All Entries in the "Trading Psychology" Category
Overcoming Trading Disasters
November 12, 2007 at 6:50 am
Running a subscription-based stock pick service, I have the opportunity to interact with quite a few traders on a regular basis. In a group of that size there are diverse styles, varying risk tolerances and numerous trading timeframe preferences. However, every style offers the opportunity for the occasional blow-up to occur.
I get contacted by traders on a somewhat regular basis wanting some help getting back on their feet after a trading disaster. Sometimes these blow-ups are self-infliicted (overtrading, breaking rules, throwing discipline out the window, etc.), while others are market-inflicted (news gaps, downgrades, corporate investigations, etc.). Both kinds are hurtful to a trader’s account and psyche, but the road to recovery is similar for both situations…if they’re willing to walk it.
I can certainly sympathize, as I have definitely been there. Blown stops, overtrading, revenge-trading, throwing rules out the window…all of it can add up to a big nasty down day that was never intended or expected. I’ve felt the shock, disgust, frustration, and pure disbelief of days like that, and it is absolutely zero fun. If you’ve recently suffered a big trading setback, I won’t kick you while you’re down, but I’ll be honest here and tell you what I think you ought to hear.
Paying Market Tuition
We all have our “refresher courses” in market education, so since we’ve paid a high tuition we certainly don’t want to lose the lesson. As long as these occasional disasters don’t knock us out of the game, they can actually make us better traders if we’ll allow it. They really ingrain in us the things we ought to be doing. The wounds from such events take time to heal from and they do leave a mark, but that serves as a reminder to stick with what we know works and get back on the right track. Until a full recovery is made, looking at your account equity reminds you of how it happened. It will motivate you like nothing else to avoid letting it happen again. There is some value in that, even if we overpaid for it.
Don’t make a bad day worse. Whether you get kicked in the teeth by a morning gap against your overnight position or you’ve simply hit your daily limit on losses, it can be a very tall order to make it back quickly. Many a trader can relate stories of attempting a comeback from a trade gone bad only to dig deeper into their hole, ultimately finding themselves down farther than they were when their bad day began. Chalking up the loss and staying picky so as not to add insult to injury can prevent more pain and sometimes let you chip away at it. If you venture into the market beyond your “uncle” point, be selective and keep your risk to a minimum.
Honor thy stop. Many active traders have gotten to the point where they trust their ability to exit when the time comes, but there simply is no substitute for having a hard stop in place. Knowing the key levels at which you need to close out a bad trade is one thing, but pulling that trigger and abandoning hope of a rebound is something entirely different. Ugly days have a tendency to tug at our need to be right, but remember that the market is always right. Limit the damage you will suffer from losing trades, and keep yourself in the game so that you can recover from losing trades without needing a miracle.
Return to what works. After a blow-up, aim to hit singles and restore your confidence in such a way that it can be built upon. Reflecting on stretches of consistent profitability will serve as a reminder of what has worked, and that’s usually the ideal place to begin. Get back to hitting singles and work your way back up. You can do it and it will take time, but if you can establish some consistency now, it will pay even bigger in the future.
Avoid Temptation
After a trading disaster strikes, the urge is usually to try to make it back in one play, returning quickly to previous account levels. You can easily double your pain if you fall for it, but those who succumb to that urge may never ever recover. I’ve seen plenty of traders take that route, and before they know it they’ve let one bad day send them into a downward spiral, never to return. Additionally, finding temporary success by swinging for the fence right after a big loss will only reinforce the very bad habits which you need to shun. Avoid it if you can. You might recover this time, but eventually that approach will seal your fate – and not in a good way!
Instead, return to a methodical way of trading where you’re looking for a day’s pay. Give your account time to recover before you start looking for the bigger swings again. The trader who suffers a big hit is rarely thinking clearly, and he needs to get back on track before considering any aggressive plays. That can take a while, so accept that fact if you really want to be good at this.
Another thing to consider is just taking a break from the market. Take a week off, and the market will be here when you get back. What you don’t want to happen is that you look back on is this moment and know that you put yourself at a crossroads in your trading career when you didn’t have to. Don’t let a frustrating day get the best of you so that 6 months from now you look back and know that dealing with it poorly ultimately sent you packing. Let your emotions come down and cool your jets. That way you will return with a clear head and a defined approach you want to take going forward.
