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Trading Psychology

How much is impatient trading costing you?

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Many people say that patience is a virtue and that is defiantly true in trading!
Although the very best traders understand the importance of patience, it is still one of the most difficult skills to learn and apply as a trader.   Most unsuccessful traders trade with little or no patience and it is therefore critical to understand why patience is one of the most important “ingredients” to becoming a successful trader, and can actually make you money faster.

It takes real patience to wait for ONLY the trades as defined in our back tested, positive expectancy trading plan. This way we are only trading when we have a positive edge/expectancy, ie we ONLY participate in the market when the odds are in our favor. This does not mean that every trade will be a winner… far from it, but it does mean that over a large sample of trades, if and only if we are patient to wait for our defined setups, then the odds of success are more in our favor.

WARNING TO TRADERS
Lack of patience in trading can manifest as:
– a tendency to over trade
– feelings of wanting to be in another trade straight after exiting a winning trade, or straight after a losing trade to try and make back those losses (revenge trading)
– meddling with your trades too much by moving stops and targets around multiple times after entering a trade
– taking smaller profits than your original planned target, or taking profits too early at the slightest sign of movement against your position
– feeling compelled to trade every day. Remember the market will be there tomorrow and you are better to wait for the higher probability trades, even if it means being on the sidelines some days, then to have traded lower probability trades, due to being impatient, and have lost.

Do you recognize any of these traits in your own trading?

The difficulty is not in finding trading opportunities, but instead making sure the trade fits your own trading plan/rules!

When looking to enter a trade, patience is critical to ensure all of your entry criteria are met (all of the “ducks are lined up”) and to leave the trade alone if they are not. Ever seen a trade setup so close to your criteria but not fully complete, only to see the market start moving in the direction of your trade? Impatient traders often enter the trade quickly fearing they will miss out, only to see the trade turn against you? Remember, the whole point of having of having a positive expectancy trading plan is so that the trades we do enter have greater odds of success. If we are impatient and not wait until all our entry criteria are present, then we are NOT entering where we have greater odds of success, therefore eroding our edge.

Exhibiting patience with a good trade setup requires confidence in your trading plan/system, having a probabilistic mindset and an understanding of why impatience actually decreases our trading edge. The same logic applies to giving the trade time to develop once you have entered, and for trade exits and profit taking.

Importance of trading patience | Patient Trader

Patience is also critical, not just in specific trade executions, but also as we are on our learning curve to becoming a successful trader.
We need patience in allowing ourselves to:

  • develop and test a trading plan that not only has a clear positive expectancy, but suits our personality, then
  • trade our plan in a simulation environment, then
  • commence live trading with small position sizes to build confidence, then
  • progressively increasing position size only once key goals are reached, and
  • to allow ourselves to make mistakes, learn from them, and apply these lessons learned.

It’s not a race and by being impatient and therefore lacking discipline, can not only extend your learning curve more than it needs to, but have disastrous consequences on our precious capital.

By slowing down and realizing that you must be patient to trade only the higher probability setups, you will inevitably build your trading account faster than if you try to “force” the market into making you money by over trading or taking low probability trades.

By understanding why being patient over the long term can actually make you money faster, we can start to embrace patience in our trading and recognize that it is actually one of THE MOST IMPORTANT ASPECTS OF SUCCESSFUL TRADERS.

6 Considerations For Improving Trading Results

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As we are nearing the end of February 2014 already, this is an opportune time to ensure our plans are now in place for improving trading results this year.

