Trader's Psychology

50 Common Interview Questions And Answers

2007-09-04T08:52:00.000-07:00

Review these typical interview questions and think about how you would answer them. Read the questions listed; you will also find some strategy suggestions with it.

1. Tell me about yourself:
The most often asked question in interviews. You need to have a short statement prepared in your mind. Be careful that it does not sound rehearsed. Limit it to work-related items unless instructed otherwise. Talk about things you have done and jobs you have held that relate to the position you are interviewing for. Start with the item farthest back and work up to the present.

2. Why did you leave your last job?
Stay positive regardless of the circumstances. Never refer to a major problem with
management and never speak ill of supervisors, co-workers or the organization. If you do, you will be the one looking bad. Keep smiling and talk about leaving for a positive reason such as an opportunity, a chance to do something special or other forward-looking reasons.

3. What experience do you have in this field?
Speak about specifics that relate to the position you are applying for. If you do not have specific experience, get as close as you can.

4. Do you consider yourself successful?
You should always answer yes and briefly explain why. A good explanation is that you have set goals, and you have met some and are on track to achieve the others.

5. What do co-workers say about you?
Be prepared with a quote or two from co-workers. Either a specific statement or a
paraphrase will work. Jill Clark, a co-worker at Smith Company, always said I was the
hardest workers she had ever known. It is as powerful as Jill having said it at the interview herself.

6. What do you know about this organization?
This question is one reason to do some research on the organization before the interview. Find out where they have been and where they are going. What are the current issues and who are the major players?

7. What have you done to improve your knowledge in the last year?
Try to include improvement activities that relate to the job. A wide variety of activities can be mentioned as positive self-improvement. Have some good ones handy to mention.

8. Are you applying for other jobs?
Be honest but do not spend a lot of time in this area. Keep the focus on this job and what you can do for this organization. Anything else is a distraction.

9. Why do you want to work for this organization?
This may take some thought and certainly, should be based on the research you have done on the organization. Sincerity is extremely important here and will easily be sensed. Relate it to your long-term career goals.

10. Do you know anyone who works for us?
Be aware of the policy on relatives working for the organization. This can affect your answer even though they asked about friends not relatives. Be careful to mention a friend only if they are well thought of.

11. What kind of salary do you need?
A loaded question. A nasty little game that you will probably lose if you answer first. So, do not answer it. Instead, say something like, That's a tough question. Can you tell me the range for this position? In most cases, the interviewer, taken off guard, will tell you. If not, say that it can depend on the details of the job. Then give a wide range.

12. Are you a team player?
You are, of course, a team player. Be sure to have examples ready. Specifics that show you often perform for the good of the team rather than for yourself are good evidence of your team attitude. Do not brag, just say it in a matter-of-fact tone. This is a key point.

13. How long would you expect to work for us if hired?
Specifics here are not good. Something like this should work: I'd like it to be a long time. Or- as long as we both feel I'm doing a good job.

14. Have you ever had to fire anyone? How did you feel about that?
This is serious. Do not make light of it or in any way seem like you like to fire people. At the same time, you will do it when it is the right thing to do. When it comes to the organization versus the individual who has created a harmful situation, you will protect the organization.
Remember firing is not the same as layoff or reduction in force.

15. What is your philosophy towards work?
The interviewer is not looking for a long or flowery dissertation here. Do you have strong feelings that the job gets done? Yes. That's the type of answer that works best here. Short and positive, showing a benefit to the organization.

16. If you had enough money to retire right now, would you?
Answer yes if you would. But since you need to work, this is the type of work you prefer. Do not say yes if you do not mean it.

17. Have you ever been asked to leave a position?
If you have not, say no. If you have, be honest, brief and avoid saying negative things about the people or organization involved.

18. Explain how you would be an asset to this organization
You should be anxious for this question. It gives you a chance to highlight your best points as they relate to the position being discussed. Give a little advance thought to this relationship.

19. Why should we hire you?
Point out how your assets meet what the organization needs. Do not mention any other
candidates to make a comparison.

20. Tell me about a suggestion you have made
Have a good one ready. Be sure and use a suggestion that was accepted and was then
considered successful. One related to the type of work applied for is a real plus.

21. What irritates you about co-workers?
This is a trap question. Think real hard but fail to come up with anything that irritates you.
A short statement that you seem to get along with folks is great.

22. What is your greatest strength?
Numerous answers are good, just stay positive. A few good examples:
Your ability to prioritize, Your problem-solving skills, Your ability to work under pressure, Your ability to focus on projects, Your professional expertise, Your leadership skills, Yourpositive attitude.

23. Tell me about your dream job.
Stay away from a specific job. You cannot win. If you say the job you are contending for is it, you strain credibility. If you say another job is it, you plant the suspicion that you will be dissatisfied with this position if hired. The best is to stay genetic and say something like: A job where I love the work, like the people, can contribute and can't wait to get to work.

24. Why do you think you would do well at this job?
Give several reasons and include skills, experience and interest.

25. What are you looking for in a job?
See answer # 23

26. What kind of person would you refuse to work with?
Do not be trivial. It would take disloyalty to the organization, violence or lawbreaking to get you to object. Minor objections will label you as a whiner.

27. What is more important to you: the money or the work?
Money is always important, but the work is the most important. There is no better answer.

28. What would your previous supervisor say your strongest point is?
There are numerous good possibilities:
Loyalty, Energy, Positive attitude, Leadership, Team player, Expertise, Initiative, Patience, Hard work, Creativity, Problem solver

29. Tell me about a problem you had with a supervisor
Biggest trap of all. This is a test to see if you will speak ill of your boss. If you fall for it and tell about a problem with a former boss, you may well below the interview right there. Stay positive and develop a poor memory about any trouble with a supervisor.

30. What has disappointed you about a job?
Don't get trivial or negative. Safe areas are few but can include:
Not enough of a challenge. You were laid off in a reduction Company did not win a contract, which would have given you more responsibility.

31. Tell me about your ability to work under pressure.
You may say that you thrive under certain types of pressure. Give an example that relates to the type of position applied for.

32. Do your skills match this job or another job more closely?
Probably this one. Do not give fuel to the suspicion that you may want another job more than this one.

33. What motivates you to do your best on the job?
This is a personal trait that only you can say, but good examples are:
Challenge, Achievement, Recognition

34. Are you willing to work overtime? Nights? Weekends?
This is up to you. Be totally honest.

35. How would you know you were successful on this job?
Several ways are good measures:
You set high standards for yourself and meet them. Your outcomes are a success.Your boss tell you that you are successful

36. Would you be willing to relocate if required?
You should be clear on this with your family prior to the interview if you think there is a chance it may come up. Do not say yes just to get the job if the real answer is no. This can create a lot of problems later on in your career. Be honest at this point and save yourself future grief.

37. Are you willing to put the interests of the organization ahead of your own?
This is a straight loyalty and dedication question. Do not worry about the deep ethical and philosophical implications. Just say yes.

38. Describe your management style.
Try to avoid labels. Some of the more common labels, like progressive, salesman or
consensus, can have several meanings or descriptions depending on which management
expert you listen to. The situational style is safe, because it says you will manage according to the situation, instead of one size fits all.

39. What have you learned from mistakes on the job?
Here you have to come up with something or you strain credibility. Make it small, well intentioned mistake with a positive lesson learned. An example would be working too far ahead of colleagues on a project and thus throwing coordination off.

40. Do you have any blind spots?
Trick question. If you know about blind spots, they are no longer blind spots. Do not reveal any personal areas of concern here. Let them do their own discovery on your bad points. Do not hand it to them.

41. If you were hiring a person for this job, what would you look for?
Be careful to mention traits that are needed and that you have.

42. Do you think you are overqualified for this position?
Regardless of your qualifications, state that you are very well qualified for the position.

43. How do you propose to compensate for your lack of experience?
First, if you have experience that the interviewer does not know about, bring that up: Then, point out (if true) that you are a hard working quick learner.

44. What qualities do you look for in a boss?
Be generic and positive. Safe qualities are knowledgeable, a sense of humor, fair, loyal to subordinates and holder of high standards. All bosses think they have these traits.

45. Tell me about a time when you helped resolve a dispute between others.
Pick a specific incident. Concentrate on your problem solving technique and not the dispute you settled.

46. What position do you prefer on a team working on a project?
Be honest. If you are comfortable in different roles, point that out.

47. Describe your work ethic.
Emphasize benefits to the organization. Things like, determination to get the job done and work hard but enjoy your work are good.

48. What has been your biggest professional disappointment?
Be sure that you refer to something that was beyond your control. Show acceptance and no negative feelings.

49. Tell me about the most fun you have had on the job.
Talk about having fun by accomplishing something for the organization.

50. Do you have any questions for me?
Always have some questions prepared. Questions prepared where you will be an asset to
the organization are good. How soon will I be able to be productive? and What type of
projects will I be able to assist on? are examples.

The Psychological Side of the Trade

2007-01-26T06:49:00.000-08:00

We live in a speculative financial world. In an ideal, basic economic society, you could imagine how goods and services would be exchanged in a matter-of-fact and straightforward way: A farmer tells a hunter, "It took me two days to produce 30 gallons of milk, and it took you two days to deliver a butchered deer, so let's make an even trade." In modern times, though, the value of goods and services are based to a significant extent on opinions, rather than on an objective, tangible value. We frequently buy houses that are overvalued based on the assumption that they will increase in value. We pay more for special edition cars not because they are faster than a standard model, but for their rarity, and the feeling of uniqueness they offer. And when it comes to trading the markets, we invest in stocks that are much higher than what a fundamentalist would pay based on dividends. It is the speculative nature of trading that makes it inherently psychological. We try our best to id entify trends and price ranges, but in the end, they are merely educated guesses. There are numerous unknown factors that influence stock prices and we can do nothing more than accept this uncertainty, and try our best to make a profit.

In principle, trading is straightforward. You pick a stock that will go up, buy low and sell high. Or go short by buying to cover and selling when the price goes down. If stocks went up and down as reliably as ocean tides, you could profit easily. Unfortunately, the ups and the downs of the markets are not always predictable. Indeed, if the market were that reliable, traders could not make money. If everyone knew the high and low points, traders could not profit by selling stocks to unsuspecting buyers at high prices, and buying them back when the price falls hard and the masses sell out of fear.

The challenge in trading is handling the psychological uncertainty. In the end, you must take a risk and decide where the price of a stock will go next. For example, consider a stock that has a clearly defined price range. Suppose that the stock traded between $50 and $52 for the past five years, and suppose there was clearly defined support areas at $50 and the price could not break through the resistance level of $52. But what happens when the price reaches $54 and has high volume? Where do you think it will go next? Will it move higher than $54? Will $52 be the new support area, or will the stock go down to the support area of $50? This is where you must make an educated guess. You must carefully review all available information and decide where new support and resistance levels will fall.

We frequently must make decisions where we are required to guess what will happen next, but the markets are often fickle. We must beat out other market participants and sell them stocks that are at a high point, and buy stocks from them that are at a low point. It's a matter of psychology. What do they think and what do you think? The one who is right is the one who wins.

What's the True Value?

2007-01-26T06:48:00.002-08:00

The release of PlayStation 3 consoles is like the tulip mania of 1636. There weren't enough game consoles to satisfy consumers; people believed they were valuable and the price skyrocketed. Some waited in line for a week just to get a console. But not all those people camping in front of electronics stores wanted to play video games. Many wanted to resell the products on eBay. Between the launch of PlayStation 3 and last Friday, over 14,000 PlayStation 3 consoles were sold on eBay for an average price of $1200. That's about twice as much as the list price. Is it worth it? It's all a matter of opinion. It's merely a function of supply and demand. Sound familiar?

In an interview with Innerworth, market observer Sam learned years ago from trading on the floor of the exchange that the financial markets are nothing more than the same kind of marketplace we see on eBay or any other auction. "When I saw how people made money on the trading floor, I realized it was nothing more than a marketplace. A buyer tries to take advantage of a seller and a seller tries to take advantage of a buyer," Sam observes.

What is the "true" price? It's all a matter of opinion. Buyers try to buy low and sellers hope to sell for a profit. But in the end, it's difficult to accurately gauge the "true value" of a stock, and thus, some traders win and some traders lose. As Sam observed on the floor, "You often see people buy something that is much too expensive, and see people selling at a price that, according to the chart, is much too cheap." It makes you wonder if there is a reasonable way to estimate what the optimal price of a stock is, but Sam argues, "The truly objective information on a price chart are areas of support and resistance. Support is where we find willing buyers. Resistance is where we find areas of willing sellers. Any time you see these facts, focus on them. And then focus on the trend." Trading profitably is often a matter of making an educated guess as to how much the masses will pay. Just like PlayStation 3, it doesn't matter what the list price is; all that matters is wh at people will pay at any given time. And that's how the markets work. If you can get in and get out at the right time, you will make a profit. If you buy too high, or sell too low, you will miss out.

Knowing when to buy makes all the difference. Sam warns, "I always remind myself how to make money trading: If I buy something, the only way I can make money is if others buy from me at a higher price. If I'm planning to sell something, the only way I can make money on a short position is if there are people who need what I'm trying to sell." But many times, novice traders forget these basic principles. They buy and sell at the wrong time. In the end, you can never know for sure when new highs will break through resistance levels or when a stock will drop to new lows. That is what makes trading a challenge: You never know what to expect next. The best you can do is realize "value" is a subjective concept, and that winning traders accept the uncertainty and figure out ways to profit from it.

Risk Management: Protecting Your Account Balance and Your Emotions

2007-01-26T06:48:00.001-08:00

The markets go up and down, and so will your account balance if you are not careful. Winning traders manage risk. There are many ways to manage risk. Some traders patiently wait for high probability setups, while other traders limit the amount of money they risk on any given trade. What strategies do you use to manage risk? How do you compare to other traders?

We asked a group of Innerworth subscribers to take the following true-false quiz. If the item is true for you, give yourself a score of 1 for the item. If you think it is false, give yourself a score of 0. Answer true or false for each of the following items, and see what score you get:

1) I stick to my stop loss rules regardless of how I feel when the price approaches my stop-loss point. 2) I never risk more than a small portion of my trading capital on any given trade. 3) Before I make a trade, I always determine my risk limit and my profit strategy, taking into account my capital. 4) I keep records of my past trades and carefully analyze them from time to time. 5) I always develop stop-loss rules before executing a trade.

What score did you get? If you received a score of 0, 1 or 2, you scored in the lower quartile, which means that less than 25% of the Innerworth subscribers who took this quiz obtained a score as low as yours. In an analysis of our database, we found that individuals who scored in this range were stressed out while trading, experienced unpleasant emotions, lacked disciplined, and had low self-esteem. In contrast, if your score was 5, you scored in the upper quartile, which means that 75% of the Innerworth subscribers who took this test obtained a lower score than yours. We found that individuals who scored in this range tended to approach trading in a carefree manner, showed self-control, and preferred a logical well-planned approach to trading.

How well do you manage risk? Managing risk not only protects your account balance, but it also helps you control your emotions. In our study of Innerworth subscribers, we found that traders who managed risk were less stressed out and tended to experience positive emotions. These findings suggest that you will feel calmer if you minimize risk. If you are not doing so now, it's easy to start taking some basic precautions. For example, develop a well-formulated trading plan before you execute a trade. Determine how much risk you are taking up front and decide if you want to actually take that risk. When used properly, by accounting for price fluctuation, protective stops are another effective way to minimize risk. Risking only a small portion of your account on a single trade is also useful. If you truly feel that risk is at a minimum and bearable, you will feel safe and relaxed. And when you feel relaxed, you will be able to trade more freely, creatively, and profitably.

Confident, Persistent, and Profitable

2007-01-09T05:10:00.000-08:00

Are traders naturally born? Can anyone learn to trade? What is the ideal psychological profile of the winning trader? At Innerworth, we have tried to find answers to these questions, but definitive answers are often elusive. We keep trying, though. We've surveyed traders and interviewed them. And we have tried to analyze interviews from Jack Schwager's classic "Market Wizards." Our conclusion: There doesn't seem to be one way to trade or one ideal trader personality. Consider Michael Marcus who was interviewed in "Market Wizards." Rather than taking a calm, unemotional approach to trading, he often seemed to fall prey to his emotions. He made large impulsive trades and lost. He sometimes let his emotions get to him to the point that he tried to use medications to gain control. His early experiences didn't permanently trip him up. He learned from his mistakes. His persistence won out, and he eventually learned to make a fortune.

Jack Schwager described Mr. Marcus as "aloof, almost withdrawn." This may be a useful personality characteristic for trading the markets. Aloof and withdrawn people tend to be focused. They may have difficulty dealing with people, but they are also likely to approach the markets with a single-minded passion to succeed. Mr. Marcus is also highly intelligent. He earned membership to Phi Beta Kappa at the prestigious Johns Hopkins University and won a scholarship to attend Clark University for graduate school. This early academic success clearly gave Mr. Marcus rock solid confidence that carried over into the trading realm. When asked, "Did the thought ever enter your mind that trading was not for you?" Mr. Marcus replied, "No. I had always done well in school, so I figured it was just a question of getting the knack of it." In our Innerworth studies of traders, we have found that regardless of whether it is succeeding in sports, academics, or business, the people who develop un wavering self-confidence as a result of these early experiences are the people who persist, hone their skills, and master the markets. Mr. Marcus strongly believed in his ability to achieve financial success. But his success didn't come easy. He admitted, "I lost. It was the same old cycle of borrowing money and losing it." Despite making loss after loss, Mr. Marcus persisted until he was able to achieve profitability. At times, he lost over five times his yearly salary, but he kept trading until he gained a wealth of experience to trade the markets profitably.

The markets are difficult to master. Many try but few make it. Mr. Marcus' "Market Wizard" interview reveals what it takes to succeed. A winning trader has confidence in his or her ability to succeed. Winning is never guaranteed and may take the stamina of a marathon runner. It is necessary to face setback after setback. You may get beaten down at times and feel like giving up. Your emotions may go up and down with your account balance. But in the end, you must believe in your abilities, and that if you put in enough hard work, you will achieve the success you have been seeking.

All In Perspective

2007-01-09T05:09:00.002-08:00

As a novice trader, Jack has just put on his tenth trade. He's still new to trading, but he is optimistic that he will be successful. He wants to succeed. He thinks, "I want to prove that I'm a good trader. I hope I do well on this trade. The outcome is critical to the rest of my trading career."

Jack's thoughts and feelings are understandable. Whenever we start a major endeavor - starting college, a new job, or whatever - we want to succeed. And it's nice to have early success. The first few moments of a major life turning point seem especially significant. When we aren't successful immediately, the initial letdown often haunts us for a long time, interrupting our train of thought, and shaking our self-confidence. Despite the reasonable hope of an early triumph, however, it's vital to keep the proper perspective when approaching trading: one must always think of the big picture, the long run.

Any single trade is of little importance. Experienced traders know this fact, and live by it as if it were doctrine. Even though they may focus all their energy on the current trade, they know it is of little real significance in the long run. It is wise to put each trade in proper perspective. It is essential that you consider, at least in the back of your mind, that a single trade is just one among a series of trades, and that the bottom line is the overall outcome across the series, not any single outcome.

There are psychological advantages to taking this perspective. When you downplay the outcome of any single trade, it is less critical to your ego. When viewed as just one in a long line of trades, it's easier to tell yourself, "It doesn't matter. There will be many more trades and opportunities to come." If there isn't much riding on the outcome of a trade, it will free up precious psychological energy. You won't waste your limited psychological resources needlessly worrying about the outcome. You will feel free and creative, ready for whatever happens next. All your attention will be focused on trading your plan, objectively analyzing how market moves fit into your plan, and taking decisive action for a clean exit.

Putting a trade in proper perspective is not only psychological, however; it also involves proper risk management. To survive the learning curve, or a severe drawdown, you must limit your risk on any single trade. By limiting your stake to a small percentage of your trading capital, the trade will have minimal financial significance. In reality, it will be of little consequence compared to your overall account balance. Merely believing that a trade is insignificant doesn't work very well unless in reality it is not significant. For example, it's hard to fool yourself into thinking that a trade is insignificant if you have a month's salary on the line on a single trade, and you can't afford to lose it. The stress will be unbearable. It's important for your psychological and financial security that you limit the risk on any single trade. Again, think in terms of the big picture. You don't need to make money on a single trade; the overall results across a series of trades are al l that really matter.

When starting a new endeavor, it's natural to want to do well on every single attempt. All of one's hopes and dreams may be placed on a few key trades, for example. But trading is much too difficult to think you can quickly make a few trades and be set for life, with all your aspirations met. The successful trader is in the game for the long haul. The trading lore is replete with stories of traders who made huge profits only to lose it all later. You may see some big trades in your career, which will provide numerous war stories that you can use to entertain your friends for hours, but when going into a trade, it's vital to keep the trade in proper perspective. It's still just one trade of the many you will make in your career.

