Category — Trading Advice

Whether you’re a novice or seasoned trader, there are days when you face setback after setback: Adverse events go against you. You make a trading error. You misread the markets. The possible setbacks can be endless, and it hurts a little to watch your account balance take a hit when one of them catches you off guard. But whatever roadblocks get in your way, it is vital that you take them in stride.

How can you gracefully take setbacks in stride? You could be naturally cool and confident. Like a “surfer dude” who just rides the waves with little worry, you can go with the flow. Are there traders who are naturally laid back and easygoing? There may be some, but a person with such an easygoing personality type usually lacks the unwavering discipline needed for long-term financial success. If you are the kind of person who saved up enough money to have a decent trading account, it’s unlikely that you are the kind of person who is so laid back that setbacks are completely unimportant. If you are like many traders, you take life seriously. It took effort to build up your assets and you are not willing to just throw your money away on a whim. Indeed, you are probably on the “anal” side in terms of your personality. You are likely to be a professional who was rewarded for working hard and showing self-restraint. And you probably showed self-restraint in more than your work life.

In many ways, if you are a person who naturally shows self-control and discipline, you must learn new ways to behave when trading the markets. You must work around your tendency to show extreme self-control. What can you do? There are many thinking strategies you can use to take setbacks in stride.

The most important strategy is to anticipate everything that can go wrong. Live by Murphy’s Law. Whatever can go wrong will go wrong. Now, not everything will go wrong, but if you live under the assumption that things are bound to go wrong, you won’t be caught off-guard. You’ll be ready to face a setback. A second strategy is to have realistic expectations. The adage, “Life can be unfair at times” is useful to consider. Remind yourself that “hard work does not always pay off,” and remember that the markets may not always cooperate with you. In many ways, you must respect the markets more than they will ever respect you. “The markets are always right.” If you can accept these premises about trading, you’ll be ready to cope gracefully. But if you demand that the markets conform to your preconceptions, you’ll constantly feel slighted, beaten, and frustrated. Stay unemotional. Avoid imbuing commonplace trading events with emotional significance. Things go wrong. That’s part of the game of trading.

Do you ever wonder if you secretly want to fail? It’s hard to believe, but some people do want to fail. They may not want to do better than their parents, and secretly they set themselves up for failure. Others fear success. They associate success with added responsibility and they want to avoid responsibility at all costs. But if you’re like most people, you want to succeed. For whatever reason however, you find you make trading mistakes that result in losses. There are times when you are your own worst enemy.

There are a number of ways that you may be your own worst enemy, but here are some common ones.
Many novice traders risk money they can’t afford to lose, and understandably, feel on edge as they execute and monitor a trade. You can’t concentrate very easily when you are agitated. In order to trade calmly and rationally, it is vital to trade only with money you can afford to lose. In addition, it is important to manage risk, so that you minimize the amount you can lose on any single trade. If you truly have nothing to fear by losing, you’ll feel more relaxed. You will trade effortlessly and you won’t make as many trading errors.
Don’t miss sleep. When you’re tired it’s hard to concentrate. When you are worn out or tired, you are understandably ready to lash out or feel extreme frustration, even when you face a minor setback. Concentration requires energy, and you don’t have adequate energy to trade when you are tired. So get the sleep you need to stay alert and ready for action.

Don’t trade by the seat of your pants. Many novice traders don’t map out their trades in enough detail. They don’t decide beforehand where to enter or where to exit. When they actually try to execute the trade, they find it difficult to stick with their trading plan because it is unclear and difficult to follow. They don’t know exactly what to do and when. And so they panic at critical moments of investing. Carefully outlining a plan and following it will help you avoid costly trading errors.

Trading is hard enough. You don’t need to sabotage your own efforts. By trading with money you can afford to lose, staying calm and rested, and by following a well-defined trading plan you can stay at the top of your game and take home profits.