Below is a brief summary of some critical items to consider for improving trading results:

1) Goals: Document both short & long-term goals for your trading business as this helps to define the path you wish to follow & direct your focus where it is most needed in order to achieve your goals;

2) Trading Plan: Ensure you have a documented AND back-tested trading plan which shows a clear positive expectancy over a large number of trades. If your trading plan does not show clear positive expectancy then no amount of trading psychology, or anything else for that matter, will help in the long run. The plan must include a breakdown of your trade selection criteria, setups & triggers, risk management, money management, trade management etc. Also include record keeping and review processes plus often forgotten items such as contingency plans (eg if your internet provided where to go offline while you’re in a trade, power failure); backup systems; etc. just to name a few;

3) Market Preparation (“prep”): Ensure you prep every market/instrument BEFORE entering any trades. Make smarter decisions up front, then manage your risk and the trade as per your plan;

4) Record Keeping & Review: Ensure you record and review your trades. Without documented metrics you have nothing to objectively review for improvement.
Without adequate record keeping or trade journal you unable to track your System Expectancy, also referred to as your “Trading Edge” for the trades you’re currently placing in the market… REMEMBER… If your trading system does not show clear positive expectancy (both in back testing AND in live trading) then no amount of trading psychology, or anything else for that matter, will help in the long run.

ACTION: Consider creating your own spreadsheet to record your trade results, or using an existing trading journal product such as “Trading Journal Spreadsheet ®”
http://www.GlobalTradingTools.com/view/TradingJournalSpreadsheet/

5) De-Clutter: can consist of both “physical” and “mental” clutter. Clutter can distract us from focusing on what we really need to be doing to achieve our goals, rob us of valuable time, lead to feeling confused or overloaded…none of which is conducive to running a consistently profitable trading business;

6) Health: along with your time, health is the most valuable asset we have. Need balance in all aspects of life.

Wishing everyone a happy, healthy and prosperous 2014.

Stuart Young

 

Inevitable Trading Losses – The Elephant In The Room

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I came by a book published around 80 years ago by R.W. Schabacker. It is amazing that even without the HFT systems, chart patterns and business channels devoted to trading and investing that the core concepts remain. Loses are inevitable.
It is how we deal with them that is key.

No trader can ever expect to be correct in every one of his market transactions. No individual, however well he may be grounded, no matter how much experience he has had in practical market operation, can expect to be infallible.There will always be mistakes, some unwise judgments, some erroneous moves, some losses. The extent to which such losses materialize, to which they are allowed to become serious, will almost invariably determine whether the individual is to be successful in his long range investing activities or whether such accumulated losses are finally to wreck him on the shoals of mental despair and financial tragedy.

It is easy enough to manage those commitments which progress smoothly and successfully to one’s anticipated goal. The true test of market success comes when the future movement is not in line with anticipated developments, when the trader is just plain wrong in his calculations, and when his investments begins to show a loss instead of a gain. If such situations are not properly handled, if one or two losing positions are allowed to get out of control, then they can wipe out a score of successful profits and leave the individual with a huge loss on balance.

It is just as important, nay, even more important, to know when to desert a bad bargain, take one’s loss and count it a day, as it is to know when to close out a successful transaction which has brought a profit.

The staggering catastrophes which ruin investors, mentally, morally, and financially, are not contingent upon the difference between a 5 per cent loss limit and a 20 percent loss limit. They result from not having established any limit at all on the possible loss.

Any experienced market operator can tell you that his greatest losses have been taken in those, probably rare, instances when he substituted stubbornness for loss limitation, when he bought more of a stock that was going down, instead of selling some of it to lighten his risk, when he allowed pride of personal opinion to replace conservative faith in the cold judgment of the market place.

We trade to make a profit.

— Written by Schabacker 80 years ago in Stock Market Profits.

Thank you and good trading.
Davin & Stuart

 

RISK WARNING:
You understand and acknowledge that there is a high degree of risk involved in trading securities, currencies/foreign exchange and/or derivative products. Trading securities, currencies/foreign exchange and/or investment in derivatives can be very speculative, involves considerable risk, may result in losses and is not suitable for every investor. Global Trading Tools does not take into account the objectives, financial situation or needs of individual users. Hence, You should carefully consider whether trading in securities, currencies/foreign exchange and derivative products is appropriate for You in the light of your financial circumstances. You should be aware that dealing in products that are highly leveraged carry significantly greater risk than non-geared investments such as share trading. As such, You could both gain and lose large amounts of money. You may sustain losses in excess of the moneys You initially deposit and also in excess of the margin required to establish and maintain any positions in leveraged products.
No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed in any form of media (including but not limited to web sites, email, print or banner advertising, social media sites and/or Global Trading Tools affiliates) by Global Trading Tools.
The past performance of any trading system or methodology is not indicative of future results.

