Great Expectations – Part 3 of 4

Great Expectations . . . Part 3 – Mind Over Money

“You are your own worst enemy. If you can learn to stop expecting impossible perfection, in yourself and others, you may find the happiness that has always eluded you.” Lisa Kleypas

The biggest challenge trader’s face, aside from inexperience, is their own psychology when entering the market. Having a trading plan with a clear set of rules is a necessity – on that we can all agree. But why is it we have such difficulty following the simple directions outlined in our rule set? We need certainty. It is how we approach the world every day. We have routines, habits and idiosyncrasies that dictate our behavior based on anticipated outcomes. We have difficulty accepting that something may be out of our control or fall outside our expectations. This is fear. We spend our lives avoiding fear, so we gravitate to those behaviors that alleviate fear. By nature we are risk averse. Trading flies in the face of all we have been conditioned to accept. There is no certainty in the market, so applying your expectations to the market creates fear in that you cannot control the outcome. You see the potential gain by virtue of profits, but fear overwhelms. Why? We have limited our abilities by our own beliefs.

The trading mindset accepts the risk and uncertainty of the market. If we show statistically that our trading system overtime will produce a profit or has a positive expectancy, we can use this data to suppress the fear of a loss. This is no different than any other business. Any prudent business person studies his market to determine potential profit opportunities. He realizes that there is risk in that not every opportunity may reach its full potential – some will, some will break even and some will lose. He still accepts the risk because his training, expertise and tools will provide an advantage or “edge.” Trading is no different. Some trades will reach their intended targets, some partial, some breakeven and some will lose. The trading mindset applies the trader’s edge based on experience and a sound trading plan just like the business man. Without experience and a sound plan, there is no edge. In the uncertainty of the market, an edge is the best we can achieve; there is no perfection, so having the expectation of certainty is unrealistic. This is the greatest psychological challenge we must learn to accept; that even if we do everything “right,” we still have the potential for a losing trade.

I mentioned in Part 2 that even though I had done back testing and applied the rules of a system, I was still struggling emotionally. What I came to realize was that the system did not fit my psychological profile. It was a scalping system based on an 8 pair portfolio on the 5 minute time frame. The system was introduced to me by a friend who did not reveal that he was losing money as well. I finally confessed to him that my back testing showed it was profitable, but I was overwhelmed by the amount of indicators and the speed at which I was receiving signals. I decide to test the system on a higher time frame. I removed the indicators that were providing redundant information, and reduce the portfolio to 4 pair. In my training class, I was shown the importance of trade plan development – how all of the elements of a trade plan should be customized to fit my individual trading profile. This was a game changer. After some practice, I could comfortably look at any trading system, back test it based on the time frames and markets I trade, and apply the indicators I could use effectively. I had to honestly analyze why I did anything and build an objective case whether to keep it or change it as it related to my plan and my psychology. I began to trust myself. I began to believe and use logic and rationality instead of supposition and opinion.

Before placing live money at risk, I would demo trade the system for 30 days to make sure I was prepared to act when I received a signal and manipulate my trading platform efficiently. Most importantly, I would react calmly, without hesitating, because I believed the system (based on stats) would apply my proven edge. My trading time frame allowed me to check my rules when I received a signal without being rushed, so I was no longer anxious or nervous. This trade plan development training became the foundation for me to decide independently how I would trade, what I would trade, and which rules I would apply for back testing and entering the market. I was actually learning the skill of trading. I was no longer dependent on other traders or marketers for input. It was finally happening. I began to trade live with mini lots and gradually increased my lot size as my trade execution became confident and consistent.

The next challenge going full time was to determine my individual tolerance for risk. Based on my back testing at that time, I determined that a stop of around 50 pips would give me the best win/loss ratio for my trading time frame. The question I had to ask and honestly answer was when eventually trading full lots, was I willing to lose $500 to gain $1,000 (At that time, my plan called for a minimum 1:2 risk/reward). I had to put this in perspective. As a business person, I had invested tens of thousands of dollars in new business ventures, some of which were very successful; others did not perform as well. None of these opportunities had the long term upside potential of the currency markets nor did they have the seemingly infinite amount of opportunities. The amount seemed reasonable from that perspective. Based on the size of my account and back testing stats, I determined the risk per trade against the winning performance of my trade plan and became comfortable with the risk. This risk acceptance became one of the most critical elements in removing the emotional investment in each trade. I became consistently profitable once my trading mindset became one of total belief and acceptance; belief in my trade plan and rules of engagement, and acceptance of the responsibility for my actions and the risk of each trade.

After first becoming aware of my trading psychology, I initially underestimated its importance. I finally stopped being my own worst enemy and began to trust. The transformation came to fruition when only I realized I had to work on me and that no system or plan could hide the fact that I was afraid. The fear of being wrong and the fear of losing were crippling my progress. It soon became evident to me that conquering this fear is the single most critical part of any successful trading plan execution. Without it, I had a shallow definition of success as a trader. Now having mastered it, I developed a positive, winning attitude. I began to thoroughly enjoy trading. I became obsessed with the markets and looked forward everyday to looking at my charts and getting a new trade signal. I am believer, not because of “faith,” but because of empirical data I had to work to gather from back testing. In this data is the proof that if I see this, then I do that. I am not guessing, hoping, wishing or really even doing much thinking. I am not lethargic, I’m prepared. I am not reacting, but attacking.