The Day After Thanksgiving: A Day To Rest or a Day to Trade?

2007-01-09T05:09:00.001-08:00

It's the day after Thanksgiving. Are you going to trade today? Some traders believe that stock prices tend to rise the day after Thanksgiving. Perhaps you have anticipated that rise and are holding a few positions in the hopes that you can sell into the strength brought on by the holidays. Nevertheless, there's going to be less trading today just by the mere fact that the markets are closing early. Who knows what will happen? Historical studies may support the claim that prices go up after Thanksgiving, but history doesn't always repeat itself. You might consider taking another day off. Why not make it a four-day weekend? If you want to trade the markets profitably in the long run, it is vital to get your rest. Trading takes psychological stamina and if you trade chaotic, hectic markets too long without a break, you will soon find that you cannot concentrate fully.

Research studies have demonstrated that when people's psychological resources are taxed to the limit, they make impulsive mistakes. Maintaining discipline takes psychological energy, and when you use it up, you have to rest. Just like a muscle, when you are worn out, you need to take a break and regain your strength. It's vital to consider that the mind has limited energy, and that after putting in a hard and tedious effort, you must take a rest and rejuvenate, so you can face the market action with a renewed sense of vigor. Holidays are one of the best times to stand aside and regain your composure.

Trading often comes down to performing in a peak performance state at a few key moments. To take advantage of these key moments, you must be relaxed. If you have strained your mental "muscles," you'll have difficulty taking advantage of these opportunities. Your mind will be elsewhere or you'll be too tired to act decisively. When you're tired, it's hard to gauge market action accurately. You'll be prone to decision-making biases and you may act impulsively because you are too tired to patiently wait for the proper signals to enter or exit a trade. By staying relaxed yet full of energy, you'll be able to trade in a logical and disciplined manner.

You don't need to perform at a peak performance state every minute of your life. Many people can work for only a limited number of hours a day, and if we try to work in marathon stretches, it eventually catches up with us, and is shown by our weak performance. Just as a runner must rest when his or her muscles ache, it's vital to take breaks after a marathon work session.

Part of trading profitably is the acknowledgment of your limitations and putting together sensible ways to work around them. Don't think you are superhuman. Take a few days off to rest and regain your mental and physical strength. Get plenty of rest so that next week, you will be ready to handle whatever the market throws at you.

Seeking Out Protection From Loss

2007-01-09T05:08:00.000-08:00

You must risk money to make money. It is sad, but true. You cannot possibly make profits in the markets unless you put up the money. Many people hate taking risks, especially with their money.

Risk is a part of everyday life, though. We take risks all the time, even when we complete the most mundane tasks, such as driving our children to school or flying home to visit our family for Thanksgiving. We even take risks while staying home. We can slip in the bathtub, for example. We can't escape risk but we can take reasonable precautions to protect our interests. When you drive down the street, for example, it's prudent to wear seatbelts and carefully drive at a safe speed. When it comes to trading, it's also vital to have proper protection. Adverse forces may go against your trading plan, and unless you protect yourself, you run the risk of getting hurt, and with trading, that often means substantial hits to your account balance.

You must be able to handle risk in order to trade profitably. When we are afraid to take a risk, we shrink back, paralyzed and defeated. So what can we do? On any given trade, we can alleviate some of the fear by risking a small percentage of our trading account on a single trade, and taking it "one trade at a time" instead of focusing immediately on the onerous goal of achieving a specific return across the entire series of trades. If you can avoid ever thinking of the long-term goal of huge success, you could probably trade forever without hesitation.

There are other obvious ways to feel protected and safe. For example, you can use a protective stop to make sure that you restrict the amount you can lose on any given trade. By looking at the past performance of a stock, you can estimate an ideal stop loss point that protects you, but does not allow you to get "stopped out" too early. Perhaps the most important form of protection, though, comes in the form of a well-developed trading plan. If you know specifically when to enter and when to exit, you can execute the plan even while feeling afraid of losses. You can easily follow your plan, freeing up your mind to focus on your immediate experience rather than the long-term consequences of a trading loss. It's also important to anticipate adverse events as part of your trading plan. Make sure that earning reports or a rate hike announcement isn't going to ruin your trading plan. Careful and precise planning is the best way to protect your account balance.

Just like engaging in a dangerous sport, you feel better when you know that you have some form of protection. Athletes protect themselves with helmets, and airbags and seatbelts protect us as we drive in rush hour traffic. Successful trading also requires adequate protection. Protection not only ensures that you can survive to trade another day, but it also allows you to feel relaxed while you execute and monitor a trade. So protect yourself. If anything can go wrong, it usually does. You don't have to worry, however. If you take precautions, you'll survive the inherent setbacks in trading, and end up winning in the long run

Carefree or Stressed Out?

2007-01-09T05:07:00.000-08:00

Carefree or Stressed Out?

Winning traders approach the markets with an optimal mindset. They trade in the zone, but it's surprising how stress can impact your ability to enter this ideal state of mind. You can carefully delineate a complete trading plan, for example, where every aspect is spelled out clearly from when to enter and when to exit, and you may have a wealth of experience executing such plans, but when you are stressed out, even the most simple task can be difficult to carry out. You may miss an obvious signal, which would be apparent in a more rational state of mind. When you are nervous and slightly overwhelmed, your psychological perceptions and intuition are restricted and closed off. You miss little things and have a tendency to respond impulsively. We may forget to place an order according to plan or we may misread a signal and close out a position too early. These little errors can be frustrating. Are you easily stressed out by trading, or do you approach trading with a carefree, re laxed mindset? Here's a quiz to see how you compare to other traders.

We asked a group of Innerworth subscribers to take this true-false quiz. If the item is true for you, give yourself a score of 1 for the item. If you think it is false, give yourself a score of 0. Answer true or false for each of the following items, and see what score you get:

1) I often over-analyze an investment decision. 2) I often feel that there is too much information to take it all in. 3) I wish that I had more time to think through my decisions. 4) When I think about my life, I frequently think pessimistic thoughts. 5) I tend to hesitate at critical moments of investing.

What score did you get? If you received a score of 0 or 1, you scored in the lower quartile, which means that less than 25% of the Innerworth subscribers who took this quiz obtained a score as low as yours. In an analysis of our database, we found that individuals who scored in this range were more relaxed when approaching trades, and reported making profits trading the markets. In contrast, if your score was 4 or 5, you scored in the upper quartile, which means that 75% of the Innerworth subscribers who took this test obtained a lower score than yours. We found that individuals who scored in this range tended to experience anxiety while trading, had difficulty handing risk, and tended to report mounting losses while trading the markets.

Why are some traders easily stressed while others are more carefree? Some people are too wrapped up in trading outcomes and how an outcome reflects on their value as a person. They may think consciously or unconsciously, "If I win, I'm great, omnipotent, and a champion. If I lose, I'm a sorry failure." When you take this approach to trading, though, it can create a roller coaster ride when it comes to your self-esteem. You'll be up one minute and down the next.

Seasoned traders report that they make the most profits when they aren't expecting them. They observe the markets openly and freely, and suddenly, they make a profitable trade. If you put pressure on yourself, however, you usually choke. Your mind isn't free, but cluttered with feelings of doubt and pressures to succeed. The frustration distracts you, and suddenly, you find it almost impossible to make enough winning trades to come out ahead. It's better to trade in a relaxed and carefree manner. It may be difficult to completely view a trade as a leisurely activity, but there is a lot that you can do to make it fun. You can limit risk so that you know that you can handle a worst-case scenario. When you know that you can't possibly lose too much, you will feel at ease. In addition, don't put your self-esteem on the line with your money. It's just a trade. Don't seek out glory. Just enjoy the intellectual challenge of trading. You win some; you lose some. Focus on playing the game and how fun it is. This approach to trading will allow you to think clearly and freely. You will make more profits if you trade with a carefree attitude.

I Want To Be Impulsive

2007-01-05T01:52:00.001-08:00

The markets keep reaching new highs. Oil prices are at their lowest levels in years. HP profits are up despite a government investigation. Many market indicators are positive. There's a sense of optimism in the air and you can't wait to cash in. It's at times like these, however, that some traders have trouble with discipline. After making a few winning trades, they want to celebrate. It's understandable but potentially dangerous.

Winning traders maintain discipline. Successful trading is a matter of odds. It's vital to get the law of averages to work in your favor. The more trades you make, the more likely you will win. But you can't make impulsive trades or abandon risk limits. After a few winning trades, though, acting impulsively is what most traders want to do. Behavioral economists call this phenomenon the windfall effect. It's much like playing with the house's money at a casino. You win big and you figure you can gamble with wild abandon.

When you trade the markets, however, sometimes you will win but oftentimes you will lose. Losses are commonplace when trading. So when you win, you must retain the profits you make for those times when, by shear chance, your method temporarily stops working. How can you maintain discipline? It isn't as easy as it may seem. Self-control takes psychological energy, and just like physical stamina, when your energy runs out, you get worn out to the point that you can't keep going. Similarly, you can only control your impulses for so long before you feel like acting out and doing something wild and impulsive. Some trading experts suggest recognizing this fact. For example, if you want to act out, stand aside and do something impulsive to get it out of your system. You might want to do something fun and exciting outside the trading arena, or even do some recreational gambling to celebrate, and pat yourself on the back. Once it's over, though, it's time to get back to work.

How else can you maintain discipline? First, admit your limitations. Self-control is like a muscle. You need to practice self-control. Don't try to be superhuman. You can't run a marathon tomorrow if the farthest you had to run in the past year was between your front door and your car. You need to work up to it. Don't expect to be able to maintain self-control without extensive practice. Give yourself time to build up your self-control skills. Second, make a strong commitment to build up your self-control skills. Take the matter seriously. Until you commit to change, you cannot improve your ability to maintain discipline. It's similar to losing weight or quitting smoking. A person must first acknowledge that he or she has difficulty with self-control before change can happen. Admitting that you need to improve your self-control skills goes a long way. Don't trade impulsively. The winning trader is the disciplined trader. The more you can stay calm, rational, and in control, t he more profits you'll take home.

A Solid Plan Equals A Winning Trade

2007-01-05T01:51:00.000-08:00

James B. Rogers, Jr. started the Quantum Fund with legendary trader George Soros. In his "Market Wizards" interview, Mr. Rogers offers some sage advice, "Just don't do anything until you know you've got it right." Many times, traders are in a rush to make profits. And in this rush to win, they often trade without a detailed trading plan. But in principle Mr. Rogers' advice is as true today as when he gave his interview almost 20 years ago.

Mr. Rogers' losses early in his career taught him to acquire an accurate view of a trading setup before executing a trade. He says, "I learned quickly not to do anything unless you know what you are doing. I learned that it is better to do nothing and wait until you get a concept so right, and a price so right, that even if you are wrong, it is not going to hurt you." The price of a stock can be a function of what Mr. Rogers called "hysteria." A stock can be hyped up, greatly exceeding a reasonable estimate of its value. A stock price based on "hysteria" is likely to go down as fast as it went up. It's useful to know if you are trading hysteria. If you are, you may be vulnerable to the whims of the masses.

In his interview, Mr. Rogers preferred to call himself an "investor" rather than a "trader." Jack Schwager's definition of an "investor" is someone who only goes long, whereas a "trader" is willing to go long or short. And since Mr. Rogers was willing to go long or short, he fits the definition of a "trader" according to Jack Schwager. Without getting into a polemic discussion of the differences between traders and investors, there is a common stereotype that traders tend to trade by the seat of their pants. Rather than carefully plan a trade after a thorough consideration of all available information, they look at only a few indicators and execute a trade. There are times when this works well, but there is wisdom in Mr. Rogers' advice to make sure that you fully understand market conditions before you execute a trade. If you know what you are doing and why you are doing it, you will be more likely to make winning trades. If you know that the price is going up because of hype , for example, you may decide to trade a little differently. Rather than buy stocks that are hyped up, you will be better off selling the stocks you held previously that are hyped up, and wait for the hype to end before you buy them back, when they return to a reasonable price.

Whatever you do, however, it's vital to have a solid trading plan. If you can identify the factors that drive the price of a stock, you will be able to make prudent trading decisions. You will have a better intuitive feel for a trade, and will feel confident in your actions. Don't trade leisurely. Trading is a business and when you develop a good business plan and follow it, you will be more likely to profit.

Background Stress: Don't Let It Impact Your Trading

2007-01-05T01:50:00.000-08:00

Have you ever suddenly just closed out a trade for no good reason? You didn't think about it. You just closed it on impulse. Perhaps you felt the stock wasn't moving fast enough, or maybe you were worried it would fall hard, and you just didn't want to see what happened next. As much as we try to monitor our trades in a cold, calm rational mindset, our emotions often seem to get the best of us. The explanation for an emotional outburst may not be apparent at first glance, but in retrospect, we may realize that a host of factors came together in a split second to make us act on impulse. It's vital to gain as much awareness as possible, however. It is useful to know what we are doing and why, and one of the reasons that impulsive decisions happen is that background stress is left unchecked.

Trading is inherently stressful. When your money is on the line, you feel stress whenever you start thinking about losing. The single losses don't matter much, but when losses mount it can be stressful. The losses lurk in the back of your mind. You may not be sure how you're going to make back the losses that have piled up. Other issues may gnaw at you. There could be a host of problems that lurk beneath the surface, from problems with family or friends to a general uncertainty about the future. Any one of these stresses may seem like nothing more than a common, everyday hassle, but when they add up, even a minor setback can set you off. When you least expect it, you lose your cool. And when you do, these background stressors are likely to influence your performance.

It is almost impossible to eliminate all background stress, but you can greatly reduce some of it. You can do a few things to ease some of the strain, like talking to friends and loved ones about your troubles. Whatever you do, it's useful to admit to someone, almost anyone, that you may be in a little trouble. It takes more energy to pretend that you don't have a problem than to merely admit that you may be stuck and that you should just admit it and devise a game plan to get out of it. By uncovering hidden stressors and talking about them, you will feel a sense of relief.

Stress can get the better of you if you let it. It builds up if it isn't released. Many traders find it useful to let it out physically. By going for a run or working out at the gym, you will let off steam. It may seem like a little thing, but it really helps. You will feel a little less stressed out and be able to cultivate a more detached, rational mindset.

The proper mindset can spell the difference between trading yourself into a slump and achieving great financial success. You must focus on the process of trading. Rather than worry about how well you are doing, enjoy every moment. The key is to take it one minute at a time. Don't mull over the past or worry about the future. Just focus on what you can do one step at a time in the current moment you are living. Once you appreciate each moment, and enjoy the intellectual challenge trading offers, you will calm down and trade more freely and creatively. Finally, always remember to run your own race. Don't try to live up to other's expectations, and don't set unrealistically high expectations. Accept what the markets give you. If you live by your own rules, and accept whatever profits you can take out of the markets, you'll feel better, trade better, and you'll take home more profits.

Facts and Figures: A Gold Mine For Some

2007-01-02T07:27:00.000-08:00

Some people like facts and figures; others prefer trusting their intuition and looking for artistic expression in the trading realm. The trading profession is big enough for all kinds of traders, though. There isn't one right way to trade, but the trick is to figure out what you are like and to match your trading style to your personality. Take the data-driven trader, for example. At an extreme, the data driven trader looks for consistency and attempts to find "rules" and conventional wisdom to guide trading decisions. For some data-driven traders, a major preoccupation is to study historical data and backtest ideas until a good fit is discovered. Other data-driven traders enjoy spending their nights scouring reports for a valuable tidbit of information that will give them an edge. If you are the kind of trader that enjoys getting caught up in the
details, using this affinity to your advantage is the best way to profit from the markets.

Consider Aaron. He trades his own hedge fund, and takes a methodical approach to trading. He loves facts and figures, and he is good at using them to make profits. He has had a lifelong interest in mathematics and science that has influenced his trading style. "I backtest everything," he says. "Much of my day is spent backtesting strategies and indicators, and most of them don't pan out. But once in a while I hit a gold nugget, and that's a good day. I think that's the most important thing: backtesting and understanding statistics so I can decide whether historical performance is a fluke or if there's some actual, profitable signal there." How does he feel when his backtesting works? "It's always a surprising and joyous moment when I find an indicator that works and lives up to statistical backtesting."

Are there any drawbacks to his approach? Aaron says, "I think I'm very linear. I can't do multi-tasking very well. I have to do one thing after another. I think that's my weakness. My strength is being very methodical and quantitative." "Sometimes it's difficult to pull the trigger," he admits. "Maybe it's getting close to my stop loss level and I think to myself, it's got to turn around. So I cancel my stop loss order to stay in the trade. Well, it might turn around and go back up, but it might just keep going down, and I'm going to wish I had gotten out and followed the strategy."

Aaron is a successful trader, but not all data-driven traders use their love of facts and figures to their advantage. Dr. Richard Geist, in his book "Investor Therapy," profiled the typical data-driven trader. Although a detail oriented trader may identify information in reports or in data records that more impressionistic traders may miss, he or she often can't separate the forest from the trees. It's hard to see the big picture when you are focused on details. It's important not to get too caught up in a small fact and forget about broader issues. For example, a company may be gearing up to manufacture a cutting edge product, but if few consumers have the money to buy it, or if there is little interest in using the product, sales will be in a slump. Discovering a "hidden" piece of information in an annual report may be a grand discovery, but depending on broader market factors, it may have relatively little impact on the market action.

Some traders are data-driven and use this style of trading to their advantage, like Aaron. Other traders, however, get too caught up in details, and need to modify their approach. There isn't one right way to trade, but it's essential that you match your trading style to your personal strengths. If you are a data driven trader, you may prefer studying facts and figures and trading for the long term. Whatever you decide to do, though, don't be afraid to be yourself. If you like facts and figures, use it to your advantage. You'll profit from it in the long run.

Take It Easy: Relax and Be Yourself

2007-01-02T07:22:00.000-08:00

When learning any new skill, you need to find the right balance between pushing yourself to the limits and setting realistic expectations and goals. But whatever approach you take, you must work with what you've got. You must identify your natural inclinations and work around them. This is especially a challenge for trading. There are two basic types of novice traders: the fearful and the overconfident. Neither type achieves long-term consistent success easily. The fearful are reluctant to put on trades. They are easily frightened. Upon encountering the slightest signal of the trade going against them, they bail out. They don't make money in the long run. The overconfident, in stark contrast, don't show enough caution. They aren't afraid to put large sums of their trading capital on the line, even when their methods are questionable. They have a gung ho attitude. They may stumble upon early success, but usually fail in the end. Fortunately, these are two extremes, with most t raders finding themselves somewhere in the middle. At whatever extreme you find yourself, you'll make the most progress if you work around, rather than try to change,
your basic personality style.

It's useful to be a little fearful, but not too fearful. At least the fearful are sufficiently risk averse that they show enough skepticism to protect their interests. Some people are overly fearful, however. Their central nervous system is easily "activated" and when facing risk, it's unbearable. Traders with this kind of personality style are afraid to put on big trades, and while they are in a trade, they feel uneasy as they wait for the trade to reach the profit objective. Because they panic a little too easily, they sometimes have trouble sticking with their trading plan. They hesitate upon entering a trade, and may exit at the wrong time. Although it's hard for the extremely risk averse to trade in a calm, objective, and effortless style, it doesn't mean that they need to give up trading. One just needs to come up with ways to work around one's limitations. Even some professional traders are reluctant to enter a trade. To work around this personal limitation, some call the trade into a broker with specific instructions, such as where to buy, when to exit, and where to place a protective stop. Similarly, other traders use the automatic settings on their trading software to enter and exit trades at optimal times. Clearly, there are disadvantages to these strategies. It's difficult to use these strategies when trading in an intraday timeframe, for example. It may be necessary to trade weekly swings or make long-term investments. It would also be useful to make every effort to address outside influences that produce anxiety and fear, such as managing risk by trading small positions and using protective stops. (And through practice and the use of professionally administered relaxation training, one can control one's natural tendency to experience anxiety and fear.) But the main point is that one can trade profitably even though one's natural inclinations don't exactly match the ideal trader personality of the cold, rational, objective trader wh o isn't afraid of risk.

