Thursday, February 25, 2016

It Is Not Easy Getting Over a Loss

The art of living your life has a lot to do with getting over loss. The less the past haunts you, the better.
Richard Ford
After considering current market conditions and the condition of your stocks; you've decided to take a $1,000 loss. When this happens most of us experience anger, our ego suffers, and we wish it just didn't happen. You rationalize: It's the nature of the game; it's my tuition in trading school. You can't stop thinking, however, about bills that are due shortly or that planned vacation in a month. Thinking, $1,000 is a lot of money, I can't consider it a minor setback and move on. That however is exactly what you have to do. The dynamics of risk aversion and loss taking run deep in most of us. As a trader you must step back: look at the big picture, understand that if I work hard enough and under the right market conditions I'll come out way ahead. 

Trading the markets whether on a full time or a part time basis is a business, not unlike any other business. Yes, this business involves risk, but so to do all other businesses. Corporations, large and small alike, also have trouble taking losses. Behavioral economists have shown that companies often go bankrupt rather than admit that their business pan needs reworking. Bankers will often refuse to write off bad loans because they don't want to admit that they mistakenly lent it to people, or companies, that were a bad risk. Institutional money managers leave losses on paper because they are afraid to own up. Many investors will not even open their brokerage statements during bad times; "out of sight, out of mind." 

Feeling guilty taking a loss isn't irrational, it's human nature. There is a strong biological urge in all of us to protect ourselves and our loved ones. In today's world that means having enough money to pay for food, clothes, and housing. Therefore when we lose money as a trader it hurts, especially when you think of what that money could purchase. As children we were taught by our parents and teachers to protect ourselves and to do what you need to make money and save it. Losing money on a trade therefore will make us feel guilty, and depending upon the size a little panicky. As an active trader you must change your thinking. You must fight against your natural inclinations and learn to take losses. 

Perhaps the first step is to admit to yourself that you feel guilty. Realize the guilt is the result of you're taking a risk that could inadvertently harm you and your family. The loss is particularly hard to accept if you really need the money to pay basic living expenses as opposed to money set aside for trading purposes. You should never use money set aside for basic living expenses to trade. If you know that you've done everything to minimize risk and you truly know that you can survive a worst-case scenario, you'll be able to take a loss more easily. 

Mentally put your trading capital in a different compartment from the monies set aside for your personal life. Learn about risk management Risk Management - An Introduction and build up enough capital for trading. 

Next identify, then refute, assumptions about risk and loss. Make a list of justifications that
you can read after you have lost: "Losses are a business expense"... "It's like a personal investment in my trading business"... "It's like paying tuition in order to learn important trading lessons." These sayings may not work at first. It's hard to change your expectations over night. It takes practice. Losses are a fact of trading life; they still can be difficult to accept. Remember you're fighting your own natural biological forces!

Thursday, February 18, 2016

Controlling Stress

For changes to be of any true value, they've got to be lasting and consistent.
Tony Robbins
Trading can be lonely and very stressful, especially if one is trading from home and alone during market hours. When market conditions are optimal and in line with your methods, it can be a real "high" with win after win after win. It is quite a different story however, when you face seemingly endless setbacks. You begin to feel the strain yet you attempt to keep going. As the markets go through cycles of up and down, traders often go through emotional cycles with feelings of excitement, frustration, and boredom. This may be one of the primary reasons many traders eventually burn out. I'm sure you've all heard stories of master traders who were at the top of their game in the 1990s, but are out of the business today.   
Trading is a profession in which you must cultivate a fighting spirit, in order to cope with new challenges and daily hassles. Trading the markets is stress provoking, if you don't watch out; you may collapse under the strain. By controlling stress, you can build up your psychological resources, combat stressful events, and endure lasting success.

Probably the first step in controlling stress is to maintain a balance between your work (trading) and your personal life. No matter what the percentage, you must devote a reasonable amount of time to family life. Trading should not be your whole life. Think for a minute; what good is all the money in the world without loved ones to share it with. Money just makes you more of what you already are. Make a good effort to form significant relationships with family and friends, this is very important. The relationships not only allow you to feel connected to others, but under some circumstances, they can provide much needed emotional support. Accepting help and support from those who care about you, and who also understand the pressures of trading, can help you ease stress. 

Next step set goals that are in line with your experience and skills. Be very careful not to set goals that you cannot possibly achieve especially when considering your experience and skill level. Any skilled professional must go through years of school then more years of training before he/she is considered a skilled professional in their field. Trading the markets as a professional is no different it requires years of experience and learning. If you are relatively new to trading, learning goals such as reading new trading books make more sense than performance goals such as making a 20% return. Over time you will hone your skills by taking small concrete steps and that will help you cope with stress and ensure that you make steady progress toward achieving your goals.

Keep everything in perspective. Your long-term goals are to develop skills that will make you profitable over the long haul. Try to consider stressful situations, and minor setbacks, in a broader context. Avoid blowing events out of proportion. Don't make a big deal about minor setbacks. Setbacks should be expected. Focus on the long-term perspective: With time and practice, you'll become a seasoned trader. Stress can kill, especially in the markets. Winning traders try to execute trades calmly, logically, and effortlessly. 

Getting yourself into this ideal mental state requires you to deal with stress. Take care of yourself physically; build up your psychological resistance to stress, dedicate time to family and friends. Find the time to engage in activities that are fun and relaxing. If you learn to cope with stress, you will sharpen your psychological edge and endure lasting success.

