Thursday, April 20, 2017

The Mindset of the Trader

I think anything is possible if you have the mindset
and the will and desire to do it and put the time in.
Roger Clemens

Way back in the 1960's and 1970's one decision stocks became a popular way to invest. A one decision stock is one you buy and hold on to forever. Along with this philosophy a select group of stocks became known as "The Nifty Fifty". Fifty stocks that were the ultimate one decision stocks; like IBM and GM. If you talk with some people who invested back then you'll sometimes hear them say: "I learned my lesson a long time ago. I put my money in the markets and lost it; Never again!"

They searched for "undervalued" stocks, purchased shares, held them, and waited for them to increase in value. Sometimes it worked, often it didn't. The buy-and-hold strategy often misleads investors. The markets don't go in one direction forever, whether the trend is bullish or bearish. Only by anticipating the twists and turns of the market can you make "significant" profits. If you are striving to become a profitable trader, you must cast aside the buy-and-hold mindset of the long-term investor, and learn to think like a trader.

The buy-and-hold strategy is still viewed as a viable trading strategy even in many business schools. Even in the wild 1990's fortunes were lost when the dot-com bubble burst, by people subscribing to that buy-and-hold strategy. Please note I am not addressing time frame. Had you purchased some of the dot-com stocks in 1995 let's say and sold them in 1998 or 1999 or even 2000, you still traded them. Your time frame just encompasses a much longer time frame than the very short-term trader.

Whether you trade based on technical analysis or prefer fundamental analysis you must try to assess the potential for that company. Are they still growing profits? Does the company have new and exciting ideas they are or will be bringing to market?

We never know for sure what the future holds. Who could have known five years ago the energy crisis was coming relatively soon and what that crisis would do to our domestic auto companies? It's difficult at best to make these forecasts.

Stock prices do reflect the companies' fundamentals most often; however they also reflect market participants perceived notion of what the future holds. Did your holding just report horrible earnings and a not so great outlook? Did their stock price decline? No! Market participants are probably now looking to changing conditions in the not to distant future, hence buying appears in the face of seemingly bad news. Don't be confused by it, listen to the market.

It may be hard to accept at first, but trading requires you to accept risk and uncertainty. It may take time and experience to accept, and you may get hurt along the way, but after a little while, you'll be able to accept uncertainty, and thrive on it.
Reprint from 2007 Newsletter

Wednesday, April 5, 2017

Striving for Perfection

Strive for continuous improvement, 
instead of perfection. 
Kim Collins

Lexus advertises the "The Relentless Pursuit of Perfection" and it seems an amiable goal; perfection. Unfortunately we are human and humans are not perfect. Perfection is a pursuit, but we can never really attain perfection. What we really do is strive to be better and better at who we are and what we do. Perfection however is out of the question, especially in our line of work. As traders the pursuit of perfection can be very costly if carried too far.

Some traders are so obsessed with looking for the ultimate opportunities that they spend most of their time looking, rather than actually trading. They don't want to miss that once-in-a-lifetime trade. There's nothing wrong with searching for a good setup, but constantly looking for the ultimate setup is time consuming. Why do some traders spend too much time searching for the ultimate trade? It may be a fear of leaving money behind. They don't want to miss out on a rare opportunity.

We want to believe that if we analyze the markets hard enough and long enough, we'll find the perfect setups and take home huge profits. This however can do us more harm than good. Spending so much time looking for the perfect setups, that really don't exist, will have us fail to trade the "available high probability setups". If you constantly search for the "perfect setup" it will restrict your actions and most often will cause unwanted and unneeded stress. Instead of moving forward; you stagnate.

Many people work under the assumption that they must be thoroughly competent, adequate, and
achieving in everything that they do. Psychologist, Dr. Albert Ellis, claims that holding such a belief produces fear and anxiety, which for traders often produces hesitation and self-doubt. As we grow up, we often face adverse consequences for not being proficient. We begin to believe that we must be thoroughly competent, adequate, and achieving in everything that we do. It is normal therefore that we come to believe; if we could just be perfect as a trader, we will make the most profits. Ironically, what happens is just the opposite

A more adaptive approach is to realize that it's impossible as a trader to be thoroughly competent, adequate, and achieving all the time. Certainly, you should develop an extremely detailed trading plan and try to account for all adverse events that may go against your plan, but there are limits to what you can do. You don't need to be perfect. You don't need to trade the ultimate setups. You just need to make profits, even if it is just from trading mediocre setups. Searching for perfection can lead to stagnation if you aren't careful.

Thursday, March 23, 2017

When The Coach Goes Home..

.So Does The Motivation
Affirmation without discipline
is the beginning of delusion.

Jim Rohn

All external motivation is temporary. External motivation is the kind that may wake you up, but it will not keep you awake for long. External motivation is motivation that comes to you from the outside. It may, and it often does, influence you to make a change, it cannot however make the change for you. And it cannot keep you from drifting off course, when the motivator is gone. 
Many of you in your school years played sports. If you played and were fortunate enough to have an exceptional coach, you knew that he expected a lot from you but he also gave you lots of encouragement. He picked you up when you were down, he made you believe that you could win, and he let you know when you did a good job. He was a great motivator and he took your team all the way to the top. He was your friend, your ally, and your strongest supporter. You relied on him for your motivation and you got it.