The overconfident, novice trader doesn't show enough risk aversion. Overconfident traders think they have more skills than they actually do, and tend to put on trades without adequate preparation. There are many kinds of overconfident traders. For some overconfident traders, their trading behavior was improperly reinforced. For example, they may have learned to trade in a bull market where prices seemed to go essentially straight up. Or their first few trades may have made big profits, purely by chance, and they gained a sense of reassurance and a false sense of confidence because of this run of early luck. Others, ironically, only appear overconfident, but actually, they lack confidence, and just put on trade after trade to hide their feelings of inadequacy. Whatever the reasons, it's vital for survival to admit that as a novice trader, one does not yet have the requisite trading skills to trade with a solid sense of self-confidence. One should be a little skeptical and take proper precautions to manage risk, again, by trading small positions, using protective stops and outlining a very detailed trading plan. It's also essential to set realistic goals. Rather than focusing on unrealistically huge profit goals, which don't match the trading skills of a novice, set moderate goals, which can be achieved. At the same time, it's useful to set ambitious "learning goals." That is, don't focus on the profits, but devote much of your time to learning how to trade. Novice traders make the mistake of overtrading. They think they "should" spend all their time putting on trades, even when the market conditions don't warrant it. Instead, they would do better to spend that time taking classes, reading about new methods, and paper trading. Don't underestimate the importance of building up well-honed trading skills. When you have the skills to trade consistently and profitably, you will truly have rock solid self-confidence. And if you are the kind of person wh o isn't afraid to take a big risk, you'll be especially ready to use your trading skills efficiently. But until then, don't over-leverage your knowledge. Don't be arrogant and overconfident. Be humble, modest, and build up your trading skills.

Whether you lean toward the fearful trader or the overconfident trader, it's useful to identify where you stand on this continuum and take active steps to work around your personality. Relax, take it easy, and give yourself the time you need to master the markets. You'll feel better and trade at your best.

Be Specific: Precisely What Are You Doing Wrong?

2007-01-02T07:21:00.002-08:00

In the trading world, the "Market Wizards" are often elevated to the status of idols. Why not? They have accomplished relatively rare feats. Consider Tom Baldwin, for example, he took what Jack Schwager called a "skimpy capital base" and turned it into a fortune. His "fearless" approach to the markets allowed him to trade aggressively. These tales of success can be inspiring, but they can also create unrealistic expectations. You may start to believe that you need to be a natural born trader to profit in the markets. But successful trading is often a matter of persistence, and it is hard to persist if you believe that trading requires special talents. It is more useful to work under the assumption that profitable trading can be learned. That's not to say that anyone can learn to trade, but if you are relatively intelligent, confident in your ability to succeed, and persist long enough, you can learn how to master the markets. It's all a matter
of taking trading seriously, set ting specific goals, and picking yourself up gracefully after a defeat.

Psychologists have found that many people get fed up and decide to quit when they make broad generalizations about their abilities after a setback. Rather than focus on specific deficits, they view their flaws as very general, enduring, and only about them. They think they aren't intelligent enough or they believe they don't have the right personality to trade. Although this may be somewhat true, it is not useful to think this way. It's much more adaptive to be specific about what you are doing wrong.

Consider the plight of Jack. He is upset because he lost money on a trade. At about 11:00 this morning he noticed that a stock rapidly went up $1 since the open. He bought 1,000 shares, but the price went down just as fast as it went up. He decided to cut his losses. What should Jack do at this point? First, let's consider what he shouldn't do: He should not attribute his loss to an enduring inability to trade. He should not think pessimistic thoughts like, "I'll never learn to trade profitability. I just don't have enough talent." What he should do is identify where he has specific problems with his approach to trading. For example, he did not have a detailed trading plan. In addition, he did not study the stock closely enough before trading it. By identifying specific problems, rather than making global statements about his abilities, he can make a specific plan for improving his method. He can learn to trade better. He can develop more detailed trading plans. He can study a company's stock chart more closely to get a good idea of the range that the price of the stock moves in a given timeframe. When his problems are stated specifically, they can be changed more easily.

Many people jump to the conclusion that their performance is closely linked to innate abilities. But oftentimes, the more you practice trading, the better you will become at it. Don't be afraid to identify specifically what you are doing wrong. The faster you do so, the faster you will improve, and the faster you will take home the profits you desire.

A Big Win: A Time to Splurge or a Time to Be Careful?

2007-01-02T07:21:00.001-08:00

Recent election results had a positive impact on the markets? Did you profit? Did you have a windfall? Behavioral economists find over and over again that when people receive an unexpected windfall, they act as if it is free money. There is a strong tendency to put on trades unnecessarily, haphazardly, and without a specific plan. Overtrading doesn't usually pay off, however, as shown by Drs. Barber and Odean, in what
has now become a classic study in behavioral finance.

Barber and Odean studied trading patterns at a large brokerage. They identified overtraders based on the number of trades they made and examined the amount of profits each group realized over the course of a year. They wanted to see whether overtraders could beat investors who used a simple buy-and-hold strategy, which is a relatively conservative trading strategy. Average annual turnover was 250% for overtraders and 2.4% for buy-and-hold investors. It is quite interesting, however, that although both groups achieved an 18.7% gross return on their investments, the net return differed greatly. Due to commissions, the overtrading group had a net return of 11.4% while the buy-and-hold group had a return of 18.5%. Overtraders were more likely to make trades after a big windfall.

Even seasoned traders may struggle with overtrading. Consider what a seasoned professional told us in an interview with Innerworth staff. "I have always struggled with, and still struggle with, becoming overconfident. When I'm doing well, I tend to become complacent in the management of the money or protective stops. Or I tend to start trading bigger size just because I have the extra money. I also tend not to be as diligent when it comes to doing my homework. I become more whimsical."

"In contrast, when I'm really working on the trades, I ask questions like, Where did it open? Where did it close? If it opens higher, where's the floor going to open it higher? Where do I expect the commercials to come in? What's the volume? What's the scale? What does it look like on the weekly? What's it look like on the daily? I get into the details. My problem is when I'm happy and making a lot of money, all of a sudden I don't worry about the details."

What is the solution? What does he do when he finds he is becoming overconfident?

"The first thing I do is start looking to see if I'm making mistakes. The other thing I do is to use a trading diary, and write down why I made the trade. The problem with human beings is that we tend to deceive ourselves time and time again. A little deception is acceptable. But then we will forgive ourselves for our own self-deception. If I just keep it in my head, I can lie to myself. But if I write it down, I can't lie to myself."

It may also be useful to stand aside after a big win. "When I have a big windfall of profits, I stop trading for a few days. I take that windfall home with me. I try to figure out ways to keep it. I come up with new strategies."

One of the best antidotes to overtrading is developing very detailed trading plans. It is to your advantage to develop a specific trading plan and stick with it. Before you put on a trade, make sure your trading plan is clear. Identify the signals or indicators you will use to monitor the trade. Anticipate which indicators will signal when a trade is going against you. Justify your trading plan, and make sure that you have sound reasons for putting on a trade. Make sure you are taking advantage of a good setup, rather than impulsively acting on the urge to put on a trade. Through careful self-monitoring of your trading plan, you can reduce overtrading and the potential damage it can do to your trading account.

Conventional Wisdom

2007-01-02T07:20:00.000-08:00

It would be wonderful if there were a foolproof and valid instruction manual for how to trade the markets profitably, a cookbook of sorts where you merely follow the steps and you are successful. For decades, traders have tried to find recipes for financial success. For some, the Holy Grail comes from the latest trading guru. For others, it may be a new software program. As appealing as a trading cookbook may sound, however, countless professional traders have told us at Innerworth that there are no quick and dirty methods for successful trading. A method may work under some market conditions and not others. And when it comes to conventional wisdom, sometimes it is true and sometimes it is not. A popular saying that captures the fallible nature of conventional wisdom is, "history only repeats itself in the markets when it does." That is, you can study old charts and discover a historical set of events that unfolded in the past that suggests a high chance of a profitable tradi ng setup in the future should the same events arise, but history doesn't always repeat itself, so you cannot count on the same chain of events happening precisely the same
way. In the end, you have to go your own way and accept what you get.

What are your favorite tidbits of conventional wisdom? Some people say avoid the market open, but other traders thrive on the chaos and uncertainty that occurs during the open. Other people warn to avoid trading right before an earnings report, but other traders make profits anticipating what the news might be. Still other traders like the idea of multiple regression formulae that will predict a trend. Sure, if you have a large enough dataset and want to make very long-term forecasts, it may work, but probably only for large institutions. In the end, conventional wisdom is right some of the time, but at the same time, it is wrong some of the time.

I'm not saying to throw out all conventional wisdom. Even though it may not be in your best interest at times, it makes sense to take conventional wisdom into account. For example, it makes good sense to control risks, and it is always vital to make sure that you can survive a trade should it be a loser. Similarly, it's always valuable to have a trading plan and to follow it. If you have a map to guide you, then you will be more likely to follow it.

Why do we have a strong need to seek out conventional wisdom and follow it? Throughout our lives we have been taught that those people who play by the rules tend to succeed. If you "do the right thing," whatever that is, you will be successful. There is a sense of security in believing that if you complete steps A, B, and C, then D will happen. It is all so straightforward, but life doesn't always work that way. And in a profession like trading, where relatively few make a fortune, it is rarely true. The steps to follow are not clear, and since market conditions are in constant flux, the "rules" seem to change constantly. But don't despair. If you have confidence in your ability to win, work hard, gain a wealth of experience and persist, you'll master the markets and make the profits you are looking for.

Bouncing Back

2006-12-13T00:34:00.002-08:00

Ever had a bad day when nothing seemed to go right? First, you got up late. Second, your computer wouldn't boot up, and third, when it did, you couldn't seem to get in and out at the right time when executing even the most basic trade. What really upset you was when your DSL line went down for 10 minutes during a critical moment in your trading plan. Traders face setback after setback, but they never feel beaten down. They recover from a setback quickly and are ready to tackle their next challenge with aplomb. Not all traders can take setbacks in stride, however. For some people, any loss regardless of how small can be upsetting. How well do you take setbacks? Here's a brief quiz to show you where you
stand?

We asked a group of Innerworth subscribers to answer the following questions on a 4-point scale. To what extent do you agree with each of the following items? If you strongly disagree with an item, give yourself a score of 1 for the item. If you disagree, give yourself a score of 2. If you agree, give yourself a score of 3 for the item, and if you strongly agree, give yourself a score of 4. Answer each of the following items, and see what score you get:

1) I tend to get angry more than most people. 2) I believe that there are people with huge resources and influence who can control market prices and I think that is unfair. 3) At times, I feel angry even though I'm not sure why. 4) When I'm feeling down, I sometimes put on a trade to feel excited and thrilled. 5) Almost every day, something makes me at least a little angry. 6) I secretly wish I could punish people who do not live up to my expectations. 7) I can make myself angry about the past just by thinking about it. 8) When I'm frustrated or upset, I have difficulty sticking with my investment strategy. 9) I blame myself when trades do not go my way.

What score did you get? If you received a score between 9 and 16, you scored in the lower quartile, which means that less than 25% of the Innerworth subscribers who took this quiz obtained a score as low as yours. In an analysis of our database, we found that individuals who scored in this range were optimistic, flexible, ambitious, and creative problem-solvers. In contrast, if your score was between 22 and 28, you scored in the upper quartile, which means that 75% of the Innerworth subscribers who took this test obtained a lower score than yours. We found that individuals who scored in this range tended to experience higher levels of stress, were easily frustrated, and often allowed this frustration to interfere with their trading.

If you scored high, don't despair. Resilient trading is often a matter of attitude. A resilient trader is realistic. He or she accepts reality and appreciates what the markets have to offer. On some days the markets offer many opportunities. On other days, however, there are just a few. But whatever opportunities are available, resilient traders accept the current state of affairs. They don't pressure themselves into trying to take out more money than the markets are willing to give.

Resilient traders are eternal optimists. They may expect setbacks, but they don't equate a setback with personal failure. They are confident that if they put in enough time and effort, they can overcome any obstacle. That said, they accept their limitations. They don't believe that they must be "perfect." Trading is challenging enough. You don't have to make it even harder. Manage your risk, anticipate losses, and don't beat yourself up unnecessarily for not meeting unrealistic expectations. Enjoy the process of trading, and don't merely focus on the prize. With the right attitude, you can be a resilient trader and achieve enduring success.

Respecting Risk

2006-12-13T00:34:00.001-08:00

Is trading easy or hard? To the outside observer, trading seems easy enough. You merely pick a stock, bet it will go up or down, execute a trade and see what happens. What's the big deal? If it were that easy, however, everyone would be doing it and making millions. Unfortunately, it is not that easy, especially in a sideways market or one that fluctuates wildly. In a strong bull market like we saw during the dot-com boom, amateur traders merely opened an online account and watched their account balances balloon. It all changed in 2000, though. We've seen a taste of "the good old days" in the past month, but even when the masses are interested and prices go up, trading is not easy. You have to work at it, and hard, to make
profits across a series of trades.

Successful trading is part financial resources, part trading strategy, and part psychology. Suppose that you had a simple trading strategy. You might decide to find stocks that temporarily went down on general weak economic news, but by all indications, the stocks should increase when clearer heads prevail. You look at all the information, and decide to develop a trading method based on "seller's remorse." That is, you anticipate that there will be those investors who sold in a panic on weak economic news and will buy the stocks back when they realize that the stocks were still good buys. But there's more to it than good trading strategy. You must also decide how much capital you will devote to the strategy. On any one trade, you might risk 2-3%, but not all of your picks will go up in the way you had planned. Trading is also part mathematics. Some of your trades will come through, but others will not. You have to decide how many trades you will make and how much you will ris k. And it's not just the number of trades that matter. You also must look at the range at which the price is likely to move. So, for the sake of argument, suppose you decide to risk 2%, on average, on each trade, and suppose you decide to make 10 trades using your seller's remorse strategy. That is a 20% risk. Psychologically, you have to be able to handle the risk. If you lose 20% of your capital, it will be difficult to make it back. Depending on your risk tolerance, it may be hard psychologically to risk 20%.

If you have relatively low financial resources, taking a 20% risk may be hard to handle. You may feel it would be a disaster if your approach did not realize a substantial profit. Psychologically, taking the risk can be anxiety provoking to say the least. A jumble of thoughts may race through your mind as you execute the trades, and monitor them. As you anxiously await the outcome, you may barely be able to think clearly as your emotions overpower you.

What do you do if you can't tolerate risk? An obvious solution is to simply take less of a risk. You may not want to make all 10 trades, for example. Instead, look for two or three of the 10 that are the most likely to produce a profit. You do not stand to make as much, but you are not likely to lose as much either. And if you have trouble tolerating risk, the piece of mind you get instead will probably be worth more than the profits you could have made, considering the financial and psychological risks it would require. What are the long-term consequences? On the one hand, it may seem that you will never make huge profits in the markets if you are not willing to take risks. After all, seasoned, professional traders put on big trades and it doesn't bother them. But you must decide if taking such big risks would be in your best interests. And until you are confident that you can make profits in market to market, you might want to hone your trading skills before taking big risk s. Seasoned traders have established trading skills and rock-solid confidence. If they lose a large stake, it would certainly be a setback, but they know that they have the ability to make the money back, eventually. On the other hand, if you are not yet confident as a trader, you know deep down that it's quite possible that you can't make back the capital that you lose. No matter how hard you try to ignore this possibility, you know in the back of your mind that it's a real threat, and it will haunt you.

Don't downplay the importance of risk management. There are financial and psychological benefits for limiting risks. A hard reality of trading is that there are few foolproof trading strategies. Even the most reliable strategy is bound to fail eventually. Market conditions frequently change, and when they do, your strategies must be changed also. The trouble is that you don't know when a strategy will fail or when it will not beforehand. Your best defense against the sporadic changes in market conditions is to limit your risk. If you limit your risk, you'll be able to survive the learning curve, and eventually, become one of the select few who profits big from trading the markets.

Going Your Own Way

2006-12-13T00:33:00.002-08:00

Don't follow the crowd! You've been warned over and over, but few are that independent minded. Breaking away is harder than it looks. We are all familiar with the rebel, the person who breaks all the rules and is skeptical of the status quo. At the other extreme, the ultra-conformist seems to follow the rules too blindly. Neither extreme is optimal for trading. It's necessary to find the right balance between these two extremes. It takes a great deal of trading experience, self-searching, and a firm, concerted effort to act independently, but it is essential to develop this skill, especially in markets that seem to change from month
to month.

All humans have a natural tendency to follow the crowd. There is safety and comfort in numbers. As the human race developed, it learned that its survival depended on banding together and working as a group. All humans inherited this legacy, and it is shown in the security we feel when we follow the crowd. It's adaptive most of the time. Although there may be vast individual differences on the extent to which people follow the crowd, with some conforming too much and others conforming too little, most successful members of society have seen the virtues in following the crowd. Blind obedience to authority may not be beneficial but compromise is. To be successful, it was vital to protect your self interests yet also stay within the bounds of acceptable behavior. It was also important to develop a clear and solid sense of personal values and to develop a clearly defined personal identity. Such a clearly defined view of oneself allows one to be self-sufficient. You can follow the crowd when appropriate, but effortlessly go your own way when it's necessary to protect yourself.

Although you've been frequently warned about the pitfalls of following the crowd as a trader, it's important to acknowledge that it is adaptive at times. For long term investing, it is wise to put your money in stocks that don't have a great deal of volatility and by all indications, have solid fundamentals that will push the stock up consistently for several years. If a large enough "crowd" believes strongly that the company will produce profits for months or years, it would be to your advantage to follow them, if you want a safe investment.

So following the crowd isn't bad all the time, especially for those who don't like risk. On the other hand, if you are a shorter-term trader trying to profit in markets that seem to change from week to week, as we are seeing these days, you must anticipate and profit from volatility and shorter-term trends. And this requires an astute intuition about where the markets will go next. You must anticipate how the movement of the masses can benefit you as a trader. The key to success is to decide when to follow the crowd and when to go against it. The crowd is usually right, until a turning point occurs. When virtually everyone has taken the position that the market is headed in a particular direction, there are few traders left to push the trend further. At that point, a countertrend initiates and moves the market in the opposite direction. The challenge is predicting when that turning point will occur, anticipating it, and developing a trading plan to capitalize on it. Now, this all sounds easy in theory, but in practice, it is difficult to implement a trading strategy to capitalize on this cycle, especially when they happen in the shorter-term, such as days or weeks. How can one predict the turning point? Some say it is almost impossible. All you can do is develop a sound method that works most of the time but also admit that it may fail. Whether you use technical indicators or you are lucky enough to use the media news to your advantage, you must temporarily believe in your method, put money on the line, and work under the assumption that overall, luck will be in your favor should you make enough trades. (And by all means, control your risk; otherwise you will be the victim of relatively risky trades, rather than the victor.)

It seems like the markets these days are changing from week to week, with weak economic news lowering prices one day and unexpected profits in key sectors raising prices the next. Only the most independent minded and perceptive traders will make a killing. But one thing is certain, in the end, going your own way is the only sure path to profits.

The Need to Control

2006-12-13T00:33:00.001-08:00

The need for control is the biggest psychological impediment to profitable trading. Traders strive to control the markets, but in the end, they find that they must accept their fate and settle for controlling their emotions. When your money is on the line, it's difficult to remain calm, rational, and in complete control. You want to win, and there is a strong need to want the market action to fall in line, but trading outcomes are rarely sure things. It's natural to want to have complete control over your destiny, but it can't happen. Instead, as a trader, you must put up with where the markets want you to go, and you must try to control your impulses and emotions rather than "acting out" impulsively against the markets out of anger and
frustration.

Many traders have a strong independent streak. They are used to having things go their way. This strong sense of independence allows them to work in an unconventional profession, like trading the markets, but it also usually means that they have trouble maintaining discipline. They may often want to control rather than be controlled. They may become frustrated by the numerous ways events can go against them, such as interest rate hikes, weak economic news, or media hype. There are a host of factors that traders cannot control. You cannot merely dominate the markets and make the markets go where you want them to do. Instead, you have to learn to go where the markets go, and rather than act out of frustration, you must maintain discipline.

How can you maintain discipline and self-control? First, you must accept events as they come. The markets are chaotic and unpredictable, and thus, it does not make sense to believe you can control events. If you try to control events, you will become angry and frustrated. And when you are angry, you are bound to act on impulse and make decisions that you'll regret later. Second, develop detailed trading plans that are easy to follow. If you trade with a detailed trading plan, for example, you will impose structure onto an unstructured reality, and this structure will give you a sense of realistic control. You can reduce some of the feelings of uncertainty, and feel in control, by clearly defining a target profit objective, and entrance and exit strategies. The more structure you impose and follow, the more powerful you'll feel. You will know what to do and when to do it, and you will gain some of the control you desire.

Seeking out complete control when your money on the line is understandable, but there's only so much you can do. The winning trader tries to gain as much control as possible by managing risk and trading a detailed trading plan, but at the same time, he or she knows that nothing in the markets is certain and that all you can do is change the things you can and accept the things you cannot.

