All Entries Tagged With: "Trading Psychology"
Reliable Technical Action
August 12, 2010 at 8:22 am
I was pointed to a post earlier today which I couldn’t disagree with more. The author opined that trading this market is a ‘waste of time’ and that the ‘real’ money won’t be made until a month or two from now.
If that’s your attitude, you’ll be exactly right. Attitude is everything – especially in trading.
Using broad, absolute statements to ignore what’s right in front of you will help you be correct – only problem is, you’ll make no money trading. And isn’t that what trading is about? I’d rather make money than be right.
It’s dangerous to adopt the ‘waste of time’ mentality, now or at any other time. Someone’s always making money, and therefore opportunity always exists. Right now, whether you’re a day trader or a swing trader, this market is moving plenty right now. We just rallied 12% in 6 weeks – how is that not enough? If you can’t pull some good trades during a period like that, then this game isn’t for you anyway.
Beyond that, the technical price action of late has been textbook – does it get any better than that?
We’ve seen multi-day rallies followed by shallow pullbacks, with higher highs and higher lows established along the way. An uptrend line was tested several times before finally breaking Wednesday, and the reversal which has followed has been very decisive. So whether you prefer the long or the short side, there’s been ample opportunity for you.
Here’s a closer look for you:
Finally, don’t be delusional enough to think you can call weeks in advance when a ‘real’ move will begin. Remember, the market caters to nobody. It’s not about being wrong or right on the timing either, it’s more about wasting the time between now and then by waiting and not watching for opportunities which are surfacing regularly.
Stay on your toes out there, and shun all excuses – a lack of success can’t be blamed on circumstances. If you’re focused and you’re attentive to the price action, you’ll get paid for your time instead of thinking it’s a waste.
Trade Like a Bandit!
Jeff White
Trader, Producer of The Bandit Broadcast
Are you following me on Twitter yet?
Three Pillars of Risk Management
July 14, 2010 at 6:41 am
As a Seinfeld fan, I really enjoyed The Fatigues episode where Jerry dates a woman with a mentor. George needs to give a report on Risk Management, and passes off the task to Jerry’s girlfriend so she can read all about it and save George time.
But Costanza isn’t the only one who doesn’t fully understand Risk Management. In fact, far too many traders struggle with this very topic, and it keeps them from surviving and from succeeding.
So, let’s look at 3 pillars of risk management as a way to keep it simple. If you can nail these down, you should be alright.
Protect Capital
This is a biggie, no doubt about it. Simple on the surface, but not easy to put into practice.
As traders, our capital is what keeps us in business. Ignoring the consequences of mismanagement is a major mistake that’s not easily recovered from. Those who fail to understand the importance of first preserving what they have tend to place profits ahead of protection. That leads to the age-old error of eyeing new trades with only potential gains in mind, rather than placing equal importance on potential losses if the trade fails.
Capital comes in two forms…psychological capital and trading capital. Both must be protected with vigilance.
Psychological capital is the amount of inner strength, confidence, and willingness to take risks that a trader possesses. It can be eroded through many mistakes, and it’s not easy to replace. Protecting one’s confidence as a trader is paramount to staying in this game, because the trader who’s unwilling to pull the trigger when good opportunities come along won’t ever win.
Trading capital is what’s available in your account, and it’s of course the type of capital most are familiar with. Money can be more easier to replace than confidence, but it’s still critical to manage risk in such a way that your account stays intact. Traders who disregard the importance of keeping an adequate capital base find out quickly they’re unable to profit big enough to matter, even when they’re right. So, try to maintain account highs as often as possible, and you’ll find your account is growing on a regular basis.
Trade YOUR Proper Size
This one will vary for everyone, so the secret is to make sure you’re trading position sizes which allow you to be at your best. That means avoiding trades which mean too much, both psychologically and financially. Let’s look at those one at a time.
Psychologically, the ability to recover from a loss is something we all must ensure. Taking a big hit from a trade which didn’t work out leaves us vulnerable to anger or despair, and neither are beneficial to our trading. Anger promotes revenge trades, and that typically leads to digging a deeper hole than that which we may find ourselves in. Despair leaves us so focused on our emotions that we fail to recognize good opportunities when they come along.
Financially, we never want to be trading so large that we can’t recover from a loss. Taking a fairly large position when you’re confident is one thing, but dumping your entire account into a single idea is another. Consider the math behind poor trades, for example. A 20% loss in your account will require a 25% gain to get back to flat. And the deeper that loss gets, the more that’s required to make it up. Taking several smaller trades instead of one big one might require more management, but it can also greatly help to avoid one major disaster.
Exit When You Know You Should
This sounds really simple, and it is, but it’s the follow through which makes this one difficult for some. Making a trading plan is one thing, but sticking with it can be another issue entirely.
It’s all about discipline, and that isn’t going to change. You know at which point you’ve stayed too long in a position and the time has come to kick it to the curb. All of us know what it means to blow stops, and most likely, it doesn’t pay off when we do. That’s a self-inflicted mistake that can be avoided, provided some measures are taken to help automate the process.
Here’s the thing…defined risks are the best kind. Pick your exit at the same time you select your entry, and commit to it. If you struggle with that, set a stop order the moment you’re filled on your entry, and then you won’t have to make a decision under the gun. If you get stopped, you most likely just saved yourself some additional pain. But you’ll be managing your risk effectively and reinforcing discipline even when you’re wrong.
If you’ll protect your capital, trade your proper size, and get out when you know it’s time, you’ll be doing 3 of the things the most successful traders focus on. How can there be any downside to that?
