Daytrading Psychology Blog

Tale of the Second Mouse

Traders: Don’t make this costly psychological mistake

The stock market is often likened to a casino, and there are parallels. In both venues, people put money to work in anticipation of rewards, while cognizant of the risks. Games of chance, however, have defined end points, when you know whether your bet was successful.

Equity trades and investments in the stock market, however, do not come with an expiration date. That circumstance increases the potential for both risk and reward and makes active traders more vulnerable if their trading psychology is flawed.

One of the most common and costly psychological mistakes is getting stuck in an opinion.

One trader I spoke with has been holding puts during the recent 50-point rally in the S&P 500. As the market rose, he just didn’t believe it would/could/should continue to rally while XYZ was happening in Europe. (Fill in the blank.)

DEATH BY OPINION
He got stuck in an opinion. He forgot that in the market casino anything is possible. So… as active traders how can we protect ourselves from self-sabotage at the hand of our own opinions?

At casinos, wise participants expect to lose because statistically we all know that the average gambler does not have an edge and casino operators work diligently to make sure that they maintain a slight advantage. You will get ejected and banned if you are discovered using methods that circumvent these measures.

THE TRADER’S ADVANTAGE
The market however, is like a casino in heaven that allows you to bet with the aid of computer assisted real-time analysis. You are permitted to analyze every card that’s been played by every player in the casino, if your computer can handle that amount of data.

You can analyze trends and apply forecasting algorithms with impunity and never get banned. You can discuss your strategy with experts; people who basically live there. Moreover, you can act on your market intelligence instantaneously and do so for a very modest fee. Your fixed cost is the commission you pay and you get to keep all your profits.

This is a much more generous and user-friendly situation than any casino would ever tolerate. To take full advantage of it, learn to trade by the numbers (i.e., mathematically). You will still have opinions, but they will probably be held less tightly than before. The less invested in them you are, the better you will do.

 

 

 

Trading Psychology: How to Overcome Chasing

chasing_money_smDo you have a tendency to chase price? That means, buy high in the hope of selling even higher. Or selling short during a rapid decline without waiting for a pullback.

Be honest. If you are male, you probably engage in this behavior, due to the primitive hunter within you. You see, there’s a part of your brain that is still on the Savannah. There, chasing was our basic mode of survival, because animals flee; and spears and arrows are short range weapons.

Chasing made sense 100,000 years ago, but in terms of trading psychology, we often do it at exactly the wrong time.

We think: “The market is running away and I don’t want to miss out. I know it’s against my rules to chase, but my gut is telling me that this is just too good an opportunity to miss. Therefore, I’m going for it!”

Heat of the Moment
In the heat of the moment, this argument seems to make sense, but like other types of passionate urges, it distorts our thinking. The more heat we feel, the dumber we behave and we eventually recognize this in hindsight.

The palpable sense of urgency we feel when the market starts moving quickly comes from dopamine circuits deep in the brain. Dopamine is the brain chemical designed to motivate us to chase and not give up until we score dinner. It is a very quick trigger; dopamine can signal the body to get going in less than 100 milliseconds.

Dopamine stimulates the entire nervous system and might make us feel smarter, but the IQ boost is illusory. Under the influence of dopamine the nerve supply to the forebrain is actually turned down. The dopamine surge distorts our trading psychology. The brain wants us to act first and think later.

When you finally wake up from this trance, you will be surprised and often dismayed at what happened.

Bottomline: When you feel the urge to chase the market to avoid missing out, your “Inner Neanderthal” has taken over your trading like a body-snatcher. One alternative is to find another way to keep him occupied. Sports is a good option. To appease him, and have a less reactive attitude while trading, I work out and play competitive tennis almost daily.[/vc_column_text][/vc_column][/vc_row]

Setting Smart Stops

Intelligent risk management means using stops. If a trader constantly gets stopped out, however, he/she may develop an aversion to using stops. They blame the stop, but the problem is usually the fact that are not setting smart stops.

It often starts with a sloppy entry. After entering in no-man’s land the trader then places a standard stop or a tighter-than-usual stop, which virtually guarantees a stop out.

For example, during a trade-along with a coaching client, I heard him say, “I got in late on that so I tightened up my stop.”

I replied, “ You are about to follow one mistake with another.”

His first mistake was not entering in a timely manner. In the heat of the moment we may hesitate, over-analyze, worry, etc. When we finally act, the market has already moved out of our strike zone, but we execute the trade anyway. This happens to all of us. It’s the next thing we do that separates the successful traders from the breakeven and losing traders.

When amateur traders realize they have made an entry error, they tend to tighten up mentally and emotionally. They switch to defensive mindset, micromanage the trade and  tightening their stop. Tightening one’s stop after a poor entry virtually guarantees a rapid stop out from mere noise.

When you make an entry error, the smarter option is to: 1) get out immediately, or 2) place your stop at the point at which you would have placed it had you entered properly.

Poor entries increase risk. If you can’t accept that risk, then don’t enter in the first place or just get out quickly. If you decide to stay in, don’t make a bad situation worse by getting defensive. Assume the larger risk and manage it rationally.

 

Ride your Winning Trades

Do you find that you are often right about a trade direction, but that you get shaken out of a winning trade before the trade heads off in the direction you expected? In this volatile market, it can be difficult to ride your winning trades to capitalize on their full potential.

If we reflect on the process of getting “shaken out” there are usually timing issues at the heart of the matter. And the most common one is impatience. What drives impatience? Fear.

1) We get in too early due to FEAR of missing out on profits.
2) We get out too early due to FEAR of giving back profits.
3) We make our stop too tight due to FEAR of losing.
4) We move our stops too soon due to FEAR of giving having a gain turn into a loss.

THE MARKET FOOD CHAIN

Let’s be realistic. If you are an aspiring trader, your account is likely to be targeted by professionals. Professionals study the behavior of smaller traders the way a fisherman studies the behavior of tuna or marlin or cod.

Interestingly, like fish, smaller traders behave quite predictably when under financial stress because fear is a consistent motivator. It’s not too difficult to figure out where the smaller traders will start to feel fear and where they will become convinced that they are wrong and take action (liquidate). So how can you ride your winning trades longer?

WHAT TO DO NEXT

I’ve developed a short self-assessment that can help you determine whether your timing and trade management issues are likely to improve on their own, simply from practicing more. You can take my FREE Risk Profile by filling out a short form on this page.

If you want to chat about your trading, contact me for a FREE 15 minute Consultation to discuss your results. Many aspiring traders wait to ask for help until it’s too late. Don’t isolate yourself. I’m a trader, too. We are all in this together and can find ways to help each other.

The Money Trap

We trade to make money, but most aspiring traders over-focus on the money, which inadvertently causes unnecessary losses. I call this vicious circle the Money Trap.

The Money Trap is an automatic process, because we are wired to react to the risk of monetary gains and losses in a suboptimal manner. Specifically, we are programmed to cut winners short and let losses run.

To trade effectively, we must condition ourselves to do the opposite of what our gut instincts demand. Why so reactive?

A CHARGED TOPIC
In trading as in one’s general life, money tends to be a charged topic. In one study of 4,500 couples, researchers determines that arguments over money were the top divorce predictor.

I believe this is because money issues are actually security, power, status, self-worth and trust issues. A power struggle over money is actually a battle over these other core needs.

In my experience as a trading coach, a power struggle with Mr. Market over  money leads to trader frustration and eventual failure.

THE NATURE OF THE TRAP
Traders in the Money Trap often pass through a 5-Step process when facing a potential trading loss.

1- Denial that the loss is real or might become real.

2- Anger when the potential loss is finally recognized.

3- Bargaining with Mr. Market to exit the trade at breakeven or a bit better.

4- Depression when the trader realizes that the situation is not getting better.

5- Acceptance, which, in trading, means actually taking the loss.

This 5-Step process delays the inevitable loss taking and actually turns small losses into large ones.

In terms of trading psychology issues, the Money Trap begins because the trader is unwilling to accept the possibility of a loss. This, in turn, often comes from a deep-seated imperative to survive. That’s not something that can be easily over-ridden.

Bottomline:  Most individuals lack the ability to be rational when it comes to taking losses. A focus on the money will inadvertently trigger one’s biological imperative to survive when the possibility of a loss arrives.

To avoid the Money Trap, shift focus away from the Money to your Method.

Assuming your method has a positive expectancy, the more you focus on proper execution, the better you will do.

Trading Mindset and Volatility

Markets oscillate between periods of low and high volatility and this fluctuation can dramatically affect our trading mindset. Early this year (2015) the Average True Range in the index futures tripled from 2014 levels. When the waves get larger, trading becomes more difficult because normal risk parameters need to be adjusted. Using normal stops in a high volatility environment guarantees losses and increased losses undermine our trading mindset. That’s a vicious Catch 22.

Additionally, your basic trading method may not work in a high volatility environment. If you are a trend trader, the increased momentum in the market may generate false indications of a trend change. Errors in execution due to erroneous trend information can further undermine your trading mindset.

To address this, I recommend that you consider adding a volatility indicator to your trading arsenal and possibly learning to take advantage of mean reversions. This might mean trading from volatility band to volatility band… in both directions. If you take this approach, set your bands to encompass the full range of volatility. If you are using Bollinger Bands, that may mean setting them to more than 2 standard deviations.

Additionally, it’s extremely important to monitor your mental and emotional state of mind while trading. The key to successful trading is maintaining an even-tempered focus without emotional swings due to price action or trading results. My Winning Trader’s Mindset Neuroprogramming package can help with this.

 

Positive Trader Mindset

When we have difficulty in our trading it’s natural to want to blame someone. Many traders blame the market and blame themselves. The blame game, however, can undermine your positive trader mindset, which in the end is your most valuable resource.

Many traders are having difficulty with the new volatility. When markets move faster than normal and further than normal, we get out of sync with the market. If your timing is off, almost everything you do will be wrong.

When the trading environment changes character suddenly, it’s easy to find oneself with a string of small losses, or with a few large ones. This can cause a cascade of negative mental emotional talk, which only makes things worse.

