Innerworth - Mind over markets newsletters

May 10th, 2006

Efficiency is doing better what is already being done.

  • Peter F. Drucker -

The Efficient and Successful Trader

How much time do you spend preparing for the trading day. Do you spend hours scouring the markets for a winning trading opportunity? Do you watch hours of commentary or read all the major financial newspapers? You don’t need to spend hours and hours reading about the markets if it doesn’t directly lead to a profit. For example, most media coverage of the markets is for entertainment value, so spending hours reading or viewing it is a waste of valuable time. You need to work efficiently and make sure that the time you spend learning about trading and the markets does indeed pay off.

Consider how Mark, a seasoned hedge fund manager, prepares. He shared his morning routine with our Innerworth staff: “I look at about 300 charts every day. That gives me a good feel for what the markets are doing overall. I try to see whether a lot of different markets are signaling the same thing and breaking out at approximately at the same time. I wait for that to happen before I take a position. When it happens, it’s fairly clear, and I really don’t have any problem with courage at that point.” The seasoned trader doesn’t spend hours the night before preparing. Instead, the seasoned, winning trader can prepare right before the trading day begins. Rather than wasting time on tasks that don’t pay off, the winning trader works efficiently.

Seasoned traders may work efficiently, but novice traders may need to spend a little extra time preparing. It’s difficult to become a skilled and consistently profitable trader. Only an individual with rare talents can rise to the top 2% who make it as a top-notch trader. It does indeed take dedication and hard work. However, some make the mistake of thinking that trading is like a regular 40-hour a week job. The idea that an hour of work directly produces an hour of pay is not pertinent to trading. Trading is more about accomplishing a specific target, and making a profitable trade, rather than putting in a specific number of hours. For instance, if it takes only 15 minutes for a skilled trader to make enough profit to have a year’s worth of living expenses, then so be it. Seasoned traders don’t have to spend 40 hours a week to make a living, if they have the requisite skills (and novice traders may need to put in more time building up these requisite skills).

The point is that if you’re a novice trader, you can’t work under the belief that everything you do will have a payoff. You must also consider that there are a fixed number of hours in the day that you can work, so you must spend that time efficiently. Trading is a challenging profession, and you need to focus your psychological energy on what matters most. For example, don’t be distracted by learning additional trading strategies that you will never use, or new indicators that are redundant with basic indicators of trend. And don’t believe you must keep up with all the media hype. Focus, work efficiently, and in time you will build the skills you need to become a consistently profitable trader.

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The real test in golf and in life is not in keeping out of the rough, but in getting out after you are in.

  • Zig Ziglar -

Is Risk Management Really Important?

Many traders view risk management as critical to long-term success. Consider what a couple seasoned traders told our Innerworth staff about risk management. Mark said, “You can have a crummy trading strategy, but if you have good money management, you can make money. If you have poor money management, it doesn’t matter how good the trading strategy is. You’re going to lose in the end.” Similarly, Chris observes, “You must have a survivability element so that if you literally wished to select stocks by throwing darts at a board, you would continue to survive market to market.”

Risk management is viewed by many as important, but what’s the best way to manage risk? Some traders use very specific rules for managing risk, such as risking a small percentage of capital on each trade. Other traders don’t seem to have any specific rules, but may look at past performance as a key. (What is the volatility? What was the previous day’s low?)

As important as risk management is, not all successful traders always manage risk. Some successful traders put on big positions when they believe they see a chance to make a huge, substantial win. When they believe they are right, they just take a chance. Doing so may lead to big losses when they are wrong, but they do it when they need to.

Is taking big risks a good idea? When it comes to trading, there is no one “right” way to trade. All you can do is consider the advantages and disadvantages of each approach and decide which approach you want to take. Whether you want to take big risks may depend on your experience and trading skills. If you are a novice trader, you have not yet learned how to use a set of methods consistently to make a profit in the long term. For novice traders, it is often vital that they control their risk (for example, risking a small percentage on each trade) so that they could survive long enough to gain mastery as a trader. One reason trading coaches preach the virtues of careful risk management is that a common mistake among novice traders is wanting to “get rich quick” and putting on big trades to make big wins. The methods and skills of a novice trader, however, do not warrant taking such huge risks. What often happens is that they lose all of their capital on a few big trades and need to rebuild their capital before trading again. Rather than gaining mastery as a trader, they fruitlessly go through cycles of risking a lot, losing it all, quitting trading to rebuild capital, and so on. These novice traders never give themselves a realistic chance of learning how to trade consistently. In contrast, the novice traders who manage their risk can trade longer, and hopefully learn how to trade consistently before their capital runs out.

