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36b6575558f8-0 | reasons for people getting their heads handed to them. They don’t have a plan. They just get long when that feels right, and they get short when that feels right. Or they just get bored. I’ve literally had traders in my office who have visited to work specifically on their impulse trades—only to sneak in orders when I wasn’t looking. The urge to jump in and be a part of the action is | Page 411 |
2d8f664e94d6-0 | that powerful. It’s like a drug addiction, and like most addictions, it never works in the long run. My method for dealing with them is to simply sit next to them and watch them trade—and to do exactly the opposite of what they’re doing. At the end of the day or the week, we compare our profit and loss statements, and that usually tells the story. This is a win/win situation because it | Page 412 |
f7b726cbec42-0 | is a great lesson for the impulse traders—there are actually people out there doing the exact opposite of what they are doing and making money—and it is a mostly profitable exercise for me. The cure for impulse trading is patience, and also understanding integrity—a topic that we are sneaking up to shortly. Patience is such an | Page 413 |
10f56c7f3942-0 | important quality for a trader —both in learning what setups best work for you, and in waiting for those setups to occur. Impulse traders who cannot own up to this bad habit need to stop trading and go to Vegas. The end result will be identical—they will lose all their money. But at least in Vegas the drinks are free. If people are stuck in a | Page 414 |
ccead09513de-0 | relationship with an individual who berates their best efforts and undermines their dreams, then it is time to leave this individual and move on. It was in this vein that I “broke up” with my impulse trading. I liked my impulse trading. It was fun. It made me feel good. It was exciting. But the bottom line was that my impulse trading was undermining my potential and preventing me | Page 415 |
6e2ce2f20f0f-0 | from realizing my dreams of being a full-time trader. Once this realization took hold, I took immediate steps to cut that cancer out of my life. This included a reward and punishment system that I discuss later in this book, in the chapter on formulating a business plan. In the end, I stuck with my friends who believed in me—the setups that worked | Page 416 |
0e95601eb088-0 | when I gave them half a chance. Once I was able to follow my setups consistently, exactly the same way each and every time, I was able to make the transition to trading full time. A large part of my transition was mental and developing what I call a “professional state of mind.” Oh, and by the way, it wasn’t until years later, when | Page 417 |
9818b2d57538-0 | I was doing a talk at a Traders Expo in Las Vegas and telling the story about the “Minnesota Stupid House” that my wife actually learned of the event. She was sitting in the audience, and I’d totally forgotten that I had never told her. Everyone around her started asking, “Wow, how did you handle that?!” Afterwards she came up to me with a sweet smile and a few blinks of the eyes | Page 418 |
1d846e7c8a53-0 | and said, “So what else haven’t you told me?” Why Do Most Traders Have to Blow Out an Account Before It All Sinks In? Trader psychology is one of those subjects that doesn’t seem to matter until it really matters, like when you’re changing a flat tire or when your three-year-old daughter | Page 419 |
55792d472231-0 | yells out in the middle of traffic, “No, Dad, I have to go poop now !” You think the issue will never arise, or it won’t apply to you, or you’ll figure it out before the moment of truth. However, that moment of truth tends to happen at the least convenient moment, typically when things are about to go from bad to much, much worse. It’s one thing for your daughter to | Page 420 |
5b29ee0e4959-0 | say she has to poop in the car, but it’s a whole new ballgame when she actually cuts one loose. The term itself, trader psychology , inevitably gets thrown around with greater and greater frequency as a trader nears the goal of trading the markets successfully, because the closer a trader gets to being consistent, the more apparent | Page 421 |
3cb5430fe3cd-0 | it becomes that his greatest enemy is rarely the individual on the opposite side of the trade. Far more often—as is the case in so many aspects of life—our worst enemy is the person we look at in the mirror each morning. Unfortunately, most traders, myself included, never realize this until they blow out an account. “Wow,” they say. “I didn’t think that would ever | Page 422 |
05e46dee4962-0 | happen to me.” Seasoned traders call this the price of tuition. The first psychological issue that traders find themselves butting up against is addiction. When people hear traders talking about addiction, they often think about gambling, an addiction to the rush of placing the trade, the anticipatory thrill as a trader establishes a | Page 423 |