“I’m a terrible trader. I’ll never get this. That was soooo stupid! I’m an idiot. How could this have happened? A competent trader would never have missed that! Maybe the market is out to get me. Yeah I’m sure of it…damn robots!!!”

Unfortunately, this spontaneous inner chatter leads directly to negative performance  because the more we berate ourselves, the worse we trade. We know this from sports psychology. Athletes with habitual negative self-talk become their own worst enemy and defeat themselves. This is why athletes hire coaches. Not just for sharpening technical skills, but for managing mindset issues more constructively.

So how do you break the cycle of negativity?

Trader Rx: The key is self-awareness. Most of the time self-talk runs on automatic. Self-awareness gives us the ability to constantly monitor our self-talk. You need to separate yourself from the negative voice and become The Observer. Don’t give that negative voice any credence or attention and it will quickly subside.

As it fades, you will notice you have a choice in terms of your attitude toward what just happened. From that place of choice, look for the POSITIVE in the situation and focus on that. A loss or a mistake can be neutralized when understood as a normal statistical event or an empowering challenge and something to learn from. Don’t let the market grind you down.

 

Improving Trader Discipline

For many traders, creativity is an enemy of profits. To increase profits, these folks need to focus on improving trader discipline.

Most traders equate discipline with cutting losses short and not going wild adding contracts or shares. These risk management tactics are the most basic expressions of discipline, but discipline is much more than that.

Trader discipline is a mindset that relates to every aspect of your trading. It is the ability to control and optimize your mental state, which in turn makes it possible to achieve peak performance. It’s acting like your own trading coach. Without discipline your trading garden will become overgrown with weeds.

Trading is largely a discretionary activity because we can’t trade yesterday’s market and our edge depends on understanding the here-and-now context within which a trade setup occurs. So it’s easy to fall into a state of mind in which discipline is lacking and not recognize it.

A lack of discipline results in very common trader problems such as:

1)  Overtrading and/or excessive improvisation;  

2)  Poor timing; getting out too early or too late;

3)  Failing to take your setups after a series of losses;

 4)  Failing to capitalize on exceptional market conditions due to complacency, or fear of giving back profits.

Has a lack of discipline crept into your trading? Or has discipline been an issue for you from the beginning?

Trader Rx: To counteract a tendency toward undisciplined attitudes and behavior, I recommend that you slow down to the point that you can execute your strategy perfectly… even if that’s just one perfect trade a day. Once you get comfortable living within a disciplined mental environment, you will never want to stray from it ever again.

 

 

Daytrader Mindset: Handling Down Markets

Markets can trend higher for a long time, but when they suddenly correct, our daytrader mindset can get inappropriately negative.

It’s not unusual for the Nasdaq to correct 5-6% in a couple of weeks, with strong downward momentum. Market leaders can be taken down double-digits from recent highs and psychologically, this will feel like double that figure.

Why? Because the human mind is programmed to pay extra attention to bad news.

Additionally, our reactions to market declines are proportional to our use of margin. Interestingly, futures traders are almost always margined to the hilt and many might not realize it.

A single S&P emini futures contract controls about $85,000 of index value, which means a leverage factor of roughly 16X. And leverage can cut both ways.

Complacency plus margin sets up the perfect circumstances for a surprise reversal and sell off. When markets move suddenly against us, we can easily lose perspective, but it can be worse than that. A sudden loss, even on paper, can trigger a shock response in the nervous system similar to what happens when one is diagnosed with a fatal disease.

This can trigger a 5-step process that starts with Denial and then moves to Anger, Rationalization and Bargaining, Depression and finally Acceptance or Resignation. Surviving as a trader means avoiding this type of unpleasant mental-emotional cascade.

When it comes to bad news, take your medicine as soon as possible.

 

Your Brain Type: Self-Assessment

Our mood and outlook on the market is colored by our brain type.  Some people do have normal brains, and their trading results are usually OK. There are five ways your brain can become imbalanced.

Read a summary and download a free Brain Type Self-Assessment here.

Your Brain Type: Part II

As I mentioned previously, our mood and outlook on the market is colored by our brain type.

There are five general brain types and I described the first three last week: Compulsive, Impulsive and Anxious.

The fourth type is the Depressed Brain. These traders feel victimized by the market in a way that is unfair. They tend to point the finger rather than taking responsibility for their trading issues. They don’t realize that they are rationalizing; manufacturing “reasonable” excuses for their pre-existing mood.

The fifth brain type is a combination of Compulsive and Impulsive. These traders are compulsively impulsive, which often leads to an addictive mindset. They tend to overtrade because they are trading-to-trade, like a mouse in a cage pressing a lever to generate pleasure signals in their brains.

If you are curious about your brain type, in my next post I will publish a free Brain Type Self-Assessment.

Trading and Your Brain Type

You probably take your brain for granted… after all, it’s difficult to separate yourself from it.

But your mood and outlook on the market are conditioned by your brain type. Brain scan researchers have identified five types of brains. For traders, the three most important brain types are Compulsive, Impulsive and Anxious.

Traders with Compulsive Brains tend to get stuck in a particular perspective on the market. It’s bullish….it’s bearish… it’s too high….it’s too low… it’s too manipulated… whatever.

People with Compulsive Brains tend to hold losing positions because they are not open to the feedback from the market. These folks demonstrate the same closed-mindedness in daily life and tend to be rigid in their habits.

Traders with Impulsive Brains are the exact opposite. Like fish chasing a shiny lure, they can’t resist getting involved in a moving market. They lack impulse control, so they rely on creativity and improvisation to make it through.

Traders with the third type of brain, the Anxious Brain, live under a dark cloud. They are skeptical and pay the most attention to the obstacles in their way to success.

I’ll publish a post about the other two types next week along with a link to a self-assessment.

 

Flash Crash Psychology

If you enjoy the power of modern motor vehicles, it is tempting to put the pedal to the metal on occasion because the human nervous system is finely attuned to speed and momentum. It feels good.

I vividly remember a recent test drive in a Tesla Model S, which delivers about 1000ft/lbs. of torque at the wheels at zero RPM. It was a brain tickler.

In trading, however, we go a step further and read meaning into momentum.  We move from “sensation” to “significance.” That’s a problem and it can cost you.

Flash Crash

If you were trading on Tuesday 1/21/14 you were probably blindsided by a sudden downward acceleration that started in the S&P futures around 11 am Eastern Time. The S&P fell about 8 points in just a couple of minutes. The avalanche was triggered by more than 6000 futures contracts hitting the bid in less than 1 second.

Markets tend to fall about twice as fast as they rise, but this was “flash crash” behavior. Did it cause you to anticipate more downside? (That’s Recency Bias.) Did you manufacture reasons/justifications for this behavior in your mind? (That’s Confirmation Bias.)

It would be normal if your thinking were altered, but a sudden shift to the dark side could  result in a serious tactical error. Within a few hours the damage was repaired and the S&P 500 closed the day in the green.

Slow Crash

Tuesday’s action may have reminded you of  the more subdued waterfall decline that happened about a week ago (1/13). The selling lasted all afternoon on that Monday, but the very next day the S&P rebounded and fully recovered before the closing bell.

Don’t Get Fooled Again!

What do you make of all this? Theories about causes abound, but the most important thing is to be aware of how market momentum can fool you at any time on any scale.

It is easy to attribute/manufacture meaning where there is none. One can quickly mistake the end of something for a beginning, especially if you are biased. Check your trading for these tendencies and if you notice them, focus on finding neutrality in the eye of the storm.

Originally published on Trader Planet

The Negativity Trap

What is the #1 characteristic of top traders?

In Trading in the Zone, Mark Douglas says, simply, “Great traders are not afraid.”

I agree, but this definition begs to be expanded. Over my 12 years as a trading coach, I’ve had the fortune to meet and work with some of the best traders in the business. If I had to pick one word, I’d describe them as amazingly resilient.

Resilience is simply the ability to snap back from adversity. We all feel the pang of loss, but resilient individuals feel it much less sharply and get over losses quickly. One famous trader who trades his 7-figure live account in a room full of eager adepts gives himself a forced time-out when he loses a trade… but that time-out only lasts 2 minutes!

For this fellow, an easy-going Southerner, that’s enough time to hit the reset button. But there is more than a 75% chance that this is not the case for you.

NATURE & NUTURE

We know that resilience is both a nature and nurture character trait. In other words, there is a genetic component (about 25% of the U.S. population has the gene configuration for resilience). But one’s experiences in childhood also play an important part.

If a child had a particularly judgmental or punitive parent or teacher, it’s natural to introject (internalize) that critical voice. This simple survival tactic makes it more likely that the child can prevent the abuse.

Unfortunately, when carried over into adulthood, negative self-talk can hamper performance in life and in trading. Negative self talk narrows options and makes one  more impulsive. This is a serious problem if you are trying to trade for a living because trading requires the mindset of a quarterback…confident, flexible and adaptive.

To meet the challenge of active trading it is imperative that you create a mindset that is  ”bulletproof.” By that I mean, a mindset that can quickly rebound from losses.

The best way to start is to make sure your self-talk is positive at all times. For additional information, read about Positive Neuroprogramming on this website.

Originally published on Trader Planet

Why Women Make Better Traders

Men, we need to talk. There is a rumor circulating that women make better traders. The jury is still out, but only because there are so few women traders to study. In my 12 years as a daytrading coach, less than 5% of my clients have been female.

In fact, one female client sought me out partly because her husband, also a trader, was losing badly and it was driving her crazy. He had already gone though the kid’s college fund and was madly chipping away at his IRA. Once the husband realized he needed help and hired me, she had no problem generating $2,000 a day in profits.

In other words, her issues were gender-related; just not her gender.

Yeah, I Knew That
A study done by Odean & Barber in 2001 showed that men have an overconfidence problem, especially when it comes to financial decision making. Oddly, men get the most overconfident in situations that have the least predictability (such as trading) and the confidence persists even when their objective results are poor!

