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You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
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Trading should be boring, like factory workMASTERING THE TRADE AMATEURS HOPE, PROFESSIONALS STEAL Professionals steal money from amateurs because amateurs hope, close their eyes, and unwittingly allow professionals to drain their accounts. The sum of my trading experience is this: I've learned that being a professional is all about maintaining a specific state of mind while trading, and traders are never going to make consistent money until they achieve that frame of reference from which to operate. All the successful traders I know blew out their account at least once before becoming consistently profitable. Along these lines, I've composed a list of 40 trading tips for staying in this professional state of mind. These 'tips are not meant to make a trader conservative or hesitant. On the contrary, trading lakes guts, and by following these tips traders will be given the key that will allow them to embrace risk and take the necessary chances required in the pursuit of capita] gain. That is, traders will feel more compelled to take a chance because they know they are also going to fight to protect their capital. They won't freeze and He helpless as it is whittled away. This is a list I've developed specifically for myself. I'm using the term you as it refers to me. Feel free to add to these or modify as best fits your own personality and trading style. 40 TRADING TIPS FOR MAINTAINING A PROFESSIONAL STATE OF MIND 1. Trading i.v simple, but it's not easy. If you want to stay in this business, leave hope at the door, focus on specific setups, and stick to your stops, 2. When you get into a day trade, watch for an SOOtick reading in the opposite direction of your trade for signs that you are wrong. This might allow you to get out of your trade before your stop is hit, 3. Trading should be boring, like factory work. If there is one guarantee in trading, it is that thrill seekers and impulse traders get their accounts ground into parking meter money. 4. Amateur traders turn into professional traders once they stop looking for the next great technical indicator and start controlling their risk on each trade. 5. You are trading other traders, not the actual stock or futures contract. Who is tak ing the other side of your trade? Is it an amateur who is chasing or a professional who has been patiently waiting for this entry all day? You have to be aware of the psychology and emotions on both sides of the trade, 6. Be very aware of your own emotions. Irrational behavior is every trader's down fall. If you are yelling at your computer screen, imploring your stocks to move in your direction, you have to ask yourself, uls this rational? Ease in. Ease out. Keep your stops. No yelling. The person who is screaming should be the one on the other side of your trade. 7. Watch yourself if you get too excitedexcitement increases risk because it clouds judgment. If you are feeling peak excitement, it probably means the move is just about over. Tighten your stop and look to reverse, 8. Don't overtradebe patient and wail for three to five good trades. 9. If you come into trading with the idea of making big money, you are doomed. This mindset is responsible for most accounts being blown out. 10. Don't focus on the money. Focus on executing trades well. If you are getting in and out of trades rationally, the money will take care of itself. 11. If you focus on the money, you will start to try to impose your will upon the market in order to meet your financial needs. There is only one outcome to this scenario: You will hand over all your money to traders who are focused on pro tecting their risk and letting their winners run. 12. The best way to minimize risk is to not trade. This is especially true during the doldrums, between 11:30 a.m. and 2:30 p.m. Eastern. If your stocks or other markets aren't acting right, then don't trade them. Just sit and watch them and try to learn something. By doing this, you are being proactive in reducing your risk and protecting your capital. The most common problem with losing traders is they always feel like they have to be in a trade. 13. There is no need to trade five days per week. Trade four days per week, and you will be sharper during the actual time you are trading. 14. Refuse to damage your capital. This means sticking to your stops and sometimes staying out of the market. 15* Stay relaxed. Place a trade and set a stop. If you get stopped out, that means you are doing your job. You are actively protecting your capital. Professional traders actively take small losses. Amateurs resort to hope and sometimes prayer to save their trade. In life, hope is a powerful and positive thing. In trading, resorting to hope is like placing acid on your skin. The longer you leave it there, the worse the situation will get. 16. Never let a day trade turn into an overnight trade. An overnight trade should be planned as an overnight trade before the trade is ever entered. 17. Keep winners as long as they are moving your way. Let the market take you out at your target or with a trailing stop. Don't use impulse exits. Every exit is taken for a specific reason based on parameters that have been clearly defined. 