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qxr1011
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A Must Trade:

Непрочитанное сообщение qxr1011 » 19 ноя 2003, 18:33

Sometimes It's Better To Stand Aside

A dream. Pure hope. A winning lottery ticket. These images capture what the masses think of trading. They don't take it seriously, and in the past couple years, they think anyone who trades is wasting their time and money. Unfortunately, many would-be traders don't seem to take trading seriously either. For example, many traders fail to properly set realistic goals. It's quite common to hear a trader proclaim, "My plan is to make $400 a day, so I can make $100,000 a year." Where's the flaw in this kind of thinking? Setting a performance goal based on a specific objective per day compels one to think that he or she must trade every single day, to meet the $400 a day, $100K a year objective. But what if the markets don't move at all on a given day? Is it time to become the range trade specialist? What if the markets are quiet ahead of an important economic or earnings announcement? Is it still a good idea to trade? Sometimes it is better to stay out of the market completely, rather than fail at trading the low probability setups available on a given trading day.

Even if one has the skills to make $400 a day, when opportunities are available, it may not be a good idea to conceptualize your goals in this way. Consider the consequences of such a strategy. Suppose Monday's trading session comes to a close and one's Profit/Loss statement remains unchanged. On Tuesday there will be a strong need to make $800 so as to stay on track with the $400 per day, $100,000 a year goal. But if there are no trading opportunities, the objective again will not be achieved. Not only will you fail to make profitable trades, you'll spend a tremendous amount of your capital on commissions. And your stress level will be elevated as well, potentially starting a never-ending cycle of frustration and disappointment. So after spending hundreds on commissions on Monday, and possibly losing a little capital on poor trading opportunities, what happens if Tuesday is also a poor trading day? At this point, it is quite likely that the majority of the move will take place overnight and a trader will be "forced" to evaluate the market at levels far beyond the previous day's settlement. Inevitably, the market will then move erratically for the first 30 minutes and then "fall asleep" for a number of hours, creating even more frustration, which is further intensified when one continues losing money and falling behind the goal of meeting the $400 a day objective.

Setting more appropriate goals will relieve frustration. It's useful to have a rough idea of how much money you want to make on a given day, but setting a specific dollar amount that you must achieve on any given day is often a hindrance for a novice trader. Research psychologists have found that pushing yourself to achieve a specific goal only works when one has the skills to back it up. In other words, if you have a strong track record in which you have proven that you can make $100,000 a year, then by all means, go for it. However, if you are a novice trader and the most you have made is $15,000 a year, then setting a goal of $100,000 may be unrealistic. You may be setting yourself up for failure. When you fail to reach your goal, you'll feel frustration and disappointment, and may start trading based on your emotions.
Setting a daily goal is even worse. Seasoned professionals suggest taking it one day at a time. Overall, they may aspire to make $100,000 a year, but they know that on any given day, opportunities may be limited. They know how to patiently wait for the opportunities to come to them. They don't impose their will on the market. And that's what traders are doing when they set a performance goal in terms of a specific dollar value per day. They are implicitly thinking, "I must get $400 out of the market today and every single day." But it doesn't matter what you wish for. There may not be enough opportunities to get $400 out of the market on any given day.

How can this potential pitfall be avoided? Remember that you don't have to trade every single day. Winning traders patiently wait for market conditions where they know they can excel. If the market is quiet, they wait for optimal market conditions. They understand that the same quiet market will handsomely reward traders who are patient. They understand that forcing the markets to move to their levels is not a blueprint for success. It's also useful to remember that all that really matters is performance across a series of trades. Many traders can lose 60% of the time, four days a week, but on that fifth day, a winner of many thousands quickly offsets nominal losses accrued across a series of trades.

When you are setting goals, it's vital that you keep them in perspective. Goals are useful when set correctly. Set goals that match your skill level. Shooting for goals that are beyond your skills will frustrate you more than motivate you. Also remember that you can't impose your will on the market. You don't know what market conditions will be until you see what they are. And if optimal conditions aren't there, you can't do much about it. You must accept what the market is willing to give you, which may mean patiently waiting for conditions to change. By doing so, you may not profit every single day, but over the long run, you'll be a consistently profitable trader.
The day will come !

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qxr1011
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Drawn to Complexity:

Непрочитанное сообщение qxr1011 » 20 ноя 2003, 17:11

When Keeping it Simple is Better

In the mid 1980s, Steve Wozniak, the creator of the Apple II computer, was asked about the future of computing. Interestingly, in hindsight, he said he thought people were making too much of the home, or personal, computer. He said that many simple tasks, such as organizing one's recipes, are better left to an old-fashioned card file, rather than using a complex computer program. He made his point by recalling an incident that happened when he returned to college to earn his BSEE degree. He took along an Apple II, but he spent more time using it to do tasks that he could have done more easily with a less complex method. Now, Steve didn't anticipate the widespread popularity of the Internet, and computers these days can do tasks more easily than those of even a decade ago. But there's a solid lesson in this anecdote: Sometimes complexity is a distraction and it's much better to keep things simple.