How is it possible to be overconfident and losing at the same time?

The Corpus Egosum

I suspect that scientists will one day discover that men have an oblong organelle deep in the male brain that takes full and complete credit for any and all positive outcomes in the neighborhood. Moreover, men readily attribute predictability to these outcomes. Nassim Taleb’s Fooled by Randomness presents a detailed study of this male foible.

Godzilla ate my Homework

Men are also more likely to rationalize failure and attribute it to external causes or Force Majeure. Freud called this tendency ‘deflection.’ How many of the prize-winning economists who sunk Long Term Capital Management ever admitted that they made a mistake?

No Small Olives

Like Freud, I believe that men have certain ‘security’ issues that are hidden from ourselves, but no doubt hidden in plain sight. When it comes to various performance metrics, including financial, men seem to need boundless reassurance and we get it by reframing reality to embellish the story.

Men, we need to talk.

Originally published on Trader Planet 

Believing is Seeing

“The human understanding, when it has once adopted an opinion…draws all things else to support and agree with it.”- Francis Bacon

One of the most ingrained foibles of human cognition is the tendency to see what we believe. It’s called the confirmation bias.

The Misconception: Our opinions about the market are the result of  balanced, rational analysis.

The Truth: Our opinions about the market have been formed by attending to information that confirmed what we already believed while largely discounting facts that challenged our preconceived notions.

Confirmation bias causes us to see what we want to see or expect to see, whether it is there or not. If it is there, it will pop to the foreground; if it is not there, we will simply create it.

For example, if you are thinking about buying a new Camry, you will constantly spot Camrys as you drive around. You won’t be able to stop seeing them; they will intrude on your sensibility at every turn. And yes, those Camrys really exist (they were there all along, but you just didn’t notice.)

And if you believe the market is way too high, every downdraft on a 15- minute chart will be an omen of “the crash.” This is your imagination distorting reality to confirm your apocalyptic bias. (Hindenburg!)

According to research done at Ohio State University, confirmation bias causes us to spend about 1/3 more time selectively reinforcing what we already believe than on material that might dis-confirm our preconceptions.

And the rabbit hole goes rather deep. As humans, we seem to need to be right to prop up our self-image. That means we have a blind spot when it comes to information that disconfirms our beliefs because it actually challenges our existential sense of security.

Trading, however, is a profession where we constantly put our security at risk. Therefore, in the service of self-soothing, confirmation bias is likely to be particularly rampant in traders. If you find that you can’t see the obvious until it is too late, reduce your risk (size) and reality will re-appear.

Originally published on Trader Planet

The Wisdom of the Obvious

How do you react to market behavior you are not accustomed to? Or to behavior that you don’t expect because it doesn’t accord with your ideas about how the market should behave?

Most traders have difficulty with bracketing our cherished opinions and expectations. This is one reason that markets can trend so strongly with hardly a pullback. They rise on the short covering of skeptics.

So, how do we outsmart ourselves and miss the obvious?

The market environment is like a Rorschach ink blot. The images we see moment to moment, and the story we tell ourselves about the market’s character and intent, are entirely of our own making, but we don’t entirely realize the consequences of the fictional overlay.

But, the plot matters. If a trader regards Tuesday’s market action as a brave foray into new high territory, she is more likely to buy the dips in order to participate.

If, on the other hand, one regards Tuesday as a pitiful example of irrational exuberance and potential entrapment (“Don’t get fooled again!”) a trader is more likely to try to pick the top and sell weakness rather than buy it.

We have two options here. Either we become more flexible and adjust our story to fit the market, or we take the Zen approach and drop our stories altogether. Kwack!

Personally, I prefer the Zen angle and that means relying on indicators instead of intuition. In trading, intuition is usually an educated guess colored by unexamined emotional biases. Indicators can take the bias out of the equation and give us a better chance of actually perceiving and trading what will soon be obvious in hindsight.

Originally published on Trader Planet

Tennis Anyone?

I play competitive tennis at the club level, which means I’ve never made a dime at it. But I don’t care. Playing tennis well is it’s own reward.

One gets the satisfaction of executing a skill, winning ‘points’  and, occasionally, a chance at a cheap trophy.

But there’s an additional payoff. A close match or a fighting chance at a championship win generates a neurotransmitter called dopamine, the active ingredient in cocaine. No wonder I like to play.

When we win something without a struggle, little dopamine is produced. It’s a ho hum victory both psychologically and physiologically.

And if one gets trounced in a match, that’s another chemical saga altogether. Dopamine levels may actually plummet in defeat well below normal levels, leading to short-term depression.

And so it is with trading. If trading is going well or even stays at a breakeven level, we will get a sufficiently large dopamine payout to feel good about our trading game and our ultimate chances of success.

If, on the other hand, we suffer chronic drawdowns or a few large losses, we may become not only angry or risk averse, but also despondent. What’s the Rx for that?

When psychology first came on the scene in the late 19th century it was  called “Mental Hygiene.” The implication is that our own minds can become toxic. Traders need mental hygiene to protect against negativity from unavoidable losses during the steep learning curve and thereafter.

Affirmations (“I am a worthy person, deserving of abundance”) are not generally sufficient to offset negative emotions, which have more than twice the psychological impact compared to pleasure.

My tennis coach says: recognize your mistakes and then immediately stop  the blame game and any negative self-talk. Otherwise, he says, if you carry the guilt, shame and blame with you into the next point, one mistake will lead to a cascade of errors that could cause you to lose the match.

In trading, letting go of negative self-talk is probably the single most important change a person can make to improve one’s odds of success. This is a type of self-discipline you might have overlooked.

Originally Published on www.TraderPlanet.com

Trading in Your Underwear?

Volatile markets can create a significant amount of stress. Because our bodies are designed to adapt to stress, we may fail to realize that we are stressed out.

Here’s an inventory of common trader behaviors that may signify excessive stress.

12 Signs of Stress

1. A vivid fantasy of making lots of money today.
2. Feelings of invulnerability.
3. Eating breakfast or lunch at your trading desk.
4. Hyperfocus on price bars as they form.
5. Talking out loud to the market.
6. Bargaining with the market about an open position.
7. Cursing at the market.
8. Expressing irritation at partner, kids, pets, plants, inanimate objects.
9. Sudden urge to increase position size or frequency.
10. Canceling or moving stops for no good reason
11. Adding to a losing position.
12. Trading in your underwear !

Frankly, I mention the underwear thing, because I’ve done it myself.

TIP: Stress degrades decision-making. If you are stressed out, shift your focus away from the Market and Money toward Managing your own State of Mind.

Beyond Lawyer Jokes

Men tend to identify with what we know, which results in becoming “invested” in being right. It’s like when someone (pedantically) informs us about something we already knew. Don’t you get a bit irritated?

Our culture reinforces this Need-to-be-Right at every turn. School is the Skinner Box for this core belief, but the business world reinforces it, as well. Climbing the corporate ladder depends on having the right solutions at the right time.

Trading, however, is probably the only profession where being wrong 50% of the time could be a sign of superiority and even make you millions.

This is why success in science or the corporate world often doesn’t translate into trading profits. In fact, the passionate search for certainty may work against you.

Ironically, it’s also why trial lawyers tend to make better traders than, say, doctors or CEOs. Markets are more like an argument than a controlled research experiment or a corporate venture. Good trial lawyers opportunistically exploit weaknesses and cultivate a certain pragmatic deviousness.

TIP: Lawyer jokes notwithstanding, we can learn something from these folks.

The Law of Diminishing Returns

If you are trying to build muscle, you have to work out to the point of failure. In the gym, effort is rewarded with commensurate results. No pain, little gain.

When it comes to trading, however, there is often a paradoxical relationship between one’s effort and one’s bottomline results. In coaching traders, I’ve observed that for many aspiring traders the harder one tries to win, the less money one is likely to make.

This Law of Diminishing Returns affects men more than women because when men experience resistance, we tend to force things. Heck, that’s what muscles are for. Right?

Forcing trades, however, will get us in trouble. When we try too hard, it’s easy to forget our trading plan and improvise instead. The improv tactics include all the bad trader habits: overtrading, chasing, doubling down and impulsively reversing one’s position. In the heroic effort, almost everything we do to save ourselves makes the situation worse.

TIP: In trading, less is usually more.

Wall Street Logic

The market sold off after the Fed announced the good “non-taper” news on 9/18/13. A paradoxical reaction to news is what Wall Street does best. If you don’t understand this type of Wall Street Logic, then you shouldn’t pay attention to news, because half the time it will bias you in the wrong direction.

Most traders simply react to news without thinking twice. As a result, news becomes an exogenous overlay on one’s Trading Plan that brings randomness and emotion in through the backdoor.

Still, it can be difficult for some traders to disconnect from the media flow. Modern screen trading is a relatively lonely business, so news feeds make us feel more connected to the larger world. The question is, what price does one pay for the virtual camaraderie?

TIP: Experiment with cutting the media cord. Your concentration and discipline might increase.

The Top 4%

The largest academic study ever conducted on day trading shows that most traders lose money …. even during a bull market. Only 4% of active traders were able to earn significant profits two years in a row.

Are 96% of traders dumb? Hardly. As a trading coach for more than a decade, I believe  traders are among the intelligent and motivated individuals.

Even so, most traders get fooled by news or price action and behave in ways that limit or erase profits.

Is this self-sabotage? Fear of success? A hidden wish to fail? I don’t think so. The struggles of most traders arise for a different reason: the trading environment turns our own reward-seeking and self-protective instincts against us.

Trading for a living is harder than it seems at first. You were probably not mentally or  emotionally prepared for the randomness in the market you trade.

There is a saying that goes: “Doing the same thing over and over and expecting different results is the definition of insanity.” In trading, however, it’s the very definition of normal. Let me explain.

We constantly get tricked and trapped due to random price action. Our job as traders is to behave consistently and predictably in the face of very different results than we expect. This is a skill few have practiced in daily life, where results are more directly linked to action.