Soaking it In
We all have a tendency to want to forget bad experiences, but that isn’t the best way to deal with a trading blowout. Spending some time reflecting on the events can be a healthy step in the healing and recovery process. Re-live those emotions and let that bad taste sink in so that you don’t do it again. Many trading blow-ups come as the result of a lack of willpower, but growing passionately dissatisfied with the loss of control will certainly help to avoid a repeat offense.
Find every possible way to build consistency and eliminate risk on each trade, every week, month after month. It won’t always be roses, but it certainly will eliminate the blow-up factor. Coming up with a defined plan for every trade ahead of time will force you to add structure. Blow-up days distinctly lack structure, and when we have them we put on trades on a whim, spontaneously throwing money at the market wall and hoping something will stick. Long-term trading success isn’t built on that – it’s built on consistency.
If excitement is what a trader is seeking, then the market certainly offers it. But if an escape from a monotonous job and the hope of making a living from the market is the aim, then trading blow-ups absolutely must be avoided. Put a cap on your daily max loss. Put a limit on how many trades you’ll let yourself place – if you only had 3 to make every day for the next week, you’d certainly make them count I bet. Rein in the horsepower and get a bat on the ball for a little while. The money can come later after you find your groove again, but don’t let one trading disaster trigger a much larger slide.
Finally, wouldn’t it be satisfying if you were able to designate a point in the future, weeks or months away when you would have fully recovered and climbed back from such an awful experience? Wouldn’t that be a huge source of confidence for you going forward as a trader? I know it would.
Resolve to climb back, be methodical, and stay patient. You can do this!
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]
Modern Day Darvas Methods
November 6, 2007 at 6:50 am
One of my favorite trading books is the all-time classic, “How I made 2MM in the Stock Market” by Nicolas Darvas. The book outlines how Darvas became a successful trader by overcoming his own mistakes through his ‘box theory’. Having gone through several different methods without finding any consistency in profitability, he ultimately became a chartist and a millionaire – imagine that! 😉
I’ve read this book probably 10 times over the years. One thing which stands out to me is that he found success by avoiding getting spooked out of good trades, which would have happened to him had he watched the tape too closely. Darvas’ inability to keep close tabs on the market at all times allowed him to let his trades fully develop, preventing him from micromanaging his positions. If you’re like me, you might stand to benefit from such an approach.
While traveling the world by way of his profession as a dancer, he received his weekly copy of Barron’s, and reviewed his stocks of interest through these quotes which were delayed by days. After reviewing the prices and locating his favorite chart pattern, he would wire detailed trade instructions to his broker. Although today’s markets move faster than they did back then, at the end of the day he was simply focused on the price action and how his stocks were moving – just as we all should be. This means he was not being distracted by the extra “noise” of every tick, geopolitical news, rumors or sentiment.
A member at TheStockBandit.com brought this up in the discussion forums not long ago, stating that since he works all day and can’t micromanage his trades, he has let them develop more fully without overreacting to every little blip that comes along. Many of us fight the urge to react to every tick, and with dirt-cheap commissions and sophisticated trading platforms, we can micromanage trades quite regularly if we allow ourselves to! I found myself in a doctor’s waiting room the other day checking quotes on my PDA, even though I knew my safety nets (stop loss orders) were in place. I think it’s a good idea to stay connected to the market (even Darvas did that via his Barrons), so long as we just don’t succumb to the urge of taking action when no action is really needed.
Here are a few ways a modern-day Darvas might prevent micromanaging trades:
* Use Your Platform Tools. Set it and forget it. Whether you have sophisticated tools like bracket orders or just the basics, use the tools your broker has provided to help you structure your trades in such a way that they have the ability to play out without needing your constant supervision. This will help you to trade without emotion and allow you to fully implement your strategy for the trade from start to finish.
* Hide The Number. I’ve written about hiding the number before, and I think it can be quite beneficial, whether it’s your account balance or even just your P&L on trades. A trader friend of mine claims that hiding his P&L has made the biggest positive impact in his trading – more than any tools or indicators. It’s an interesting concept, particularly if you find yourself overreacting to every little pullback or advance. By giving his broker trade instructions ahead of time, Darvas didn’t watch his P&L or spook himself out of trades.
