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.


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.


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:


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.


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.


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.


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.

The Fundamentals of Forex Fundamentals

By Justin Kuepper from Investopedia

Those trading in the foreign-exchange market (forex) rely on the same two basic forms of analysis that are used in the stock market: fundamental analysis and technical analysis. The uses of technical analysis in forex are much the same: price is assumed to reflect all news, and the charts are the objects of analysis. But unlike companies, countries have no balance sheets, so how can fundamental analysis be conducted on a currency?

Since fundamental analysis is about looking at the intrinsic value of an investment, its application in forex entails looking at the economic conditions that affect the valuation of a nation’s currency. Here we look at some of the major fundamental factors that play a role in a currency’s movement.

Economic Indicators
Economic indicators are reports released by the government or a private organization that detail a country’s economic performance. Economic reports are the means by which a country’s economic health is directly measured, but remember that a great deal of factors and policies will affect a nation’s economic performance.

These reports are released at scheduled times, providing the market with an indication of whether a nation’s economy has improved or declined. These reports’ effects are comparable to how earnings reports, SEC filings and other releases may affect securities. In forex, as in the stock market, any deviation from the norm can cause large price and volume movements.

You may recognize some of these economic reports, such as the unemployment numbers, which are well publicized. Others, like housing stats, receive less coverage. However, each indicator serves a particular purpose and can be useful. Here we outline four major reports, some of which are comparable to particular fundamental indicators used by equity investors:

Gross Domestic Product (GDP)
GDP is considered the broadest measure of a country’s economy, and it represents the total market value of all goods and services produced in a country during a given year. Since the GDP figure itself is often considered a lagging indicator, most traders focus on the two reports that are issued in the months before the final GDP figures: the advance report and the preliminary report. Significant revisions between these reports can cause considerable volatility. The GDP is somewhat analogous to the gross profit margin of a publicly traded company in that they are both measures of internal growth.

Retail Sales
The retail-sales report measures the total receipts of all retail stores in a given country. This measurement is derived from a diverse sample of retail stores throughout a nation. The report is particularly useful as a timely indicator of broad consumer spending patterns that is adjusted for seasonal variables. It can be used to predict the performance of more important lagging indicators, and to assess the immediate direction of an economy. Revisions to advanced reports of retail sales can cause significant volatility. The retail sales report can be compared to the sales activity of a publicly traded company.

Industrial Production
This report shows change in the production of factories, mines and utilities within a nation. It also reports their “capacity utilizations,” the degree to which each factory’s capacity is being used. It is ideal for a nation to see a production increase while being at its maximum or near maximum capacity utilization.

Traders using this indicator are usually concerned with utility production, which can be extremely volatile since the utilities industry, and in turn the trading of and demand for energy, is heavily affected by changes in weather. Significant revisions between reports can be caused by weather changes, which in turn can cause volatility in the nation’s currency.

Consumer Price Index (CPI)
The CPI measures change in the prices of consumer goods across over 200 different categories. This report, when compared to a nation’s exports, can be used to see if a country is making or losing money on its products and services. Be careful, however, to monitor the exports – it is a popular focus with many traders, because the prices of exports often change relative to a currency’s strength or weakness.Other major indicators include the purchasing managers index (PMI), producer price index (PPI), durable goods report, employment cost index (ECI) and housing starts. And don’t forget the many privately issued reports, the most famous of which is the Michigan Consumer Confidence Survey. All of these provide a valuable resource to traders if used properly.

So, How Are These Used?
Since economic indicators gauge a country’s economic state, changes in the conditions reported will therefore directly affect the price and volume of a country’s currency. It is important to keep in mind, however, that the indicators discussed above are not the only things that affect a currency’s price. Third-party reports, technical factors and many other things also can drastically affect a currency’s valuation. Here are some useful tips that may help you when conducting fundamental analysis in the forex market:

• Keep an economic calendar on hand that lists the indicators and when they are due to be released. Also, keep an eye on the future; often markets will move in anticipation of a certain indicator or report due to be released at a later time.
• Be informed about the economic indicators that are capturing most of the market’s attention at any given time. Such indicators are catalysts for the largest price and volume movements. For example, when the U.S. dollar is weak, inflation is often one of the most-watched indicators.
• Know the market expectations for the data, and then pay attention to whether the expectations are met. That is far more important than the data itself. Occasionally, there is a drastic difference between the expectations and actual results. If so, be aware of the possible justifications for this difference.
• Don’t react too quickly to the news. Often numbers are released and then revised, and things can change quickly. Pay attention to these revisions, as they may be a useful tool for seeing the trends and reacting more accurately to future reports.