18. Don't overweight your trades. The more you overweight a trade* the more hope comes into play when it goes against you. Remember, hope (o trading is like acid to skin. 19. There is no logical reason to hesitate in taking a stop. Reentry is only a commis sion away. 20. Professional traders take losses. Being wrong and not taking a loss damages your own belief in yourself and your abilities. If you can't trust yourself to stick to your stops, whom can you trust? 21. Once you take a loss, you naturally forget about the trade and move on. Do your self a favor and take advantage of any opportunity to clear your head by taking a small loss. 22. In general, you should never let one position go against you by more than 2 per cent of your account equity. Many setups work out better if you can use a larger stop. Instead of trading 20 E-mini contracts with a one-point stop, trade 10 con tracts with a two-point stop, or 5 contracts with a four-point stop. The monetary loss is exactly the same, but one set of these parameters will work better on a particular setup than all the others. Find out what works best for your setup and adjust your parameters accordingly. 23. Get a feel for market direction by drilling down.' Look at the monthly charts, then the weekly, daily, 60-minute, 15-minute, and 5-minute to get the best idea of what the market is going to do in the short term. Always start with the larger timeframes and drill down to the smaller. 24. If you are hesitating to get into a position when you have a clear signal, that indi cates that you don't trust yourself, and deep inside you feel that you may let this trade get away from you. Just get into the position and set your parameters. Traders lose money in positions every day. Keep them small. The confidence you need is not in whether or not you are right; the confidence you need is in know ing you execute your setups the same way each and every time and do not devi ate from the plan. The more you stick to your parameters, the more confidence you will have as a trader. 25. Averaging down on a position is like a sinking ship deliberately taking on more water This is ridiculous and stupid. Don't be ridiculous and stupid. 26. Try to enter in full size right away. If you pick up a half position first, don't add to it and create a full-si zed position unless the trade is going your way. 27. Ring the register and scale out of your position. Have modest, mechanical targets for the first half of your position. Give the second half more room to run. 28. Adrenaline is a sign that your ego and your emotions have reached a point where they are clouding your judgment. If you are not in a trade, do not enter a new trade in this state of mind. If you are in a trade, stick to your parameters and walk away. If you are in a losing trade that has gone through your stop, exit your trade immediately and walk away from the markets. 29. You want to own the stock before it breaks out, then sell it to the momentum players after it breaks out. If you buy breakouts, realize that professional traders are handing off their positions to you in order to test the strength of the trend. They will typically buy them back below the breakout pointwhich is typically where you will set your stop when you buy a breakout- Use this information to make money off of amateur traders who buy breakouts. 30. Embracing your opinion leads to financial ruin. When you find yourself rational izing or justifying a decline by saying things like, They are just shaking out weak hands here or, The market makers are just dropping the bid here then you are embracing your opinion. Don't hang onto a loser. You can always get back in. 31. Unfortunately, discipline is not learned until you have wiped out a trading account. Until you have wiped out an account, you typically think it cannot happen to you. It is precisely that attitude that makes you hold onto losers and rationalize them all the way into the ground. If you find yourself saying things like, My stock in EXDS is still a good investment^* then it is time to rethink your trading career. 32. Siphon off your trading profits each month and stick them into a money market account. This action helps you to focus your attitude and reminds you that this is a business and not a place to seek thrills. If you want thrills, go to Disneyland. 33. Professional traders risk a small amount of their equity on one trade. Amateurs typically risk a large amount of equity on one trade. This type of situation creates emotions that ruin amateurs' accounts. 34. Professional traders focus on limiting risk and protecting capital. Amateur traders focus on how much money they can make on each trade. Professionals always take money away from amateurs. 35. In the financial markets, heroes get crushed. Averaging down on a losing position is a heroic move that is akin to Superman taking a spoonful of Kryptonite to prove his manhood. The stock market is not about blind courage. Nobody hands out any awards to traders who picked the dead high or the dead low. Wait for a setup. This is about finesse. Don't be a hero. 36. Traders never believe that they will blow out their account. Always realize you will become a candidate for this if you don't stick to your trading rules. 37. The market reinforces bad habits. If early on you held onto a loser that went against you by 20 percent, and you were able to get out for breakeven, you are doomed. The market has reinforced a bad habit. The next time you let a stock go against you by 20 percent, you will hang on because you have been taught that you can get out for breakeven if you are patient and hang on long enough. 