I now expect to win, but I completely accept losses and do not waste a minute dwelling, whining or thinking about them. I am sure I will never know it all, but I know enough and have the ability to look at any market with total confidence and resolve. That is solely the result of doing the back testing work and acquiring the belief in my trade plan and system.

Had I known all of this at the outset, I could have honestly taken years off of my learning curve. I still would have had challenges, but having the tools and methodology sooner would have made all the difference.
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In Great Expectations Part 4, I will discuss how goal setting creates performance expectations from which you can measure your progress.

Great Expectations – Part 2 of 4

Great Expectations Part 2 – The Big Surprise

“It wasn’t that things were harder than you thought they were going to be, it was that they were hard in ways that you didn’t expect.” Lev Grossman

I call it the “Big Surprise.” We’ve all experienced it. It is the cathartic moment after placing a trade when the market, for no apparent reason, goes wild and/or against your position in a Nano second and you sit frozen, confused and bewildered. You feel a level of helplessness that is rarely rivaled. You begin to think about what happened, why you didn’t see it coming, what you did wrong, and that this was just some kind of freakish anomaly. The Big Surprise is simply the realization that trading is not as easy as it looks and certainly not as easy as you believed. It is the realization that predicting whether the market will move up or down is actually impossible and there are no answers, only probabilities. It is humility and embarrassment punching you in the gut, telling you that you are small, insignificant and unprepared . . . at least that’s how I felt.

After many years of success as a business man and entrepreneur, trading brought me back to square one. In all of my professional life, I could not remember feeling so self-conscious and uncomfortable in any business or market environment. I felt disillusioned and defeated. I had taken classes (to the tune of $15K), purchased the best charting package, opened an account at the best brokerage firm and was ready to take on the market . . . or at least I thought I was. In fact, I was naive and arrogant because I thought trading would be easy. I did not realize it at the time, but the classes only exposed me to the basics. I say exposed because there was no emphasis placed on the importance of really commiting and learning the skill before entering the market. There was a class outline, but no real structure, no learning progression and no formulation of any kind of a trading plan. Even if I’d had these tools, the Big Surprise would still have come. Why?

The reason the Big Surprise is inevitable is because there is nothing that can prepare you psychologically for what happens in the market. We have all had emotional challenges, but nothing has previously tested us like participating in an environment completely outside our sphere of influence. Throughout our lives we have expectations about things and events we feel we can influence, control, and/or manipulate, or at the very least, we believe things within our sphere have an acceptable level of predictability. In other words, we perceive there are boundaries. We naturally create boundaries to keep us safe from the unexpected and protect us from pain. The same principles do not readily overlay onto the markets. We are not prepared for the markets because it is a world without boundaries. The security we derive from our predictable and routine surroundings does not exist in the market. Nothing we know previously exposes us to the anxiety of a drawdown, requires the absolute discipline needed to follow a set of rules (rules are meant to be broken, right?), demands the unconditional belief required to totally trust a plan, and entails the inflexible patience to hold a position open until targets are attained. The market forces us to relinquish control of traditional paradigms that we use to protect ourselves and punishes us for not doing so. We are programmed to act on emotion, but when we do so in the markets, we suffer. The market requries that we abandon emotion for indifference, and for this we are unprepared.

Not only was I unprepared, I had no reasonable expectations of what was really required. Once I determined that trading was going to be just like learning any other skill, I began to make some headway. I developed a study guide, found some reliable resources and set some goals for when I would begin trading again. I understood this would take some time and I had no reason to be in a hurry. Even though I was anxious to learn, I was not anxious to lose more money, so accepting the fact that significant time would be involved helped my focus and relaxed my attitude.

Along the way, one aspect I overlooked was my own trading psychology. I did not ignore it on purpose; I was simply unaware of how important it was. I attributed my Big Surprise to my lack of commitment in learning market basics – things like support and resistance, Fibonacci, candle patterns, etc. Even after I had mastered these concepts and began trading again, I was never at peace. I still lacked confidence. I was an emotional wreck when I had open positions and reacted haphazardly – closing trades too soon, fat fingering platform commands and riding a spastic emotional roller coaster while staring at every tick. At best I was at break-even trader. At worst I was having emotional convulsions. I was determined, but clueless. I clearly knew something was missing, but wasn’t exactly sure what it was or where to find it. I would soon discover that my trading psychology would be the most important and challenging part of my trading to master.

Like most of you, I was trying every system, indicator, robot, and attended every free webinar I could – all to no avail. One afternoon I received an email with an upcoming webinar titled “Why Most Traders Fail.” This intrigued me as I could relate to the title – so I registered. For the first time in all of my exposure to trading, this presenter described my challenges to a T. It was as if he’d been sitting next to me throughout my trading career and had made note of every emotion, mistake and frustration I had experienced. Never had I heard anyone explain so thoroughly and eloquently why I was failing. For the first time I had found someone that had formally identified, organized and explained succinctly a learning progression for trading that was logical, insightful and all encompassing. I was blown away – I’d finally found it!