In these modern times, we seem to be drawn to technology and to the complexity it may bring. But is technology and complexity always better? For example, do we really need to store our appointments and address book on a PDA? Is it really more efficient? When it comes to trading, technology has indeed helped. Real time charts are useful for analysis, and it's vital to have summary data of current market conditions immediately available. But seasoned traders warn not to get too wrapped up in all the complexity. Many seasoned traders note that one can just look at price and volume and make huge profits in the markets, which is quite the opposite of what one might think after having read popular trading magazines touting overly complex indicators.

For anyone who aced introductory statistics in college, some of the "statistical" indicators presented in trading books and magazines seem unnecessarily complicated. It's as if someone went out and made up complicated formulae to impress people who equate complexity with innovation. There are numerous examples of common indicators that summarize basic market information, yet seem unnecessarily complex, but let's look at how even a seemingly simple indicator should be examined in even more basic terms. Take the simple moving average, for example. What is an average, or mean? What does it do? It does nothing more than describe the "center" of a distribution. The first lesson a statistics professor teaches is that the mean is only a good measure of central tendency when there are no outliers or extreme scores. An extreme score biases the mean. In other words, if there is a big price spike anywhere in the series of prices that go into the average, it will bias the estimate. The lesson: Remember what a mean is, and thus a moving average, and keep in mind that it is doing nothing more that summarizing a series of prices. Also keep in mind that under certain conditions, the mean is a fallible measure of central tendency. Thus, when you look at a moving average, always look at the basic information that went into its calculation. Remember to move to the chart at a higher timeframe to see the actual time points that were used to calculate that average. Don't get overly wrapped up in all the complexity. The point is that when looking at any statistic, such as a simple moving average, it's important to remember that it is doing nothing more than summarizing basic price information. Don't think that a statistical indicator does something magical.

With all the complex indicators out there, it's easy to believe, however, that some indicators are magic. But all any indicator does is describe a series of numbers. It is useful to remember a basic data analytic principle: Look at the original values that went into calculating the summary statistic. Don't focus only on the summary statistic itself. And also remember that complex isn't always better. Many times it is useful to keep things simple.
The day will come !

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qxr1011
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The Emotional Whipsaw

Непрочитанное сообщение qxr1011 » 24 ноя 2003, 17:14

Participating in the stock market often creates an emotional rollercoaster in which one moves from the dizzying heights of hope and excitement down to the dreary lows of frustration and disappointment. For example, one minute you can go long a stock, hoping to make a huge profit, only to see the price drop a few minutes later. It's disappointing. It can be painful. There's a natural human tendency to make the right decisions and to avoid loss, and so when most traders see the price fall hard, it hurts. The immediate reaction is to just dump the trade, and by doing so, end the emotional pain. Some traders know when to quit and stand aside until they gain their composure. Other traders can't stay away. The stock rebounds immediately; they jump back in too soon, and it falls hard again. They sell, and face even more frustration when they realize they sold near the low of the move. At this point, they don't know what to do. It's an emotional whipsaw where they are completely confused and uncertain. At an extreme, a destructive cycle of buying high and selling low can occur in which the trader's emotions are a jumble of anger, frustration, disappointment, helplessness, and despair. It's essential that you identify the possibility that you may face an emotional whipsaw and take steps to minimize its influence.

Besides producing a confusing mix of emotions, the emotional whipsaw creates a complete breakdown of trading discipline. Whenever we enter a trade, we have an expectation that the market will move in our favor. But we must always acknowledge that it may not and be prepared for it. The emotional whipsaw occurs when traders do not follow a well-defined trading plan. They enter a trade without clear profit objectives, upfront estimates or risk, and a clearly defined exit strategy. Without a clear plan, they let their emotions lead them rather than their logic. For example, they may enter a trade without a sound reason for anticipating the price movement. Their decision to enter may be based only on a vaguely defined gut instinct. The trouble with using only your gut as a buy signal is that you tend to put your ego and self-esteem on the line with your money. One tends to want to be right and implicitly believes, "If this trade fails, it proves that I don't know what I'm doing." So when the trade goes against the trader, what does he or she feel? Extreme defeat and despair. Since personal, psychological stakes are involved, the feelings of frustration and disappointment are especially pronounced. But trading should be much less emotional. In contrast, consider the person who uses a more objective approach. For example, if one uses a technical indicator as a basis for a trading plan, and is aware of its limitations, little ego is on the line. Sometimes an indicator works and sometimes it does not. It has nothing to do with you or your self esteem. It's just a matter of chance whether it will work on a given trade. So there is no reason to feel poorly about yourself when a trade doesn't go your way. You should just execute the trade mechanically, and when it appears to be going against you, close it and move on. There is no need to let self-esteem and emotions get in the way of following the plan.

Allowing your emotions to influence your trading decisions is one of the surest ways of amassing trading losses. It's vital for survival to avoid this detrimental emotional rollercoaster ride. It's wise to recognize a potential emotional whipsaw and make sure you deal with it. Make sure you enter a trade with a clearly defined plan so that there are no emotions involved. Enter a trade in a certain range, set a protective stop, and if you get stopped out, don't ridicule yourself, just look for another trade. Gain your composure. It's like taking a time out and counting from one to ten when you are angry. Perhaps after some time away from the trade, you can reevaluate the trade setup in a new light. Re-study the original setup and see if it still looks like a good trade. If it still looks good, specify entry and exit criteria and be patient about getting back in. The time spent out of the market gives you a chance to get your emotions under control. Through clear planning, you can keep your emotions out of the picture, and trade objectively and logically.
The day will come !

