Innerworth featured articles

[qxr1011]

Changing Your Personality to Suit Your Trading Lifestyle.

Many successful traders have entered trading after a successful career in another field. However, achieving success in the markets is quite different from achieving success in other occupations. The markets do not necessarily reward the personality traits that are developed and rewarded in other occupations. Do you have personality characteristics that have gotten you ahead in the world, but may not get you ahead in the markets?

If you do, you may have to work on changing some of these traits to be a successful trader.

Let's review some of the personality traits that may not be conducive to trading. Take conformity, for example. When working your way up the corporate ladder, it's vital to be able to perceive how you fit into the organization. One must accurately perceive what his or her superiors view as the direction for the company, regardless of whether one agrees with this direction or not. Conformity is often rewarded over independent thinking and independence. If you have worked in a corporate setting, you are probably aware of how everyone seems to dislike the person who is always questioning group decisions and seems to self-promote his own ideas at the expense of the group. In contrast, conformity is a limitation rather than an asset when it comes to trading. Ideally, traders look only within themselves for the ultimate answers. They don't rely on the opinions of others, are skeptical of prevailing opinions, and continuously try to find a new trading plan before everyone else, so they can beat the crowd, rather than follow them.

Related to conformity is sociability. In many occupations, people work with other people. They must get along with others, perceive their needs, and sometimes yield to the needs of others at the expense of their own needs. Successful traders, in contrast, are rugged individualists. Many times, sociability and trading don't mix. A trader must make independent decisions, which again, means looking within themselves to find the right answers. It may also mean spending a great deal of time alone studying the markets and preparing for trades, rather than spending time with other people (which is also true of some other occupations). Traders must find the right balance between fulfilling the need for social contact and finding the time to spend alone to focus on one's trading passion.

Traders are creative people, who take personal risks, think independently, and intensely focus on trading problems to develop innovative solutions. Creativity requires independent thinking, non-conformity, and social isolation. In many occupations, such traits are not viewed as desirable, so you may not have developed these traits. But, if you trade full time, it is useful to develop some of these traits to some extent. You don't have to drastically change your personality, but be aware that some of the traits that got one ahead in other occupations don't get you ahead as a trader.

[qxr1011]

Two Emotional Tendencies Driving Market Decisions

A basic premise of technical analysis is that fear and greed drive market prices. These emotions influence trading decisions regarding whether to buy or sell. When investors fear prices will decrease, they sell. When they fear an opportunity to make a profit may be missed, they buy without good reason, according to Dr. Martin Pring. Greed, in contrast, arises from a combination of overconfidence and a desire to achieve profitable results in the shortest possible time frame. When traders perceive they can make a quick and easy profit, they buy.

Dr. Hersh Shefrin, a prominent behavioral finance researcher, argues that fear and greed do not drive financial markets entirely.

Fear does indeed play a role, but traders react less to greed and more to hope. When traders are fearful, they focus on unfavorable aspects of a trade. For example, during a losing trade, one thinks, "I wonder how much further the price can go against me? Can things get any worse?" Hope is the polar opposite of fear. When traders feel hope, they focus on favorable aspects of a trade. They think, "I wonder how much money I'm going to make on this trade?" They count on making money, rather than continually worrying about how much money they are going to lose.

People trade to fulfill personal or financial goals, according to Dr. Shefrin. When traders decide to make an investment, they hope it will help them achieve their goals. If the investment is successful, hope turns into pride. However, if an investment is not successful, hope turns into fear, and fear turns into regret. The tendency to experience hope when evaluating investment alternatives is quite different from the tendency to experience fear, but both tendencies exist in everyone. Dr. Lola Lopes, however, suggests that one tendency predominates over the other. There are individual differences; some people tend to be optimistic and hopeful while others are pessimistic and fearful. Dr. Lopes believes that a need for security may underlie these differences. Some people do not view their surroundings as stable and secure. They believe that their environment can change at any minute, so they are on the lookout for any sign that may indicate change, which in turn could lead to instability and possibly chaos. These individuals believe they cannot tolerate an unstable environment, so they avoid it at all costs. This leads them to be on the lookout for a loss. They constantly fear that they may lose money. In contrast, individuals who believe that their environment is safe and stable aren't very concerned about potential changes or possible instability. They believe they can cope with any possible change. This allows them the freedom to focus solely on the profit potential of an investment. They are optimistic and believe they are going to make a great deal of money. It's optimal to be in the middle of these two extremes. Nevertheless, emotions clearly influence trading decisions. But remember, it's not just fear and greed, but hope as well.

