Tuesday, May 26, 2015

Prediction versus Money Management

I posted this last week in the Linkedin Group - Trader, Trading & Risk Psychology hoping to begin a discussion. Some excellent professional comments have so far presented themselves. Now lets see if you can add your expertise.

The Prudent Trader tag line is:

Trading is NOT about being right or wrong. 
Trading IS about managing money. 

Yet it seems that most of what I read on the Internet and the Financial media deals with prediction, being right in the forecast. Conveniently left out, risk assessment and money management. Of course this will allow the author to be eventually right, regardless of what happens beforehand . 

In this authors Humble Opinion, one needs a trading/investing plan based upon the management of your total account, How will the monies be divided up, what are the risk parameters? Are the risk parameters calculated on the individual trade or the total account size? How do you calculate the appropriate position size? etc, etc 

What Say Ye?

Thursday, May 21, 2015

You Don't Have to Be Disciplined All The Time

Discipline is the bridge between goals and accomplishment.
Jim Rohn

If you read enough you've probably heard the saying; "The winning trader is the disciplined trader". What that means in its basic form is you outline a specific trading plan and you follow it. Sounds simple enough, however people differ in terms of their ability to maintain self-control and discipline, especially in difficult market environments. In Neil Simon's play the "Odd Couple" Felix Ungar and Oscar Madison illustrate perfectly the stark contrast between the disciplined and the undisciplined. Felix was the neat freak, everything had its place and everything belonged in its place, Oscar on the other hand was sloppy and impulsive. But even though Oscar was undisciplined he showed signs of discipline in certain areas. Oscar was a well known sports writer and he had to show an acceptable amount of self control and discipline in order to put out his column every day. So even if you are an undisciplined person in terms of personality traits you can show discipline when completing specific tasks. And of course we are talking about the specific task of trading the markets successfully. 

The lesson here is that you don't have to be disciplined all the time. You only need to be disciplined when you are putting on or taking off a trade, not during all your waking hours. Just understanding this can take some of the pressure off. Secondly it is a good idea to have a detailed trading plan written down. Specify exactly what signals will tell you to enter a trade and what signals will tell you to exit. Many traders make the mistake of leaving some of these factors unspecified and unwritten, they just "wing it". This approach will cause problems for discipline. When you don't know what to do specifically, that breeds sloppiness which leads to the loss of self control. As an added benefit to writing down your rules and writing down your reasons for each trade is that you create a log, a journal, which over time you can refer back to and learn from. You will be amazed over the next year what you will learn not only about trading but about yourself. I can't tell you how many times I've looked back and said to myself - did I really think that back then?

When you are getting ready to trade make sure your energy level is high and your stress level low. When you are tired and worn out you have little energy left to focus on managing your tasks. Be relaxed, rested, and energized. If you aren't you'll tend to make careless unnecessary mistakes! 

It's healthy to be skeptical and overly cautious while planning your trade, but once you have outlined your trading plan, you must execute it with confidence. You can't question it. You can't second-guess your decisions. You must execute your plan as if you are absolutely positive it will succeed. You can mull over its success later, after the trade is through. So don't minimize the importance of self-control and discipline. The more disciplined you can trade, the more profits you'll realize.

Reprint from PrudentTrader archives 2005

Thursday, May 14, 2015

Persistence Can Be A Complex Issue

Persist and persevere, and you will find most things that are attainable, possible.
Philip Stanhope, 4th Earl of Chesterfield

Trading is a profession where one must not give up in the face of adversity. "You've got to go into the trading day expecting to lose," is what some seasoned traders warn. It's not the most optimistic outlook, is it? Today's choppy markets requires more skill and persistence. To make the huge profits, you've got to take some risks. Taking risks means you must be ready to face some losses. Even when you control your risk on a given trade (which is strongly advised), you are bound experience periods where you encounter loss after loss and watch your account balance diminish. As much as you objectify the loss, and see it as merely percentage points, there's still part of you that experiences the loss and feels the pain. At these times, it is easy to fall victim to the "why bother" attitude. You might as well give up. It is at these times, though, when you must be the most persistent. You must believe that you can master the markets and recover from the slump. There's a right way to go about this and a wrong way to go about this, however. Persistence is a complex issue and an understanding of it will help you approach a setback with the proper mindset. 

Motivational experts often argue that people's expectations of reward or punishment influence whether they will persist or give up. If you believe, for example, that there is no way you'll make a profit no matter how hard you try, you'll want to give up. On the other hand, if you believe that success is assured, you will not only persist, you'll enthusiastically charge ahead in anticipation of a reward. Trading isn't an activity where success is assured. New traders who open accounts are very enthusiastic. They tend to believe that trading is "easy money," but they soon face the harsh reality that market conditions change, and what worked in one market fails in another. From a motivational point of view, if you believe that trading is easy, that you are skilled at it, and that success is assured, you will persist. Such thinking exemplifies the overconfident. 

Begin to think, "Profitable trading is almost impossible, but I can learn how the markets work, develop the requisite skills, and eventually achieve consistent profitability." Granted, this isn't the most optimistic way to look at trading, but it does hold some realism. It isn't overly optimistic. Profitable trading is "almost" impossible. The key word here is "almost." Acknowledge that trading is a challenge that few seem to master. By acknowledging the difficulty, you are looking at the world realistically and will be able to handle setbacks more easily. If you aren't overly optimistic in the first place, your hopes won't be easily dashed when you face a setback. 

Next learn to develop the requisite trading and risk management skills. Here's where realistic optimism comes in. We know for a fact that there are traders who have developed trading skills and have realized success. It is realistic to hold this belief and it is realistic to believe that if you put in the time and effort, and get the proper amount of training, you can achieve profitability also.

Thursday, May 7, 2015

Are You Too Overconfident?

Almost everyone's instinct is to be overconfident and read way too much into a hot or cold streak.
Nate Silver
Overconfidence usually reflects an exaggerated view of your ability. Overconfidence can be fatal for trading, where accurate and realistic perceptions of one's skill level are crucial. When traders are overconfident, they falsely believe that they can trade beyond their skill set. When people feel inadequate, they often tell themselves that they are superior in order to bolster their own feelings of incompetence, a process known as "ego defense".  Everyone feels inadequate every now and then, and thinking, "I'm doing great" can soothe unpleasant feelings of incompetence. It's probably not a good idea to do this very often, but doing so from time to time is relatively harmless, and it may even be a useful strategy when used sparingly. 

Telling yourself that you are a smart and brilliant trader has its time and place but do it too often and you may never look at your trading skills objectively. If you rarely look at your trading skills in an objective manor, how will you be able to take the necessary steps to build the skills you need to become a successful trader.

Overconfidence is a big problem, however, when you overtrade and do so impulsively. The overconfident trader may put on trades that just won't pan out. Over time, a great deal of money is lost, and it is hard to get out of the hole. At these times, it is essential to take a brutal, honest look at your trading skills. You must gain an accurate assessment of your skills, identify your weaknesses, and build skills to compensate. Focus on performance rather than potential rewards to your ego and social status. Doing so will help you develop an accurate view of your skills and a realistic level of confidence. And if you have an accurate level of self-confidence, you will trade more profitably.