Temporary Insanity

Have you ever had a moment or moments where you simply do not know how to react or interpret what you see on your charts? . . . or what action to take?

This feeling of disorientation can be attributed to lack of a thorough preparation and a complete trade plan. Your trade plan must include a variety of responses that can be applied rapidly and consistently. It must take into account the various market conditions so that we can be prepared for all scenarios.

How prepared are you? Your true advantage or “edge” will include your ability to respond confidently when other traders are experiencing this confusion and doubt.

No matter what other traders do, we must put ourselves in a position of success by having a strategy for every situation. This does not mean getting caught up in information overload or acting anxiously. It means being able to calmly recognize the current status of the market and confidently and purposefully prepare for action or inaction.

Here’s a secret . . . most of the time, our best position is to do nothing. If a trade does not meet our rules, we do nothing. If we are a trend trader and see a counter trend set-up, we do nothing. If we enter the market and have set our stops and profit targets, from there, we do nothing. Trading is a game of patience and that patience is lucratively rewarded.

The problem with most traders is that psychologically most have been conditioned that inaction is a trait of failure or laziness. They feel compelled to act or deviate from their rules simply because they can not accept inaction – especially when they have devoted a specific amount of time to sit down with their charts. They feel like they must place a trade regardless of the rules of their trade plan. “If I’m here, I’m going to trade!”

This behavior reinforces the possibility of disorientation because the action is based on emotion, not logic. We all know that emotion based trading is a costly lesson. When capital is at risk, remember it is always better to not trade if doubt or confusion is present. There will always be another opportunity and another trade. It is our job to be patient and let the market invite us to trade with a valid signal based on our plan and rules.

If you find yourself disoriented on confused, do nothing – that is, do not place any trades. Try to evaluate why that emotional state exists when you encounter it. Have you done your back testing? Have you performed adequate repetitions of your trade signal? Does your trade plan account for all market conditions? Have you thoroughly prepared for each trade session by performing your top down analysis? What is causing your anxiety and confusion?

That fact is that in trading, we will spend most of our time doing nothing and simply waiting for the right moment to engage. This is counter-intuitive to most of our experiences where we have come to believe that activity is equal to productivity and/or output. Because the amount trading activity has little correlation to productivity (or profit in our case), the importance of preparation and patience are greatly magnified. Large sums can be made with only a few trades. More trading does not equal more profits.

As we have said many times before, the market rewards preparation and patience. We also know from experience that the market punishes emotion and being over-zealous.

The key is balance. Disorientation and confusion are the signs of imbalance and spontaneity. Make sure you have done the work to engage the market prepared and purposeful – and remember that doing nothing is better than doing something arbitrary and costly.

Rick

Great Expectations – Part 4 of 4

Great Expectations Part 4 – Taking Aim

“A goal without a plan is just a wish.” – Antoine de Saint-Exupery

So many folks begin trading with only one focus. They have envisioned how they are going to spend wheel barrows full of money they will be making in little or no time at all. Soon they find out that such a dream is a complete fallacy and are demoralized by the reality that trading is difficult and perhaps they did not think through their approach to the markets.

What do you expect the market to provide? Do you treat it like a job? What is your level of commitment? Most traders would be fired from their current jobs if they used the same approach in their employment that they apply to trading. You go to work every day, follow your company manual, have a clear set of parameters under which you are evaluated, and you plan your future/retirement. In other words, you have goals – hourly goals, daily goals, weekly goals. Perhaps you may not have goals. At the very least, you have expectations of what your work life can provide and what you must provide in return to achieve your desired outcome. You know that your employer has companywide goals, forecasts, and rules to measure whether or not expectations are being met for the overall condition of the company’s health. You know your skills and performance must fit within these company-wide metrics for you to retain your job and receive the benefits of the company’s existence. The same approach should apply to your trading – or better yet, your “trading business.”

