All Entries in the "Trading Psychology" Category
Making it Back
June 29, 2010 at 7:01 am
Anytime the market makes as big and consistent of a run as it did from March 2009 to the April peak, there’s a growing confidence that invites new money to the game. Those who were completely spooked in early 2009 saw an impressive rebound, not only in prices but in their willingness to participate.
Of course, the longer in the tooth a rally becomes, the closer the end of it naturally gets. That’s unfortunate for some, but it’s simply the nature of risk in the market. After all, those who step out on a limb first will stand to make the most if they’re proven right, while others who wait for more of a sure thing may be among the last to the party right before it ends.
It’s natural for someone who buys at or near the peak to quickly find themselves underwater, and at this point just a short time removed from the April highs, there are no doubt many folks who were late to the party now feeling serious pain.
That feeling of panic has set in for them, and in most cases, there’s no exit plan. The failure to designate a safety net prevents level-headed execution of a game plan, so now they’re forced to think fast in the heat of the moment, sparking a slew of potential mistakes. Making it back now becomes the primary goal, as if there’s something magical about getting out unscathed. Nevermind the fact that the entry was made in hopes of turning an actual profit.
Exaggerating Errors
Traders face this dilemma on every timeframe when in a bad trade. With a negative P&L on the day, week, month, or year, the focus turns from sticking with a strategy to doing anything that might get them out of the hole – and fast.
Along with this mindset comes an urgency factor which may not have been present before – uh oh! The sudden recognition that they might be perceived as having been wrong strikes fear in their hearts and now the race is on to erase the losses.
I’ve been there plenty of times, and it’s no fun. But over the years, I’ve found several ways to reduce the impact of my errors. Here are a few things I try to do when I find myself underwater:
- Slow down. Often times the desire to just get into anything that might be moving means it’s also easy to overtrade. Spinning my wheels won’t help my P&L, and it sure won’t help my objectivity.
- Get selective. Rather than jumping quickly on anything that comes along, I’m going to be much more effective if I wait for the cream of the crop to surface. Waiting for the best risk/reward opportunities to arrive means passing up many other plays along the way, and returning to holding a high standard for where my capital is allocated.
- Trust your method. Some stretches of trading are better than others, absolutely. At times it’s extremely frustrating, while other times it feels almost easy. So there will be ups and downs, but over time my method has served me very well. When I find myself with the wrong color P&L, I remind myself that I’ll eventually get my groove back, so long as I don’t stray far from my style. As they say here in Texas, “dance with the one that brung ya.”
Translation for Timeframes
On a day trading timeframe, it can be tough to take a few hits early in the session. Your confidence gets quickly shaken, and you wonder whether it’s just a tough start from which you can recover, or if instead it just isn’t your day. The key is to avoid emotion-based decisions, which will lower your standard for trades and shift your attention to the money rather than the price action. Never do you want your losses to cause you to force trades, so if that’s your primary motivator, get away and return another day. If instead there are still ample opportunities for good trades, patiently wait for the best risk/reward setups and then make the most of them.
For a swing trading timeframe, streaks will happen where at times it seems you’re on the wrong side in every trade you place. Making it back will take a little longer, but it can be done if you’re methodical about it. Cut down your size immediately while you wait to find your groove, as that will slow the pace of your losses if you continue to time trades poorly. Become selective, because confusion can set in quickly if you aren’t following a clear strategy with a known objective. Patience will be crucial, but it can pay quite well, too.
Finding yourself down in a hole is no fun, but it’s a reality of trading that each of us will face from time to time. So take a long-term view with your trading career, even if your timeframe for each trade is quite short-term. Doing so will keep you level-headed when it’s the hardest, and it’ll make you tougher and better as you find your way back on the right side – and you will!
Trade Like a Bandit!
Jeff White
Swing Trading & Day Trading Service
www.TheStockBandit.com
Are you following me on Twitter yet?
Are You Too Motivated to Make Money?
