Trading Psychology

This is a discussion on Trading Psychology within the Psychology, Risk & Money Management forums, part of the Methods category; Psychology is 90% of trading success say many commentators. Replicated below are some articles I found in my archive, starting ...

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Old Nov 22, 2008, 9:52pm   #1
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Trading Psychology

Psychology is 90% of trading success say many commentators.
Replicated below are some articles I found in my archive, starting with;

Master the 4 fears

Merriam-Webster's dictionary defines fear as "an unpleasant, often strong emotion caused by anticipation or awareness of danger, going on to explain that fear...implies anxiety and usually the loss of courage." This definition of fear is useful in helping define the issues that traders face when coping with fear. The reality is that all traders feel fear at some level, but the key is how we prepare to address our concerns related to taking on risk as a trader. In this article I will review four major fears experienced by traders, and I'll take it a step further by noting how the outcomes of these fears create undesirable trading behaviors. Basically, my aim is to have you walk away with an understanding of these dangers so you can and implement strategies that will address your fears and let you get on with your trading plan.

Mark Douglas, an expert in trading psychology, noted in his book, Trading in the Zone, that most investors believe they know what is going to happen next. This causes traders to put too much weight on the outcome of the current trade, while not assessing their performance as "a probability game" that they are playing over time. This manifests itself in investors getting too high and too low and causes them to react emotionally, with excessive fear or greed after a series of losses or wins.
As the importance of an individual trade increases in the trader's mind, the fear level tends to increase as well. A trader becomes more hesitant and cautious, seeking to avoid a mistake. The risk of choking under pressure increases as the trader feels the pressure build.

All traders have fear, but winning traders manage their fear while losers are controlled by it. When faced with a potentially dangerous situation, the instinctive tendency is to revert to the "fight or flight" response. We can either prepare to do battle against the perceived threat, or we can flee from this danger. When an investor interprets a state of arousal negatively as fear or stress, performance is likely to be impaired. A trader will tend to ?freeze.? In contrast, when a trader feels the surge of adrenaline but interprets this as excitement or a state of greater alertness before placing a trade, then performance will tend to improve. Many great live performers talk of feeling butterflies just before they go on stage, and how they interpret this as a wake-up call to go out and perform at their highest level. That's clearly a more empowering response than someone who might interpret these butterflies as a reason to run back to his dressing room to get sick! Winners take positive action in spite of their fears.

1. Fear of Loss
Analysis Paralysis and Its Cousins

The fear of losing when making a trade often has several consequences. Fear of loss tends to make a trader hesitant to execute his trading plan. This can often lead to an inability to pull the trigger on new entries as well as on new exits. As a trader, you know that you need to be decisive in taking action when your approach dictates a new entry or exit, so when fear of loss holds you back from taking action, you also lose confidence in your ability to execute your trading plan. This causes a lack of trust in your method or,more importantly, in your own ability to execute future trades.

Thus, you can see how fear can set in place a vicious cycle of recurring doubt and, in turn, reinforce a traders' lack of confidence in executing new positions. For example, if you doubt you will actually be able to exit your position when your method tells you to get the heck out, then as a self-preservation mechanism you will also choose not to get into new trades. Thus begins the analysis paralysis, where you are merely looking at new trades but not getting the proper reinforcement to pull the trigger. In fact, the reinforcement is negative and actually pulls you away from making a move.

Looking deeper at why a trader cannot pull the trigger, I believe the root stems from a lack of confidence about the trading plan, which then causes the trader to believe that by not trading, he is moving away from potential pain as opposed to moving toward future gain. No one likes losses, but the reality is, of course, that even the best professionals will lose. The key is that they will lose much less, which allows them to remain in the game both financially and psychologically. The longer you can remain in the trading game with a sound method, the more likely you will start to experience a better run of trades that will take you out of any temporary trading slumps.

When you're having trouble pulling the trigger, realize that you are worrying too much about results and are not focused on your execution process. Make sure your have a written plan and then practice executing your plan.

Start with paper trades if you prefer, or consider trading smaller positions to get the fear of losing out of your system and get yourself focused on execution. When in the heat of battle and realizing you need to get in or out of a trade, consider using market orders, especially on the exit. That way you can't beat yourself up for not pulling the trigger on your trade.

Many traders may get too cute with a trade and try to work out of a position at a limit price better than the current market price, hoping they can squeeze more out of a trade. But as famed trader Jesse Livermore advised in the classic book Reminiscences of a Stock Operator by Edwin Lefevre, ?give up trying to catch the last eighth.? Keep it simple with a market order to exit allows you to bring closure when you need it, which reinforces the confidence-building feelings that come from following your trading plan. In the past when my indicators noted it was time to exit, I have experienced firsthand the pain of not getting filled at my limit, watching the option drop and then placing a new limit back where I should have exited at the market in the first place! Then I have realized I was not going to get filled there either, so I again kept lowering my limit until, in frustration, I placed a market order to exit much lower than I could have closed the position initially. Not only can you feel the pain of loss financially but, more important, you can chip away at your internal state of confidence and create frustration by not getting filled.

You should be more concerned about avoiding big losses and less concerned about taking small losses. If you can?t bear to take a small loss, you will never give yourself an opportunity to be around when a big winning idea comes along, as every trade you enter has the risk of first turning against you for a loss. You must execute by knowing what your risk is in each trade, and define parameters to make sure you can ride favorable trends correctly as well so that your winners will be larger than you losers. And never get stuck in the mindset of hoping a loser will come back to "breakeven," as that is one of the trader's most deadly mental fantasies. Billions of dollars have been lost by technology investors hoping their stocks would bounce back in recent years to allow them to escape the downtrend. That only led to even greater losses in most cases. That's how a short-term trader can become a long-term investor unintentionally, and that is a position in which you never want to put yourself.

Ask how well you trust yourself to execute your trading plan. You want to judge your effectiveness based on how well you get in and out of the market when your method gives entry and exit signals. You?ll need to be decisive, not hesitant, know in your heart that your method is well tested and that your risk is low compared to your likely reward. In other words, you must be fully prepared before you go into the heat of battle during a trading day. You need to know where you will enter and where you will exit if you are a discretionary trader. Or you need to know what system you are following and be prepared to enter and exit as the system dictates. This keeps you disciplined and focused on following a process that can generate favorable results over time.

2. Fear of Missing Out
Being a Part of the Crowd Isn?t
Everything It's Cracked Up to Be

Every trend always has its doubters, but I often notice that many skeptics of a trend will slowly become converts due to the fear of missing out on profits or the pain of losses in betting against that trend. The fear of missing out can also be characterized as greed of a sorts, for an investor is not acting based on some desire to own the security - other than the fact that it is going up without him on board. This fear is often fueled during runaway booms like the technology bubble of the late-1990s, as investors heard their friends talking about newfound riches. The fear of missing out came into play for those who wanted to experience the same type of euphoria.

When you think about it, this is a very dangerous situation, as at this stage investors tend essentially to say, "Get me in at any price - I must participate in this hot trend!? The effect of the fear of missing out is a blindness to any potential downside risk, as it seems clear to the investor that there can only be gains ahead from such a "promising" and "obviously beneficial" trend. But there's nothing obvious about it.

We remember the stories of the Internet and how it would revolutionize the way business was done. While the Internet has indeed had a significant impact on our lives, the hype and frenzy for these stocks ramped up supply of every possible technology stock that could be brought public and created a situation where the incredibly high expectations could not possibly be met in reality. It is expectation gaps like this that often create serious risks for those who have piled into a trend late, once it has been widely broadcast in the media to all investors.

3. Fear of Letting a Profit Turn into a Loss

I get many more questions from subscribers asking if it is time to take a profit than I do subscribers asking when they should take their loss. This represents the fact that most traders do the opposite of the "let profits run, cut losses short" motto: they instead like to take quick profits while letting losers get out of control. Why would a trader do this? Too many traders tend to equate their net worth with their self-worth. They want to lock in a quick profit to guarantee that they feel like a winner.

How should you take profits? Should you utilize a fixed target profit objective, or should you only trail your stop on a winning trade until the trend breaks?

Those who can accept more risk should consider trailing a stop on their trending position, while more conservative traders may be more comfortable taking profits at their target objective. There is another alternative as well, which is to merge the two concepts by taking some profits off the table while seeking to ride the trend with a trailing stop on the remaining portion of the position.

When I trade options, I usually recommend taking half of the position off at a double or more, and then following the half position still open with a trailing stop. This allows you to have the opportunity to ride my best trading ideas further, as these are the trades where I am mostly likely to continue being right. Yet, I am also able to get the initial capital at risk back in my pocket, which frees me from worrying about letting a profit turn into a loss; I am guaranteed a breakeven even if the other half position were to go to nothing overnight. My general rule for the remaining half position is to exit if it reaches my trailing stop of half its maximum profit on an end-of-day closing basis, or scale out of the remaining half position every time it doubles again.