38. The true mark of an amateur trader who is never going to make it in this business is one who continually blames everything but himself or herself for the outcome of a bad trade. This includes, but is not limited to. saying things like: The analysts are crooks. The market makers were fishing for stops. I was on the phone, and it collapsed on me. My neighbor gave me a bad tip. The message boards caused this one to pump and dump. The specialists are playing games. The mark of a professional, however, sounds like this: It is my fault. I traded this position too large for my account size. It is my tault. 1 didn't stick to my own risk parameters. It is my fault. I allowed my emotions to dictate my trades. It is my faulL I was not disciplined in my trades, It is my fault. I knew there was a risk in holding this trade into earnings, and I didn't fully comprehend them when I took this trade. The obvious difference here is accountability. For amateurs, everything having to do with the market is outside their control. That is not reasonable thinking and really just points to individuals who have, probably for the first time, had to confront their real self as opposed to the perfect self or idealized self they have constructed in their mind. This is also known as living in a fog. People can drift around through life in their own private world, where they are pretty special and can do no wrong. Unfortunately, trading rips off this mask, because you cannot dispute what has happened to your account. This is also known as confronting reality. For many people, when they start trading they are suddenly confronting reality for the first time in their lives. Just to see the world as it really is requires a lifetime of training, and for many people trading the stock market is their first real step on this journey. Some people say that traders are born, not made. Not so. If you choose to see the world as it is, then you can start trading successfully tomorrow. 39.Amateur traders always think, How much money can I make on this trade? Professional traders always think, How much money can I lose on this trade? Traders who control their risk take money from the traders who are thinking about the red BMW they are going to buy. 40. At some point traders realize that no one can tell them exactly what is going to happen next in the market, and that they can never know how much they are going to make on a trade. Thus the only thing left to do is to determine how much risk they are willing to take in order to find out if they are right or not. The key to trading success is to focus on how much money is at risk, not how much you can make. SURVIVING THE TRADER'S JOURNEY Strategies fail because traders only have to have a couple of losing trades in a row before they throw out the whole system and go back to relying on their gut. Once traders are in this situation, they head into a downward spiral very quickly. Human emotions get people in at the dead highs and then human emotions get people out at the dead lows as they continually buy at the top out of greed and then sell the lows out of fear Or, in the case of shorts, they sell at the lows out of greed and cover at the highs because of fear. And this is a cycle that happens over and over and over again. And it's never going to stop. The financial markets naturally take advantage of and prey upon human nature, especially when it comes to greed, hope, and fear. The key is to remember that the biggest movements in the markets occur not when traders in general feel like buying. They occur because groups of traders are all getting skewered at the same time and are forced out of a position. In reality, traders are not trading stocks, futures, or options. They are trading other traders. The profitable traders learn to be aware of the psychology and emotions behind the person who is taking the opposite side of their trade. Average traders understand only their side of the trade, Superiur traders understand what's happening on both sides of a trade and know how to lake advantage of situations that will hurt most traders. They know how to take advantage of human weakness, and, therefore, they are able to grind most traders into the ground like so much raw meal. In essence, winning traders steal money from losing traders. My partners and I jokingly refer to the financial markets as the Goddess of Temptation. The goal, of course, is for traders to develop a professional trading mindset that prevents them from succumbing to these temptations. Instead of being the cause of the ebbs and flows of the markets, traders need to jump the chasm that allows them to ride out these ebbs and flows on a course toward profitability. Good skiers rarely worry about a route. They just go, confident that they'll react to changes in the trail as they come upon them. It's the same thing in trading: Traders have to have confidence in their technique. That is the beauty of mustering the right mindset before a trader starts the dayit enables the trader to feel like a good skier, nice and relaxed for the next unexpected turn. CONCLUSION AND FINAL THOUGHTS Finishing a book must be similar to sending a child off to college, except in this case I'm not sad to see it go. It's a great process, and it even helped me to clarify some of my own trading ideas . . . but if s a lot of hard work. If it helps you to become a better trader, then the time was well spentThis book really discusses everything I know about trading up to this point in time. If you are interested in additional resources outside of this book, you can pay us a visit at our main Web site, www.tradethemarkets.com. We