6a2ea322993e-0 | position and hopes that it goes her way and brings in tons of cash. And yet that all pales in comparison to the addiction to being right or, worse, not being wrong. It drives human behavior into the realm of absurdity. For example, placing a trade that will make money as long as that market doesn’t crash overnight is a reasonable setup and a | Page 424 |
e38dffd84bce-0 | reasonable assumption. Stops can be used. Risk can be assessed. In the early morning of January 17, 1995, an earthquake hit in Japan, causing its stock market to take a nosedive. One particular trader saw this unfolding, watched his losses mount, and started doubling and tripling up in order to recoup his position and make money on the trade by bringing down his average | Page 425 |
9f6aa1cadce3-0 | cost. When the bounce failed to materialize, the trader, Nick Leeson, bolted out the door, leaving a note that said, “I’m sorry.” This trade lost $1.3 billion and bankrupted Barings Bank. Although this is an extreme example, it happens every day around the world with much smaller accounts. Maybe $5,000 doesn’t seem like much in comparison, but if that is your entire trading stake, | Page 426 |
7244e16c4624-0 | losing that amount can be just as devastating as losing $1.3 billion. Okay, maybe not quite as devastating, but you get the idea. In many facets of life having to do with careers, an addiction to being right is a strength. It forces us to work harder to meet our goals and to prove to ourselves and to others that we can, in fact, accomplish what we’ve set | Page 427 |
b119d460b7e1-0 | out to do. It can cause us to view a potentially devastating setback as a mere learning experience, and onward we go, dusting ourselves off and getting back on the horse for another ride. It’s like the movie Rocky each and every trading day. No one thought an uneducated but kind-hearted debt collector for a loan shark could get a shot at the world heavyweight | Page 428 |
8df6898f1ee4-0 | championship. But he did, and he proved that everyone was wrong and showed everyone that he was right, and it made a great movie. It’s a fantastic life lesson in persistence and in following your dreams. But if you try that in trading—try holding on to a losing trade until it turns back into a winner, just so you can prove to everyone that you aren’t wrong— you’ll get your ass handed to | Page 429 |
62542d284679-0 | you. Maybe it won’t happen on this current trade and maybe not on the next one, but it will happen, and it will lead to a blown-up account. True, not many of us will ever bring down a bank, but wiping out your life savings is a close second. Trading is the only profession that punishes tenacity by taking your money. Be tenacious in learning how to become a better trader, not in proving | Page 430 |
a349500720e2-0 | that you are right on this current trade. But it’s not just the human need to be right that makes trader psychology such a complex battle, it’s that other great power of the human mind—the power of rationalization. This is a topic I’ve already touched upon, but it’s worth another quick look from a slightly different angle. | Page 431 |
22c1f4f2ea30-0 | In the film The Big Chill , Jeff Goldblum’s character discusses this subject in a particularly salient manner. Michael: Don’t knock rationalization. Where would we be without it? I don’t know anyone who’d get through the day without two or three juicy rationalizations. They’re more important | Page 432 |
6e4520e8cdee-0 | than sex. Sam: Ah, come on. Nothing’s more important than sex. Michael: Oh yeah? Have you ever gone a week without a rationalization? Rationalizing the events on your screen means rewriting the story of what’s actually happening in a way that feels comfortable to you, | Page 433 |
f2b67f07072b-0 | that makes your position seem like the correct one. “This trade isn’t going to go against me for long,” thinks Joe Trader. “They aren’t going to shake me out!” And if it works out, Joe Trader compliments himself for being the genius that he is. He just knew it would work out, especially this particular trade. Call it a gut feeling. And, of course, since it did work out, it just proves that | Page 434 |
50dadce9e249-0 | his analysis was spot on. “You know,” he muses, “I think it’s time for me to up my trading size on this next one.” A person can gloss over reality in nearly all areas of her life, reshaping her interpretations of events to put her in a favorable light and keeping that pristine image intact. After all, it’s okay to ignore your kids | Page 435 |
