1. Trading an inappropriate position size. Simply put…if you risk too much, you’ll lose too much. In my eyes, this is the single most important rule of trading. Risking only 1-2% of an acct value is crucial to staying in the game.
2. Not knowing when to take the loss. If you cannot answer the questions “Where am I taking the loss,” and “Where is my profit target” then stay out of the market. If you leave these decisions for later, then you will make them emotionally, which will be the worst decisions a trader can make.
3. Trading on someone else’s research or recommendation. We have all heard stock tips thrown our way. Sometimes we might even hear people throw out potential trades that they are watching and become tempted to jump in. Sometimes I throw out stocks that I am trading and I am watching. The problem is that you might not know what this person is watching for, what strategy this stock fits, or what types of efforts are thrown into their research. If you take these stocks into consideration, make sure they are trades you would have likely come across on your own by conducting your own research. Read More
We urge you to use this checklist for your own trading and investing preparation. We truly feel that these traits are very important for you to understand. These trader traits coupled with the proper psychology can make a huge positive difference in your overall trading performance.
• The ability to act on your decisions.
• The ability to accept responsibility for your actions.
• You must have emotional detachment from the markets.
• The ability to accept risk and take losses (you’ll never be right 100% of the time). Read More
The language you use as a trader can provide either positive reinforcement through honest self awareness or negative results through demeaning self talk. In other words, when discussing your trading with others or in your journal become aware of how you view yourself. Do you see yourself as an amateur, a whipping post, a loser? Do you blame an indicator or the market or an advisor for your failures and lack of discipline? When you are with others do you brag about your winners and hide your losers? All of this talk is based on fear: fear of being wrong, fear of what others might think of you and your decisions; fear of the market; fear of being afraid. When you practice positive self awareness you create a fertile learning environment that allows you to grow and progress as a BETTER trader, not focus on BECOMING a GOOD trader (implying that you are a bad one). When I work with individuals I often hear the following: “If I would just do this I would become a good trader” or “If I had your discipline I would be a able to make money.” These statements are grounded in a sense of doubt and fear. Instead, these statements should be replaced with “I am becoming a BETTER trader because I know the market cannot hurt me” AND “I am becoming a BETTER trader the more I stick with my rules.” See the difference between the two? One is focused on the joy of progress; the other on the fear of not being good enough. Are you focused on progress or failure? Listen to yourself and you will quickly figure it out. It is EASY to get down on yourself and much HARDER to remain positive in the face of adversity.
George Soros doesn’t need an introduction. He is a living trading legend. Here are some of the smartest things he has ever said about markets. His thoughts are in brown.
1. Perceptions affect prices and prices affect perceptions
I believe that market prices are always wrong in the sense that they present a biased view of the future. But distortion works in both directions: not only do market participants operate with a bias, but their bias can also influence the course of events.
For instance, the stock market is generally believed to anticipate recessions, it would be more correct to say that it can help to precipitate them. Thus I replace the assertion that markets are always right with two others: I) Markets are always biased in one direction or another; II) Markets can influence the events that they anticipate.
As long as the bias is self-reinforcing, expectations rise even faster than stock prices.
Nowhere is the role of expectations more clearly visible than in financial markets. Buy and sell decisions are based on expectations about future prices, and future prices, in turn are contingent on present buy and sell decisions.
2. On Reflexivity
Fundamental analysis seeks to establish how underlying values are reflected in stock prices, whereas the theory of reflexivity shows how stock prices can influence underlying values. One provides a static picture, the other a dynamic one.
Sometimes prices change before fundamentals change. Sometimes fundamentals change before prices change. Price is what pays and until expectations change, prices don’t change. What causes expectations to change? – it could be change in fundamentals or change in prices. So what I am saying is that sometimes prices could be manipulated to change expectations, which will fuel further price momentum in a self-reinforcing way.
3. “Once a trend is established it tends to persist and to run its full course.” – Sentiment changes slowly in trending markets (up or down) and extremely fast in choppy, range-bound markets.