use this site to post our research on currencies, futures, stocks, and options, as well as post our mentoring and seminar schedules. We don't do these very oftenjust when the markets slow down as it gives us a break from our computer screens and allows us to interact with our clients. We usually do one in Chicago each year at the Sears Tower. This is a great location because we can visit the CME and CBOT and give people a real sense of how trading works. Beyond that, we look at places we would like to visit and schedule an additional seminar there, A lot of times these are based where we have clients that are interested in meeting with us. For example, due to meetings I've had with clients in China, I'm currently looking at scheduling a seminar in Hong Kong and Shanghai in 2006 and 2007. I'd like to bring in 15 people from the U.S. and 15 people from China and have everyone together for four days as a group. I think it would be a great experience for the people to interact with each other, make great overseas contacts, and learn about trading. For information you can view the websites, or call our offices toll free within the United States at 888-898-8118 (for international call +1 512-266-8659), or e-mail me atjohn@tradethemarkets.com. International callers can check the websites for the most up-to-date information on our direct office line numbers. Our main offices have recently moved from Boston, Massachusetts, to Austin, Texas. When 1 kicked this off about 400 pages ago, I mentioned that intermediate traders generally fall into the following three categories: Those who know the setup like the back of their hand, but fail to make money because of a flawed trading methodology Those who know the setup better than their spouse's bad habits, but fail to make money because the setup is being used in the wrong market Those who know the setup better than the varied plot lines on Alias, but fail to make money because they can't stick to their rules. The point of this, of course, is to emphasize the importance of establishing a trade setup from a multifaceted approach. Successful trading is a lot more than just, What's my entry, and what's my stop? In addition to the actual setup, there also needs to be a foundation from which to operate the setup. This foundation consists of the following: the right setup, in the right market, in the right timeframe, all of which tie into the trader's personality. How will you know when this all comes together for you? The first clue is that it will have nothing to do with how you feel about it. It has everything to do with the results. I've shared with you some of the setups that work for me. Find two setups out of this book that you can follow in a particular market in a particular timeframe, stick to your rules, and make them your own. Once you have two setups that work for you consistently, start looking at adding a third. There is no reason to rush into this. Take your time and master each step as you go. As I state in the introduction, without rules, a trader is like a wounded antelope in the center of a lion pride. It is not a question of if the antelope is going to get whacked faster than a newly discovered FBI informant within the Mafia, but rather of when. For traders without the discipline to follow their rules, the possibility of financial ruin is not a question of if. It's onlv a matter of when. I work with traders all the time. The ones who turn the corner and eventually start making a living at this profession leam to stick to their rules. This is typically a painful process. There is only one guarantee 1 can give you in this business, and it is this: If you can't stick to the rules you develop and, if you are always finding some excuse to enter or exit a trade earlier or later than your rules state, you will never, never make it as a trader. As a history major, I have to say that this is the most exciting time to be alive in the history of the world. Change used to occur over the course of centuries, and then decades, then years, and now change is taking place every day. One of my favorite fiction books of all time is James ClavelFs Taipan. This book is based on historical facts and tells the tale of rival China traders Dirk Straun and Tyler Brock in the newly formed British colony of Hong Kong in the 1840s. They had to make their buying and selling decisions for vast quantities of spices, cotton, and tea using price quotes from London that were printed three months before. Can you imagine trading with quotes delayed three months? That is what people had to do less than 150 years ago. Today, when I'm in Hong Kong on business, I can type in real time and get responses in real time with a counterpart in London through instant messaging. Don't get caught up in any wishing for the good old days or any of that nonsense. Change is life, life is change. For traders, whether the markets go up, down, or sideways, whether the economy is growing or we are in the midst of a great depression, there will always be opportunities to trade. After reading this book, it is my hope that you will have a better foundation for a plan to trade the maikets successfully on a full time basis: proven setups to play, markets that best fit that particular setup and a set of rules to apply to that setup. That is pretty much all a trader needs to survive and thrive in this greatest of professions. 1 wish you well on your trading journey. Live your own life, for you will die your own death. |
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