[qxr1011]

Investing and trading decisions are always made in anticipation of future price action. If we put a magnifying glass to the process, we see that the investor or trader forms a hypothesis and then aims to implement his trading plan in accordance with it.

Daytraders can go through this process within seconds, in anticipation of the immediate future, while long-term investors will tend to dedicate more time in forming their hypotheses, in anticipation of the long-term future.

In either case, skepticism often plays a role in forming a hypothesis about what future price action will be. For example, suppose an investor initially hypothesizes that interest rates are due to rise within the next 2-3 years. In an attempt to be prudent and objective, the investor might identify reasons for why interest rates may not rise. And he may then skeptically focus on these reasons, deciding to avoid an investment that would benefit from rising interest rates. This type of thought pattern tends to be common among intermediate traders who've experienced how the markets can sometimes contradict what they firmly believed would have happened. In extreme cases, some traders even end up struggling with the inability to form hypotheses they firmly believe in, and therefore can't make decisions to act on trade or investment opportunities.

In forming hypotheses, successful and experienced traders tend to be more optimistic, in line with their winning attitudes. They understand that a general hypothesis about economic data or market sentiment will often turn out to be true in the long run, even though they may be able to identify certain details that contradict the hypothesis today. The knowledge that supports this understanding is that of mass psychology and how price patterns in the markets reflect such psychology.

In exercising your contrarian way of thought and techniques, the key is not to take a contrary stance to what the masses believe, but to take a contrary stance to the actions their beliefs translate into. You need to be able to see economic and market issues just as mass psychology would dictate, and then to use your contrarian thinking to make your trading and investing decisions.

It's very important to properly control any skepticism while forming hypotheses. Instead, get an optimistic feel for what will happen in the future and then use contrarian technique to make your final decisions.

[flipper]

ссылку не дадите?

интересные статьи, но ведт ничего нового в них нет:)

[qxr1011]

http://www.innerworth.com

Мне это присылают по почте.

Конечно ничего нового там нет, а где в треидинге есть что-то новое?

Но иногда статейки бывают интересные...

[qxr1011]

When trying to develop skills in a new area, people often think in terms of analogies. An analogy can be used to integrate new information with old information. When one uses an analogy, one infers that if two or more things are similar in some respects, they are similar in other respects. There's a very human tendency to use previously learned skills when trying to develop new skills. It's easier to understand a new topic if it can be related to a topic that one already understands. This is especially true of trading. Trading the markets is hard to do and it's easier to get a handle on it if we relate it to topics we already understand: that is, we can more easily understand trading by thinking in terms of analogies.

We've presented many analogies to trading: Trading is like playing sports; technical analysis is an art; traders are intuitive scientists, or trading is like surfing. Although thinking in terms of analogies helps one understand trading, it's important to remember that one is merely using an analogy as a guide. Don't confuse the analogy with the actual phenomenon you are trying to understand. Trading can be similar to a particular activity, but it is also quite different. Let's review some common trading analogies and consider how they are similar to trading, but also dissimilar.

Scientist: A scientist develops hypotheses about general laws of nature, collects data, and tests the validity of these hypotheses. Traders similarly develop hypotheses about the markets. They try to gauge market sentiment, predict what the market will do, and test out the hypothesis by putting on a trade and seeing what happens. But scientists conduct studies to find basic laws that are repeatable. Scientists have tried to study the markets with little success. Unfortunately, the markets are too random and chaotic. It's important to remember this fact when making a trade. The markets are not as predictable as science requires, so it's not useful to pretend that one can much such predictions. Don't over-analyze and don't strive for predictability. Accept that the markets are unpredictable.

Sports: Trading is a lot like playing sports. Professional athletes are rewarded for having extremely well developed skills. Trading similarly requires well-developed skills. Traders practice, prepare, and get ready to "play" the markets when they see an opportunity. Trading is a lot like playing a sport, but it does require that one learn trading methods that require relatively little physical activity compared to playing sports. And the markets are a little less predictable compared to what the other team or an opponent might do.

Artist: Art is often difficult to understand. Ever see modern art? It's hard to see what makes it art. But it is. It's all a matter of context. Seeing chart patterns that indicate a trading opportunity is an art. When evaluating a chart in the right context, one can see and perceive a pattern that can lead to a big payoff. But trading isn't purely art. It's useful to have an artistic inclination, but artists can afford to let their art speak for itself. Traders need to be accurate in their interpretations of the market or they won't make a profit.