Once a trader becomes seasoned, he or she may want to “reach the next level” and make a lot more profit. Seasoned traders often reach an asymptote, at which point a self-imposed cap limits their profits. It’s hard to break through this barrier, and no one really seems to know why. Very experienced traders who want to make greater profits need to start bending or breaking the rules a little to see if they can make greater profits and break through the barrier. This is risky, but some seasoned traders are willing to take the risk in order to make huge yearly profits. That said, they also can afford to take more risks. As seasoned traders, they have the methods and experience to take risks, but a novice trader does not. So even though there is no right or wrong way to trade, if you are new to the trading field, risk management has the advantage of allowing you to “survive the learning curve” until you find the once-in-a-lifetime opportunities to make you wealthy beyond your wildest dreams.

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May 15, 2006

I worked with patience which means almost power.

  • Elizabeth Barrett Browning -

Don’t Plan to Fail

If you’re like most traders, you’ve made trades that you have regretted. Perhaps you misjudged the markets or acted on impulse, but all you knew in the end was that you lost money, and you wished you hadn’t. It may be hard to believe, but it is possible that you may have planned to fail. You may have covertly made a plan to sabotage your efforts.

Dr. Alan Marlatt, a prominent psychologist at the University of Washington, has studied the reasons people fail to maintain self-control. Whether it is trying to quit smoking or losing weight, it’s difficult for people to maintain discipline. Many times, people “relapse.” They are successful for a while but soon return to older patterns of behavior. Trying to maintain control requires planning. People make a series of decisions when trying to maintain control. Many of these decisions are “apparently irrelevant,” but they end up influencing what happens to us.

Consider how Jack, who is trying to save money to build up trading capital, may have set himself up for failure. Jack was paid on Friday at 5 P.M. and made the “apparently irrelevant decision” to deposit his paycheck at the ATM located near his mother’s house on Saturday morning, which happens to be located at the shopping mall. Although these decisions may have seemed arbitrary to Jack when he made them, you may see that they may have increased the odds that he will spend more of his paycheck than he had planned. The decision to deposit his paycheck at the mall increases the odds that he will walk into a store and make an impulse buy. In addition, making the deposit in the morning gives him the rest of the day to spend money. It’s possible that Jack may have “covertly” planned to spend money. Without thinking, he may have set himself up to fail. Consider how he might have planned things differently so as to ensure that he didn’t spend any of his paycheck. He could have deposited his paycheck after work at an ATM far from convenient shopping where he might impulsively spend money. The next day, he could leave his ATM card at home and ensure that he could control his spending. He may have had to drive a few miles out of his way, but this minor inconvenience would ensure that he did not spend his paycheck. The general idea is to plan your life in such a way that you increase the odds that you will maintain self-control. Why put yourself in situations that may thwart your plans?

This framework can be used to explain how a trader may put on a losing trade. Before you put on a trade, you make a set of apparently irrelevant decisions. You may think they have nothing to do with executing or monitoring a trade, but they do, whether you consciously know it or not. If you decide to party too hard the night before a trade, you may be too tired to concentrate. If you decide to meet up with a friend who goads you into bragging about your trading plans, you may feel uneasy about losing the next day, and the added stress may adversely influence your ability to put on the trade while in an optimal state of mind. You may spend a little too much money on the night before a trade and feel that you have to make extra money the next day to make up for your lavish spending. Each of these decisions may seem irrelevant but they may impact your trading performance. Why do we make such decisions? For some people, such decisions are made without thinking. Others, however, may “unconsciously” set themselves to fail. Regardless of one’s motives, these decisions matter. Rather than put yourself in situations that may increase your odds of failure, it’s wise to anticipate situations that may encourage you to trade on impulse and avoid those situations. Trading is difficult enough without you trying to sabotage yourself. The more you can set yourself for success, the better.

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May 16, 2006
Such power there is in clear-eyed self-restraint.

