Archive for March 2012
In the previous posting in this series, we talking about how feelings can help reveal a hidden value that might be in conflict with your trading decisions. Let’s now add to that discussion and talk about determining the higher value.
So what is the greater value in our trading? What is the standard by which we are going to make our decisions? These standards can be for almost anything that we do in our trading decisions. What type of method we are employing, the amount of money we’re putting at risk, determining whether the trade is worthy of our investment, and the way I feel about the trade and the decision. All of these can be guided by a higher value that is more important to us than just pulling the trigger and entering the market.
So here is an example of determining guiding values for a methodology. For the sake of this discussion, I’m going to use my self and my trading methods as the example. I’m not advocating my methodology or the methods of anyone else.
As a technical trader, I have literately thousands of indicators to choose from. And, if you believe the statistics that 90% of all traders fail, there apparently isn’t any one indicator that stands head and shoulders above the rest. So the decision of what I’m going to use as an indicator is very personal and needs to be guided by what ‘feels’ right for my style of trading and my perception of the trading world.
To decide what feels right starts with understanding what type of trader you want to be. I like trading trends. I determined this after many loosing trades trying to fight the trend or picking the tops and the bottoms. I also like trading smaller, intraday, charts. I like the sense of getting in, making what ever the market will allow, and being done for the day. There was a time when I would spend the entire day and part of the evening sitting in front of a computer screen. This obsessive behavior lead to an understanding that there is more to life than trading. Also, I value my coaching practice and working with clients. Trading the entire day would not allow me to work with others and their trading plans.
So now that I know I like trends and short time frames, I began building a method accordingly. (For more on building a trading method, click here.) I experimented with Bollinger Bands, Keltner Channels, various different moving averages, MACD, RSI, ADX with DI, a brief stint with Heken Ashi charts, candle stick patterns and formations, and market profiles.
After many incarnations , I’ve settled on what I currently use. It looks something like this:
That’s the other thing that I would like to emphasize. Our view of the world will change as we develop new skills and perceptions about the market. I often talk about trading as an art form. As the market changes, so must we change to adapt. What I’m looking at today, may not be what I’m looking at next year. The only constant in this venture is that the market is changing. That, too, can be a value we use to make better trading decisions.
In case you’ve missed it, I’ve been talking about trading strategies and the various different components of a strategy. The first of these was on trading methods or how do you find tradable opportunities. I talk about how all trading methods eventually fail because a method takes advantage particular market conditions. When the conditions exist, then the method should easily find tradable opportunities. When the market doesn’t cooperate is when methods typically fail.
Now this doesn’t mean that the method is flawed (I’m assuming that the method has been thoroughly tested and is proven viable). It just means that the market isn’t right for the method. The simple way of handling this is to wait for the market to change so that the method will work. It’s the simple answer but the execution is anything but simple.
When I propose this solution to a client, I’m often met with the rebuttal, “well I just need a method for this particular market.” As if more methods will lead to more opportunities and therefore, by extraction, more money. We come by this philosophy quite naturally in the industrialized world of the 21st century. I’m here to say that more isn’t more.
I wrote about this last month. What I’d like to share with you is a entertaining and informative talk sponsored by TEDGlobal 2005 by psychologist Barry Schwartz on The Paradox of Choice. When you listen to Barry speak, replace his obsession of blue jeans with trading methods and you’ll get the point. Enjoy.
This is the second is a series about trading strategies. The first posting is located here.
Money management is probably one of the most important components of a trading strategy and the most misused and misunderstood. When I first started trading in 2002 I was taught that your trade shouldn’t exceed some percentage of your trading account. I still hear this mantra from clients today and it’s time to move the concept of money management into the 21st century.
Let’s put this into perspective. Let’s say your going to buy a car. When do you consider the price of the car? Before you begin shopping of after you’ve picked out the color? Do you let the salesman and the sales process dictate your purchase or do you control how much you are going to spend?
Most prudent shoppers are going to have an idea before they begin shopping of approximately how much they can spend. We may not have complete control over what we are are purchasing, given inventory availability, but we can control how much we’re willing to spend.
There are a lot of reasons to create and maintain this control over your spending. For the sake of this discussion, the main reason is to know when you’ve reached your spending limit. The ability to say “no that’s enough” is incredibly important. To be at choice over what and how much you are spending.
Sadly, when it comes to trading, we often leave this common sense thinking at the door of our trading offices. True money management should be about controlling how much you are willing to put in the market during any individual trading session. Knowing when to say “that’s enough” is what will keep you trading for tomorrow.
The way to achieve this is to create a distribution pool from your trading account to finance the current trading day’s activity. Hedge funds do this on a much larger scale but the basic principle is the same. Here’s how it works.
Let’s say you have $10,000 and you’ve determined that you’re willing to risk 10%. (The discussion about how much to risk is for a different posting.) That gives you $1,000 for today’s trading activity. All your trades will be funded out of this $1,000. When you’ve gone through that money, you are done trading for the day.