June 7, 2010 at 1:38 pm
I know you aren’t lazy. The fact that you’re reading this tells me you care enough about your trading to hunt for clues that will make you better. You’re motivated.
Many of us think of ourselves as hard workers. Lazy gets us nowhere.
The problem is that when it comes to trading, motivation doesn’t always translate into greater profits. Incorrectly applied, motivation in trading can actually bring on some serious heartache.
The ‘O’ Word
It’s definitely true that the timeframe you trade should match your personality. Those who are patient can take longer timeframes while waiting for larger moves to develop. Those who are less patient will tend to find that the shorter timeframes suit their needs for knowing if they’re right or wrong.
But…that’s not what I’m referring to.
Regardless of your preferred timeframe, the fact is that you can still overtrade. Whether your average number of transactions per week is 100 or 3, there will still be a point at which you should be done. Perhaps the move of the day has already happened, and you’ve got a sense of that, but you keep pushing buttons in an attempt to make something happen. Maybe your P&L is flat, and you hate the idea of fighting to a draw. So, you lower your standards and take some trades in hopes of either making some money or losing some. Hey, at least you’ll have something to show for your time, right?
Or consider another scenario in which you’ve turned a quick profit, whether through an overnight position that gaps in your favor, or simply some quick trades early in the session which put you nicely positive on the day.
If it were 90 minutes to the closing bell, you’d probably shut it down, but it’s only an hour into the session and you’ve got no idea what to do with your day if you quit now. So…you stay and trade and give some or all of it back.
You hate yourself an hour or two later, wondering why you didn’t just ring the register on the early profits and call it a day. In hindsight, up a little is much better than flat or down. But your greed and your ‘motivation’ really cost you.
Sound familiar? It is to me. I’ve been there way too many times, so these are mistakes I’m all too familiar with.
The Real Meaning of Lazy
For me, it really stems from the (incorrect) notion that not trading = lazy. That’s dead wrong, but periodically I’ll operate under that mindset and later on wish I hadn’t. I’ve never been a lazy person, because there’s always something to do. I like the feeling of getting things done. And when the market’s open, I know what my job is – to trade. Or so I tell myself.
In reality, my job as a trader is to put money at risk when there’s an expected payout of greater proportion. That should translate into profits.
My job isn’t to continually churn my account, try to grab every stock on the move, or to hit a daily volume target. I need to feed the family, pay bills, and build my wealth through my trading. That’s it. Pretty simple, but easy to forget when quick gains come along or when I battle several hours and make no progress.
Oddly enough, being lazy as a trader involves sitting at your desk when you should be doing something else. It’s hard to get up and walk away when that ticker’s still on the move. The allure of ‘what if’ drives too many to stay right there in their seat for just a little longer, and it’s costly.
3 Tips to Stay On Track
There are several ways to stay on track with your trading, so let’s take a look at a few of them.
1. Remember your goal. This seems obvious, but a regular reminder of what you’re striving to achieve through your trading will be a tremendous help to you. Maybe you keep a photo of your family close by as a reminder that you can’t afford big down days, and it helps you walk away when you aren’t seeing the tape clearly. Or maybe you keep a picture of that boat you want to buy close to your screens, helping you to focus your efforts on only the cleanest chart patterns so you can reach that goal sooner.
It’s a fine line to walk between fixating on something that’s actually a distraction, versus keeping a reminder in front of yourself to maintain the proper mindset. However, if you’re keeping yourself reminded of what it is you’re after, you won’t leave yourself much room to stray from the route you’ve laid out to get there.
2. Define your job. The word ‘trader’ might suffice when you’re telling someone else your occupation, but when it comes to the daily tasks you set out to accomplish in your trading, some boundaries should be defined. With greater experience comes greater clarity, so this will be easier for those of you who have been in the game a while. Nonetheless, it’s important to outline for yourself which kinds of market conditions you’ll be active in and which conditions will warrant standing aside.