I?m also a big fan of moving your stop up to breakeven relatively quickly once the position starts to move in your favor, by about five percent on a stock or by roughly 25 percent on the option. It is also critical to recognize the impact of time spent waiting for a position to move. If you are not losing but not yet winning after several trading days, there are likely better opportunities elsewhere. This is known as a "time stop," and it will get your capital out of non-performers and free it up for fresher trading ideas.

4. Fear of Not Being Right - All Too Common

Too many traders care too much about being proven right in their analysis on each trade, as opposed to looking at trading as a probability game in which they will be both right and wrong on individual trades. In other words, their overall method will create positive results.

The desire to focus on being right instead of making money is a function of the individual's ego, and to be successful you must trade without ego at all costs. Ego leads to equating the trader?s net worth with his self-worth, which results in the desire to take winners too quickly and sit on losers in often-misguided hopes of exiting at a breakeven.

Trading results are often a mirror for where you are in your life. If you feel any sort of conflict internally with making money or feel the need to be perfect in everything you do, you will experience cognitive dissonance as you trade. This means that your brain will be insisting that you cannot exit a trade at a loss because it ruins your self-image of perfection. Or if you grew up and feel guilty about having money, your mind and ego will find a way to give up gains and take losses in the markets. The ego?s need to protect its version of the self must be let go in order to rid ourselves of the potential for self-sabotage.

If you have a perfectionist mentality when trading, you are really setting yourself up for failure, because it is a given that you will experience losses along the way in trading. Again, you have to think of trading as a probability game. You can't be a perfectionist and expect to be a great trader. If you cannot take a loss when it is small because of the need to be perfect, then the loss will often times grow to a much larger loss, causing further pain for the perfectionist. The objective should be excellence in trading, not perfection.

In addition, you should strive for excellence over a sustained period, as opposed to judging that each trade must be excellent. The great traders make mistakes too, but they are able to keep the impact of those mistakes small, while really riding their best ideas fully.

For the trader who is dealing with excessive ego challenges (yet, who wants to admit it?), this is one of the strongest arguments for mechanical systems, as you grade yourself not on whether your trade analysis was right or wrong. Instead you judge yourself based on how effectively you executed your system?s entry and exit signals. This is much easier for those traders who want to leave their egos at the door when they start to trade. Additionally, because we are raised in a highly competitive culture, the perception of a contest or competition will also bring out your ego's desire to win and beat others.

You will be better off seeing trading as a series of opportunities that will become apparent to you, and your task is to create a plan that finds opportunities with potential rewards that are several times greater than the risks you incur.

Be sure you are writing down your reasons for entering each trade, as the ego will play tricks and come up with new reasons to hang on to losing positions once the original reasons have evaporated. One of our survival mechanisms is remembering the good and omitting the bad in our minds, but this is dangerous in trading. You must acknowledge the risk and use a stop on every trade to admit when the analysis is no longer timely. This helps prevent undesirable situations where you get stuck in a position because you did not adhere to your original stop. This is a bad use of capital being tied up in an under-performing position, when there are likely to be many better opportunities elsewhere. Trading without stops is an ego-driven approach that hopes to avoid accountability for a losing trading idea. This is an unacceptable behavior to the successful trader, who knows he must limit risk with stops to stay in the game for the next trading opportunity.

In summary, your trading plan must account for the emotions you will be prone to experience, particularly those related to managing fear. As a trade, you must move from a fearful mindset to mental state of confidence. You have to believe in your ability as well as the effectiveness of your plan to take profits that are larger than the manageable losses. This builds the confidence of knowing that you are on the right track. It also makes it easier to continue to execute new trades after a string of losing positions. Psychologically, that's the critical point where many individuals will pull the plug, because they are too reactive to emotions as opposed to the longer-term mechanics of their plan. If you?re not sure if you can make this leap, know that you can if you start small.

Too many investors have an "all-or-none" mentality. They're either going to get rich quick or blow out trying. You want to take the opposite mentality - one that signals that you are in this for the longer haul. This gives you "permission" to slowly get comfortable and to keep refining your plan as you go. As you focus on execution while managing fear, you realize that giving up is the only way you can truly lose. You will win as you conquer the four major fears, to gain confidence in your trading method and, ultimately, you will gain even more confidence in yourself.
I can stand the despair - it's the hope I can't manage (John Cleese - Clockwork.)
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Old Nov 22, 2008, 9:52pm   #2
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article: The Psychology of Risk

bbmac started this thread As a person who is either trading, or thinking about trading, the first question you must ask yourself is why you want to trade in the first place? Is it for lifestyle, is it for money to help with cash flow, is it for income to live off, is it because you want to control the way you earn your living and who you are responsible to for earning that living? Do you have a higher purpose than existence and survival in mind when you think of trading? For example do you intend that successful trading will provide you with the means to engage in, and design a living, rather than continuing to follow the teachings of conventional wisdom which suggests that making a living is all about survival from one year to the next without ever really getting ahead and achieving freedom?

When you work out your answer to this question, you must then never allow the reason why you wish to trade to put pressure on you to succeed. If you do allow it to put pressure on you, your chances of success are minimal because all the pressures you place on yourself will be based on emotions, which will cause your trading decisions to be based on emotions. As soon as you allow your emotions to guide you, you will lose!

As you read on you will begin to understand that successful trading is not so much about making money as it is about making clear and effective clinical decisions that lead to taking advantage of opportunities when they arise, exiting these opportunities when necessary and protecting the downside through disciplined money management strategies.

The single biggest mistake that novice traders make is to think that trading is all about making money and it’s no wonder. It’s not hard to find ad after ad that says something like, "you can earn a living through trading", or "earn all the income you want" or "leave your job forever and live off all the money you’ve ever wanted." As your eyes scan these adds they catch words like ‘freedom’, ‘luxury’, ‘lifestyle’, ‘succeed’, ‘security’, ‘choice’ and ‘wealth’ that are typed in bold and liberally peppered throughout. They’ve got you hooked now haven’t they? The strength of their emotional pull is extremely powerful.

Making money will only ever be a by-product...

Successful trading has absolutely nothing to do with making money and everything to do with trading successfully. Making money will only ever be a by-product of successful trading. Successful trading is not a by-product of making money. When you attach trading to money and money to emotions and emotions to money you’ll have taken your first loss but you won’t know it yet.

Then you’ll enter the market and start trading. In most cases your first trade will be a loss and you’ll convince yourself that it had something to do with timing or rushing things or changing market conditions or the broker. So you’re going to be more decisive next time and respond more effectively. Perhaps the results of your first trade may even be worse than taking a loss, you could actually be successful. You might even be successful on the second trade, then the third, then and the fourth. The market’s really trending and it’s just so easy. By now you’ll be feeling confident and you’ll have just taken your second big loss but you won’t know it yet.

The processes of trading now consume you emotionally. You won’t be losing money so much as you’ll be losing what money means to you psychologically. The minute you start using money psychologically you’re banging nails into your trading coffin. You’ll start losing big time because you won’t be losing money so much as losing what money psychologically means to you. In other words you will be losing the representation of the things that are important to you. When you start losing the psychological representation of what’s important to you, you’ll freeze, start acting emotionally and try all sorts of scrambling, compensatory behaviors. You’ll panic and you’ll go to pieces. The only time relief will come is when you’ve wiped out your account. You’re on the mat and you’re shell-shocked. You’re down for the count and you’re angry. How could that happen to you?

It happens to you the same way it happens to most all novice traders who are sold the dream of instant wealth. "You can earn a living through trading", or "earn all the income you want" or "leave your job forever and live off all the money you’ve ever wanted." Hang on you were promised ‘freedom’, ‘luxury’, ‘lifestyle’, ‘succeed’, ‘security’, ‘choice’ and ‘wealth’ weren’t you?

In terms of instant wealth, never before in history has there been so many people willing to tell so many people exactly what they want to hear. In the words of John Rothchild, author of, ‘A Fool and His Money’, "... the investors’ need to believe somebody is matched by the advisor’s need to make a nice living. If one of them has to be disappointed, it’s bound to be the former."

Trading is a game between your emotions and your psychology. It’s a game between amateurs and professionals. It’s a game between your account size and time. If you have what it takes and you get a really good coach and you put in all the work, discipline, personal sacrifice and training that’s needed, then there is a high probability you will succeed. However if you don’t do these things the odds are stacked against you. Approximately 80% of all would-be traders lose their trading accounts in a very short time and never recover. This means that nearly 80% of all those who attempt to trade are not disciplined, don’t have the right psychology, don’t have the right coach, don’t trade to a well defined and worked out system or simply run out of money, time and commitment before becoming sufficiently skilful traders.

Successful trading can only be learned

It’s my view that successful trading cannot be taught. However it can be learned. This is not mere semantics here. Just like someone can be taught to swim or kick a football I don’t believe they can be taught to be a champion swimmer or footballer. For that you need a burning desire, passion, dedication, focus and belief. These can only come from you. Many dream of becoming champions but few succeed. Why do you suppose this so?