* Turn off the news flow. Darvas found that his absence from the Street allowed him to stay in trades longer so that he could let his original game plan play out. That means he was not surrounding himself with rumors or opinions or the news flow. He didn’t make bets based on gut feel – he stuck to the charts, trading from the price action when opportunies arose. If for you that means turning off CNBC, avoiding comparing opinions with your trading buddies by staying off of instant messenger or Skype, then so be it. Whatever helps you make your money is what you need to focus on. Remember, Silence is Golden!
Every one of us has some things to practice and refine in our trading. If you find yourself letting every tick influence your trading decisions too much, then take more of a Darvas approach and see what happens. You just might realize that your original game plan will serve you far better than shifting gears on the fly in an effort to control every move of your stock.
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, Darvas[/tags]
Questions and Answers
September 26, 2007 at 7:03 am
Here are a few questions I’ve been asked in recent days by other traders which I thought some of you might find to be helpful. I’ve included the questions in bold below, along with my answers….
How would you describe your trading style, other than swing trading?
I am more of a quick-hit (Bandit) type of trader, so I don’t mind booking quick double-digit percentage gains in only a few days. For example, on Monday over at TheStockBandit.com we closed out a nice 15.5% winner in LDK, a stock we held just 4 days after buying it last Wednesday when it broke out at $61.00 from its ascending triangle pattern. The fast gains are my favorite kind, and I’m much more prone to be in and out of trades in a few days than to linger for weeks on end hoping my idea will eventually pan out. I stick with the charts, and I want to be in when there’s momentum and out when there isn’t. In addition to swing trading, I also like to catch some day trades for faster, smaller gains of a couple percent. These plays also come from the charts but typically in stocks which look poised for a temporary move where I can grab an initial breakout (or breakdown if shorting).
I’ve read about the Turtles, do you often catch major turns with your trading?
Quick money is fine with me, in fact I like it better than slow money! It adds up more rapidly and I don’t usually have the patience of a Turtle to stay long or short a stock (or index) for more than 2-3 weeks. I want my money turning over more rapidly, compounding faster.
How do you deal with closing out a solid gain, only to see the stock keep going without you?
It can be tough but that is sometimes just part of trading. I’ve found that when strong trends are present, multiple entries can set up along the way, letting me trade the same stock a few times profitably even if I don’t catch the entire move. I like catching a piece of it but I feel no obligation to participate in a long-term trend. I want to get in, get paid, and get out. That’s what my Bandit style is based on.
I have trouble leaving a nice winner on the table, how do you decide when it’s time to cash out? Any help would be appreciated.
For most of my trades I will set up my entry, stop, and usually 2 targets. Setting two profit targets allows me to book some gains along the way to ring the register while waiting for a potentially larger move to develop. That helps me offset the urge to take a good trade off the table, so partial sales are definitely helpful for allowing you to stay with the stock if even with a smaller position late in the trade. Most traders think they need to be IN or OUT of a trade, but few of them consider the idea of partial sales in order to scale out of a good trade carefully.
Trade well out there today!
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]
Don’t Wear Out Your Welcome
September 24, 2007 at 6:52 am
We’ve all been in trades which were treating us well, moving along in the anticipated direction as we giggled to ourselves about what we might spend the profits on….only to get slapped in the face when we get too greedy and stay too long after the move exhausts itself. It’s called wearing out your welcome, and it’s very tough on us as traders. It can easily lead to a loss of confidence, causing you to become timid with subsequent trades which you should be aggressive with. The fear of giving back gains again causes micro-management of trades, as a lack of trust begins to replace that winning swagger you once had.
Profits are the aim of our trading efforts, so it’s vital to recognize when the time comes to ring the register and pay ourselves.
Wearing out your welcome applies to a lot of arenas, so making a habit not to do it in other areas of your life can help to establish some better trading habits. For example, I was a professional golfer for a few years right out of college. A local country club allowed me access to their facility as a courtesy as long as I didn’t overstay my welcome. If they were hosting a tournament or it was a busy day with lots of members around, I slipped away and found another place to practice. Had I stayed too long, they likely would have asked me to leave, which would have been costly to me. As a result of my respect for them, we had a great relationship and they were happy to extend their facilities to me, knowing that I would not impose on the freedom of their members. All I had to do was stay aware of the conditions without getting consumed in my own activities.