Outside the realm of market conditions, you also should have some general guidelines for your P&L on any given day, week, or month (depending on your trading timeframe). For example, as a day trader, perhaps you structure a typical max-loss amount which will mean no more trades. That might be $500 per day for some, or $5000 per day for others. But having it in place will serve as a system breaker and avoid overtrading when you’re clearly out of sync.
You can also designate a general target for gains, that when it’s reached, you’re then committed to retaining a certain amount of those gains. Suppose once you’re up $1000 on the day, you’ll commit to keeping $500 of it, no matter what. You can keep trading and add to it (if the right setups come along), but you’re going to book an up day regardless. These things will help to protect not only your capital, but your confidence as well.
3. Have something else to turn to. Simply put, if you’ve got a go-to list of things to tend to always at the ready, then you’ll have that much more reason to shut down your trading once you’ve hit your loss limit or booked nice gains on the day. Rather than falling into the trap of sitting at the PC and pushing more buttons out of boredom, you’ll always have something to move on to when the time comes. That might mean you run some errands, get organized, go for a bike ride, or grab a book. It’s not so important what it is, so much as you have another activity to turn to when you recognize you shouldn’t be trading. Have that ‘thing’ in place at all times, and you’ll avoid overtrading.
In summary, dirt-cheap commissions and sophisticated trading platforms with all kinds of bells and whistles are really great to have, but remember one thing…they only exist to help you do your job. Don’t use them as reasons to be active when you should be sidelined. Know your objective for the current conditions, for the next trade you take, and for the reason you’re trading to begin with – and be not distracted.
Trade Like a Bandit!
Jeff White
Swing Trading & Day Trading Service
www.TheStockBandit.com
Are you following me on Twitter yet?
Selective Memory
May 26, 2010 at 10:40 am
Trading is one of those things that really requires a selective memory.
The same kind of selective memory that I needed when I was on the dating scene. I chose to ignore the bad experiences I’d had with certain girls, and I stayed in the game long enough to find the wife of my dreams.
It’s the same kind of selective memory needed on the golf course. That bad shot from a few holes ago needs to be suppressed for this next one across the water hazard. Otherwise, you’re toast.
Some traders never develop this skill, unfortunately. They cling to the past, unwilling and unable to let it go for the sake of making that next trade. Getting faked out of a good trade last week prevents them from taking a similar setup this week, afraid it will hurt their account once again, or worse, their ego.
They have a good memory, yes, but they’re not using it in a good way.
That’s no way to trade. Clinging to memories which don’t empower you is a form of recency bias, and it can really prove costly in this game.
The Petrified Don’t Profit
Take last week, for example. The downdraft in the market left many trying to step in and get long near what they thought was the low of the dip. They were early on Wednesday and Thursday. Those who threw in the towel never took a swing at it on Friday, which provided the best rally of the week with the morning gap fill and continued climb into positive territory.
Sound familiar to you? Is this starting to ring a bell?
In a recent conversation with my friend Charles Kirk, he was telling me about some newer traders he had been working with. His delight came not only from helping them discover more about trading, but also from their attitudes in taking trades during difficult market conditions. He mentioned how the newer traders see a setup and just go for it, rather than hesitate the way some experienced traders do who are dealing with recency bias.
Love is a Choice
Love is commonly described as a feeling, but true love is really a choice. It’s a commitment to look beyond one’s faults and accept the entire person. It’s a decision. Marriages which last 40, 50, or even 60 years are based on that decision, long after superficial beauty has faded.
Having a selective memory in your trading is also a decision. It takes commitment and practice to make it a routine, but it’s worth it. Expect the best from yourself, but along the way, know that you’re going to make some mistakes. There will be headfake moves which shake you out. They aren’t fun, but they don’t have to sideline you and damage your confidence forever.
Mistakes cost money, so they’re worth learning from. However, they can also cost us opportunity if we allow the memory of them to stand in the way of taking new trades which suit our plan and which offer great potential rewards.