Merchant: Many traders say one needs to operate trading like a business. Merchants are very systematic when it comes to planning and maintaining an inventory, and selling merchandise. But merchants usually have a good idea of what the public needs. Supply and demand in terms of the markets is a little more complicated. Sometimes, fundamental forces of supply and demand have little to do with price movements, and it's important to remember that when trading.

Analogies can be useful when trying to understand trading, but remember, an analogy is merely an analogy. Trading may appear similar to an activity you already understand, but remember it may also be very different.

[qxr1011]

Tools & Concepts

The Trading Plan - Part 1 of 10

Before you try to develop a trading plan, it's essential that you have the tools you'll need. The process itself is complex, which is why you might have great difficulty finding a good guide on to how to develop an effective trading plan. It's critical that you approach the task of developing a plan in a very organized and systematic manner. Part of this organization is to be prepared before you start the process.
You will need to have a good understanding of your trading personality, particularly your strengths and weaknesses as a trader.

Many novice traders might be quick to write this requirement off, claiming that they're very aware of their strengths and weaknesses and that this is not as relevant as it emphasized here. But this is very important, because you'll be using this information to customize your trading plan so that you can more easily manage and execute trades according to it. It tends to be very difficult to come to this understanding by reflection alone. Although self-awareness exercises and meditation can be very helpful in this area, trying to assess the color of something is very difficult if you're looking through differently colored lenses. One of the most effective and quickest ways of getting an effective insight into your trading personality is to take a professional trader's assessment.

It's highly recommended that you do take a professionally developed assessment in addition to engaging in self-awareness exercises and meditation focused around your trading capacities. This is by far the greatest and most important aspect of preparing to develop your custom trading plan.

You'll also need to make sure you've got access to a reliable data source from which you can retrieve all available historical data, to the detailed tick level. You can get this from any good trading platform. The best ones are those through which you can trade direct on the ECNs. From such a platform, you'll usually also be able to get good charting tools, which will be essential to the process of developing your trading plan.

Finally, you'll need to set-up a trade diary for yourself. It's highly recommended that you use one that's either already available or that you've developed in your computer. Try to avoid using a manual or hand-written one because analysis will become tedious and prone to error later on.

[qxr1011]

Analyzing & Understanding Your Trading Personality

The Trading Plan - Part 2 of 10

Prior to moving on to actually developing your trading plan, you'll need to take a little time to focus on analyzing and understanding the results of your trading personality assessment. The reason you want to look at this before you move on is because the way you're going to approach the process of developing the details and specifics of your trading plan is going to depend on this information.

The goal of this exercise is to increase your understanding of your strengths and weaknesses when it comes to trading. Having a sufficient level of understanding will mean that you know what your capacity is for risk management, understand how you respond to stressful situations, know what level of control you have over your emotions, understand whether you're an independent thinker or tend to be heavily influenced by specific or certain types of outside sources. You'll also know how self-confident you are, what can build or break down that confidence, whether you're able to think independently or if that's something you need to work on, and so on.

You're going to use this information to decide how to design your plan. Ideally, it will leverage all your strengths to their full potential and protect you from all your weaknesses. Practically, you'll succeed by having your trading plan customized to your personality to a certain extent, and beyond that, you'll need to separately work on your trading skills to hone your strengths and correct your weaknesses.

For example, you might discover that for whatever reason you have a tendency to panic in stressful situations, which causes you to jump into obviously bad trades and possibly even exit out of good ones. To address this, you can prepare to incorporate some personal rules into your trading plan. You may want to incorporate, for instance, a rule that says you have to wait for 2 or 5 minutes after your decision and before you actually make the trade. You might even have a quick checklist of questions to make sure you're not acting in a panicked way.

Keep in mind that normally, because you have the trading personality you have, you're likely to design your trading plan to mirror your trading personality, weaknesses, biases, and all. This process of analyzing and understanding your trading personality will allow you to consciously steer away from that

[qxr1011]

Developing a Preliminary Proprietary Plan That Works For You

The Trading Plan - Part 4 of 10

If you're committed to the development of your trading plan and you've successfully achieved enough experience with the pre-development steps, you're now well equipped to begin developing the mechanics of your trading plan or set of plans.
From your study of existing methods and systems, you've no doubt found several which appeal to you in some way. And since you already created and studied variations of these, you've already begun the process of development.