d77dae0affd6-0 | when you’re on the computer if you’ve got VITTD (very important things to do)—or so goes the rationalization. None us wants to admit when we are being a shitty parent. In trading, however, at the end of the day, the result is right there on your profit and loss statement. No matter how “right” you persuaded yourself you were, a loss that was incurred when you were | Page 436 |
a1ab670c1aff-0 | trying to prove yourself right is still a loss, and your story doesn’t mean a thing to a neutral-minded market. The P&L is the great equalizer. It reveals you for who you really are, and in many instances the picture ain’t pretty. Unfortunately, most people would rather do anything other than confront themselves, their ideal image of who they are. It’s not fun. Believe me, I thought I had | Page 437 |
b36a76af66bf-0 | much better qualities as a person before I got into analyzing my trading personality. And this is why trading has such a high failure rate. Flaws explode onto the P&L. They must be addressed—not just in theory, not just through a few notes in a trading journal, but in practice, on each and every trade. The game changed for me when I committed to becoming a | Page 438 |
6b10e52ac214-0 | better trader on each and every trade, as opposed to rationalizing why I was right on every trade. The Trader Mindset: What Is the Best Way for Getting, and Keeping, Your Head in the Game? Great trading, like greatness in any profession or art, is a kind of balancing act. Each trade requires us to split | Page 439 |
956eafe6eeef-0 | ourselves into two parts: caution and boldness. We need the caution to be patient, the courage to get in and the courage to stay in a winning trade, and the caution to protect our gains once we have them—but not too aggressively, so that we don’t get stopped out on a mere wiggle. And most important is the courage to admit that our trade is wrong and to get the hell out. Great | Page 440 |
76b7af7a1d61-0 | trading is all of these things, which is why great traders are so rare. This balancing act is the reason so many type A personalities perform so badly in the markets. While they may possess boldness, courage, and decisiveness, they frequently lack the caution, patience, and ability to accept that their first impression was the wrong one. Or, more simply, they lack the ability to | Page 441 |
ffc0c8c7d81c-0 | concede that, while their setup might have been as attractive as a Swedish au pair, it just didn’t go the way they expected it to go. The market doesn’t care if the setup was a good one. It’s still going to do whatever it wants to do. Something happens at the beginning of a trade, a psychological battle. It’s that classic scene of a devil on | Page 442 |
8820e445e065-0 | one shoulder and an angel on the other. One tells you to hang in there with all your might, that things are going to go your way eventually, no matter what the evidence suggests, and the other screams in your ear to preserve your capital, to get out, to take a tiny profit or a tiny loss. Just get out! It’s a powerful sensation, especially for the beginning trader, which is why a clear | Page 443 |
b4f431a89937-0 | trading strategy is critical. A trading plan in which you can place your faith is like a pair of mufflers, blocking out the sound of that noisy chorus. Trading without a game plan is like swimming in the Amazon River with a couple of raw steaks strapped to your waist. You might get some good exercise, but the longer you are in the water, the greater your chance of a violent end. | Page 444 |
4b4cd1ec75db-0 | It’s when you’re not trading your plan that fear takes hold, and when fear takes hold, it’s easy for you to lose perspective and exit too early, cutting your opportunity for profitability off at the knees. Yet fear can also cause traders to do something that seems the total opposite of fear. It can cause traders to ratchet up their nerve and stay in the trade long after signs of | Page 445 |
36d659ebd15d-0 | danger have presented themselves. That is, fear triggers an irrational boldness. It takes courage to stay in a trade, that much is certain, but the lesson that too many traders learn too late is that it takes just as much courage, if not more, to get out of a trade that’s clearly not working. The greater a trader’s nerve, the greater his chances of ruin. | Page 446 |
a3ec02ca514e-0 | I often think of the words of a great general who said, “Retreat is a perfectly legitimate military tactic.” Of all the parallels between war and trading, none may be truer than this one. There is no shame in taking a small loss. In fact, when taking a small loss prevents you from taking a big one, it should be considered a victory. If things aren’t going the way you hoped, preserve your | Page 447 |
1430cb286aa1-0 | capital and live to fight another day. And always remember, reentry is only a commission away. Go flat, take a walk, and clear your head. The market isn’t going anywhere. It sounds simple enough, as if you could simply resolve at the start of every trade that you will exit neither too early nor too late, and you will have courage in | Page 448 |
