All Entries in the "Trading Psychology" Category

Trading With Objectivity

July 8, 2008 at 10:39 am

Trading today’s markets is as competitive as any other endeavor. The brightest minds are involved, countless sums of money are at stake, and if you don’t show up prepared, you can get your face ripped off.

The Bottom Line, At the Top

Here’s the concept that so many traders miss: if your head isn’t clear, then do not trade.

Simple, but not easy, right? With dirt-cheap commissions and the ability to enter and exit trades with a single click, it’s incredibly easy to be overactive. It can be downright exciting to dart in and out of the market. The problem is, that typically leads to a loss of focus as you chase every tick, and rarely does it translate into overall profits. Instead, it can quite often lead to a nasty losing streak where you ultimately don’t know which way is up.

I can’t think of anything I’d like to avoid more!

Honesty Helps

Not long ago, a trader I know was being very up-front with his reasoning to stand aside, and it reminded me of the importance and the truth of this trader’s words. After being frustrated by a few trades, he commented that “today I don’t think I’ll be able to very objective….I’m clearly too angry right now to be productive. I don’t know if I’m like other traders but I’m (carrying) a lot of emotional investment baggage that will show itself in times like this.”

Wow! How often can you make that kind of admission to yourself? Self-honesty is a great thing to strive for in your trading, because the trader who knows himself and his own tendencies can avoid the pitfalls which so many other fall victim to.

This is indeed a trying time for traders of all but the shortest of timeframes. Long-term investors are getting hammered, and those with intermediate-term timeframes are having to stay very selective and hold high levels of cash while waiting for lower-risk opportunities to surface.

Whenever that’s the case, it’s of paramount importance to trade with your objectivity intact. If you’re thinking clearly and you have your head on straight, then nothing is holding you back and you can actively seek out new trading opportunities.

However, if you’re paralyzed by recent trading losses, if you have a distinct market bias which puts you at odds with the existing downtrend, or even if you have personal distractions away from the screens, then there’s nothing to justify being active. If that describes you, then sit on your hands for a little while and wait for the fog to lift. Remember your trading objective, and wait for the right conditions to surface (both externally and internally) before you get active again. You’ll prevent a lot of frustration by doing so.

Protecting Two Kinds of Capital

As traders, we all have to remember our top priority and keep our trading accounts intact so that we can stay in the game. However, often times we ignore the state of our emotional capital and the importance it carries. When we neglect the condition of our psychological capital, we leave ourselves vulnerable to a different kind of drawdown – the worst kind.

When we lose our objectivity and continue trading anyway, the harm done to our trading account can be significant, but often times it pales in comparison to what’s happening to our confidence. Once that erodes, it’s extremely difficult to replace, so take every measure possible to protect your confidence along with the dollars in your account. After all, survival is the secret.

Objectivity is key in this game, and to me it is a top priority to keep it intact. That’s how I’ll locate good opportunities to trade going forward without trying to force something that isn’t there.

Jeff White
President, The Stock Bandit, Inc.
Swing Trading & Day Trading Service
www.TheStockBandit.com

More on Learning from Trading Disasters

June 26, 2008 at 12:22 pm

The best way to stop a losing streak is to STOP!….Stopping lets your emotions calm down and lets you reestablish your momentum with your intellect.
– Marty Schwartz, Pit Bull

A couple of weeks ago, I received a pretty sad email. The trader who sent it had been losing money over the course of 6 years to the tune of $150k (yes, you read that correctly). He couldn’t stop. On this particular day the trader lost his last $16k gambling on an earnings release (the same gamble I caution against in my trading rules), sealing the fate of his account.

Another trader I know has really struggled to accept losses. Whenever she finds herself on the wrong side of a trade, instead of taking her medicine and stopping out, she often adds to the position and hopes her double-down is well-timed. In the past it has meant going through periods of inactivity while she waits for her stocks to come back, choosing to become a stuckholder rather than a trader. That hasn’t always worked either. Currently she’s stuck in losing trades with her capital tied up, unable to keep her money compounding due to her refusal to accept a loss and move on in expectation of making up for it elsewhere in another trade. She’s now hoping that the market will rebound to bail her out, babysitting those bad trades in the meantime.

Losing Control

Now, I don’t want to be Debbie Downer here 😀 , but the fact of the matter is that it happens all the time. Traders lose their heads, then they lose their way, and then they lose their shirt.

I continue to find reasons to harp on this lesson, and I suppose there will always be examples of the pain, frustration, and opportunity costs associated with letting losses get out of hand (my biggest trading fear). But to those of us who intend to survive, persist and succeed in the trading game, it’s worth occasionally stopping to examine the other side of the coin. After all, the mistakes of others serve as excellent reminders to us of what to avoid.