Trading has everything to do with personal psychology, rules, systems, discipline, focus and skill. Like anything else that’s skill based, once you start it takes time and practice to become skilful. Ultimately trading is about making decisions between two choices, to buy or sell. As simple as these two choices are the variables that effect the decisions surrounding them can be as complex as the human mind can make them.

As a trader your central focus should be on your system. You should know your system inside out, its strengths and weaknesses. Your system should be comprised of a set of rules that ultimately guide you in making either of two decisions, to buy or sell. You should be able to read your system with respect to market conditions and base your trading choices on what your system is telling you.

As a trader you must understand that you're the weakest link in the system because the complexity will reside with you. Good systems are simple. They are nothing more than a series of instructions called trading rules. The primary thought that should be central in your mind is that it’s the system that makes the money, not you. The more skilled you become at reading market conditions and marrying these conditions to your system the better a trader you’ll be.

Only you can beat you

Successful trading is 80% psychology and 20% methodology. Only you can beat you. I can’t beat you and the market can’t beat you. You are the one that you have to beat and you’ll be the hardest player to beat. In order to achieve victory over yourself you must understand the psychology of money, the psychology of trading, your own personal psychology and a thorough understanding of what ‘risk’ means to you. In addition you must have a strategy in place to minimize the risks of loss in any trading position you enter.

Successful trading is not about how much you achieve or lose, it’s about how well you trade. One of the funny things about trading is that to be a good trader you must lose well because if you are going to trade you are going to lose money. It’s a must part of trading. To win you must be in the market and to be in the market means you are open to the probabilities of loss.

Understanding your own investment psychology and risk tolerance is crucially important if you want to be a successful trader. Yet this very understanding is the central thing that’s lacking in most traders’ tool kits. If you are going to trade you must only do so after a thorough examination of your attitude to risk and loss. Take your time here because there’s no need to rush things. Understand yourself first and then understand why you are considering trading. If you are serious about it then you must seriously peruse learning, not gimmickry.

Before you start trading some useful questions you might ask include what’s your long-term plan for becoming a good trader? How long are you going to give yourself in order to learn what you need to learn to become a good trader? In fact, have you got a long-term plan at all? What size is your trading account and how much are you prepared to lose during your educative process? What markets are you going to trade and what are you going to trade in them? As a wealth creation vehicle where is trading going to sit within your overall wealth creation tool kit? Who are you going to get to teach you their trading system? Who is your coach going to be? How often are you going to get them to coach you until you succeed?

To be successful at trading you need, in the first instance, to be aware of a bigger picture and make observations about what you see. Some questions you must continually ask yourself include, "why is only a small group of people ever successful? Why does only 1% of the population ever achieve wealth?" Why do the majority of traders who start on their trading journeys never succeed? Look around and observe. Ponder such things and your position with regards to your observations.

While the answers may be many ultimately they must revolve around the concept, "that only a small percentage of any given population are willing to do whatever is necessary to achieve wealth. Few people are willing to do what most are unwilling to do. Those who succeed are the ones willing to go beyond their comfort zones and challenge their beliefs. They are the ones prepared to understand themselves, their conditioning and their psychology." Which group do you want to be in?

If you zoom out of the detail and look at the big picture you’ll discover that at any one time in any one generation only a small percent of the population were willing to do whatever was necessary to achieve wealth. Today it still holds true that only a few are willing to do what the majority does not. They are the ones willing to go beyond their comfort zones and challenge their old beliefs.

In spite of the greatest economic decade of all time in Australia, in spite of all the knowledge and information that’s currently available on trading and wealth creation, in spite of all the books, all the seminars, all the tapes, all the videos and all the courses, history continues to demonstrate that only one percent of any given generation will achieve financial freedom.

People seldom ever take the next step

Deep down in side almost everybody I speak to knows they need to do something about their finances if they wish to live a lifestyle of choice. Intellectually they know it and emotionally they know it. But they seldom ever take the next step and seriously learn what they need to do in order for their desires to come true. So what stops them?

Why do so few achieve? Why? Why? Why? Despite the majority of people saying they want financial freedom and a lifestyle of choice. Despite them saying they wish for more financial security in their lives. Despite them saying they’d like to be living a more comfortable lifestyle rather than continue to work the hard and long hours they do. Despite wishing things could be better for them, why do so few people actually make wealth happen?

Our emotional and psychological conditioning has been so successful that it continues to allow the system to extract enormous profits at our expense. We lose thousands, if not tens of thousands, of dollars every year and we hardly even notice it. If we do we just ignore it as a normal part of life. Conventional wisdom does its teaching so well that most don’t recognize any cognitive dissonance at all.

We have been so conditioned to believe that it’s okay to buy a brand new car for $40,000 and as soon as we drive it out of the car yard it drops in value by up to $10,000. That’s nearly a 30% loss but that’s okay because we feel good, we’re in our nice new car and we don’t give it another thought. We’re encouraged to go on holidays, pay up to $5,000 or more on airfares and accommodation. Somewhere along the way we’re encouraged to swipe another $5,000 or so on the plastic fantastic. At the end of our holiday all we have left is a memory and a debt and we’re supposed to feel good about it. We’ve just dropped another $10,000 but we feel good and we talk about our holiday in glowing terms as we get out the holiday snap shots.

For $1,000 we could have stayed home, drank French Champagne every day, bought $500 dollars worth of trading books, propped ourselves up in a comfortable position and made ourselves a hell of a lot smarter.

Nearly everything that you buy drops in value as soon as you make the purchase and get it into your hands. If nothing changes, throughout your lifetime you’ll keep making financial decisions that lose you tens of thousands of dollars and you’ve been conditioned to feel good about it.

But potentially lose some money in the market place and every negative emotion you can muster suddenly springs into action. Try and improve your financial position by doing a course on wealth creation and every skeptical and cynical voice you can find will scream at you both from inside and outside your head.

Fear of failure is the single biggest factor in why people don’t succeed. Because they fear failure they never move out of their comfort zones. Fear of moving outside comfort zones is so strong that rather than learn things for themselves, rather than put themselves in a position where they can control their own financial destinies, many would be investors give their life savings over to complete strangers who, for the most part, they know nothing about. Remember, "... the investors’ need to believe somebody is matched by the advisor’s need to make a nice living. If one of them has to be disappointed, it’s bound to be the former."

Wealth creation is an uncertain activity for most people and, to do something without certainty of outcome, takes courage. It takes courage to do what the majority is not doing. It takes courage to overcome skepticism and cynicism. It takes courage to deal with fear and overcome fear barriers.

Courage is involved in every aspect of investing, trading and the wealth creation process. It takes courage to learn to trade successfully as opposed to finding some ‘quick fix’ offered by a machine and a smooth talker. It takes courage to concentrate on being a good trader when the attraction of ‘making money’ is so much more seductive. It takes courage to stop using excuses and start taking 100% responsibility for your financial destiny.

It’s easy to say what should be done but it takes courage to act on what should be done. It takes courage to have an entrepreneurial spirit while those around you feel threatened. It takes courage to follow beliefs and convictions that are different from the herd. It takes courage to employ doingness when those around you are not. It takes courage to stop thinking like a victim and start thinking like a winner.

In order to be successful as a trader you have to view risk through different eyes. If you do nothing then the risks of achieving nothing are extremely high. With a good trading plan, some solid learning, a good coach and some discipline your chances of success are extremely high because you’ll be competing against people in the market place who have not done the learning and who do not have a sophisticated trading plan. However if you’re not going to take total responsibility for all the financial decisions you make, you’re going to find it very difficult to be financially successful.

The way I view risk has to do with ‘the probabilities of making ineffective financial choices’ be they trading or otherwise. I believe a more accurate, and ultimately more empowering, description of risk should include, ‘the lower one’s knowledge base the higher the probabilities are of making ineffective financial choices’. You can think of leaving your money in a bank account earning .001% as low risk and safe. The truth of the matter is, if inflation is running at 3% you’re loosing 2.999% of the value of your money because of a low risk strategy Before you begin your journey you must be convinced that the benefits of financial freedom far outweigh the risks associated with accumulating wealth. You must have a personal vision that includes wealth in your life, that way you will develop the courage that it takes to defeat the negative ‘what if’ voices that rattle around inside your head. The courage that it takes to begin to remove the barriers you place between yourself and financial freedom. The courage that it takes to understand that the extent of your financial achievement will rarely, if ever, exceed the development of your own personal psychology.