Similarly, successful trading should be the same way. When you make a profitable trade and a stock meets your criteria for exit, don’t overstay your welcome! Knowing when it’s time to cash out and find another place for your trading capital is crucial to developing yourself as a profitable trader. Manage your trades well and you will end up happy. Staying too long and trying to squeeze that last drop of profit out of the trade will likely prove costly, not only in the current trade but perhaps also in your confidence going forward, depending on how much of your open profits you give back.
It’s been said that the last $0.25 can be the most expensive part of a trade, and I couldn’t agree more! So if you enter a stock for a trade, take most of your profits as a trade. Don’t say those 5 expensive words or let a trade become an investment. Always following your trading plan and resisting that urge to get greedy will let you come out ahead with both your profits and confidence intact.
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]
Satisfy Your Craving For Risk
September 17, 2007 at 10:36 am
Most traders at least occasionally have to deal with the urge….the temptation….the allure of taking on more risk. Sound familiar?
Risk’s Widespread Appeal
I’ve had the good fortune of spending time and trading with quite a few traders of all types. Some trade stocks, others trade futures or options. Some of them are day trading, others are swing trading. Some of them trade part time, others trade full time. But regardless of the characteristics which define their approach, every last one of them has at some point felt this urge of which I speak.
Oh there have been some great stories along the way of big wins and losses, but every single memorable story involves risk. Great days and even downright pathetic days will all boil down to how much risk is taken, and how well it is managed. If you stop to think about it, we’re all quite lucky to have the ability to make this choice every day. Those who become highly skilled in the balancing act of taking and managing risk effectively become successful traders. Those who do not will quickly become a mere statistic.
Gambles Must Be Small
I’ll venture to say that all great traders have a respect for risk in the markets they trade, and as a result they all have a certain level of discipline which goes along with it. I’ve commented to people before when asked if day trading is a high-risk endeavor that “it could be your own little Las Vegas every day of the week if you want it to be” but that taking that path almost guarantees a brief career as a trader. Personally, I don’t want a real job!
But what if you love to take occasional risks? Can you still be a great trader? What if you just have that urge to swing for the fence sometimes? Well, I’m here to tell you that it can hurt you, unless you do it the right way.
Taking high-risk trades doesn’t have to mean the kinds of gambles which get amateur traders into trouble. Stubbornness and speculation are not the same thing. The trader who blows out his account after adding repeatedly to a losing position is very different from the trader who puts on a small position as a hunch, risking a limited amount and never putting his trading livelihood on the line. Buying a lotto ticket isn’t the same as putting your car keys into a Friday night poker pot! Rolling the dice is alright on occasion, so long as the consequences aren’t significant enough to cause any real damage.
Some traders might want to buy a small amount of a high-flyer, trade some out-of-the-money options, or dabble in some illiquid little stock while waiting for an anticipated story to play out. Maybe you can’t fight the urge to take a few shares of a stock into earnings, or to try to game a Fed move after the announcement, both of which are a complete coin-toss. Perhaps you’re able to do this right alongside your normal positions and never let these little speculations interfere with your day-to-day operations, but if you’re like me, you find them somewhat distracting as your attention moves from what you should be watching to these little speculative trades like horses in a race.
The Solution for Speculators
Never fear, there is a solution: trade multiple accounts! I’ve found this to be the ideal way to separate different types of trades, allowing me to satisfy that occasional urge to take a risk while still keeping my attention where it needs to be – on my primary trading account.
Funding a speculative or secondary account with only a fraction of what your primary trading account is funded with will keep any profits or losses at a minimum, because remember, profits isn’t the point of a secondary spec account. This account exists solely to let you trade the high-risk plays in order to scratch that itch for an occasional home-run-or-strikeout type of play. The aim of this account is to let you act on those urges without the consequences if you’re wrong. After all, these are the kinds of plays which could really wreck your main account, so keeping them separate and tiny lets you focus on what matters most – pulling consistent gains out of the market in a more methodical way than going for the long ball.
These secondary accounts can also be used to hide longer-term plays from plain view, which will come in handy on occasion. What happens if you’re short-term bearish but have some long-sided positions socked away for the long term? It’s easy under the gun to lump everything together, but separating your timeframes across accounts can be an effective way to trade both timeframes according to your plan. Secondary or spec accounts also effectively hide the number while letting your higher-risk plays fully develop.