If you’re like most modern traders, you try to do it all. You study charts and historical data for trading opportunities. You struggle to devise a thorough, well-designed trading plan. You enter trades on your own electronic trading platform, and you monitor your trades to make midcourse corrections when necessary. Depending on your personality, available resources, and time commitment, you may want to consider depending on others to do some of the work. You don’t have to do it all. You can look toward others for help.

In the “old days,” traders and investors placed trades with a broker. Electronic online trading has changed all that for the most part. But the change was not without its disadvantages. Behavioral economist Dr. Terrance Odean has shown that the switch to online brokerages had some negative consequences. Traders, especially young men who had a recent trading windfall, tended to over-trade. Easier doesn’t always mean better. There was an interpersonal element of trading with a broker that was lost when it became electronic. It took a little extra effort to call your broker to place an order, but it gave you one more chance to think your decision through. You may have paused for a moment and thought, “Is this move actually a good idea? I don’t want my broker to think that I am foolish.” If you talk to many hedge fund managers, they actually have a staff member place their orders. Are they afraid to place orders themselves? Believe or not, many of them say that having someone else place their orders works out better overall.

And when it comes to developing a trading strategy, some traders prefer to leave it up to others. Rather than scour the markets for the next insight, you can purchase a trading system. Trading systems usually have a poor reputation in the trading field. A system works great for a little while, but then market conditions change, and the system fails. This common belief may have some truth, but it isn’t necessarily true. It is a matter of what system you chose. You cannot just pick any system. You have to do your homework. Look at the track record of the system and decide if it produces the level of profit you need. The main idea is to put your energy into finding the system that meets your specifications, rather than devoting that time and effort to trying to find new, innovative ideas. In a similar vein, you might also subscribe to newsletters that provide profitable setups. Again, you don’t need to do everything. You can get help when you need it.

There are other ways of easing the burden of trading. You can use automatic settings on your trading platform. If you are busy working your main job during the day, you can swing trade, for example, by putting a protective stop to ensure that you don’t lose your entire stake should the market turn. There are obvious disadvantages to using automatic protective stops. For example, if you set the stop too tight, you may get “stopped out.” But for the busy part-time trader, the added protection and peace of mind are worth the disadvantages. You may lose a trade here and there due to an improperly placed stop, but you can work your eight-hour shift at your day job with the reassurance that you are protected from whatever market calamity may ruin your trading plan.

There are many ways to ease the endless burdens of trading. The key is to stop trying to be a super-trader. Don’t try to do it all. Even top-notch, professional traders spread the workload, and so should you.

When your money is on the line, you can’t help but feel a little uneasy. What if you lose? It’s hard not to put some of your ego on the line with your money, and when you lose, feel hurt. Winning traders, though, keep cool. They don’t ride a roller-coaster of emotions, feeling euphoric after a win and beaten after a loss. They take losses in stride, but if you are a novice trader, it’s hard to stay objective and completely unemotional.

The perspective you take when you look at a past setback, such as a major financial loss, can dictate how you feel about it, specifically the intensity of the emotions you feel. A study by Dr. Ozlem Ayduk and colleagues shows how the way people look back on, and think about, a past event can influence the emotions they experience (Kross, Ayduk, & Mischel, 2005). Past research studies have shown that if people emotionally distance themselves from past events, they remain relatively unemotional, and are then able to look at events more abstractly and rationally. For example, you could be self-immersed in a past setback by going back in your mind to the specific time and place where the setback took place and relive it as if it were happening all over again. If you try to remember the experience vividly, you are bound to start intensely feeling the same feelings you felt during the original experience. If you thought about how you put a lot of capital on a “sure thing” and lost it all, you may find yourself unable to execute properly.

In their experiment, Drs. Ayduk and colleagues asked participants to recall a past setback in which they felt extremely angry. Some participants were asked to recall the event by taking a self-immersed perspective while others took a self-distanced perspective. They were also asked either to take a “what focus” or a “why focus” regarding their emotions. While they thought about their emotions, participants using a “what focus” tried to think about what specific emotions and sensations they felt; they intensely focused on the emotions they experienced at the time. Participants using a “why focus” thought about why they felt what they felt, in other words, the reasons that were behind their emotions.