Everything in this world involves risk but by far the greatest risk is staying in your comfort zone because this involves the risks of lost opportunities. The secret to risk lies in knowing how to minimize its impacts on you. If you want to be a successful trader you must become passionate about the learning process. You must become totally focused on trading well as opposed to making money. You must learn from someone who can show you how to trade successfully rather than rely on machines and promises of ‘golden eggs’. You must become absolutely disciplined in the activity of trading.
I can stand the despair - it's the hope I can't manage (John Cleese - Clockwork.)
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Old Nov 22, 2008, 9:54pm   #3
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article: Secrets of Top Trading Perfornmance

bbmac started this thread Secrets of Top Trading Perfomance
Linda Bradford Raschke
LBR Group

Trading is a performance-oriented discipline and every great athlete, trader, or performer will occasionally hit performance blocks. Every Olympic contender trained hard physically, but the difference between the ones who made the Olympic team and those who did not was the emphasis put on mental coaching by the winners. Much of a trader's early education is concentrated on strategies and market analysis. But what are the necessary ingredients for peak performance? What are the tools for both mastering the mental side of the game and busting out of the inevitable slumps that can occur along the way?
First - what is the mindset necessary for peak performance? How does one ultimately get in the groove? There is no better feeling than being in the "flow" - especially with trading. That is what many of us live for and what keeps us in the game, because trading can be a very tough business with long hours.
There are several key common ingredients when you are performing your best (see sidebar), no matter what the field.
EXPECT success. It begins initially with your self-talk. Do you get down on yourself when you make a mistake? - or do you say to yourself - next time I will do better because I have great trade management and am a superior trader! Be your own best motivator and believer in yourself. Positive Self Talk leads to positive BELIEFS. If you believe you can do something, you WILL eventually find a way. When you have a positive belief system that the eventual outcome will be OK, then you are more mentally and physically relaxed. You then have better concentration, which leads to smoother execution, which of course leads to peak performance.
Now, on the flip side of the coin, negative self-talk sows seeds of doubt. This lowers self-confidence, which leads to a negative belief system. This then creates anxiety, which leads to disrupted concentration. Now the trader becomes tense and tentative which in turn leads to poor performance. Talk about a vicious cycle!
Positive Self Talk
What are some concrete tools to break the cycle and bust out of the slump? The number one tool for starters is POSITIVE SELF TALK. We all talk to ourselves in our own head. Be aware of the things you are saying to yourself. The written word is also a powerful tool. Read affirmations and books on positive thinking. Norman Vincent Peale, Napoleon Hill ... Arnold Schwarzenagger's autobiography are a few. Richard Marcinko wrote a book called the Rogue Warrior. He talked about the Will to WIN and the belief that ANY circumstances could be overcome. This is a great inspirational book for traders.
Next - act like you are already where you want to be. Assume the mannerisms, posture and talk of a top trader. In addition to self-talk and reading written words, develop mental pictures. Visualize what you are going to do with your wealth or how it is that you want to live. Think of the power that money would give you to start any organization you want or to make other people's lives better. Visualize your dream house. Program your subconscious as though you are already there. Dare to dream.
OK - talk, words and pictures…what is next? Look at your environment that you have surrounded yourself with. Your success in trading will also be a product of your environment and I am not just talking about office space. Look at the people you surround yourself with. Do they support your activities? Surround yourself with people who believe in you, who smile, and who are enthusiastic in anything they try or do. The top Olympic athletes had friends and family cheering them on every step of the way.
Be Prepared
All of the above factors deal with external factors and internal belief systems. Now let's get down to the DOING part! Every trader should be prepared before the markets open because they already did their homework - right?! One of the most impressive points in the Rogue Warrior book was this veteran navy seal's obsession for being totally prepared for Mr. Murphy! There was always a backup plan for everything and this is what kept him alive. Prepare your daily game plan by looking for both new setups and preparing strategies for managing existing positions.
So, assuming that you have done your daily homework as a trader, the next step is to learn how to get into the groove. There is no better tool for this than having routines and rituals. Pre-market rituals help calm the nerves, get you into a rhythm, and also help to turn off the logical part of your brain - the part that wants to overanalyze everything. If you have a chattering monkey sitting behind your ear, routines and rituals are one of the best things to shut that monkey up. Maybe there is an opening sequence of tasks you do before the market opens. Perhaps in the middle of the day you draw swing charts or take periodic readings of the market's action. Maybe you keep a journal and make notes to yourself. At the end of the day, what type of record keeping do you do for your trading activity? What do you do to unwind? Salesmen are taught to do small rituals before cold calling clients. It controls the anxieties and fears of rejection. Baseball pitchers have a pre-wind up ritual. It calms their minds and puts their body on the autopilot mode. It keeps them involved in the PROCESS and not thinking about the outcome. One of the more common rituals on the trading floors was to wear the same disgusting lucky tie every day. If the mind BELIEVED that the tie was lucky, this was all the traders needed to tipt the long term odds in their favor.
Here is another helpful factor: A healthy body keeps a healthy mind. EXERCISE! This gets oxygen to the brain and keeps the blood flowing. How can you expect to be a peak performer when you are eating junk food and going through insulin swings? Or perhaps you drank too much wine the night before or are jittery from drinking too much coffee. How can you concentrate well if you are not getting a full decent night's sleep? Sure, most of these are minor factors but they can all add up to major bumps in your performance. One moment of sloppiness can lead to forgetting to place stops or letting a bad trade go too long. Then when damage is done, your confidence gets chipped away. You must treat your confidence level as something to be protected. Good habits will keep your confidence level high. Once you have good habits, it will allow you to increase your trading size.
If you want to push yourself to the next level in your trading and are wondering how to increase your size, you MUST have a foundation of good habits. If you are running into a mental block in this area, it is your subconscious’s way of telling you that either you have not done adequate preparation or you are not satisfied with your money management habits.
Goal Setting
There is one more extremely important thing that contributes to your success and that is GOAL SETTING. When you set your goals, they must be concrete and measurable. You must also break them down into bite size pieces. Perhaps your larger goal is to make 7 digits over the next three years, but how do you get there? Put together a more detailed business plan that is NOT dollar oriented but will help you eventually reach your dollar-oriented goal. Maybe it includes how many trades you should make per week, how much time you should devote each evening to preparation and studying charts, and plans for controlling risk. Both short term and long term goals help achieve peak performance.
You must also have concrete ways to measure those goals. Top athletes know the splits that they run. They know if they are ON or OFF according to how practice goes. They know their unforced error percentage, their personal best, and their competition’s stats. The same should apply to you in your trading. Know your weekly win/loss ratios, your trade frequency, and the average amount of profit or loss each month. Only by having something to measure can you tell if you are improving or not and moving closer to your goal!
The battleground isn't the markets but what's within you. The more you talk with other traders, the more you realize that everyone goes through various common experiences. Everyone makes many of the same classic mistakes. But what distinguishes the ones who can ultimately overcome them?
And on that last note, remember that ATTITUDE is everything. How you frame out an individual experience or event will affect your success in the long run. Do you see a trading loss or bad drawdown period as a major setback, or do you see it as a learning experience from which you can figure out how to be on the RIGHT side of a trade instead of the wrong side the next time around. Many great traders use periods after drawdowns to go back to the drawing board. Some of the best systems and trading ideas have come after periods of adversity. What incentive is there to learn and improve ourselves when everything is smooth sailing and we are fat and happy? But when times are tough, that is when we can rise to the occasion and prove that we can overcome any obstacle set down in our path. So many great athletes have been able to come from behind when they are down because they have learned how to seize that one opening or opportunity and CONVERT. They latch on to the tiniest shift in momentum and milk it for all it is worth. Latch on to that next winning trade and convert. The first small moral victory is the first step towards reaching the top of Mt. Everest. And if you keep making small steady steps, you will eventually reach the top. Sometimes for a trader, the greatest feeling in the world can be making back those losses, no matter how long it takes, because once you have done that, you realize you can do anything.
Passion. You must be passionate about what you are doing and having fun. Passion first, then performance.
Confidence. Top performance comes from having a high degree of confidence. You must have the confidence that you can take control and face adversity. You must also be confident that you will have a favorable outcome over time.
Concentration. Peak performance comes from exceptional CONCENTRATION. You must concentrate on the process, though, not the outcome. A sprinter who is in the lead is thinking about the wind on their face, how relaxed their arms are, feeling the perfect stride…they are totally in the moment. The person who does NOT have the edge is thinking, “Oh, that runner is pulling ahead of me…I don’t know if I have enough wind to catch the leader…” They are tense and tight because they are thinking about the outcome, not the process.
Resiliency. Great performances come from being able to rebound quickly and forget about mistakes.
Challenge. Great performance comes from pushing yourself and trying to overcome limitations. Staying in the safe zone becomes a monkey on your back. Challenge yourself to take that hard trade. Manage it. If it does not work out, so what…your risk was limited and you can pat yourself on the back for taking the hard trade in the first place.
See and DO ... don't think! Great performance comes from turning off the brain and becoming automatic. This is being in the Zone …in the groove. You can’t overanalyze the markets during the trading day.
Relaxation. When you are relaxed, your reflexes and timing are superior because you are loose
The accompanying comments were inspired from Brad Gilbert's book, Winning Ugly, which was written about tennis. There are many parallels between tennis and trading, both being individual performance disciplines.
Desire. The most successful players are the ones who have a burning desire to win.
Defy Failure! Don't check out of the game. Never give up!
Consistency. Improve your consistency. Stay active, stay involved, and keep your feet moving.
Patience. Be patient. Do not force a trade that isn't there. Wait for the play to set up.
Management. When you get a good trade, go for it. Manage it. Trail a stop. Don't be too eager to get out.
Flexibility. Be flexible - if what you are doing isn't working, change what you are doing!
Confidence. When down, get a little rhythm and confidence going. Don't worry about being too ambitious.
Concentration. Stay with your game. Don't let outside distractions bother you. They take energy and break your concentration.
Know Yourself. Match your particular strengths to the type of market conditions.
Clean Up Your Act. Hate making stupid mistakes and unforced errors. This includes not getting out of a bad trade when you know you are wrong.
Stay Positive. Many players will play their best game when they are coming from behind.
I can stand the despair - it's the hope I can't manage (John Cleese - Clockwork.)
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Old Nov 22, 2008, 9:54pm   #4
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article: Mental Aspects of Trading