Now, you'll need to combine what you perceive to be the advantageous aspects of your preferred methods and any variations that you came up with. As you combine methods, be sure that you're not creating a conflict within the system - for example, a certain pattern potentially having more than one meaning or signal. You'll usually find that you will come across such situations. In these cases, you need to find out what factors are causing the conflict and either eliminate one or more of the causes or add another rule to your method that blocks the conflict.
One of the greatest difficulties traders have at this stage in development is that they lack the confidence in their abilities. The key is to be confident and just go for it. Even though what you're developing now is not your final trading plan, you should strive to come as close as you can to it.

Many traders tend to come up with qualitative ways of evaluating a price pattern and include that into their plan as "points of consideration." This is exactly what you want to steer away from. One of the reasons you're going through this process is to reduce the errors made during last-minute decisions. You must be able to quantify your qualitative evaluations. If you cannot find a quantitative method that gives you the same information, leave it out of your plan.

As you go through the process, you'll discover that no matter how many methods you combine or use, you will never achieve perfect projections - there will always be a number of unknown factors that define the future as being undetermined. This is to be expected. Thinking about and including concepts of probability and statistics in your methods will help address this issue. If you haven't dealt with these topics before, it's highly recommended that you learn more about them before proceeding.

[VAVA]

А это все к чему?

[qxr1011]

Это просто так для общего развития...)

[qxr1011]

A common problem among traders and investors is the tendency to sell profitable trades prematurely and hold losing trades unnecessarily. Once we have held a losing trade for a long time, we have a strong need to justify our actions. This need for justification is so powerful that we often change our opinions because of it. We start to believe that the losing trade will turn around, rather than admit we have spent money and psychological effort for no good reason. This is called the insufficient justification effect.
A classic study in social psychology illustrates the powerful impact insufficient justification has on opinions. Research participants were asked to complete a very boring 1-hour task in which they had to look at pictures and make decisions about them.

After completing the task, all participants agreed it was boring. Participants were then persuaded to recruit other participants for the task. They were asked to give a "hard sell" in which they described how fun and interesting the boring task was. Half of the participants were given $1 for making the sales pitch while half were given $200. After delivering the sales pitch, all participants were again asked to rate how interesting they thought the task was. People given $200 didn't change their minds. They still thought the task was boring. People given $1, in contrast, changed their minds; they thought the task was more interesting than they had previously thought. This finding shows the insufficient justification effect. People have a strong need to maintain consistency between their beliefs and actions. When there is a discrepancy, or cognitive dissonance, something must change for consonance to be restored. In this case, since participants had already made the sales pitch, they couldn't change their inconsistent actions, they had to change their opinions. They thought, "I did the sales pitch in which I argued that a very boring task was interesting for only $1. Why did I do that? That doesn't make sense. I guess the task was not as boring as I had thought." People are motivated to align their beliefs and actions. Participants who were paid $200 didn't have to justify their inconsistent actions. They argued that the boring task was interesting because they were paid sufficiently to do so.

The psychological processes of logical consistency and dissonance reduction influence trading decisions as well. If one holds a losing trade for a long time, for example, one may think, "I have held this trade for a long time yet it is losing money. Why am I doing that? Why have I expended so much money and psychological energy? I must truly believe it is going to turn around." There is a strong need to justify our actions. It's especially difficult when we put our self-esteem on the line, such as when we also think, "If I admit I'm wrong, I'm a bad trader. I have to hold on to this trade." To maintain logical consistency and reduce cognitive dissonance, you must hold on to the losing trade. One way to combat this tendency is to accept a set of beliefs that will allow you to sell your position, such as "A good trader cuts losses and I'm a good trader" or "Many times my trading strategy will fail and I must cut my losses before I make them worse." It's also useful to realize that it is difficult to take action in the midst of a losing trade. Some trading coaches suggest having a clearly defined exit strategy, such as a stop loss point, as a preventative measure. Once you engage in self-justification for holding onto a losing trade, it's hard to beat it. By taking a preventative measure, you can close out the losing trade before self-justification processes take hold. It's useful to consider the insufficient justification effect. There may be times when you engage in poor decisions to justify your actions or to maintain your self-image. Try to identify these times and try to combat them.