The Bottom Line
There are many economic indicators, and even more private reports, that can be used to evaluate forex fundamentals. It’s important to take the time to not only look at the numbers, but also understand what they mean and how they affect a nation’s economy. When properly used, these indicators can be an invaluable resource for any currency trader.

Tips to Avoid Over-trading

From Investopedia

Why do casinos provide both the winners and the losers with complimentary goods or services? Because both will continue to gamble more than the average person.

Despite the fact that the odds favor the house, the losers, desperate to recoup their losses, will try to ride out their bad luck by playing through it. The winners, convinced they’re in the midst of an unstoppable streak, will try to ride it all the way to the top and invariably give much or all of their winnings back to the casino.

Professional trading is nothing like gambling, but many amateur traders act as if it is, and trade excessively for the same reasons as an ordinary gambler. Every active trader should learn to trade, instead of gamble. Here we’ll take a look at traders’ tendency to trade excessively and examine the way this behavior can affect a portfolio.

Evolution of a Trader

As traders develop skills, each one travels virtually the same path: initially as a discretionary trader, then as a technician and ultimately as a strategist or systematic trader. A trader first analyzes the market direction or trend, then sets targets for the anticipated move. Correctly reading or predicting the market then becomes the highest priority, so the trader learns as many new indicators as possible, believing they’re like traffic signals. This search for a magical combination of indicators leads to the inevitable realization that multiple scenarios might exist. A trader’s focus then moves to the probability of each outcome and the risk-reward ratio.

Advancement to the successful professional ranks is not achieved until emphasis is placed on strategy. Excessive trading, or the excessive buying and selling of instruments, may also be referred to as overtrading. It occurs within each step, and correcting it often enables a trader to progress to the next level. The three most common forms of overtrading are bandwagon trading, hair-trigger trading and shotgun trading. Each manifests itself differently, and to varying degrees, depending on whether the trader’s style is discretionary or technical.

Discretionary Over Trader

The discretionary trader uses no quantifiable data – such as advice from a broker or perceived expert, news reports, personal preferences, observations and intuition – to determine entry and exit points. Position sizes and leverage are flexible. Although such flexibility can have its advantages, more often than not it proves to be the trader’s downfall. Discretionary traders often find inactivity the hardest part of trading; as a result, they’re prepared to embrace any development that will allow another trade. This impulsive behavior, in fact, isn’t trading at all – it’s gambling, similar to that described earlier. And just like in the casino, the odds are not in the over trader’s favor.

Technical Over Trader

Traders new to technical indicators often use them as justification for making a predetermined trade. They have already decided what position to take and then look for indicators that will back up their decision, allowing them to feel more comfortable. They then develop rules, learn more indicators and devise a system. If it’s right more often than not, they believe they’ve finally beaten the odds, and may reason that if a solid 60% of their trades are successful, they’ll improve their profitability with increased trading. Unfortunately, this is another example of overtrading, and it can have severe consequences for these traders’ returns.

Hair-Trigger Trading

Hair-trigger trading is enhanced by electronic trading, which makes it possible to open or close a position within seconds of the idea forming in the trader’s mind. If a trade moves slightly against the trader, it is sold immediately; if a market pundit shouts out a tip, a position can be opened before the ad break. Hair-trigger trading is easy to identify. Does the trader have many small losses and a few wins? Looking back over trade logs, did the trader overestimate his wins and conveniently dismiss his losses? Were trades exited almost as soon as they were entered? Are some positions continuously opened and closed? These are all classic, easily-identifiable signs of hair-trigger trading.

But the fix is also easy: only enter what you “know” will be a good trade (i.e., a high-probability trade according to your research and analysis, meeting all your predefined trade criteria). If there is doubt, do not make the trade. Losses are far worse than inactivity, and compounding losses are devastating.

Shotgun Trading

Craving the action, traders often develop a “shotgun blast” approach, buying anything and everything they think might be good. They might justify this by the fact that diversification lowers risk. But this logic is flawed. First, true diversity is spread over multiple asset classes. Second, multiple bad trades will never be better than just a few. If a trader has isolated a promising trade, concentrating capital on that trade makes the most sense. A telltale sign of shotgun trading is multiple small positions open concurrently. But an even more firm diagnosis can be made by reviewing trade history and then asking why that particular trade was made at the time. A shotgun trader will struggle to provide a specific answer to that question.
If you’re attracted to the diversification aspect of investing, it’s far better to buy and hold a blend of the market indexes. This puts the “house odds” in your favor. Be very selective when trading individual positions, and trade only the highest probability trades: a respectable success rate trading one position at a time can quickly degrade to less than 50% success with multiple positions.