What’s the best way to review a past setback, according to these study findings? First, you don’t want to immerse yourself in your emotional past. You want to look at the past from the vantage point of a detached observer. Look at your past as if you are completely indifferent, as if it is merely a fictional character in a book or a movie that you just don’t care about. Second, don’t focus on what specific emotions you are re-experiencing. Instead, while you look at yourself as a detached observer, focus on the reasons that the “emotionally distant you” is experiencing specific emotions. The worst thing you can do, however, is to become immersed in the past. When people try to relive a past event, they feel upset, regardless of whether they focus on what specific emotions they experience or why they experienced them. In addition, even if you take a detached perspective, focusing on the specific emotions you experienced, instead of focusing on why you experienced them, will make you uncomfortable.

Setbacks are commonplace in trading, but you don’t have to let a setback upset you. Emotionally remove yourself from the situation. Look at it all from the perspective of a detached observer, and rather than focus on what emotions you are experiencing, focus on the reasons you are experiencing them. If you can stay detached and logical, you’ll stay calm. You will take losses in stride, recover quickly, and think of creative solutions to tough, complex problems. And in the end, you’ll trade like a winner.

Temptation is rampant in the markets. Nevertheless, you must restrain yourself from making impulsive trades. There’s a very human tendency to seek out excitement and receive a quick reward. You must fight temptation and maintain self-control, however. Electronic trading platforms have made trades easier to execute, but at the same time, they’ve made trade execution so fast and easy that many novice traders overtrade, and even when traders don’t overtrade, they may be tempted to constantly monitor their trades and abandon trading plans prematurely, a common ailment of novice and seasoned traders alike. Practicing patience can help you stick with your trading plan until it comes to fruition.

Impulsive trading doesn’t happen in a vacuum. Many factors contribute to prematurely abandoning a trading plan. A significant precursor, though, is a feeling of boredom. When we are bored, we may want to spice things up, and what better way to put a little excitement into life than looking at a position to see how well things are going. What’s the problem? The more you look at how a trade is going, the more you think about it, and if your plan is to patiently wait for a week or longer, looking can only make you feel like you want to take action. It’s necessary to remove temptation.

Don’t think you are a hero. The biggest mistake traders make is thinking that they have superhuman self-discipline. Avoid looking at the market action unless it is a necessary part of your trading plan.

How else can you maintain discipline? First, admit your limitations. Self-control is like a muscle. You need to practice self-control. Don’t try to be superhuman. You can’t run a marathon tomorrow if the farthest you had to run in the past year was between your front door and your car when you were late for an appointment. You need to work up to it. Don’t expect to be able to maintain self-control without extensive practice. Give yourself time to build up your self-control skills. Second, make a strong commitment to build up your self-control skills. Take the matter seriously. Until you commit to change, you cannot improve your ability to maintain discipline. It’s similar to losing weight or quitting smoking. A person must first acknowledge that he or she has difficulty with self-control before change can happen. Admitting that you need to improve your self-control skills goes a long way. Third, you must use psychological techniques to learn to maintain discipline. It is essential to avoid temptation. It’s essential to not trade impulsively. Sadly, many traders succumb to both temptation and impulsive trading.|

Bill went to bed early last night, woke up early, and is excited about starting the trading day. It’s a cool, sunny day, and Bill can’t help but feel rejuvenated. After a quick run, he can’t wait for the markets to open, so he can make a few winning trades. Bill thinks today is his lucky day, the day that he’s going to make a month’s worth of profits. Why not start the trading day with excitement and vigor? Drink some coffee to get yourself going. Work out to get your energy level up and your physiology moving. Think positively and believe that you can overcome any obstacle. Why not get psyched up?