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qxr1011
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The Gambling Analogy:

Непрочитанное сообщение qxr1011 » 28 ноя 2003, 18:01

Consider the Advantages

"Trading is like gambling." Some say trading "is" gambling, but for now, let's just focus on the proposition that trading is analogous to gambling. An analogy is a comparison between two things that are similar in some respects. People use analogies to explain a complicated topic, or to understand a complicated topic. Trading must be complicated, since it seems that 95% of those who attempt to trade end up failing. It's either complicated, and thus, we need to use an analogy to understand it, or it's an impossible task, like trying to survive jumping off of a high cliff. Some people survive the fall, but most do not. If it's impossible, an analogy isn't going to give us much help. But assuming that trading for a living is viable under the right conditions, most novice traders are willing to use analogies to understand complex trading issues.

In considering any analogy, it's essential to avoid confusing the analogy with the actual phenomenon that one is trying to understand: Trading is like gambling, but it's not exactly like gambling. A dictionary definition of gambling is "playing games of chance or betting in the hope of winning money." At Innerworth, we sometimes get letters rebuking us for propagating the "myth" that "trading is gambling." Now look at that dictionary definition. Trading is indeed a "game of chance," since it is not a 100% certainty that one can put on a trade (or a long-term investment for that matter) and be guaranteed a profit. And why do you trade (or invest)? You do so with the "hope of winning money." So from a purely semantic argument, trading is gambling. "But casinos are the only officially permitted institutions that allow legal gambling and the institutions that oversee trading and investing are quit different," is what critics of the gambling analogy shout with fervor. All right. We'll give you that one. Here's another debating point we will give you. In the "Diagnostic and Statistical Manual of Mental Disorders," the "bible" used as a reference by all mental health professionals, there is a disorder called "pathological gambling." It usually refers to the base aspects of gambling. Gambling can be an addiction, like alcoholism, and no reference is made to "pathological trading." So I guess that means that the society as a whole has yet to recognize a pathological version of trading. If it's so important to you to argue to your friends and loved ones that you are not gambling by trading, there's some ammunition. But whatever you call it, it's just a form of denial, because like it or not, you are gambling. So now that we've temporarily kept the critics at bay, let's get down to business. How is trading like gambling? And how can using this analogy help you understand trading?

No one has developed the ultimate signal or indicator that allows a trader to anticipate the next market move with 100% certainty. There's some risk involved. And again, that's what makes it gambling. So the gambling analogy is useful. The fact that you can lose money should be at the forefront of your mind; you aren't putting your money in an FDIC insured savings account. Once you acknowledge risk, you can take precautions to protect yourself. Unless you want to act like a "pathological" addictive trader, it's wise to define your risk clearly before entering a trade, take measures to protect yourself, and set up an exit strategy, should fate move against you. Since trading is a matter of probabilities, it's to your advantage to limit your risk to a small percentage of your total trading capital on any single trade, for example. That will help you survive a severe drawdown and stay in the game. You'll be acting like a professional gambler rather than an amateur.

Perhaps the greatest value of the gambling analogy is the mindset it offers the trader. If you look at trading as a game of chance, it allows you to think in terms of probabilities: trading is a matter of capitalizing on chance across a series of trades. The outcome of a single trade is of little importance, since if you make enough trades, you end up with an overall profit. Mark Douglas wrote one of the best expositions of this thinking strategy in "Trading in the Zone." When you play some games of chance, the distribution of all possible outcomes can be represented by a probability distribution in which some outcomes are more likely than others. For example, when you throw a pair of dice, there are 36 ways for the dice to fall, and about a 3% chance of getting a 2 or 12, and about a 20% chance of getting a 7. Traders try to find the high probability trades; it's like betting on getting a 7. You may try for a 7, but there's still a small chance of getting a 2 or a 12. But the more times you throw the dice, the more the law of averages works in your favor. That is, about 20% of the time you'll get a 7, if you throw the dice enough times (but theoretically, there's still a chance you will never get a 7). Throwing dice is analogous to using a trading strategy with a proven track record. If you use a trading strategy with a historical track record of 80%, for example, you should expect it to work 80% of the time. It's all a matter of executing the strategy effortlessly and mechanically over and over so that the odds will work in your favor. (But unlike casino gambling, where someone knows the odds, and the "problem space" is essentially identical time after time, a trading strategy is rarely executed in an invariant problem space; history only repeats itself when it does. The gambling analogy in this instance doesn't hold. The professional gambler has better odds because theoretical laws of probability apply to traditional games of chance, but not to trading strategies.)

When you work under the assumption that you are doing nothing more than playing a game of chance, where the more trades you execute, the more the outcomes will follow a probability distribution where the outcomes are skewed in your favor, the more confident you will feel. As you execute the strategy over and over, you can remind yourself, "I'll trust my strategy, repeat it over and over, and the odds will work for me." The gambling analogy in this case gives you an edge. It puts trading in manageable terms. You'll feel more relaxed, confident, and trade effortlessly in a peak performance state. In the end, there are more advantages to viewing trading as gambling than not. By doing so, you will acknowledge the potential risk immediately, and take steps to minimize it. At the same time, you'll also be able to use the thinking strategy of looking at trading as a matter of probabilities. The relaxed, confident approach you will achieve from this mindset will give you a mental edge.
The day will come !