THIS ARTICLE IS FOR EDUCATIONAL PURPOSES ONLY.

Resolve one of the most common barriers to trading success

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What are your barriers to trading success ?

Many new traders can easily get caught in the trap of focusing more on their winning percentage (accuracy) or entry setups, rather than having a balanced approach to their overall trading system, thereby creating common barriers to trading success.

There are many aspects to successful trading which are equally important and must not be neglected, including risk/reward ratio (generally making more on your winning trades than you lose on the losing trades), trade management, money management, trading psychology etc.
Another critical, yet often overlooked aspect is, knowing the system you’re trading actually has a positive edge/positive expectancy (please note a positive edge is not simply having an accuracy rate greater than 50%).

Remember trading is an odds-based endeavour and traders are continually challenged by the prospect of making decisions in the face of uncertainty. As a trader, we must therefore place our trades based on a trading plan/system which has a proven edge (positive expectancy) and learn to think in terms of probabilities.
The importance of this statement must not be underestimated!

However every day, many traders put their hard earned money into the markets WITHOUT even knowing their system truly has a positive expectancy or worse still, not even trading to a documented and properly back tested trading system/plan.

  • This is a clear barrier to your trading success!

“We look to enter where the outcome is unknown BUT the odds are in our favour”
— Davin Clarke

As Davin’s quote above indicates, trading is a business of dealing with probabilities, not certainties, and traders must train themselves to think in terms of probability for a very important reason:
Individual trades are not predictable. However, we can achieve a level of predictability in the outcome of a series of trades when you have an edge.

Mark Douglas (in his book, “Trading in the Zone”), calls this….
Paradox: Random Outcome, Consistent Results

It’s the ability to believe in the unpredictability of the game at the micro level and simultaneously believe in the predictability of the game at the macro level that makes a trader effective and successful at what they do.Mark Douglas, Trading in the Zone

So, how do you make the probabilities work for you?

  • Trade ONLY When You Have A Positive Edge !

But what does this actually mean?

Ask yourself the following question…
“What is my System Expectancy, also referred to as your “Trading Edge” (average $ return per trade) for the trades I’m currently placing in the market“?

If you’re unable to answer this question, this may be one of your key barriers to trading success and indicates that you are either:

  1. Not recording your trading results at all,
  2. Not analysing the results of your recorded trades, or
  3. Are unsure how to calculate these values

In any case you need to take action in order to track your trades and analyse your results…

ACTION STEP:
Consider creating your own spreadsheet to record your trade results, and at a minimum, record data to derive the following figures:

  • Accuracy (Winning Percentage)
  • Average Win (Net $)
  • Average Loss (Net $)
  • Losing Percentage
  • Risk/Reward Ratio
  • Expectancy ($ per trade)

If your unable to create such a spreadsheet, or looking to record and analyse your trading to a deeper and more detailed level, consider using an existing Trading Journal product such as “Trading Journal Spreadsheet®”
http://www.GlobalTradingTools.com/view/TradingJournalSpreadsheet/

If creating your own spreadsheet but unsure how to calculate the expectancy of your trading plan, below is the formula:
Expectancy ($ per trade) = (Win% x Ave Win) – (Loss% x Ave Loss)

This expectancy value tells the trader how much money they would expect to win on average, per trade, however, to get a clear picture of your system expectancy you really need to aim for an absolute minimum of 100-200 trades, but the more the better.
Use a product such as NinjaTrader ‘Market Replay’ functionality to speed up the initial back testing of your plan, however after completing initial back testing, you then need to trade your system in a demo or simulation account to confirm you’re able to replicate the back tested results on live markets.

Only after these steps have been successfully completed, should you then consider trading in a live account (using your own capital), starting with small trade sizes.
This is NOT trading advice, just educational material to illustrate the process traders can go through. Your capital is at risk and you must do your own research.