Look for some mistakes you made this week, learn from them, and then choose to look beyond them so they don’t cost you any opportunity.
Trade Like a Bandit!
Jeff White
Swing Trading & Day Trading Service
www.TheStockBandit.com
Are you following me on Twitter yet?
Prepare for Anything
January 21, 2010 at 7:00 am
On several occasions in recent years, I’ve taken a spring trip with my dad and some friends to Arizona to play golf for a few days. I love the desert, and it’s fun to spend some time with the guys and make a few birdies (let’s not talk about the bogeys!).
Around Scottsdale, and particularly to the north of town, it’s quite common to see single-engine planes buzzing around the skies. Maybe it’s the great weather and silence of being on the golf course that made me notice them, but they seem to be everywhere. They’re pilots in training, and they’re starting small before they work their way up to something larger (like perhaps, something with more than 1 engine!). I respect that approach, and we’ll touch on that shortly.
But one thing that really caught my attention is that they actually shut off their engines – on purpose – over and over. What? It’s one thing to hop in that little thing with what sounds like a lawnmower motor on it, but hey, it’s no glider. Why would they do this intentionally?
They’re creating stall conditions and learning to recover. Learning to purposely manage a malfunction in a controlled environment (well, partially) helps them avoid panic should it ever happen unannounced. Eventually, they’ll become the kind of pilot I wouldn’t mind flying with.
From One Cockpit to Another
As a trader, sometimes that malfunction happens without warning. Sometimes right after an entry is made, the position rips right against you, perhaps even before you’ve had time to place a stop. Sometimes it’s an overnight trade which has unexpected or unscheduled news hit which causes the stock to gap against you, perhaps even beyond where you had intended to exit in the event of a failed trade. It’s painful and shocking, and more often than not, it results in panic for the untrained trader.
So how do you deal?
It’s almost impossible to mimic the emotions that go along with such a situation, but here are a few simple things you and I can do in order to avoid panic.
1. Expect it to happen. That doesn’t make us negative thinkers, mind you, but rather traders who are mentally prepared for anything – including the worst-case scenario. After all, if we’re prepared to face the worst, what could possibly cause us to panic? The point here is that through logical thinking as well as visualization, unexpected events and adverse moves can be mentally rehearsed to the point that when it does happen, we’re focused on the solution rather than the problem.
2. Keep a level head. By doing #1, we’re freed up to maintain our wits. Throwing a temper tantrum or freezing up entirely is only going to make it worse. The deer in the headlights stands motionless (at least here in south Texas), which means it’s up to the car to change course if something awful is to be avoided. Don’t be the deer – you can’t base your protection on hope that the stock will change course for you. Cooler heads will always prevail, so exercise self-control when you find yourself in a sticky situation and your mind will be available to strategize.
3. Expect to survive. Trusting that you’ll be alright in the long haul will help keep things in perspective, just as they should be. What might feel like a catastrophe to the inexperienced trader might be a little unsettling to you, which is something you can absolutely recover from. At the worst, it’s one bad trade out of your next 1000 trades, so consider it a spot on the windshield to look beyond rather than something worthy of doing more damage to you than it already has.
4. Never allow one trade to be too important. This of course takes into account position sizing and position risk, because the financial hit is the one that comes first. Putting on trades which are larger than they should be is nice when they work, but when they don’t, look out. Staring at a loss which is bigger than you’ve faced before will bring instant regret. Similarly, trading within one’s limits also means that no trade is ever emotionally too important. The aftermath which follows a big loss can be more emotional than financial, so walk the line carefully when choosing position size, and you’ll avoid a tailspin.
The market will dish out surprises from time to time, no doubt about it. Train yourself to expect it, and mentally rehearse some ways you’ll respond when it happens. You’ll ultimately feel as though you’ve been there, and your second reaction (following ‘oops’) will be a remedy rather than crippling anxiety and fear.