The Chain Reaction

2006-12-05T04:52:00.000-08:00

It all starts innocently enough. You open an online trading account. You make a few winning trades, and you find it fun and exhilarating. You're hooked! You make another trade and then another, and the winning streak holds up. You get the hang of it and decide to increase your position size. It works for a few more months, but then you hit upon a slump. The method that worked so well for the past few months has now stopped working. It's a critical point in a potential chain reaction of events that spells doom. Many traders let the chain reaction happen. Their method stops working, but rather than make a careful study of what is going right and what is going wrong, they just keep going. They make losing trade after losing trade, risking money they can't afford to lose, until finally, they end up blown out. They wrongly believe that an optimistic attitude alone will allow them to return to profitability. In the end, however, all they have to show for their efforts is red ink. W hen you are at a critical point in your trading career, it's vital to know when to
go on and when to "fold 'em." Well, temporarily at least.

Art Linkletter once said, "Things turn out best for people who make the best of the way things turn out." Humans are eternal optimists, and when you trade the markets, it's hard not to want to make a fortune. It's hard to know when to be optimistic, and make the best of things, and when to be a pessimist and stand aside. One moment it all looks bleak. The next moment, the market opportunities seem endless. A pessimist is less likely to lose money, but runs the risk of watching profits go by while standing aside. A winning trader, in contrast, is always searching for, and trading, the next big opportunity. That said, winning traders are optimistic but skeptical. Sure, they may take losses in stride, but at the same time, they are constantly aware that if they are not careful, they may set off a chain reaction of events that leads to their downfall.

When your plan seems to stop working, it is sometimes necessary to evaluate its reliability. You must ask, was there something to learn here? Sometimes there is and sometimes there isn't. A good trading plan can often fail for no good reason. What winning traders don't do, though, is mull over a setback too long. They make the best of it and move on. That can mean executing the same trading plan under more favorable market conditions or it could mean searching for a new trading opportunity. Whatever they do next, though, they do not act blindly. They know what they are doing and are fully aware of the consequences of continuing to use their methods.

Self-monitoring is the key to success. A trade dairy may be particularly helpful. For example, you might record key features in your trading diary, such as the market conditions for your trades, the specific strategy, your mood, the rationale for the trade, and its outcome. It is vital to record detailed information before and after the trade so you can study it carefully later. Looking at your performance can be difficult. It is useful to set up a time and place to study your performance objectively. A careful examination of the circumstances when you perform at your worst, and your best, can be enlightening. You may find that the time of day matters. Some traders make their worst trades at the open, others find they make the most mistakes toward the close. Yet others find the break before lunch to be the most optimal time of day. The key is to discover what works and what does not in order to constantly improve your approach to trading. All traders have their talents, and w inning traders capitalize on those talents rather than waste time trying to do something they are not good at. So rather than go along on your merry way until a crisis happens, be on the lookout for a chain reaction that can spell your downfall. And if you see it coming, don't be afraid to stand aside, regroup, and tackle the markets in earnest with a winning, new approach.

Frustrated, Angry, and Irrational

2006-12-05T04:51:00.000-08:00

If you are like most traders, you have an unbridled need to win, and win big. With the interest in the markets in the past few weeks, you may have high expectations for your trading. You may believe that with all the interest in the markets these days, taking profits out of the markets should be easy. But even during times of optimal market conditions, obstacles get in your way: Current events impact prices, or reports of interest rates hikes or consumer confidence may temporarily make the markets go against you. Unless you are ready to tackle these setbacks, they can throw you off balance, and produce feelings of
frustration and anger. And when you are angry, you can make impulsive mistakes or even act irrationally.

People experience anger when they feel that they have been unfairly wronged. Traders become angry at the markets because they believe that the markets and the people involved in the markets should act in ways consistent with their trading plan. It's emotional and illogical but true. When the profits don't materialize, they implicitly or explicitly believe that the markets have wronged them, and they naturally seek revenge.

Anger can be a dangerous emotion. When people are angry, they are ready to put up a fight. They focus all of their energies on fighting and seeking revenge. It's hard to think clearly when you are angry. Sound decision-making requires the avoidance of such emotions.

There's no reason to be angry at the markets. It's important to recognize the reasons for our anger. By doing so, we will feel less anger in the long run. How can you stay calm? First, don't take setbacks personally. Setbacks happen. Taking them personally only makes you feel bad. Anger is an interpersonal emotion. We are usually angry with someone because we believe that he or she has purposely tried to harm us. The markets may consist of people making trades, but it doesn't make sense to treat the markets as an interpersonal setting. The people participating in the markets may engage in actions that thwart your goals, but their actions are not directed toward you personally. It is best to look at the markets as an abstract impersonal entity, rather than a collection of people. The more abstract and impersonal you look at things, the easier it will be to look at matters coolly and objectively.

Second, expect setbacks. Setbacks are commonplace when trading the markets. We tend to feel angry when our expectations are not met. When you are expecting to win, and profits are not realized, you have a natural tendency to feel upset, frustrated and angry. However, it isn't useful to have high expectations in the markets. Don't depend on the markets to fulfill your goals or meet your expectations. Assume that anything can happen. Indeed, in dealing with the markets, it's almost a given that you will lose money, so it is not useful to expect to make money on every trade. Just accept what you can get. You will feel better if you do. Eliminate any preconceptions you have regarding the outcome of a trade. For example, it is essential that you learn to anticipate and accept losses. If you cannot accept a loss, you will feel anger and want to get even. But if you expect to lose and accept as a natural consequence of doing business, you will tend to stay calm. Don't let anger imp act your ability to trade the markets in a cool, rational and objective state of mind. If you can anticipate setbacks and accept that nothing is completely certain when trading the markets, you will be able to cultivate the mental edge of a winning trader.

Still Can't Seem To Win

2006-12-05T04:50:00.000-08:00

There has been great interest in the markets lately, so there's no reason that you shouldn't take home huge profits, right? Although many traders profit, there are some who still can't seem to make a profit, even during relatively good times like these. Let's consider some of the psychological impediments that may limit
success.

The most obvious reason for an inability to win is a lack of experience with the markets. Trading is a skill that cannot be mastered overnight. Sure, you can make a few winning trades, but taking out profits day in and day out takes experience and practice. Many novice traders suffer from the double-edged sword of incompetence. That is, they are incompetent but don't know it. The reason can be simple: They don't put in enough time and effort. Many traders think they have more skills than they actually do, and similarly, they falsely believe that they put in as much time and effort as everyone else, yet if they were to look at what a skilled winning trader actually does, they would find that winning traders put in at least twice as much effort as one would think. In addition, winning traders use their time wisely, and because they have more experience, they can read reports faster, know precisely where to look for information when evaluating their trading plan, and have a more astute perception of the market action. So if you are a novice trader and still can't seem to win, calm down, work extra hard and give it time. The more experience you have, the more likely you will be able to take profits out of the markets.

A second reason that traders fail is that they set themselves up to fail. Some traders actually fear success. This is not true of all traders, though. In one of our Innerworth surveys of traders, we found that relatively few traders had a fear of success. For example, only 12% thought that if they made huge profits that others would try to take advantage of them, and similarly, only 10% indicated that they thought that if they were successful traders, their lives would change in adverse ways. That said, those who feared success tended to feel stressed by trading and generally felt disappointed and upset. Some people secretly believe that money is the root of all evil or that they are not deserving of making huge profits. If you secretly fear success, you will find that even during optimal market conditions, you will not feel good about winning and may unconsciously sabotage your efforts.

Traders are also their own worst enemy when they trade when worn out and tired. Trading uses up limited psychological energy, even when you are winning. The emotional ups and downs can take a toll on your body and mind. It's vital to get plenty of rest while you are trading. Don't force yourself to trade like a robot or superhuman. You are not. You need rest, relaxation, and rejuvenation. When you are tired and hungry, you are bound to act on impulse while trading. It's an unnecessary way to make errors, however. All you need to do is get proper rest, so you might as well rest up when you need to. Many traders sabotage their own efforts either consciously or unconsciously. But most of the time, you can gain awareness, overcome psychological obstacles and trade with a mental edge. It just takes commitment, planning, and effort.

Winning Traders Are Flexible and Realistic

2006-12-05T04:49:00.000-08:00

Eternal optimists often make the best traders. The winning trader engages in a constant search for innovative ways to take profits out of the markets. It takes a positive attitude to persist in the face of almost endless setbacks. If you are an optimist, you will pick yourself up gracefully after a loss. When you can't seem to find a high probability setup, you'll keep searching until you find one. An upbeat, optimistic attitude is an essential ingredient for success. But traders are infamous for their unrealistic optimism. They tend to look at the world through rose-colored glasses at times. It's easy to understand why. Most traders are attracted to the markets for the money they can make. They can't wait to get rich. Unfortunately, you have to risk money to make money, and when your hard-earned cash is on the line, it's hard to stay objective. You want to see endless possibilities. But if trading were that easy, everyone would make millions. Oftentimes, optimism is merely a defense against the anxiety-provoking realization that you are more likely to lose than to win. There is a fine line between realistic, cautious optimism and defensive,
inflexible optimism. The winning trader, though, knows the difference. Do you?

An experiment by psychologists Radcliffe and Klein highlights the downside of defensive, inflexible optimism. Study participants were identified as realistic optimists or unrealistic optimists. They were asked to estimate the odds of experiencing an adverse outcome, in which a reasonable estimate of the actual probability was known. Unrealistic optimists underestimated the odds of the adverse event compared to realistic optimists. They also allowed their unrealistic optimism to bias their judgment. When presented with information regarding how they could reduce the probability of the adverse event, they did not review it closely, compared to realistic optimists. They did not show proper concern and did not take necessary steps to protect themselves from the adverse event.

During the excitement of the past month, it's easy to feel optimistic about the markets, but if you have watched closely, you have also seen that it is quite possible for an adverse event to sporadically turn things around, even if it is just for a short time. The winning trader is flexible and cautiously optimistic. As hard as it may be to consider all possible adverse events that may thwart your trade, it's vital to consider all possibilities. Don't let your enthusiasm cloud your judgment. The more flexible you are, the more likely you will see an adverse coming and take precautions.

Carefree and Profitable

2006-12-05T04:48:00.000-08:00

Even though there is great interest in the markets these days, and more opportunities than usual, it's vital to approach trading with the proper mindset. You can't try to do too much, too fast. Successful traders approach trading with a carefree, focused attitude and putting added stress on yourself interferes with attaining this peak performance mental edge. When you are in the proper mindset, you execute trades effortlessly. You concentrate on your ongoing experience. You don't second-guess your decisions and you are not overly influenced by their emotions. But even when things are not going well, you may find yourself thrown off base. You can no longer trade effortlessly. You feel stuck. When you feel stuck and unable to move forward, it's vital to get motivated and go forward. Here's a view key thinking strategies to help you
get moving again.

It's important to always look at the big picture. Don't get stuck focusing on a single trade. It's also important to limit your risk. When you focus on one trade as if it is a major event, and if you risk too much on a single trade, you will feel overwhelmed. And when you feel overwhelmed, you are prone to experience stress and choke. It's more useful to minimize the significance of a single trade, both emotionally and financially. It helps to limit your risk by placing relatively small trades (about 2%, for example). There are financial and psychological benefits for limiting risks. A hard reality of trading is that there are few foolproof trading strategies. Even the most reliable strategy is bound to fail eventually. The trouble is that you don't know when a strategy will fail or when it will not beforehand. Your best defense against the sporadic changes in market conditions is to limit your risk on a single trade. Think in terms of the big picture. Your ultimate goal is t o achieve profitability across a series of trades. The outcome of a single trade is relatively insignificant. All that matters is the overall outcome. Limiting your risk on a single trade ensures that should you encounter a string of losing trades, you can survive and avoid completely blowing out your account.

When you are feeling stuck, it's also important to think positively and take it easy on yourself. Pessimistic beliefs can be a trader's worst enemy. Many times one may think "I can't be wrong on this trade" or "I must capitalize on every opportunity to make a profit," or even worse, "I must make a ton of money to get caught up and get ahead." These expectations are so high that they can cause uneasiness. When you hold such high expectations for your performance, you place too much pressure on yourself, and cannot maintain a carefree attitude.

It's better to trade in a relaxed and carefree manner. It may be difficult to completely view a trade as a leisurely activity (unless you are so wealthy that it really is just for fun), but there is a lot that you can do to make it fun and carefree. You can limit risk so that you know that you can handle a worst-case scenario. When you know that you can't possibly lose too much, you will feel at ease. In addition, don't put your self-esteem on the line with your money. It's just a trade. Don't seek out glory. Just enjoy the intellectual challenge of trading. You win some; you lose some. Take losses in stride. If you take it easy, you will feel free and creative. That is, when you try too hard, you are bound to crack under the pressure. But when you let the markets take you where they want you to go, ironically, you'll feel carefree and trade more profitably. So don't put unnecessary pressure on yourself. Slow down, enjoy what you are doing, and when you feel carefree, the pro fits will come your way. Try it. It's commonsense advice but it really works.

Hoping to Break Even

2006-11-14T04:29:00.002-08:00

Jim has been holding a position for six months. A media analyst predicted the stock would hit $100 by the end of the year. He bought it at $75. It went down to $50, and it's on the way back up. During the recent interest in the markets, Jim is hoping that it will hit $75 so he can sell it and break even. The break-even point is critical. When you are on the losing side of a trade, all you can do is hope it comes back, but
should you wait around and hope? Isn't it better to just cut your losses and move on?

When on the losing side of a trade, the break-even point inspires hope. Humans have a natural tendency to avoid risk and loss. When in the midst of a losing trade, many tend to hold on and hope that the loser will turn around and return to the break-even point, where there may be no profits, but at least there are no losses (but perhaps commission costs). Hoping, however, has disadvantages and it is wise to consider these disadvantages while trading.

There are many good reasons to cut your losses, rather than hope for the loser to turn around. When you are in a losing trade, you are rarely alone. Many other traders are also long, for example, trying to exit without a loss. And there are other traders trying to short as well, defending the same price area to protect profits. It's unlikely that you can be the victor of this contest, so the best choice is to just cut your losses, and move on to the next trade. But people can't do it. They hate losses so much that they hold on, no matter how many trades they miss because their capital is tied up in a losing trade.

Many people, like Jim, just can't let it go. He blames fate and himself. He asks, "Why couldn't events go my way? I should have been more skeptical. I shouldn't have trusted my intuition. I shouldn't have risked so much." Jim's reasoning makes some sense. He feels disappointed for trusting himself and angry at external events for not going his way. He feels guilty for losing, as if he has let himself down. He wonders what he could have done to prevent the losing trade. He tries to pretend that it just didn't happen. He thinks, "Maybe I could have risked less or prepared for the trade more. I should have studied every possible factor that could drive the price down, and accounted for them in my plan." Jim's feelings are a natural response to the potential loss. The internal dialog that underlies his emotions is also understandable. He wants to undo this event that he views as devastating and humiliating.

How should Jim cope with these emotions? First, he needs to stand back and look at things logically, unemotionally and objectively. Right now, his emotions are clouding his judgment. A little distance, or even optimism, would work well right now. Sure, he risked money and now regrets it, but that should not make him think he has done something wrong. In addition, it wasn't necessarily a bad idea to do what he did. Losing trades are a fact of trading. Perhaps Jim should have thought of other factors that may influence the price or not listened to the analysts' forecasts. If he had objectively looked at the evidence rather than go with an unfounded hunch, he might have avoided the mess he is in. That said, seasoned traders go with hunches, so doing so isn't inappropriate. And sometimes, analysts are right, so it isn't terrible to consider their opinion when devising a trading plan. But no one can know anything with certainty in the markets. Information is frequently fallible, s o even if he had studied all the available information more closely, he might not have been able to anticipate what would happen with complete certainty. In the end, Jim should ease up. He tried his best, showed courage by risking his capital on a promising trade, and he should pat himself on the back for his efforts. He may have made a few mistakes, but he is only human. When you are in the midst of a losing trade, close it. You'll feel better. There are many opportunities out there. All you have to do is have confidence in your ability to trade and find them. Getting stuck in a rut will get you nowhere.

Calm and Strategic Trading

2006-11-14T04:29:00.001-08:00

Successful trading is part reliable method and part mental edge. On the one hand, without a sound set of methods and financial resources, it is impossible to trade profitably. Your method should have a good track record, and it is essential to have enough capital to allow your method to work in terms of realistic position sizes and the number of losing trades you can afford to take before you hit upon a winning streak.
But method is only part of the equation. You also need to approach trading with the proper mindset..

Trading can be a matter of odds. Even when you have accounted for all possibilities, there are times when the circumstances don't match up with your trading plan and you end up with a losing trade. For example, a company may miss earnings expectations, and from studying the products of the competition, you can arrive at the astute conclusion that the company's stock price is destined to decline. You buy to cover. But what you didn't account for was a popular media analyst talking up the stock and claiming that it was bound to hit new highs in the next quarter. The masses act on the report and the price goes up. What can you do? Rather than kick yourself for being wrong, it is prudent to take it stride and move on. Trading the markets with aplomb can be a matter of odds. You have to go where the markets take you and accept what happens. You cannot impose your will onto the markets, and when things don't go your way, you cannot take it personally.

Why do we take setbacks personally? Many times, it is how we look at the situation that dictates how we will feel about it. When we believe a setback happens because it was our fault, and circumstances cannot be changed, we will take the setback personally. A trader might think, for example, "I don't have the natural ability to make it as a trader. It's not the markets, it is me, and I will never master the markets." Psychologists call this kind of thinking "helpless prone." When we make a failure a big deal, we cannot help but feel pessimistic and helpless. Instead of falling prey to a sense of hopelessness, you need to develop an action-based, realistic plan for overcoming obstacles. You must work under the assumption that you can achieve your goals if you put in enough time and effort. What is wonderful about the trading profession is that it is only about the markets and you. There is no supervisors or customers to please. It's not about overcoming interpersonal or instit utional barriers (if you trade your own account), which means that to a great extent, you are in control of how you perform in the long run. You may not be in control of what the markets will do, but you are in control of how you respond to the markets. So rather feel helpless, learn to change the factors you can control and accept the factors that you cannot control.

Accept personal responsibility when appropriate. The method you use to trade the markets is your responsibility. You must decide to use a sound method. You must decide to carefully manage risk to ensure your long-term survival. You must decide to put in the necessary effort to find high probability setups. But you can't control the market action. You can't control how much public interest there will be in the stock you are trading. You can't control the extent that unexpected news or unexpected world events may influence the price of the stock. Assuming you can control everything will make you "helpless prone." Once you have taken every precaution and trade with a sound method, you can limit the amount of risk on each trade and make a profit across a series of trades. Rather than mull over the outcome of a single trade, you can nonchalantly move on to the next trade. And when you take losses and setbacks in stride, you will be more likely to trade freely, creatively, and prof itably.

Searching For Where the Masses Will Go Next

2006-11-14T04:28:00.001-08:00

Even during a strong bull market, you have to do your homework. Sure, many stocks will go up while the public is interested in trading the markets, but not all stocks are equal. Some will go up dramatically while others will barely move. If you want to trade like a master trader, you must closely study the markets to
find stocks that are likely to go up.

In his interview in "Market Wizards," David Ryan offers some useful tips. Despite the necessity of studying the fundamentals of a stock, mass psychology is also important. A stock may rise steadily, but "people might not believe that the earnings are going to continue as strongly as they had in the past." The opinions of the masses do matter, and it is vital to continually ask yourself, why would the masses be interested in trading the stock? "There should be something new that attracts people to that stock." We see this principle work these days just as it did in the 1980s when Mr. Ryan gave his interview. When Apple announces a new iPod, the extent to which the masses will buy it dictates the price of the stock. The trick is in anticipating how the masses will react. Will the masses buy a new product? Will a different company come up with a better competing product? These factors are a matter of mass psychology, and the trader who knows how to anticipate what the masses wil l do next will be the one who makes the most profits. That said, the facts of the tape also make a difference. Price is important but so is volume. As Mr. Ryan suggests, "You can tell a lot by volume. If the volume doubles one day and the stock moves to a new high, it is telling you a lot of people are interested in the stock and buying it. If a stock moves to a new high ground, but the volume is only up 10 percent, I would be wary."

This is sound trading advice. You must always look at the interest of the masses and figure out how this interest will impact prices. When the masses strongly believe in a company, the price is bound to eventually go up. Products and earnings are also important. We have seen time and time again that a hot product also has a major impact on earnings. The trouble is that it is hard to know what the latest hot topic will be. How many innovative products are now commonplace? Consider the iPod, cell phone, PDA or laptop computer. Hot new examples of these products may be forthcoming, but perhaps innovation in these areas may have ended. Your ability to guess what happens next will foretell how well you will do in the future. If you can figure out what the masses will buy next, you will profit. What is the next trend? People have been more likely to shop at Target than at a luxury department store in the past few years. But some of you may remember the early 1980s when designer jea ns and Polo shirts were all the rage. Perhaps clothing preferences will change in the near future. If you can get an intuitive feel for how the public wants to spend their limited finances, you will be able to purchase stocks that are on the rise. Consider the 1930s when people's income was limited. They didn't go to movies but stayed home and listened to the radio. RCA stock may have been a relatively good investment in those days. It is no different these days. If you know the next trend, you will profit. Trading is often 90 percent psychology, so if you can anticipate what the masses will do next, you will profit.