342787f63dff-0 | the right measure at the right times, but it’s actually a tremendous shift in perspective for most traders. We are all geniuses when we’re looking at the charts in hindsight. It’s making decisions in real time, clearly not knowing what exactly is going to happen next, that makes or breaks a trader. Anyone can tell you what you should have done. | Page 449 |
1f6001c33ed9-0 | Great flexibility is required when you’re looking at the markets. There is a certain Zen attitude that is reached by the greatest of traders. In fact, this is one of the terrific, sometimes hilarious, paradoxes of the trading world: meeting serious traders in their seriously expensive suits, who amidst their talk about the hard-core daily battle between the bears and the | Page 450 |
931f155b7f85-0 | bulls sprinkle in Zen proverbs. “There’s no meaning to a flower unless it blooms.” Or, perhaps more relevant, “No ego, no pain.” The people who have learned these lessons are the ones who make money in the market, because they have learned that when you are forming an opinion of the market, that’s all you are doing: forming an opinion. You must leave room for | Page 451 |
fa07010df85a-0 | chance. And when you see that your opinion was the wrong one, you must have the courage to get out and the faith to accept another difficult truth: the opportunity will always come around one more time. Again, the markets aren’t going anywhere. Once a trader accepts the constant flow of the market, that endless renewal of | Page 452 |
d26efb23446a-0 | opportunity, then he understands that there is no need to enter the market on half-convictions. Just sit back and wait until a setup has laid itself out with clarity. Not a maybe or an almost—it’s simply there, period. In the meantime, a trader’s main job is to fight off his boredom and stay flat. Traders who take on a position out of boredom then spend their time managing | Page 453 |
0bf6b394ada6-0 | that mediocre trade while good ones pass them by. Getting in too early and getting out too late just means that someone else is eating your lunch that day. Your stop loss is another trader’s first target. The markets change daily. Literally—there is never the exact same combination of orders and trader actions from one day to the next. The | Page 454 |
33a6117dfaca-0 | gravity of that fact can be hard to grasp when you read about the same kinds of setups or anticipate the same kinds of moves day after day. But the market truly is continually changing and forming new combinations. There is an infinite number of possibilities on any given day, at any given minute. Did you know that each time you shuffle a deck of cards, the odds are that no deck of | Page 455 |
1bba55db197c-0 | cards in history has ever been in that precise order? In fact, the odds against it are staggeringly astronomical. Imagine what that suggests about the markets, in which the variables are tremendous by comparison. For that reason, it is critical that you take a fresh look every day to consider the possibilities, not merely in relation to what you saw yesterday or the day before, but in terms solely of | Page 456 |
aa5eedeb0c52-0 | this moment, today. You must always ask yourself, “What is the market telling me now?” bringing to the table no preconceptions or intentions of your own. What Is the Easiest Way to Establish a Consistently Winning Outlook? Just as a professional gambler is unfazed by his winning and losing streaks, | Page 457 |
573ea599a7f3-0 | great traders learn to roll with the punches (because they are so used to taking them), while managing their money in such a way that no one session leaves them broke. One strategy in establishing the proper outlook is to stop thinking of your money as money. Anyone who had a job as a teenager will surely | Page 458 |
ae594031e4dc-0 | remember the way in which every hour of work could be translated into a real-life desire. An hour of work might have been a bit of gas for the car, a night out at the movies, or dinner with a girlfriend. In trading, there is the temptation to do precisely the same thing: to say, “I just won my car payment,” or, “I could have bought a new home entertainment center with that loss.” Don’t think | Page 459 |
6207a64f9e7c-0 | of it as money. In the world of trading, remember that money is only a tool of the game, a means to keep score. Though this removal from the literal value of money could certainly be a hazard in real life, it is an excellent habit for removing an emotional element from the trading day. The moment you lose sight of money as a tool of the game and revert to | Page 460 |