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qxr1011
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Striving for Consistency

Непрочитанное сообщение qxr1011 » 03 дек 2003, 16:17

When it comes to trading, profitability is frequently equated with consistency. The novice trader is often inconsistent in terms of profits. This inconsistency is reflected in a jagged equity curve that may soar to the heights of profitability but frequently plunges deeply into the red. The consistently profitable trader, in contrast, has a smooth curve that grows exponentially upward. Trading consistently means approaching each trade in a logical, well-prepared, and decisive manner. Striving for consistency should be a main objective, especially for novice traders.

There's an old saying that applies to trading, "First learn the rules and then learn how to break them." Experienced traders may not follow rules consistently, but they know what the so-called "rules" are and when to break them. Nevertheless, it's useful for the novice trader to try to follow conventional wisdom at first. It's wise to learn how to follow a method consistently and trade profitably before testing the limits.

The rationale for learning to trade consistently is based on the idea that trading profitably is a matter of probabilities. If you trade a sound trading method with a strong track record, success is merely a matter of odds: If you make enough trades, the odds should work in your favor, and you'll take home profits. It's like rolling dice or flipping a coin. For example, if a coin is flipped over and over again under identical conditions, it will tend to come up heads 50% of the time. But the key to getting heads 50% of the time is to repeat the flip of the coin "under identical conditions." When one views trading as analogous to flipping a coin, the theoretical probability of getting heads is the best-case scenario. One achieves the maximum wins by flipping the coin under identical conditions. However, finding "identical conditions" when trading the markets is difficult. Market conditions are hardly ever consistent, and the adept trader is always on the lookout for subtle changes. You cannot control the markets. One must take what the markets have to offer, and thus, one must look elsewhere when searching for consistency.

A source of inconsistency that you can control lies within yourself. You can strive for consistency and try to eliminate inconsistently by looking at the way you trade. The first step in cultivating a consistent trading style is identifying sources of inconsistency. Remember the analogy of flipping a coin. You must flip the coin under identical conditions, time after time to maximize profits. So how can you trade consistently time after time? One way is to limit your risk in a consistent manner. For example, only risk about 2% of your trading capital on each trade. Novice traders have a tendency to get a little excited when they have hit upon a winning streak, and increase the amount they risk on a trade to take advantage of the streak. This approach produces the jagged equity curve, however, and a rollercoaster ride of extreme ups and downs in terms of profits. By keeping your risk constant, you can introduce consistency into your trading (Again, a seasoned trader may adjust risk depending on the quality of the trade setup. That's taking a big risk, but a seasoned trader usually has the skills to make up the losses should the trade be a loser. Novices, on the other hand, are better off in the long run taking precautions).

What other sources of inconsistency can traders eliminate? Another source of inconsistency is the market conditions under which a trade is executed. Although it is necessary for a top-notch trader to master a variety of market conditions, it's wise for novice traders to stick with what they know. Some traders, for example, know they are most profitable when trading in a bull market two hours after the open. This may not be a very challenging set of conditions in which to hone one's skills, but it is worthwhile when starting out to trade under these ideal conditions, or trade in whatever conditions where one consistently finds success. Your initial goal as a novice should be establishing consistency. Once this criterion is met, the novice can build skills in a variety of market conditions. But initially, it's useful to trade under conditions where success is assured. There are other sources of inconsistency requiring standardization. For example, it's necessary to prepare for trades and develop a scrupulously detailed trading plan in which you know where to enter and when to exit. (And it's also important to stick with a trading plan, instead of following the plan only when you feel like it.) Many novices fail to achieve consistent profits because they impulsively put on trades rather than following a detailed plan. Careful planning reduces impulsive over-trading and produces consistent trading.

All traders want to be profitable, but that's especially difficult when learning how to trade. One of the keys to success as a novice is to strive for consistency. Consistency not only gives you financial profits, but psychological profits as well. Once you've achieved consistency, you'll develop a stronger sense of self-confidence, and then you will be ready to trade consistently with a variety of trading strategies across varying market conditions.
The day will come !

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qxr1011
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The Advertiser's Dream

Непрочитанное сообщение qxr1011 » 05 дек 2003, 17:04

Image is everything. We are bombarded with advertising images on radio, television, and more recently, on our computer screens. These images work on both conscious and subconscious levels. We see an attractive model next to a racy new sports car and the message is that we too can have a desirable mate if we buy the new car. Sometimes we aren't entirely aware of how these powerful images may influence our behavior. In a classic psychology study, for example, Dr. Robert Zajonc demonstrated that mere exposure to an image increased subjects' preference for it. The more we see an image, the more we like it. The image of a company or stock can also have an impact on our trading decisions. Whether it is seeing commercials touting how a company is changing the world on Sunday morning talk shows or just financial analysts talking up a stock, these images impact our preference for the stock. Upon seeing these advertising images, we may irrationally believe the stock has more growth potential than it actually does.