Bandwagon Trading

Bandwagon trading is a deliberate attempt by discretionary traders to piggyback or mimic those they consider to be “in the know.” This ploy is fundamentally flawed for two reasons. First, even experts don’t have all the answers, and they can’t predict the future. Their experience and talents are merely two factors among many.
The second reason is that when many traders follow the same path – led by a loudmouthed pundit, a biased stakeholder or the results of many technicians inadvertently using the same indicators – the initial move may degenerate rapidly. This is a basic economic principle: competition reduces margins. In trading, this manifests itself when bandwagon traders compete to exit identical positions as early as possible, often causing a price stall or reversal.

To make matters worse, novice traders are most likely to trade on the bandwagon and most likely to exit prematurely, exacerbating this effect. The strongest signal of bandwagon trading is adhering to someone else’s recommendations, or a system devised by someone else. Is there a dependence on popular indicators with the same settings as taught to beginners? Has the “hot” new system or indicator lost its reliability?

If you find comfort in crowds and conformity, buy the index. If you want to trade, first develop your own system, do your own research, customize your indicators and finally – test, experiment and test some more before you trade.

Movers and Shakers

The market is not always smooth sailing. Instead of large trending moves, it sometimes shakes about in a choppy, sideways direction. Many novice traders will overtrade by assuming that minor market corrections are the beginning of the next trend. They’ll then jump in and out as the expected trend forms and fails. They may even compound the situation by doubling their positions.
This can be the most destructive form of overtrading. Confident that the reversal is imminent, the trader doubles the size of a losing trade in the belief that he or she has averaged down to a better entry price and will therefore make a bigger profit on the move. Most often, however, this just increases losses. On the other hand, successful traders sometimes double winning trades – never losses – and are quite content to sit out the market, waiting for the right conditions under which to re-enter. An unskilled trader, however, will be continuously drawn back in.

The Bottom Line

The various forms of overtrading can be explained by the amateur’s order of priorities. First and foremost, the beginner trader wants to confirm the advisability of his trade by taking profit whenever possible. Secondly, the novice trader wants to reduce his emotional discomfort either by selling as soon as a loss appears or by immediately re-entering the market after a loss or period of inactivity, hoping to “win it back” just like the casino gambler. Overtrading makes only a broker happy; the true professional’s priorities will look like this:

1. Avoid losses
2. Minimize risk
3. Minimize volatility
4. Maximize returns

Stick to these simple guidelines, and you’ll be able to steer clear of overtrading.

The Trader’s Mindset

by Bennett McDowell

Developing “The Trader’s Mindset” is a must for trading success and this can take some time. This is not an area where you can take a short cut or learn a formula. You usually develop it by actually trading and the experiences you gain from trading. We will help guide you towards developing “The Trader’s Mindset” and help you handle account draw-downs, losses, and profits. Yes, profits can actually cause you stress!

You can see how powerful psychology in trading is, if you show the same successful trading approach to one hundred different traders. No two of them will trade it exactly the same way. Why? Because each trader has a unique belief system and their beliefs will determine their trading style. That is why even with a profitable and proven trading approach, many traders will fail. They do not have the proper belief system to enable them to trade well. In other words, they lack “The Trader’s Mindset.”

When you encounter psychological issues it is best to recognize the issue, just be aware of it, don’t deny it. In order to “fix” psychological issues we as human beings must first become aware of the problem and issues causing the problem in order to heal and “fix” the problem. This is much of what psychoanalysis is all about. The psychologist or psycho- therapist tries to let the patient first see the problem and then the patient must believe that these issues are causing the problem in order for the patient to heal. The reason this process can take so long, perhaps even years is because the patient needs to not only recognize their problems, but must accept that there truly is a problem. They must take responsibility for their problems to heal.

Success in trading is a direct result of a sound trading system, sound money management, proper capitalization, and sound psychology. All of these must be in sync to be successful in your trading. The “ART” system is designed to focus on all of these areas. The only area where you may need additional help once you have mastered your trading skills, is your psychology.

Psychology is the one area that you may need additional help and can take up to a year or so to resolve personal issues attaining trading success. Our consultation services focus on this aspect and if you find yourself struggling with psychological issues, you owe it to yourself to get help in this area.