Cultivating a positive attitude for the trading day may not be as simple as it looks. Traders must continually walk a tightrope between extreme overconfidence and self-doubt. The trick is to find a level of confidence where you can realistically evaluate the market action and accurately acknowledge your limitations, yet at the same time, avoid talking yourself into a state of cynicism and self-doubt. Novice traders, especially, are infamous for overconfidence. Behavioral economists have shown, for example, that after a big win, young enthusiastic traders overtrade and take unnecessary risks. Enthusiasm can sometimes cloud your vision to the point where everything looks rosier than it really is. Humans tend to be efficient, but often poor decision makers. They are prone to self-serving decision making biases that are ego building but unrealistic. Humans have a natural tendency to see matters more positively than they really are. While trading, for example, novice traders may wrongly biased to the long side.

Humans can indeed be self-serving in their decision-making, especially novice traders who are on a quest for early success. But that doesn’t mean that you need to live your entire trading life blandly fighting boredom. Getting psyched up has a time and place. You obviously don’t want to be so euphoric during a trade execution that you throw out your trading plan on a whim because you wrongly get a hunch that something bigger is on the horizon. When you are executing your trading plan, it’s essential that you mechanically stick with it. This can be done by carefully outlining a trading plan with clear entrance and exit strategies. You should also decide beforehand what signals you will look to monitor the trade and make minor midcourse corrections. Surely, during the execution process of the trade, you want to stay calm and rational.

But what about while you develop your trading plans, can you be optimistic at this stage? While you explore your options, it can be useful to build yourself up. Remind yourself that you are creative, intelligent, and resourceful. It can help to get really psyched up: “I have rare trading talents. All I have to do is get my creative juices flowing and I’ll be able to discover market opportunities that will pay off big.” While you’re trying to come up with trading ideas, there’s really no harm in thinking that you are omnipotent. You need to think creatively, and when you are excited, your brain physiology jumps into action. Ideas connect and reconnect, and suddenly new insights spring up. So there is a time and place for extreme optimism. That said, during the idea generation stage, it’s also vital to calm down and rationally tear apart your ideas. Before executing the trading plan, you must make sure that you’ve accounted for every possibility that could thwart your plans.

Everything has a proper time and place. During the idea generation phase of trading, you can allow yourself to get psyched up and feel omnipotent, but it’s also essential to question your ideas, and evaluate their plausibility. And finally, it is important that you curb your enthusiasm as you execute your trading plan. If you can control your emotions and impulses as you execute your trade, you’ll show the discipline you need to trade like a winner.

It’s not the number of times you fail that matters. It is all about getting back up after you’ve been knocked down. Ask any successful person and you’ll find that he or she has experienced a mountain of failure. Trading is a challenging profession. Few make it, and of those who do, many eventually blow out their accounts and give up the profession. What’s the difference between the successful, winning trader and the disillusioned would be trader who gives up: It’s all about expectations, persistence, and a realistic, yet optimistic, attitude.

Positive thinking alone isn’t going to make you a winning trader. You can believe that you are destined to be one of the next “Market Wizards,” but if you aren’t ready to accurately assess your skill level, and put in a heroic effort to develop the skills you need to master the markets, looking at the markets through rose colored glasses won’t get you very far. The kind of optimism you need to succeed as a trader is a combination of enthusiasm and a willingness to do hard work. It’s similar to the work of an athlete. An opponent might beat you, but you don’t leave the field in despair if you want to be a winner. You stand up, try again, and over time, you hone your skills in a variety of contexts until you feel naturally confident that you can handle almost anything. Each setback represents a new challenge, a learning experience that will bring you closer to your goals.

From a psychological viewpoint, there is a lot you can do to help motivate you to continue. First, you can keep your eye on the big picture. Don’t worry about the minor setbacks that you experience today, this week, or this month. Remind yourself that if you continue to practice and hone your trading skills, you will eventually develop the skills you need to master the markets. Every trade you make, successful or not, takes you closer to your goal. You will see a new market condition, or you may learn how you mentally handle a specific challenge. These experiences teach you, and bring you closer and closer to mastery. Second, never stay down for very long. If the markets beat you down, stand back up and try again. Persistence and hard work is the only path to success. The difference between those who win and those who sit on the sidelines is an unrelenting ability to face their demons, overcome them, and try and try again until they make it.