  • James Russell Lowell -

Controlling Your Mood and Maintaining Discipline

Winning traders are disciplined. Discipline means controlling impulses and fighting the urge to abandon your trading plan prematurely. Maintaining discipline is often easier said than done, especially when the market is moving in your favor. It’s hard to avoid closing a trade out early in order to lock in profits. Even winning traders face more losers than winners, and when you hit upon a winner, it’s tempting to take profits as soon as possible. But since winning traders are relatively rare, it’s vital to fight the impulse to sell prematurely and let the winning trade run for a while. In order to win big, it is necessary to delay gratification and patiently wait for the price to rise to your exit point according to your trading plan. Discipline is key, and it is vital to take whatever steps are necessary to maintain discipline.

Your mood can play a major role in determining your ability to stick with your trading plan. When you are in a bad mood, you may have trouble sticking with your trading plan. A study by Knapp and Clark (1991) illustrates how feelings of emotional distress can influence your ability to maintain discipline. Participants engaged in a laboratory simulation in which waiting patiently resulted in greater profits. Specifically, participants were asked to pretend they were fishing in a lake, and that they would be given a monetary reward for each fish they caught. Taking too many fish out of the lake early in the game produced immediate profits, but when fish are taken out early, fewer fish are left in the lake to reproduce, and thus, few fish can be taken out for a profit in the long run. Thus, waiting patiently to take out fish later is the most profitable strategy. Participants’ moods influenced their ability to wait patiently and fight the urge to take profits too early. People in a sad mood had difficulty waiting. They wanted immediate gratification, and believed that immediate profits would make them feel better immediately.

You might see how this experiment has relevance for trading. When you are in an unpleasant mood, you may have a strong need to feel better. How can you feel better? Making money usually makes you feel better. You can either take profits out of a winning trade immediately or you can make an impulsive trade to get a quick thrill. Your mood can make all the difference. It is useful to make sure you are in a good mood while trading. When you are in a bad mood, you may act impulsively in order to make yourself feel better.

Maintaining discipline is vital for trading success but it is difficult at times. The best ways to keep disciplined are to trade with a detailed trading plan, but this may not be enough. You must also make sure you are in a good mood. A good mood can mean the difference between trading impulsively and maintaining discipline.

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grt…

1 Like

May 17th 2006

Fear has its use but cowardice has none.

  • Mahatma Gandhi -

Coming Back Strong

Jack is down $50,000. He doesn’t know what to do. He thinks, “How much money can I lose? Will I ever make it as a trader?” Jack is surely at an emotional turning point. He can either give up on his dreams, or dig in his heals and work even harder to become one of the select few who master the markets. Does his plight sound familiar? Have you felt that you could never get ahead? If you are looking for reasons to leave the trading profession, you won’t have to look very far. Many winning traders who made money before the bubble burst have never made back what they have lost. Perhaps we will never see the consumer interest in the markets that we did in the late 1990s, but are you ready to give up? Let others give up. It just means more opportunities for you, right?

It’s easy to feel beaten down. It is easy to feel pessimistic. But in our studies of master traders at Innerworth, we’ve found that many traders blew out their account, felt beaten, but kept honing their skills until they became a winning trader. So what do you want to do? Give up? Do you want to give into your pessimism, or do you want to work hard to fulfill your dreams? If you want to fulfill your dreams, here’s a few ways to help you make them come true.

First, be a realist. Thinking like a realist isn’t thinking like a pessimist but it may seem that way at first glance. Many people set themselves up for failure by trying to accomplish unrealistic goals. For example, they may wrongly believe that they can turn a $5,000 account into a fortune. It is pretty much mathematically impossible to do that, so trying is going to ensure failure and disappointment. It is important to set goals that are consistent with your skills and financial resources. For example, it is necessary to build up trading capital to make it as a trader. You may need to get a second job and live a frugal life, but it is necessary to have adequate capital. Capital is needed to survive the learning curve. Capital is needed to survive sideways markets. Capital is needed to live through a psychological slump. You need to do whatever you can to build up capital. As a realist, you need to find a way to build capital and put in the required time and effort to hone the skills you need for success.

Second, you need to work hard and at your own pace. Trading is a business where some people find early success. Indeed, biographies of successful traders reveal that there are some people who actually can turn a miniscule $5,000 account into a fortune, but most people can’t, and few will do so in the markets of the next few years. Many novice traders, however, make the mistake of comparing themselves to others. They see a friend who was an overnight success and they believe that it is the norm, and that they should be able to put in a relatively minimal effort and achieve success. Don’t set yourself up for a disappointment. It may not happen that easily. You may need to work harder and longer than others, and patiently wait to achieve your goals. But the worst mistake you can make is to give up early and dream of what could have been.

