A Strong Trading Mind

[Snake.Head]

All you can do is improve. Constantly improve. And the one, single way to do that is to set whatever you’re working on loose, gather feedback and try again. You repeat this process every time you make something, and sooner or later, you’re going to get better.

 

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Mental Errors Traders Make
http://www.newtraderu.com/2015/04/23/10-mental-errors-traders-make/

Here are the 10 primary mental errors traders and investors make.

1. They hold on to preconceived beliefs about the direction of the market with no planned signal that will show them they are wrong. This is an ego error when we think we’re smarter than the market.
2. Taking a huge position size that will cause a huge loss if wrong or a huge win if right. This is greed that only sees the upside and not the downside.
3. Buying a position late in a move when the risk/reward is not favorable is due to the fear of missing out on a profit.
4. Trading with no plan is due to laziness and possibly arrogance.
5. Not taking a stop loss when it is triggered is usually due to the fear of locking in a loss.
6. Abandoning a plan is due to fear of a draw down or a lack of discipline.
7. The inability to manage emotions as the trader or investor sees money enter and leave their account is usually due to stress so profound that they can not trade.
8. Being wrong and staying wrong about a trade is due to stubbornness and denial.
9. Entering a trade without a good safety margin with a stop loss or a great entry is simply gambling. Trading without a set up is the error of a gambling impulse going in with the odds against them in hopes of easy money.
10. Asking others for opinions about trades shows our own lack of discipline to have a plan, a system, and to have done our own homework.

 

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Trading Truths
http://www.newtraderu.com/2015/01/27/my-20-trading-truths/

Here are twenty things that I learned through actual trading that have dramatically helped me to be consistently profitable in my trading through skill.

1. You have to have passion for learning to trade; passion is the energy that you need to take you to your goals.

2. You have to have the perseverance to keep going after you want to give up. 90% of new traders quit when they were very frustrated while 100% of successful traders didn’t quit until they reached their goals

3. New traders spend too much time looking for what to trade instead of focusing on who they are as traders. You have to know who you are as trader first then you can start building your trading system.

4. Traders have to be able to manage their stress by trading inside their current comfort zone. Traders have to grow themselves and trade size step by step.

5. The vast majority of new traders fail simply because they did not do their homework before they started trading.

6. A trader has to build a trading system that matches their own personality and risk tolerance levels.

7. A trader that chooses to be master a specific type of trading method or trading vehicles has a much better chance of success than the traders that just dabble in many different things and never make much progress.

8. A trader has to write a good trading plan while the market is closed to guide their trading while the market is open.

9. A trading plan has to be followed with discipline to have a chance at success.

10. A trader has to manage their behavior by acting consistently with their own rules.

11. “The answer to what’s the trend? Is the question “What’s your timeframe?” – Richard Weissman. All traders are simply trying to capture trends in their own time frame.

12. Never risk losing more than 1% of your trading capital on any one trade. Once you lose 1% of your capital you should exit the trade.

13. Be very aware of how much risk your total account is exposed to at any one time through position sizing and volatility.

14. Set your stop losses far enough away from your entry point to avoid regular noise and fluctuations. Find your stop level first, and then position size accordingly.

15. A trading plan has to be followed with discipline to have a chance at success.

16. The money I have made in the stock market was made through following the chart and the trend not from some prediction or opinion.

17. My biggest trading losses came from hoping, stubbornness, and bias.

18. My best trading has happened when I was the most open minded simply trying to answer the question: “What is the chart telling me to do now?”

19. If you have to ask others for their opinions about your trade you should not be trading you should still be in the process of study and writing your trading plan.

20. “If you diversify, go with the trend, and manage your risk, then it just has to work.” – Larry Hite

 

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Breathe
http://www.success.com/blog/10-ways-successful-people-stay-calm

The easiest way to make stress intermittent lies in something that you have to do every day anyway: breathing. The practice of being in the moment with your breathing will begin to train your brain to focus solely on the task at hand and get the stress monkey off your back. When you’re feeling stressed, take a couple of minutes to focus on your breathing. Close the door, put away all other distractions, and just sit in a chair and breathe. The goal is to spend the entire time focused only on your breathing, which will prevent your mind from wandering.