bbmac started this thread Many traders quickly come to acknowledge that despite being familiar with winning strategies, systems, and money management techniques, trading success is dependent on your psychological state of mind. If you're a trader just starting out, where do you find the initial confidence to pull the trigger? How do you deal with the down times without digging yourself deeper into the hole? If you are in a hole, how do you work your way back out? How do experienced traders push through the ceiling of profitability that caps their initial trading years and make a truly fabulous living?
Trading is a performance-oriented discipline. Stress and mental pressures can affect your ability to function and impact your bottom line. Much of what has been learned about achieving peak performance in both business and sports can be applied to trading. But before looking at some of these factors, let's first examine the ways that trading differs from other businesses.
Intellect has nothing to do with your ability as a trader. Success is not a function of how smart you are or how much you have applied yourself academically. This is hard to accept in a society that puts a premium on intellect.
There is no customer or client good will built up each day in your business. Customer relationships, traditionally important in American businesses, have little to do with a trader's profitability. Each day is a clean slate.
The traditionally 8-5 work ethic doesn't apply in this business! A trader could sit in front of a screen all day waiting for a recognizable pattern to occur and have nothing happen. There is a temptation to take marginal trades just so a trader can feel like he's doing something. There's also the dilemma of putting in constant hours of research, having nothing to show for it, and not getting paid for the work done. Yet if a trader works too hard, he risks burn- out. And what about those months where 19 out of 20 days are profitable, but the trader gives it all back in one or two bad days? How can a trader account for his productivity in these situations?
If you were to invest time, energy, and emotion into developing a business venture and backed out at the last minute, it would be considered a failure. However, you should be able to invest time and energy into researching a trading idea, and yet still be able to change your mind at the last minute. Market conditions change, and we cannot be expected to predict all the variables with foresight. Getting out of a bad trade with only a small loss should be considered a big success!
What IS the definition of a successful trader? He should feel good about himself and enjoy playing the game. You can make a few small trades a year as a hobby, generate some very modest profits, and be quite successful because you had fun. There are also aggressive traders who have had big years, but ultimately blow-out, ruin their health or lead miserable lives from all the stress they put themselves under.
Principles of Peak Performance
The first principle of peak performance is to put fun and passion first. Get the performance pressures out of your head. Forget about statistics, percentage returns, win/loss ratios, etc. Floor-traders scratch dozens of trades during the course of a day, but all that matters is whether they're up at the end of the month.
Don't think about TRYING to win the game - that goes for any sport or performance-oriented discipline. Stay involved in the process, the technique, the moment, the proverbial here and now.! A trader must concentrate on the present price action of the market. A good analogy is a professional tennis player who focuses only on the point at hand. He'll probably lose half the points he plays, but he doesn't allow himself to worry about whether or not he's down a set. He must have confidence that by concentrating on the techniques he's worked on in practice, the strengths in his game will prevail and he will be able to outlast his opponent.
The second principle of peak performance is confidence. in yourself, your methodology, and your ability to succeed. Some people are naturally born confident. Other people are able to translate success from another area in their life. Perhaps they were good in sports, music, or academics growing up. There's also the old-fashioned "hard work" way of getting confidence. Begin by researching and developing different systems or methodologies. Put in the hours of backtesting. Tweak and modify the systems so as to make them your own. Study the charts until you've memorized every significant swing high or low. Self-confidence comes from developing a methodology that YOU believe in.
Concentrate on the technical conditions. Have a clear game plan. Don't listen to CNBC, your broker, or a friend. You must do your own analysis and have confidence in your game plan to be a successful trader.
Analyze the markets when they are closed. Your job during the day is to monitor markets, execute trades and manage positions. Traders should be like fighter pilots - make quick decisions and have quick reflexes. Their plan of attack is already predetermined, yet they must be ready to abort their mission at any stage of the game.
Just as you should put winning out of your mind, so should you put losing out of your mind - quickly. A bad trade doesn't mean you've blown your day. Get rid of the problem quickly and start making the money back. It's like cheating on a diet. You can't undo the damage that's been done. However, it doesn't mean you've blown your whole diet. Get back on track and you'll do fine.
For that matter, the better you are able to eliminate emotions from your day, the better off you will be. A certain amount of detachment adds a healthy dose of objectivity.
Trading is a great business because the markets close at the end of the day (at least some of them). This gives you a zero point from which to begin the next day - a clean slate. Each day is a new day. Forget about how you did the week before. What counts is how you do today!
Sometimes what will happen during the day comes down to knowing yourself. Are you relaxed or distracted? Are you prepared or not? If you can't trade that day, don't! - and don't overanalyze the reasons why or why not. Is psychoanalyzing your childhood going to help your trading? Nonsense!
The third important ingredient for achieving peak performance is attitude. Attitude is how you deal with the inevitable adverse situations that occur in the markets. Attitude is also how you handle the daily grind, the constant 2 steps forward and 2 steps back. Every professional has gone through long flat times. Slumps are inevitable for it's impossible to stay on top of your game 100% of the time. Once you've dug yourself out of a hole, no matter how long it takes, you know that you can do it again. If you've done something once, it is a repeatable act. That knowledge is a powerful weapon and can make you a much stronger trader.
Good trades don't always work out. A good trade is one that has the probabilities in its favor, but that doesn't mean that it will always work out. People who have a background in game theory understand this well. The statistics are only meaningful when looking at a string of numbers. For example, in professional football, not every play is going to gain yardage. What percentage of games do you need to win in order to make the playoffs? It's a number much smaller than most of us are willing to accept in our own win/loss ratios!
Here is an interesting question: should you look at a trade logically or psychologically? In other words, should every trade stand on its own merits? Theoretically, yes, but in real life it doesn't always work that way. A trader is likely to manage a position differently depending on whether the previous trade was a winner or a loser.
How does one know when to take profits on a good trade? You must ask yourself first how greedy do you want to be, or, how much money do you want to make? And also, does your pattern have a "perceived profit" or objective level? Why is it that we hear successful winning traders complain far more about getting out of good trades too soon than not getting out of bad trades soon enough? There's an old expression: "Profits are like eels, they slip away."
Successful traders are very defensive of their capital. They are far more likely to exit a trade that doesn't work right away than to give it the benefit of the doubt. The best trades work right away!
OK. Realistically, every trader has made a stubborn, big losing trade. What do you do if you're really caught in a pickle? The first thing is to offer a "prayer to the Gods". This means, immediately get rid of half your position. Cut down the size. Right off the bat you are taking action instead of freezing up. You are reducing your risk, and you have shifted the psychological balance to a win-win situation. If the market turns around, you still have part of your position on. If it continues against you, your loss will be more manageable. Usually, you will find that you wished you exited the whole position on the first order, but not everyone is able to do this.
At an annual Market Technician's conference, a famous trader was speaking and someone in the audience asked him what he did when he had terrible losing trades. He replied that when his stomach began to hurt, he'd "puke them at the lows along with everyone else." The point is, everyone makes mistakes but sooner or later you're going to have to exit that nasty losing position.
"Feel good" trades help get one back in the game. It's nice to start the day with a winning scalp. It tends to give you more breathing room on the next trade. The day's psychology is shifted in your favor right away. This is also why it's so important to get rid of losing trades the day before. so you don't have to deal with them first thing in the morning. This is usually when the choice opportunity is and you want to be ready to take advantage of it.
A small profitable scalp is the easiest trade to make. The whole secret is to get in and get out of the market as quickly as possible. Enter in the direction of the market's last thrust or impulse. The shorter the period of time you are is the marketplace, the easier it is to make a winning trade. Of course, this strategy of making a small scalp is not substantial enough to make a living, but remember the object is to start the day out on the right foot.
If you are following a methodology consistently (key word), and making money, how do you make more money? You must build up the number of units traded without increasing the leverage. In other words, don't try going for the bigger trade, instead, trade more contracts. It just takes awhile to build up your account or the amount of capital under management. Proper leverage can be the key to your success and longevity in this business. Most traders who run into trouble have too big a trade on. Size influences your objectivity. Your main object should be to stay in the game.
Most people react differently when they're under pressure. They tend to be more emotional or reactive. They tense up and judgement is often impaired. Many talented athletes can't cut it because they choke when the pressure's on. You could be a brilliant analyst but a lousy trader. Consistency is far more important than brilliance. Just strive for consistency in what you do and let go of the performance expectations.
Master the Game
The last key to achieving mental mastery over the game is believing that you can actually do it. Everyone is capable of being a successful trader if they truly believe they can be. You must believe in the power of belief. If you're a recluse skeptic or self-doubter, begin by pretending to believe you can make it. Keep telling yourself that you'll make it even if it takes you five years. If a person's will is strong enough, they will always find a way.
If you admit to yourself that you truly don't have the will to win at this game, don't try to trade. It is too easy to lose too much money. Many people think that they'll enjoy trading when they really don't. It's boring at times, lonely during the day, mentally trying, with little structure or security. The markets are not a logical or fair playing ground. But there are numerous inefficiencies and patterns ready to be exploited, and there always will be.
I can stand the despair - it's the hope I can't manage (John Cleese - Clockwork.)
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Old Nov 22, 2008, 9:55pm   #5
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article: A Trader's Thoughts Demons

bbmac started this thread The business of trading can be fertile ground for negative thought choices. If you let them, these negative thought choices can become your demons and sap your positive mental energy. By identifying and understanding the realities of these thought demons, a trader is better able to redirect energy away from them and diffuse their power.