 

Stay Assertive

As a trading coach, I’m aware of the parallels between sports and trading, particularly with respect to the attitudes of offense and defense. Because these states of mind are so different, you might assume that it is obvious when you are in one or the other. This week, however, my tennis coach dispelled that illusion.

I’m a competitive tennis player and I play “first strike tennis,” which means I’m not a defensive player. I attempt to take control of the point as soon as possible. Nevertheless,  my coach showed me that I have been in a covert defensive mode, playing-not-to-lose much more often than I realized. In fact, I was giving into an emotion (fear/intimidation) that I was not consciously aware of, yet it was actually running my tennis game.

The fear, however, wore a slick disguise. In playing-not-to-lose, I made few errors, so it actually looked like I was a competent, consistent and disciplined player, albeit on a lower level than I was truly capable of. Plus, I have an intimidating forehand, which got me points when I needed them.

Nevertheless, a stealthy fear was responsible for a ho-hum serve, an erratic backhand and wobbly volleys. I just wasn’t 100% committed to making these shots. My coach helped me see that I was hiding like an ostrich, equivocating in my own mind and subtly sabotaging my results.

The same thing can happen to traders. After a few years on the battlefield, we may become subtly defensive. We will get out of trades too soon, trade too conservatively, over-indulge in SIM.

Here’s a Coaching Tip: If this is you, challenge yourself to bust out of your comfort zone and do what’s necessary to take your trading to the next level.

The Trap of Common Sense

Markets are designed to fool the most people possible. As a trading coach and trader, I’ve learned that the answers to how to trade are often paradoxical and contradicts common sense.

The reason is simple: most of our problems in trading are self-generated, so the solutions naturally appear illogical. Einstein once said, “Problems cannot be solved by the same level of thinking and behavior that created them.” In solving trading problems, our common sense solutions may cause new problems, so we end up chasing our proverbial tail.

In modern markets, behavior driven by common sense is often punished. Legendary Turtle trader Richard Dennis estimates that modern markets are 10 times more difficult to trade than in the 1980’s when he made his millions.

We live in the Information Age, which means there are fewer fools. Consequently, those with large orders to fill need to employ sophisticated tactics to get a price advantage for their buying and selling.

In my experience as a coach and trader, I’ve found that the most common tricks and traps now fade common sense, but also basic technical analysis, as well. Virtually every rule you have been admonished never to violate is a rule likely to be used against you by the more predatory programs running in the market these days, because these rules make your behavior predictable.

How one trader avoids the trading trance

I spoke with a former professional derivatives trader today who is now trading futures for his own account. Derek has been very successful in his professional hedging career and in his own options trading, where he would always trade non-directionally. He sold options and collected premia.

As a futures trader, however, he is having to trade directionally (long or short). This has proven to be quite a challenge. Derek has had 4 semi-serious drawdowns since he started in November, 2012 about which he feels some shame. He told me, quite frankly, “I can’t believe I did that!”

To solve his problem, Derek is reading through his trading plan every two hours. This helps keep him out of the trading trance. That is a state of mind where he gets nervous, over-trades and loses money.

What do you do to stay out of the trading trance? Read more about the trading trance here.

How to trade news

The world is getting smaller. Someone sneezes in Italy or China and the Dow Jones Industrial Average catches a cold. Or does it?

Truth be told, the market is quite resilient with respect to bad news. It loves to climb a Wall of Worry. For the most part,  it is the good news you should worry about. Markets start falling when everyone who matters has made a commitment to the bullish case.

Here’s what Warren Buffett has to say on the subject:

“We will continue to ignore political and economic forecasts, which are an expensive distraction for many investors and businessmen. Thirty years ago, no one could have foreseen the huge expansion of the Vietnam War, wage and price controls, two oil shocks, the resignation of a president, the dissolution of the Soviet Union, a one-day drop in the Dow of 508 points, or treasury bill yields fluctuating between 2.8% and 17.4%.

“But, surprise – none of these blockbuster events rendered unsound the negotiated purchases of fine businesses at sensible prices. Imagine the cost to us, then, if we had let a fear of unknowns cause us to defer or alter the deployment of capital. Indeed, we have usually made our best purchases when apprehensions about some macro event were at a peak.”

So, how to trade the news? Ignore it. 

How to use live trading rooms

3/04/2013

David M. told me a story today about an issue he is having being in a live trading room. The head trader had been doing well for a while, but lately had about a 25% win rate. My friend said he is feeling “chronic pain.” He added that he has stayed in the room since he paid a lot of money to follow this guy.

Many aspiring traders find themselves in this predicament. They hope to earn while they learn by following in the footsteps of a good trader who calls live trades. Generally, this is a mistake, unless you plan on mastering the exact method taught in the room. 

Otherwise, you will be doing yourself a disservice. Following a trader blindly doesn’t teach you how to trade, if teaches you dependency and self-doubt.

Plan on paying a decent amount of tuition to learn to trade. If you try to make the lessons pay for themselves, you are putting the cart before the horse. First learn, then earn.

Trading Coach Diaries: The Trader Who Forgot How To Wait

3/02/2013
From trading coach Dr. Kenneth Reid – the story of a currency trader with a “Type A” personality who lost and then recovers his ability to wait by radically accepting his losses.

Don’t eat lunch… at your trading desk

One of the trickiest traps that traders fall into is what I call “over-coupling” with the market. Trading has an addictive quality; it can induce a trance-like state of mind which makes it difficult to maintain a rational perspective.

We become fascinated by the action and before we know it we are trading from the much smaller (and dumber) brain located in our gut.

It is a myth that snakes hypnotize their prey before striking.  That said, an entranced trader is easy prey for most professionals. One way to break the trance is by taking frequent short breaks from your trading desk.

If you have a tendency to not take breaks and eat lunch at your trading desk, you are asking for trouble.

Trading to Make it Back

One of my clients who trades options rather aggressively recently had a period of drawdown after a multi-month winning streak. Having three weeks of losses in a row was uncharacteristic of this trader. So I asked what else was going on in his life.

As it turned out, he was experiencing some financial pressure in another part of his life. This caused him to decide to use his options trading skills to make up for the deficit in that area.  As a result, when he traded, he had shifted his mindset from following his system to making back his money.

This was a disaster. The more he focused on making money, the worse he traded. He subtly abandoned his system and began to take trades that were based on his gut feel for a market he knew well. Even so, they did not produce the expected results. 

The moral of the story: Focus on the Money and you risk sabotaging yourself.  Focus on your Method and the Money will follow.

How much should you trade?

Aspiring traders often trade way too much. They trade more because they miss out on so much, so they are always playing catch-up.

The equity and futures markets have two activity periods, 2 hours in the morning and 1 hour in the afternoon. If your trading method and mindset are sound, you should be able to reach your daily goal by trading only the morning session.

If you are inclined to trade mid-day and afternoon ask yourself if it is because you are addicted to the excitement of trading or because you have made errors or missed out in the morning. These are not good reasons to trade. If you analyze your trading results by time of day, you will probably find that most losers occur after the morning session.

Do your account and your nervous system a favor and try to get your trading business done in 2 hours a day while you are fresh in the morning.

Trader Development

The way I see it, one’s development as a trader proceeds through Four Phases. The First Phase is romantic, during which the trader is focused on the possibilities of gratification. 

The Second Phase is one of  Healthy Disillusionment, wherein the trader realizes the  important truth that trading is harder than it looks.

In the Third Phase the wise trader shifts focus from dreams of gratification to implementing a plan for reducing risk and managing losses.  This stops the bleeding and begins to produce profits.

In the Fourth Phase, the wise trader becomes aware of the risks associated with over-confidence and takes steps to control so-called positive emotions.

Market Prediction for 2013

Markets are like Rorschach tests– blobs and squiggles about which everyone seems to have a strong opinion, but these views often diverge 180 degrees. I believe the US equity market is about to begin another historic blow off rally that will take the Dow to 16,250 or higher.

A friend and fund manager points to the bullish sentiment and does not want to buy into this, fearing that 1500 in the S&P is likely to be a significant top.

I mention our debate not to promote one opinion over the other, but rather to remind you that such opposing views generate the daily, hourly and minute by minute movements of the indices and index-correlated assets. If you got recruited to the bull’s camp based on the morning rally, you may have been hurt by the afternoon avalanche.

It pays to be able to identify who is in control in the here and now, and follow the elephants as they rampage through the bush. Take what you can get and then prepare for those creatures to come running right back at you a few hours later. That’s the nature of the market in 2013.

Trading Trance

I was talking with one of my alumni students today. My alumni program runs 3-months and is designed to take traders from SIM to live. Dennis is a programmer for a large financial services firm and trades weekly options on AAPL mostly on expiration Friday. He mentioned three interesting things.

First, he said he now expects every trade to be profitable. Second, he has noticed that he is in a normal state of mind when trading. Third, he is making money consistently. These factors are all inter-related.

Trading weekly AAPL options on Fridays is one of the more intense activities a trader can indulge in.  You can be up 4-figures and then watch it evaporate in a few minutes. A few months ago Dennis was letting a $5000 winner turn into a loss. He knew that was not a “good idea,” but he was not in a rational state of mind while trading. He was in the Trading Drama. He now is able to take 4-figure profits when he has them, and he can keep his losses small.

I think the key is his state of mind. He has fully accepted the possible win and the possible loss and he is comfortable with them. As a result, he can manage the trade rationally.

Ask yourself: Are you in a  ‘normal’ state of mind when trading? If not, your results will suffer.

Trading or Gambling?

Last night at the tennis club a buddy of mine who trades stocks commented that he wants to buy AAPL before earnings. He is convinced that the company will beat expectations and the stock will pop.  I said, “Don’t do it.

The reason for my remark has to do with the difference between trading in a low-risk manner and what I call gambling. Gambling has two characteristics. First, it is usually an all or nothing bet on a hunch. Second, it is driven by the psychological fear of missing out. My friend would feel bad if AAPL popped and he was not in it, so he is trying to prevent that scenario.

