Thursday, April 30, 2015

Winning Traders are Highly Motivated

Failure will never overtake me if my determination to succeed is strong enough.
Og Mandino

Are you a novice trader who is deeply frustrated and ready to give up? You have read many of the trading books, followed all the trading "pundits," 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 extremely excited. They dream of success and 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 and consistently. 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.


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 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 not believe anything you read or hear. The only time you actually know that you have stumbled upon a profitable trading strategy is when it, indeed, produces a profit. Just convincing yourself that 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 is 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 is not 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.
Reprint from the PrudentTrader archives (2005)

Thursday, April 23, 2015

Performance and Learning Goals

Stop setting goals. Goals are pure fantasy unless you have a specific plan to achieve them.
Stephen Covey

Often new and inexperienced traders enter the trading arena thinking that they can begin making big profits right away. I'm going to tell my boss where to go and make my living trading the markets - freedom at last. How often I have heard those words. It takes skill, knowledge, and experience to trade profitably over the long term. Anyone may experience some initial success, and begin to think I love this, it's easy. Often however the success is sporadic and short lived. A seasoned trader hones his/her skills over many years gaining a wealth of experience. If you do too much too soon, odds are you will fail, and become very disappointed. New traders, after experiencing that failure and disappointment, will often give up rather than continue on. If you are new or even relatively new take smaller steps and build up your skills, the failure and the disappointment is your education (just like college), you will soon experience profitability, if you learn from your disappointments.


Psychologists have learned that setting high performance goals, such as trying to make your living from trading when still a novice, are not always the most appropriate goals. If you lack the skills and experience to reach a particular goal you are setting yourself up for failure. You would not try to win a triathlon without proper training, would you? Why make such high trading goals until you have the requisite knowledge and skill? Setting goals to high is certainly understandable, however, ambitious people are taught to set high goals. If you do not even consider achieving an ambitious goal, then you will probably not even try to achieve. It's very important that we set high standards and go out and do whatever it takes to reach them. The important difference is the initial goals must match your skills and experience. If you push yourself before you are ready you may not only fail but you may give up as well.


We need at this point to distinguish between performance and learning goals. It's quite normal when setting goals to think only in terms of performance; that is, we think about specific dollar amount or percentage gain per month, or quarter that we should achieve. If you are new to this game, it is much more useful to think in terms of learning goals instead. A learning goal is more modest and easily achievable. Break down the larger goal into specific steps that are doable and achievable, and rewarding yourself after each step is accomplished. For example, a learning goal may be, "I'm going to read one book about trading the markets every week (month)." This specific goal may not lead you directly to your monetary goal right away, but it is easy to achieve, and the knowledge gained definitely will aid you in developing a plan that will get you to your monetary goal. 


So if you're a novice trader, set yourself up to win. Do not set overly high performance goals; set high and realistic learning goals. Break the bigger goal down into specific steps, and reward yourself after you complete each one. When you become a seasoned trader with advanced skills, you can set out to achieve those high performance goals. But right now, it's in your best interest to focus on skill building, rather than high performance.

Thursday, April 16, 2015

One Step at A Time

One may walk over the highest mountain one step at a time.
Barbara Walters

"I want to be an expert trader. I want to be able to handle anything the markets throw at me." Is this you? This is a nice sentiment, wanting to be a trading expert who can trade under a variety of market conditions with many different methods. It's also a very ambitious goal. Trading in a variety of market conditions takes time and vast (years) of experience, as well as an advanced skill set many novices simply do not possess. Even many experienced traders find the task daunting, and when they experience setbacks they become discouraged. It is much more useful to pick a few key trading strategies, identify the market conditions conducive to those strategies, and trade only under these ideal conditions while you build up our trading skills and confidence. For example some people trade extremely well in strong trending markets utilizing only a couple of indicators and not well in choppy markets, while others are just the opposite.


