.
Don't give up though the pace seems slow, 
You may succeed with another blow. 

Often the goal is nearer than 
It seems to a faint and faltering man. 
Often the struggler has given up, 
When he might have captured the victor’s cup. 
And he learned too late when the night came down, 
How close he was to the golden crown. 
Success is failure turned inside out, 
The silver tint of the clouds of doubt. 
And you never can tell how close you are, 
It may be near when it seems afar. 
So stick to the fight when you're hardest hit, 
It is when things seem worst that you mustn’t quit. 

Thursday, September 17, 2015

Concentrate On The Big Picture

Details create the big picture.
Sanford I. Weill
When you're having a tough time of it, it is easy to get bogged down. You find yourself thinking totally about the current trade you are about to make; you desperately want it to be a winner. Instead concentrate on the big picture. Especially at times like this it's important to remember that this is merely one trade among the many you will make, and the outcome of a single trade is not relevant to the total picture of your trading account. All that is important is at the end of your accounting period, across a series of trades that you come out ahead. When you are in a slump looking at the big picture can do a lot to make you feel better, and when you're feeling better your better apt to make that trade.

BigPictureWhen you are looking at the big picture, think in terms of probabilities. Across a series of trades, if you are following a sound trading plan with sound money management and risk parameters you will need only one in three to be successful in order to be successful overall. Unfortunately when we trade we do not win one and lose two then win again. In the real world we may lose 5 in a row, then profit on 3 of the next four, then 4 of the next eight and so on. But if we are overall winning one in three we should be just fine (Review Money & Risk Management ). So maybe you've lost four in a row and the next will be number 5, but in the big picture we find we are doing just fine. In fact a very good friend of mine, we were brokers together, used to cheer out loud when he took a loss, he would say hey I'm getting closer to a big win 
In a purely mathematical sense, it isn't possible to estimate the odds that a trading strategy
is expected to produce a win, since the strategy cannot be repeated an infinite number of times under the exact same conditions. The best we can do is use historical data to see how well the trading strategy worked in the past, and assume it will work in the future when similar market conditions occur. 

Ideally, historical data should provide evidence that your strategy will give you enough of an "edge" to come out ahead. Since you never really know how well a trading strategy will work until you try it under current market conditions, it is extremely important to control risk.
Unless you control risk, then a single trade may actually be quite significant. It's a good idea however, to minimize the significance of a single trade in terms of your overall capital so that it won't hurt very badly should it go sour. By managing risk and trading high quality setups, you can more easily think in terms of probabilities. That is, a single trading outcome will actually be minimal compared to a large set of outcomes. From a purely psychological sense, think of outcomes as just one among a series. It will take some of the pressure off of you. You will not tend to think that every trade needs to be a winner, which can be very stressful, and you will be more relaxed if you look at the bigger picture.

Thursday, September 10, 2015

Dealing With The Unexpected

To expect the unexpected shows a thoroughly modern intellect.
Oscar Wilde

Experienced, winning traders try to stay in control by not letting their emotions influence their decisions even when the unexpected crops up. It is quite normal when we are caught off guard to react emotionally, that is human nature, however, one of the best ways to handle getting caught off guard is to remain calm and logical, which in turn will reduce our psychological stress. 

Trading in and of itself is stressful. With each trade your money is on the line and you are aware that you may have to deal with a loss and perhaps a blow to your ego. You have to take it all in stride and not allow yourself to be overwhelmed by it all. Feeling flustered is very natural but you need to reduce as much background stress as is humanly possible. When background stress is great, even a minor setback can set you off. Instead of flying off the handle prematurely, it is better to reduce background stress, and thus, increase your ability to handle unanticipated events. 

In addition to managing background stress, it is also important to anticipate as many possible adverse events as possible. It is impossible to anticipate everything that can go wrong, but the more you can specify what can go wrong, and have a plan to deal with it, the more you'll be able to handle the event when it happens. For example, be aware that earnings reports, rate hikes, or major political events can impact the markets and play havoc with your trading plan. If you get caught off guard, you may not handle the situation very well. You may get overly angry or frustrated, and act on impulse, rather than calmly and rationally. But if you decide beforehand how you will deal with the event, you'll react more decisively. 

Being on-guard and ready to take action, and you will get through unanticipated adverse events without getting bogged down by them. The more you can reduce background stress and react to unanticipated events decisively, the more profitably you will trade in the long run.