be823da88195-0 | thinking of it in terms of its purchasing power, you have sentenced yourself to playing less skillfully and more emotionally, which is poison to any trader. What Does Personal Integrity Have to Do with Successful Trading? In the game of life, everything is in play: your time, your money, your | Page 461 |
256a5d09dd86-0 | relationships, your social position. Every element of your day-to-day existence is in your hands, and you protect each part of your life by investing wisely in each category. In fact, your quality of life is entirely determined by the way you handle those investments. You invest in your health by treating your body in a certain way and asking only reasonable things of it. You invest in your | Page 462 |
9dd4a8a116d7-0 | relationships by fostering them, treating them respectfully and with care. The way in which you invest in your life for a positive outcome can be boiled down to a single word: integrity. Integrity is often thought of as doing what you say you are going to do with regard to other people. When you say you’ll be at a meeting, you show up at the appointed | Page 463 |
fa45ce55cec5-0 | time. When you promise to take out the trash, you get it to the curb before the trash man cometh. Other people’s faith in you grows each and every time you keep your word. People who don’t keep their word are not treated seriously. If you have an opportunity for a new business venture and you need to find a partner, whom are you going to choose? Not someone who can’t even | Page 464 |
32311b015f4d-0 | keep his word on the little things. Integrity is its own type of currency in the world. It is how we show others that we deserve their respect, their love, and their compensation for our hard work. The problem comes when we don’t treat ourselves with the same integrity. We do have a sense of self that we come to rely on when the | Page 465 |
b50bcc2ca918-0 | chips are down. We have varying degrees of faith in ourselves in various situations, based on how we’ve handled those situations in the past. In trading, it is critical that we are able to trust ourselves to follow our plan, preserve our capital, and not freeze when the going suddenly gets very rough. How do we build integrity with ourselves? Simple: we keep our word. If | Page 466 |
d0e42cf04abf-0 | we write down that we are going to go to the gym at 3:00 p.m., then come hell or high water, we get to the gym at 3:00 p.m. And if we also tell ourselves, “Today I’m not eating any dessert,” then we stick to the plan, honor our word, and pass on the dessert. With each missed workout, with each slice of cheesecake, another shred of integrity is lost. This chips away at our own sense of | Page 467 |
ffb3071e5aaa-0 | self, creating a growing sense of unreliability. The end result? For traders, it’s being scared to take a trade because you don’t know if you can trust yourself to follow your plan once you are in it. And not trusting yourself as a trader is a guaranteed route to disaster. How do you build up this sense of self, this sense of trust in yourself? It’s very | Page 468 |
255ac27f3f39-0 | simple: keep your word with others and yourself, starting today. More important, learn to say no so that you don’t overcommit. But when you agree to do something, whether it’s meeting someone for a drink or going to the gym at a certain time, then fight like hell to make it happen. Be unreasonable if you have to—after all, you are building up your most important trading tool, and | Page 469 |
7195d0cbaf34-0 | that is faith in yourself that you will follow your trading plan, which is following your word. There’s no one else there to hold you to it. You have to rely on yourself, and you have to know with absolute conviction that you are someone who can be counted on. As traders, we are confronted each moment | Page 470 |
de2e2d106221-0 | with opportunities to violate our plans. Every new bar or candlestick is a chance to let just one of our rules slip. Whether the outcome is a win or a loss, toying with your rules in the heat of the moment is more than merely a bad idea; it’s a message to yourself that you aren’t reliable, that you don’t play with integrity. Eventually your integrity with yourself erodes to the point where you | Page 471 |
330b964b7595-0 | don’t even trust yourself. “Man, I hope I don’t screw this up again,” Joe Trader thinks. Integrity in trading is the most critical component of your trading plan. Building up that integrity is easy to do. Start with the next trade. Follow your plan and follow your word, and your trading skills will increase. Where Are You Now in | Page 472 |
041681bf2114-0 | Your Trading Journey? It is critical that traders understand this process and recognize where they are on their journey. This is obviously important for a trader’s own development, but there is a more subtle reason why it’s essential to grasp this concept—so that a trader can understand what mistakes other traders are making and how to profit | Page 473 |