[qxr1011]

The next time someone tells you he can teach you the golden rules of trading, look him in the eye and laugh, just as any other successful and experienced trader would do. Any really good trader knows that there are no rules when it comes to trading. Your trading plan comes closest to anything that could even remotely resemble a set of rules, and you're the master of your trading plan.
In studying and practicing the development of trading plans, you've most likely already learned that it's critical that your plan be designed to work with your trading personality.

You've also probably come to the conclusion that you have to build your plan from scratch, based only on your ideas.

By observing the different trading plans used by successful traders, you'll find that the closer the trading plan is tailored to the individual's personality, the more successful it is, and the more comfortable the trader feels with it. You'll also notice that although there may be some similarities amongst the plans, there is no specific set of "rules," or to-do list that's consistently a part of every plan. The most consistent thread of similarity you'll find is that successful trading plans are developed to work with the trader's personality and style.

Since trading requires interpreting markets and patterns, a trader's personality has a great deal of influence on his trading decisions. The same set of "rules" may work for certain traders and yet be detrimental for others. Some traders will often consider a colleague's methodology and approach silly or ineffective, even if that colleague happens to be making more profit than they are. This is because the other person's approach doesn't fit their own trading personality and won't work for them.

So if there are no rules, what do you do? How do you establish guidelines for your trading? The answer is that you learn how to think independently, and in terms of what works for you. Whether or not you realize it, you've followed rules most of your life. Enjoy the freedom. Look at the markets any way it suits you, regardless of what the media or any book says. You have to trade according to who you are. Explore different methods of thought and what comes naturally to you. Find your own trading style and apply it.

[qxr1011]

News reporters who cover the stock market have an especially difficult job, since it falls to them each day to explain convincingly why shares have acted as they did. As we all know, sometimes the reason stocks move up or down can be quite baffling. But saying so is not something the reporter can get away with very often. So if a stock falls when there has been seemingly little news to explain it, the reporter usually resorts to that old standby: “profit-taking.”

But who says that news drives stocks? A more intriguing theory, and one that is certainly plausible, is that stocks rise and fall because of cyclical mood swings that we cannot always explain; moreover, the mood on a given day will tend to color our perception of the news rather than the other way around. We’ve all seen days when there was seemingly negative news on the tape, yet the stock market was able to shrug it off. Such was the case recently when Freddie Mac, one of the biggest players in the financial world, was reported to be under criminalinvestigation. Although weakness in Freddie’s stock could devastate the mortgage markets, producing potentially catastrophic fallout for the entire economy, investors hardly missed a beat. The market sold off gently for a couple days, then continued an upward trek that had begun months earlier. This led many to infer that Freddie’s problems were somehow manageable and could be dealt with by a new team of executives. But if news of the criminal probe had come when stocks were in a protracted downtrend, the impact could have been devastating. This is one case where market psychology and the mood of America may have benefited from the tail’s ability to wag the dog.

[qxr1011]

Should I buy? Should I sell? Many traders often focus their efforts on identifying buy and sell signals. The research and analysis they do are geared towards reaching the goal of getting that “bottom line” directive to guide their actions.

Any successful, experienced trader will tell you that although properly identifying buy/sell signals is important, it’s not the key to being successful. Instead, the way you manage each trade is what will determine your success.

Traders who take the bottom line approach tend to believe that the success of their trading activity is dependent on following the right buy/sell signals at the right time. Clearly, it’s important that a trader be able to understand the process of generating signals and to use the methods involved. Realistically though, almost any trader can find a way to generate signals (whether using technical methods already out there, coming up with their own system, or using their platform’s automated signal generation tools).
Any successful, experienced trader will tell you that your trade doesn’t begin and end with a buy or sell. There’s a trade management process involved. For each trade you make, you’re making a group of decisions. The way you manage and time those decisions is what will determine the success of your trade.


Suppose two traders get the same signal at the same time and act on it. One’s trade may result in profits while the other’s results in losses. This could occur because each trader made a combination of additional decisions throughout the process of the trade. These decisions might include scaling in and/or out of the trade, using trailing stop losses, setting profit objectives, waiting, etc. The trader who made the more effective overall combination of decisions will have the better trade results in the end.
It’s very important to regard trading as a process, and to understand that a trader’s efforts need to be focused on the activity of trading itself, as opposed to getting a quick bottom line answer. Because there are many aspects involved in making your trades successful, it’s essential that you educate and train yourself in all the different areas. Learn how to develop better trading plans and analysis methods, and then learn how to apply what you’ve developed to the process of a making a trade – from the original impetus to enter or stay out of a trade to the psychology of managing that trade.