Thursday, February 26, 2015

Be Modest and Realistic

Modest doubt is called the beacon of the wise.
William Shakespeare

It may be enjoyable to occasionally dream of how you'll solve all life's problems by making a few million dollars trading the markets, but deep down you know it's unlikely to happen. It's hard to make that kind of money under most market conditions and without sufficient investment capital. In the end, that kind of thinking will just get you discouraged. It is important to identify such flawed plans and make them more modest and realistic. 

In setting goals, it is important to have realistic expectations. Trying to make huge profits quickly is unrealistic; modest goals are more realistic, and thus, more satisfying. Many (especially new traders) make goals that are not realistic, nor achievable. If your expectations are unrealistic, you'll fail quickly, feel disappointed, and very possibly just give up. If for instance you have insufficient capital that cannot cover draw-downs, fees, and commissions, you are being unrealistic. If you are trading with unreliable strategies and expect to make money on a consistent basis, you are also being unrealistic. It is not only impossible to achieve unrealistic goals, it can create a great deal of stress, which itself can produce trading errors. Setting more realistic expectations eases some of the pressure and will help in building sound trading skills.

Seasoned traders emphasize that such consistently profitable trading may take several years. And it is hard to achieve. It requires dedication and effort, yet many new traders think only minimal effort is needed. For example, they may think they can trade profitably by treating trading as a hobby rather than as a serious business. They over-estimate their ability level. They over confidently think that they have skills and abilities that they do not yet have. Do not ever underestimate the tendency to be overconfident. Conquer the tendency to trade beyond your skills by cultivating a sense of healthy skepticism regarding your trading skills and your trading strategies. Be realistic about what you can actually achieve. 

In the end, it is important not to get your hopes up too high. Novice traders think they'll make more profits than they can realistically see, or they believe that when they achieve huge profits, all of their life problems will be solved. Motivating yourself by fantasizing of these potential rewards will likely fail in the end. The only way you will achieve profitability is by setting realistic goals. You must accept the fact that trading is just plain hard work. You will have to put in a heroic effort to achieve success. With enough persistence, hard work, and determination, however, you will build up the skills you need to become a consistently profitable trader.

Thursday, February 19, 2015

Fear and Trading

I have learned over the years that when one's mind is made up, this diminishes fear; knowing what must be done does away with fear.
Rosa Parks

Fear is an emotion that signals impending doom. When our human psyche perceives a threat, both our psychological as well as physical assets are activated. Fear is instinctive and is related to the fight-or-flee response. It's a very basic response that animals use to survive in the wild and it's controlled by very primitive parts of the brain. When harm is perceived, a wild animal must mobilize resources and make a quick decision to either fight the opponent or flee to safety. Fear again is instinctive. If left unchecked, it can sabotage even the most foolproof trading plan. But seasoned traders rarely act on their fear. Through experience, they've learned to control it. And through practice and concerted effort, you can too, if controlling fear is an issue for you. 

There are a few key strategies you can use that will effectively control your fear. It's very difficult to control fear when you have a great deal of money on the line. That's why most successful traders tend to risk relatively small amounts of capital on any single trade, and they have clearly defined exit strategies. Putting less money on the line with each trade is one effective way to decrease fear of losing money. It is also important to trade with money you can afford to lose. If you trade with money that you need to pay basic expenses (i.e. betting the mortgage money), you will have a valid reason for fearing a loss. It will then be
difficult to fool yourself, so don't bother trying. If you can't afford to lose your stake, build up your account balance and stand aside until you can calmly put a trade on without concerning yourself with the adverse consequences of a possible loss.

Some people were taught as children to hide their fear, to pretend that they were courageous in the face of adversity. But trying to hide your fear often makes it even more difficult to control. It's better to just admit that you are afraid, and admit that there is, indeed, a good chance that you will lose money on your trade. You'll find that once you admit the possibility of loss, you'll feel much better, and control fear more easily. In his book, "Trading to Win," Dr. Ari Kiev offers a quick and sometimes effective way of controlling fear: "Acknowledge you are afraid and the feeling will pass. Refuse to acknowledge fear and it will perpetuate. So admit you are afraid and the fear will disperse."

From the PrudentTrader archives 2004

Friday, February 13, 2015

External Motivation

People often say that motivation doesn't last. Well, neither does bathing - that's why we recommend it daily.
Zig Ziglar

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 you 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.

Thursday, February 5, 2015

Your Mental Home

Positive thinking will let you do everything
better than negative thinking will.
Zig Ziglar

Imagine for a moment a "mental home" - the place where you live with your thoughts. Your home is furnished with everything you think about yourself and the world around you (the economy and the markets too). Your "mental home" just as where you live is furnished, much of it antique, handed down from our parents, our teachers, our friends and everyone else who has played a part in programming our minds. They gave you this mental furniture which you have kept and continue to use.

Much of that hand-me-down furniture (our negative thinking) is weary with age. That old tattered sofa is sagging and worn. The chairs are shaky the pictures yellowed and faint. The kitchen table is wobbly and cracked the dishes are chipped and so on. In this "mental home" a strong new piece of furniture (some positive thought) would seem out of place.

Now lets say I agree to come over to your "mental home" and help you get rid of that old furniture. So tomorrow afternoon I arrive and we begin to carry all of your hand-me-down furniture out to the garage. We remove every piece, every dish, every table, every chair, and every rug. We take out every old negative self-belief and store it away out of sight. After I leave you stand in the middle of your "mental home". It is empty and spotless. There is not a negative thought. This is great! Now I can be a positive thinker!

After a little while what do you suppose you do? You will go out to the garage, where the old furniture is stored, and get a chair. A little later, you will make another trip to the garage and get a table, and maybe a dish or two. In a short time all the furniture in the garage will work its way back into our "mental home".

We are most comfortable with the thoughts we have lived with the most. It matters not if those thoughts aren't the best for us - it's what we know, it's what we are most secure in keeping. When you decide to stop thinking negatively, and do not have an immediate new positive vocabulary to replace the old, you will always return to the comfortable, old negative self-talk of the past. We rarely throw out a piece of furniture until we have acquired a new piece to replace that old piece of furniture and so it is with our thoughts and our feelings. Without replacing the old with the new, you will keep all your old thoughts and feelings. You may re-arrange your furniture but the same old programming is still there.

From Prudent Trader Archives 2004