Get A Grip!

You might be struggling in this market right now, and if so, remember that there are a couple of things you can do. First, stop trading. Close out your losing positions and clear your head for a little while. It’ll be well worth it, both monetarily and mentally. Second, regain your focus. Remind yourself what you’re aiming to do with your trading, what your style consists of, and what you need to see before taking new trades. If you don’t see it, don’t push any buttons! And finally, don’t try to “get it back” quickly. That is the fastest way to compound your problem and double or triple the size of the hole you find yourself in.

It’s been said before that the market will expose your every weakness, and that’s certainly true right now, particularly if you’re biased to trading the long side. This is the kind of market environment that can bring the pain if you aren’t careful or in control of your trading. Fighting the current downtrend we’re in can make for a very tough road to travel.

As this market corrects, if you aren’t short, then cash is the next-best alternative until the technicals improve. So be very careful out there, don’t be a hero, and make sure you’ve got your game face on before getting active!

Jeff White
President, The Stock Bandit, Inc.
Swing Trading & Day Trading Service
www.TheStockBandit.com

Evaluating Trading Performance

June 12, 2008 at 7:25 am

A trader recently asked me how I evaluate my performance as a trader, and while to many the answer might seem obvious, in reality there’s certainly more than one answer.

That’s because there are numerous ways to evaluate our performance as traders, but let’s look at 2 general categories for the purpose of this post.

The most common way to evaluate performance is based purely on the results…P&L, win rate, max gain vs. max loss, drawdown depth from account highs, etc. That’s the quick conclusion most people jump to, and those statistics are definitely important, particularly to those who simply want to know the bottom line.

The only problem with the data is that it only tells part of the story. Many traders know the bottom line, but they aren’t sure where to get answers pertaining to how to improve it.

Getting across that bridge requires another strategy.

Another way to evaluate our performance as traders is to closely examine our trading process. Doing this in an honest and objective manner can reveal some very useful information when it comes to modifying our trading plan moving forward.

In order to accomplish this though, we have to ask ourselves some difficult questions in search for the truth, some of which might be:

Did I have a specific plan for that trade and follow it?
Am I taking plays which I understand and which are suitable to my trading timeframe?
Am I trading too large, and as a result making poor decisions as I respond only to my P&L?
Am I preparing myself for the trading day by doing my homework?
Am I trading responsibly?
Do I have some reliable strategies which can produce a profit over time?

I think the deciding factor between these two main evaluations is the difference between data and our mindset. Sometimes we trade with the proper attitude and emotions, yet our data needs fixing. Sometimes our data is a little off, but what really needs fixing is our attitude or our mental approach (overtrading, revenge-trading, carelessness, fear, etc.). Taking notice of the symptoms will help us know which way to turn.

Personally, I used to evaluate my data at the end of every month, but now that I’ve been at this for a while, my frequency and evaluation style will vary as needed. When things are going well, I really don’t evaluate much at all, I just try to keep doing what is working.

When I get in a slump, I’ll first look at my routine to be sure that’s in order. Then I’ll turn to my win rate and determine if something is causing that to falter (like certain chart patterns not working, for example). If I’m still seeking a solution, I’ll then see if my max gain vs. max loss during that period is out of whack, or if my average gain vs. average loss size comparison needs to change.

As I go through this process, total honesty with myself is required or else I’m simply wasting time. And as I see certain things begin to stand out, I’ll impose some restrictions or new rules on myself in order to first stop the bleeding, and then hopefully right the ship.

So the next time you get to thinking about how your trading is going, be sure to look at some different angles than purely your P&L. While that may be the bottom line that you’re striving to improve, examining some other areas of your trading process can shed some very helpful light on how you can go about growing your trading account.

Trade well today!

Jeff White
President, The Stock Bandit, Inc.
Swing Trading & Day Trading Service
www.TheStockBandit.com

Patient Progress

May 22, 2008 at 10:09 am

Developing an effective trading methodology takes time and patience. It doesn’t happen overnight, even if you hit a home-run in your first at-bat. It’s been said there is no substitute for experience, and that is as true in trading as it is anywhere else.

There will always be stories of new traders who had no idea what they were doing who happened to get lucky with a big score early. They are the exception, not the rule, so pay them no mind. The truth is that becoming a great trader and gaining the experience you’ll need is likely to take some time, so pull up a chair!