If you haven’t considered having a primary trading account and at least one smaller trading account to satisfy your urge for that occasional added risk you love to take, give it a shot and you’ll quickly see the benefits. Have the discipline to set one up. If anything, it’ll keep your pain to a minimum when you swing for the fence and miss, while keeping you focused on the types of trades which really pay the bills.
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]
How Gaps Change Motivations in the Market
August 10, 2007 at 8:19 am
With so many gaps hitting the market in recent days, it’s the perfect time to discuss them a little bit. Not only are they occurring in individual stocks as a result of earnings announcements (which is typical and expected), but we’re seeing a lot of them in the market indexes with the recent news flow adding to the volatility. Of particular note is how many of them have filled.
Before I get to the heart of this article, let’s look at an example in case you’re not quite sure what I’m talking about. Here’s a look at a 5-minute chart of the NAZ on Thursday morning, which gapped down some 40 points from Wednesday’s closing levels. It ended up rallying back up to fill the gap soon afterward, and even turned positive for the day after about 90 minutes.
(Click for full-size image, courtesy of TeleChart)
The Mechanics of a Price Gap
So how do these price gaps even come about? Well, they occur from a buildup of orders overnight which create an imbalance between buyers and sellers. Market makers and NYSE specialists have to take the opposing side of the public’s orders (they buy when you sell and vice-versa), so to offset this risk they do it at higher or lower prices, depending on the imbalance. When the public is buying en masse, market-makers will sell but at higher levels. That’s how gaps are created.
Once they’re in place, the next question is how do they get filled? Well, since many of them lately are occurring on emotional reactions to the news flow, most of the traders who would act on the news are the ones creating the gaps. After their orders build up which create the gap to begin with, there are very few traders leftover placing subsequent orders in the same direction, thereby limiting the extent of any follow through. As a result, the path of least resistance shifts to the other direction, meaning the gap now has greater potential to fill.
Psychology’s Role in Gaps
On top of the mechanics of how the gaps are created and filled, there’s also a lot of psychology at work which is adding fuel to the fire. Traders who are already holding positions in the direction of the gap are greatly tempted to take those profits, which means on a gap up that they create selling pressure as they move to book gains. The overnight windfall of “free money” motivates them to ring the register, and that only accelerates how quickly the gap may fill, especially when combined with the natural mechanics of a gap. Additionally, downside gaps are often viewed by those with cash on hand as an irresistible sale, unable to pass up the thought of buying “cheap” stocks. Their buying, along with the covering of short sellers, drives prices higher to fill the gap.
There is never a shortage of interesting dynamics at work in the market, and price gaps are a study in the psychology which can help us learn a lot about why things move the way they do. If you catch a gap in your favor, play it close to the vest and squeeze out of it whatever you can, but if it begins to fill just remember how momentum is shifting and decide quickly whether you want to battle it or not.
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]
Round Numbers
July 18, 2007 at 10:28 am
Lots of traders (myself included) notice that stocks behave differently as they approach round numbers, like $20 for example. That’s probably due to many stops being set around those levels, both on the buy and sell side. Once a stock gets through the large buildup of orders at those whole numbers, they often see a nice pop because the resistance (of sellers, or of buyers on the downside) is now behind the stock and it’s now able to move more freely.
But have you noticed the same thing in your trading account? As your account nears a nice round number (whether it’s $10,000 or $3,000,000), do you notice some “resistance” in clearing those zones? I sure have.
Of course, once they are cleared, things seem to cruise along nicely again. The trades tend to keep producing, and the account balance climbs.
I finally realized why that is….it’s because as my account approaches a nice round number, my attention gravitates to that number rather than focusing as I should on my trades. I get to thinking about how a particular trade might impact “the number”, but that’s not what got me there to begin with.
Fortunately, my broker has a great tool which allows me to hide “the number” with a single click, and that helps a lot. It makes me turn my attention back to my open positions so that I can manage them the best way I know how. That’s what good trading is all about – managing each position well.
If you’re finding it difficult to get over the hump in your account as you reach a certain number or account highs, HIDE THE NUMBER! I’ll bet it helps you focus on your trades much better, and that alone should get you back on the right track in growing your trading account.
Jeff White
President, The Stock Bandit, Inc.
Swing Trading & Day Trading Service
www.TheStockBandit.com