Third, you need to believe that trading is a skill you can learn. Perhaps some people are natural born traders or have relatively unlimited financial or psychological resources that give them an edge. That does not mean that you cannot make it also with hard work and perseverance. Work at your goals every day. Even if it means just studying the market action and testing out new strategies on paper, do it. Don’t give up. Keep honing your skills until the day comes when the ideal market opportunities will come along to allow you to make huge wins.

When you feel beaten down, it’s vital that you pick yourself up, and start fighting to make a strong comeback. With realistic goals, hard work, and an optimistic outlook, you can master the markets and make your dreams come true.

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Excellent article ,:blush:
Eagerly waiting for the next

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May 18, 2006

A ship in harbor is safe, but that is not what ships are built for.

  • John A. Shedd -

Relatively Safe Trading

Humans don’t like taking chances with their money. If given the choice, they would take a sure thing rather than a gamble, even if it meant making relatively little profit. What do you think most people would do, take $100 right now or take a gamble in which they would either receive nothing or $200? Most people would take the $100 but would you? If you trade the markets as a short-term trader, you would be willing to take a risk, but there is still a voice deep down that yearns for a safe, sure bet. And the best way to make it safe is to anticipate all possible adverse events and create a trading plan to let you to feel a little safer and a little more relaxed.

How can you cultivate feelings of safety? First, trade with money you can afford to lose. Second, trade positions that are so small that you may think, “What’s the point of even putting on the trade.” If you can minimize the personal significance of a trade, you will feel safer and at ease. With a minimal psychological stake on the line, you have almost nothing to lose, and you’ll feel less pressured. If you make sure that you limit your risk as much as possible, you’ll know it and you will feel safer. If you lose big on a single trade, it will take many more trades to build your capital back up to the previous level. You know this as a fact and it makes you feel uneasy. If you also know, however, that you’ve taken precautions, you feel better. It’s also essential to learn to cut your losses short. Don’t get stuck in a losing trade. Don’t hope that it will turn around. Just sell the loser quickly. Controlling risk will not only make you feel safe and secure, it will ensure your longevity as well.

It’s also important to trade with a detailed trading plan. Before you execute a trade, specify precisely how and when you will enter, the signals that indicate the market may be going against your trade, and how and when you will exit. Many traders feel anxious and uneasy because they don’t carefully plan their trades. They impulsively execute a trade and then think they can develop the plan as they go along. What usually happens, though, is that they panic easily because they don’t know what to do and when to do it. It’s hard to think on your feet, especially when you are taking risks. A safety net helps you feel better. And a detailed trading plan is one of the best safety nets you can have. The more clearly the plan is laid out, the easier it is to follow. And when the plan is easy to follow, it’s likely that you’ll stick with it. You’ll be disciplined and in control of your emotions and thought processes.

It’s impossible to find stocks that are guaranteed to increase in price, so when we trade, we always carry with us a feeling of uneasiness. We don’t have to let these feelings of uneasiness overwhelm us. By taking precautions, we can feel a little safer, a little surer, and trade a little calmer. And these feelings can make all the difference between winning and losing.

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May 23, 2006

Never fear shadows. They simply mean there’s a light shining somewhere nearby.

  • Ruth Renkela -

Fear of Leaving Money on the Table

During the trading day there are often opportunities to make huge, profitable trades. The trouble is finding them! Some traders are so obsessed with looking for the ultimate opportunities that they spend most of their time looking for the most profitable opportunity, rather than actually trading. They don’t want to miss a potential once-in-a-lifetime trade. There’s nothing wrong with searching for a good setup, but constantly looking for the ultimate setup can be time consuming. Why do some traders spend too much time searching for the ultimate trade? For many, it is a fear of leaving money on the table. They don’t want to miss out on a rare opportunity.