I call that “trading-not-to-miss-out” which is a cousin of “trading-not-to-lose.” It’s not effective trading and will hurt you in the end. Your Prime Directive is to keep your capital safe. Your only real edge is applying your bread and butter setups in a consistent manner. Stick with those and you will prosper.  Leave the gambling drama behind.

How to Increase Discipline Without Really Trying

Discipline is a well-known character trait of successful traders, especially those with longevity. For many aspiring traders, however, discipline is not their strong suit and will-power alone is usually insufficient to increase it, because discipline can feel like a straight-jacket. Here’s a tip on how to get around that Catch 22.

Choose a skill or habit you have been neglecting; one that you know you want to improve. Focus on this skill or habit for the coming week. Don’t trade in your usual manner; instead go to school and make developing this skill or habit your #1 priority. Establish a baseline and keep a daily record of your results.

In order to achieve your goal, you will naturally apply discipline, but discipline itself will not be the goal. You will succeed on both counts, however, because you are channeling effort into something you really want.

How to Build Consistency

On the way home this morning from my regular tennis game an obvious parallel between tennis and trading occurred to me. In both “sports” consistency is paramount.

Tennis is a “game of errors,” which is to say that the person making the fewest errors usually wins. The secret of consistency in tennis is getting into the correct position so that one can hit the same shot in the same way, over and over.

In trading, your “shot” is your favorite setup. Consistency comes from not allowing oneself to get distracted by “the score” and instead focusing entirely on making the same trade, the same way, over and over. If you can do this 100 times in a row, you will never, ever wonder about consistency again.

If you don’t know what a “setup” is, email me for a brief consultation.

Are you tough-minded enough to trade?

“John” is a retired business man now living in Arizona. He told me on the phone just now that when he puts a fish in his fish tank and the fish gets picked on, he naturally feels bad for it.

In our conversation, he then realized that he has been trading this way, too, and it has made him identify with losers. That attitude will get you killed in trading.

In trading zero sum markets (futures, options and forex) winners get paid by the losers. That’s the only way they get paid. (Trading stocks is a little different… and easier.) This is why pit traders in New York and Chicago look a bit predatory. They are.

Bottomline: If you want to be a winner as a trader, you need to develop a mercenary attitude.

If you love a stock, sell it!

The Citi downgrade of AAPL (December 2012) generated a swirling controversy. Apple’s products inspire fierce loyalty among users, and the stock is no different. With shares trading above $700 just a few months ago, it was widely expected among Apple enthusiasts that they would eventually reach the magic $1000 mark, a Manifest Destiny mindset.

Several Apple pundits were outraged at the Citi call, and have denigrated the other “stupid” analysts who jumped on the downgrade bandwagon today. The nerve!

I have no opinion about fair value for the company’s shares, but psychologically speaking, if you love a stock, sell it. Why? Because love (and greed) will cloud your judgment. Moreover, a stock with a large herd of emotionally committed followers is a juicy target for professional short-sellers.

Swimming Against the Tide?

Determining the market’s directional bias (trend) is valuable because otherwise you will find yourself swimming against the tide.

In addition to price, professionals use various volume measures to identify shifts in control. All the bulls have to do is stop buying and the market will fall of its own weight. If someone decides to push it, then it falls that much faster.

We all have biases. What matters is how often we check them against reality. Check your trend indicators at least 3 X a day to determine if you have missed something. Make sure the information is objective, not subjective. The more bullish or bearish the market seems, the more likely that a trend reversal is just around the corner.

Principle of Max Pain

Alexander Elder, a psychiatrist and trader, points out that markets lack “normal human helpfulness.” That’s an understatement.  The real situation is much more adverse.

In professionally controlled markets the principle of Max Pain applies. This means that, over the short-term, prices will move to levels that cause the maximum pain to the most people. This is the real Efficient Market hypothesis, as far as active traders are concerned, because professionals are very efficient at this.

Fade the News

The news over the weekend (December 2012) was all about the deadlock in the ‘Fiscal Cliff’ negotiations. Over the past few weeks this topic has been yanking the market’s chain. Interestingly, however, S&P futures are up nicely this morning.

My point is that news has impact, but the impact is generally short-lived. After the market moves through a reaction-cycle a few times, the “News Effect” wears off. At that point, the market fades the bullish or bearish news and catches traders wrong-footed.

Some of the best trades come from fading the news, which means being psychologically nimble enough to know when the News Effect has worn off.

Be the 2nd Mouse

I classify traders into four types according to their style of trading (Breakout, Pullback, Volatility and Narrative (i.e., trading the ‘Story’). It is important to discover which type you are, your native preference, so to speak. We can learn to trade all styles, but one will probably feel most comfortable.

I’m a Pullback trader and I’ve found that buying pullbacks (dips) is much harder than it seems. In fact, I’ve spent the last 5 years working on various pullback systems. (If you hire me as your coach, I will provide you with one, if you need it.)

Pullback systems can be a tad complex, but the essential concept is buying an oversold market. The question then becomes: “How to measure oversold?” One can use various indicators or fibs, but I would like to offer you one additional hint based on trader psychology: often the best oversold entry is one beat after the one you have a gut impulse to take.

In other words, let the first mouse go for the cheese. It often pays to arrive a bit late to the Pullback Party; be the Second Mouse.

Leading Indicators

Many traders bemoan the fact that indicators are ‘lagging’ and seek something that actually leads price. Some traders think that volume leads price, but in actual studies that is only true in high volume situations.

Let’s get more practical.

The stock market is like an army of followers with a small handful of leaders. It’s hidden strength or weakness can be seen in the behavior of the leadership. Right now (November, 2012) there are quite a few disabled Generals. If one looks closely, however, there is a small handful that have suffered setbacks, but are still standing, such as AMZN, GOOG and AAPL.

Until these leaders are pushed and held below their waterline (the 200 ema), I believe that the bulls have the football.

The Uncle Point

The mechanics of trading can be reduced to the common sense expression “buy low, sell high” (the reverse for shorts, of course). It is for this reason that some trading coaches argue that the exit is the most important element in trading. This advice has merit given the fact that many traders get shaken out of good (winning) trades shortly before the trade “works.”

To tenaciously trust one’s original premise for the trade and weather the storms of adversity, however, only makes sense if the entry made sense. Stubbornly holding a position due to one’s arbitrary commitment to a particular “story” is the main reason so many futures traders go bust. Like a heat-seeking missile, the market will sense your mistake and take you to your ‘Uncle Point’.

You might assume that the lesson is to learn to take losses while they are small. This is true, but the equally important lesson is to pay a great deal of attention to your entries. Careful entries include a well-defined margin of error. The better the entry, the smaller that margin needs to be and the easier it is to take the loss.

Trading our Opinions

The market sets “traps” for traders. One doesn’t have to be paranoid to believe this; such “traps” occur all the time; whether they are orchestrated or accidental does not really matter.

By a “trap” I simply mean a type of price action or price pattern that creates directional biases in traders, which are then ‘faded’ by the professionals. The reason this is effective is that it is difficult for the average trader to shift biases quickly. In fact, there are often 5 distinct stages we need to move through before we can adjust a strongly held opinion.

If something goes wrong and you find you are suddenly underwater in a trade, ask yourself a hard question: “Am I  still in this trade because I have not yet changed my opinion?”  

Don’t wait for ‘confirmation’

Trading is about assuming risk. That means we have to place our bets in the dark. We cannot see around the corner of time. Of course, jumping in like this goes against our natural human tendency to look-before-we-leap.

Therefore, many traders hesitate to pull the trigger until one has ‘confirmation.’ Sometimes, waiting pays, but often in trading ‘waiting for confirmation’ is merely indulging our fear and the meat of the move is over.

Trading is all about timing: not too early, not too late. If you are buying high or selling low and getting killed, then work on your entries. Contrary to the advice some popular pundits, mastering entries is by far the most important element in trading.

For Traders, Risk is our BFF

I tested a system yesterday that took 20 trades on the S&P futures on 11/14 with a 95% win rate. It is a trend-following system, so it works well on trendy days.

Although I developed the system myself, my own trading results yesterday were not stellar. When I analyzed the reason for the discrepancy, I discovered that my entries were generally good, but I got out too early. I was trading too tightly. I did not give my trades breathing room.

When I clamped down on the risk side of the equation, the reward side was proportionally degraded. The best system in the world will not work properly without the right balance between risk and reward.

Bottomline: traders only get paid when we take risks. Risk has to be/become our best friend forever.

The Power of a Plan

Generally, opening gap-fill rallies are quite robust.

Most traders do not trade opening gaps, however, because trading gaps is a specialty niche. So how do you handle it when the market is running and you are not in? You might be tempted to blindly chase, but this tactic undermines your trading discipline.

My suggestion is to have a trading plan and trust it. The more you trust your plan, the easier it will be to allow the market its sudden surges without you being in.

The Second Mouse

There are many valid ways to trade. Those who trade “pure price action” (traders who only use candlesticks, pivots and fibs) argue against the use of indicators based on the fact that they ‘lag’ price. The implicit conclusion is that lagging indicators cause one to arrive too late to the party.

That may be true, at times, but due to the high level of randomness in the market, pure price action is noisy. When we jump in on a candlestick breakout, we may become the target of those professionals who fade breakouts for a living.

Indicators filter the noise and may save you from being whacked by the trap. The Second Mouse gets the cheese.

A Fish Tale

This morning I made a video on a simple trading system for a client that had about an 85% win rate on the S&P futures today. What struck me, however, was not the win rate, but the fact that the system had a fairly long period during the middle of the day when it had no signals.

As I reviewed the video, I wondered whether most traders could tolerate the two hours of choppy conditions and keep their powder dry for the afternoon action? Sometimes it is difficult to sit on one’s hands, especially when the market is moving fast. It is easy to feel like one is missing out.

To build positive trading psychology, learn to tolerate the market moving up and down without you. Focus less on the captivating, greed-inspiring movement of the fish and more on the method you need to use to catch it.

ER Docs

I’ve noticed that successful traders share some personality traits with ER doctors. For example, in both professions, time is of the essence. This is particularly important on days with high volatility. You snooze, you lose.