My thinking completely changed within moments of the conclusion of the presentation. I finally recognized that I had to get out of my own way – that a set of rules and trading plan were only one part of consistency and success. I had to take complete responsibility for my actions and commit to a system, test it to prove its viability, and then develop a plan based on the testing stats to attack the market. I had to believe. This all made perfect sense! I had to develop a “trading mindset.” I didn’t sleep that night. I worked diligently on looking back at the trading system I was using and testing it, gathering the statistics to prove it would work. It wasn’t long after I began trading again and started off with great results. I’d previously had a rough plan with some rules and was following them, but not religiously. I had been reacting too emotionally. It wasn’t long after this re-start that I was giving money back and had a long string of losers. Something wasn’t working. I was still anxious, nervous and edgy. It was clear I wasn’t out of the woods yet. I knew that I’d need to emulate success rather than try to achieve it on my own and my poor results were the constant reminder.

I had always known I was capable, but I was missing a complete blueprint to eliminate the emotion from my trading. The webinar was only the intoduction, but the subsequent course material provided really cleaned up my mental mess. The emphasis and instruction on mastering psychology was transformational. It elevated my trading beyond anything I could have imagined. This may sound obvious, but the ability to control and actually surpress my emotions was the key to my eventual success. I had not realized this at the outset. I did not expect it nor was I prepared for it. The psychological challenges that had been the most troublesome and demanding had evolved into relaxed intensity – a confident focus. Once I completed this work, everything else seemed to fall into place.

Were it not for exposure to the tools for conquering this psychological aspect, I have no doubt I would have continued to flounder. This information connected the dots for me and for the first time I completely understood all the elements of successful trading and the formula for systematic trade plan development. The foundation for my transformation was a process that started with back testing to accumulate empirical data on my trading model’s performance, using this data as proof the system was profitable, using this proof to build belief and confidence in the plan, and hours of practice to visually imprint in my mind’s eye a valid signal based on my rules to act without hesitation or emotion when a signal was received. That is the process in a nutshell.

It was then up to me to put the process into action; to simply follow directions.

In Great Expectations Part 3, I will discuss how I came to understand what my own expectations revealed about my trading personality and risk appetite to achieve a trading mindset

Great Expectations – Part 1 of 4

With apologies to Charles to Dickens, here is my 4 part series “Great Expectations” about why we are unprepared for the market environment and why it is so difficult for us to make the necessary changes to adapt to it.

Great Expecations Part 1 – Delusions of Trading Grandeur

“When we pick up the newspaper at breakfast, we expect – we even demand – that it brings us momentous events since the night before…We expect our two-week vacations to be romantic, exotic, cheap, and effortless. We expect anything and everything. We expect the contradictory and the impossible. We expect compact cars which are spacious; luxurious cars which are economical. We expect to be rich and charitable, powerful and merciful, active and reflective, kind and competitive. We expect to be inspired by mediocre appeals for excellence, to be made literate by illiterate appeals for literacy…to go to ‘a church of our choice’ and yet feel its guiding power over us, to revere God and to be God. Never have people been more the masters of their environment. Yet never have a people felt more deceived and disappointed. For never have a people expected so much more than the world could offer.” Daniel J. Boorstin

In my limited exposure to trade rooms, forums and chat rooms, one reoccurring theme is ever-present. It is the idea that somehow one can learn enough to be a consistently successful trader from those same trade rooms, forums and chat rooms. I will be the first to admit that there are some pretty good traders and perhaps even some pros in these groups, but based on the content of the posts and the redundant dialogue, it’s often more like the blind leading the blind. I was fortunate in that I discovered trading from some institutional traders that provided access to the professional realm early on. Even though it had its shortcomings, I believed it was better than “discovering” trading online. In reality, it was not better because I made the same common mistakes that plague most online newbies. Why? Partly because it was early in the development of retail Forex trading, but mostly because I had unrealistic expectations about what it would take to become a successful trader. This is one common thread that unites the 95% that are unsuccessful.

Think about it. Regardless of your age, we typically have a very linear view of how to attain a level of professionalism – become proficient at the basics, introduce and practice the intermediate, and then expand to an area of expertise. This is the model for our entire educational system. Grades 1- 12 are for learning the basics, college for the intermediate (declaring a major) and enter the workforce to develop a specialty. Even if college was not part of your education, this model can be applied to any vocation where you become a journeyman or intend to make your primary income. This learning progression model can be applied universally.

Yet, with surprising regularity, most folks entering the trading arena believe that somehow this model does not apply. What is the difference in perception? The first variable is that there are really no barriers to entry. Unlike the required certifications or degrees or experience required of most professions, literally anyone of age can open a trading account. I guess the thinking here is that if you are only risking your own assets or damaging your own financial well-being, you are entitled to do so. The perception then becomes “if this is all it takes to open an account, trading must be easy.”

The next big difference is that free information abounds. Search “trading” on the internet and be flooded with systems, robots and literature – totally overwhelming. Compare this to the information available or required to be an engineer. There is equally enough online information about engineering, but the fact remains one must take a certification exam or be degreed from an accredited institution to be titled “Engineer.” To be called a “Trader,” one can decide at any moment to apply the title because the perception is that the simple act of trading anything makes one a trader. With a certification or degree, a minimum level of success or expertise is required. In retail trading, there is no such requirement (This articles assumes you are not trading or investing on behalf of others where a license or certification is required.) The perception is reinforced by this glut of information leads to the common idea that one can become a trading professional for “free.” Although this may happen, those are the rare exception. If trading wasn’t this easy, why would so many people giving this information away (or selling it for such a low price?)