The school year is over and you graduate moving on to college or the work force and the coach goes home. What does he take home with him? Your motivation, that's what! He was your motivation. Now you must receive your motivation from somewhere else, because the motivation was external and now it is gone. All external motivation works the same way. Keep giving us motivation and we will do better, take it away and we will gradually move back to where we were before the motivation began.

That is why so many of the hopeful at so many motivational talks get so excited, full of energy, and then slow down or stop dead in their tracks within a few days or a few weeks. The inspiration is no longer there, because the speaker has left town. It takes more than a great speech to erase and replace those internal programs, which tell us we should know better than to believe that we are powerful champions of success.

An hour or two of someone else telling us the "we can do it!" simply does not have a chance. The intentions were great, the talk inspiring the ideas incredible. But when the coach goes home - so does the motivation.

I am not saying, or even implying that one should not to attend those seminars, or buy the books, or listen to cassettes. They all help, they all generate ideas, and this one may begin to move you in the right direction. Just do not overestimate the outcome unless you have truly unclogged your mind of most all of your previous negative thinking.

Reprint; 2007 Prudent Trader Newsletter

Wednesday, March 15, 2017

Taking on Greater Levels of Risk

The biggest risk is not taking any risk...
In a world that changing really quickly,
the only strategy that is guaranteed to fail
is not taking risks.
Mark Zuckerberg

Education never stops. No matter how long you've been an investor you know and understand that your education is a never ending process. You purchase and read books, newspapers and magazines, to continue your learning and to continue to prosper. While continuing our education you come across books and articles about some of the elite and brilliant traders who have a rare talent for making huge profits in a field where few can excel. "Market Wizards" is how we refer to them and being human we can't help but dream of being just like them.

Unfortunately, the facts tell us very few traders reach the top. The best most can do is evaluate and accept their abilities, and do their best. Pushing yourself too far and too fast doesn't work. It leads to frustration, and possibly failure. You must work at your own pace. This is especially true when one is attempting to take on greater levels of risk. Depending on your risk tolerance, taking on greater levels of risk can make you feel uneasy. If you want to make huge profits as a trader, you eventually need to learn to effortlessly take on greater levels or risk.

Extending ones comfort zone is never easy. For most people, it is a gradual process. For example, first one must learn to put their hard-earned money on the line, and accept what it feels like to lose it. Taking a loss is disconcerting and a little frightening. Losing a few dollars is one thing, but as the amount increases substantially, so does the pressure. It takes a little practice to learn to risk ever-increasing amounts of money and take it in stride. Some people are natural born risk takers. Most traders however have come to their present state; by learning to manage money wisely. The idea of taking larger and larger risks to move beyond your comfort zone can be difficult. You may have a natural inclination to protect what you've worked so hard to accumulate. It's tough to not be a little wary.

How do you learn to take on more risk? Again, it depends on your personality and the amount of trading capital in your account. You may need to train yourself to take on greater levels of risk. Move up gradually; don't make the mistake of moving too fast.

Taking on greater and greater amounts of risk is fear-provoking. If you do it all at once, you move from relatively little fear and anxiety to terrifying amounts of fear and anxiety. To shocking for many. It's better to work up to it. You wouldn't try to run a 10-mile marathon tomorrow if you could barely run a mile today. You would build up your stamina and gradually work up to your objective. It's the same thing with trading. Increase the amount you risk gradually. The rate at which you increase it depends on your personality. Use your own judgment; if you can increase your risk a little each trade, good then try to keep up that pace. If you find that after a month, you've surpassed your comfort zone, well then reduce your risk. The key is to gradually increase your comfort zone, don't force yourself to go beyond your limits. Work at your own pace. If you try to do too much, too soon, you'll just feel overwhelmed and you may never reach your objective. If however you move up gradually, you will increase the likelihood that you will be able to increase the amount of risk you can handle.

Trading is emotional. Taking on greater and greater amounts of risk is stressful. Instead of becoming overwhelmed, and possibly under mining your long-term financial goals, take it easy, and work at your own pace. You'll eventually be able to take on greater levels of risk, and trade more calmly, logically, and profitably.

Friday, March 3, 2017

Beat Stress Before It Beats You

Adopting the right attitude 
can convert a negative
into a positive one. 
Hans Selye
Did news items ruin your plans this week? Adverse events, such as foul weather (think Oil, Agriculture, Shopping patterns), is just one of the many sources of stress an active trader must contend with. If you're not careful, you can become easily overwhelmed. When you are "stressed out", you may not be able to think clearly, you won't read the markets objectively. You must do whatever you can to stay calm while trading.