Why do so many traders enter the markets without the same job-like approach? Why are you trading? Have you taken time to evaluate what you consider to be a successful trader? Are you working from organized and planned benchmarks in your trading education and career? Have you written down a time line to establish when you have arrived at each milestone? Why not? You must adhere to a similar model to be successful at your job. You need to treat your trading like a job, a business, and have a business plan. For many of the reasons discussed in the previous posts, people simply don’t get it – trading is just like any other job – to get paid on a regular basis, you have to do the work within the scope of the defined objectives. The allure of trading is the perception that it is just the opposite – no work, easy money, and little commitment.

Why have goals? How else are you going to determine if you are making progress? How will you measure your success? Goals are a vital part of keeping track of your trading development. What goals have you set for yourself? Are they realistic? Are you committed?

“Whenever you want to achieve something, keep your eyes open, concentrate and make sure you know exactly what it is you want. No one can hit their target with their eyes closed.” Paulo Coelho

Think for a moment about your current situation in life and then look back. Is there anything you would have done differently? Could you have made better decisions? Did you procrastinate? Did you take shortcuts to avoid pain?

How would your life change for the better if right now you got serious about trading full time, committed to a realistic plan and executed it? Think about 5 years from now. What positive changes could you make for you and your family? What do you see as the benefits? The pitfalls? Write down that list and keep it front of you every day as you practice trading. Keep these things in mind as motivators as you work toward achieving your trading goals.

Think carefully about this . . . what if you did nothing? Where would you be 5 years from now? Is that a place you want to be?

If trading full time is your goal, you must develop a plan and strategy to get there. Because of the lack of boundaries in the market, trading requires more definition than a typical business or job. Therefore a clear set of objectives must be defined before placing our capital at risk. Your trading plan will set entries, stops and targets, but what about your goals as an individual? How will you support your lifestyle? How are you planning your future? If one of your goals is to trade full time or professionally, there will be a demarcation where you decide to transition from your “regular job” to trading full time. Is it based on a consistent income level? You need to decide what the trigger will be and be realistic about the timing.

You must take the time to thoroughly think through what is it you expect your trading business to provide, pick a time in the future when you’d like to achieve the cutover to trading full time and then work backwards. This is really no different than mapping your career in any other vocation. This step is essential to keep your trading mind in tune with your goals. Only you can draw this roadmap because only you will be able to evaluate if you are meeting your milestone deadlines. Consider sharing you goals and plan with your partner and have him/her involved in your journey. The transition from regular job to trading full time can be stressful if you do not have the support of your family. They must be on board with your plan.

Be prepared to make adjustments as you get better feel for timing and improvement. Nothing here is set in stone, so adapting your plan to your individual psychology and abilities will keep you on track. Do not get overanxious. It took you the better part of your life to get where you are in your current profession. This will not happen overnight and will be a good test of your patience and fortitude.

You will undoubtedly spend time in chat rooms and forums, reading how other traders are making 100’s of pips every day – do not get caught up in the hype! Stay out of the chat rooms and forums. They are full of losing traders. That’s why most of the 95% are there. They have not made a commitment, are taking shortcuts and are looking for everything free. From this moment forward, you are no longer part of that group! You have decided to become one of the 5% of winners that make money in the markets because you have defined goals, you are treating your trading as a business, and are committed to doing the work required to be successful.

You now have a better sense of the kind of effort necessary to become a successful trader. Hopefully you also have a better understanding and more realistic expectations about what is required to get there. The evolution from amateur to professional described in these articles had a common thread in some form among all of the professional traders I know. Their stories (and mine) are all virtually the same. They have all made mistakes, bought into the lazy, get-rich-quick approach, and lost money. They all had to decide they wanted to be professional, set goals and a timeline, make a commitment to do the work, and develop and execute their plan. One thing they also have in common now is the lifestyle and financial freedom trading can provide.

The passage to full time trading can be difficult and challenging. Not everyone will make it. It will test your patience, emotions and endurance. You will be frustrated, humiliated and enlightened. You will be forced to look inward. For the first time for many of you, you will take complete personal responsibility for your actions and decisions. There is only one promise I will make for those of you that bet on yourselves and get serious about this – it’s worth it.

“The only thing standing between you and your goal is the bullshit story you keep telling yourself as to why you can’t achieve it.” Jordan Belfort.

Your “Great Expectations” are what you say they are and what you want them to be.

The time to get started is NOW!

Rick

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