I’ve always found it interesting how in the trading realm, speed does not necessarily trump wisdom and discernment when it comes to capturing big profitable moves. Oh sure, the gunslinger-type might be able to impress with some rapid-fire executions, but they’re often outgunned by guys who have been around the block a time or two. The point of trading is to make money, so even if your trading style involves the need for speed, remember that it’s going to take some time to formulate your opinion. You might be eager to learn, but be careful not to rush the process.

Truth be told, you’ll be far better off pulling up a seat beside an experienced trader any day of the week than to hear a story from an overleveraged and overconfident new trader who just made a heroic trade. The experienced trader has been around and seen it all, and often times can spot a move coming from a mile away. Plus they have an uncanny ability to sift through all the noise and get to what really matters – gauging the forces of supply and demand. Stated otherwise, they know how to wait on the market.

So as you proceed down the path in search of profits, remember to be patient with yourself. Take it slow if you’re just starting out, and don’t force trades, especially if you don’t have a defined trading plan or method. Preserving your trading capital so that you can stay in the game is your number 1 priority if you’re going to find success in this game.

Observe the market, observe other traders, and always observe yourself. Don’t let your emotions get the best of you – and you will find yourself fighting them plenty! Giving yourself the best odds for success in every individual trade, every week, and every month will leave you knowing that over time you have an edge.

And finally, keep tabs on your progress – not just monetarily, but psychologically as well. If you’ll be honest with yourself along the way about what you’re learning and how well you’re applying it, you’ll shorten the learning curve significantly. The idea is to always be gaining momentum as you progress, just like a good trade!

Trade well out there!

Jeff White
President, The Stock Bandit, Inc.
Swing Trading & Day Trading Service
www.TheStockBandit.com

What If…

February 20, 2008 at 6:50 am

Do you ever find yourself asking, “what if..?”

Maybe you’ve done it in traffic when the lane you had been in is now moving faster than the one you’re currently in. (I hate when that happens.) What if you had stayed in that lane? What if you had taken an alternative route? Would you get to where you’re going any faster?

Well, trading offers unlimited opportunities to ask yourself exactly these kinds of questions, but are those thoughts worth exploring? It’s easy to beat yourself up over moves you did or did not make, so only look in that rear view mirror if there’s something you stand to gain. Let’s unpack this idea a little further.

The Plan

Over at TheStockBandit.com, I put out a nightly newsletter discussing the market averages and the individual trades I’m making. Some are swing trades with a multi-day timeframe, and some are purely day trades where I’m looking to rent a stock for up to a few hours to catch a smaller move. Regardless, every play has a designated trigger price which the stock needs to trade through before I’ll enter the trade, because I want to buy stocks on the way up and short stocks on the way down.

That concept is nice until we get a price gap. We all know that stocks don’t have to open tomorrow at the same level they close at today, so that can sometimes throw a kink into my plans. Sometimes a day trade candidate I’ve listed the previous night gaps through the trigger level. When that’s the case, I don’t chase them, at least not on the open. For day trades, my risk is kept tight and a gap represents a change in the risk/reward profile of that trade.

Every now and then, a day trade candidate will gap through my trigger price and never even look back. They just cruise higher while I sit there and watch, not participating. When that happens, my initial response is inevitably to kick myself, but that doesn’t serve a purpose. Instead, I need to review the stock and see if missing a great move is cause for concern.

Let’s look at an example and I’ll show you what I mean.

Monday night, I listed CLF as a day trade candidate for Tuesday if it could trade up through $118.30. On Tuesday morning though, CLF gapped through that price by nearly $2, so I skipped the trade not wanting to chase the upside gap. I’ve seen a ton of them fill, especially on the first trading session of the week. Nonetheless, CLF proceeded to run another $6 rather quickly after gapping up $2, and it wasn’t easy to watch! Here’s a look at the move it made after gapping above the trend line:

(Click for full-size image, courtesy of TeleChart)

The Evaluation

After passing on a trade and seeing a move like that, it’s time to evaluate what happened. Sometimes a distraction can be the cause for missing a move. Other times perhaps it’s diminished confidence after sub-par trading, or maybe it’s even due to a stock moving so fast that we simply choose to cancel an order.

What we’re wanting to determine is whether what happened was the exception or the rule. If it’s the rule, then there had better be a good reason for skipping the trade! However, if it’s the exception, then there’s no need to beat ourselves up over not catching it.