c6b94b30756e-0 | from those mistakes. This is the biggest poker game on the planet, and the money that’s flowing into your account isn’t appearing as if by magic. It’s coming from someone who is still learning how the markets work, and who most likely followed her gut and got suckered into taking the wrong side of the trade. Believe it or not, everyone | Page 474 |
0c046f943396-0 | who is trading today has about the same odds of making money on his very next trade. There is simply not a lot of skill involved in making money on one trade. The difference is over the course of 60 trades, 100 trades, or 1,000 trades … who is going to be able to generate an uptrending equity curve over the course of that many trades? It’s the traders who have graduated | Page 475 |
9b158c99ddce-0 | from the four basic phases of trading: • Phase I: Destined to lose —six months to a year • Phase II: Fear-based trading—two to six months • Phase III: Search for the Holy Grail—six months to death • Phase IV: Learning how not to lose | Page 476 |
ac3d6b3686fc-0 | I’ve found that most traders go through these phases in one fashion or another. Unfortunately, by the time they get through Phase III, they are typically out of money and can’t even move on to—or grasp— learning how not to lose. Phase V, of course, represents the time when a trader has become consistently profitable. This | Page 477 |
da983a1c77bc-0 | doesn’t mean on every trade —it means creating an equity curve that has an overall upward slope. It means having the ability to be strict enough in your discipline to be able to make a consistent income from the markets. This means trusting yourself that you won’t break down and screw it up yet again. Remember, the moment a trader wavers from her plan, the market is ready to attack. | Page 478 |
b75764203f1c-0 | It’s waiting ever so patiently, ready to suckle those emotions, ready to lure traders back into their old habits … just one more time! And the trade might even work. If it does, it doesn’t matter. That’s not the point. If you break your rules once and win, you’ll break them again. At some point, this will come back to haunt both you and your trading account. This discipline and | Page 479 |
dac50692bb84-0 | patience has to be utilized on every trade, period. Are you starting to see that this is 90 percent of the battle here? Phase I Trading: Destined to Lose—What Are the Traits That Make People a Success in Life but Routinely Get Them Killed in the Markets? He that lives on hope | Page 480 |
741768ce4408-0 | will die fasting. B ENJAMIN F RANKLIN It has been said that the road to hell is paved with good intentions, and nowhere is this more apparent than in the world of trading. (It also becomes very apparent when you start hiring relatives to help you with your business, but that story is for another book.) I have yet to meet one individual who went into | Page 481 |
65e81ced81d0-0 | trading with the goal of losing money. Everybody’s intentions are quite the opposite, and the first thing people do when they enter the world of trading is tap into what has worked for them successfully in the past. The problem is that the tactics that an individual uses to achieve his goals in everyday life do not work in trading; in fact, they are one of the main reasons for | Page 482 |
d5a033bfe3ba-0 | failure. While good judgment is critical for an individual who wants to climb the corporate ladder or start a business, we have already seen why “good judgment” didn’t work in the middle of the TASR trade. This leads us to what has to be the most painful lesson ever inflicted on the optimistic nature of the human species: the tactics that an individual uses to achieve her dreams | Page 483 |
6253b1bf733d-0 | and goals in everyday life do not work in trading; in fact, they are one of the main reasons for a trader’s failure. The determination, courage, positive thinking, and resoluteness that have made people a success in one area of their life simply set them up for slaughter in the markets. It is these types of traders who obstinately hold on to a losing position, adding to it on the way | Page 484 |
65ba159d2734-0 | down, using positive thinking techniques to visualize this fiasco eventually turning into a winning trade. I don’t care how many Tony Robbins tapes the employees of Enron listen to; it’s not going to get their stock back up to $90 a share. The trader who is unaware of this phenomenon is set up for failure from the very beginning. This doesn’t mean that a person shouldn’t be positive about her ability | Page 485 |
6f9740ebeefa-0 | to eventually become a successful trader. Far from it. However, a trader will be much better off assuming that every trade she takes is going to fail. This way, she learns to focus on protecting her downside and minimizing her risk. The upside can take care of itself, thank you very much. It’s the downside that can easily get out of hand. Be positive on life, but pessimistic on your | Page 486 |