ER docs need to be able to make a quick diagnosis when a new patient arrives. Day traders must also make an assessment about the nature of the market as soon as possible, usually within the first 15-30 minutes after the open.

To help you determine a rational bias for the day, study the action in a stock or index around the open. Use the 15, 30 and 60-min range as a reference. For futures traders, these levels are just as important as floor pivots.

The 5 Stages of Changing One’s Mind

Today was a down day. If you were expecting a sell-off today, then you probably are able to take advantage of the market’s weakness. If you were expecting a rally, however, then you may be having difficultly accepting the market’s behavior and trading with the trend.

Instead, you might be trying to pick a bottom.

For some of us, changing our minds can be difficult. If one is attached to one’s opinions, one’s mental/emotional process may require going through the 5 Stages of Death and Dying: Denial, Anger, Bargaining and Depression to get to the final stage: Acceptance.

When you find yourself on the wrong side of the market, do your best to get through these 5 Stages as quickly as possible. The sooner the better.

“KISS”

A universal psychological tendency called the Recency Bias makes it difficult for traders to avoid developing a directional bais. After a sharp rally, for example, many traders are not psychologically prepared for a deep retracement.

Great trading, however, depends entirely on minimizing the effects of common cognitive errors such as the Recency Bias. That’s why I recommend relying on more objective determinants of Trend than your gut feelings.

This can be accomplished by examining swing pivots (HH, HL, LH, LL), or with indicators. Whichever route you take, keep it simple. If your trend determination method is too complicated, you will probably not be able to follow it on a day like Friday.

Indicator Creep

True confession: I’ve never met an indicator I didn’t like. I could/should start a meeting of Indicators Anonymous. “Hello, my name is Kenneth…”

This is a psychological ‘disorder’ similar to hoarding. If you have this problem, then you probably notice “indicator creep.” That’s when a nice clean chart starts to get cluttered.

Once a week, at least, clean your room and your charts. The more ‘stuff’ we have on our charts, the more often the various signals cancel each other out, which leaves us on the sidelines, missing the obvious. Additionally, just keeping track can be mentally draining.

You will work hard with little to show for it.

Wave Theory

Like the ocean, markets move in waves. Sometimes those waves are small (chop), sometimes very large (like today) and sometimes just the right height and pacing to give us great surfing.

Unfortunately, days consisting of one large wave (up or down) often lack good entry points, so methodical traders may underperform and those who like to chase momentum tend to do well. A breakaway gap and rally, for example, has no significant intraday pullbacks.

Your trading psychology needs to be focused on the patience to wait for a  low risk entry. For example, remember that there will almost always be a mid-day consolidation. When it arrives draw the box (like a Darvas box) and buy/sell near the boundary of the box in the direction of the trend.

Do not fade the freight train; instead find a rational way to jump on board.

Trading and Tennis

I play competitive tennis and I have a coach. I had a lesson today and it reminded me of a parallel between tennis and trading.

In tennis one has several shot types, which are equivalent to setups in trading. We have the forehand, the backhand, the volley, the half-volley, the drop shot, the lob and the overhead smash. Seven basic shots. The critical thing is to hit each one the same way, each time.

That means we have to trust the bio-mechanics of the shot. If we fiddle around with it because we are off balance, then we lose our advantage. My coach advises not to focus on the result of the shot, as long as the mechanics are correct.

In trading, we need to practice our setups in SIM and then trust them in live trading. If, after a loss, we try to adjust them on the fly in live trading, we lose our edge.

More on Stalkers vs Trappers

I recently discussed a distinction between the stalking mentality and the trapping mentality. Stalkers often lack a plan and tend to make up tactics on the fly. This approach is all about relying on one’s gut reactions.

If your gut is ‘smart’, then no problem. But if your gut is fascinated by “bright shiny objects” (i.e. momentum), for example, then you risk chasing. This leads to buying too high or selling too low. Your position then becomes a target for professional traders.

Trappers, however, don’t chase anything. Instead, they figure out low-risk entries in advance and usually lighten up on positions into momentum runs.

Which would work best for you?

Mass Psychology

In the same way people project unconscious biases or preoccupations on a Rorschach ink blot test, I believe traders unavoidably project our biases on ‘The Market.’ These biases can simply be categorized as bullish or bearish, optimistic or pessimistic.

Although investor sentiment is quite bearish at this time, a recent article by Raymond James’ strategist Jeffrey Saut points out how well the market has held up despite a perfect storm of bad news. He also notes how often headlines augur the end of a important development (i.e. it is now fully priced-in) rather than the beginning of an actionable trend.

This is the same principle of mass psychology that causes traders to capitulate at the exact bottom of a move. Mass psychology (which operates on all time frames) has a compelling emotional component, but savvy traders use it in a contrary manner, rather than as a leading indicator, which it surely is not.

Stalker vs Trapper

In trading, there are two distinct mindsets: the Stalker who actively tracks his prey and the Trapper who sits quietly waiting for the animal to step into the trap.

Most traders are men and testosterone biases us toward the primal Stalker mentality. Stalkers don’t necessarily have a plan, however. In fact, plans can get in the way. After all, Stalkers need to be flexible, spontaneous, tactical.

Trappers are the planners. They don’t care about the zig zag path the animal takes to the trap. Consequently, trapping is easier than stalking, but also much less entertaining.

If you are having difficulty in this market, you may be getting fooled as you pursue your prey. (In the modern market, solitary Stalkers are also hunted.) Consider setting a trap and practicing patience. It will be more boring, but probably more profitable.

Ambush!

When the market gaps DOWN after closing UP on a final rally the day before, traders who held positions overnight are caught wrong footed.

An end of day rally may seduce you toward a bullish mindset the following day but that would be a mistake.

Don’t over-commit to your hunches about the next’s day’s action. Practicing effective trading psychology is about staying flexible, because ambushes happen.

Trading the Day After: A Road to Nowhere

The day after a big move can be difficult to trade because we get accustomed to the increased volatility… and then it disappears. The trend following methods useful on a big trend day are largely useless the day after, when volatility subsides. That’s when you need to think in terms of ranges or channels, rather than trend.

Be sure you have at least two gears for your trend-trading vehicle: one for smooth, fast conditions, and the other for a slow, bumpy road that goes nowhere.

Trading Big Trend Days

Strong trend days are relatively rare, so it is easy to forget how to trade them. Psychologically, trend following is much harder than it seems, especially on big days. Mega-trend days show us our weaknesses.

Many conservative traders find that they underperform on such days, because they don’t want to buy near the highs or short near the lows. If you have been struggling lately, then you were probably tempted to take profits early or you may have just watched from the sidelines. If you have a contrarian temperament, you might have tried to pick the bottom…  over and over.

If you are not satisfied with your performance on big trend days, analyze your behavior objectively. What were the automatic thoughts that ran through your mind? What were your fears? Journal about it. The more you understand your weaknesses, the easier it is to correct them.

Cutting Winners and Letting Losers Run

The two hardest things to do in trading are cutting losses and letting winners run. Humans (especially men) are programmed to do the opposite. We hold on to losers because we don’t want to admit we are wrong. We deal with losers the same way we deal with the prospect of death: first denial, then anger followed by rationalization and bargaining.

We cut winners because we have had too many losers and we feel desperate for a gain, so we settle for less. If you don’t have a clearly defined targeting system for your trades, your doubts will gain traction and you will be more vulnerable to this psychological trap.

Solution: Set targets for every trade. Make targeting an essential part of your Trading Plan. 

Timing is Everything

Your trading results are largely dependent on your sense of timing. The better your timing, the less ‘heat’ you take on a trade after you enter. The less stressfull the trade, the more likely you are to manage it well.

Like CPUs, we all have different mental “clock” settings, some faster, some slower, which represent the number of decisions per unit of time we can handle without making errors.  Traders get in trouble when we trade a time frame that is too fast for our CPU.

So, ask yourself: “In what time frame am I an accurate timer?” That will be the time frame in which you can read ‘the story of the market’ most clearly. Trade only that time frame; nothing faster.

Psychological Whipsaw

This morning (October, 2012) U.S. index futures are soaring simply because Europe shrugged off all the bad news. If you got bearish last week, you are probably feeling whipsawed.

You may be tempted to abandon your Trading Plan today. When markets make a U-Turn and catch us wrong-footed, they cause us both financial and psychological pain. When in pain, however, we tend to make poor decisions.

Take a deep breath so as not to act impulsively from a sense of urgency. The best trading decisions are deliberate and planned. Otherwise, you risk making two mistakes back to back. That can lead to a downward psychological spiral.

In trading, we are often wrong. Psychologically speaking, what distinguishes successful traders from struggling amateurs is just one thing: how we handle being wrong. Don’t make a bad situation worse. Take the hit, take a break to reset yourself mentally and emotionally, and get back to trading your Plan.

Groundhog Day

 For traders, our relationship to “the market” is similar to what Bill Murray’s character experiences in the film ‘Groundhog Day’. Deja vu… again and again.

Although the context varies day to day, if we have a defined Trading Plan, the setups are the same. The only relevant variable is us. Our attitudes, our opinions and our moods change constantly, so we see our setups differently or don’t see them at all.

Like Bill Murray’s character, our task as traders is to realize that trading is largely a mental-emotional training exercise that forces us to grow as individuals. If we don’t get the lessons, if we don’t change, our results will inevitably reflect that inner stuckness.

Change of Character

Like people, markets (including individual stocks, commodities and currencies) have ‘character.’ As we trade, we get accustomed to a certain set of behaviors associated with the market’s current character.

In normal people, character traits don’t change much, but unlike most people, markets are inherently ‘bipolar.’ In other words, they tend to express two different styles of character, which we commonly refer to as bullish and bearish.

Having a bipolar character structure, however, is considered a psychological disorder. Individuals with this disorder tend to suffer a great deal and they almost always drive the people around them crazy.

Markets can switch polarity rather suddenly. We need to be psychologically prepared for such shifts or we will be thrown off balance, trapped wrong-footed.