Another misconception about trading is the length of time required to become consistently profitable. Using our linear model again, let’s think about the time involved to become an expert in any field or profession. We can estimate that after a basic education, it will take minimum of a few years because to master any skill we know that to become an expert requires training, experience and application. The majority of trading advertising would lead one to believe that learning to trade can be achieved in a “few easy steps” and you can “earn a fortune while you sleep.” These unregulated marketers rely on greed and laziness to seduce folks into believing that you need minimal education or participation to be successful. Would these claims apply to any other “real” profession? Absolutely not! But, for some reason, we are willing to believe that somehow they can be applied to retail trading.

We have become a society of doing the least possible for the most gain. We are living with a demand for instant gratification and a false sense of entitlement – that we deserve something for nothing. It drives our media, our personal interaction and the way perceive the world. This desire fuels all the get-rich-quick schemes and short-cuts to wealth that bombard us on a daily basis. It is no mystery that we thrive on this idea and there are so many people willing to buy and sell the “smoke and mirrors.” Trading product marketers rely on this belief to keep you in the vicious cycle. They know trading is difficult and that human nature is to take short-cuts. They know you don’t have the patience to actually test the products, are over anxious to become a zillionaire, and want a magic bullet to do it all for you. That’s why even though you may have previously purchased the end-all be-all system, robot or indicator, you will still open email after email advertising the latest and greatest. (I did too!)

We have to come to grips with the fact that trading is like any other skill. It takes an understanding and mastery of the basics, practice and proficiency with intermediate concepts, and a commitment to achieve a level of expertise. There is really nothing free about a trading education. It follows the same model we have been taught since our earliest days of education, so is it imperative that you begin to think about trading using the same progression model. It will save you many moments of frustration and perhaps a few lost dollars in the market and on worthless products. If you do get the privilege to hang out with some generous professionals (like here!) you will almost always find they use minimal tools to trade. Ultimately we all discover that less is more. Until, then we will continue to add crutches to our charts and systems in the form of more indicators and/or robots – anything that will absolve us from the two most important additions that are the most required and most often omitted – responsibility and accountability.

In Great Expectations Part 2, we will discuss the “Big Surprise” and why we are not prepared for the market environment based on our expectations from past experiences.

Rick

My Rude Awakening

I would like to share how I gained some insight, rather abruptly, not long after I was introduced to trading.

One of the best pieces of advice I ever received about the mindset of a successful trader was shared with me by a trading professional I met early on in my trading education.

He suggested to me that I view trading as “Financial War.” At the time I thought this was a bit extreme. However, he went on to describe trading as a “zero sum game” – that is to say for someone to profit, someone must lose. I have heard this several times since, but have no evidence as to whether or not this is true – and opinions vary.

He went on to say as he looked me straight in the eye . . . “if you are not going to take this seriously and do what it takes to figure this out, then just write the check directly to me right now, because I will be the one in the market taking your money.” He explained why 95% of traders lose money and that he absolutely counted on their laziness every day to make his seven figure income.

As harsh as those words were and as shocked as I was, the idea that any of this might be true motivated me to get serious. I could not stand the thought of being a wide eyed newbie and just handing my money over to the sharks like a sucker. I stopped trading, started over and found some very successful traders to emulate.

My trading education was not free. It cost a lot of time and money, and was one of the hardest things I have ever done, but it was more than worth it. Why was it so difficult? . . . because I had to work on me. I have been fortunate to have some success in my previous career, but nothing I previously knew correlated to trading. I was not prepared to enter an environment with no boundaries. It was equally difficult to believe that my emotions, which had been responsible for my previous business success, were now irrelevant from the market’s perpsective, and yet would also be the cause of my greatest challenges,

What I also learned is that almost anything free in this arena usually has no value – at least for me, no perceived value. There are exceptions, but very few. Through this journey I learned to ask questions only after I had exhausted all other means of research on my own. I learned that for me to be successful, I had to do the work. I learned that for me to have confidence, I had to put in the time to actually learn the skill of trading, not just how to trade. I learned that for me to call myself an expert or professional trader and make a living at trading, there were no short cuts.

I could not figure out why I originally thought trading would be any different than learning any other professional skill. Once I came to the realization that trading is no different, my approach totally changed. It became more natural, more relaxed, more focused, and more profitable. This was familiar to me – reaping the rewards of commitment and hard work. What I didn’t know when I began was that this is not a “feel good” warm and fuzzy environment. These folks in the market can and will eat you alive.

Just though I would share a defining moment. This guy really shook me up and got me laser focused. I owe him big time.

Rick

Making Winning a Habit

I have reference many times my travails early on in my trading career whereby fear caused me to expect a loss – completely manifested as the result of my bad habits. How was I eventually able to overcome and change?

Think about some of your own bad habits – especially the behaviors that create the internal dialogue “I know better” or “I’ll never do that again!” The problem is that most of the time your internal dialogue is not supportive of your desired outcome. In order to change those bad habits and behaviors, you must commit to change them.

Commitment – that is the key word. Most traders think they are committed. They spend hours studying charts, asking every question under the sun, and trying to nail down some form of certainty to overcome their fears. However, they are always looking for some external resource to solve their problems.