3a247b70083a-0 | next trade. Traders who “play the markets” with a mental framework oriented toward how external society rewards and punishes “good” and “bad” behavior are set up to lose from day one. For example, “cutting one’s losses short” is difficult when there is the possibility of the market’s coming back to the breakeven point. At | Page 487 |
9d0bc072a9fe-0 | breakeven, the trader is not a “loser.” Thus, according to the benchmarks of society, if traders can exit a position with a gain, they are “successful.” This leads to the removal of stops “once in a while” in the hopes of getting out at breakeven—in order to be a winner in the eyes of society (sigh). This can work 10 times in a row, even 100 times in a row, but it is the one time when it | Page 488 |
74ea2a6d86b8-0 | doesn’t work that knocks traders flat on their back. On this particular day, these traders will be among the many who cause a “riplike movement” in the markets as they pound their keys in disgust to get out of a trade that is killing their account. This habit of removing stops, even if it is done only once in a while, is reinforced by the societal belief of what defines a winner versus a | Page 489 |
3b58f36dd19f-0 | loser. This habit will destroy a trader’s account faster than anything else—and the smaller the account, the more quickly it will be destroyed. By using hard stops and sticking to them, a smaller trader at least has a fighting chance of being able to do this for a living. If he can’t at least do that, he will not make it as a trader. Period. What happens to traders | Page 490 |
9d68a30003cb-0 | in the beginning is that they naturally end up on a cycle in which they label themselves as good traders on days when they make money and as bad traders on days when they lose money. This is an ordinary reaction instilled into them based on the principles that apply to general society. After all, straight As mean that a student is a success, while Fs mean that he is a failure, | Page 491 |
51905f58fb5d-0 | right? If there is anything I can emphasize in this book, it would be this: trading has nothing to do with general society . In fact, the markets are set up in such a way as to use what most people hold near and dear to their hearts as a means of taking advantage of them. The markets thrive on taking the rules and ideals that govern general society, wadding them up into a ball, setting | Page 492 |
7c5eb2d89952-0 | them on fire, and then shoving them down a new trader’s throat. Any trader who is unaware of this phenomenon is being played like a fish right from the opening bell. General society tells us that losing money equates with failure and making money equates with success. After a losing day, the trader unconsciously thinks, “I’ve | Page 493 |
fbcccaa3f3dd-0 | lost money. I can’t do this. If I had just removed my stop, the market would have come back and got me out at breakeven, and then I’d still be a contender.” So what happens is that the trader starts looking for opportunities to remove her stops in order to not end up with a losing trade. Not on every trade, of course. Just on some trades. And how do traders determine when to do | Page 494 |
3e6481b7d274-0 | this? It’s easy enough; they just use their “judgment” while they’re in a trade. And this is exactly when professional traders step in for the kill. This society focus on money traps traders into the very habits that cause their ruination. Removing a stop in the hopes of getting out at breakeven is one of the worst habits a trader can develop. | Page 495 |
4ab0e9737d77-0 | Sure, it will work some of the time, but it has to turn into a disaster only once to wipe out half or more of an account. While the rest of the world views losing as a bad thing, in trading, small losses are the best sign of success. Nobody outside of trading will ever understand this, so don’t waste a lot of time telling your in-laws how losing only $2,000 yesterday is part of your success plan. | Page 496 |
c28af59447c6-0 | Yes, this means you are doing your job, but as long as the sun continues to rise in the east, other people will never get it. The only people who understand traders are other traders. Personally, when I’m at a cocktail party and people ask me what I do for a living, I’ve found it’s easier to say that I do charity work. People at least understand that and can empathize. | Page 497 |
538e1ea7513c-0 | The biggest issue for newer traders is to reprogram their brains into realizing that in trading, losing is winning. A professional trader’s job is to take small losses. Period. Most traders don’t realize that there are only a few days each month where big profits can be made. The rest of the time, traders are doing their job if they are keeping their heads above water. The idea is to keep the trading account | Page 498 |