The fear of leaving money on the table is natural. We desire profits, and we have a strong human need to strive for perfection. We want to believe that if we analyze the markets long enough, we’ll find the perfect setups and take home huge profits. But these assumptions usually do us more harm than good. We may spend all our time looking for perfect setups that don’t exist, and ironically, failing to trade available high probability setups. Many times striving for perfection can be “maladaptive” in that it restricts our actions, and often causes unwanted stress. And when we are overly stressed, we may stagnate rather than move forward. It is much more useful to aim for more modest goals. But many people work under the assumption that they must be thoroughly competent, adequate, and achieving in everything that they do. Renowned psychologist, Dr. Albert Ellis, claims that holding such a belief produces fear and anxiety, which for traders often produces hesitation and self-doubt. The development of this belief is understandable. As we grow up, whether it is at home, school or work, we often face adverse consequences for not being scrupulously proficient, and we begin to believe that we must be thoroughly competent, adequate, and achieving in everything that we do. And we believe that if we could just be perfect as a trader, we will make the most profits. Ironically, however, the opposite happens. If we believe that we must always be competent, we will expend all our precious psychological energy looking for perfection, rather than taking active, specific actions.

A more adaptive approach is to realize that it’s impossible as a trader to be thoroughly competent, adequate, and achieving all the time. Certainly, you should develop an extremely detailed trading plan and try to account for all adverse events that may go against your plan, but there are limits to what you can do. You don’t need to be perfect. You don’t need to trade the ultimate setups. You just need to make profits, even if it is just from trading mediocre setups. Searching for perfection can lead to stagnation if you aren’t careful. Don’t be afraid of leaving money on the table. Relax, trade instead of search. You’ll find you will take home more profits in the long run.

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grt…

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Very Nice Dude…

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It’s seems like article was written for me only describing my very recent experience. Very interesting suggestion Mr. Nitin, I will surely try to follow this.

1 Like

May 25, 2006

Slump? I ain’t in no slump… I just ain’t hitting.

  • Yogi Berra -

The Doubting Trader

It’s almost impossible to have rock solid confidence as a trader. Sure, some traders can’t be thrown off track very easily, but it’s natural to feel a little afraid occasionally. Let’s look at some of the reasons that you might feel shaken. What the markets will do tomorrow or next week is far from certain, and you don’t have a crystal ball. Your information is fallible. And without perfect information, you are bound to feel a little uneasy when your money is on the line. In addition, there’s always a possibility that something may go wrong. A media analyst may hype a stock you are shorting. And what about trading strategies? You can perfect a trading strategy only to see it fail when market conditions change without warning. If you lose your confidence occasionally, it’s understandable.

Even a seasoned hedge fund manager can lose confidence. Consider what Manny told us when we asked him about what underlies his self-doubt. “Fear of losing money and fear about the lack of validity of my research. It’s perfectly natural. Just like in sports, the difference between the physical abilities of the top pros is virtually nil. But the mental difference is huge. The guys at the top in tennis, for example, are mentally consistent throughout the whole match. It’s the same thing in trading. The psychology of professional traders allows them to stick to their strategies. They don’t stress out as much as rookie traders. I still make mistakes once in a while, but not as often as I used to. It’s impossible to eliminate all doubt. I still fall victim to doubt and other psychological pitfalls. I still have major doubts, but now I know how to control them better.”

How did Manny conquer his feelings of doubt? Gaining a wealth of knowledge is key. “It requires a combination of research and experience. After a while, making or losing a lot just did not seem to bother me. It became second nature. The other thing is learning to handle profits and the losses. With experience, you don’t get as excited over them. After a while, you expect to experience the natural ups and downs.”

When you experience self-doubt, don’t make matters worse by feeling bad about feeling bad. Everybody experiences doubt at times. It’s natural when trading something as chaotic as the markets. If you are a novice trader, feel solace in the fact that your self-doubt will subside after you hone your trading skills and gain a wealth of experience. And if you are a seasoned trader, it may be useful to remind yourself that everyone gets in a slump occasionally. Don’t worry. You’ll regain your momentum if you keep trading. The key to success is to remember that self-doubt usually leads to stagnation. When in doubt, don’t panic, calm down, and think rationally. You’ll eventually work through your self-doubt and return to profitability.

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May 31, 2006

In quiet places, reason abounds.