The most common thought choice demon for traders is fear. Traders encounter opportunities for fear on a regular basis. If allowed, fear will confuse and emotionally paralyze a trader.

A fear can feel overwhelming and difficult to handle when it is being consciously or unconsciously experienced. Fear can create the envelope of our reality because it can determine what we do and avoid doing so as not to experience the fear.

Fear is a reaction to a memory of a past experience, which leaves the thought, “I will never do that again.” It can also be the anticipation of an unknown, future event, or a “possible” future outcome. It can range from apprehension to dread. The intensity level of a fear is directly proportional to the amount of energy we choose to feed it.

Thought choices that support fear provide a great example of how we create our reality and what we experience. For example, a trader sees a wonderful trading opportunity but is frozen in fear and does not take it. His fear could be a memory of a past trade that didn’t work, or as protection against a “possible” losing trade and what he perceives will result in emotional pain if the trade does not work. However, what the trader doesn’t realize is that when he was frozen in fear, he was experiencing exactly what he was fearful of – emotional pain at that present moment in time. He was experiencing his fear in the present, not in his anticipated future. His fear was emotional pain, and he is experiencing, consciously or unconsciously, this pain at the moment he was frozen in fear and unable to make the trade.

It is important when sensing fear, to pay attention to breathing. Often, when a person experiences fear he tends to hold his breath or to breathe in short and inefficient shallow gasps of breath. Both of these breathing approaches will increase intensity and heighten his fear and anxiety. Taking slow deep breaths is very important in assisting the trader to control his fear reaction. The deep breathing will allow more oxygen to circulate to the brain and will help the trader stay focused.
Let’s examine and de-energize some of the most common trader fears

Losing Money

If a trader chooses to be afraid of losing money, there are two things he should consider:

Any time money is used to make money, there is a level of associated risk. The intent of a trading business is to have money make money. Therefore, there is an associated risk of losing money in trading. If the idea of losing money is very uncomfortable for the trader, he should examine this fear. If the trader cannot get beyond this fear, the conclusion may be that he should not be trading.

In any business, not every business decision will make money. This is also true in the trading business. There is a high level of certainty that no matter what trading techniques are used, not every trading business decision will make money. Therefore, by the very nature of the trading business, a trader will have losses. Keep in mind that it is not the profit or loss from one trade that determines the success of a trading business. Rather, it is the total trading profit from a series of trades.

Because not every trading decision will make money, the key is having appropriate risk management parameters that do not overexpose trading capital to any one trade. Since the trader never knows with absolute certainty which trades will be profitable, only trades that completely comply with every aspect of the trader’s strategy should be entered. In this way, every trade has an equal chance of being successful.

Lack of Control

A trader who doesn’t understand the difference between the aspects of trading he controls and those he does not is in for a rude awakening. In general, people try to control a situation in order to get what they want or in order to avoid surprises and the experience of a fear.

This approach does not work when applied to trading. The trader soon finds out he does not control the market’s behavior. Even a large trader’s influence on the market is only temporary. The fact is, no trader can control the market, and this lack of control can be unsettling for some. A trader may hesitate putting on a trade, or feel that he is out of control and doesn’t know how to take the next step.

As a trader, you need to focus on what you do control, instead of what you don’t. As you can see, the aspects of trading you do control far outnumber those you don’t. It is not necessary for the trader to be in control of the market to establish a profitable business.


Many traders consider failure to be a missed trade or a monetary loss. Fear of failure, as they define it, causes them to hesitate when putting on a trade, or not making the trade at all. Some traders may even take an unproductive trade personally and believe that they are the failure.

The fact is, missed trades and monetary losses are part of trading. True failure for a trader is not following his trading game plan.

This means not entering a trade or not taking profits or taking losses when required by his trading approach. The trader who chooses to take the results of a trade personally has put energy into the belief that the outcome of a business decision reflects who he is as a person. This is a mistake and deadly for a trader.

The good news is that these are all areas you, as a trader, control. It is your acceptance of the risks associated with trading, your understanding that each trade is a business decision and nothing more, and your discipline and consistency in applying your trading strategies that will determine the productivity and success of your business.

Emotional Pain

Instead of taking responsibility for their trades, some traders believe that the market is intent on causing them emotional pain with each losing trade. They forget that no matter what source of information they used to make the trading decision (broker, newspaper, newsletter, hot tip or their trading system), the trade is their responsibility once it is executed.

The fact is that the only emotional pain a trader can have is self-inflicted. There is no emotional relationship with the market, except what the trader imagines. The market is an entity that brings buyers and sellers together and that’s it. It does not know that you, as a trader, exist. Nor does it care about who you are, your feelings, your social status or how much money you have. This makes the market your perfect, unbiased trading partner.

Taking responsibility for trading decisions and consistently following your trading game plan are key to eliminating the potential for self-inflicted emotional pain.

Missing a Trade

Many traders fear the missed trade. No matter how great the trader thinks the missed trade was, there will always be another trade, just as good, at some point in time. The chance of a trader missing a trade drops dramatically if he is trading in the present moment with an awareness of his markets and consistently following his trading strategy.

Hesitating to Enter a Trade

A trader may hesitate or abandon entering a trade because he senses his own fear. His conscious or unconscious interpretation is, “If I am sensing fear, then I should not be doing this trade.” The bottom-line reason why a trader hesitates is because he is not totally confident in his trading strategy or in himself. He can change this by properly researching and understanding his trading strategy and by practicing the techniques in this book to help increase his confidence.

Stay in a Profitable Trade Too Long and It Becomes a Loser

The major reasons why a trader fears overstaying his welcome in a trade and allowing a profitable trade to become a losing trade are:

The lack of predetermined profit exit criteria. The trader never determined under what circumstances he would capture profits. Whether it is a change in fundamentals, a magnitude objective or a change in technical analysis parameters, the decision of when to exit a trade must be determined before a trade is entered. Otherwise, the trader runs the risk of letting profits slip through his fingers, as well as providing himself with an excuse to become emotionally involved with trade.

The fear that if he exits a profitable trade, the market may continue and he won't capture “all” of the profits. The trader is forgetting that if he establishes parameters for re-entering a trade, he can get back into the trade if the trend continues. He is also forgetting that profitable trading occurs by
consistently following his personally researched trading strategy, not by always buying the exact low or selling the exact high of a market.

The trader becomes comfortable, lazy and emotionally attached to the trade. He forgets that a trade is a business decision and nothing more. When exit criteria are reached, the trade is exited. Period. There is nothing to think about or discuss.

The trader held the position through other pullbacks, and it eventually continued in a favorable direction. The trader's approach worked because the pullbacks were profit-taking moves and the trend continued in the previous direction. There will be times, however, when the pullback is not profit taking, and the market will change direction. The trader must be prepared for all contingencies. (A profit-taking move occurs when prices temporarily move in the opposite direction of the current trend. For example, a bullish trend is in place, moving prices in an upward direction. A downward bearish countertrend move is caused by sellers who previously bought and were long the market, and now want to take profits. To do this, these traders exit their positions by selling and closing out their previous long positions. If there are enough sell orders from long traders selling to overwhelm the buying orders coming into the market, a bearish countertrend will begin, moving prices downward. This bearish countertrend will sustain this downward movement as long as this profit taking action is in place. Because the cause of the countertrend movement is the profit-taking actions of long traders, the overwhelming sell orders will stop when they finish taking profits. At this point, there is no reason for the countertrend move to continue, and the bullish trend will continue in its original upward direction. The opposite is true when sellers are buying to take profits in a bearish trend.)

Greed drives the trader to hold onto the trade. A greedy trader will never be successful because he will never be satisfied with his profits. This trader will over-stay his welcome in the trade because he will want more than the market can give at any point in time.