The commitment that is most vital is the commitment to look inward; to explore the psychology of why you are fearful, why you repeat the same mistakes while knowing they are sabotaging your success.

We know that we must build a belief in our trading plan and trading system. With that we must also build trust in ourselves. That trust comes from having realistic expectations, understanding time is required to become an expert, and working smart.

Happily, I get many emails from traders telling me they are now starting to get it. They are beginning to see the light – working through their psychological challenges. The single greatest revelation is that they all have calmed down and redirected their focus on the process. This is the beginning of positive change. The process as outlined through complete Trade Plan Development is the road map to success. In short, process will lead to profits.

The other great discovery is that they now know they can not trade $500.00 into $1 million. They are no longer counting on pipe dreams and wishes. They are treating their trading as a business, allocating appropriate capital and applying sound principles to their money management. They are developing the patience to seek and execute the best trade signals; following their trade plan and rules.

These are the signs of true commitment; of professionals – and real professionals make money. These milestones build confidence and self-trust.

Now, what once seemed impossible becomes a good habit – a winning habit. The defining moment is when you realize that winning is really not difficult at all. In fact, you will expect it!

So many traders are mystified and curious – somehow still assuming that I am afraid or reluctant to post losing trades. But at this stage of my trading, I just don’t have that many. I have tried to illustrate how winning is possible using thorough preparation; Top Down Analysis, market structure, valid signal choices, patience, discipline and not over trading – all learnable skills! But all skills that required a true commitment on my part!

Remember in My Story that I emphasized that I had to work on me. That’s when things began to change for the better.

My habits changed, from fearful to controlled. I stopped acting like a loser and began acting like a winner- a professional. From there, it became more fluid and simple.

Winning became a habit.

If you don’t have the fortitude or the heart to make the commitment, you are going to struggle. If you do, you will struggle at the outset, but will eventually be successful.

The fact is that most people simply do not want to expend the effort or energy to do what it takes – at anything. That’s really great for those of us who do.

Remember to make an honest assessment of what you are doing and why. Make the commitment to change and follow the process. You will soon find winning the norm, not the exception.

“Long-lasting change that will help you create new habits and actions requires an inside-out approach, as well as two very important tools: the mirror and time.” Darren L. Johnson

Rick

Some Interesting Observations

I saw this post on Forex Factory a while ago and found it very thought provoking – very rare for most of the things posted there. Please feel free to leave me your comments. I would be interested in what you think. The discussion was about the life cycle of threads that are sharing trading systems.

“No doubt, I like the idea of sharing trading ideas and concepts. But, to share an entire trading system (if it truly is a full blown trading system) is not only unwise, but in most all cases it will be as close to impossible as anything else.

Real trading systems have lots of moving parts. Each of them could be uncomplicated as a simple one line mathematical function that derives a single value. Or, a part of a trading system could be an entire cluster of mathematical functions, algorithms and signal processors – just to make-up one component of an even larger trading system.

Trading Systems, are really not the same as Trading Methods, Trading Tactics and/or Trading Strategies. A system by definition is the integration of several (many) lower-level functions, methods, calculations, inputs, filters, scanners, etc. To describe how one uses just one of those components, could take an entire semester. To layout a full blown trading system, could take years in an online environment such as this.

For that reason, I opt to talk about trading concepts that have made me a consistently profitable trader. To that, I would add several key concepts that I learned from a serious trader about 7 years ago. That person showed me the futility of attempting to trade any market without making certain that my trading system could account for the following concepts:

a) Timing
b) Direction
c) Magnitude
d) Framework
e) Probability

I learned from that individual the importance of trying to account for each of these core elements to successful trading and how ignoring any of them would lead to ultimate de-optimization of my trading system.

When you stop to think about it – each one of these core components go hand-in-hand. I was shown that:

Timing = Maximizing profit
Direction = Minimizing draw-down
Magnitude = Identifying profit potential
Framework = Minimizing psychological draw-down
Probability = Maintaining positive expectancy

Trying to trade without these core components, de-optimizes the entire process of trading in general. To prove it to yourself, simply take the inverse of each one and say it out loud to yourself:

“Minimizing profit”
“Maximizing draw-down”
“Failing to identify profit potential”
“Increasing negative trader psychology”
“Maintaining unreliable and unstable expectancy”

You would not willingly attempt to blend any of those things into your trading routine. Yet, many traders do this all the time without ever realizing it, by failing to properly account for these core elements by their own design.

Thus, whatever the trader can do to ensure that they have accounted for these core elements in their trading habits, routines and systems, is time well spent.”

Some great and interesting observations . . . discuss.

Rick

Technical vs. Fundamental

I consider myself a technical trader. What does that really mean and what are the advantages?

Technical trading is based on technical analysis – the use of price action to determine trends and potential trend reversals. The consistency of technical analysis lies in the fact that all traders see the same thing when looking at a chart. They may react differently, but the data they observe is the same.


(Click on chart to enlarge)

Based on the chart above, 1000 out of 1000 traders would have to agree that . . .

The candle at 1 is the structure low of the price action shown.
The candle at 2 is the structure high of the price action shown.
The candle at 3 is the swing low immediately following 2.
The candle at 4 is lower than the low of the candle at 3.