It's All About Image But Should It Be?

2006-11-14T04:27:00.000-08:00

Preconceived images have a powerful influence on our decisions. If we believe that a company has a hot new product, we can't help but think its stock price is bound to go up. Trading the markets can be 99% psychology at times. The image of a company can often mean more to us than actual earnings reports, but the masses can be fickle and it is vital to consider as many factors as possible while outlining a trading
plan.

Image isn't all bad. Perhaps you believed that the recent Apple Computer commercials on television were effective. The company was projecting a good image and you decided that the upcoming earnings report (released last week) would boost the stock price. If you worked on the assumption that image would drive the price of the stock, you were right in this case (yet sales of iPods and MacBooks were also a significant influence on the stock price). But when a company's image is inaccurate and based on nothing but hype, you may regret acting on this biased information.

Images can significantly influence our estimates of stock prices. Dr. Donald MacGregor and colleagues at Decision Research studied a group of advanced business students enrolled in a securities analysis course. They were 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 researchers found that image biased estimates of returns. The better the image of a company, the higher the estimated return. Despite people's estimates, a company's image had no re lation to actual market performance, as measured by weighted average returns for the industry group. This study illustrates how there are times when the image of a company means everything, but should not. Trading on a company's image is all right as long as the masses agree with your perception of the image. But if your perception of the image is wrong, your estimates of the price movement will be biased and you will end up making losing trades.

Don't let your preconceptions bias your decisions. Be aware that sometimes you may have a positive image of a company that may override your logic. How can you stay unbiased? The best solution is to double-check your facts. Get earnings reports or whatever data you need to make the best educated guess. It's impossible to be right all the time, but if you based your investment decisions on a combination of cold, hard facts and an astute reading of market conditions, you will profit nicely.

A Time For Optimism, But Not Overconfidence

2006-11-14T04:26:00.000-08:00

There is a sense of excitement in the markets these days: Highs above 12,000, profitable earnings reports, stocks on the move. All these signs show the world that the stock market is doing well, and as a trader, you should be ready to capitalize on the enthusiasm. You have to ask yourself, however, am I going to be
a wise, profitable investor or one of the na�ve masses that ends up giving back more than I made?

With all the excitement, it's easy to get caught up in thinking only about short-term gains. Why not push yourself to the edge and trade with wild abandon? You might make a few big wins, but the long-term profitable trader looks at the big picture. Behavioral economists have two pieces of advice during record breaking bullish markets where high probability setups seem abundant: Don't let overconfidence get the better of you and treat windfalls with respect. Finance professors Brad Barber and Terrance Odean analyzed account records from a large sample of online investors. They identified a subgroup as "overconfident" in that they had a substantial initial success at the start of the study, but ended up with lower account balances at the end of the study compared to less confident investors. The overconfident investors put on substantially more trades than other investors, yet achieved few rewards for their efforts. Optimism isn't all bad, but it's probably not a good idea to b e optimistic to the point of putting on trades without thinking through all the consequences, and carefully managing risk, such as limiting the size of a position or using protective stops. During optimistic times, though, it's tempting to believe that potential profits are unlimited and that to make a once-in-a-lifetime trade, you should abandon all risk limits and take huge risks. For some people and under the right circumstances, such a strategy can pay off big, but more often than not, many traders who abandon risk limits end up with nothing more than mountains of regret.

During optimistic times, you may also fall for the windfall bias. Suppose you devise a trading plan to take advantage of those earnings reports. Perhaps you anticipated that the earnings report would lead to a stock price increase and got in and out at the right time. What do you do with your profits? Many traders view such profits as a windfall and tend to trade this new found wealth recklessly. A study by Dr. Hal Arkes and colleagues at Ohio University, for example, illustrates how people tend to spend windfalls freely. People were unexpectedly given a windfall of $5 right before attending a basketball game. They spent twice as much money as people who didn't receive a windfall. When people receive windfalls, they tend to think, "easy come, easy go." As tempting as it may be to treat windfalls as easy money, though, don't forget that profits are profits. It is vital to treat profits equally, regardless of how easy they were accumulated. When trading the markets, how well y ou do across a series of trades is tantamount. You can't throw out discipline just because the market is reaching new highs. Your long-term survival depends on carefully managing your capital. Don't feel that you can take bigger risks with capital that was easy to come by. Capital is capital, and if you manage it prudently, you will make significant gains that you can keep well after market conditions change.

Trading With Discipline

2006-11-14T04:25:00.000-08:00

Disciplined trading is vital for lasting success. Profitable trading requires a combination of skill and odds. The winning trader implements proven trading strategies over and over, so that across a series of trades, the law of averages works in his or her favor. Unless you make trades, you have no chance of winning. It's just like in sports. Unless you step up to the plate, you cannot hit a home run. The more times you try, the more likely you will succeed. An important part of discipline is consistency. When a trader uses one approach one time, and a different approach at another time, performance is haphazard. It is essential to use a strategy consistently, following a specific trading plan on each and every single trade, so that across
the series of trades, you will make an overall profit.

If you follow the plan sometimes and abandon it at other times, you throw off the probabilities, but many traders can't seem to stick with their plan. What precipitates a lapse in discipline? Many times, traders forget the consequences of not following a plan. They may suddenly see an opportunity to make a quick profit and decide to abandon risk limits. In another scenario, a trader may question his or her plan, and out of fear, abandon it. How can you make sure you stick with your trading plan? Many times, we forget why we need to follow a well-defined trading plan. A simple way to remember is to pull out an index card with the reasons and read it over and over again. You might write, "If I abandon my plan, I will lose in the long run." You may also list a few trades where you abandoned your plan and you regretted it. The images of the trade, along with the feelings of regret, will encourage you to stick with your plan. By putting the consequences of abandoning your plan ri ght in front of you so that it is clearly in your awareness, you will be more likely to stick with your plan.

There are other reasons that trading plans are abandoned. One of the main reasons trading plans are abandoned is that they are not specified clearly enough. By specifying every aspect of a trading plan from how much you will risk to when you will enter and exit, you will have an easier time following your plan.

Another reason plans are abandoned concerns fear. When your money is on the line, it's natural to feel afraid. As much as you try to forget, it's hard not to worry about losing money. There are times when you may feel so panicked by the chaotic moves of the markets that you can't think clearly. You may feel agitated and on edge. A detailed trading plan, however, can help you stay calm during the storm of market action. The more clearly the plan is laid out, the easier it is to follow, especially when you are agitated and upset. And when the plan is easy to follow, it's likely that you'll stick with it. You'll be disciplined and in control of your emotions and thinking.

The difference between winning traders and unprofitable ones is the ability to muster unwavering self-control in response to chaotic, ever-changing markets. Trading is serious business. It's not a hobby, but many traders approach the endeavor as if it were recreational gambling. They don't develop a trading plan, and if they do, they tend to abandon it prematurely. Winning traders, however, are methodical. They carefully develop a trading plan, execute it, and stick with their plan. If you want to trade profitably, develop well-defined trading plans and follow them.

Staying On Top

2006-11-14T04:24:00.000-08:00

The markets may be reaching new highs these days, but not everyone is able to profit from these conditions. Take Stan, for instance. On Monday, he was down $1,000. He thinks, "I can't lose $1,000 when the market reaches new highs almost every day. People are making a killing these days. I've just got to make that money back and get ahead today." Stan continued to trade even though he was off his game. With the record highs he has been hearing about day after day, he could not let himself give up. He put extra pressure on himself to make back what he had lost and in the back of his mind, he told himself, "With opportunities like these, I should be making a killing." But continuing to trade while putting extra pressure on himself to perform didn't help. He kept losing. In hindsight, Stan looked at how much he had lost and realized too late that he would have been better off if he had just stood aside, rested, and regained
his composure before continuing to trade.

Does Stan's story sound familiar? Many traders are afraid to accept their limitations. Rather than face the fact that they are just not in the proper state of mind, they continue to trade and pay a high price. During times like these, many traders feel that they can't lose, but instead, they end up making mistakes and losing. No matter how good the markets seems, it is vital that you monitor your mood, mindset, and skill level every minute of the day. If any of these factors are off, take a break. It's vital for success to monitor your general mood and your specific emotions. When you aren't feeling up to par, stop trading until you regain your composure.

Systematically monitoring your mood is essential. Rate your mood before the markets open on a 1-10 point scale, ranging from out of sorts, pessimistic (1) to full of energy, optimistic (10). If you take an honest look at your mood and do not achieve a score of at least 7, you may want to take the day off. There is no point in trading the markets when you are stressed out or feeling out of it. New market highs will do you no good if you are not ready to trade. It is better to stand aside and rest, relax, and regain your physical and emotional strength before returning to the markets.

It may not be a good idea to trade in a pessimistic mood, but trading in an overly enthusiastic, overconfident mood isn't a good idea either. When you see new market highs for the past two weeks, it's tempting to feel overly optimistic. Getting a swelled head, though, often interferes with maintaining a realistic, detached and focused mindset. It's important to stay calm, objective, and unemotional, but getting overconfident is not going to help matters. When you see market opportunities that haven't been present in months, it's easy to erroneously start to think you are invincible and can do no wrong. Overconfidence, however, usually leads to trading mistakes that may spell doom. It is essential to stay realistic while trading.

It is also vital to stay calm and at ease. Don't push yourself too far. When you feel pressured, you'll tend to make trading errors. If, on the other hand, you try to achieve realistic standards, you'll feel more relaxed. Ironically, if you strive for goals that are consistent your skill level, you'll meet these goals, and in all likelihood, you'll exceed your expectations. By respecting your comfort zone, you'll feel more at ease and make more profits. It's hard to stay on top of your game, but if you trade in the proper state of mind, you will achieve lasting success.

Avoiding Frustration

2006-11-14T04:19:00.002-08:00

How well have you been doing in the markets these days? There have been many opportunities in the past few weeks, but an abundance of market opportunities don't always guarantee success. Setbacks are the rule rather than the exception when it comes to trading. Discovering reliable trading strategies is a challenge, and frequently, a promising strategy produces a series of losses, especially under new market conditions. Losses and other setbacks can be frustrating and anxiety provoking. If you are expecting to win because the markets have been showing new highs, you can feel especially frustrated when you don't meet your expectations. As much as you don't want to be fazed by these setbacks, it can be difficult. When you face setback after setback, it can be hard to pick yourself up. It's tempting to give into the frustration and feel beaten by the pressure. The only way to make it, however, is to pick yourself up and
keep trading the markets with a fighting spirit.

In order to keep up a fighting spirit, it is vital to have high frustration tolerance: No matter how many setbacks you face, you must keep going. Maintaining a fighting spirit is largely a matter of having the proper mindset. People with low frustration tolerance tend to believe that they should never experience a setback and that if they experience a setback, it is impossible to overcome it. But this mindset will get you stuck rather than moving ahead. It is essential to constantly remind yourself that setbacks are a natural part of life. Indeed, if you are trying to succeed at trading, you should expect setbacks. Instead of dreaded events, challenges and setbacks can be viewed as part of the excitement and stimulation of living. When you face a setback while trading, you should view it as an opportunity to learn and develop your trading skills rather than a discouraging impediment. Merely changing your viewpoint regarding potentially frustrating events can significantly cha nge your ability to tolerate them. If you expect them and accept them as natural rather than a disaster, you'll feel less frustrated. And instead of passively feeling paralyzed by them, you'll try to creatively think of ways you can use the setbacks as a new starting point than can lead to a higher level of trading skills. It is useful to view setbacks as ways for you to gain more experiences with the markets and hone your trading skills.

A proper attitude is one of the best ways to prevent feelings of frustration, but it is also important to build up physiological defenses. Every time you face a setback, it can take a great deal of energy to cope with it. Each setback uses up physical and mental energy, and if you are not careful, a series of setbacks can wear you out. By getting plenty of rest, and especially sound night's sleep, we can cope with frustration more easily. Regular exercise and proper nutrition can help your body create a natural defense against frustration. It is also important to set realistic expectations. You will feel especially frustrated when you set unrealistic expectations and fail to meet them. By realizing that no matter how optimal the market conditions, profits are never guaranteed, you'll feel more at ease when you encounter setbacks. You won't be caught off guard, and you will be ready to deal with them. It may be discouraging at times to continually face setbacks, but it is nece ssary to realize that you have the freedom to decide how you will feel when beaten down. You can choose to feel frustrated or you can view setbacks as challenges and optimistically be ready to think of exciting, new ways of overcoming them. The more you can acknowledge that setbacks are a necessary part of trading, the more easily you'll cope with them, and be able to use them as stepping stones to higher levels of trading success.

It's Not About Being Right

2006-11-14T04:19:00.001-08:00

The biggest ailment facing many traders is the need to be right. Most people hate being wrong. They hate being wrong so much that they lie to themselves about being wrong and refuse to acknowledge that they are infallible. But seasoned traders know that if you are obsessed with being right, you will never be honest enough with yourself to hone your trading skills to the point that you master the markets. In an interview with Innerworth staff, Bo warns, "You have to be able to be honest with yourself about what you're doing. In many areas of life, it is important to be right. In the markets, it's not about being right. It's about managing risk and making sure the odds are stacked in your favor. If being wrong about a trade hurts you personally, then you're never going to make it as a trader. You can't let errors faze you. You just can't care. It's a little bit like rolling a die. You never quite know whether the next trade is going to be a winner or a loser. But if you stick t o your plan and remain disciplined through a series of trades, more likely than
not, you'll be in the plus column."

The difference between the master trader and the novice is that the novice trader is thrown off his or her game by repeated setbacks, while the master trader just brushes off mistakes and keeps going. Being wrong can hurt. It often feels like we are being punished for being a poor student, a bad child, or an unproductive worker. If you are not careful, you can imbue being wrong with too much personal significance. It can have symbolic meaning. The trick, however, is to remove the symbolism, and neutralize the emotions to the point where you just say, "So what, of course I'm wrong. That's what I expected. I'll just get over it and move on." When you are wrong and make a mistake, you need to get back in the game as soon as possible and try to turn things around. That's often easier said than done, though, especially when you have a lot on the line. But there's a lot you can do psychologically to set yourself up for success and avoid failure.

The first thing you need to do is make trades, experience being wrong and see that being wrong is not so bad. The more you face the unpleasant reality of being wrong, the more you will see that being imperfect is not so bad. If you believe that you must be absolutely right and can never be wrong, however, you'll feel ill at ease. And then, you'll be afraid to be wrong, feel stressed out, make trading errors and lose. But if you remind yourself that trading is hard, and you are likely to be wrong, you will feel better. You'll think, "Of course I was wrong. Trades don't work out a lot of the time. I'll just take it in stride." With a more flexible state of mind, you'll feel more relaxed, and take precautions to protect your ego and your assets. Ironically, if you just accept that you may be wrong at times, and that being wrong is not so bad, you will be able to relax and recover easily from a setback. And if you feel relaxed and keep trading, you'll hit upon a winning streak an d trade profitably. On the other hand, though, if you think you must be right and that losses are a terrible tragedy, you'll never feel at ease. You'll always feel you're about to take a fall and be unable to get up. In the end, the more you are not afraid of being wrong, and expect to make mistakes, the more you will persist. And the more you persist, the more profits you will make in the long run.

Decisions, Decisions: What Do We Do Next?

2006-11-14T04:17:00.000-08:00

It is Tuesday, and Jim has been watching the markets closely for the past two weeks. It appears to be the fulfillment of his dreams: new market highs. He wonders, "What is the smart thing to do?" On the one hand, he can go long, but will this optimism last? Oil prices are still high, but they are lower and a little more stable compared to last summer. Everyone is hoping that companies will show strong earnings this quarter, but will they? Are the record highs just temporary? On Wednesday, the masses were worried about interest rates and the markets closed down, so cautious optimism may be warranted. Many investors prefer a bullish market, but smart traders are cautiously optimistic these days. When trading the markets, you can't count on a sure thing. It can be up for several days and down the next. No one knows
with 100% certainty what will happen next.

There is no replacement for doing your homework. The more you know about the markets and the companies you trade, the greater your odds of winning. Which companies will have earnings that match analysts' forecasts, and more important, will it matter? As any astute market observer knows, a stock may rise before an earnings announcement, if the masses are optimistic, but should the earnings report fail to match expectations, the price will decline even though the company may have done rather well. It's all a matter of the opinion of the buyers and sellers.

What will the masses do? That's the big question. Right now, there is international turmoil and a belief that we may not experience the economic growth to which we have been accustomed. And when that happens, the masses may turn to pessimism. What can you do to profit?

To a great extent, it depends on your personality. If you are a risk taker, you can capitalize on the times. You can trade on the likely probability that the masses will sell off stocks in companies that fail to meet analyst expectations, feel seller's regret, and buy back those stocks they sold out of impulsive fear. You can buy at the low point and sell it back to them when seller's regret sets in. One warning, however, it sounds easier than it is. But as a strategy, it works. Whether you try it depends on your personal psychology. If you don't mind the risk and uncertainty, it will work for you. If you are a cautious, however, then this may be a time to stand aside. Cautious traders stay away from trading right before earnings reports. You never know what will happen until it happens. The cautious trader may not want to risk money when analyst forecasts and earnings reports have the most power to dictate how the masses will behave. The masses react to news, and unless yo u have a trading plan that just happens to capitalize on the news, you may end up on the wrong side of a trade. But again, there is no one right way to trade. It is up to you.

In the end, even during times of optimism, it is wise to stick to the basics. Manage risk by risking only a small amount of capital on a single trade. Think in terms of the big picture and realize that what matters most is your performance across a series of trades. And work hard. Study the markets. Make an educated guess as to what the masses will do, and outline detailed trading plans. And most important, trade your plan. Sticking to the basics may not allow you to make huge profits on a few key winning positions, but on the other hand, it will keep you in the game should the markets turn against you. And in all likelihood, when you stick to the basics, you will end up taking home huge profits overall.

Losing May Not Hurt As Much As You Think

2006-11-14T04:16:00.002-08:00

Humans don't like to lose. Whether it is losing a job or a romantic partner, when contemplating the possibility of a loss, the prospect of losing is worse than reality. That is, we tend to believe that a loss is
going to hurt us emotionally more than it actually will.

People often base their choices on how they think the outcome of the choice will make them feel. Investors and traders, for example, seem to believe that a loss will hurt more than a win. For example, when contemplating a trading outcome, we are more concerned with losing $1,000 than potentially winning $2,000. Surely, winning $2,000 will make us happy, but the possibility of losing $1,000 is so dreaded that unpleasant feelings of loss far outweigh the potential joy of winning. Psychologists Deborah Kermer, Timothy Wilson and colleagues (2006) at the University of Virginia conducted a novel experiment to illustrate this phenomenon. They asked a group of participants to play 44 trials of a gambling game in which a computer randomly ranked playing card suits (hearts, spades, diamonds, and clubs) from first to last. Participants were asked to guess what the top-ranked suit would be. They won 50 cents if the suit they guessed was ranked first, and won 25 cents if ranked second. T hey lost 50 cents if their guess was ranked third, and lost 50 cents if ranked fourth. Participants forecasted how they would feel if they lost. After playing the game, participants discovered that they felt must better after losing than they had anticipated: The prospect of losing felt worse than the actual reality of losing.

Why do people think they would feel worse after a loss than they actually do? Kermer and colleagues argue that people have many ways of looking on the bright side, but forget this fact when contemplating a potential loss. People know how to cope with defeat. They build up their ego automatically and unconsciously. These psychological processes happen so quickly that we don't realize we have these coping abilities until we need them. People are inaccurate in their expectations regarding a loss because people do not remember similar losses in the past. They do not accurately remember how they felt and wrongly assume they felt worse than they actually did. What is the solution? The solution may be obvious to seasoned traders: Make a bunch of losses, and repeatedly experience how you cope with them. Once you see how well you can cope with losses, you will tend to be less averse to losses in the future.

Perhaps one of the biggest reasons that losses are hard to handle is that losing money is not socially accepted. If you told your frugal parents, for example, (who were unfamiliar with trading) that you had lost $20,000 last month, they would treat it like a tragedy. It may not be a great feeling to lose such a large amount, but as most traders know, losses are commonplace and you must take them in stride and move on to the next trade to make profits in the long run. It is easy to put yourself in a fearful, pessimistic state of mind by allowing conventional social standards about losing money to make you feel awful. But with the proper mindset, you can cope with losses and the prospect of losing money. First, remember that losses are just an everyday fact of life when trading the markets, and that losing is not morally wrong. Second, remember the times you have lost in the past but survived to trade earnestly and make huge profits. When you are stunned and paralyzed from the prospect of losing, remember that the prospect of losing is much worse than reality.