Firmly Objective

Reversal days like today are psychologically challenging. For one thing, they reveal how our biases can get in the way. If you get bearish due to the market being ‘overbought’ you may get squeezed by a surprise rally. If you stayed stubbornly bullish too long, however, you may find yourself trying to fight an avalanche.

Reversal days show us the inconsistencies and weak links in our Trading Plan. Are you really prepared to catch a trend…regardless of direction? Can you reliably identify the first pullback in a new trend (the ideal place to enter), whether the trend is up or down?

Often we have blind spots. It is difficult to see what we are not prepared and ‘primed’ to see. If you struggle to identify trend, check your Trading Plan. If your Plan is adequate, then work on developing the flexibility to be firmly objective about market direction each and every day.

Missing Out

Markets can move quickly. If you blink, you miss it.

When one misses out, one might experience an irresistible urge to get in at the soonest possible moment, because the pain of missing out is a strong motivator. I urge you to resist that urge. Why?

By prioritizing “getting in at any cost” you are likely to abandon your Trading Plan and take a sub-par entry. This not only undermines your discipline, but sets you up for a whipsaw. The experience of missing out followed by a losing trade is a double dose of pain that may then motivate you to try even harder, but your stress level will probably degrade the quality of your subsequent decisions, leading to a downward spiral.

Bottomline: Psychologically speaking, it is a much better strategy to practice tolerating the pain of missing out.

Should You Set a Daily $ Goal?

I’m often asked whether a trader should set a daily $ target. For the most part, the answer is ‘No.’ Setting a money goal mean we are focusing on the money, and that is a slippery slope in a highly random environment. It’s much better to focus on your method.

If you do set a monetary trading goal, make it one that is achievable. It should correspond to your normal abilities. If focusing on your goal helps you trade in a more disciplined manner, that’s a good thing. Otherwise, simply focus on your method.

Capitalizing on the Mistakes of Others

True confession: I am an indicator junkie. Whether I’m actually ‘recovering’ is uncertain, as I have a rather hefty bill each month for my programmer. One of my favorite market conditions to build indicators for is divergence.

Technically, divergence is a discrepancy between price and an indicator. For professional traders, however, divergence sets up the possibility of trapping unsuspecting novices on the wrong side of the market, because novices tend to buy too high and sell too low.

The strongest moves in the market are initially driven by psychological pain, i.e. traders wanting to get out of losing positions. Consider incorporating this rather mercenary motivational factor as you design your Trading Plan.

Riding Big Waves

Markets constantly ‘fade’ the obvious, which can be confusing to aspiring traders. However, this teaches us to conceptualize the future in terms of probabilities, rather than in purely logical terms.

The human brain, however, abhors uncertainty. This puts traders in a psychological double bind. How well you deal with this double bind entirely determines how well you will do as a trader.

On highly volatile days, the market’s swings can be disorienting if you are a pullback trader because the retracements exceed ‘normal’ levels. If you find such volatility confusing, wait for the market to settle down. One sign of that is the first normal retracement that is respected.

It is difficult to be patient when the market is moving away from you very quickly, but chances are it will soon move back toward you even faster.

Back to School

Traders pay for our education. When I make a mistake and grossly underperform my chosen market (NQ), I go over my charts to discover errors of commission and omission… what I did wrong and what I missed.

I like to do this on Saturday mornings over a cappuccino. The drama has subsided and I can see my mistakes clearly and make the appropriate adjustments.

Of course, avoid adjusting your system to trade yesterday’s market. Just realize the type of market it was (steady markdown) and how your charts look when it occurs.

Humble Pie

Days like today (a big down day) are humbling to the pundit in me who thinks I know what is going to happen. I traded largely from my bullish bias, so I was picking up nickels and dimes, when I could have made a small fortune on the short side.

I know one thing about myself, however. I prefer to trade long. This preference, which I have yet to overcome, means I under-perform on large down days.

If you have a directional bias or preference, I recommend not trading at all on the days that are opposite to your bias/preference. Knowing when not to trade is just as important as knowing what constitutes an easy day for our personal system.

Planning vs Reacting

Active traders are often wrong about market direction; what matters is how quickly we recognize the fact. Having a written Trading Plan helps.

I would argue that all active traders think they have Trading Plans, it is just a question of what type. If you lack a written plan, then you will substitute one of three types of ‘default plans’: a Gut-feeling, an Emotionally-driven plan or an Intuitive plan. All of these alternative plans, however, will be made up on the spot. You will tell yourself that you are planning, but you will really be reacting.

If you can’t write out your plan in a way that a 12-year old could understand you might be fooling yourself about really having one.

The Pause that Refreshes

When markets consolidate in an uptrend, some traders get bearish. That is a psychological error in judgment. A lack of upside momentum is not the same as a downtrend. When conditions are overbought, markets naturally consolidate to catch their breath, so to speak.

I have a 200 ema on all my charts, regardless of timeframe, to help me determine trend. Whatever market you are trading there is probably a moving average that provides a trend indication. Find out what it is. Use it to help orient you to trend and to avoid trading counter-trend during normal pullbacks or consolidations.

Home on the Range?

When the market is range bound how do you handle that? Ranging markets require a different trading psychology than trending markets. One needs to be more alert, more nimble because the market is inherently more random and volatile. Trade management needs to be “all in/all out”.

Hint: Develop two techniques and two mindsets: one for trading trends and one for trading ranges. Use previous swing pivots, the ADX or the slope of a mid-length moving average to give you an objective reading on choppiness. With practice, you can learn to feel at home on the range.

Gain Perspective

I use weekends to gain perspective on my trading system and on my execution. Reviewing trades when the market is closed can prevent over-tweaking a system based on short-term results.

Also, because trading is stressful, your body needs time to re-set its cortisol (stress hormone) levels. A good night’s sleep will often do it. With lower cortisol, you will think more clearly.

Respect SIM; Don’t Abuse It

Let’s talk for a moment about trading in simulation mode (SIM).

I recommend trading in SIM while one is working out the details of a system, when you change something in your trading plan and need to practice, and when you are trading a new market.

Using SIM as a ‘entertainment’ tool, however, can be counter productive.

If you trade in SIM for recreational purposes, like playing a video game, you may find yourself taking what I call “gunslinger” trades. These trades often represent an indulgence of impulsivity and high risk behavior.  Without realizing it, however, you are conditioning yourself to trade in this manner and it will carry over into your live trading.

If you trade in SIM, to avoid corrupting your trading method, I recommend that you trade exactly the way you would trade live. If you can’t, then don’t use it. Your results in SIM will probably be significantly better than your live results. So, if you can’t make money in SIM, you are not ready to trade live. And if you can make money in SIM but you do it in an undisciplined manner, you are not ready to trade live.

Trust the Force; Fade the Obvious

It’s not uncommon for day traders to say, “Damn! If I had done the exact opposite of what I actually did I would have had a great day.”

On strong trend days it’s important to “Trust the Force.” This is more difficult than it sounds because trends arise when least expected.

On non-trending days (range bound days) it pays to Fade the Obvious, because markets will do the exact opposite of what our gut and intuition and previous experience expects. On range-bound days, initially strong bullish moves consolidate, roll over and die. Sudden sell-offs have no follow-through and quickly snap back forming  ‘V’ or ‘U’ patterns.

When you notice lack of follow-through, reduce the size of your targets, i.e. ‘scalp’. Increase your skepticism and Fade the Obvious.

Optimal Adrenaline

There are many good reasons to trade in SIM. For example, you are practicing a new trading method or trading in a new market. If you have been trading in SIM for a long while, however, it might be to your advantage to trade live…even though you might not feel quite ‘ready.’ Here’s why.

If you are careful, you can increase the speed of your learning curve because live trading can create “positive stress”. Positive stress is stress at a level that is stimulating, not debilitating. It is stress in just the right amount….optimal adrenaline.

I recommend starting your ‘Optimal Stress’ program trading very small size. Risk a trivial amount per trade (less than 0.25% of your account). Positive stress must be time limited as well. Enjoy the thrill, but stop before you are tired.

Rogue Trading

The real-life film Rogue Trader illustrates a key principle in trading psychology. Leeson’s mistake was his unwillingness to take a loss, because it was significantly larger than what he was comfortable taking. He had a reputation to uphold as the floor manager, after all. Ego exposes us to huge risk in trading.

Once we refuse to take a loss, one’s trading account is doomed, especially if we get away with it a few times, as Leeson previously did.

Interestingly, after he was released from jail, Leeson earned a degree in psychology and regularly writes and speaks about the adverse effects of stress on risk management.

The Recency Effect

Daytraders who become bearishly biased after a sharp sell off are unprepared to catch the rebound. This bias is the result of the Recency Effect, which is the tendency to attribute more meaning to what-just-happened, especially if it happened quickly and had adverse connotations.

A primary principle in daytrading psychology is to minimize or expunge such biases and remain neutral….regardless of what the market just did.

Beware the Obvious

When you daytrade the indices, or other professionally-controlled markets, be prepared for surprise reversals… in the direction of the existing trend. Trends tend to persist longer than one expects. Don’t over-anticipate reversals, rather, learn to play the trend game with the pros. This is a key daytrading psychology concept.

Trust the System

I have been developing my personal daytrading system for a number of years. It is getting easier for me to follow because I have simplified it and backtested it, so I trust it more and I second-guess it less. I had a short signal on the Nasdaq futures just a moment ago and I simply took the trade. I didn’t think twice.

It has taken me a long time to get to the place where I don’t spend time and energy trying to figuring out whether a signal is a ‘good’ signal or whether I’m being fooled. That’s really not part of my job description as a daytrader anymore. I just take the signal. Do you trust your system? If not, why not? Trust is key for building positive daytrading psychology.

Perfect Contrary Indicator

Markets have been selling off for a while (August 2012) and I just received an email from my perfect contrary indicator pundit. Over the last 4 years he has been wrong 100% of the time, but the great thing is that his timing is perfectly out of sync, as well. The email warns against “imminent financial collapse.” The guy is always bearish, but I wait for his more extreme calls, like this one. Then I know we are set for a great bull run.