f67c37f1676e-0 | intact for when the big moves come along. If on Monday some traders take three small losses in a row and end up down on the day, they are doing their job and have the chance to be successful professional traders, because they will have maintained the bulk of their account to use on one of the few days when the markets really move. That is what trading is about. It’s | Page 499 |
22d997626c58-0 | about traders sticking to the parameters that they have set for themselves and sticking to the setups that they’ve decided to follow. It’s not about gut reactions and chasing the latest sound bite mentioned on CNBC. That is the path to trading annihilation. I remember getting a call in mid-2003 from a guy who was running a $10 million | Page 500 |
f1a5bd2ed2a2-0 | hedge fund for his family. It was never made clear to me how he qualified for this role, although I think he mentioned something about knowing how to use the Internet. He sent me an e- mail about YHOO, asking me for my thoughts. I looked at the chart. The stock was trending higher on nice volume, and I told him about a couple of different setups I would use to get long the | Page 501 |
1358f4421515-0 | stock. Apparently that wasn’t the answer he was looking for, because he called me the next day and told me that I was reading the chart wrong. As I listened to him rant on about page views and price/earnings (P/E) ratios, a light went on. I interrupted him and asked, “Where did you short this stock?” After a moment of silence followed by a cough, the story emerged. He had shorted it at | Page 502 |
c418fa90d4ea-0 | $12.00 based on a newsletter recommendation. As the stock rallied, the newsletter had shorted more, and so did he. By the time I talked to him, he had shorted 400,000 shares at an average price of $16.25, for a total outlay of $6.5 million. I asked if the newsletter was still short, and he said no. I checked my quote screen and saw that YHOO | Page 503 |
c4e4a59c21f6-0 | was trading at $22.50 and had just cracked out new 52- week highs. He asked me if he should short some more to raise his average cost, “so it won’t have to go down as much for me to get back to breakeven.” Here he was down $2.5 million on the trade, his family hadn’t seen the statements, and he was trying to salvage his career as the | Page 504 |
dd32995e4f0b-0 | family financial guru. There was zero rationality in his thinking. I told him he needed to get out of the trade, or at least buy call options for a hedge. I even said that YHOO was going to keep on rallying until all the people who were short cried uncle and covered. Apparently that wasn’t the advice he was looking for, either. He ended up shorting another 100,000 shares. He | Page 505 |
99ddb614d703-0 | finally caved when YHOO hit $30, for a loss of $6.25 million. It’s an excruciating story, but this happens all the time with all types of different account sizes. This guy didn’t want to take a small loss because he didn’t want to look like a loser to his family. His motto became, “As long as I hold on to this position, it’s not really a loss.” This is like having blood pour out of | Page 506 |
623e32268d71-0 | your bowels and choosing not to go to the doctor. “As long as I don’t go to the doctor, no one will know I’m dying.” Trust me, once you are dead, people will figure it out. Averaging down on a losing position is like a sinking ship taking on more water. When the family fund manager kept shorting YHOO as it made new highs, | Page 507 |
8d53a8ef5cdf-0 | he might as well have been driving nails into the Mona Lisa . Both are deliberate acts of destruction. Financial planners always talk about dollar cost averaging . I call it dollar loss averaging . Adding to a winning trade is okay, but adding to a losing trade is insane (unless scaling into a full-sized position is part of your trading plan). If you caught some of your employees stealing from you, | Page 508 |
e1a2bf25c069-0 | would you give them a raise or fire them and find somebody else? This guy trading YHOO would have given them a raise, a housing allowance, and a comfortable pension. As traders approach the end of Phase I, assuming that they still have any capital left, they have some solid experience under their belt. However, they haven’t quite | Page 509 |
3f039578eef1-0 | figured out why they are getting hammered by the markets. It’s not as if they have lost money on every trade. In fact, they’ve had some great trades. Unfortunately, they’ve also been knocked down pretty hard on a number of occasions, and their account is under water. They started off optimistically, but now they just want to be a little more careful. And the bottom | Page 510 |
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