Think Fast

2006-11-14T04:16:00.001-08:00

Have you ever watched the last minute of a close football game and felt excited? When you are anticipating what will happen next, you often feel a little high, especially if you expect a desirable outcome. Humans like excitement. Whether it is a traffic accident on the way to work or the last scene of a murder mystery on television, we like suspense. Trading is naturally exciting, but if you are a winning trader, you do not put on trades for sheer excitement. Losing traders seek out thrills. Winning traders assess the market action rationally, make a sound trading plan, and calmly trade the plan. It may seem boring at
times. But it doesn't always need to be. If you "think fast," you can spice things up.

In the current issue of "Psychological Science," Drs. Emily Pronin and Daniel Wegner study a phenomenon they call "Manic Thinking." Have you ever experienced racing thoughts, and felt a sense of eagerness, urgency, and wild exhilaration? Perhaps you were trying to meet a deadline, and felt at the top of your game, as if you were not only going to meet the deadline but also do a great job. You've probably also felt this sense of eagerness, urgency and exhilaration when you were about to close a big winning trade. When you are about to take home huge profits, feeling excited is understandable. If only we could bring this sense of excitement to the more mundane tasks of trading, such as when we are scouring charts for the next high probability setup. Increasing the speed of your thinking may offer a solution.

In a laboratory experiment, Drs. Pronin and Wegner randomly assigned participants to read a set of computer-presented statements at either a fast or slow rate. Changes in pleasant moods before and after reading the statements were measured. It didn't matter whether participants read enthusiastic statements or pessimistic statements, the people who read the statements at a more rapid pace felt happier. These results suggest that if you can speed up your thinking, you will feel more optimistic. This phenomenon can be especially useful when you are feeling in a little bit of a slump. If you are feeling stuck, as if you will never find a high probability setup, try to think faster.

How can you think faster as a trader and sharpen your mental edge? Thinking fast is not the same thing as acting impulsively. Trading with the proper mental edge demands that you feel calm and rational, but rather than allow your mind to wander lackadaisically, you want to push yourself to think with more attention. Rather than let your thoughts drift, focus on your trading. Try to block out distracting thoughts, and intensely focus on your immediate experience. Try to search for new setups more rapidly. Run through possible scenarios more rapidly. Plan more rapidly. If you can increase the speed of your thinking processes, you will feel more creative and optimistic and this state of mind can help you discover new insights. That said, it is essential to avoid trading impulsively. Think fast while you are planning the trade, but make sure you have a clear head before you execute the trade. Again, the idea is to "think fast" when you are in the planning stages of a trade in ord er to come up with a creative idea, but in the end, not all creative ideas are winning ideas, and it is vital for your survival to carefully evaluate your plan before you execute it.

Trading is a demanding profession. To make profits day after day, it is necessary to find new high probability setups. It can be a daunting task, and if you are not careful, you can feel beaten down. But when you feel a little down, think fast. Your mood will pick up. You will see new possibilities, and trade at your best.

In Control and Profitable

2006-11-14T04:15:00.000-08:00

Last summer, Jack decided to fix his leaky roof. But one thing led to another and he never got around to finishing it. Now it's almost the middle of October and rainstorms threaten his home. Jack decides to buckle down and beat the elements. He pushes himself to nail down the shingles to protect his property. There's a primitive human instinct to protect your assets. When rain threatens to ruin your valuable
property, you get motivated and get moving. You do everything physically possible to beat the odds.

When it comes to physical labor, getting yourself energized helps. You can gain full control of your domain. You can build a strong shelter to beat nature (that is, it's always physically possible though somewhat impractical at times). Such an approach may not work for trading, however. When it comes to trading the markets, you can never gain complete control. In the final analysis, the markets are in control, and no matter how much physical energy you expend, there are times when you cannot overpower what the markets want to do. An overly zealous gung ho mentality, fight them and beat them, may not be appropriate. You must flow with the markets, and go where the markets take you.

Dr. Richard McCall in the "Way of the Warrior Trader," outlines how you must watch the markets like a skilled warrior, see what move they make, and make a counter-move. It requires astute perceptions and a winning strategy to beat a skilled opponent like the markets. Brute force alone is not enough. You have to accurately identify what you can control and what you can't, and allocate your energies appropriately.

What can't you control? You can't control how the masses will react. You can't control world events that may impact stock prices. You can't control how the media may report on the market action and influence prices. You can't control how much profits a company will make or their earnings reports. You can't control the Fed's decision to raise or lower interest rates. The factors that you cannot control, and must live with, are numerous, and trying to control them is a waste of your time.

Just because you cannot gain complete control of every aspect of trading is no reason to despair, though. You merely need to get in sync with the markets and figure out a way to go where they go. The kind of action you must take is pensive, analytical and quantitative. You have to concentrate and focus on the markets. This requires studying charts and reports, and mentally planning what to do rather than taking physical action. Instead of merely getting up your physical energy, you have to build up your mental energy as well. And then you have to put all your mental effort into finding new trading setups and waiting for the right moment to enter and exit. The action you need to take is in preparing for trading and focusing on executing trading plans flawlessly. Winning traders know when to accept circumstances beyond their control and when to take decisive action whenever they are able. When you take appropriate control of the situation, you will achieve lasting financial suc cess.

A Moment of Brilliance

2006-11-14T04:14:00.000-08:00

It has often been said that trading is not rocket science. Perhaps it isn't. You don't need to be as brilliant as a rocket scientist to trade the markets profitably. That said, there are moments when a trader has a brilliant insight and takes home huge profits because of it. (I don't know any rocket scientists, but I'll bet that a rocket scientist isn't brilliant every waking moment, and occasionally, must also rely on a moment of brilliance to get the job done.) All traders have their moments when they have a brilliant, astute insight and
profit from it.

When we interview master traders at Innerworth, we enjoy asking them to describe their biggest winning trades. Usually a combination of luck and brilliant insight results in the biggest wins. For example, in an often told story, a trader just happened to own stock in a company that was talked up by a media analyst. The price jumped on the news, and the trader sold into strength for a huge gain. In other stories, traders make a good guess that a product or service is bound to be in high demand in the future and that eventually the stock price is going to reflect the demand. For example, if you perceived early that all the kids on the block were going to successfully convince their parents to buy them an iPod, you would have made a killing buying Apple stock a few years ago. Other traders capitalize on unexpected world events. For example, if you lived in Richmond, California and saw a major refinery fire before the media picked up the story, you could buy stock in gasoline com panies before the story broke and set off a subsequent gasoline shortage. Winning big is often a matter of being at the right place at the right time, and having the right intuition regarding how the markets will behave. But it isn't simply a matter of luck. A winning trader knows the markets, and how they will behave to the news. Unfortunately, there is no crystal ball to tell you how the markets will behave. The past may offer a hint, but when it comes to the markets, history only repeats itself when it does. The rest of the time, the markets go their own way.

So what's the lesson? Sometimes you will have a brilliant insight and make a killing, but other times, you will not. Should you wait around for a brilliant insight and stand aside at other times? No. If you take no action, you will stagnate, and then, when a "once-in-a-lifetime" trade happens, you won't have the skills to execute the trade and capitalize on the opportunity. Instead, you should trade day after day, and always accept what the markets have to offer. Don't demand that the markets give you rare trading opportunities every day. There will be times when you will come across a rare market event, but the rest of the time, you have to settle for finding profitable run-of-the-mill trades. It is vital that you scour the markets for high probability setups and trade them, rather than only look for potentially big wins. The typical offerings may not allow you to achieve 50% of your earnings on a single trade, but they will allow you to make profits. And across a series of trades, these profits will add up.

As much as you want to find that big trade that you can talk about for the rest of your life, realize that it may not be the big, thrilling trades that matter, but the smaller trades you make every day to become a winning trader.

Good Times

2006-10-09T00:56:00.000-07:00

The markets have been closing at record highs recently. It looks like we are in for some good times. So what can go wrong? Plenty, if you are not careful.

Overconfidence may be the biggest concern. With all the pessimistic market forecasts in the media during the past few months, many traders may have been in the doldrums, feeling stuck as if we were in for a serious long-term economic slowdown. They may have wondered whether circumstances were ever going to improve, and now that market conditions have improved (at least temporarily), some traders may be relieved. Relief after a period of dark despair can often result in exuberant euphoria, however. Many traders may be so optimistic that they think it is time to make some easy money. But trading the markets profitably is never easy. It's not a good idea to ever let your guard down. Your long-term survival depends on paying attention to risk limits, and making sure that you limit the amount you risk on any single trade. It may be tempting to invest more capital than usual during this temporary boom, but you may pay for it if you are wrong. Sure, many stocks are going up, but the re still may be downgrades or bleak financial forecasts for any given company. The markets are never certain. It's not clear what will happen next. For example, a company like Hewlett Packard went up despite the fact that it was in the midst of an investigation, while a company like Apple Computer went down because it was reported that the new video iPod would not be released before the Christmas shopping season. How the market reacts to news events is rarely certain and difficult to anticipate. Just because we are in a boom does not mean that any stock we pick is bound to go up. Don't be overconfident. Temper your optimism with caution.

Some traders may react to the temporary boom with optimism, but other traders may feel overwhelmed. When market conditions are less than optimal, many traders rightly decide to stand aside. But when market conditions rebound, these same traders may feel compelled to trade the markets in earnest. And unfortunately, they may put extra pressure on themselves to perform. They may think that they must make a profit, since trading conditions are better than they have been in a long time. Nothing is easy, though. Just because market conditions are better than usual does not mean that anyone can trade and make a profit. It still takes skill. Putting unnecessary pressure on yourself to trade more profitably than usual will just make you feel stressed out and will increase the odds that you will make trading errors. It's vital to remember that you don't have to be perfect. You don't have to find every possible market opportunity. Just do your best. There may be more opportunities in th e next few weeks than usual, but that doesn't mean you have to find them all. Don't set objectives that you can't meet. Be realistic. If you can trade with a relaxed mindset, you'll see high probability setups and you will take home profits. Don't force it. Just let it happen.

Times are good, but you won't make profits if you are over-confident or overly optimistic. Take advantage of the times through realistic planning and diligent, hard work. If you do, you will find that good times will lead to huge profits.

How Indecisive Are You?

2006-10-09T00:52:00.000-07:00

Do you have trouble pulling the trigger? How many profitable trades have you missed because you were uncertain and afraid to take action? It's too bad that we have to take risks. If every trading idea that popped into your head turned out to be profitable, you would never hesitate. You would have nothing to fear and you would take decisive action. Unfortunately, you've probably learned the hard way that not every trading idea is a good one. There's a good chance that a trading idea that you thought was a sure win will end up losing money. The possibility of being wrong and losing money can shake your confidence,
if you dwell on it do much.

Do you have a problem with hesitation? We asked a group of Innerworth subscribers to answer the following 10 questions on a 4-point scale. To what extent do you agree with each of the following items? If you strongly disagree with an item, give yourself a score of 1 for the item. If you disagree, give yourself a score of 2. If you agree, give yourself a score of 3 for the item, and if you strongly agree, give yourself a score of 4. Answer each of the following items, and see what score you get: 1) I scold myself when I make a bad trade. 2) I often mull over a trading strategy excessively before implementing it. 3) I often hesitate to act on a trade because I'm afraid that I have not anticipated every possible flaw in my trading strategy. 4) I feel angry or depressed when I lose even a small amount of money on a trade. 5) I often spend too much time analyzing a decision about a trade. 6) When I don't meet the goals I set for my trading, I become pretty upset with myself. 7) I try to devise a perfect trading strategy because losses are difficult for me to deal with later. 8) I hesitate to initiate a good trade unless I am absolutely certain that it will produce a profit. 9) When I realize I made a bad trade, I become consumed with anxiety and find it difficult to take action. 10) There have been times when I have hesitated in making a trade for so long that market conditions changed and I could no longer successfully implement my trading plan.

What score did you get? If you received a score between 10 and 20, you scored in the lower quartile, which means that less than 25% of the Innerworth subscribers who took this test obtained a score as low as yours. In an analysis of our database, we found that individuals who scored in this range tended to experience very low levels of stress, had an optimistic outlook, were flexible, independent thinkers and were able to cope with past failures easily. In contrast, if your score was between 27 and 40, you scored in the upper quartile, which means that 75% of the Innerworth subscribers who took this test obtained a lower score than yours. We found that individuals who scored in this range tended to experience higher levels of stress, had a pessimistic outlook, showed rigid and inflexible thinking, were overly concerned with past failures, and experienced unpleasant moods such as sadness, disappointment, and fear.

When your money is on the line, it's hard to stay relaxed and decisive, especially if you are a novice trader. Sometimes there's a good reason to feel afraid and hesitation is justified. Rather than impulsively jumping into a trade that may be a loser, it's useful to take a minute to think it over. But if you hesitate too much, you are likely to miss critical market moves and end up losing money. In his book, "Trading to Win," Ari Kiev suggests that novice traders don't trust their instincts because they think they don't have enough experience to take action on ideas based on shear intuition. It takes experience to feel at ease with your intuition, and many novice traders understandingly question their instincts. But not all first hunches are inaccurate. Many times, they are right on target. Your first hunch may be astute, and little is to be gained by further deliberation. But many traders don't want to take the chance. They want perfect, infallible information and confirmat ion. According to Dr. Kiev, however, the need for confirmation can distract you from taking decisive action. Over time you will learn to trust your instincts and act on them. Don't waste time unnecessarily deliberating. Sure, you don't want to make too many mistakes, but you can make a few occasionally with few repercussions. All you can do in the end is to do your best and keep building up your trading skills. You might as well work hard and think positively. With enough time and effort, you'll eventually develop the skills you need to achieve enduring financial success.

The Heat Is On

2006-10-09T00:31:00.000-07:00

Have you ever watched the last few moments of a tense sporting event? Sometimes the last few seconds can make all the difference, like when a quarterback throws a Hail Mary pass for the winning touchdown in the last few seconds of a football game. Depending on how much talent is involved, a great deal of stress can increase performance or hinder it. If you are extremely talented, a little bit of stress may compel you to push your talents to the limits and pull off a miracle. But for most people, it is hard to perform under extreme pressure. Most people choke under the strain. Ideally, it is easier to perform when you feel you can take it easy, calmly assess what you want to do next, and take decisive action. Whether you are trying to live up to someone else's expectations or are trying to reach self-imposed high standards, trading under
pressure is bound to put you on edge.

How can you feel more relaxed and creative? The first step is to identify sources of pressure. The second step is to minimize the sources of stress either through taking action to relieve the stress or using thinking strategies. There are at least three sources of pressure: Financial, social, and self-imposed unrealistic standards.

Most of us could use a little extra money these days, so there is always a little financial pressure to trade profitably. But financial strain can adversely impact your ability to trade with a calm, relaxed, focused mindset. If possible, it is useful to relieve some of the financial strain. A straightforward way to lessen financial pressure is to reduce the size of your trades. The less money you risk on any single trade, the less stress you will feel. Thinking in terms of probabilities can also relieve financial pressure. That is, if you remind yourself that any single trade is just one trade across a series of trades, and that the profits across a series of trades are all that matter, you will feel more relaxed.

Social pressure can also tax your limited psychological resources. At its worst, we may continually feel that someone is watching us. Our family, friends, or spouse may expect us to make profits. It's natural to care what they think, but caring too much can gnaw at us. The social pressure to perform can upset us so much that we make trading errors, or hold on to losing trades to avoid having to admit that we have been mounting losses. If you feel social pressure, you may want to get into the habit of keeping how you are doing to yourself. But if you must tell close friends or loved ones how you are doing, make sure they understand that the trading business has ups and downs, and that it is best to not feel too excited during the ups or not feel too upset during the downs.

Finally, perhaps the biggest source of stress is the expectations you place on yourself to do well. If you want to master the markets, you have to be ambitious, but on the other hand, too much ambition can put unnecessary pressure on you. It's better to take it easy. Don't try to be perfect. Try to work hard, but at the same time, just do your best.

When the heat is on, it's hard to perform at your beat. So why push yourself too hard? Why not take some of the pressure off? The less pressure you feel, the more free you will trade. And the more profits you will make.

Motivated, Persistent, and Profitable

2006-10-03T07:22:00.000-07:00

The markets have been bullish recently, but that's still no guarantee of profitability. The only sure path to profitability is through hard work and persistence. First you have to find a high probability setup. Next, you have to patiently wait for ideal market conditions and get in and out at the right times. And if everything goes well, you take home profits. Most of the time, though, you have to face setbacks and losses, and unless you are persistent, you can feel like giving up.

For the past week, stocks have been on the rise, reaching new heights, but how long will it last? If you get in now, you may end up selling as a turning point happens, and may end up as merely one of the many sellers looking for buyers who just are not there. The only way to ensure profitably is to work hard, search for setups and execute trades with discipline.

It can be hard to find the proper motivation at times, especially during a sideways market. But the way the markets have been behaving lately should motivate you to believe that if you execute enough trades, you will take home profits. It's at times like these that you can trade in earnest until you hit upon a winning streak, and when you get in the zone, push yourself to the limits. But at the same time, don't get overly confident. Sure, the markets have been on the rise, but that does not necessarily mean you can buy a stock at the wrong time and profit. The overconfident trader, however, falsely believes that trading is that easy, especially after a big windfall. Don't let the exuberance of the past week give you a false sense of security. It is vital to approach trading with a sense of optimism, but temper your optimism with caution.

It may also be useful to set modest goals. In times of exuberance, many traders are afraid they are missing out on opportunities. Instead of identifying just a few specific trades, they become over-ambitious and push themselves to identify more trading setups than they can handle. They spend too much time trying to find as many trading setups as possible, and in the end, they don't end up paying enough attention to a few specific trades that are likely to produce a profit. Rather than set yourself up for failure by trying to do too much, set realistic objectives and accept what you can accomplish with the time and resources you have available.

Most importantly, profitable trading comes with persistence. As overwhelming as trading can be at times, it is essential to believe that if you work hard enough, you can make profits. Even when times are good, setbacks and losses are commonplace. If you are not careful, a series of setbacks can get you down. But if you work hard, persist, and work diligently to overcome obstacles, you can take home huge profits, especially during a bull market.

Building Mental Momentum

2006-10-03T00:29:00.000-07:00

When you're under a great deal of pressure, it is easy to choke. You feel the stress, and when you're on edge, it is difficult to make decisions or to look at your current trading predicament objectively. It's much nicer to feel you are ahead of the game, than struggling hard to come back from behind. When you have a drawdown, you can feel a little disappointed, a little stunned, as if you have fallen, and you are having trouble getting up. After you've made a series of successful trades, however, you can feel much more powerful, as if you can relax a little bit. And when you feel relaxed, you also feel creative, and can think of winning strategies. Everything seems to click and you start trading effortlessly and profitably. Feeling ahead of the game usually puts you in an optimal mental state. But it is hard to feel such empowerment when you are feeling behind, or stuck in a rut, not making any headway. At these times, it is important to remember that there are two types of momentum in trading. There is profit momentum and mental momentum. Mental momentum can be just as powerful as profit momentum. and it is useful to build it up.

We're all familiar with profit momentum. That's when you are way ahead in terms of profits. Mental momentum is also useful, though. We feel mental momentum when we believe we have made our best effort, when we feel that we have done everything we possibly could have done. At these times, it is useful to pat ourselves on the back for a job well done. While trading, we usually forget to give ourselves credit when we have put in a good effort. We are usually focused only on profits and those efforts that produce profits. In order words, we focus exclusively on performance goals, while completely forgetting about learning goals, which are equally important.

Instead of only focusing on a performance goal, such as striving for a 20% profit per month, for example, it is useful to think of other goals that are equally important, take effort, but may not always directly produce a profit. There are many modest goals that can be achieved more easily and deserve a reward upon completion. It is useful to break down the goal of making a huge profit from a few good trades into specific steps that are doable, and should be rewarded after each step. For example, studying for 30 hours a week or learning a new trading technique is important and worthy of reward, even if the reward is just a personal sense of accomplishment. The specific goal may not immediately lead to the larger goal of making a 20% profit per month, but it is easy to achieve, will lead to personal satisfaction upon completion, and in the long run, will contribute to the long term goal of becoming a seasoned, profitable trader. The more you complete these modest goals, the mo re mental momentum you achieve.

It is important to give yourself credit for all the effort you put into trading. It is tempting to feel good about your efforts only when they pay off, but you put in just as much effort putting on a losing trade as a winning trade. Regardless of whether you win or lose, you'll feel better if you reward yourself for all the work you do, regardless of the outcome. The more you reward yourself for all the work you do, the more mental momentum you will feel. This, in turn, will make you feel strong and empowered, allowing you to trade more effortlessly and profitably.