Thursday, February 11, 2016

High Hopes

Start by doing what's necessary; then do what's possible; and suddenly you are doing the impossible.
Francis of Assisi
I am probably dating myself a bit but I wonder how many of you remember Frank Sinatra? One of Frank's Academy Award songs (1959) was "High Hopes" the verse:

Just what makes that little old ant
Think he'll move that rubber tree plant?
Anyone knows an ant, can't
Move a rubber tree plant.
But he's got high hopes, he's got high hopes
He's got high apple pie, in the sky hopes

The power of positive thinking, it is essential to trading/investing successfully. Thousands if not millions of people have attempted to master the markets, unfortunately few achieve enduring success. If you don't push yourself you will never make it. It's one thing to be optimistic, but are you really setting yourself up for failure? Optimism must be tempered with realism. You should be optimistic when entering a trade and hope for the best but do not expect a miracle. 

While being optimistic about the markets or an individual trade is essential, you must, be careful not to turn that optimism into a false hope, or create overly high expectations for yourself. Trading/investing requires creativity, and interaction with the markets. The markets don't always provide opportunities. There must be a match between current market conditions and a given trader's talents, style, goals, and plan. When they don't match it's next to impossible to trade profitably. A trader must continually monitor current market conditions and decide if he or she can trade under such conditions. If the market conditions are not optimal; stand aside and wait. When market conditions are ideal; a trader must push himself to take advantage of current conditions. Optimism will not change current market conditions.

Another important consideration: If you are overly optimistic, you may not recognize your limitations. You cannot expect to trade in every possible market condition and make the same amount of profits. Unless you temper your optimism with a bit of realism and wait for your ideal market conditions to exist, you will likely fail to reach your expectations and become disappointed. When you are under the influence of disappointment and frustration you will make the most trading errors. 

Begin to think in terms of "should" instead of "must" and do not define your goals too narrowly. I should make $50,000 a year and not I must make $1,000 a week. They are not the same goal. If my goal is to make $50,000 per year I have an entire 12 months to achieve that goal. If the goal is $1,000 per week I am setting myself up for disappointment and frustration, the very first week I fall behind. If you just broke even that week then the next you must make $2,000 to be back on track, if you break even again then the following week its $3,000 and so on, not to mention a losing week, creating a seemingly impossible task. You will become frustrated, disappointed, dejected and your own worst enemy. 

One of the greatest obstacles that traders face is their own unrealistic expectations. It's better to live by the old cliche', "Accept what the markets give you." You don't control the markets. You have to accept what you can get, and feel good that you got anything. If you adjust your expectations to market conditions, you'll feel better, and if you feel better you'll trade better.

So any time you're gettin' low
'stead of lettin' go
Just remember that ant.
Oops there goes another rubber tree plant
When troubles call, and your back's to the wall
There's a lot to be learned, that wall could fall.

Thursday, February 4, 2016

Are You Self-Confident?

Believe in yourself! Have faith in your abilities! Without a humble but reasonable confidence in your own powers you cannot be successful or happy.
Norman Vincent Peale

Experienced traders/investors do not follow the crowd. They lead it. They anticipate and capitalize. They make a careful assessment of the factors driving the price. With experience they have come to trust their instincts when devising and executing a plan. They look inward and trust their intuition. They go their own way. This is not unwarranted cockiness but confidence and intuitions gained through experience. Going your own way is not easy. It takes guts, courage, and confidence. It is extremely difficult for most to take a risk when there's a good chance that the path may lead to a devastating blow. To take such risks and rely solely on your intuition, you must have rock solid confidence. It cannot waver. This is not the confidence gained with a rise in your account balance that will fall and waiver during a drawdown. It is a confidence based on feelings that reside deep within your psyche. Self-confidence should be so ingrained within your being that nothing can shake it. The more genuine self-confidence you have, the more profitable you will invest. 

Some traders appear confident, and they are to some extent, but mostly as long as everything is going their way. Few have rock solid confidence. With most people confidence waivers; it can be super high even to the point of arrogant overconfidence when they are on a roll, but it can plunge to the depths of despair during long setbacks. This is a false sense of confidence. Some will appear confident on the surface, but is it merely because they have always been "king of the hill." Much like living your entire
life in a small town where everyone knows you, where all is familiar, and you feel comfortable and secure. In the end however, self confidence only comes from mastering various life experiences. Unless you have overcome life's barriers and successfully triumphed over hardship, you will never truly feel you can tackle anything. This is true in life and it is true in investing.


Unfortunately many new investors learned to invest during strong bull markets where prices go up, up, and away, and they feel they just cannot lose. Remember all those long-term investors during the 1990s that thought they could invest just because, through little more than luck, they picked a company that just happened to go up due to media hype. That is not investing. If you want to be a truly robust, winner, you have to look at the dynamics of a stock, study the factors that underlie the price move, and go with your instincts. The more you trade in such markets, and succeed, the more genuine self-confidence you will have, and the more profitably you will trade. There is no substitute for experience.

Bull markets can make one feel like a natural born trader/investor, but when the markets change, and change they will, and profits are suddenly elusive the confidence turns to despair. This is the time you must look within you and decide whether to go away or do whatever it takes to master the markets. It will not happen over night but if you persist and gain as much experience as you can, eventually you will gain mastery. You don't need to trade like a superstar. You just need to know precisely when you can trade profitably and when you choke. When you achieve such self-knowledge you will gain the confidence to trade well. Once you have developed that rock solid confidence, you'll achieve long-term financial success.