Think about how it feels to breathe in and out. This sounds simple, but it’s hard to do for more than a minute or two. It’s alright if you get sidetracked by another thought; this is sure to happen at the beginning, and you just need to bring your focus back to your breathing. If staying focused on your breathing proves to be a real struggle, try counting each breath in and out until you get to 20, and then start again from 1. Don’t worry if you lose count; you can always just start over.

This task may seem too easy or even a little silly, but you’ll be surprised by how calm you feel afterward and how much easier it is to let go of distracting thoughts that otherwise seem to have lodged permanently inside your brain.

 

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Manage trading emotions
http://www.tradeciety.com/trading-gambling-controlling-emotions/

Every morning, before you start up your trading platform, take some time to assess your current state of mind. The following points can serve as a guideline to evaluate yourself:

• Do you feel sick? Although it is obvious that you shouldn’t trade if you are sick, most traders don’t think that way and still trade as normal.
• Have you had enough sleep? A sleep deficit has severe impacts on performance and how we react and interact with the markets. Dr. Steenbarger has a great article about sleep and performance. As a side note, this also holds true if you had too many drinks the night before.
• Are you angry or aroused? An argument with your spouse or a serious conversation at work can, and will, carry over into your trading routine and will create a lack of focus.
• Over-excitement, on the other hand, can also significantly influence your decision-making process. Being too euphoric can be dangerous because you might analyze risk wrong or are too casual about potential losses.
• If you are coming from a winning streak, traders also tend to feel too confident and, therefore, be less risk averse. This usually leads to excessive risk taking.
• On the flip side, coming from a losing streak can make you be too cautious and, therefore, make you miss potentially profitable trade.

If you feel not too well and you answer most of the questions above in a way that signals that you are not in the optimal state of mind, don’t trade! Take the time before lunch off, or even take the whole day off. You will always get another trade, but you can’t get back the money that you lost by making an unnecessary mistake.

Another way of avoiding unnecessary mistakes when you don’t feel well is that you trade smaller positions. If you normally risk 2% per trade, go down to 1% or 0.5% until you are sure that you feel better. Trading is not a business where you get paid by the hour, but by your performance.

 

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Professional Trader-An Elite performer

http://www.tradeciety.com/4-pro-tips-to-become-an-instant-elite-performer/

I recently came across Josh Waitzkin after listening to his interview with Tim Ferriss. Josh Waiztkin became a chess ‘superstar’ as a child and a grandmaster later on, before making a radical change and pursuing a career as a martial artist.

Keeping in control of your emotions is the most important factor and what separates the winner from the loser.

Waitzkin emphasizes the importance of regaining focus, separating yourself from the scene to get a new perspective and a clearer view. He did that by splashing water into his face, getting up and getting a drink of water, deep breathing, and even doing some physical exercise. He calls is “psychological flushing” because it takes your brain off the subject completely for a minute or two. Afterwards you come back refreshed and with a brand new perspective.

As traders, we almost daily deal with challenging decisions and how we deal with the psychological aspect of trading makes the difference between win or loss. Making a bad call right after a loss or an impulsive move after missing a trade are just two examples. If you find it hard to deal with emotions, separate yourself from your trading platform after a trade. Just walk away for 5 – 10 minutes, do something completely else and when you come back you can look at things in a different way.

Every day we are bombarded with exciting news, flashy advertisements, attention-grabbing headlines and highly inspiring stories. What this does to our minds can be deadly for high performers. We are so used to seeing new and exciting things all the times that we get bored easily. When nothing happens, we are looking for distractions which then often lead to making mistakes.