Trade Like a Bandit!
Jeff White
Are you following me on Twitter yet?
The Envy of Other Traders
January 7, 2010 at 7:30 am
If you have traded for virtually any length of time, you’ve no doubt found yourself on both ends of the spectrum when it comes to winning and losing.
At times we can do no wrong, nailing trades with concise entries and the ability to scale out at our own prices. It’s nice. And during those times when it feels much more easy to fatten our accounts, it seems like such a foreign concept to lose. How could I ever have done that?
The Grass P&L is Greener on the Other Side
Other times, we find ourselves dead wrong with terrible timing. We’re dead wrong, and it feels like the moment a trade is entered, it begins moving against us. Frustration builds while confidence erodes, and you wonder if there’s something else you should try – anything to stop the bleeding. To top it off, knowing that we’re building the accounts of those guys on the other side of our trades is completely awful!
When we’re at our best, the traders we’re going against know the P&L is greener on the other side. Our side. It’s not about keeping “them” down, but rather ourselves up with consistency.
If there is one reality of trading, it is that we will indeed have losing trades. But how can we find ways to increase our odds of staying on the winning side more often?
5 Ways to Maintain an Edge
Put Yourself in Their Shoes. Considering the other side of your trades on a regular basis can give you a valuable taste of the emotions driving your competition to take action. Recognizing the greed or fear of traders by way of the price action will give you a valuable edge, whether by way of timing a new trade or adding to your confidence in an existing position.
Remember that Cash IS a Position. At times you’ll need to move to the sidelines, and others will wish they were with you. Feeling like you need to be in something all the time is a major but common mistake. When you see no great opportunities, sit on your hands.
Maintain High Standards. This goes hand in hand with the previous point, but those who overtrade are not keeping the bar set high. They’re lowering the barriers to entry, so to speak, by accepting mediocre setups, sloppy patterns, and generally trades with risk/reward profiles that aren’t in the upper echelon.
Zig and Zag. Many of us do have a directional bias with our trading, which may simply be a part of our nature. But trading isn’t about making ourselves comfortable – it’s about extracting profits. Sometimes that requires us to lean against or, dare I say, step a little outside those outer boundaries of our comfort zones. Consider the occasional short sale, because there are always weak stocks (even in a bull market). And even within a bear market, there will be strong stocks to focus on. Keep an eye on the outliers, there’s opportunity there.
Don’t Hesitate. When you see the writing on the wall that you’re poorly positioned (on the wrong side, or on the sidelines), act immediately. Hesitation opens the door for doubt, which results in costly delays. You either end up chasing a stock too far and end up with a poor entry, or you miss it entirely. So the moment you know you need to be out of a trade or into another, do it. Stay sharp, and show up focused. Speed is everything in this game, and absolutely includes your decision-making.
Trade Like a Bandit!
Jeff White
Are you following me on Twitter yet?
The Importance of Off-the-Screen Goals
December 17, 2009 at 7:54 am
Ah, the end of the year! A time for pigging out, hanging with relatives, and reflecting on the previous 12 months.
For some, it’s a rewarding time. Looking back on achievements and areas of growth brings some satisfaction and motivation for the year to come. But for others, disappointment and disgust dominate their thoughts as they wonder how they could have set such lofty expectations just 1 year ago.
Goals can be great. They can drive us to achieve more, reach higher, and to get clear on what it is we really want.
But goals can also hinder us when we find ourselves in a rut. They can be a psychological burden, annoying us – no, pressuring us when we stop to think how far away from them we are. In those times, we need no additional motivation – our own frustration is plenty. And in the trading realm, there are times when that is definitely the case.
I’ve realized over time something of great value: I really need off-the-screen goals.
The reason why is so that trading isn’t everything. I don’t want it to be everything. I do love it, but it isn’t my life.