The point simply is that there is nothing that is subject to interpretation. Therefore, because the information is the same, this levels the playing field between all traders viewing this data. What they do with the information may vary widely, but the fact remains, the data is the same for all.

Fundamental analysis is quite another story. Fundamentals hinge largely on speculation. Although they clearly effect the markets, they are subject to wide interpretation. If they were not, we would not need the likes of CNBC, Bloomberg and other financial information outlets. These sources owe their existence to the opinions of their “experts” that consistently debate opposing viewpoints; their interpretation of the data generated by the fundamental variable and how it will affect the market. Furthermore, beyond our resources, there may be inside information or other factors we are unaware of that will influence the outcome of the news. Without this additional information, it would be ridiculous for us to speculate as to the market’s behavior. We would never have enough information to create an edge, so trading purely on fundamentals is not wise because the risk for most of us is unacceptable.

As technical traders, we are only interested in what the results are, not why. We can observe the market’s reaction to fundamental data, but we react with a technical approach. We know that news (fundamentals) may move the markets, or not. We never know to what degree or in which direction the market will react until we actually observe the outcome using our technical analysis. How often have we thought the market should do one thing based on fundamental data, and to our minds, the market’s reaction was totally the opposite? How often have we found that there is really little correlation to news and the market’s reaction to it?

It is often said that fundamentals drive the market and we can all cite infinite examples. That premise is not in dispute. However, all we have to concern ourselves with as technical traders is that something did happened and the price action we observe is the result. We need to be aware of the news, but we should never assume we know how the market will react to it.

Don’t get caught up in the speculation. Know when the news is coming, but let your technical analysis and trading plan dictate your rules of engagement – not the pundits.

Rick

Education of a Trader

I can not find the source reference for this Article. All the same, some good information – Rick

Throughout your personal trading journey I submit that you will find there are two distinct types of education:

FORMAL EDUCATION

This is typically obtained from books and seminars. This information is critical as it appeals to the logical mind and is accepted based on the trader’s belief or current references about that particular topic.

FOR EXAMPLE: Trading with the tides shifting and the particular alignment of the moon with the other planets might be considered by some to be total hogwash. While others who understand the incredible power of symmetry and the mathematical relationships study this phenomenon with passion. Your personal beliefs about the value or validity of this trading style will greatly influence your ability to accept it as a viable strategy.

LIFE AND TRADING EXPERIENCE

Is knowledge obtained from the experiences that life teaches? Formal education may or may not teach an individual how to trade, but allows the trader to learn from the mistakes of others. This is a good learning experience, since it would take the trader a long time to make all the same mistakes. Education from real life trading experiences, teaches an individual appropriate and necessary survival instincts.

The final step to achieve success is to apply analytical evaluation to the actions required. This places emphasis on repeating actions that produce the desired results, and carefully examine closely what does not work. Once the reasons are clearly understood why some technical actions do not produce desired results, they should be adjusted, improved or discarded.

This basic approach of how to achieve success may leave the reader with the false impression that trading success is an easy process. Not so. General George Patton stated, “A warrior’s greatest asset is self-confidence.” This demands knowing what should be done, and why it should be done. This will be presented later, when I will examine the reasons that prevent most people from achieving success, and what can be done about correcting them.

The importance of a positive attitude, the two most important psychological laws, and the four steps to achieve success have laid the foundation for understanding the nature of personal change, why most traders lose money, and actions responsible individuals take to correct losing behavior.

The Three Reasons Why Most Traders Lose

One way to change from a losing trader to a winning trader is to change the thoughts that preceded the actions responsible for the losses. It is difficult to alter the habitual thought processes that have embedded themselves deeply in a trader’s personality over a number of years, due to the powerful influence of three intertwined emotions: fear, anger and guilt.

Fear is an emotional state of anxiety due to the presence or perceived presence of danger. (Stress is often defined as anxiety from an unknown source.) Each newborn child has only two natural fears- fear of loud noises, and fear of falling. Most fears produce learned behavior to a specific set of conditions, called conditional responses. Pavlov pioneered this research with dogs in the 1920’s, then B.F. Skinner with human beings and animals in modern times.

Fear often impairs the rational trade decision-making process by emotionally relating the possibility of past financial losses to the future. Fear often immobilizes the trader’s decision-making process resulting in no trading decision, or a delayed incorrect trading decision response.
Fear will elicit a trader’s “flight or fight” response when he is confronted with methodology’s trading signals. The trader will either take actions as demanded by his trading methodology, or remove himself from the presence of danger. An acronym for Fear may be “false evidence appearing real.”

Attitudes Determine Actions

Traders with positive attitudes have positive expectations, and take decisive goal-directed trading actions despite fear.

The winning trader accepts the possibility of losses or mistakes yet has the self-confidence to take action despite fear. Winners manage fear, and losing traders are controlled by it. The greatest mistake is to fear making a mistake. Trading success is based on knowledge of what works and what fails. Managing fear and accepting mistakes are an essential part of the trading educational experience that makes success possible. Winning traders learn from mistakes, losing traders repeat them.

Self-confidence naturally develops from self-discipline as a trader learns what actions should be taken from a given set of technical conditions. The more accurately a trader interprets price action, the better his trading results should be. Thought precedes both emotion and action, yet thoughts combined with emotions determine actions. Self-confidence comes from believing in one’s abilities, assessing and accepting risk, then taking actions. The winning trader knows personal or financial growth is impossible without risk assumption, which is part of an educational process.