This distribution pool of funds becomes the gauge by which you measure today’s trading activity. If you have made a series of loosing trades and find you are down $400, or 40% of your allotted funds, use that as an indicator that perhaps you are not in the right frame of mind to be making trades today. Perhaps you need to change your point of view for a moment. Get a cup of coffee or go for a short walk to clear the mind and change your perspective.
If the opposite is true, and you find that you are up 40% on the day, that could be an indication that the day is going well and the need to take every tradable opportunity is not necessary. More trading does not necessarily lead to more money, but it does lead to greater risk.
In the end, trading is about our decisions and how we feel about them. Having rules is essential, but they are not the entire story. To understand that the judgment calls we make in the market has a greater effect on our trading then mere rules is the key to trading success.
If you would like a copy of Money Management – Debunking Common Wisdom feel free to send me a email and I’ll be happy to send it to you.
In a previous posting, I wrote about the use of emotions in predicting the future. That the unconscious mind has the ability of giving us a sense of what might be coming up in the future without any real concrete evidence. Well to continue that conversation, here is an article from Wired magazine that asks the questions Are Emotions Prophetic?
Our minds are amazing. We are capable of doing so much more than any computer can do. Computers are great and they can do certain things really well. But they are never going to out think a human. I hope you enjoy the article.
In the previous posting, I talked about the role of emotions in our decision making process. The feeling that we are making the ‘right’ decision is part of who we are as humans and really can’t be separated from the cognitive process. The use of those feelings, that feeling of making the ‘right’ decision, is what I’d like to expand on in this posting.
One way of making a decision that feels ‘right’ is to have a clear concept of a greater value that you’re using as a standard. When we begin to feel anxious, fearful, hesitant, our body is saying that something is amiss. We’re making a decision that is in conflict with something that we hold of a greater value.
Now where a lot of new traders get into trouble is that they take readings of these feelings and think that something is ‘wrong.’ Let’s begin a new conversation about what feelings are telling us. One that can help us rather than drive us crazy.
Feelings are neither right nor wrong. They are just a way of receiving information. Placing a judgement on your feelings is a rationalization and that’s in your head. Feelings are in your body. They come up as the butterflies in the stomach, tightness in the neck or a pressure in the chest. The beginning of understanding feelings is to first be aware of them.
Next, feelings are often experiential. Being anxious about pulling the trigger could be based on something that happened in the past. I had one client that had great difficulty in placing a trade because it never looked ‘perfect.’ Turns out, through our coaching sessions, he discovered he had a mild form of ADD and would obsess about many decisions, not just trading, before making the ‘right’ decision.
This is where the adage “trader know thyself” comes in handy. Our cognitive process doesn’t happen in a vacuum and isn’t dictated by a trading methodology. Just because someone says that a trading method is the next best thing since sliced bread doesn’t necessarily make it so.
Understanding what is driving our decisions can help us decide what we want to place as a value. In the case of my ADD client, we came to the conclusion that short term trading was not the answer. Since there is very seldom a ‘perfect’ setup on an intraday chart, taking the longer view of his trading decisions was the best way for him to execute trades. By examining his emotions, we were able to find the values that could formulate a trading strategy for him.
What are your feelings that come up when you trade? What might those feeling be telling you about yourself and your cognitive process? Where do they reside in your body? How might that understanding help you make better trading decisions? In our next posting, a discussion about creating a higher value.
“Don’t trade with emotions!” “Park your emotions at the door!” How many time have we heard these words when it comes to trading? When I first started trading, this was the advice that I received and it always made me scratch my head. No one ever explained exactly how to go about doing this.
As it turns out, my skepticism was well founded. Though my continuing education as a trade and a coach, I’ve learned that to divorce ourselves from our emotions is impossible. As humans, we need to have that emotional component in our decision process. All decisions. I wrote about this as part of a series, A Trader’s Diary on Fear.
Well, there seems to be a growing trend in this type of thinking. I first read about this concept in Malcom Gladwell’s book Blink. It’s about that moment of instant cognition that happens in the first two seconds of encountering a new idea. Those can be incredibly valuable insights and sometimes really good.
And an article appearing in the Washington Post on March 3rd is further evidence of this growing trend. This isn’t a crystal ball thing and I’m not going to rely on a tarot card reading for my trading decision. But our brain is able to do so much more than a series of indicators or trading rules.
I would say that I’m generally a happy, upbeat person. My family, for better or worse, has experienced my darker side, but for the most part, I present the world as glass-is-half-full kind of guy. When I’m trading, I certainly try to maintain that same type of optimism. But we are talking about trading. The market has a unique ability of challenging the happiest of traders in new and twisted ways.
This is the reason why I dedicate a number of postings to mindfulness, being in the moment, and the art of the trade. Our mental state of mind has more to do with our success in the market then any method or trading strategy. Simply put, if you look at the world, or the trade, as if ‘they’ are out to get you, you’ll probably get your wish.
The good news is that we can change our perception of the world and by so doing, change our trading results. Positive psychologist Shawn Achor from Harvard University gave a talk at TEDxBloomington in May of 2011. In it he describes the value of a positive psychology and becoming better than average.