An example:
If you have an accuracy rate of 55% (Win%), with your Ave Win being $280 and your Ave Loss being $140 …

Step 1:
We have a 55% probability of winning $280 and therefore, a 45% probability of losing $140

Step 2:
Expectancy ($ per trade) = (Win% x Ave Win) – (Loss% x Ave Loss), therefore …
= (55% x $280) – (45% x $140)
= 154 – 63
Expectancy ($ per trade) = + $91

If these were your trading statistics over a large sample size then your system would certainly have a positive expectancy, and therefore a positive edge.

If the trader of the above figures placed 100 trades (applying their trading plan with consistency and discipline) they would expect, on average, to make approximately $9,100 over 100 trades.

The real results of course will not be exactly the same (perhaps a little more or a little less) however if the edge that produced the above system statistics was applied by the trader consistently and with discipline, then over a 100 trade sample, they would expect, on average, to earn around $9,100.00

If however, the trader does not apply their edge with consistency and discipline, for example by taking “ad hoc” trades, entering earlier than defined triggers, not following trade or money management rules or failure to hold to targets while the premise for the trade is still intact, then it is extremely unlikely the trader will be consistently profitable over the long run…. which after all is what we’re really aiming to achieve.

Key points to remember:

  • Ensure you have a documented AND back-tested trading plan which shows a clear positive expectancy over a large number of trades.
  • Ensure you have clearly defined money management (eg % risked per trade) and trade management rules within this plan.
  • Trade your trading plan/system with consistency and discipline.
  • Take your losses at pre-determined stop levels, and while the premise for your trade is intact, let your trades run to pre-determined target levels (Risk/Reward ratios)
  • To get a clear picture of your system expectancy you need an absolute minimum of 100-200 trades, however the more the better!
  • If your trading plan does not show clear positive expectancy then no amount of trading psychology, or anything else for that matter, will help in the long run…  remember this is an odds based industry.
  • trade ONLY when you have an identifiable, proven positive edge!

Thank you and good trading.

Stuart Young

 

RISK WARNING:
You understand and acknowledge that there is a high degree of risk involved in trading securities, currencies/foreign exchange and/or derivative products. Trading securities, currencies/foreign exchange and/or investment in derivatives can be very speculative, involves considerable risk, may result in losses and is not suitable for every investor. Global Trading Tools does not take into account the objectives, financial situation or needs of individual users. Hence, You should carefully consider whether trading in securities, currencies/foreign exchange and derivative products is appropriate for You in the light of your financial circumstances. You should be aware that dealing in products that are highly leveraged carry significantly greater risk than non-geared investments such as share trading. As such, You could both gain and lose large amounts of money. You may sustain losses in excess of the moneys You initially deposit and also in excess of the margin required to establish and maintain any positions in leveraged products.
No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed in any form of media (including but not limited to web sites, email, print or banner advertising, social media sites and/or Global Trading Tools affiliates) by Global Trading Tools.
The past performance of any trading system or methodology is not indicative of future results.

 
THIS ARTICLE IS FOR EDUCATIONAL PURPOSES ONLY.

Trade The Reality, Not The Belief

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We’ve just completed a record-smashing quarter: S&P 500 ($SPX) ends above 2007’s record close, Dow ($DJIA) posts best Q1 Since 1998, both recovering all of the losses from the Global Financial Crisis. Source: CNBC

This has been an amazing run and the US stock market does not appear to be concerned with the continuing problems both in the wider U.S. economy (eg budget/debt ceiling battles) & the continuing European debt crisis, latest being the bailout of Cyprus and concerns of a bank run during last 2 weeks.
While the world economy is still in fragile shape it is a reminder that as traders, we must trade what is presented to us on the charts rather than what we believe should be the case… Trade The Reality, Not The Belief.

As the quote from one of the most influential economists of the 20th century, John Maynard Keynes goes… Markets can remain irrational longer than you can remain solvent.

A quote well worth remembering !!
Thank you and good trading.

Stuart Young

 

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