Focusing On You and the Markets

2006-09-29T14:13:00.001-07:00

Throughout our lives, we are told that the key to success is to compete with others, and beat them. We compare ourselves to others, inspire ourselves to do better, and try to outperform our peers. As children playing sports, we were advised to hone our skills and become a star player. In school, we were often told that higher grades were the key to long-term success, and that we better get them, or else we would fail. And when we enter the working world, we learn that survival depends on beating out our competition. But when it comes to trading, you aren't actually competing with anyone but yourself. When it comes to
trading, an obsession with winning can actually do more harm than good.

Comparing our performance with others does seem to have some advantages. Knowing that a goal is attainable is often a powerful motivator, for example. Several scientific discoveries were slow to materialize because they were thought impossible at first. But once the goals were deemed feasible through comparisons to others in the scientific community, progress was accelerated. But comparisons can also have adverse influences. Ironically, people who achieve great things usually work independently. They follow their own timeline, follow their own passion, and look inward for where to go next. Trading is a similar creative process. You are the only one who needs to hone your trading skills. You are the only one who must find a method that matches your aptitudes and personality. Comparisons to other traders can often prove problematic. How you perform has nothing to do with how others perform. And comparisons are likely to cause upsetting emotions, such as jealously or envy. Upon seeing that you are doing relatively poorly compared to a fellow trader, you are likely to think distracting thoughts such as, "Why can't I do as well?" or "I must not be as good of a trader as I had thought," Such thinking does nothing to keep you focused on honing your trading skills.

Don't look at anyone else's record but your own. You'll often be tempted to compare your current performance to that of others. That's how it's been throughout your life, and it's not easy to change a lifelong pattern overnight. But with trading, you must restrain this urge. Everyone has a different learning curve. To keep your spirits up, you'll do best as a trader to focus on improving your past performance record in your own time and in your own way, rather than trying to match other traders. You don't know what factors created their performance records, so comparisons can only mislead and hinder you. Other people's records do not have a direct bearing on your own record. Who cares if you make 50% less than other traders? Your energy should be focused on making yourself a master trader as defined on your own terms, not on beating others. Such comparisons will only disappoint and distract you. Focus on you, the markets, and nothing else. You will trade more calmly, creative ly and profitably.

Let It Go

2006-09-29T00:10:00.001-07:00

Have you ever owned an older car and sunk a lot of money into it? First the transmission goes out, and you figure that rather than buying a new car, you would save money if you repaired it, but then it needs a valve job. It doesn't end there. You replace some of the wiring and then it hits you: You would have been better off buying a new car, but at this point, you've sunk so much money into your car, you can't seem to part with it. This same phenomenon happens while trading, We may put a great deal of time and effort into a trading strategy or method and we just cannot seem to give it up no matter how much we have lost. Behavioral economists call this malady the sunk cost effect.

The sunk cost effect is most insidious while holding on to a losing trade. Suppose you were holding a position that had lost 20% of its value for the last four months. Your trading plan may dictate that you close the trade, but you do not close it. Instead, you can't believe how wrong things are going. You think of how much time and effort you put in studying the fundamentals of the company, and watching the markets to find the right time to enter. You hold on and things get worse. At some point, your thinking is fatalistic and you figure, "Why stop now? What else do I have to lose?"

It's easy to fall for the sunk cost effect. Humans hate to experience a loss or setback of any kind, and when they do, they increase their commitment to a losing course of action because a great deal of time, effort, and/or money has been spent. But when this happens, it is better to just accept the setback, cut your losses and move on.

It's hard to admit we were wrong, though. It's like the old car you dump money into. You feel like you have to justify the time and effort you put into a losing course of action, and rather than admit you are wrong, you just put in even more time, effort and money. In the end, however, it is vital to admit you've made a mistake and move on before the situation compounds into an even bigger problem.

One of the best ways to beat the sunk cost effect is to allow yourself to make mistakes. The sunk cost effect is especially powerful when we believe that we must be perfect. But we don't need to be perfect. We can be human. This is where a strong independence streak is useful. Independent people don't care what anyone else thinks. When we feel we must justify our actions, we usually are not trying to justify our decisions for ourselves. Usually, we are trying to justify our actions to someone else. It may be friends, family, or even some undefined social standards we feel we absolutely must obey. But in the end, the only standards that you must meet are your own. So if you want to be a fallible human being, you have the right. Once we realize that we do not have to justify our mistakes, it's easier to accept a setback and move on.

Don't waste time justifying your mistakes. Trying to justify your behavior will gnaw at you, and if you are not aware of it, and are not trying to control it, you will have a tendency to get stuck and stagnate. As you trade, be aware of the powerful influence of the sunk cost effect. Try to consider whether or not sunk costs are influencing your decisions. Don't try to justify a losing course of action. Let it go and move on to the many trading opportunities that are waiting for you out there.

Where Are We Going Next?

2006-09-27T23:05:00.001-07:00

Have you been reading the media reports lately? What's going to happen next? Are you bullish or bearish? It's hard to know what to think and what to do. Looking for guidance from the media, analysts or the crowd may be reassuring, but in times like these, times where we do not know whether we are heading for inflation, recession, or a temporary economic slump, it's hard to know whom to trust. Some analysts are bullish, and others are bearish. There are good arguments for both sides, so which path will you follow? In the end, the best that you can do is go your own way.

Whatever you do, however, you must recognize the powerful tendency to follow the crowd, even when the masses are wrong. Following the crowd is instinctual as well as socially learned. Most successful members of society have seen the virtues of following the crowd. They have learned to look for rules to follow and to decide which standards to strive for. In school, for example, it was to our advantage to follow the rules. Blind obedience to authority may not be beneficial but compromise is. To be successful, it is often necessary to stay within the bounds of acceptable behavior. So although following the crowd has disadvantages, it's important to acknowledge that it is often adaptive. In addition, humans may follow the herd instinct. There is safety and comfort in numbers. The masses offer confirmation, and it's nice to have the sense of reassurance that the confirmation of the masses offers. Following the crowd is comforting and adaptive most of the time, but there are times when the crowd is wrong. And when you follow the crowd at the wrong time, you lose, and lose big.

During times when the longer-term trend is uncertain, it isn't safe to follow the crowd. In times like these, you must go your own way. You must think outside the box, guessing what the crowd will do next, and anticipating how the movement of the masses can benefit you as a trader. The key is to know when to follow the crowd and when to go against it. The challenge is making an educated guess as to when a turning point will occur, anticipating it, and developing a trading plan to capitalize on it. Now, this all sounds easy in theory, but in practice, it is difficult to implement a trading strategy to capitalize on this cycle. How can one guess the turning point? Some say it is almost impossible. All you can do is develop a sound method that works most of the time but also admit that it may fail. Whether you use technical indicators or you are lucky enough to use the media news to your advantage, you must temporarily have full confidence in your method, put money on the line, and act decisively. Sometimes thinking independently is risky, but trading during uncertain economic times is inherently risky. You can either stand aside or trade and accept the risk and uncertainty. In the end, if you want to keep trading, you have no other choice but to go your own way.

Sealed Fate

2006-09-26T08:51:00.000-07:00

The movie, "Apollo 13," offers insightful lessons about trading, especially for a movie that isn't about trading. Apollo 13 was the doomed mission to the moon that was literally stuck in space. Without a cool, calm, methodical style of problem solving, the astronauts would have never made it home. One scene is particularly apt. While following standard operating procedures, command module pilot Jack Swigert stirred the oxygen tanks. Unexpectedly, one of them exploded. What did he do wrong? He just hit a button like he was supposed to. Yet the tank exploded. The rest of the mission was tense. How would they get back home? In a later stressful moment, fellow astronaut Fred Haise accused Jack of doing something wrong and getting them all stuck in space. We know now that Jack had done nothing wrong but was merely following procedures. The oxygen tank was a defect, an error made by someone else months before they had even left the ground. But Fred's reaction was understandable. Th ere is a very human, natural knee-jerk reaction to falsely believe that every action we take has a direct effect on what happens next. Sometimes what we do does make a difference, but at other times, our fate is sealed. And we can do nothing about it.

When trading the markets, it's natural to want to make every trade a winner. You can get overly compulsive about trying to anticipate everything that might go wrong, however. You may fruitlessly try to develop an action plan for every scenario. There's nothing wrong with over planning, but there comes a point where you have to accept that there is only so much that you can do. You can't control everything. It's just like the Apollo 13 mission. As much as the crew wanted to land on the moon, they could not. A series of events worked against them. If only the defect could have been identified sooner, they would have been safe. Such counterfactual thinking rarely gets us anywhere, though. During the mission, Jack Swigert probably wondered at times if he could have done something different. The truth is, unfortunately, he could have done nothing to prevent the malady. It's the same with trading. You may think you have accounted for all possible events that could go against your t rade, but you cannot. Six months ago, for example, there may have been an accounting mishap that will be caught the day of your trade and reported by the media. There's nothing you could have done to know that an event from months ago would disrupt your plans. Similarly, you may have done all your homework on a company, and put on a trade, but little did you know, it was decided last week that the company was going to announce a merger with its rival. You may have scoured all the company reports, and talked to your "contacts" for hours, but the information you have as a trader is not perfect. And there are times when we are not able to anticipate every possible event. What happens will happen no matter what we do. It can be hard to accept that we are that helpless at times, but unfortunately we are.

You may ask, if my fate is sealed, then why bother trading? Just because your fate is sealed at times is no reason to become upset. In some ways, it can be a relief. If there are times when our fate is sealed, then we don't have to berate ourselves for the market going against us. We are mere humans trying to trade markets that are influenced by a host of factors, factors that no human can fathom. So when you are beating yourself up for failing to anticipate where the markets will go next, relax. Just do your best, and enjoy yourself. If you accept whatever happens, you'll trade more freely, creatively, and profitably.

That's My Plan and I'm Sticking To It

2006-09-25T09:03:00.000-07:00

When your money is on the line, it can be difficult to stay calm and rational. Many traders make trading errors and regret it later. There are many reasons for abandoning a trading plan. Some traders don't outline a detailed trading plan. They trade by the seat of their pants and when panic sets in, they act on impulse. Other traders cannot seem to follow their trading plans no matter what they do. And they can't understand why. Everything just seems to happen so fast; maintaining discipline seems beyond their control. One minute they are in a rational state of mind, and their objectives seem clear, but the next minute it seems as if they are in a state of panic. They don't know what to do. Have you ever felt this way?

As much as it seems like you may not have control over your impulses, you do. It's all a matter of gaining awareness, and taking precautions to stick with your trading plan. If you have trouble sticking with a trading plan, the first step to gaining control is admitting that you have a problem. When you anticipate that you have a problem sticking with your plan, you will see the need to make a concerted effort to develop strategies to stick with your plan. When you are aware of the problem, you can more easily take precautions that will help you maintain discipline.

If you want to seriously stick with your trading plan, outline the reasons why you want to stick with it. Usually, the best reason is to limit losses. If you have trouble sticking with a trading plan, you might write these reasons down on an index card and be ready to pull it out and read over the reasons when you feel the urge to abandon your trading plan. For example, suppose that you buy a stock at $50 and have a plan to sell at $52. When the price reaches $51, however, you have a strong urge to sell prematurely and lock in profits. When you feel the urge to sell, you may try to pull out your index card, and look at how much money you have lost or want to make. It is useful to repeat to yourself, "I must hold on and see what happens. Only if I stick with my trading plans will I make sufficient profits in the long run." By repeating these statements over and over again, you can slow down your thinking and stick with your plan.

When you think you may lose control and abandon your plan, try to slow down. Stop taking action, and remind yourself of the consequences of abandoning your plan. And try to calm down. If you can relax, slow down, and remember the reasons you want to maintain discipline, you will. And you will make more profits in the long run.

Is Being Wrong Really So Bad?

2006-09-24T14:25:00.000-07:00

When trading the markets, it's more common to be wrong than right. There are many ways to be wrong. You can misread a chart pattern, since interpreting a chart is largely a matter of subjective interpretation. You can falsely anticipate what the market will do next, or you can simply commit too much capital to a trading strategy that just may not pan out in the long run. Novice traders, in particular, are infamous for needing to be right. This natural, human tendency is so powerful that novice traders engage in unproductive trading behaviors to avoid admitting that they are wrong. They might hold on to a losing trade, for example, to keep losses on paper. They may procrastinate or put off making a trade in an effort to avoid facing the consequences of a bad trading idea. In many ways, a need to be right can be stifling. Rather than feel free and creative, a trader who consciously or unconsciously needs to be right may hold back at critical moments of trading. When you are inh ibited and afraid, you avoid making trades. And unless you make trades in a variety of market conditions, you'll never hone your trading skills and master the markets. To trade like a master, it is vital to stay calm, open, and ready to trade with a winning edge.

Is being wrong really so bad? Many people have trouble admitting they are wrong. It can be difficult to admit we are wrong. It hurts. We tend to place great psychological significance on negative feedback. For example, when we are wrong, it is as if parents or teachers are criticizing us for doing something morally wrong. But this is a false assumption. When we are wrong, or make a mistake, we are not doing anything morally wrong. We are just being human. We all make mistakes, and it is vital to take setbacks in stride. If you can learn to downplay the emotional significance of being wrong, you will feel calmer and can trade more freely and creatively.

Another reason we hate being wrong is that we have an irrational need to be perfect. We often assume that unless we are always right, we will not be successful. This is especially true when trading. Every dollar we lose may often require the effort of making two dollars to make up the difference. It's natural to want to be perfect and never lose. But we don't always need to be right. We learn to assume that we always need to be right in school. In school, we were usually allowed only one chance to turn in a term paper or take a test. In most school settings, you can't retake a test or rewrite a term paper, and thus, you can't learn to hone your skills. Many people carry over this mindset into trading. But it doesn't need to apply. If you make small practice trades, for example, you can make a trade, learn from your mistakes, and make a new trade. Over time, you'll hone your trading skills. Since risk is managed, you can make mistakes and learn from them. There's nothing to fe ar.

There's no reason to kick yourself for making a mistake. You're human. You are allowed to be wrong. Don't be afraid to accept your limitations. If you allow yourself to be wrong, you will allow yourself to trade more freely, and over time, you'll hone your trading skills to the point that you will trade the markets skillfully and profitably

The Ideal Environment

2006-09-21T22:39:00.000-07:00

When trying to trade at your best, the proper trading environment can make all the difference. For some people, the proper environment may be on the floor of the exchange, getting charged up from the traders yelling in the pit. For other people, the ideal environment may be sitting in a bathrobe with your dog at your feet. Whatever your ideal environment is, however, it's necessary to trade in this environment when you are trying to trade at your best.

Behavioral psychologists argue that the environment in which you trade can dictate how you think, feel, and react. The environment can even elicit memories and motives that influence your decisions and actions. Have you ever tried to sleep in a strange bed, but couldn't fall asleep? Perhaps it was the sheets, the lumpy mattress, or the noise outside your window. Whatever it was, it just didn't feel right. When you are at home in your own bed, however, it all feels right. You feel calm, comfortable, and relaxed. You fall right to sleep. It can be the same way with trading: The ideal trading environment can immediately put you in the proper, winning state of mind.

Working in an environment that suits you can greatly improve your performance. If you prefer a neat environment, it may be hard for you to concentrate when your workspace is cluttered with charts. It may be necessary to straighten things up before you can trade in a calm and relaxed manner. Some traders prefer a small cubbyhole with a desk and a few monitors.

From a psychological point of view, a workspace can have "stimulus qualities." What that means is that our thoughts and emotions can be linked to a particular workspace environment. For example, your family room with a big screen television and theatre quality sound can be associated with relaxation and fun. It may be difficult to work in that environment, even with the television set turned off, because the space is "conditioned" to thoughts, feelings and motives of entertainment. Similarly, when you are sitting at your dining room table, you may naturally think of eating rather than working. And when you are in your bedroom, you may naturally think of sleeping. Each environmental space has a specific set of thoughts, feelings, and motives associated with it.

There are times, however, when we "condition" multiple thoughts, feelings, and motives to a particular environmental space. For example, you may eat, sleep, and watch television in your family room. When you do multiple activities in the same space, the space loses some of its "stimulus value." In other words, when you find yourself in a space that has multiple uses, it can elicit a variety of thoughts, feelings, and motives. You don't want this to happen to your trading workspace, however. When you enter your trading workspace, you want to immediately feel energized and ready to trade. It may be necessary to take specific steps to ensure that your trading workspace elicits a winning mindset.

It is necessary for your trading workspace to be distinct. It should not be in a space where you engage in other activities such as eating or sleeping. Your workspace doesn't necessarily have to be an entire, separate room, although a dedicated room for trading would be ideal. You can merely use your desk as a workspace if that is all you have. The key is to keep the space distinct, though. Don't eat or sleep at your workspace. If you feel like eating, sleeping, or even daydreaming, it is better to get up and do these activities somewhere else so as to preserve the positive stimulus qualities of your workspace. By keeping your workspace distinct, it will elicit only thoughts, feelings, and motives related to a winning mindset. Also keep in mind that a workspace can be "conditioned" to elicit thoughts, feelings, and motives that are associated with a pessimistic mindset. If you are stuck in a rut, your workspace may become associated with a bleak outlook. Don't under-estimate the power of the space. If you get a negative vibe from your workspace, it's vital to trade somewhere else for a while until you regain your mental edge. Once you return to profitability, you may be able to return to your old workspace and "re-condition" it so that once again it elicits a winning mindset. Where you trade can make as much of a difference as how and what you trade. When you trade in an environment that elicits a winning mental edge, you will trade at your peak.

In a Patient State of Mind

2006-09-20T23:52:00.000-07:00

Have you ever sat staring at your screens and thought about how you wanted the price to move. Perhaps you anticipated the price moving $1 in the next week. You stare at the screen and think, "It isn't moving at all. What's going on?" Staring at a stock price on the screen and hoping it will move can be like waiting for a pot of water to start boiling. It cannot happen fast enough and you start getting agitated waiting for something to happen. Unfortunately, watching a stock can also be like sitting in front of a slot machine, and trying not to put in a dollar and pull the handle. You have to fight the urge to make an impulsive, potentially losing trade. Trading requires patience and discipline. The only thing an impatient state of mind will do for you is make you feel frustrated. It's vital that you calm down and wait.

Many times, the key to patience lies in monitoring what psychologists call, "self-talk." Whether we are conscious of it or not, we often have a dialog with ourselves. When you are driving, for example, you may unconsciously tell yourself, "I'm going to slow down, watch out for oncoming traffic, and make a left turn." In addition to running through instructions on how to accomplish the turn, you may also have a soothing dialog that keeps you calm and alert, such as, "I can do this easily. I've made a left turn safely a hundred times. I just need to calmly wait for an opening." The same sort of dialog happens while you are trading the markets. You may think, "I"m going to buy at 80, wait for it to hit 83, and sell." When you are impatient, though, you tend to engage in an unproductive dialog: "I bought at 80, and I absolutely need it to move to 85. When is it going to move? It should at least be at 81 by now. What's going on? Maybe I'm wrong. Maybe I should sell." You cannot fo rce a stock at will to move according to your expectations. You must be patient, but when you are feeling pressure to perform, your self-talk becomes unproductive. The little voice inside you starts making unrealistic demands. You start to believe that you absolutely must see a price change. Unfortunately, you can only go where the markets take you. You must follow their lead. It is vital to remain calm and patient, and the best way to remain calm is to monitor your self-talk and change it when it becomes demanding and impatient. When you are feeling frustrated or impatient, start thinking calming, optimistic thoughts, "I am going to go where the markets take me. This is just one trade among many. There is nothing to get worked up about. I'm just going to calm down and accept whatever happens. It will be all right in the end." It is important to always remember that all you can do is try to do your best. After that, it is essentially all up to fate. So rather than get yourse lf upset, calm down, relax, and get into a patient state of mind.

Don't Worry, Take Action

2006-09-19T13:52:00.000-07:00

After lunch at my favorite Chinese restaurant, I opened my fortune cookie, and read, "Action is worry's worst enemy." Of course, I immediately thought, "How can I relate this to trading. Is their some wisdom in this trite saying that can help enhance trading performance?" When you trade the markets, is it true that action is worry's worst enemy? Is worry so bad? According to Webster's dictionary, to worry is "to feel uneasy or troubled." When you're trading, you surely don't want to feel troubled or uneasy about anything, but should action always be the antidote to worry.

Worry can be adaptive at times. If we have a legitimate matter to worry about, worrying let's us know that we may be in danger, and that if we are not careful, our doom is inevitable. That said, there are those times when worry gets us nowhere.