  • Adlai Stevenson -

A Quiet and Meditative Place

Do you ever feel the pressure to perform? If you are making a short-term trade during a hectic trading day, you may have trouble controlling your emotions. You may have a trading plan clearly spelled out, but when it comes to executing it during a rough trading day, you may abandon it. Here’s how Bo, a seasoned trader, described his early trading experiences to our Innerworth staff. “When I first started to trade, I almost had a few panic attacks. My pulse quickened. My hands sweat and I could not breath. This mental state clouds your judgment and you tend to make a lot of wrong decisions, like getting out at the very, very bottom after a stock has fallen. You’ve sort of denied reality that it’s falling and when you finally hit that level of pain, you get out and the stock then bounces. I was definitely in a negative emotional state and I had to break the emotional cycle and get back into reality and objectivity.”

When your emotions take over, it can be hard to think calmly and rationally. Your mind can be thrown completely off track. Bo described what happened when he lost control. “I’d come into a trade with a very clear, objective stop-loss strategy for exiting if things went wrong. But once I entered a trade, I started to second-guess myself. I would get a little bit of profit showing and want to take the sure bet right away, rather than letting profits run.”

It’s essential to remember that your mind and body are closely related. When you are trading under stress, your body reacts physically with agitation. Your thoughts start racing and you cannot easily slow them down. You either must get up and leave the trading arena, or calm down before making a trading error. The best way to calm down is to use a form of meditation. A simple form of meditation is to close your eyes, concentrate on your breathing, and repeat a favorite phrase that will calm you down, such as “Everything will be all right.” The main idea is to get your mind to slow down and allow your thoughts to move away from the market action that is shaking your focus. Once you regain your composure and can concentrate fully, you can return to monitoring your trade.

Bo had a novel way of getting his mind to move into a meditative state. “I play the drums. When you’re playing the drums, you have all four appendages going at once and usually independently. You’ll have both hands doing a different pattern on a cymbal and a snare drum and your feet are both going in different rhythms as well. Something about that touches something deep inside me and takes me to a meditative place where I feel a sense of flow.” Bo discovered he could quickly bring forth this meditative state during the trading day. “One day, I started juggling and it brought me into that same state I felt as a drummer. So I started to use that as a tool to break away from the almost hysterical emotional response I felt while trading, and returned to a place of more objective, dispassionate observation.” So how does juggling work? “It requires so much focus. If you’re going to throw those balls around and not drop them, you have to take your mind away from the stock and your fears, and focus on that moment, namely, where the balls are going and where your hands need to be. It’s almost a meditative state when you get that flow going and are in the zone.”

Trading requires an optimal mental state, but many times the markets just don’t cooperate. The stress wears down your ability to maintain self-control. When that happens, it’s vital to calm down and return to a focused, meditative state.

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June 1, 2006

Experience tells you what to do; confidence allows you to do it.

  • Stan Smith -

Free and Easy Trading

Throughout the day you make everyday decisions that mean little to you. You drive your kids to school and along the way, you make a host of decisions about which route to take, where to turn, or when to stop off for gas. Each decision is made with little thought. Later in the day, you may decide to stop off at the grocery store. You decide what to buy for dinner and how much you will spend. Do you obsess over these everyday decisions? You probably don’t. Why should you? What’s the big deal? The implications of the decisions are almost nil. But tell that to someone with obsessive-compulsive disorder. They have a different perspective regarding the significance of such decisions. Even minor insignificant everyday decisions are a big deal to individuals with such an ailment. Aren’t you glad that you don’t have obsessive compulsive disorder? If you are a novice trader that has trouble making trading decisions, though, a seasoned trader may think you have a kind of obsessive compulsive disorder. Whereas you sell early or abandon your trading plan because you are impatient or frustrated, seasoned traders have no problem making what they see as everyday decisions. To them, it’s no big deal; it’s just a decision that must be made. Wouldn’t it be nice to trade with such a free and easy trading style?

Traders can often take the decisions they make during the trading day too seriously. It’s natural. When your money is on the line, you can’t help but worry about losing it, and you want to protect it, even if it means obsessing over minor details or reacting with extreme emotions. Some people even personify the markets by viewing a trading decision with the same emotional intensity as they do with their interpersonal relationships. In “Trading In the Zone,” for example, Mark Douglas points out that traders often equate losses in the markets with their parents punishing them for breaking rules. When the markets are viewed in this way, losses take on a great personal significance. But it doesn’t help to make such a big deal of things.

