Wednesday, January 28, 2015

Let Go of the Past

When I let go of what I am, I become what I might be.
Lao Tzu

What are your worst losing trades? Do they haunt you? It is important to learn from your mistakes and to the extent that you can do that objectively and unemotionally. I am well aware it is not easy, but it is often necessary to now forget about the past and think of tomorrow. Once you have learned from your losing trades it is no longer necessary or desirable to think about them. Get rid of the baggage and remove historical emotions from your trading. It is important for your long-term success to neutralize the influence of these memories. Your past doesn't need to influence your future. It only has an impact if you let it. 


When everything seems to be going wrong, it is hard not to panic, especially if you are a new trader. Your emotions may start to take over. You may start to fear that you can't make profitable trades that you just want to walk away. Your past emotional baggage can intensify these feelings to the point that you start making stupid mistakes and dig yourself even deeper into a hole. 


There is a lot you can do to put aside these past memories and start your trading anew. The first thing you need to do is acknowledge your past losing trades. Don't pretend that they didn't happen or that they have no meaning, when you actually place a great deal of significance on them. You don't have to over-analyze, merely acknowledge that you had some past losing trades and that they bother you. You need to acknowledge that you may place losing trades in the future, but you aren't going to let that fact hinder you. In addition you need to realize that your past does not dictate the future. Believing that the past and future are linked is a common irrational belief that you must refute. Remind yourself that you can take steps to overcome a potential losing trade. For example, you can limit your risk so that you will know deep down that it is virtually impossible to have a losing trade in the future that can have any real great significance. You can also make a list of past winning trades that you can pull out and review while in the midst of a current loser to remind yourself that you can overcome your current circumstances by calming down, thinking positively, and taking decisive action. You can tell yourself encouraging thoughts, such as "It's no big deal. I can endure. I can get through this if I just calm down." 

Knowing that you have an action plan for dealing with an emotional setback can do wonders. If you know that you have a specific plan ready to put into action, you'll feel a sense of freedom. You'll know that you are ready for anything. Let it go and focus on tomorrow.

Thursday, January 22, 2015

Surviving Chaos

The battlefield is a scene of constant chaos. The winner will be the one who controls that chaos, both his own and the enemies.
Napoleon Bonaparte
Why is it that some people who are very successful in demanding professions have trouble gaining confidence as a trader? Why do some people buckle under pressure, yet others thrive on it? Perhaps because markets are often unpredictable and uncertain; causing some to act impulsively, abandoning their trading plans prematurely. Traders, who are able to weather the storm to make enormous profits, have a combination of characteristics that make them winning traders.
Of course there is no substitute for experience. The winning trader has experience with the markets and with his or her own personality. New traders are very much like beginners learning a new sport, such as skiing or tennis. They haven't experienced the variety of events that may come up. They see the market as a structure of random movements. The winning trader sees structure in what others see as chaos. Over time, comes an intuitive feel for the markets. They can sense when particular market conditions have emerged and they know that the odds of success are on their side.
Uncertainty is anxiety provoking and new traders succumb to the fear. When they are ready to put on trades, they aren't calm and focused; they are scattered and afraid. Winning traders, in contrast, have experience, and confidence. They know that the odds are in their favor, and that if they make enough trades under these ideal market conditions, they will come out ahead. Since they know that in all likelihood that they will succeed, they are calm and relaxed. Of course there are no guarantees, but they truly believe that it won't be the end of the world should they hit upon a series of losing trades. Should they encounter the worst-case scenario, they know they will live to trade another day and make the losses back.
When a trader has genuine trading skills, he or she knows that there is little to worry about in the long run. He or she is never stressed out. The uncertainty and unpredictability of the markets that produces stress in the new trader is seen as excitement and opportunity by the skilled, seasoned trader. The more trades you make, the more success you enjoy, the more likely you will gain experience and hone your trading skills. It will not happen over night, but it will happen eventually. In the meantime, you might as well accept your fate and patiently wait until you build up superior skills and confidence. If you stay optimistic, working hard, you will gain valuable market experience, and survive the chaos.
From PrudentTrader Archives 2006

Friday, January 16, 2015

Personality Style & Trading Decisions

The 'self-image' is the key to human personality and human behavior. Change the self image and you change the personality and the behavior. 
Maxwell Maltz

Part of developing a mental edge is becoming aware of your personality and working with it, or around it, not trying to change it. Personality traits are people's tendencies to behave consistently across time and across situations. It is useful to identify key traits in your personality and be aware of how they may influence your trading decisions. 


There are many characteristics that can be used to describe people's personality: friendly; creative; or argumentative, are examples. When it comes to determining your own personality style that it's most often not a "black and white" issue; there are many shades of gray. Some people are friendly all the time, other people are unfriendly all of the time, but most are friendly some of the time, but not at other times. For some their everyday personality bleeds over into their trading life, however for some their trading personality is distinct from their everyday personality. We as traders need to decide just how much of our personality will impact our trading. 