Trading isn’t always exciting and sometimes the markets just don’t do anything for hours or even days. How you deal with these situations decided over your fate as a trader. The professional traders stay focused, they analyze their past trades, they revisit their trading plan or journal their trades. Or, they just walk away and use their ‘free time’ in a more creative way. On the other hand, the amateur trader tries to create excitement. He randomly flips through time-frames, charts and markets and tries to make up excuses why taking a trade would be the right thing to do.

“…almost without exception, champions are specialists whose styles emerge from profound awareness of their unique strengths, and who are exceedingly skilled at guiding the battle in that direction.” – Josh Waitzkin

How did you ‘find’ your current trading system? Did you buy it from a landing page? Is it an indicator package you downloaded in a forum or something you picked up in a chatroom? A trading system is a very personal thing and it has to be modeled around your personal strengths and weaknesses. Audit yourself: Are you patient? Risk seeking? Can you deal well with losses? Can you focus for a long time without needing a break? Do you easily screw up once you are in a trade or can you handle retracements?

It becomes obvious very quickly that traders should adjust their trading parameters according to their own profile. One size fits all does not work.

The professionals don’t get wind up in fancy techniques. In competition, those who win are usually the ones who have better honed skills and it is not the one with the most creative or extravagant technique.

Making smaller circles describes the concept of picking one thing and learning everything there is to know about it – starting with the most important concepts and working your way up to the nitty-gritty slowly. Traders often jump around systems, look for fancy and new indicators and try to come up with trade entry signals to outsmart the market.

Instead, you should focus on one thing at a time. Identify your greatest problem and work on it. Is it really an ‘inaccurate’ indicator setting that keeps you from winning or is it more likely that your mindset and general approach is not where it should be? Try to understand and overcome one obstacle at a time and always focus on your greatest challenges first.

 

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Trading Checklist: Trading Psychology
http://thepatternsite.com/tradehelp.html

• Are you trading because you want to trade? Consider trading a business not a game.
• Are you not trading? This is the opposite of trading too often. You may be so scared of taking a loss that you avoid trading altogether.
• If you get stopped out of several stocks, walk away. Paper trade until the profits return.
• Follow the system. Would you be making more money if you followed your trading signals? Understand why you're ignoring the signals you receive.
• Don't overtrade. Sometimes the best place for cash is in the bank. You don't HAVE to trade.
• Learn from mistakes. Review your trades periodically. It'll uncover bad habits.
• Focus on the positive. The loss your suffered today pales to the killing you made last week.
• Ignore profits. If you find yourself getting nervous about a winning trade or making too much money, then concentrate not on the bottom line but on improving your trading skills. Get used to making too much money.
• Obey your trading signals. Otherwise, what are you trading for? Plan your trade and trade your plan.
• Don't trade when you're upset. This also goes for being too excited.
• Abandoning a winning system. Don't become bored with your winning system and search for new, more exciting ways to lose money.

 

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Trading Checklist: Before Buying
http://thepatternsite.com/tradehelp.html

• Check the markets and trade in the direction of the prevailing market trend.
• Check the industry. Are other stocks in the same industry moving the same way?
  
• Are they showing signs of topping out or bottoming?
• Which stock leads the pack? Study it for clues to future price direction.
  
• Check industry relative strength. Make sure the industry is top ranked. See Industry Relative Strength
• Look at the weekly scale (or the next higher scale) for any threatening chart patterns.
  
• Is the stock trending in the same direction as on the shorter time scale?
• Do you see any existing chart patterns?
• Do you see underlying support or overhead resistance?
• Draw trendlines to see where price may intersect them.
  
• Score the chart pattern. See my book, Trading Classic Chart PatternsTrading Classic Chart Patterns book. (pictured on the right) to gauge how likely the chart pattern will work. I have a taste of the scoring system here.
• Historical review. Find another chart pattern in the same stock and see how it performed in the past.
• Check your favorite indicators. What are they telling you?
  