It’s much better to take a more detached, objective approach. How can you do it? First, don’t think about, or obsess about, the outcome of a single trade. Think of the bigger picture. You may lose on a single trade, but across a series of trades you will come out ahead, if you have a trading strategy that has a high probability of success. Successful traders plan on executing many trades, rather than just a few key significant ones. As they trade, they know that not all trades need to be winners in order to increase the equity in their accounts. It’s your success overall that counts. Keeping this fact in mind takes some of the pressure off. Second, it is vital to use proper risk management. Successful traders risk only a small percentage of their trading capital on a single trade. Limiting the risk on a single trade further relieves some of the pressure to feel that every trade needs to be a winner, and thus, some of the personal significance is reduced.

There’s no need to imbue a trade with great personal significance. By limiting the amount capital you risk on a trade, the actual consequences of the trade are limited, so what’s there to worry about? You might as well trade free and easy.

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June 2, 2006

The time to relax is when you don’t have time for it.

  • Sidney J. Harris -

Don’t Forget to Take a Break

Reality is subjective. There are different states of reality in the same way that there are different states of mind, or different states of emotion. After a series of setbacks, for example, the world can look bleak. Yet after a series of big wins, in contrast, you can feel euphoric, even omnipotent. So which is the true reality? This is a hard question to answer. Perhaps it is best to consider that there are multiple realities, and that some are more conducive to optimal trading than others.

One reality is that you must make profits. If you don’t make enough winning trades, you will blow out your account. As true as this fact of trading is, however, forcing yourself to make trade after winning trade can actually make you choke under the pressure. While trading the markets, it is best to put this reality out of your mind. The more you can stay focused on your ongoing experience, rather than dwelling on your performance, the better. The more you just don’t care, the better you will trade. Psychologists call this phenomenon the paradox of control: You have to give up control to actually gain control. If you feel that you can lose money and survive, you’ll actually make more money. It sounds strange, but it’s true. That said, it is hard to forget about your financial needs, aspirations, and expectations. If you are serious about the trading profession, you are probably the type of person who has high aspirations. You seek out success and you are ready to do whatever it takes to make your mark. But again, it can be difficult at times to forget about your expectations. It can be difficult to avoid putting pressure on yourself.

If you want to trade in a peak performance mindset, however, it is vital to get away from it all, psychologically, that is. You need to let your mind relax. You need to let your thoughts slow down. You must occasionally get away from the competitive world of trading. Everyone has his or her approach. Some use meditation. Others work out at the gym until they let off pent up energy and are fully relaxed. And many people get a massage to relieve physical tension. The key is to shake your mind out of one reality and put it into another. Here’s one method that can really give your mind the shock it needs. You can immerse your body in warm water (hot but not scalding and preferably at a professionally operated spa) for two minutes and then jump into a pool of cold water. When you immerse your body in a pool of hot water, all you can think about is coping with the heat. It’s a little painful and so you must maintain concentration to avoid jumping out. It’s a great way to focus. Your mind can’t actually think of anything else but concentrating on how you will cope with the intense heat surrounding your body. You soon enter a meditative state. You aren’t thinking at all about how well you are doing in the markets! Next, you immerse your body in a pool of cold water. The rapid change in body temperature allows your mind to slow down. You feel relaxed, and somewhat in a daze. By repeating the process a few times, you will be able to fully relax. You will be in a new reality. From a psychological standpoint, getting into this new reality can have rejuvenating effects. You will put things in perspective. You will see that trading activities, and the high standards you try to attain, are only one aspect of your life. This realization can provide solace during a stressful trading day. You’ll remember that there are other realities in the midst of chaos. But more importantly, you will feel relaxed and ready to tackle the stresses and strains of the markets with renewed vigor.

Trading is inherently stressful. As much as we try to avoid it, our ego is often on the line with our money. It’s essential to psychologically get away from it all. Whether it is meditation, exercise or a vacation on a tropical island, it’s vital to shake up your reality, rest, and rejuvenate.

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Wow, these are some gems that every trader must read. Thanks for sharing @nithin.

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6th June 2006

Sometimes something worth doing is worth overdoing.

  • David Letterman -

Rising to the Occasion

Trading is a challenging profession. Many seek out success, but few make it. The markets don’t always cooperate with your plans. You can trade all day, and work hard at it, but you can still end up losing money. Thinking of the big picture helps ease the pressure. You can calmly think, “What’s there to worry about? It’s just one trade among many. It’s just one day. There are many more days to trade.” Thinking of the bigger picture is a great thinking strategy that you can use to calm down. It’s also useful to realize that you can’t control everything. All you can do is persist in the face of uncertainty and hope for the best. You may not win all the time, but you deserve to win, and you should trade as if you are a winner.