Babe Ruth struck out many times in his career, but overall, we remember his winning averages. Winning traders also make many losing trades, but all that matters in the end is how many winning trades that are made and how much money one makes on those trades. You will never find out if you can master the markets if you don’t make enough trades. Don’t sit in the corner and mull over your failures. Take them in stride, move forward, and make the profits you’ve dreamed of taking home.

Have you ever made a small losing trade and thought, “It’s all right; I’ll win on the next one.” The next trade comes along, and you lose. And then the next one is a loser, and so on, and so on…until finally, you are in a severe drawdown. You need to constantly monitor your progress, so that you never dig yourself into a hole that is virtually impossible to climb out of if you’re going to survive. Take a good hard look at the facts and make adjustments. Believe me, I know whereof I speak. I once lost 11 consecutive trades. The odds of doing that are astronomical as I later discovered. I don’t remember the exact figure, but it was something way more than a million to one.

Humans are notorious for their eternal optimism. Who wouldn’t want to think they were making a killing in the markets. When you aren’t profitable it’s easy to fall into a state of denial. In order to build up our egos, we ignore how poorly things are going and tend to look at the world through rose-colored glasses. There are times when it is useful to look on the bright side. To win in the markets, you have to truly believe that you can succeed. Focusing on your limitations or the inherent challenges the markets often pose may get you down. And when that happens, you may think it’s impossible to master the markets.

On the other hand, too much denial may prevent you from taking the steps you need to improve your trading performance. Denial can go too far. If you feed your account every month, you may not face the fact that your trading strategies just aren’t working. Successful traders carefully monitor the process of trading. They keep a trade diary in order to identify those strategies that work from those that don’t. They identify the specific market conditions that are optimal to their methods. They also report their moods in an attempt to isolate psychological factors from market factors. Some strategies just do not work under particular market conditions. And if you are bogged down with psychological factors, no trading method is going to produce a profit. It may be hard to face the facts, but unless you do, you’ll never be able to identify your weaknesses, make midcourse corrections, and hone your trading skills.

It’s hard to not be impacted by images and feelings that enter our consciousness without knowing it. Humans have a natural affinity to attach emotional significance to inanimate objects, like a stock, or a particular futures market of a forex pair. It is helpful most of the time. When you hear about a product or services failing to perform at par, such as a new computer running too hot or an airline that tends to arrive late and misplace luggage, you instinctively try to avoid such companies in your personal life. You may similarly avoid the supermarket that fails to store its raw meat properly or the drug store that sells over-the-counter medications with expiration dates that end within a week. We feel uneasy when we experience such events in our everyday lives. Avoiding products and businesses that don’t meet our expectations is a useful rule of thumb. Unfortunately, the same processes also work for pleasant events. When we see an attractive model of a car that everyone is buying, we tend to want to get one for ourselves.

Don’t be afraid to keep a trade diary. Identify what works and what does not. Don’t let denial prevent you from taking a good honest look at what you’re doing. You may be surprised to find that you are doing a lot right, and that by making a few minor changes, you can greatly improve your trading. The aware trader is the winning trader. By taking an honest look at your limitations, you’ll be able to hone your trading skills, reach ever-higher levels of performance, and take home huge profits.

Pete is kicking himself right now. He just made an unexpected losing trade and he feels especially down. He expected to make a killing, and he was looking forward to winning and celebrating big. He thought he had done everything to prepare for the trade. He had looked at the moving average to discern the trend. He looked at the highs and lows of the stock for the past two months, and set his stop loss accordingly. But in his strong desire to believe that he was about to execute a winning trade, he made a fatal error: He forgot to account for an upcoming earnings report. The company failed to meet analysts’ forecasts, and the stock fell hard and fast. Pete didn’t lose too much. His protective stop saved him, but it still hurts. He had gotten his hopes up, and now, he is especially disappointed.