A study by Dr. Donald MacGregor and colleagues illustrates how the image of a company can bias decision-making. The better the company image, the higher the perceived growth potential. In their study, a group of advanced business students was asked to make decisions regarding a set of industry groups on the New York Stock Exchange. Examples of the industry groups were computer software, pharmaceuticals, railroads, and managed care. Unknown to the participants, half of the industry groups consisted of high performing stocks (greater than 20% return) while the other half consisted of low performing stocks. Participants rated each industry group on whether they had a positive (for example, value, activity, and strength) versus negative image. They were also asked to estimate the rate of return for each industry group. The more highly an industry group was rated on value, activity, and strength, the higher the estimated return. However, a company's image had no relation to actual market performance, as measured by weighted average returns for the industry group. In other words, participants let the image of the company influence their forecasts.

This study shows how images can have a powerful influence on our decisions. We encounter many images in our everyday lives, and it's essential that we identify the potential influence of these images on our judgments. Don't let these images bias your price forecasts. Be aware that, sometimes, you may have a positive image of a company that may override your logic. Try to minimize the influence of these attitudes. Reevaluate your trading plan and make sure that you are basing your decisions on specific evidence, rather than hype or image.
The day will come !

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qxr1011
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Take Responsibility and Take Control

Непрочитанное сообщение qxr1011 » 12 дек 2003, 17:04

The prominent psychologist Dr. Julian Rotter noted that there are basically two ways to understand and interpret events in one's life: One can attribute the cause of events to internal forces, such as hard work, talent, or ability, or one can attribute the cause to external forces, such as luck or fate. When one looks for internal forces, one tends to take full and complete responsibility for an outcome. For example, one may say, "I made a profit on the trade because I prepared properly, waited for the right signals, and traded my plan." That's an explanation based on internal forces. For a winning trade, it's easy to explain the outcome with internal forces. We have a natural tendency to build ourselves up and enhance our ego when we win, so it makes us feel good when we do well and believe it is due to our talents and skills. But what about a losing trade? When we lose, it's also due to our talents and skills, but in this case, it may be a lack of talent and skills. Such a possibility is harder to accept. When faced with a defeat, most people suddenly switch from looking for internal forces to looking for external forces: "The market conditions changed too quickly. The market makers are manipulating the price again. I shouldn't have taken the advice offered by that uninformed analyst. I was unlucky." It's easier to find an excuse than take full responsibility when faced with a loss. It's at these times when most of us tend to look at the world in a self-serving way, attributing our success to internal personal characteristics, but our failures to external situational causes. However, there are advantages to bucking our natural instincts and always taking full responsibility for both our triumphs and defeats: One gains a sense of power and complete control.

In a study of self-help instruction, such as the kind of psychological advice we offer in these Innerworth daily columns, it was found that participants who tended to attribute life outcomes to internal forces were more satisfied and able to use the self-help information to change their lives than people who tended to look for external explanations. They were able to more easily apply the self-help advice to their lives, and felt a sense of power and mastery. Taking responsibility for one's action allows one to gain full control of one's life, and make significant changes. Rather than always looking for excuses and trying to place blame on situational factors, all energy is focused on increasing performance and developing new skills. Traders who don't take full responsibility, in contrast, tend to devote the bulk of their psychological energy to defending themselves against their mistakes. Rather than cultivating an accurate, objective view of the markets, they are easily biased because of an incessant need to protect their egos. An emphasis on external causes for setbacks makes one feel good in the short term, but it hinders performance in the long term. Over time, skills aren't developed, and limited psychological energy is wasted on protecting one's ego. It takes time and energy to find an external reason for a failure. This time is better spent identifying one's flaws and developing new skills to compensate for these deficits.

Taking full responsibility is difficult, especially after a losing trade. It's hard to look at one's faults and limitations. But in the long run, the payoff is greater than the temporary uneasiness one experiences while reviewing one's limitations. In the end, if you look at your faults, acknowledge them, and take full responsibility, you'll be gaining power and control. So take full responsibility and take control.
The day will come !

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qxr1011
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Urges To Follow

Непрочитанное сообщение qxr1011 » 14 дек 2003, 00:29

One of the most difficult things for a trader to learn is when to restrain his or her urges, and when to give them free rein. The reason is that most of your urges come from your viscera, and have little to do with the cold, calculating reasoning that forms the basis for most good trading decisions.
But every once in a while, you get an urge that you ought to follow, because it represents the sum total of everything you’ve learned about trading successfully, and it offers an angle on obtaining a major gain that most other traders haven’t yet seen.

Here are some guidelines to help you discriminate between urges to ignore, and urges to follow:

If It Makes Sense: Emotional urges tend to fly in the face of reason. They’re like betting $1,000 on a single spin of a roulette wheel - they certainly may come up winners, but chances are they won’t. Yet other urges emerge from more rational mental processes that you may not even be aware of, but which are nevertheless valid. When you examine your urges in more detail, you find that some of them accurately take into account the tiniest details of what you know, and conform to your deepest understanding of how the market operates. In short, while all your urges may contain a special kind of inferential leap, there are some that contain reasoning in which you can’t punch any holes.