In the end, all you can do is work hard. The final outcome of your trading efforts may not be in your control. All you can do is gallantly try to overcome obstacles and trade as if you deserved to win. That isn’t to say that you should give up and assume you couldn’t win. Indeed, trading to win is far from that. You must work so diligently that regardless of the outcome, you will feel at peace knowing that you did your best.

Ever heard the phrase, “Winning is the only thing”? Winning is important, but ironically, it can’t be “the only thing.” A more apt saying for success is, “It’s not whether you win or lose, but how you play the game.” If you trade with resolution and discipline, you’ll be more likely to achieve success. You must respect trading and the markets. You can’t impose your will onto the markets. The markets will do whatever they want. You must be ready to accept what the markets have to offer you. It’s vital to enjoy the process of trading. It’s intellectually challenging. You can use your creative abilities to identify trading opportunities, and feel a sense of accomplishment by solving difficult problems. Sometimes you’ll win, but many times you will lose. But each trading opportunity has a little something to teach you about yourself, the markets, and trading. It may be just a little thing, like how you can accept taking a loss after a fluke ruined a perfectly good trade. Or maybe you will merely learn something about your current limitations. There’s always something to learn. Whatever you do, though, don’t get caught up focusing entirely on winning. You can’t completely control whether you win or lose and when you think about winning, you just get distracted.

Enjoy the process of trading. Fight hard; try to overcome every obstacle. But do it because you love it, not because you need to win. If you can step away from the idea that winning is all that matters, you’ll be able to control your emotions. When you encounter a setback, you won’t experience self-doubt or inadequacy. Instead, you will actively and creatively think about what you can do next. What is the next step you can take to bring you closer to your goals? It’s hard to do. In modern society we are driven to win, but ironically, the people who actually win in the long run aren’t consumed with winning. They are consumed with the process of trading, honing their skills, and gaining a sense of peace knowing that they have worked to the best of their abilities. They feel satisfied just knowing that they have put in a noble effort.

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June 7, 2006

The ideal attitude is to be physically loose and mentally tight.

  • Arthur Ashe -

Independent Minded and Carefree

Novice traders are often puzzled by their inability to put on winning trades. Everything seems plausible in the planning stages of a trade, but when it comes time to execute the trading plan, they choke. Why? Many times it is because of performance anxiety. When their money is on the line, they worry about how well they will do, and they can’t get the idea of losing out of their mind. What’s the solution? If you can think like an independent-minded trader, you will trade freely, creatively, and profitably.

Going against the crowd isn’t easy. We have a natural human, adaptive tendency to follow the crowd. Following the crowd usually keeps us safe, like fish that swim in schools for protection. The old adage, there’s safety in numbers, is true most of the time. As adaptive as conformity is, however, it prevents us from looking inward for guidance. We have a habit of looking outward and thinking of what we “should” do rather than what we want to do.

It’s amazing how conformist humans can be. Have you ever been at a party and done something you would never think of doing just because everyone else was doing it? It’s hard to break away from the crowd. It is difficult to look completely inward for direction. But, ideally, we should be able to look inward and not care what anyone thinks. For example, imagine going to the financial district during lunch hour, taking off all your clothes, and walking around nonchalantly (believe or not, you can actually see this happen in San Francisco occasionally). It would be difficult to do, but if one were completely independent minded, he or she would have no trouble doing so. He or she wouldn’t care what anyone thought. If only we could always be so secure that we naturally traded like rugged individualists.

Rugged individualists are not driven by money, fame, or recognition. They are resilient and persistent. At their core, their self-esteem is genuine and unwavering. As Dr. Nathaniel Branden observes, “When we appreciate the true nature of self-esteem, we see that it is not competitive or comparative. It is not about making myself higher by making you lower. It has nothing to do with you. It is the joy of my own being.”

Winning traders are extreme individualists. They see trading as an art form. They aren’t concerned with the status and prestige that riches may bring. They love what they do and enjoy the benefits of working for themselves and being accountable to no one. They go their own way and know deep down that they are meant to be traders. It’s not just a job; it’s a calling. The more you can think like an individualist, the more you’ll be trade freely and creatively. The profits will soon follow.

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Thank you very much for this wonderful article.

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