The trader begins to think about how he will spend the trade’s profits and refuses to exit as he sees his spending plan disappear. He forgets that the profit in the trade is not his until he closes the position.

The trader steps out of his trading strategy profit exit and begins to hope for more profit than his trading strategy can provide. The trader forgets that his hope is irrelevant to his trade. The price behavior and his trading strategy are his guides, not his hope.

Panicking and Staying in a Losing Trade Too Long

The major reasons why a trader fears panicking and staying in a losing trade too long are in some cases very similar to why he stays in a profitable trade too long and then watches it become a loser:

The lack of predetermined risk management loss exit criteria. The trader never determined under what circumstances he would exit a trade with a loss. Just as with the profit exit, whether it is a change in fundamentals, a magnitude objective or a change in technical analysis parameters, a decision of when to exit a trade must be determined before a trade is entered. The worst time to decide when to exit a losing trade is when the losing trade is occurring. If the market is moving quickly or slowly, the trader can become emotionally involved with the trade and frozen in inaction as he sees money being drained from his account.

The trader is emotionally involved with the trade and cannot bring himself to take the loss, learn from it and move on to the next trade.

The trader forgets that not all of his trades will make money. He continues to stay in the trade hoping the loss will change to a profit. He forgets that a trade is a business decision and nothing more. When exit criteria are reached, the trade is exited. Period. There is nothing to think about or discuss.

The trader thinks exiting the trade will somehow mean that he has been “wrong,” so he continues to hold on to the losing position. The trader forgets that trading has nothing to do with being right or wrong. A trade is either a profitable or unprofitable business decision.

Greed drives the trader to hold on to the trade. A greedy trader will never be successful because he will never be satisfied with his profits.

The trader steps out of his trading strategy and begins to hope the trade will work. He is not consistently following his trading and risk management strategies and he is setting himself up for disappointment, frustration and inconsistent trading results.

Uncertainty of the Future

Successful traders know that the market can do anything at any time. They realize they cannot predict the future, so they don't waste their time trying. They also understand that the results of each trade are independent of each other. They do not carry emotional baggage from the outcome of profitable or unprofitable past trades. Instead, these traders focus on the opportunity the market is presenting at the present moment, and the application of their trading strategy. If applied correctly over time, the trading strategy will provide them with a profitable result.

Being Embarrassed and Losing Face The only embarrassment in trading is what the trader creates. Remember, the market is the ideal, unemotional, non-judgmental, impersonal trading partner.

Some traders, whether on the floor surrounded by other traders or behind a computer screen and talking to a broker, let their egos interfere with running their trading business. They fear embarrassment or losing face and allow their perceptions of what others may or may not be thinking to determine how they manage their trades. Such a trader may not exit a losing trade because he just put the trade on and he feels it would be embarrassing to exit so soon. Instead, he stays in the trade, suffers an even greater loss and exits the trade only when his pain from the loss is greater than his fear of embarrassment. He thinks he has shown them that he's tough, he can take it, and he showed the market who is boss.

This emotional baggage is totally fabricated by the trader. The only thing he has shown is that he is not a very good businessperson, and he has emptied the money from his account trying to prove that he is right. The business of trading is not about being right – it is about making money. His focus should be consistently applying his trading strategy.

Being Wrong

The concept of "being wrong" implies there is a personal connection between a trading decision, which is an impersonal business decision, and the outcome of a trade. It is dangerous to make a personal connection to the outcome of the trade, because it mixes the trader's self worth with an impersonal business outcome. A trade is only a trade. There is no personal connection to the outcome of a trade unless the trader consciously or unconsciously creates one.

The fear of being wrong is further magnified when a trading decision is not productive and the trader takes it personally. He begins to feel that he is incompetent, a bad person or an unworthy person, and he stops trusting himself. The result is that at the next good trading opportunity, the trader hesitates to enter the trade, and an opportunity is missed. The trader then sees the profitable results from the missed trade and, instead of bolstering his confidence in the fact that his trading strategy works, he becomes frustrated and less confident.

This trader is not afraid of the market. He is concerned with his ability to trust himself. Instead of thinking in terms of "right" and "wrong," he can describe the results of his trades as productive or unproductive, profitable or unprofitable, or cooperative or uncooperative. This depersonalizes the trade results and keeps them in the proper perspective.
As a trader, what fears have you created? We create our fear by using past experiences or anticipating and imagining what the future will hold. We do not control the past or the future. We do control our reaction to the present moment. If we spend our time thinking about what has happened or what may happen, we are not in the present moment and we are not exercising our control over our reaction to the current situation. The result is that our fears become our reality, and this reinforces our fear belief system.

Overcoming fear is self-empowering, and it builds confidence to deal with future challenges. Remember, the only limitations you have are the limitations you impose on yourself.
Samurai warriors were without a doubt some of the fiercest fighters who ever existed. The key to the samurai’s incredible fighting ability was the complete elimination of their fear of death and their complete focus on being in the present moment. They did this by entirely de-energizing their fear of death. If a person in a fighting situation is distracted by thoughts of being hurt or dying, he will be the loser. Samurai warriors were unencumbered by these fears and were courageous in the face of the unknown. In short, they were empowered by a lack of fear, and this allowed them to completely focus, react and stay in the present moment. They fought without hesitation and with complete confidence. This is exactly the mindset of the successful trader.

OK, so you’re not ever going to be a Samurai warrior, but there are still ways to deal with fear and eliminate it from your trading experience.

Face Your Fears
The first step in controlling fear is to face it. If you are not willing to face your fear, then fear, not you, will control your life. When you are afraid, use deep-centered breathing, acknowledge the fear, and face it head-on. Tell yourself, “I am stronger than my fear, I control my fear, and I can overcome my fear.”

You will become more comfortable in the presence of a fear by decreasing your sensitivity to it. As you repeatedly face your fear, you will realize that your energy in the fear will decrease.

Courage is moving ahead even though you’re afraid. There is a wonderful true story of Ishi, the last living member of a Native American tribe. Ishi and his tribe believed trains were monsters that ate people. One day, Ishi found himself in the position of having to take a journey by train. When he boarded the train, he was asked by a person who understood the beliefs of his tribe how he could even step onto the train. Ishi responded, “Since I was little, I was taught to always be more curious than afraid.” Use fear as an opportunity to learn and progress.

Acceptance of Responsibility
A critical element in dealing with fear is to accept that you alone are responsible for the creation and intensity of your fear. You must realize that you are responsible for your thought choices and the amount of energy you feed them. This recognition alone can put fear in perspective, diminish the energy in the fear and prepare you for the acceptance of new thought choices.

Accepting responsibility for your thought choices puts you in control of your fear not the other way around.

Identify the Thought Choice
Our fears are created by our thought choices. In order to eliminate our fears, we must change the thought choices that create them. For example, if a trader fears losing money, he is unconsciously saying to himself, “ I choose to experience the fear of losing money.”

That same trader can choose not to feed energy to this fear choice and make a different, conscious choice. He can say, “I choose not to fear losing money, and I accept that losing money is a part of the trading business.”

Until you identify your fear thought choice, you cannot change it, and you keep the fear alive. Allow yourself the freedom to make this new choice without judgment. Exercise your positive, conscious thought choice whenever the old fear choice returns. Each time you do this, you drain the energy from the old fear, and you create the change for which you are striving.

Acceptance of Risk
It is very important that the trader completely and honestly accept the risks involved in trading. Trading is a business of percentages. Not every trade will make money. If a trader cannot accept the risk, he cannot fully commit himself to the trade. If he cannot fully commit himself, taking the next trade can be a frightening experience. He will lose confidence and become frustrated and locked in a cycle of fear and doubt.

On the other hand, if the trader has complete acceptance of the risk and all possible results, then he can be optimistic, committed and realistic about the next trade and its outcome. He can now move aside the interference caused by fear and confidently deal with any future outcome.

Eliminate Self-Sabotage
Every trader has a level of comfort and familiarity with trading. To go beyond this level of comfort usually requires taking a risk. This is when fear, as an unconscious act of self-sabotage, can creep in. This fear is actually misguided self-preservation, intended to protect the trader from the fear and anxiety he may experience if he leaves his level of comfort and risks the possibility of things not going his way. A trader may fear that he would suffer embarrassment and personal devastation if he tried his best and failed. Fear as self-sabotage becomes the trader’s excuse to maintain his level of comfort and the status quo. The easiest way to protect himself is not to try.

He can also self-sabotage his trading by initiating a trade that does not meet his trading strategy requirements. In this way, if the trade doesn’t work, he can tell himself that it wasn’t his best effort because it wasn’t his main strategy. He unconsciously has protected his comfort zone and his false mental perceptions.

The bottom line with self-sabotage is that the trader is linking his self-worth to trading. If the trader doesn’t meet his own expectations of what being a successful trader means, his self-esteem will suffer. To avoid this blow to his ego, the trader trades carelessly, doesn’t give it his all, and then uses the excuse that he didn’t really fail because he wasn’t really trying. This trader doesn’t realize that a trading decision outcome has nothing to do with his self-worth, but is merely a profitable or unprofitable business decision.

