Thursday, June 25, 2015

Employ A Healthy Skepticism

On the road from the City of Skepticism,
I had to pass through the Valley of Ambiguity.

Adam Smith

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 "gurus," 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. 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 is 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 will 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't 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 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's important to view trading like a sport. If you score the winning point, fine. But if you miss it, do not 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 isn't 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.

Thursday, June 18, 2015

Gaining Self-Control

Self-reverence, self-knowledge, self-control; these three alone lead one to sovereign power.
Alfred Lord Tennyson
Are you having trouble trading with consistency? Does your account balance rise and fall sporadically and do you experience a rollercoaster of emotions? Chances are you plan your trades, but is it likely that you don't stick with your plan? Sometimes you follow your plan, but at other times you abandon it on a whim. You need to practice discipline. I'm sure you have heard countless times, "the winning trader is a disciplined trader". If you have a problem with discipline its worth building up this skill.Some are highly disciplined and very self controlled and others are impulsive. Which are you? 

The very disciplined person follows rules methodically, and is careful to control his or her impulses. If you are not this type I'm sure you know someone who is. They pay off their credit card bills every month, they are never late for an appointment, they plan every detail of their lives. Although these characteristics can be ideal for trading they are not always. This personality type tends to have trouble taking risks, preferring a sure thing, and trading outcomes are rarely sure things. Often winning traders are the kind of people who prefer living a little on the wild side. They do not recklessly seek out risk like a gambler does, but they do not mind it. Relatively speaking, they do tend to lack discipline and self control. Perhaps that's why so many trading books and coaches find it necessary to remind novice traders to practice discipline and self-control. How is your discipline and self-control? Do you have trouble sticking to your trading plan?

If you have trouble with discipline, you may want to try a stimulating exercise to increase your awareness: Observe your level of self-control in your everyday life and try to gain more. How much discipline and self-control do you practice in your everyday life? Are you late for appointments? Do you spend more money each month than your budget allows? Do you frequently find yourself breaking promises? It ia not necessarily the case that a disciplined trader is disciplined in all aspects of his or her life, but it helps. The life approach we use in everyday life may blend over into our trading life. 

Try this exercise: spend a few weeks trying to control as much of your life as possible. Pick specific areas where you can gain more self-control. Control your caloric intake, the money you spend, and time spent in leisure activities. See how well you do. It may change your reference point. You may soon discover that you rarely control your impulses, and can do much better. And this in turn may positively influence your ability to stick with your trading plan. It's worth trying. Discipline is the key to trading success, and it's vital that we do everything we can to increase it.
Reprint from PrudentTrader Archives July 2005

Thursday, June 11, 2015

Why Do You Trade?

Love is of all passions the strongest, for it attacks simultaneously the head, the heart and the senses.
Lao Tzu
Why do people trade? The obvious answer to this question is, "For the money." It may be a no-brainer to many, but to experienced, seasoned traders, the answer isn't always so obvious. When you are focused on the profits and the glory of making winning trades, there is a tendency to put too much pressure on yourself. When the pressure is too high, it becomes easy to choke, making trading errors and ending up with a blown out trading account. 

What experienced, seasoned traders know is that it is vital to love trading for the sake of trading. You should enjoy trading so much that you would do it for free if you could. If you were to look into the backgrounds of top traders, many seem to be the same: They tried to get a job in the trading industry as soon as possible, any job as long as it involved trading in some way. They were fascinated by the markets; the money was either secondary or not an issue at all. Ask a typical non-trader, or new trader, or even a would-like-to-be trader what he or she thinks inspires traders, and the impression is quite different. Most will answer that traders are out to make big bucks, achieve high status, and show it all off with luxury cars and nice homes. While these may be some of the side benefits, they aren't the primary motivators. Successful traders love the challenges the markets offer and view their work as meaningful.

Psychologists have long known the advantages of pursuing goals that are intrinsically interesting and personally meaningful. When trading is pursued for these intrinsic rewards it can be especially fulfilling. It is much better to follow one's passion than to be overly consumed with competition, financial reward, and high status. Psychological studies have shown that people who pursue goals for intrinsic rewards are better adjusted and more satisfied with life, compared to those who seek out external rewards, such as profits and status. They are also much better at controlling their ego, which we have discussed many times, how ego can be the deathnell for traders. They can easily accept their limitations; they don't mask their limitations by touting their superb trading ability. 

You have a choice when it comes to the reasons you pursue trading. You can focus on the glory, the profits, and the status. You can be a big shot and show your friends and relatives that you have the upper hand. But you'll pay a big price for this approach in the end. In all likelihood, you won't be able to maintain profitability over the long term. It's much more fulfilling to trade for intrinsic, passionate motives. When you follow your passion, you'll find trading intrinsically satisfying, enjoyable, and meaningful. You will gladly work tirelessly to achieve high performance levels. So focus on intrinsic rewards. You'll enjoy the process of trading. And in the end, you'll stay consistently profitable.


Discuss: Why Do You Trade?

Thursday, June 4, 2015

Don't Take It Personally

If you really believe in what you're doing, work hard, take nothing personally and if something blocks one route, find another. Never give up.
Laurie Notaro
Experienced traders have a knack for staying detached, new traders however, often have trouble with this mindset. They take trading losses and drawdown's personally. You cannot allow this to hit your ego by attaching personal significance to just an everyday trade. Losses should be expected, they are an integral part of this business, and you cannot take them personally.

It is perfectly natural for a person to feel upset, disappointed when experiencing drawdown. You have lost money and even if you were to return to profitability after a drawdown, from a mathematical standpoint it may take some time to build one's trading capital back up to its original level. There is however, a difference between taking it extremely personal, letting it impact your self-worth, and feeling a little disappointment. That being said, disappointment can be useful. Disappointment can have two consequences; it can cause you to give up and that's unfortunate, or disappointment can spur you to take action. If you lack the skills necessary to perform to your satisfaction, you better work on building those skill sets. Disappointment is a natural emotion, but it is not very adaptive for trading. Trading requires that one do the unnatural. Therein lies the case for being detached and objective. 

What is consistent trading about? Using a trading strategy that is capable of producing a profit, note I said strategy not system. Sometimes it takes ingenuity, sometimes its serendipitous and sometimes it's a matter of learning from others. In the end however much has to do with odds. You expect to make profits over a large number of trades but in the short run even the best winning strategy must have a string of losers. That is just the nature of probability theory! The probability of flipping a head or a tail is 50/50 however that does not mean in the short run you can't flip 10 consecutive heads, it means in the long run you will flip 50% heads and 50% tails.


When I say trading requires that one do the unnatural, I mean that when it comes to trading you've got to unlearn what you've learned your whole life.  It isn't all about you, at any given time it may just be the odds working against you. In most professions you put in effort to make sure you meet the expectations of the people who pay you, and you're a success. Your effort and talent have a direct payoff. With trading however you need to consider that success can sometimes (not always) be a matter of odds. That is extremely difficult for most to accept that to some extent your success or failure may just be due to odds randomly working in your favor.  That takes some of the glory out of it, doesn't it? But on the other hand, it helps you cope with drawdown's. If you are a skilled trader who really has mastered the markets, you can feel assured that, if you are trading at peak performance, the odds will soon move back in your favor, and you will again see consistent profits. Taking a detached, unemotional view may take some of the glory out of trading, but on the other hand, it will help you stay unemotional, take precautions, such as careful risk management, and stay focused on the process of reading the markets, implementing winning trading strategies, and trading consistently.