If It Follows Your Method: The bulk of emotional urges come out of left field, and would be a major departure for you to act on. But a few of your urges actually fit within your trading method. These are worth considering, because they offer the opportunity to tap into a different level of knowledge and awareness without compromising the elements of trading - such as consistency and favorable conditions - that are essential for success.

If It’s Low Risk: Many emotional urges are of the “Damn the Torpedoes” variety - if they turn out poorly, the penalty can be extremely high. These are the kind of urges you’ll do well to resist. But other urges fully incorporate your established risk management and money management strategies. Because there’s no extra downside if one of these urges turns out to be wrong, they may be worth testing.
The day will come !

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qxr1011
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The Power of Commitment

Непрочитанное сообщение qxr1011 » 15 дек 2003, 16:30

There’s something about the hesitant masses that feeds their timidity. They often feel that there’s too much danger in taking a first step until and unless they can see the entire journey. They are reluctant to make a commitment about doing something worthwhile without advance assurances they will be successful.

Unfortunately, the world doesn’t work that way. In almost every human endeavor, and particularly in trading, it’s very difficult to see the whole journey in advance. It’s almost impossible to know you will succeed before you’re well into the project and already trying as hard as you can. That’s why the most successful traders tend to be people who are comfortable with uncertainty, and who are willing to trust in the process they follow, without requiring a guaranteed outcome.

It’s this willingness to commit to trading, and in particular to commit to a specific trade, that seems to account for much of the difference in results between those who are successful, and those who only want to be.

Here’s why:

Commitment Begets Effort: Traders who don’t commit to a trade, or a method, or a strategy, are fooling themselves. They’re only dabblers, looking for easy opportunities and taking advantage of the “low hanging fruit” that anyone can find, from time to time, in the markets. Once you make a commitment, honoring that commitment requires that you put in a lot of hard work. And it’s the hard work, even more than the commitment, that produces the profitable results.

Commitment Begets Concentration: Traders who aren’t committed to their work tend to spread their attention among lots of different opportunities, lots of different markets, lots of different trading methods, and lots of different stocks. As a result, they know very little about any one of these. Committed traders, on the other hand, tend to bear down very hard. They focus tightly on a relatively few opportunities, and they gain an advantage because they know a great deal more about these few things than most other traders.

Commitment Begets Perseverance: Most traders dip in and out of the markets according to their whims. They may be persuaded to invest by a jubilant headline, then scared out of the market prematurely by a quick price dip or some seemingly “bad” news. Whether they’re holding positions for weeks, days, hours, or minutes, traders who have made a serious commitment to their profession tend to be in the markets for the long term. As a result, they aren’t so easily led about, driven off, or stampeded into foolish actions.

Commitment Begets Positive Energy: W.N. Murray’s famous quotation makes a truthful point - that the “the moment one definitely commits oneself, then Providence moves too.” For whatever reason, things seem to work out better for people who have made a commitment than they do for people who haven’t. No one can explain it. Yet the evidence that it happens is abundant, and very clear.
The day will come !

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Another Kind of Risk

Непрочитанное сообщение qxr1011 » 16 дек 2003, 17:48

Successful traders and those who are working toward becoming successful generally agree that managing your risk is a central element of trading success. But there are really two kinds of risk, and both need careful management.

The first kind of risk is the obvious kind: the risk of losing your trading capital. Much has been said in this space and elsewhere on Innerworth.com about money management, and much more will be said in the future. So for the moment, let’s ignore this kind of risk.

The other kind of risk is more emotional and psychological. It’s the risk to your self-esteem and confidence that occurs when you trade in new ways that exceed your well-established comfort level.

For the most part, you probably don’t want to exceed this comfort level, because it closely defines those areas of the markets where you’re knowledgeable, smart, experienced, and competent. Those are the areas where you’re most likely to make money, and so that’s where you ought to be doing most of your trading.

But from time to time, you may encounter certain circumstances when you’ll want to step out and away from what you know. If the situation is right, you’ll gain some advantage from taking the other kind of risk. Here are three reasons to do so:

To Grow As A Trader: If you never try a new kind of trade, you’ll always be trading the way you already know. Sometimes, that’s OK. But if you want to develop your trading skills, evolve as the markets evolve, and expand your ability to squeeze a good income from the markets, you’ll need to try new kinds of trades and trading from time to time.

To Learn New Parts Of The Market: Many traders spend their whole careers trading only a few stocks, or only a few types of investment vehicles. But other traders would get bored with this, or feel limited when those particular vehicles are cooling off instead of heating up. So it’s important for them to stretch into new kinds of trades, or into established trades of new kinds of vehicles. This not only provides new profit opportunities, it often helps them to learn how to get more from the same profit opportunities they’ve already been trading.

To Stretch Your Tolerance For Stress: Staying within your comfort zone all the time feels good, but doesn’t prepare you for situations where you’re tossed out into new challenges. Some traders feel better when they prepare themselves for the unknown by experimenting very gingerly, of course with situations that make them anxious. As you stretch your tolerance for stress, you tend to perform better even when you’re not at the limit of your risk.
The day will come !

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Preparation For Trading

Непрочитанное сообщение qxr1011 » 19 дек 2003, 17:16

No one bent on success would even think of going to work without adequate preparation. In the trading world, preparation is especially important, because the combination of rapid-fire developments during the day, high pressure, great risk, and potential for emotionalism makes it extremely difficult to make all the necessary decisions as effectively as you would want.
Preparation for trading is different for every trader, of course.