Many times, traders and investors worry unnecessarily. If you are making a longer-term trade, for example, and you have a clear exit strategy, looking at the stock price unnecessarily can make you worry. "What if it doesn't go up any higher? Is that minor dip reflective of a major change in trend?" These minor "what-if" kinds of worries can throw you off balance. You can't let minor worries unseat your trading plans. You must follow through. When it comes to patiently waiting for a trading plan to come together, you actually may want to sit still rather than take action.

Obviously, complete stagnation will get you nowhere. If you are feeling stuck and worried about what you want to do next, sitting around worrying can make you feel so bad that you start to think the future looks bleak. Surely, taking action will help prevent you from entering a rut. But you have to be careful about the kind of action you take next. If you feel stuck, and out of desperation, make an impulsive trade just to feel you are taking action, you may end up losing money. And this can lead to a downward spiral in which you lose more money, and more money, and so on. Soon you will find yourself in a really big slump. How worried will you be then?

So what's the right kind of action to take? It depends on the situation (A) If you are stuck in a losing trade and afraid to face the consequences, take decisive action: Close out the trade. (B) On the other hand, if you are in a potentially profitable trade and unnecessarily worrying about it, stop worrying. Don't take action. Think about something else. (C) If you are wallowing in self-pity, don't act impulsively. Act decisively but diligently. Make a few practice trades, or just trade on paper. Study a few charts to get your creative juices flowing. Worry can often be a trader's enemy, but action isn't always the solution. When you are worrying too much, however, stop. You will trade more profitably if you are in an optimistic, calm state of mind.

Panicked and Stunned

2006-09-19T06:42:00.000-07:00

Tom is in a panic. He has been pushing himself all month to reach a specific financial objective, but he can't seem to make it. In a last ditch effort, he has made a big trade and he is ready to execute it, but he can't get it done. He is so anxious, agitated, and frustrated that he cannot do the most simple task. Tom is having a trader's panic attack. He is so fearful that he just cannot function.

Have you ever felt like Tom? When fear sets in, your body reacts with such agitation that nothing seems to go right. You start doing dumb things. Even the most commonplace task can't get done, or you make stupid mistakes, like closing the wrong trade or reading a chart incorrectly. You can be so agitated that you accidentally kick the power cord for your computer out of the wall socket. The human body is wired to panic at times. There are vast individual differences. Some people are calm no matter what, but others are easily unnerved. Nevertheless, when panic sets in, our attention is truncated and our options are limited: We either stand up and fight or run away to save ourselves. These are the two basic instinctual responses when panic sets in. Some traders react to panic and frustration by throwing their mouse out the window. That's how basic the human animal can be at times. But again, there are vast differences. There's no one right way to trade and many different viabl e trader personalities. The limitation isn't in having the "wrong" personality for trading. The limitation is in trying to be someone that you are not. If you are easily panicked, it is vital that you identify this potential drawback and work around it.

Look at your personality closely. Are you the kind of person who may have a trading panic attack? Do you get so agitated at times that you can't think straight? If you are prone to such a malady, you can work around it. First, limit your risk. The more you have at stake, the more agitated you are likely to become. If you risk little, though, you will know in the back of your mind that you can handle the worst case scenario. It will calm you down. Second, always remember that you can scale back your financial goals if necessary. If you can't reach your goals, don't worry about it. Do what you can do. You will find that your feelings of agitation are greatly reduced when you set more modest goals. Third, use a broker if you need to. Although we are in the midst of a technology boom, many professional traders still call their broker to place a trade. It may seem old fashioned, but some traders realize that actually placing trades puts them on edge. They know that they feel calme r when someone else actually puts their money on the line.

You don't have to be the ideal trader to profit in the markets. Indeed, the myth of the ideal trader is just a myth. There are many different kinds of people trading the markets profitably. The key to success is to be true to yourself. Gauge what your personality is, and work around it if necessary. Don't be afraid to be yourself and to take steps to change your trading methods to suit your personality. If you are prone to anxiety attacks while trading, scale back and calm down. You'll find that you can think more clearly and trade more profitably.

I Just Don't Care

2006-09-19T06:41:00.000-07:00

Have you ever seen those people who really don't care what anyone thinks? They seem to have an independent streak that sets them apart from everyone else. They may wear tennis shoes with an Armani suit or get a part time job at Starbucks so they can spend half their time surfing. There are many variations on the theme, but however they express themselves, the main point is that they don't care what the "rules" are; they merely care what they want to do. They are completely unabashedly individualistic. They come from all walks of life. I once met a young man from Beverly Hills who felt that he was a non-conformist because he changed his own oil in his car instead of going to the service station. That's a form of rule breaking, I guess. It's all relative. If a person is from an upper middle class family, and decides to go to trade school instead of university, that may be seen by family and friends as a radical departure. On the other hand, a person from a working class family who decides to go to college instead of working in the steel mill like three generations before him could equally be considered a radical. There is no single way to be individualistic. But however you define individualism, there is clearly a group of people who just don't care what society thinks, what their families think, or what happens to them. They go their own way. How often do you go your own way? Are you constantly worried what people will think? It's hard not to go your own way, but if you can go your own way, you can trade like a master.

Many times, people get stuck on the notion that they absolutely must follow some set of rules. For example, a trader may think, "I have to make enough money this month to meet my monthly living expenses." This may be a rational, adaptive way to think, but is it absolutely true? There may be consequences for not making very much money, but in reality, you don't have to make any money at all in the end. You could afford to charge a month's worth of expenses if you wanted to, for example. I'm not suggesting that you do so. I'm just trying to make a point: In the final analysis, you do not have to do anything or pay attention to anyone else's rules if you do not want to. You can do anything that you want. This is a very useful thinking strategy when trading the markets.

Again, many times, people get it stuck in their head that they absolutely must do something, whether it is making $100 or $10,000. When they start thinking that they absolutely must do something, they start to put pressure on themselves to perform. Next, they start to feel a little stressed out. And then they can't think creatively. They stagnate and may not find creative, high probability setups. They would be better off thinking, "Who cares? I don't have to do anything. Whatever I make is what I make, and that's all that matters." Psychologists call this phenomenon the "paradox of control." When you put pressure on yourself and try to control your environment, you choke. When you think, "Who cares?" and completely forget about trying to gain control, however, it is a big relief. The pressure is off, and you start thinking creatively. In other words, when you try to gain complete control, you end up losing control. When you don't seem to care about gaining control, you ironi cally end up controlling things more than if you had consciously tried to gain complete control.

I'm not suggesting that you change the way you dress or that you completely become irresponsible. I am merely suggesting that there are those times when we put pressure on ourselves to perform, and ironically, when we push ourselves beyond our abilities, we usually choke and get nowhere. So when you are feeling stuck and in a rut, ease up. Tell yourself, "Who cares? I'm doing it my way." You'll find you feel relieved, calm, and ironically, ready to trade at your best.

Totally Objective and Rational

2006-09-19T06:39:00.000-07:00

Winning traders maintain an objective state of mind. Rather than react to every setback with frustration, they just brush it off, as if it really didn't matter. But to the novice trader, it is difficult to take losses and other setbacks so nonchalantly. It's hard to avoid thinking, "I have lost a lot of cash. I could have paid a lot of my living expenses or bought some great stuff with the money I've lost this month. I need to win it back right now." This sort of thinking, however, can be very unproductive. The minute you equate losses with actual money, you will start reacting emotionally. Your emotions will start to play a significant role in your decision-making. In the end, emotions should have no place in trading. It is useful to cultivate a more
objective, unemotional approach when trading the markets.

Cash is a strong motivator in our society. It's the ultimate reward. It has meaning. The more money we have, the more freedom we have. Money can change people's lives. People's attachment to money is understandable. Every dime we lose hurts. Every dollar we win makes us feel great. But when it comes to trading, you must divorce your emotions from the money you are trading. It's like when you spend money on credit cards. When using credit cards, it's easy to forget you are spending real money. The money is abstract. It's not as real. When trying to trade objectively, it's essential to learn to look at the money you're trading as objectively and abstractly as possible, as if they are merely percentage points or ticks.

Psychological studies have clearly demonstrated that by cultivating an objective state of mind, you will react less emotionally. Creating psychological distance can help you cope with upsetting events. If you were to view a distressing film, such as a film showing a surgical procedure for example, it is easier to watch it and feel at ease if you objectify the ongoing action. Rather than fully emotionally engage, you must keep your distance.

When it comes to trading, there are a few simple things you can do to maintain an objective state of mind. Many say that when money is committed to a trade and the risk and potential loss is experienced, "objectivity goes out the window." Thus, anything you can do to minimize the feeling of risk and potential loss will help you cultivate an objective mindset. First, it's helpful to trade with money you can afford to lose. Trading is a profession where you should go in expecting to lose. If you can't afford to lose the money you trade, it will be difficult to maintain objectivity. Deep down, you will know that you are risking money you just can't afford to lose in a worst-case scenario. Second, it is also crucial to manage your risk. By carefully managing risk on any single trade, you call tell yourself, "I've got little to worry about. I can afford to take the loss." At first you may have to consciously remind yourself of this fact (again, make sure it is a fact), but over ti me it will automatically be in the back of your mind. You will be calmer, and can more easily cultivate an objective mindset. Finally, view profits and loses in an abstract framework. Rather than focusing on concrete dollar amounts, try to focus on percentages, or just abstract, theoretical numbers. Don't think of the dollar amounts in terms of what can be purchased. Equating dollar amounts in terms of tangible terms, such as car payments or sought-after luxury items, will weaken your objective mindset. You'll be more prone to experience elation from big wins and disappointment from losses. Rather than trade emotionally, you will make more profits if you trade objectively.

Stuck In a Hole

2006-09-19T06:37:00.000-07:00

If you're like most traders who have tried to hone their skills, there have been times when you've found yourself stuck in a financial hole. Perhaps you thought you could avoid managing risk or maybe you just had a run of bad luck, but whatever you did, you ended up deep in the red. Soon you may have found yourself feeling guilty for letting yourself get so behind, and depending on how much you had lost, you may have felt a little scared. When you feel this way, it's a critical point. If you aren't careful, you can feel overwhelmed. You can start worrying what you will do and how you will dig yourself out of a hole. But if you start worrying too much about what you will do, you will start to panic. And where will you be then? You'll probably dig yourself in deeper. It's better to stay calm, make a sound plan of action, and carefully
and diligently dig yourself out.

When we are stuck in a hole, the first thing we usually do is hope for a miracle. We start to think that if we work hard enough, we can discover a way to get ourselves out of trouble fast. Perhaps a once-in-a-lifetime trade will present itself or perhaps we will have a brilliant insight that will solve all our problems instantly. It usually doesn't work that way, though. What we usually have to do is buckle down, make slow but steady progress and work our way out of the trouble.

That said, it's often hard to manage our emotions when we are afraid. We try to do too much and feel anxious. At the same time, we may feel guilty for getting in so much trouble. But as bad as we feel, we have to remember that feeling bad about feeling bad makes things worse. It would be nice if we were so perfect and brilliant that we never made a loss, but the trading business doesn't work that way. Losses are commonplace. In most walks of life, losing money is frowned upon, but if you are a trader, you must look at things differently. Look at your situation from the perspective of a trader, not from the vantage point of non-traders. All is not lost. Don't imbue losses with special significance. It's no big deal. You've lost. So what? You can make a plan and win it all back.

Another reason our emotions are hard to handle when we have mounted losses is that we react out of a sense of fear. And because we are afraid, we want to trade perfectly to win all the money back. As natural as such thinking seems to be, such thinking is unrealistic. You can't trade to perfection. No one can. When you make a series of trades, you will face many losses (even when you are lucky). The added stress that you put on yourself to do the impossible will be your ultimate undoing. Rather than put unrealistic pressure on yourself, you must be realistic. Take it easy. Think realistically and optimistically. If you put in a noble effort, and work hard enough, you will realize success. All you have to do is relax, trade creatively, and recoup your losses. It may not happen instantly, but if you work diligently, it will happen. So when you find yourself stuck in a hole, don't dig the hole deeper. Calm down, relax, and slowly but surely, dig yourself out.

The Mental Aspect of Trading

2006-09-12T02:32:00.000-07:00

Many traders quickly come to acknowledge that despite being familiar with winning strategies, systems, and money management techniques, trading success is dependent on your psychological state of mind. If you're a trader just starting out, where do you find the initial confidence to pull the trigger? How do you deal with the down times without digging yourself deeper into the hole? If you are in a hole, how do you work your way back out? How do experienced traders push through the ceiling of profitability that caps their initial trading years and make a truly fabulous living?

Trading is a performance-oriented discipline. Stress and mental pressures can affect your ability to function and impact your bottom line. Much of what has been learned about achieving peak performance in both business and sports can be applied to trading. But before looking at some of these factors, let's first examine the ways that trading differs from other businesses.

Intellect has nothing to do with your ability as a trader. Success is not a function of how smart you are or how much you have applied yourself academically. This is hard to accept in a society that puts a premium on intellect.
There is no customer or client good will built up each day in your business. Customer relationships, traditionally important in American businesses, have little to do with a trader's profitability. Each day is a clean slate.
The traditionally 8-5 work ethic doesn't apply in this business! A trader could sit in front of a screen all day waiting for a recognizable pattern to occur and have nothing happen. There is a temptation to take marginal trades just so a trader can feel like he's doing something. There's also the dilemma of putting in constant hours of research, having nothing to show for it, and not getting paid for the work done. Yet if a trader works too hard, he risks burn- out. And what about those months where 19 out of 20 days are profitable, but the trader gives it all back in one or two bad days? How can a trader account for his productivity in these situations?

If you were to invest time, energy, and emotion into developing a business venture and backed out at the last minute, it would be considered a failure. However, you should be able to invest time and energy into researching a trading idea, and yet still be able to change your mind at the last minute. Market conditions change, and we cannot be expected to predict all the variables with foresight. Getting out of a bad trade with only a small loss should be considered a big success! What IS the definition of a successful trader? He should feel good about himself and enjoy playing the game. You can make a few small trades a year as a hobby, generate some very modest profits, and be quite successful because you had fun. There are also aggressive traders who have had big years, but ultimately blow-out, ruin their health or lead miserable lives from all the stress they put themselves under.

Principles of Peak

PerformanceThe first principle of peak performance is to put fun and passion first. Get the performance pressures out of your head. Forget about statistics, percentage returns, win/loss ratios, etc. Floor-traders scratch dozens of trades during the course of a day, but all that matters is whether they're up at the end of the month.

Don't think about TRYING to win the game - that goes for any sport or performance-oriented discipline. Stay involved in the process, the technique, the moment, the proverbial here and now.! A trader must concentrate on the present price action of the market. A good analogy is a professional tennis player who focuses only on the point at hand. He'll probably lose half the points he plays, but he doesn't allow himself to worry about whether or not he's down a set. He must have confidence that by concentrating on the techniques he's worked on in practice, the strengths in his game will prevail and he will be able to outlast his opponent.

The second principle of peak performance is confidence. in yourself, your methodology, and your ability to succeed. Some people are naturally born confident. Other people are able to translate success from another area in their life. Perhaps they were good in sports, music, or academics growing up. There's also the old-fashioned "hard work" way of getting confidence. Begin by researching and developing different systems or methodologies. Put in the hours of backtesting. Tweak and modify the systems so as to make them your own. Study the charts until you've memorized every significant swing high or low. Self-confidence comes from developing a methodology that YOU believe in.

Concentrate on the technical conditions. Have a clear game plan. Don't listen to CNBC, your broker, or a friend. You must do your own analysis and have confidence in your game plan to be a successful trader.

Analyze the markets when they are closed. Your job during the day is to monitor markets, execute trades and manage positions. Traders should be like fighter pilots - make quick decisions and have quick reflexes. Their plan of attack is already predetermined, yet they must be ready to abort their mission at any stage of the game.

Just as you should put winning out of your mind, so should you put losing out of your mind - quickly. A bad trade doesn't mean you've blown your day. Get rid of the problem quickly and start making the money back. It's like cheating on a diet. You can't undo the damage that's been done. However, it doesn't mean you've blown your whole diet. Get back on track and you'll do fine.
For that matter, the better you are able to eliminate emotions from your day, the better off you will be. A certain amount of detachment adds a healthy dose of objectivity.

Trading is a great business because the markets close at the end of the day (at least some of them). This gives you a zero point from which to begin the next day - a clean slate. Each day is a new day. Forget about how you did the week before. What counts is how you do today!
Sometimes what will happen during the day comes down to knowing yourself. Are you relaxed or distracted? Are you prepared or not? If you can't trade that day, don't! - and don't overanalyze the reasons why or why not. Is psychoanalyzing your childhood going to help your trading? Nonsense!

The third important ingredient for achieving peak performance is attitude. Attitude is how you deal with the inevitable adverse situations that occur in the markets. Attitude is also how you handle the daily grind, the constant 2 steps forward and 2 steps back. Every professional has gone through long flat times. Slumps are inevitable for it's impossible to stay on top of your game 100% of the time. Once you've dug yourself out of a hole, no matter how long it takes, you know that you can do it again. If you've done something once, it is a repeatable act. That knowledge is a powerful weapon and can make you a much stronger trader.

Good trades don't always work out. A good trade is one that has the probabilities in its favor, but that doesn't mean that it will always work out. People who have a background in game theory understand this well. The statistics are only meaningful when looking at a string of numbers. For example, in professional football, not every play is going to gain yardage. What percentage of games do you need to win in order to make the playoffs? It's a number much smaller than most of us are willing to accept in our own win/loss ratios!

Here is an interesting question: should you look at a trade logically or psychologically? In other words, should every trade stand on its own merits? Theoretically, yes, but in real life it doesn't always work that way. A trader is likely to manage a position differently depending on whether the previous trade was a winner or a loser.

How does one know when to take profits on a good trade? You must ask yourself first how greedy do you want to be, or, how much money do you want to make? And also, does your pattern have a "perceived profit" or objective level? Why is it that we hear successful winning traders complain far more about getting out of good trades too soon than not getting out of bad trades soon enough? There's an old expression: "Profits are like eels, they slip away."

Successful traders are very defensive of their capital. They are far more likely to exit a trade that doesn't work right away than to give it the benefit of the doubt. The best trades work right away!

OK. Realistically, every trader has made a stubborn, big losing trade. What do you do if you're really caught in a pickle? The first thing is to offer a "prayer to the Gods". This means, immediately get rid of half your position. Cut down the size. Right off the bat you are taking action instead of freezing up. You are reducing your risk, and you have shifted the psychological balance to a win-win situation. If the market turns around, you still have part of your position on. If it continues against you, your loss will be more manageable. Usually, you will find that you wished you exited the whole position on the first order, but not everyone is able to do this.

At an annual Market Technician's conference, a famous trader was speaking and someone in the audience asked him what he did when he had terrible losing trades. He replied that when his stomach began to hurt, he'd "puke them at the lows along with everyone else." The point is, everyone makes mistakes but sooner or later you're going to have to exit that nasty losing position.

"Feel good" trades help get one back in the game. It's nice to start the day with a winning scalp. It tends to give you more breathing room on the next trade. The day's psychology is shifted in your favor right away. This is also why it's so important to get rid of losing trades the day before. so you don't have to deal with them first thing in the morning. This is usually when the choice opportunity is and you want to be ready to take advantage of it.

A small profitable scalp is the easiest trade to make. The whole secret is to get in and get out of the market as quickly as possible. Enter in the direction of the market's last thrust or impulse. The shorter the period of time you are is the marketplace, the easier it is to make a winning trade. Of course, this strategy of making a small scalp is not substantial enough to make a living, but remember the object is to start the day out on the right foot.

If you are following a methodology consistently (key word), and making money, how do you make more money? You must build up the number of units traded without increasing the leverage. In other words, don't try going for the bigger trade, instead, trade more contracts. It just takes awhile to build up your account or the amount of capital under management. Proper leverage can be the key to your success and longevity in this business. Most traders who run into trouble have too big a trade on. Size influences your objectivity. Your main object should be to stay in the game.

Most people react differently when they're under pressure. They tend to be more emotional or reactive. They tense up and judgement is often impaired. Many talented athletes can't cut it because they choke when the pressure's on. You could be a brilliant analyst but a lousy trader. Consistency is far more important than brilliance. Just strive for consistency in what you do and let go of the performance expectations.

Master the Game

The last key to achieving mental mastery over the game is believing that you can actually do it. Everyone is capable of being a successful trader if they truly believe they can be. You must believe in the power of belief. If you're a recluse skeptic or self-doubter, begin by pretending to believe you can make it. Keep telling yourself that you'll make it even if it takes you five years. If a person's will is strong enough, they will always find a way.

If you admit to yourself that you truly don't have the will to win at this game, don't try to trade. It is too easy to lose too much money. Many people think that they'll enjoy trading when they really don't. It's boring at times, lonely during the day, mentally trying, with little structure or security. The markets are not a logical or fair playing ground. But there are numerous inefficiencies and patterns ready to be exploited, and there always will be.