Only emotionally healthy traders can adequately assume risks, because losses must be emotionally and financially acceptable to each individual trader. Each trader must define their own thresholds of pain for each, and develop the self-confidence to accept them. Fear of being wrong may be more important to a trader’s ego than fear of sustaining a financial loss.

In a similar manner, many traders can’t accept financial success, because it does not conform to their negative self-image as a losing trader. There are various ways fear can be creatively used for financial destruction by the losing trader, but the one common denominator is allowing fear to control trading actions.

It is important to analyze fear and determine its origin to learn why it is being experienced. Most fear is based on irrational beliefs adopted years ago. If fear of losing money is causing anxiety or loss of self-esteem, the trader may wish to simply stop trading until this fear is understood and positively accepted as part of the trading experience. Traders should never borrow money to trade, or risk money they cannot afford to lose.

A few solid takeaways here – Rick

Getting A Grip

We know trading is a mental game. What are we doing that is holding us back, creating anxiety and hindering our progress? Distractions, doubts and just life itself can put forth many ongoing and daunting hurdles.

Please consider these questions as a probe into your trading mindset and everyday personality that may bring to light some of the issues we need to address to get beyond our struggles and begin to turn the corner.

If we learn from our mistakes, then why are we so afraid to make them?

What is the one biggest fear that is holding you back? Why? What are you doing to overcome it?

What mistakes are you making over and over again? Why?

What worries you the most about your future? What are you dong every day to plan for it?

Trading success is not out of reach by any means, you just have not stretched yourself enough. Ask yourself if you are really stretching – getting out of your comfort zone?

The problem is that most people/traders pretend to understand when they really don’t – trying to avoid embarrassment. What are you pretending to understand that is confusing you?

What are you procrastinating about right at this moment that is effecting your trading?

In what ways are you currently sabotaging your trading success? Make a list.

What is the #1 thing you intend to accomplish as a result of your trading success?

What has the little voice inside your head been saying lately?

What is worse, failing or never trying?

Are you totally committed or just settling for your current effort?

When will you stop fearing risk and just go ahead and do what you know is right?

Are you holding onto something or someone you need to let go of? Past events or relationships?

At what time in your recent past have you felt passionate about something and really alive? Do you feel that way about your trading?

Decisions are being made right now. Are you making them for yourself or are you letting others make them for you?

Here are some suggestions to create a more highly effective mindset – that is, one that makes the best use of available resources to create positive change and good decisions. It’s not about trying to do everything or be everything at once. It’s about making the very best of the moment with what you know and finding some enjoyment with the process. (Some ideas taken from Practical Tips for Productive Living.)

1. Enjoy and appreciate the present – Quit thinking that happiness waits in the future or that your best times are in the past. Your happiness or misery depends solely on your attitude at any given moment, regardless of events. You need much less than you think to be happy and have a lot more than you might think. It’s just a matter of thinking differently.

2. Connect your purpose with your effort – What is important to you? You can accomplish anything when you really care about it. You need to wear yourself out with focus and discipline on the purpose that connects with who you really are. Start being sincere and authentic toward achieving this purpose and you’ll find joy and success.

3. Accept and embrace challenges – The most productive and rewarding days of your life won’t be easy. Contending with great challenges forms the foundation of greatness and accomplishment. The most satisfaction you will ever derive will be when you feel overwhelmed, but still persist and overcome. When you are challenged by tasks that engage your purpose, your talents and energy help you grow into your greatest self.

4. Employ self-discipline – Without discipline, success is impossible. Discipline is making the choice to do what must be done for as long and as often as required – whether you like it or not. Discipline allows you to truly control the course of your life. If not, others will do it for you, but not necessarily to your best advantage. Whatever goals or aspirations you have, discipline is the vehicle to get you there.

5. Remain positive and focused during times of failure – Progress is more important than worrying about failure. If things don’t work out as you planned, make adjustments and try again. In the end, it is focused resilience that will lead you to your desired result. Make the decision to stay positive and persistent and you will begin to reap the rewards of your intended effort.

6. Filter and channel anger – Being angry is easy, but anger never gets anything accomplished. Put your anger to good use by adopting a productive plan of action. You must direct your anger at specific problems that can be solved, not people or general things. Look for answer and solutions, not excuses or complaints. Read The 7 Habits of Highly Effective People.

7. Serve others – Interestingly enough, when you serve others, you benefit as much if not more than those you serve. The most curing work is found in helping someone with less than you. When your focus shifts from your own confusion and difficulties to those of others, you will see the positive difference you make and be filled with meaning and satisfaction. This is the illumination that will light the way for your brighter future.

You can surely see that your trading success is directly influenced by all the other aspects of your life. You must live and behave congruently or your efforts will be in conflict with your goals – an impossible way to achieve your desired results.