Here is a list of common psychological trading issues and their causes:

Fear Of Being Stopped Out Or Fear Of Taking A Loss: The usual reason for this is that the trader fears failure and feels like he or she cannot take another loss. The trader’s ego is at stake.

Getting Out Of Trades Too Early: Relieving anxiety by closing a position. Fear of position reversing and then feeling let down. Need for instant gratification.

Adding On To A Losing Position (Doubling Down): Not wanting to admit your trade is wrong. Hoping it will come back. Again, ego is at stake.

Wishing And Hoping: Not wanting to take control or take responsibility for the trade. Inability to accept the present reality of the market place.

Compulsive Trading: Drawn to the excitement of the markets. Addiction and Gambling issues are present. Needing to feel you are in the game.

Anger After A Losing Trade: The feeling of being a victim of the markets. Unrealistic expectations. Caring too much about a specific trade. Tying your self-worth to your success in the markets. Needing approval from the markets.

Excessive Joy After A Winning Trade: Tying your self-worth to the markets. Feeling unrealistically “in control” of the markets.

Limiting Profits: You don’t deserve to be successful. You don’t deserve money or profits. Usually psychological issues such as poor self-esteem.

Not Following Your Proven Trading System: You don’t believe it really works. You did not test it well. It does not match your personality. You want more excitement in your trading. You don’t trust your own ability to chose a successful system.

Over Thinking The Trade, Second Guessing Your Trading Signals: Fear of loss or being wrong. Wanting a sure thing where sure things don’t exist. Not understanding that loss is a part of trading and the outcome of each trade is unknown. Not accepting there is risk in trading. Not accepting the unknown.

Not Trading The Correct Position Size: Dreaming the trade will be only profitable. Not fully recognizing the risk and not understanding theimportance of money management. Refusing to take responsibility for managing your risk.

Trading Too Much: Need to conquer the market. Greed. Trying to get even with the market for a previous loss. Theexcitement of trading (similar to Compulsive Trading).

Afraid To Trade: No trading system in place. Not comfortable with risk and the unknown. Fear of total loss. Fear of ridicule.Need for control.

Irritable after the Trading Day: Emotional roller coaster due to anger, fear, and greed. Putting too much attention on trading results and not enough on the process and learning the skill of trading. Focusing on the money too much. Unrealistic trading expectations.

Trading With Money You Cannot Afford To Lose Or Trading

With Borrowed Money: Last hope at success. Trying to be successful at something. Fear of losing your chance at opportunity. No discipline. Greed. Desperation.

These are by no means all the psychological issues but these are the most common. They usually center around the fact that for one reason or another, the trader is not following their chosen trading approach or system. And instead prefers to wing it or trade their emotions which in trading will always get you in trouble. So, I think you can see how psychology is all important in trading.

Our goal as traders in regards to psychology is to maintain an even keel so to speak when trading. Our winning trades and losing trades should not affect us. Obviously we are trading better when we are winning, but emotionally we should strive to maintain an even balance emotionally in regards to our wins and our losses.

It will happen when it happens and when you achieve this level of mental ability; it will come after working long and hard on your problems, but will come without you knowing it. It usually happens when you least expect it.

Below is a list of what one feels after acquiring “The Trader’s Mindset.”

-Sense of calmness
-Ability to focus on the present reality
-Not caring which way the market breaks or moves
-Always aligning trades in the direction of the market, flowing with the market
-Not caring about the money
-Always looking to improve your skills
-Profits now accumulating and flowing in as your skills improve
-Keeping an open mind, keeping opinions to a minimum
-Accepting the risk in trading
-No Anger
-Learning from every trade
-Winning and losing trades accepted equally from an emotional standpoint
-Enjoying the process
-Trading your chosen approach or system and not being influenced by the market or others
-Not feeling a need to conquer or control the “market”
-Feeling confident and feeling in control of “yourself”
-A sense of not forcing the markets or yourself
-Trading with money you can afford to risk
-No feeling of ever being victimized by the markets
-Taking full responsibility for your trading

When you can read the list above and genuinely say that’s me, you have arrived!

Read this a couple of times. Great tips and insights. – Rick

Destructive Behavior Patterns in Trading

Harsh, but an interesting perspective . . .