When trading is going well, it’s great. But when it isn’t, I’ve found that mentally I get a huge boost to be achieving in other areas of my life. It’s just part of my personality that I need to be achieving somewhere in my life, so if I rely solely on trading to provide that, I’m setting myself up for some disappointment during those challenging stretches. I don’t want that – life is too short!
Let me encourage you to first make the time to set some goals for 2010, but furthermore, to include some off-the-screen goals to strive for. Maybe they pertain to relationships, health, travel or a hobby. What matters is that you’ll have them, because trading isn’t always fun – at times you’ll need those diversions away from the screens.
Remember, trading isn’t everything, so don’t treat it like it is. Give it your very best day in and day out, and be passionate about it, but don’t let it dictate your happiness. Bring some balance into your life, and it’ll help your trading in 2010.
Trade Like a Bandit!
Jeff White
Are you following me on Twitter yet?
Other Goals-Related Posts:
How to Lose Like a Winner
December 15, 2009 at 1:48 pm
I recently heard that in relationships, you can be happier if you choose to accept the whole person. The idea is that instead of trying to weigh everything you like vs. everything you dislike, accepting them as generally positive is a better decision. Thankfully, my wife does that for me, looking beyond my numerous flaws and allowing my positives to overshadow them.
If you stop to think about it, this is a pretty good way to measure everything and everyone in our lives. Staying objective about ‘it’ lets you recognize that overall it’s a positive thing.
The successful trader is no different. He looks at his overall trading operations for a given timeframe, and if the profits are there, then the mission was accomplished.
That’s not always an easy thing to do. In fact, I’d suggest that your inability to view your trading in that general light could put you in the popular camp of those who can’t cut it in this game. It’s much more natural to allow specific trades to stand out and influence our line of thinking. It can result in a directional bias, a pet stock, or a slew of other closed-minded patterns of thinking – all of which can lead to the destruction of one’s account.
What we want to do is to win. And if winning is defined as overall profitability, then winning will involve some losses along the way. You and I have to be able to lose like winners!
Here are 4 ways you can do that:
1. Allow no single trade to define your trading. Dwell on it for a short time if you must, but then move past it whether it was a big win or a disappointing loss. You might have put a lot of preparation, concentration, and capital into that one great idea, but it’s over now. Either pat yourself on the back for a trade well done, or brush yourself off and get back on your feet. Think about how you can use it to your advantage. Maybe you fattened your account with the profits from it, or expanded your comfort zone because of it. Great. Get back on your horse.
2. Win the war, not every battle. Put on individual trades which have sensible risk/reward, but place emphasis on your overall operations rather than each individual effort. Basically, see the forest and not just the trees! Accept that there will be some some losing trades, perhaps frequently, depending on your timeframe, and aim to overcome them with larger or more frequent winners. The point of taking this step is not to go to battle with every trade due to the mindset of having to be correct. Accept it when you are wrong, and no single ‘battle’ will ever sink your ship.
3. Cast fear aside. Fear is arguably our biggest enemy in trading. It can cripple you if you allow it. This is manifested in ways like trading so small that a win or loss has virtually no impact, or maintaining stops so tight that the stock isn’t able to fluctuate naturally without shaking you out. Those who spiral down the drain of losing are often times gripped by fear. Don’t allow that to be you. Maintain a healthy respect for the market, but don’t be afraid of it.
4. Learn from every loss. You’ve paid the tuition, so you might as well get the lesson! This makes a loss something you can still gain from, and every winner does it. Always seek out ways to increase your trading knowledge, whether through specific education like a stock trading course or simply picking up on subtle behaviors in price action that are starting to surface. Is the market starting to change, or are you refusing to avoid methods which aren’t paying off? Keep an open mind, always look for the lesson, and let the long-term losers be the stubborn ones.
Lose like a winner this week, and you’ll have more to show for it.
Thanks for stopping by and I’ll see you here soon with more. Until then…
Trade Like a Bandit!
Jeff White
Are you following me on Twitter yet?