But there are some basics you’ll want to consider as you get ready for the next trading day:

What To Trade: Unless you regularly concentrate on just a few trading vehicles, the broad range of trading opportunities you face every day can be daunting, and difficult to monitor. That’s why your trading improves when you prepare for the next trading day by looking over the markets and deciding precisely where you’re going to concentrate your attention.

What To Watch: In addition to your trading vehicles, you’ll want to identify the forces most likely to be driving prices. Often this includes news like earnings reports, mergers and acquisitions, or the outcome of legal issues. But it can also include anything from broader economic measures to the stock’s own price action. Because there are so many influences at work in the markets, you’ll find it difficult to monitor what’s happening, and why, unless you decide in advance where to focus your attention, and you have a plan to guide you.

Mental Readiness: Trading is a particularly difficult profession, and you can’t excel at it unless you’re as sharp as can be. This requires bringing your brain up to full speed before the market opens, often by using mental exercises or meditation routines to make sure you’re thinking clear and fast before you make a trade. Because you use your mind for so many activities beyond trading, it’s also important that you get in the habit, at least during market hours, of shutting down extraneous thoughts. You don’t want to be thinking about your daughter’s birthday or getting the car repaired when you should be focused on what’s happening to your open positions.

Physical Readiness: Many top traders believe that the single most important factor for success in the markets is physical conditioning. The pressures are so intense that, if you’re not in top shape, you simply can’t think and act decisively for as long as you need to. In addition, exercise and getting your body in shape are great ways to blow off the pressures and tensions that active trading generates. While many traders like to exercise after the close of the markets, one good way to prepare for the trading day is to go through a quick exercise routine that gets your body loose and relaxed even before the pressures begin to build.
The day will come !

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You Ain't So Big

Непрочитанное сообщение qxr1011 » 22 дек 2003, 16:31

One of the reasons it’s so difficult to remain successful in the markets for more than a few months or years is the human tendency toward self-importance. People who become successful traders have mastered the markets, and have made a lot of money in the process. It’s only natural that they begin to succumb to the blandishments of power and success.

They feel more and more dominant over their social and economic environments. They also feel increasingly in control of their own destiny. As a result, they begin to change their relationship to the markets - from something like a flea hanging on to the side of an elephant, to something more like the mahout who controls the elephant and gets it to do useful work for him.

Unfortunately, the market is no elephant. It’s not susceptible to control, and any useful work it does is not going to be specifically intended to help you.
The truth is that, like a tornado or a hurricane, the market is far larger and more powerful than you. Should you ever forget your true relationship to the market, you’ll be reminded via a quick and probably very expensive lesson.
To save yourself the heartache and the money, simply remember:

The Market Doesn’t Work For You: The market is the amalgamation of the perceptions, desires, and financial requirements of its tens of millions of participants. As a result, it’s very much like a force of nature -- the result and expression of massive forces well beyond your ability to control. If you ever lose respect for the market and what it can do, it’ll promptly stomp all over you.

The Market Doesn’t Know You: Certainly, the market includes your open positions among the millions of inputs that help it take shape. But the market doesn’t know or care about you, personally. It moves implacable, unaware of and immune to all your paltry importunings and prayers. If you ever begin to believe the market serves you, or even cares about you, you can kiss your account balance goodbye.
The day will come !

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Tell Yourself The Truth

Непрочитанное сообщение qxr1011 » 28 дек 2003, 14:29

There’s no way to be successful in the markets without honesty - without, in fact, an unswerving devotion to a level of personal honesty that many people cannot tolerate.

Because trading is such a personal, psychological activity, success requires that you be willing to look inward with an unflinching gaze, no matter how unpleasant or disappointing you may fear the view will be.

Some of the things to think about include:

Who You Really Are: The top traders are not super-human. In fact, many of them have very human frailties. What sets them apart, however, is the way they have traded on their strengths. Whether they are strong in math, in understanding trader psychology, in spotting economic trends, in willingness to work long hours, or something entirely different - they have recognized their strengths and found ways to incorporate them into their trading method. Equally important, they have faced their personal weaknesses and found ways to prevent them from destroying the success they are trying so hard to build.

What You Really Want To Achieve: The most successful traders are people who really like to trade. That’s what leads them to the markets, and that’s what keeps them striving even when runs of bad luck or economic downturns discourage so many others. Before you can make a full commitment to trading, you must be certain this is the activity you want to pursue. If you’re in it just for the money, you’ll likely become discouraged by the chores, obstacles, and difficulties of trading before you accumulate enough winnings to be satisfied. Until you can make a serious commitment to the daily activity of trading, it’s unlikely you’ll be more than a little successful in the markets.

How Far You’re Willing To Go: The markets are full of traders who are eager to make the easy trade, follow the easy path, and collect the easy money. But none of these will ever be more successful than the average. The traders who reach higher plateaus of success do so because they’re willing to take the extra step, spend the extra time, and push themselves a little beyond what others accept as their limits. Unless you’re willing to explore the outer limits of your capabilities often enough and thoroughly enough to deserve extraordinary success, you’re not going to achieve what you want in the markets.
The day will come !