The first step in eliminating self-sabotage is to recognize it. The trader must ask himself: Do I select trades that imply illusions of grandeur? Do I select trades with total disregard for my trading strategy? Do I feel that the trade is too much to handle, and I just want to get it over with? A “yes” would indicate poor trade selection and lack of a risk management exit, both of which imply a total disregard for his trading strategy.

Second, the trader must re-center himself with deep breathing and focus on the strict application of his trading strategy.

Reality Check
As a trader, if your greatest fear came true, what is the worst that could happen? Your honest answer can help you examine and deplete the energy of your fear.

Visualization is a powerful tool that allows a trader to identify, examine, experience and de-energize a fear. It allows him to mentally envision solutions to his fears in a non-threatening way. Visualization will reduce your anxiety and prepare you if you’re faced with the fear-producing situation again.

Fear Lead Up
It is possible to stop fear before it gets started by identifying the conditions that immediately precede the fear and by changing your reaction to the fear-producing situation.

For example, a trader has a solid, well-researched trading strategy. The trade entry and profit or loss exit is completely established before the trade is entered. However, once the trade is initiated, the trader watches every little price movement of the market. Eventually, the trader gets emotionally involved with each price move, becomes afraid, and feels a sense of urgency to exit the trade. The result is that the trader exits the trade before either its profit or loss price objective is reached. He never gave his well-researched trading strategy a chance to work for him.

The trader’s lead up to fear was his watching of every movement of the market. In order to de-energize his fear, he changes the fear-producing conditions: once he has entered a trade with the appropriate profit and loss orders in place, he does not continually look at that market. Instead, he periodically checks the trade. This change eliminates the anxiety associated with every price change and gives his trade and his trading strategy an opportunity to actually work for him.

Trading Plan
A solid trading plan is crucial for any trading business. It provides the trader with strategies for trading in any market condition, and a solid foundation for a successful trading business. It also can protect a trader from one of the things that can destroy a trading business, or any business for that matter - the surprise event. A well-planned trading strategy, including capital allocation parameters, and defined entry, exit and risk management criteria will allow the trader to trade without fear, knowing he is prepared for any potential event.

Learn From It
Fear can be an opportunity to learn and progress. Learn from it and move on. Visualize solutions where you calmly and confidently act out the right solutions. This will prepare you and reduce your anxiety if you’re faced with that fear-producing situation again. If you forget about yourself and your fears and completely focus only on what needs to be done, you will neutralize your fears. They will never stop you
I can stand the despair - it's the hope I can't manage (John Cleese - Clockwork.)
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Old Dec 7, 2008, 1:52am   #6
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Joined Jan 2003
amusing but so true re trading

bbmac started this thread Author: unknown

Earlier in my trading experience I had spent 18 months, five hours a day, learning and trading various platforms and methods. I treated trading as a job from the first day, no mulligans permitted. I researched, read, struggled, made error after error, modified my trading plan and finally, after 18 months I felt ready to “go live” with real money. For the record, I was making between 5 and 15 trades per trading day and over the term had made an average of 256 pips per month with a 78% correct trade record. Not a bad record. I was ready. I gathered up my $10,000 and opened my live account with a reputable brokerage.
I still laugh at my naiveté, as the broker opened my account and automatically limited my leverage to 5:1; suggesting I may want to proceed slowly in this risky market. Following my arrogant and complaining email, the leverage was quickly increased to the then normal 100:1. I still have that email containing the staple marks and blood from my forehead.
My first live trade was a success, the plan worked well and closed the day with a 35 pip profit. Whew! The first live trade behind me, my methods confirmed; my wife and I celebrated my success and I completed my homework for next days trading plan. Confident, I slept with the angels knowing full well that my well-deserved success was just a few months away.
Enter now stage left, the Fifth Emotion of FEAR along with her cousins Self-Doubt and Conviction.
The research and homework from my first day had indicated a short trend. The charts showed a strong overhead resistance. Watching for a short opportunity, I opened my second live trade, SHORT a few pips below the prior days close. With strong resistance overhead and the first support level some forty pips below, my methods confirmed, my confidence high, I saw no urgency to set a stop loss, after-all I was right there; my finger “on the trigger”.
My entry method proved successful, the market moved 25 pips to the short side. I was elated, the wind was to my back! All the hard work and lonely trading hours were paying off. Success was right here, right now! The market had given me 25 pips, not quite my intended target level of 45 pips, but close; I held my short. My enthusiasm and joy were short lived as the market stalled and began a reverse that would gobble up my “profit” over the next five minutes. Finishing that meal, the market continued LONG, heading for the overhead resistance mark.
As the market approached my break-even point, FEAR crept into my mind, I set a stop loss LONG at the resistance price and re-evaluated my trade. My method, my charts, my friends in the chat-room, all indicated; stay SHORT. I reviewed my reasoning for taking the trade and became convinced that SHORT was the correct position. After-all, the market had failed the resistance level three times, the news was good, the trend was in line. I was right; I had the conviction. The market continued LONG, now by 20 pips.
The bull run continued, as the market approached my STOP-LOSS, FEAR and SHAME walked into the room. SHAME told me that a 45 pip loss was bad and would wipe out yesterdays profit; FEAR agreed calling CONVICTION who said that my trade strategy was correct; the market would certainly turn back SHORT before it broke the resistance. GREED arrived on his black horse. He suggested that I cancel my stop loss. FEAR AND SHAME both agreed, so did I.
My stop loss cancelled, FEAR and SHAME stood on my right side,happy that they could help.
It was dark and chilled in my trading room, quiet and alone I searched for my friend CONVICTION. He was there, leaning on SHAME’S shoulder and told me I was right.
Suddenly, from nowhere, lightning struck! Thunder roared! The quiet became a torrential storm as the bulls took over. Within two minutes, the market moved through the resistance and the market was LONG over 100 pips.
TERROR arrived in his black robe! CONVICTION and SHAME cowered in his mighty presence.
Reality set in as I realized I was down not just the 128 pips, but $1280 real dollars. Over 10% of my trading account had been destroyed in a single trade, in less than 5 minutes.
I evaluated the numbers and searched for a solution to my dilemma.
HOPE arrived, warm and promising. HOPE smiled, whispered gently in my ear, “if you average here, you can get out even on the retrace, remember the past”. TERROR chuckled under his breath and gave a high five to CONVICTION.
CONVICTION agreed that the retrace would take the price back within an acceptable level of loss. I decided to take the average. HOPE was such a help, so warm, so friendly, so reassuring.
My reality at this point was that I now had 2 lots at risk, (twenty percent of my trading account) averaged into a 64 pip loss, hoping for a recovery on the a retracement of a 128 pip move.
Thank god it was Friday and this move would be over soon, the pain would end. If I can just get out of the trade even, life will be fine. I know my mistake, I recognize my demons and I can move on.
As dawn broke, bringing with it the warmth of the sun, HOPE and I partied as the market began a reversal pattern; back towards home, towards warmth and security; back toward my dreams.
TERROR took a chair in the far corner of my trading room. Together HOPE, CONVICTION and I had succeeded. I was right, thanks to my long practiced methods, my analysis, my friends HOPE and CONVICTION. I was being rewarded. Success was again at hand.
Suddenly, without warning the market reversed again to the LONG side. HOPE dropped her drink. TERROR jumped from his chair with the speed of lightning, “a bull run” he shouted as the market moved another 92 pips to the LONG side. TERROR was exhilarated! He immediately telephoned DESPAIR and she came running.
This rampage of unchecked emotion continued through the session.
The comedy and the tragedy of compounding errors ended with one last average 257 pips above my initial short. I was now 3 lots SHORT; averaged to 125 pips down; in a reversing market; on a Friday.
TERROR and DESPAIR partied all weekend while my wife and I made the painful decision to take the loss.
The end result of this trade was; after one more average, the market did reverse. The trade cost me $3600, 36% of my account and I’m happy it happened when it did. It was the BEST TRADE I EVER MADE. And the market didn’t care!! The lessons learned from this trade were more valuable to my trading than the entire 18 months of advance preparation.
Now, hundreds of trades later, I revisit all my friends during my trades. They are my friends, they taught me, they are my mentors. But now I control them. I tell myself daily before I enter the market that “I alone have the ability to destroy my account”.
I can stand the despair - it's the hope I can't manage (John Cleese - Clockwork.)
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Old Dec 7, 2008, 9:57am   #7
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Joined Feb 2004
Well done bbmac! I can't agree more with your post. I started trading in 2003 after 6 months of 'research' and thought this was easy. Put £3,000 in my IG trading account - within 1 month it was in IG's bank and I was broken. Haven't spread bet since. All I trade now is fixed-odds bets.

Keep up the good work bbmac!
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Old Dec 7, 2008, 2:14pm   #8
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Joined Dec 2008
Very nicely explained....
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