• Relative strength index (RSI): I use this for divergence and as an indicator of overbought (too pricey) or oversold (too cheap).
• Bollinger bands: When the bands narrow (low volatility) that tells me price is going to make a big move. Price often bounces from one band to the other, especially when the band is horizontal and price touches it.
• Is the stock price diverging from the indicator?
• Is the indicator signaling a trade?
• Check for failure swings, little M or W shaped patterns that may signal a short-term reversal.
  
• Review the industry relative strength. How is this industry doing compared to others? You'll find that industries performing well will continue to do well, usually for months.
• Is the stock trending up? Why buy a stock today when it will be cheaper tomorrow? Wait for price to turn up before buying. View the stock on the weekly scale (or higher time scale) to help decide the trend.
• Is the stock trading near the yearly high? Buy stocks showing chart patterns near the yearly high, preferably breaking out to a new high. When the breakout occurs, price coasts higher on momentum, so you can raise your stop. You do use stops, don't you?
• Get a quote before trading. Delay buying if the quote is lower than the last time you checked.
• If the stock is up too much intraday, skip the trade. Don't chase a stock higher.
• Look for overhead resistance. Where is price likely to stall or reverse?
• Look for underlying support. How far down is the stock likely to go?
• Place that stop with your broker.
• Will a throwback or pullback happen? Prices return to the breakout price usually in about a week. Consider initiating or adding to your position once price resumes the original breakout direction. Statistics show that chart patterns with throwbacks or pullbacks perform worse than those without throwbacks or pullback, so keep that in mind.
• Check for DCBs. Avoid any stock showing a dead-cat bounce within the last six months. Why? Because one dead-cat bounce tends to follow another.
• Prices don't trend forever. If you are about to buy a stock that has been trending upward for several days in a row, count on price reversing just after you buy. The same goes for a consecutive declining price series. Wait for the turn then trade.

 

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Trading Checklist: When to sell?
http://thepatternsite.com/tradehelp.html

• The stock is about to hit your stop. Sell it now! Why wait for price to hit your stop if you know that it will?
• A bearish chart pattern has broken out downward. Sell now! If price turns around, it's a pullback and the stock will soon head back down.
• The stock has closed below an up-sloping trendline. This is the first indication of a trend change. The longer the trendline the more reliable it is. Switch to the weekly (or higher time) scale and check the trendline again. Use the log scale for earlier exit trendline signals.
• Stock falls more than 62% retrace. Measure the retrace after an up move. A retrace larger than 62% means the stock is going down. Period. Sell it.
• Price has hit the target. If this is a short-term trade, then sell it. If not a short-term trade, then raise your stop.
• The averages are dropping. If the market is taking other stocks down along with yours, it's time to sell. Flip to the weekly scale. If the trend is still down, then sell.
• Stocks in the industry are topping out. Any bearish chart patterns in stocks in the same industry are warning bells. Consider selling. Rare is the stock that can swim against the current for long.
• Look at the weekly scale. New chart patterns, trendlines, support and resistance all appear on the weekly chart. Use them as sell signals.
• The market is up but the stock is down. If the Dow is up 100 points but your stock is down, find out why. This intraday price divergence is a warning signal. Sometimes there is a good reason for the divergence – a hurricane approaching oil rigs for example.
• Historical price review. What happened the last time the stock made a new high, shot upward in a straight-line run, consolidated, dropped a few points in just days, or stalled at an old high? Past behavior can give you an indication of how well the stock will behave in the future. However, the more you rely on past behavior, the more likely the stock will surprise you.
• Check the indicators. Are your favorite indicators saying sell? What does the best indicator say -- price? Is price rising or falling? Is price trending up or down? Don't know? Then switch to the weekly scale and ask if price is rising or falling. If it's falling then sell.
• Indicators are diverging from price. This is usually a reliable sell signal, but not an automatic one. Price can diverge from indicators for months before the stock turns down, if it turns down at all.
• Indicator failure swings. These M and W shapes in the indicator can call short-term turning points accurately.
• Overhead resistance. Has the stock hit overhead resistance and is now heading down? Sell.
• Is a throwback or pullback happening? Throwbacks and pullbacks happen often after a breakout. Initiate or add to your position after a throwback once price resumes the move up. For a pullback, it's often your last chance to exit a stock before the decline resumes. Take the sell signal and get out.