It is essential that trader's build up a sense of confidence with but a few key strategies. Psychologists refer to this process as building self-efficacy. Self-efficacy is different from self-esteem. A person can have a low self-esteem, yet believe they can perform a specific task under a specific set of conditions - that is self-efficacy. You can believe you are an average trader but have specific abilities when trading a particular strategy under very specific market conditions. 


Research on self-efficacy has shown that when people believe they have self-efficacy regarding a specific set of skills, they set challenging goals, show unfailing persistence, experience pleasant moods, and can easily handle stress. These characteristics are conducive to profitable trading.Anything you can do to increase self-efficacy will help you master the markets and achieve long term profitability. 


Two obvious ways to increase self-efficacy are: 1) start off trading with methods you have mastered so that you meet with initial success and increase your feelings of efficacy; and 2) practice and gain experience as a trader. The more success you achieve, the more likely you'll be able to trade in a greater variety of market conditions and persist until you achieve consistent profitability. 


So don't be overly ambitious. Set realistic goals, achieve initial success, and build up your sense of self-efficacy. The greater your self-efficacy, the more success you'll achieve, and the more profitable you'll be in the long run.


Reprint from PrudentTrader Archives 2004

Thursday, April 9, 2015

It Never Hurts to Ask

The art and science of asking questions is the source of all knowledge.
Thomas Berger
A well-worded question posed at the right time to the right person can change a life.

After hearing a news report about the Beatles phenomenon in England, 15-year-old Marsha Albert wrote to her local Washington, D.C. radio station and asked, "Why can't we have music like that here in America?" Inspired by Marsha's question, disk jockey Carroll James managed to get a copy of "I Want to Hold Your Hand" from a British flight attendant and introduced the song to his WWDC radio audience on December 17, 1963. Within minutes, requests for the record flooded the station. Within days, radio stations all across the United States were playing the song. And Capital Records was forced to release it on December 26th, three weeks earlier than scheduled.

According to Bruce Spizer, author of "The Beatles Are Coming! The Birth of Beatlemania in America", when the band appeared on Ed Sullivan's TV show on February 9, 1964, 73 million people -- an unprecedented 40% of the U.S. population at the time -- watched. "There's no doubt whatsoever that the Beatles would have conquered America anyway," Beatles historian Martin Lewis told USA Today. "But the speed and magnitude of that stratospheric kick-off could not have happened without Marsha Albert. If the record had been released on January 13th, as planned, kids wouldn't have heard it 20 times a day, as they did during the school break. It would never have sold 1 million copies in three weeks. There wouldn't have been 10,000 kids at JFK to greet the Beatles. Marsha didn't start Beatlemania. She jump-started it."

That's what a single, simple question can do. 

It's no different when it comes to trading and investing, ask questions. One great source of trading and investing ideas are companies based your local area, no matter where you live. About 30 years ago when I was a broker at the then Bache & Co., one of the other brokers in the office came to me and asked what do you know about Rogers Corporation, then listed on the Amex? My response, almost nothing, why I asked? I drive by their plant everyday on my way into the office, and recently I've noticed what seems to be a much larger than normal amount of trucks entering and leaving the plant, they must be doing some great business. [Rogers Corp is located in Rogers, Connecticut, a small hamlet in the eastern part of this small state] 

We both looked up reports on the company via the many research outfits such as S&P but found nothing particularly exciting. We decided to begin asking everyone we knew, clients, friends, other brokers who do you know at this company? Within about a week or so one of our clients, come to find out was good friends with a director of the company. We asked if he could set up a dinner with us? This director was more than anxious to talk about his company. In fact he was so excited about talking to some Wall-Street folk that he wouldn't allow us to pick up the tab (a nice side benefit to asking questions). We found out that business was indeed taking off and more new customers were coming on board very rapidly. In fact they needed to hire a great deal more people in order to take care of all the new business. We became privy to information not widely known at the time.  And all because a question was asked!

All this occurred during the primary bear market of the 1970's. This stock was trading around $3 or $4 a share, today (after several stock splits) it trades in the 80's. Look in your local area and Ask questions! What's the worst that could happen? You find nothing that excites you? What's the best that can happen? You find a gold mine!