4. “When a long-term trend loses it’s momentum, short-term volatility tends to rise. It is easy to see why that should be so: the trend-following crowd is disoriented.” Read More
Most of the time, you want to own the stock before it breaks out, then sell it to the momentum players after it breaks out. If you buy breakouts, realize that professional traders are handing off their positions to you in order to test the strength of the trend. They will typically buy it back below the breakout point—which is typically where you will set your stop when you buy a breakout. Greed comes into play when the stock breaks out again, and the momentum players are forced to chase it and “pay up” for the stock. Be aware of how trends are established and use that to your advantage to enter and exit positions.
Embracing your opinion leads to financial ruin. When you find yourself rationalizing or justifying a decline by saying things like, “They are just shaking out weak hands here,” or “The market makers are just dropping the bid here,” then you are embracing your opinion. Don’t hang onto a loser. Cut your losses. You can always get back in.
Unfortunately, discipline is typically not learned until you have wiped out a trading account. Until you have wiped out an account, you typically think it cannot happen to you. It is precisely that attitude that makes you hold onto losers and rationalize them all the way into the ground.
Siphoning out your trading profits each month and sticking them in a money market account is a good practice. This action helps to focus your attitude that this is a business, and your business should generate profits on a monthly basis.
“Professional traders only place a small portion of their assets into 1 position. Or if they take on a large position, then they strictly limit their risk to 1-2% of their current equity. Amateurs typically place a large portion of their assets into 1 position, and they give it “room to move” in case they are actually right. This type of situation creates emotions that ruin accounts, while professionals are able to make decisions and cut losses because they strictly define their risk.”
In trading, and in anything in life, we need to be focus and committed to achieving excellence in what ever we do. However, you need to remember that there will always be more than one way to reach a destination. Yes, let me repeat, there will always be more than one way to achieving a goal.
Stay committed to your decisions but stay flexible in your approach.
If you believe what I say, and you should at least try to, then you’ll realise that the methodology that you’ve learnt about trading is the only thing you know at the moment. And, unfortunately for many, you don’t know what you don’t know.
To overcome that, you need to be hungry and curious about learning new markets and new trading systems all the time – continuous development. Nonetheless, you’ll also need to be discipline and structured about how you learn them. The last thing you want to do is to be jumping around trading everything that moves in the market place. Do you get my point?
Once you become a flexible trader, you can trade anything you want and make as much money (from the market) as you like. Right?
Now, the key question. If the market has no influence on you (as to how you make money), how can it have any influence on you now?
Chairman Bernanke’s remarks in Boston were dovish on the outlook for interest rates, but did little to counter the notion that tapering will occur relatively soon. In some ways his comments echoed those from earlier in summer and spring: distinguishing the asset purchase policy from the zero rate policy, and emphasizing that decisions on one policy won’t necessarily impact decisions for the other policy. However, yesterday his remarks went further, by laying out the reasons for why rates won’t rise dramatically in the medium-term. The reason for this subtle change in emphasis is the revised forecasts released after the most recent FOMC meeting, which showed a quicker move down in the unemployment rate. Irrespective of tapering concerns, this change in forecasts makes it harder for the Chairman to argue that rates will be low for a very long time. The approach he took yesterday mirrored some recent Fed research in arguing that the unemployment rate understates the degree of labor market slack. Ultimately, however, the emerging communications challenge was apparent to the FOMC even last year as they debated the threshold guidance: only laying out conditions for the first rate hike is an incomplete means to ensuring accommodative financial conditions, as the market may thereafter price an aggressive path of tightening. In any event, unlike tapering, tightening will likely be a choice for Bernanke’s successor, so what he says about the conditions for tightening are only indicative of the thinking that may prevail at that time. Read More
1) the recognition that our thinking and our emotions are intertwined and both influence our perception and judgment that leads to our decisions and actions (this view also happens to be consistent what the leading brain scientists are now saying)
2) much of our motivation – the intertwined thinking/emotion that drives our behavior – is actually subconscious, e.g. we assume we are trading the market but on other levels we are also trading our P&L and our feelings about our P&L (and what our P&L represents to us) is just one example.
3) when we understand (self-awareness) the underlying/subconscious motivation for our behavior we are in a better position to choose an alternative.
Obviously, nothing can guarantee change or improvement (contrary to many claims made by pseudo “experts”), but at least an approach that emphasizes expansion of awareness puts the odds in your favor.
And I have to play the probabilities here. Because more people tend to respond to a change process that includes an emphasis on self-awareness, I choose to use this approach in my own trading and in my coaching….it simply has the highest probability of actually helping.