Destructive Patterns in Trading

By Brett N. Steenbarger

Before we get into the topic of destructive trading, allow me to explain how psychologists assess whether or not a person has a problem with alcohol consumption. Here are ten questions that a professional might ask in order to assess any kind of substance use disorder, including alcohol abuse:

1. Have you found that your drinking is bringing unwanted, negative consequences?

2. Have you recently felt guilty over the way you have been drinking?

3. Do you find you need to drink more just to get the good feeling?

4. Do you find that your personality changes when you drink excessively?

5. Do you find it difficult to take a break from drinking, even when part of you knows that this would be best for you?

6. Do you find yourself drinking to feel good about yourself?

7. Do you sometimes feel that you cannot control how much you drink?

8. Do you find yourself getting angry when someone close to you questions your drinking?

9. Do you find yourself vowing to limit your drinking, only to slip back into overdrinking?

10. Do you find it difficult to not drink given the opportunity, even when the occasion is not really appropriate?

Now for the topic of destructive trading: Please answer the above questions, but substitute the word “trading” for “drinking”, and substitute the word “trade” for “drink”.

Fear and greed are potent influences on trading, but the greatest trading problems, I find, are addictive in nature. Successful traders really want to trade; they have a passion for trading. Addictive traders need to trade; they have a passion for action and excitement.

An addictive trader will not manage his risk. That is because risk is part of the high.

An addictive trader will not stop trading, even when losing money. That is because action, not profit, is the goal.

An addictive trader will cycle between periods of guilt and responsibility and periods of excess and irresponsibility.

Good traders trade actively. Addictive traders overtrade.

If you see yourself in this profile, do the right thing, before your patterns ruin your career and harm those who depend on you. Get help. You can change. Your trading and your happiness lie in the balance.

“Get help” . . . good advice. If you’re here on this site, you’re on the right track.


Why Are You Trading?

One of the most important and often overlooked questions we must ask ourselves is “Why are we trading?”

The most obvious answer would be the unlimited upside for potential income.

Not everyone trading is motivated by the financial potential. The answers can actually be quite varied. For most traders I’ve met, it is the idea of control. Control over your own financial destiny and freedom from the “rat race.”

There is no arguing that a full time trading vocation has many advantages. I saw the income potential of the market, but that was not my primary motivation. For me, after owning and operating several companies, trading offered me the freedom from the typical trappings of business ownership – liability, employees, and client idiosyncrasies. Working from home also was appealing.

The current state of the global economy has created more urgent reasons for many people to enter the trading foray – unemployment and/or lack of job security and loss of capital or ROI via mainstream institutional options (401Ks and other retirement instruments.) It is no longer prudent to rely on traditional templates and models for employment, retirement and investing. 25 year careers and generous retirement benefits are a thing of the past. Through the current failures and of those possibilities and institutions, a new explosion of self-investors has emerged.

The reason you are trading will have a direct effect on your trading psychology – the more urgent your need for income, the more haphazard your approach to the market. If you are in “survival” mode (needing immediate income to cover daily living expenses) you are going to struggle. Your decision making will be motivated purely by emotion. You will be too focused on the outcome, not the process. This is a recipe for failure. You will behave irrationally and erratically with every tick in the trade. You will not be able to overcome this challenge until you find a steady source of income to satisfy your immediate needs. Only then will you be able to focus without this overwhelming and stressful distraction.

If you have adequate income for expenses and to invest, your approach will be more tranquil because you can afford to lose the money. This can be detrimental as well because you will not be compelled enough to totally commit and your view of trading will be one of folly. Money lost can be easily replaced, so why worry about really learning the skill of trading. You view this “investment” as you would laying down cash in a casino throwing dice at a crap table or playing blackjack; simply for the fun of it, to see if it works, with no real expectation of a meaningful payoff. If you can afford it – great. But I maintain it is no fun wasting or losing money.

The other trap is to view trading as a part-time endeavor. We all have to start somewhere before we can transition to trading full time – that’s a given. But the perception that trading only part time will lead to the consistent success and return we seek is a fallacy. This perception also sabotages the maximum commitment required to learn the skill of trading and prevents us from doing the necessary work needed to truly become proficient in the market. Think of your current job or primary source of income and imagine performing it part-time. For most of us that idea would make no sense at all. So whether you ultimately make it or not, your goal should be to become a full time trader. This is the only way you can be thorough and focused enough during your trading journey. It will keep your mindset professional and mature.

It is important that you ask yourself the question and then answer in terms of the present circumstances of your life. We all know that the ultimate reason is for money, but your current underlying reasons and intent (survival, liassez-faire or professional) will manifest themselves in your results – and this will be our constant reality check as we measure our progress.

Do an honest assessment of your current situation. Make sure your trading resources, approach and goals align realistically with your availability and lifesytle. If not, you will be making this harder than it already is and adding unnecessary time and frustration to your learning curve.