Rick

Managing Capital and Risk

A great Article by Nial Fuller

The Trading Secret That Will Decide Your Success or Failure

Fact: If you take three traders with the exact same abilities and trading talent and pit them against each other, on average only one of the traders will survive. It doesn’t matter if a guy is playing poker with his mates or they are trading together at a coffee shop, the last-man standing will ALWAYS be the guy who managed his bank roll properly.
This article is going to show you how to not only be the “last man standing”, but to be a disciplined winner and hopefully come away with a larger bank roll than you started with. Today, we are going to talk about the capital management “secrets” that will give you the edge over any other trader in the room or your mates at the poker table, so pack your cigars, because if you manage your capital properly you might just walk away a winner next week

The best offense is a good defense.

As a trader, if you really want to have a chance at long-term success, you need to learn VERY quickly that your mental energy must be focused on the trading variables that you CAN control. Obviously, we cannot control the market or make it do what we want (although certainly some traders act as if they can), but we can genuinely control most other aspects of trading; 1. Trade entries, 2. Capital preservation and money management, and 3. Our exits…these are all things we DO have control over.

The KEY point there is capital preservation and money management; properly controlling the amount of money you risk per trade (your leverage and exposure to the market) is the primary thing that will make or break you as a trader; in fact, it will decide the fate of your entire trading career. Any professional trader knows that capital preservation is the most important part of their day to day routine as a market professional, this can also be called “playing defense” in the market.

Great traders and fund managers think about how much they could lose before thinking about how much they can win; this is essentially the OPPOSITE of a gambler’s mentality. Gamblers suffer from an uncontrollable mental sickness whereby they focus almost entirely on how much money they could win with almost no regard for losses, this is borderline psychopathic behavior. Unfortunately, this behavior is also very common for many beginning and struggling traders.

Why some of the best traders and market analysts end up as “nobodies.”

I’m sure you’ve heard of some of the huge hedge fund blow-ups that have occurred in recent years. The two primary causes for these have been fraud and excess leverage. Excessive leverage can also be called “irresponsible use of risk capital”, aka NOT practicing proper capital preservation.

As Scott C. Johnston points out in his popular blog “The Naked Dollar”, many prominent hedge fund managers and traders have blown-up hundred-million-dollar portfolios because they did not manage their capital properly. It only takes one hot-head “young-gun” trader to think he is “sure” of something to blow-up a huge fund by taking an extremely over-leveraged bet on some company or some news event.

As I alluded to in the opening paragraph, you can take two traders or investors with the same amount of skill and trading knowledge and one will achieve long-term success while the other continuously loses money and blows up trading accounts. The difference between the two traders is that only one of them may have the mental abilities to manage risk, plan for losses, manage trades and execute capital management correctly and consistently (meaning with discipline over time). Thus, a good trader is truly defined by his or her ability to manage risk and control their exposure to the market…not by their ability to find trades or analyze the markets, contrary to popular belief.

SOME OF THE BEST TRADERS WITH THE BEST TALENT WILL ALWAYS BE NOBODIES, they will always be losers, and they will never make the headlines, because they completely lack mental discipline or skills with capital/portfolio management, and that is where it counts. So heed this advice and listen up…it’s one thing to find a good strategy, it’s another to stay in the game long enough to see the fruits of the trading method; if your capital management and risk control sucks, you’re going to be a loser, it’s pure math, plain and simple.

Capital preservation IS exciting…you just aren’t thinking about it right.

I know why many traders don’t focus enough on capital preservation and risk management: because they mistakenly think it’s not “fun” or “exciting”, but that’s only because they aren’t thinking about it right or they don’t fully understand how powerful it is.

You see, the KEY to making money over the long-term in the markets is simply staying in the game. You need to preserve your capital good enough so that you stay in the game long enough to see your trading strategy play out and reward you.

The only way to make consistent money as a trader is to have small losses (because you will have losses so better to keep them small) and a few big winners in between. It seems simple, but if you can’t do that, you can’t make money. Now, the hard part in all of this is having the mental state of mind to manage capital properly on a per-trade basis, one must consider dollars risked on the trade and also the leverage used, one must also calculate if this risk is justified but not get too emotional about it. You should always have a max dollar loss per trade pre-planned, but you may risk less than that amount obviously, it all depends on how confident you are in the setup. In essence, you need to have a mental “obsession” with capital preservation, and drop your obsession about rewards and profits. Ironically, if you can do this, you will then start to see the rewards that you were so obsessed with before.

The best traders cut their losses and they get the hell out when they know they are wrong, and they NEVER put their portfolio, their major assets or their shareholder’s assets at major risk if they get a trade wrong. They plan ahead obsessively and they always know the “worst case scenario” for any trade or investment. These are the traders, investors and fund managers that stand the test of time and experience success while the others blow-up accounts and fall to the way side.

As far as HOW you actually preserve your capital, it mainly involves knowing how much you are emotionally OK with losing PER TRADE and understanding position sizing and risk reward.

Conclusion…

Whilst sound capital and risk management is certainly the “key” to success in the markets, combining these money management skills with an effective trading strategy will give you an extremely potent edge in the market. Combining my price action strategies with sound capital preservation and risk management skills has enabled me to stay in the game for 12 years. Of all the traders I know and have met, the one thing they always describe as their “secret weapon” and the reason for their success, is focusing on capital preservation; keep losses consistently below a certain dollar threshold and secure profits and let them run when you can. Capital preservation and risk management is your most definable edge in the market, and it’s an edge you have full control over, so don’t take it for granted or abuse it. Your other genuine edge needs to be an effective trading strategy like price action.