Trade Like a Bandit!
Jeff White
Swing Trading & Day Trading Service
www.TheStockBandit.com
Are you following me on Twitter yet?
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?
Disgusted
June 18, 2010 at 10:54 am
Disgusted…
It’s a word you probably learned in junior high when someone paid that kid $5 to eat frito pie from the cafeteria trash can.
But it’s a word you still experience.
You hate the way you feel, so you start eating better. You hate how your yard looks, so you get more diligent at mowing, fertilizing, and watering it. You’re sick of that relationship being on bad terms, so you make amends and try harder going forward.
Trading can be the same way. It can leave you wondering what you’re missing. The market acts or moves a certain way for so long, then shifts on a dime. You’re left feeling clueless and out of sync. You’re hemorrhaging capital, and you have no idea how to stop it. You’re completely disgusted with it.
Disgust isn’t necessarily a bad thing though. Mind you, it sure isn’t a good way to feel, but it can produce some incredible results – if you know how to use it.
Channeling Disgust into Diversity
What you’re about to read may disturb you, but here goes…
Embrace it.
Disgust is usually the rock-bottom spot where you’re finally ready to do some changing…of your attitude, of your expectations, of your approach. Most of us have to get to that place before we’re willing to make a change.
Until we’re there, it’s just too easy to tell ourselves “I’m just out of rhythm” or “this market is just acting strange” or “things will get back on track any day now.” Uh huh. What if the market stays strange for a while, or what if you don’t find your ‘rhythm’ quickly? You’re in big trouble, right?
Perhaps the greatest opportunity born out of disgust is that of diversity. When we hate the results we’re getting, we either continue to get them (by not changing), or we expand our horizons and learn some new approaches. Those are the 2 choices we have.
When it comes to trading, those new approaches might include different trading methods we’ve heard about or considered, but have not yet committed to. Or it might involve different timeframes for trades. When day trading isn’t offering much, shifting out to a swing trading timeframe can often make all the difference in the world. That’s why it’s so important for us to diversify as traders.
Dual Benefits
When you shift your approach from one which isn’t working to another method, you’re going to see some short-term changes in your results. Often times that’s going to mean instant improvement, which is quite refreshing. It brings you out of your funk almost immediately, so your attitude is also likely to be better.
But what’s even better is that as you learn another method, you’re that much more equipped down the road to make a shift when conditions call for it. Because you’ve now recognized what isn’t working, and which conditions prompted a change, you’ll be able to identify similar shifts the next time around, and you’ll now know better how to adapt. Win/win.
So if you’re currently feeling rather disgusted with your trading, I’m aware that it’s no fun – I’ve been there too. But if you want out of that mode, then don’t wallow in your sorrows any longer. Get on the move and start finding and employing some new styles and strategies – the ones you’re using are costing you too much in capital and confidence to continue using them right now. Keep them in the bag for later, but channel your disgust into a desire to develop new approaches, and you’ll be glad you did.
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?
Reminiscences of a Stock Operator – Annotated Edition
February 24, 2010 at 11:07 am
Trading books are among my favorite to read, and I’m always on the lookout for a good one. The ones I like the most aren’t of the how-to nature, given that I’ve been a full-time trader for so many years. Instead, I really like those that get inside the heads of great traders.
I’ve pointed out my favorite reads in this category before, and that hasn’t changed. I still re-read them each year, and I either pick up new lessons or am reminded of timeless lessons each time I go through them. It’s a good investment of my time.
Perhaps at the top of the list is Reminiscences of a Stock Operator
It’s based on real-life trader Jesse Livermore, but technically the book is fictional. Having read several other books by and about Livermore, this one does chronicle much of his trading past in an accurate fashion. However, I’ve always wondered about the facts behind the book and have wanted to know more.
So, when I was asked if I’d be interested in receiving a copy of the new Annotated Edition
- Foreword by Paul Tudor Jones. Need I say more? A Market Wizard weighs in on why this timeless classic is among his favorites, including an in-depth Q&A in the back of the book.
- How Lefévre got Livermore’s story. I had wondered how Lefévre told Livermore’s stories with such accuracy and keen insight, and it’s clear their combination created a better work than either of them could have told individually.
- Explanation of Livermore’s ‘hunches.’ The book helps explain how a pro like Livermore can act boldly when he felt the urge to go big, based on pattern recognition and his experience as a tape reader.
- Selected quotes by chapter. Dozens of snippets from the book which could each be taped to my monitor on any given day, such as:Â “Remember that stocks are never too high for you to begin buying or too low to begin selling.”
- How Livermore manipulated stocks. It was interesting to see how Livermore shifted from a trader to an ‘operator.’Â It’s an art form how a whale like him can accumulate and distribute large positions, and additional light was shed on how and when he made his big moves, minimizing slippage along the way.
This new Annotated Edition is filled with side notes, insights, and the historical context in which the events took place – right alongside the original text of the book. Cultural settings are explained, and economic and political circumstances are discussed. Backgrounds of key characters are highlighted, helping to further clarify each scene.
The photos and detailed descriptions of the conditions under which Livermore was trading also shine considerable light on each circumstance. As a result, I not only learned some interesting history of the market, but along the way I also gained some valuable, timeless insights to apply in today’s trading environment.
Thank you Jon for sending me a copy of the book! And in case some of you haven’t read this classic, pick up a copy of it today – I have no doubt it’ll quickly become your favorite.
Trade Like a Bandit!
Jeff White
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?