Pete’s plight is common for both experienced and novice traders alike. There is a strong human need for eternal optimism. Pete isn’t naïve. He knows that earnings reports can unexpectedly impact a stock’s price, but he had wanted to make a big winning trade so desperately that his subconscious mind prevented him from seeing matters clearly. Sometimes, we want something so strongly that we see things that just are not there, or we shut out things that we don’t want to see. That’s what Pete did. He didn’t look carefully at all possibilities and he missed the obvious.

Why does Pete feel so badly? It could be for a number of reasons. First, he got his hopes up, but his dreams were dashed. When we expect a big win, and don’t get it, we are especially hurt. Second, Pete may be trying to live up to his own unrealistic, perfectionist standards. He may be beating himself up because he wrongly believes that he must trade to perfection; he must account for all possibilities. It is a fact that had he been able to see that an earnings report was scheduled, an obvious potentially adverse event, he would have saved precious trading capital. But mistakes do happen. We are human. We often let our emotions take over, and when that happens, our rational mind doesn’t stand a chance.

How can Pete feel better? He needs to change his frame of reference. When many people make an obvious mistake, they let their superego rule. Our superego consists of the ideals we strive for and the moral rules that our parents taught us while we were youngsters. When many people make a mistake, they treat the situation as if a parent or teacher were scolding them for breaking a rule. They re-experience feelings from childhood, hurt, beaten feelings. In some cases, the feelings may be shame or guilt. This is the wrong frame of reference to use to understand trading setbacks, however. When you lose money on a trade, it is not useful to allow your unconscious to equate the loss with being punished by your parents for breaking a rule. Instead, it is vital to look at matters from the perspective of a trader. Traders are human and they make mistakes. If you make mistakes you are no different from the rest of us humans.

There are times when our judgment is cloudy. Perhaps we want so much to win that we optimistically see trading opportunities that aren’t there. At other times we may be so stressed out, busy, and tired that we can’t concentrate, and end up making an impulsive decision or a trading error out of a sense of frustration. As much as we search for a rational, unemotional perspective on the markets, it is hard to come by. We are human, and our natural human tendencies can get in the way of trading calmly and rationally. How can you cultivate a more objective, rational approach to the markets? Here are some useful tips.

• Remember that self-control and discipline work like a muscle. You cannot over-tax your muscles. When you do, you feel tired and worn out. Your body needs to rest and rejuvenate before trying to exert more physical energy. Physical stamina isn’t built up over night. Similarly, your ability to maintain discipline for long hours, day after day, may also be limited at first. It’s necessary to build up this ability over time. And after a few hours of extreme self-control, you must let lose. Take a rest, leave the trading arena for a little while, and do something wild.

• Second, don’t underestimate the need for rest and relaxation. Not only does self-control take energy, but concentration takes energy as well. When you are hungry, tired, and frustrated, you’ll have difficulty concentrating. You’ll be easily distracted and thrown off course by even a minor setback.

• Third, don’t try to live up to standards that you can’t reach. If you try to over-leverage your knowledge, you’ll feel frustrated and crack under the added pressure. Set modest goals and trade with money that you can afford to lose. Don’t pressure yourself. When you put a lot of money on the line, money you can’t afford to lose, you will bias your perspective. You’ll hold on to losing trades too long, falsely hoping they will turn around, or you will see profitable setups that don’t exist. If you trade smaller positions and manage risk, you’ll feel more relaxed and you will minimize the need to perform miracles as a trader.

• Fourth, don’t personify the markets. Stay objective. If you take trading so personally that you act as if a trading setback is a personal affront against you, then you may become obsessed with perfection and feel down on yourself for making a mistake, or you may even become angry with the markets and seek revenge when things don’t go your way. Don’t think of the markets as a person. View the markets as nothing more that a nameless group of unknown market participants who don’t know who you are and don’t care about you. It’s not personal. It is just business.

It’s natural to want to seek out pleasure and avoid pain. But many times, you have to take a good hard look at the facts, no matter how much it bothers you and causes you to feel pain. Don’t be afraid to try to look at the markets as objectively as possible. It isn’t always easy, but if you feel stress-free, open, and creative, you’ll increase your chances of maintaining a crystal-clear view of the markets.