Scientists have shown that stressful emotions can build up, and if not released, a person can become overloaded by stress. Laboratory animals placed in

stressful situations, for example, die if the stressful events are continuous and
enduring. You can't completely remove stress from your environment, but you can prevent the stressful aspects of trading from making you feel anxious and fearful. Here is a short plan to help you develop an effective stress reduction plan:
  • Avoid caffeine.
    Many people believe caffeine keeps them alert. The downside of caffeine however, is that caffeine will elevate your nervous system to the point that you feel on edge and ready to panic? Trading and life is stressful enough; you don't need to pre-elevate your nervous system.
  • Exercise regularly.
  • Many successful traders view exercise as a key component to creating a calm and relaxed mindset. You don’t need to go to a gym, take a brisk walk around the block; it will clear your mind and give you new and fresh perspectives. We must all regularly release tension that builds up each day.
  • Minimize background stress.
  • Daily hassles, such as minor arguments with your spouse or others, or traffic congestion can, when added together, be as stressful as a major life event (such as the death of a loved one). Don’t ignore these events; don’t pretend they aren’t important enough to deal with now. Deal with the hassles and then minimize them as well as you can. Seemingly minor hassles can accrue and cause you great strain in the long run.
  • Don’t attempt to exceed your trading skills.
  • Do not put extra pressure on yourself by trying to achieve trading goals that are beyond your current skill level. As an example, keep your position sizes relatively small, consider scaling into a position as opposed to an all or nothing approach and have clearly defined risk limits. If you push yourself beyond your skill set in an attempt to achieve an unrealistic goal, you will feel an extreme sense of anxiety and fear. Take your time, you will get there!

Friday, February 17, 2017

So You Want to be a Trader?

Unless commitment is made, there are only
promises and hopes... but no plans.
Peter Drucker
You have made a decision: you're going to become a trader, master the markets and take home huge profits. Each year thousands upon thousands of people make the same decision. Most often the reason is to relieve them of a boring, mundane job. If this is you, the bad news is that the vast majority of these would be traders fail. Why? They have made an apparent decision to trade but they have not made the more important decision to make the proper commitment. You have to incorporate trading into your life and do whatever it takes to hone your trading skills to the point where you can master the markets.
"Until one is committed, there is hesitancy, the chance to draw back" - Goethe.
In his book, "The Mentally Tough Online Trader," Robert Koppel observes, "Top performing traders are committed to overcome any hardship or roadblock to achieve their goals." Besides capital you also must invest time and energy. It's impossible to digest all there is to know overnight. You just can't do it in an hour a week.

Learning about the markets and developing an intuitive feel requires time and practice. In some cases, it can take many years before you can trade the markets profitably. But to the trader who is fully committed, these are minor setbacks. Once you make the commitment to
master the markets, you'll do whatever it takes to attain success.

Trading is serious business. You cannot treat it like a hobby. If you do not have the proper commitment, you will approach trading lightly. You will begin to feel that you might as well have fun, trade on impulse, and seek out excitement. Why not visit a casino once in awhile to satisfy that need. A casual, uncommitted attitude will prevent you from excelling. In fact a casual, uncommitted attitude will eventually wipe out your account balance. I have personally witnessed the effect of non-commitment, far too many times in my career. Don't make this mistake! Trading the markets requires you to passionately commit to becoming the best trader you can be.

If you want to make huge profits, it's not enough to decide to become a winning trader. You must also make a strong commitment to do whatever it takes to achieve enduring financial success.
If you forget you have to struggle for improvement you go backward. - Geoffrey Hickson

Thursday, February 2, 2017

Trading With Discipline

Planning is bringing the future into the
present so that you can do something
about it now.
Alan Lakein

In my decade and a half or so as a stock and commodities broker, I was exposed to many different trading styles as well as trader types. Some were very successful, some only slightly, most however, failed over time. Those that were very successful shared two common traits. First they had a trading plan, that was perhaps revised from time to time, but nevertheless followed religiously; and second they had untiring discipline.

Expert trader John Hayden author of "The 21 Irrefutable Truths of Trading" states: "Without discipline, you will be unable to master your ego, create empowering beliefs, have faith, and develop confidence in your abilities. The lack of discipline will prevent your skill as a trader from progressing."

Making an occasional winning trade, that ignores your trading plan, may provide short-term pleasure, but entering trades unsystematically can adversely influence your ability to maintain discipline over the long term. Why? When you stop following your plan, you are being rewarded for a lack of discipline. You may start believing that abandoning your plan is therefore not a big deal. Then, whether consciously or unconsciously, you'll begin to think: "I was rewarded once; maybe I will be rewarded again. I'll take a chance." Positive outcomes from undisciplined trading are most often short-lived, and the lack of discipline will ultimately produce trading losses.

Who cares if the win is from my plan or not? It's still a win, right! A win that results from following a trading plan reinforces discipline. A win that occurs by chance (deviating from your plan) will increase your bottom line temporarily, but may cause harm to your psyche and be responsible for future unexplained losses. It reinforces undisciplined trading.

Cultivating discipline is essential for consistent and profitable trading. Trading is a matter of getting the law of averages to work in your favor. You implement proven trading strategies, over and over, so that across a series of trades, the strategies work enough to produce an overall profit. You should trade consistently, following a specific trading plan on each and every trade. This will allow the law of averages to work in your favor. If you follow the plan sometimes and abandon it at other times, you throw off the probabilities, and you are likely to end up losing overall.