Some personality traits are especially pertinent to the profession of trading. Some traders are intuitive while others are more concrete and analytical. Many traders are risk averse, while others are impulsive and seek out risk. Each style has its advantages and limitations. Know which style describes you, and how accurately it describes you. Your inherent personality style may influence your trading decisions. 


Three popular trading personality types are intuitive, data oriented, and impulsive. The data-oriented trader focuses on concrete evidence and is often very risk averse. They seek out as much supporting data for a trading decision as possible. The trader who prefers to do extensive back-testing of a trading idea exemplifies data-oriented type. Consider incorporating elements of data oriented trader personality into your trading style regardless of your natural inclinations. It's vital to make sure that you have adequate information (a reason) before executing a trade. Particularly important is to have and trade a detailed trading plan in which risk is minimized and entry and exit strategies are clearly specified. Most often however, the data-oriented trader may take things a little too far. Searching for "the perfect" knowledge that just doesn't exit in the trading world. At some point, one must accept the fact that he or she is taking a chance and no amount of data analysis can change this fact. 

The intuitive trader is the opposite of the data-oriented trader. Trading decisions are based upon hunches and impressions rather than on clearly defined data. There's a difference between being an intuitive trader who develops this style over time and one who is naturally intuitive. The experienced intuitive trader, bases decisions on data and specific market information. But, as a seasoned trader, analyzes the data quickly and efficiently. It happens so quickly that it seems like it occurs intuitively, but it is actually based on solid information. Ideally, all traders should gain extensive experience to the point where sound decisions are made with an intuitive feel. 


A third trader personality type is the impulsive trader (gambler). This is the most dangerous style. The impulsive trader allows his or her decisions to adversely influence trading decisions. Rather than looking at information logically and analytically, information is discounted completely. The impulsive trader seeks out risk and enjoys taking risky, exciting trades. Impulsive traders can often make huge profits one day and see large draw downs the next. Your personality can have a huge influence on your trading performance. Identify your assets and liabilities, and work around your personality when it is necessary.

Taken from PrudentTrader Archives 2005

Thursday, January 8, 2015

Make a Change and Make It Stick

To improve is to change; to be perfect is to change often.
Winston Churchill

The New Year is here and it's a time to renew commitments, make big changes, and live 2015 as if it is a new beginning. Changes can be hard to make, despite the best laid plans. If you want to make permanent changes to your life and to your market approach, you must understand how most people fail and make sure you avoid common traps. The most common trap is to be unrealistic in terms of the changes you wish to make and the rewards that you will receive. If you are realistic, you will be able to make the changes, and perhaps more importantly you will be able to make them stick.


One common mistake is to attempt dramatic changes when modest changes are much more realistic. Do not strive for goals that you cannot possibly achieve or have expectations beyond reality, you will fail quickly, feel disappointed, and just give up. Do not underestimate the time it takes to affect change. For instance It would be unrealistic for a newer trader to expect to make huge profits without honing their trading skills or gaining a wealth of knowledge and experience with the markets. You can't just will yourself into becoming a seasoned trader over night, give yourself enough time. This coming year set some learning goals. Set aside a specific amount of time each day to hone your skills, and reward yourself for achieving minor goals, whether you profit or not. Make a small goal to read one trading or investing book a month, and reward yourself when you finish. If you start out with this strategy, you'll feel you are making progress and you'll find it easier to persist when the markets appear to be fighting you.


I have at times seen people give up trading prematurely simply because they thought that mastering the markets was easier than it actually is. Good traders spend years honing their skills, a hobbyist approach will not work. In 2015 make a commitment to master the market and work towards it. Do not under estimate the difficulty and expertise needed. When you are trying to master a challenging profession it is easy to react with overconfidence and unrealistic optimism. I have often stated to friends, the best thing that can happen to a new trader is a loss, so they begin to understand this profession is not easy. If your hopes are dashed it is hard to continue fighting. I do not believe it is helpful to be a pessimist, but it is essential to be a realist. Cultivate a healthy skepticism regarding your trading skills and your trading strategies, you will find you stay positive and focused. Setbacks will be a minor glitch, rather than a major tragedy.


It is not only necessary to stay realistic when it comes to how difficult it is to master the markets but also it is essential to be realistic about your expectations regarding potential rewards. Novice traders often envision extreme wealth. Media images do not help matters. Expensive cars and luxurious homes are associated with happiness and bliss, and it is reasonable for people to think that making huge wins will produce ultimate contentment. These expectations rarely materialize and one usually encounters disappointment. Realize that even the most successful trader does not have a perfect life. The potential rewards most people dream about are often unrealistic. It is wise to make sure that your expectations of reward are realistic. When it comes to trading, long-term enduring financial rewards may take a little while. It may not bring the happiness you are searching for. It is useful to enjoy the process of trading. Trading is a fun and rewarding endeavor in and of itself. If you remember that fact, you'll feel happy and rewarded every day. That will help you continue trading in 2015. Make a new commitment to trading. Stay realistic and enjoy yourself. The more you can do so, the happier you'll be and the more successful you'll trade.
Reprint from PrudentTrader archives 2006