In this case, there were a couple of logical reasons why I chose not to take the trade. First was the frequency with which gaps have been getting filled lately. I don’t want to buy into what is typically a great opportunity for selling. Second is the shift in the risk profile of the trade. With a closer target on my day trades, I absolutely have to keep my risk in check, and that means a tight leash on such trades. I can’t make a habit of paying up by $2 above a trend line when my timeframe for the trade is minutes or hours, as that’s rarely acceptable when my timeframe is weeks. With CLF set to report earnings this week, I had to have an abbreviated holding timeframe for the trade (as per my trading rule of avoiding earnings).

So upon further review, this time I get a pass. It can be a helpful habit to run through this thought process after the fact in stocks which are in your trading plan, whether you took the trades or not. But when you do so, limit the time you spend looking backward. Take what you can from each experience, and if you find something useful, apply it going forward. Stick with your plan and take the trades which you feel have the highest probability of working for you. All else can be ignored.

Jeff White
President, The Stock Bandit, Inc.
Swing Trading & Day Trading Service
www.TheStockBandit.com

[tags]Stock Market, Day Trading, Stock Trading, Swing Trading, Investing[/tags]

Deal or No Deal

January 22, 2008 at 12:00 am

One television show I find myself mindlessly watching probably once a week is Deal or No Deal. Perhaps the allure of the spotlight is simply too much to turn down, but it’s uncanny how the first good offer is never taken and the participant’s greed overcomes them to make poor financial decisions.

Often they are lower-income earners with a shot at a million, and something like $200k just isn’t enough for some reason. I can’t help but wonder if for many of them they had been offered $200k before they even taped the show that they’d take it, yet when on the air it’s a completely different story. The show offers them a gift and they turn it down.

You’ve no doubt made the same comparison, but I can’t help but relate this to trading. A good trade turns great on news or a major market move, and all of a sudden a home run isn’t enough – you want a grand slam.

My suggestion? Don’t fall victim to that mentality on Tuesday if you’re short coming into the day.

The giant gap we’re poised to see is a gift to you from the market, so push that big button quickly and ring the register! You might even have an opportunity to flip the position if we start to see buyers step in to scoop up bargains, but otherwise you could take the rest of the day off! When you see your P&L and it’s larger than you expected, it’s time to take the market’s gift.

For more market commentary, be sure to check out this week’s Market View page over at TheStockBandit.com. You might find some food for thought before you start your trading week after taking a closer look at the index charts which were posted tonight (and every Sunday). Hope you enjoy it!

Be patient this week and don’t get greedy. 😉

Jeff White
President, The Stock Bandit, Inc.
Swing Trading & Day Trading Service
www.TheStockBandit.com

[tags]Stock Market, Day Trading, Stock Trading, Investing, Swing Trading[/tags]

Remember Your Trading Objective

November 13, 2007 at 9:31 am

Emotions sure are running high right now! We’ve seen tremendous moves take place in a very short amount of time, and it may not be over yet. Momentum leaders like GOOG, AAPL, RIMM, and BIDU, which were only days ago running to new highs have since fallen out of bed, getting hammered with profit-taking. The directional change has been fast and fierce, and it has opened the doors of opportunity for nimble traders.

But nimble traders aren’t the ones suffering. The part-time traders are. Obviously any bull lately has suffered some pain, but that’s not what I’m referring to. I’m talking about the traders who aren’t quick on the keys, the ones who are just trying their hand at some dip buying. They don’t realize the sheer panic of so many other market participants which they’re buying in the face of. They don’t realize that even on a bounce bulls can become sellers. There’s a lot of supply just waiting for a chance to get liquidated once some relief comes along and higher prices are seen, and that’s precisely what can bring the pain to the uneducated part-timer.

There’s a huge urge for traders to catch market turning points, probably because so many traders fail to check their ego at the door. That desire can cause a trader to step out of their usual routine and attempt to catch a falling knife like this market or call a top when things get stretched to the upside. Rarely does it pay off. Usually it costs some money and objectivity, and what mojo you had before will quickly disappear.

This is an incredibly volatile market right now, and it’s no time to be trying new aggressive strategies (such as trying to buy the low). Your trading objective is to stay patient and wait for the conditions to arrive which suit your trading style. If you don’t see those conditions, then don’t play. Wait patiently and spend your time tending to other matters. Because the truth is, eventually this phase will end and a new one will begin which may be far more suitable to your trading style. Being willing to sit out volatile times like this will preserve capital and allow you to resume profitability once your ideal conditions surface again.

Shun the urge you may have right now to add new trading styles to your arsenal. Stay focused on what you know, and if you don’t see it then be willing to wait.

Jeff White
President, The Stock Bandit, Inc.
Swing Trading & Day Trading Service
www.TheStockBandit.com

[tags]Stock Market, Day Trading, Stock Trading, Investing, Swing Trading[/tags]