Make sure this does not apply to you. Pay little or no attention to the news. Keep your biases out of your trading.

Fear/Pain of Missing Out

Sudden suprise up-moves in the market often leave daytraders behind and trigger feelings of ‘missing out.’ The pain of missing out can then causes us to manufacture trades that do not comply with our rules.

But think about it for a moment. Which is more important for you? To be in a trade or to be in the right trade?

The fear and pain of missing out will get you in, but not necessarily in a trade that makes sense. So when you notice those emotions, move your hand away from your mouse and breathe. Think about the pride you will feel from following your rules even in such tempting circumstances. And remember, self-mastery is the key to successful daytrading. Each day, judge your success based on that metric. Positive daytrading psychology is all about mastering the Trader, not the Market.

Fading the rip?

I was trading the Nasdaq futures this morning, which ran like a tiger a few minutes after the open and filled the opening down-gap plus some. It was tempting to short the sudden rip at several resistance points, but one would have been run over by the bulls.

If you find yourself on the wrong side of a rip-roaring market, you may need to examine your tendency to act on snap judgments (“The rally has gone too far….and without me!”). Snap judgments cause daytraders to temporarily suspend our trading plan, which is a very dangerous thing to do. In other words, snap judgments = bad trading psychology.

One of the best daytraders I know (he trades 13 lots in CL and drives a Lamborghini) checks every single day to make sure his daytrading matches his plan. His plan is just a paragraph long, but he checks anyway. I doubt he will ever wreck his car… or his account.

Amateur vs Pro Part 2

I was trading AAPL yesterday and noticed some very sharp V-like moves that cleaned out hard stops across a price band of 3-4 points. Of course, the stock quickly reversed its precipitous fall and continued to move higher. If you are daytrading stocks or instruments that are professionally traded, then you need to understand why this happens and protect yourself against being a casualty of intraday stop running.

Here’s an analogy. When you lay a foundation for a wall, you tamp down the earth before you pour your footing or lay your block. This makes for a more solid foundation. In trading, however, larger players like to break support by selling into weakness and undercutting it. It doesn’t cost them that much and the spike down removes the weak hands who have their stops just under “support.”

Try to recognize this daytrading pattern and understand it, so you don’t get blindsided or get overly bearish by misinterpreting every break of support as a meaningful reversal. In trading psychology terms, this will immunize you against being fooled by the Recency Effect, (i.e. by attributing too much value to what-just-happened.)

Amateur vs Pro

Research shows that the more often individual equity investors buy and sell, the worse they do. The rate of capital destruction is about 4% per trade, annualized. Over time, male traders fare far worse than women because they trade more often. So what’s the problem?

Amateur investors tend to buy high; professional investors work hard to take advantage of market weakness to enter or add to positions. Buying on weakness, i.e. buying pullbacks, is natural for some traders and difficult for others. Nevertheless, it is a psychological trading skill that can be learned.

If you find yourself buying high and hoping for the market to go higher, start training yourself on the complementary skill of buying lower. The rewards are likely to be substantial, both psychologically (less stress) and monetarily.

What’s Your Sport?

Watching the procession of athletes from 204 countries during the opening ceremonies of the Summer Olympics I was struck by one thing: each athlete has a specialty. Even within specific sports, various ecological niches were quite differentiated.

In daytrading, we often neglect to specialize. It is not uncommon to see aspiring daytraders apply vague methods to multiple markets. The less defined the method, the less efficient the analysis and the more time consuming the trading process. Professional daytraders often trade less than 3 hours a day. This helps preserve their psychological trading capital.

If you are spending lots of screen time with not much to show for it, work on increasing your expertise in just one niche. Focus on one market and one method until you master it. That may be all you ever need.

Chasing the Melt-up?

Today the market is in melt-up mode on hopes that the world’s central banks are on the verge of another rescue package. On “irrationally exuberant” up-days, it can be difficult to enter the market rationally.

How susceptible are you to chasing price… jumping in without a valid setup? Usually, traders who do that have a huge fear of missing out. For them, missing out is just as painful as losing.

If this applies to you, ask yourself how the Fear of Missing Out affects your entries in general day to day. Go back over last week’s trades and analyze the timing on your entries. Were you mostly too early?

Traders who fear missing out usually are. If so, practice waiting a beat or two before entering. Sit On Hands (SOH) for a count of 10 (or 20, 30 or 60 or more) and chances are a better entry will materialize, like magic.

The Paradox of Success

It can be difficult to include taking losses as part of one’s success plan, but it is essential. For some traders, the desire to succeed may function as a psychological imperative that keeps them from taking losses when they are small.

Achievement-oriented traders may over-focus on the potential for gains and minimize the emotional impact of losses. In trading more than almost any other business venture, however, one has to learn to be a good loser before one can truly succeed.

The Mistaken Power of Convictions

From a Skype chat with a client….
[10:25:49 AM] Rick W. I have a lunch appointment … going to let it ride on my conviction.
[10:27:24 AM] Kenneth Reid, Ph.D.: Hummmm….try not to have any convictions, just tentative theories. Why? Convictions are difficult to change….so if you are wrong, you might not admit it soon enough.

Convictions are also biases that operate in the background and cause us to make snap judgments that support the bias. Impulsively increasing position size, for example, is a snap judgement. They are almost always mistaken.

The Defeat of Human Nature?

“Successful investing is the defeat of human nature. Human beings prefer to buy shares of a common stock which have gone up in price recently. They prefer to participate in styles and sectors which have done better in the most recent five to seven years.” William Smead

True, a certain group of traders and investors feel more bullish after an advance, but that is not necessarily a mistaken approach. In fact, buying high and selling higher is a proven long-term method of investing according to IBD founder William O’Neil, if you can pick the right stocks. So O’Neil developed a method for doing just that.

What’s critical is not so much when you buy, but how you buy. Do you have a method that gets you in at a low-risk spot? Some traders are naturally Bottom-fishers; others buy in the Middle of trend runs…. and of course, some do end up buying at or near The Top. O’Neil popularized the “cup and handle” breakout, but there are many other methods.

To be sure, it is important to have a method and execute it consistently, but the most important thing is to select a method that accords with your own personality. My guess is that Mr. Smead denigrates the all-too-human O’Neil-style breakout traders because he has a different personality and trading style. There really is no one right way to trade or invest….but there is a right way for YOU.

Mastermind Prescription

The Cycle of Self-Sabotage can run for years. To finally break this cycle, you need to permanently root out bad behaviors and replace them with good behaviors. There's a new technology that can help you do that... for just $9.97/month. Read more.

Free AWARE Trader Personality Profile

Finally, an easy to understand Personality Profile that shows you exactly which personality traits help (and hurt) your trading! Read More


 

Free Report: Secrets of the Top 4%

The largest academic study ever conducted on day traders revealed that most lost money .... even during a raging bull market! About 15% did very well each year, but fewer than 4% of daytraders were able to make significant profits two years in a row. Read More


 

Increasing Discipline: The Easy Way! (On sale for just $149)

Many aspiring traders lack sufficient self-discipline to stay the course as a trader and protect capital during the learning curve. Willpower is not enough because trading challenges us in profound ways.

Increasing Discipline: The Easy Way is designed to help you increase self-discipline naturally, effortlessly, painlessly using (+) Neuroprogramming technology. Read More


 

Create a Winning Mindset: The Easy Way! (On sale for just $149)

According to Mark Douglas, the #1 characteristic of top traders is a lack of fear. These folks maintain a positive attitude regardless of the outcome of any particular trade. This technology will help you trade like they do. Read More


 

Risk Profile

DayTrading attracts individuals with different natural trading abilities. Some people are natural-born daytraders. These Market Wizards (4% of daytraders) are natually fearless, competitive and report little emotion in trading. Read More


 

Free 15-min Consultation

Trading can be a lonely profession. Chat about your trading for 15-min with a coach who trades. I may be able to offer a few quick tips that will get you back on track. Read More


 

Free Webinar Notification

 
 

Trading Psychology Blog

Traders: Don’t make this costly psychological mistake

The stock market is often likened to a casino, and there are parallels. In both venues, people put money to work in anticipation of rewards, while cognizant of the risks.…
Read more

Trading Psychology: How to Overcome Chasing

Do you have a tendency to chase price? That means, buy high in the hope of selling even higher. Or selling short during a rapid decline without waiting for a…
Read more

Setting Smart Stops

Intelligent risk management means using stops. If a trader constantly gets stopped out, however, he/she may develop an aversion to using stops. They blame the stop, but the problem is…
Read more
View All Posts

Trading Psychology Video Blog

The Psychology of the Zero Sum Game

Zero sum markets are significantly different than asset (equity) markets. In this short video I will summarize the psychological and technical adaptations that aspiring traders need to make in order…
Read more

Trading Psychology: Exploiting The Mistakes of Other Traders

Greetings traders, this is Dr. Kenneth Reid. This video illustrates how traders can get trapped on the wrong side of the market and how you can exploit that circumstance if…
Read more

Mastering Volatility

Market volatility has tripled over the last few months, which poses technical and psychological challenges. In this video I point out 8 ways in which you can master volatility and…
Read more

How to Avoid Whipsaws in Trading

Trading without a technical trading plan puts active traders into visual and emotional reactivity. The more you react, the more often you will experience whipsaws. Reactivity is what makes us…
Read more
View All Video Posts

Coaching Testimonials

"When I met Kenneth Reid I was at the end of my rope. It turns out, signing up for his 6-week program was the best thing I’ve ever done. I learned more with Ken in the first 3 days than I had in years of trading. Part of the reason is that he doesn’t just teach “how to trade,” he teaches you how to be a trader.

This is the most in-depth and highly personalized training I’ve ever experienced. I’ve learned how enter trades with minimal risk and maximum reward. My first day trading I had a 10 1/2 point trade on the ES. I had never done that before. He has shown me how to keep my losses very small and put myself in a position to make consistent profits..." Read More