 

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Trading Checklist: General Trading Tips
http://thepatternsite.com/tradehelp.html

• Tighten stops. If other stocks in the same industry begin trending down, then tighten your stop. If your stock shoots up several points over several days, then tighten the stop because price may reverse.
• Trade tall patterns. Tall patterns outperform short ones. What is short and tall? Refer to my book, Encyclopedia of Chart Patterns Second EditionEncyclopedia of Chart Patterns 2nd Edition book. (pictured on the right) for details as it varies from pattern to pattern.
• Narrowing prices. If the daily high-low range narrows over time, then expect a trend change. A symmetrical triangle, with its narrowing price trend, shows this behavior. The breakout comes after the price range contracts and volume diminishes.
• Trade busted patterns. Chart patterns that breakout downward then quickly reverse often soar.
• Trade with the trend. If the market and industry are moving up, select stocks with upward breakouts. Avoid countertrend trades.
• Reversal chart patterns must have something to reverse. A stock showing a diamond top/downward breakout that appears several points above a price plateau often returns to the plateau.
• Don't average down (buying more at a lower price). For traders, you will get fed up and sell just as price bottoms. If you buy-and-hold, then ignore this advice; you can likely ride out the downturn unless your stock is Enron, WorldCom, Penn Central, United Airlines ….
• Trade intraday. Switch to the intraday scale or the next shorter period to place the trade. The shorter time scale will zoom into the price action and highlight short-term support and resistance zones.
• Raise that stop as price rises. Check the volatility and place it no closer than 2 times the current price volatility.
• Never lower a stop. If you feel a desire to lower a stop, sell the stock.
• Follow the same stocks each day. Become familiar with them. Don't invest in unfamiliar stocks.
• Choose chart patterns that work for you. Some chart patterns perform better than others do. Be selective and become an expert in the patterns you trade.
• Keep a trading diary and review it periodically. Log the date, number of shares traded, order type (stop, market, limit), price filled at, stop loss price, price target, reason for the trade, and so on.
• Diversify. Don't load up your portfolio with stocks from one industry. Look what happened to airline stocks from 9/11/2001 to 9/17/2001 ("9/11").
• Don't over diversify. Owning more than a dozen will make it hard to follow.
• Check commodities. Oil, copper, and natural gas are important ingredients for many industries. If the price of oil is shooting up, the airlines and truckers may suffer but oil service companies, refiners, and drillers should prosper.
• Tune your system. The markets change over time and so should your system and your trading style. If the markets are trending, remain in your position. If the markets are choppy, rely on short-term trades.
• Ignore chat room chatter. People in chat rooms are sometimes selling more than their opinion.
• If you have to ask, you're making a mistake. If you have doubts about a trade then don't trade. Don't let others spend your money.
• Set price targets. Price targets work well for short-term trades (swing trades). Use trailing stops for longer hold times.
• Late entry. For proper entry, place an order to buy the stock a penny above the breakout price.
• Watch for a throwback or pullback. Prices turn an average of 3 days after a breakout and complete the move back to the breakout price in 10 or 11 days. Prices resume the original breakout direction 86% of the time.
• Don't short a stock. If you can't make money on the long side, you won't make it on the short side either. Try it on paper first.
• Prices drop faster than they rise. Price trends after downward breakouts are quicker and steeper than are their upward counterparts. If you can't sell, your losses will grow quickly.
• Price reverses 1 month after the breakout in a bear market. This is also true in a bull market, but less often. The 1-month benchmark also varies from pattern to pattern. It's rarely shorter, but often longer -- 5 to 7 weeks after the breakout.
• Price moves most in the first week after a breakout, so get in early.