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Focus On Essentials

Непрочитанное сообщение qxr1011 » 12 янв 2004, 18:11

There are many who believe that trading is a vastly complicated undertaking that requires a combination of in-depth expertise and up-to-the-minute knowledge of far-flung interests, events, and undertakings.
While for various traders this may be in true in some degree, for all traders the simplest rules are probably the most important. And this includes one of the simplest rules of all: sell your losing trades before they drag you down with them!

Traders who forget that trading requires capital, and capital - once lost - is not easily regained, are among those most likely to go broke in the markets. This is because there are many, many plausible reasons to own a stock. So it’s easy to talk yourself into opening a dangerous position, and holding it even while it moves against you.

Successful traders have learned - usually through financial pain - how dangerous it can be to hang onto a position that’s not performing as expected. As a result, they have no interest in staying with a position that’s moving farther against them than they have anticipated.

To develop the same kind of exit discipline in your trading, try following these ideas for the next few months:

Allow Yourself No Discretion About Getting Out: Until you’ve developed sufficient strength for exiting positions, remove all discretion. Every time you open a trade, give yourself a stop-loss price and make sure you always use it, even if you believe the stock will soon turn in your favor. Once you’re confident you can exit a losing trade on a timely basis, you can slowly allow yourself more and more discretion to hang on, if and when appropriate.

Keep Track of Each Stock’s Behavior Past Your Exit Point: Just for fun, track the further progress of the stocks you stop out of. Over time, you’ll see in black and white how often getting out is the best course, and how rarely the stock really does come back as quickly and powerfully as you believed it would.

Practice Admitting You Are Wrong: The ego is the largest reason people won’t take a small loss to prevent a bigger one. So work on overcoming this hurdle by admitting your errors as frequently as you can. In casual conversations, shop-talk sessions with other traders, and your personal analyses of recent trades, explicitly detail at least one error you’ve made. Because it won’t kill you to admit you were wrong, you’ll gradually become more comfortable admitting to having made bad trades, and getting out of them before they can hurt you.
The day will come !

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The Unconscious Drive to Fail

Непрочитанное сообщение qxr1011 » 20 янв 2004, 15:08

Ask traders about their reasons for trading, and most will tell you, "I want to make huge profits." Although most traders get into the business to make a significant return on their money, the vast majority blow out their accounts. Why do so many traders fail? The obvious reason for many is that they just don't know how to trade. They don't use proper risk controls. They don't have enough financial resources. They don't have proper instruction or an efficient trading platform. They don't have solid, reliable trading strategies. And for many, they don't have good reference points; they don't have a clear understanding of how the markets work. Any or all of these factors can spell disaster for the novice trader. One doesn't need to explore the depths of one's psyche to find other reasons for failure. That said, there's an interest among many would-be traders as to the extent unconscious processes thwart their trading efforts. Perhaps, unconsciously, there is a hidden motive for self-sabotage. Seasoned traders are especially interested in this topic. Many prominent, highly successful traders end up losing most of their capital in the end, and many never come back. Some have speculated that a hidden motive for self-sabotage is the reason for such failures. It's worth considering in a little detail, either just for fun or as a serious line of inquiry, depending on your preferences and worldview.

Years ago, Freud wrote about people who fail after achieving great success in "Those Wrecked by Success." According to Freud, some people feel guilty and physically ill upon attaining a lifelong dream. Upon experiencing success, they aren't comfortable with it, and unconsciously take steps to punish themselves for being successful.

Most contemporary research psychologists, in contrast, do not think people seek out failure, consciously or unconsciously. People experience failure because they cannot master difficult situations. In other words, traders don't repeatedly fail because they have an unconscious wish to spoil their efforts, but trading is just plain hard. Traders repeatedly fail because they don't have proper financial resources, solid trading strategies, or the proper mindset.

Psychoanalyst Roy Shafer argues, however, that some people view "success" as a type of failure, and in a twisted way, they avoid "success" because unconsciously they view it as a failure. For example, in one case study, a young man avoided success because he was afraid of doing better in life than his father, who was a failed all through his life. Veteran traders have made similar observations. Some novice traders don't trade merely to make profits. They have a hidden agenda. They want to show their family and friends that they could be a success. The problem with finding oneself in this circumstance is that while one may consciously strive for success, one has been given a powerful psychological message that he or she cannot succeed, and is not worthy of success. Unconsciously, it's hard (but not impossible) to prove these significant others wrong. Whether good or bad, what your friends and family think of you is important. They define who you are, and unconsciously, you may not want to prove them wrong. It's best not to let such psychological issues impact your trading, however. Always trade for yourself. Trade because you want to, not because you are out to prove anything to yourself or someone else. Doing so raises the stakes so high that you'll put a lot of pressure on yourself to succeed, and that usually leads to failure.

As we've often said in this column, unconscious processes may not play a role for everyone who pursues trading. It's an issue for some people, however. If you think your reasons for trading may reflect a need to satisfy past unconscious conflicts, it's wise to work through some of these issues with a trading coach or other professional. Don't let unconscious motives get the better of you. Identify them, work through them, and trade freely, effortlessly, and profitably.
The day will come !

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