Innerworth - Mind over markets newsletters

May 16, 2006
Such power there is in clear-eyed self-restraint.

  • James Russell Lowell -

Controlling Your Mood and Maintaining Discipline

Winning traders are disciplined. Discipline means controlling impulses and fighting the urge to abandon your trading plan prematurely. Maintaining discipline is often easier said than done, especially when the market is moving in your favor. It’s hard to avoid closing a trade out early in order to lock in profits. Even winning traders face more losers than winners, and when you hit upon a winner, it’s tempting to take profits as soon as possible. But since winning traders are relatively rare, it’s vital to fight the impulse to sell prematurely and let the winning trade run for a while. In order to win big, it is necessary to delay gratification and patiently wait for the price to rise to your exit point according to your trading plan. Discipline is key, and it is vital to take whatever steps are necessary to maintain discipline.

Your mood can play a major role in determining your ability to stick with your trading plan. When you are in a bad mood, you may have trouble sticking with your trading plan. A study by Knapp and Clark (1991) illustrates how feelings of emotional distress can influence your ability to maintain discipline. Participants engaged in a laboratory simulation in which waiting patiently resulted in greater profits. Specifically, participants were asked to pretend they were fishing in a lake, and that they would be given a monetary reward for each fish they caught. Taking too many fish out of the lake early in the game produced immediate profits, but when fish are taken out early, fewer fish are left in the lake to reproduce, and thus, few fish can be taken out for a profit in the long run. Thus, waiting patiently to take out fish later is the most profitable strategy. Participants’ moods influenced their ability to wait patiently and fight the urge to take profits too early. People in a sad mood had difficulty waiting. They wanted immediate gratification, and believed that immediate profits would make them feel better immediately.

You might see how this experiment has relevance for trading. When you are in an unpleasant mood, you may have a strong need to feel better. How can you feel better? Making money usually makes you feel better. You can either take profits out of a winning trade immediately or you can make an impulsive trade to get a quick thrill. Your mood can make all the difference. It is useful to make sure you are in a good mood while trading. When you are in a bad mood, you may act impulsively in order to make yourself feel better.

Maintaining discipline is vital for trading success but it is difficult at times. The best ways to keep disciplined are to trade with a detailed trading plan, but this may not be enough. You must also make sure you are in a good mood. A good mood can mean the difference between trading impulsively and maintaining discipline.

14 Likes

grt…

1 Like

May 17th 2006

Fear has its use but cowardice has none.

  • Mahatma Gandhi -

Coming Back Strong

Jack is down $50,000. He doesn’t know what to do. He thinks, “How much money can I lose? Will I ever make it as a trader?” Jack is surely at an emotional turning point. He can either give up on his dreams, or dig in his heals and work even harder to become one of the select few who master the markets. Does his plight sound familiar? Have you felt that you could never get ahead? If you are looking for reasons to leave the trading profession, you won’t have to look very far. Many winning traders who made money before the bubble burst have never made back what they have lost. Perhaps we will never see the consumer interest in the markets that we did in the late 1990s, but are you ready to give up? Let others give up. It just means more opportunities for you, right?

It’s easy to feel beaten down. It is easy to feel pessimistic. But in our studies of master traders at Innerworth, we’ve found that many traders blew out their account, felt beaten, but kept honing their skills until they became a winning trader. So what do you want to do? Give up? Do you want to give into your pessimism, or do you want to work hard to fulfill your dreams? If you want to fulfill your dreams, here’s a few ways to help you make them come true.

First, be a realist. Thinking like a realist isn’t thinking like a pessimist but it may seem that way at first glance. Many people set themselves up for failure by trying to accomplish unrealistic goals. For example, they may wrongly believe that they can turn a $5,000 account into a fortune. It is pretty much mathematically impossible to do that, so trying is going to ensure failure and disappointment. It is important to set goals that are consistent with your skills and financial resources. For example, it is necessary to build up trading capital to make it as a trader. You may need to get a second job and live a frugal life, but it is necessary to have adequate capital. Capital is needed to survive the learning curve. Capital is needed to survive sideways markets. Capital is needed to live through a psychological slump. You need to do whatever you can to build up capital. As a realist, you need to find a way to build capital and put in the required time and effort to hone the skills you need for success.

Second, you need to work hard and at your own pace. Trading is a business where some people find early success. Indeed, biographies of successful traders reveal that there are some people who actually can turn a miniscule $5,000 account into a fortune, but most people can’t, and few will do so in the markets of the next few years. Many novice traders, however, make the mistake of comparing themselves to others. They see a friend who was an overnight success and they believe that it is the norm, and that they should be able to put in a relatively minimal effort and achieve success. Don’t set yourself up for a disappointment. It may not happen that easily. You may need to work harder and longer than others, and patiently wait to achieve your goals. But the worst mistake you can make is to give up early and dream of what could have been.

Third, you need to believe that trading is a skill you can learn. Perhaps some people are natural born traders or have relatively unlimited financial or psychological resources that give them an edge. That does not mean that you cannot make it also with hard work and perseverance. Work at your goals every day. Even if it means just studying the market action and testing out new strategies on paper, do it. Don’t give up. Keep honing your skills until the day comes when the ideal market opportunities will come along to allow you to make huge wins.

When you feel beaten down, it’s vital that you pick yourself up, and start fighting to make a strong comeback. With realistic goals, hard work, and an optimistic outlook, you can master the markets and make your dreams come true.

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Excellent article ,:blush:
Eagerly waiting for the next

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May 18, 2006

A ship in harbor is safe, but that is not what ships are built for.

  • John A. Shedd -

Relatively Safe Trading

Humans don’t like taking chances with their money. If given the choice, they would take a sure thing rather than a gamble, even if it meant making relatively little profit. What do you think most people would do, take $100 right now or take a gamble in which they would either receive nothing or $200? Most people would take the $100 but would you? If you trade the markets as a short-term trader, you would be willing to take a risk, but there is still a voice deep down that yearns for a safe, sure bet. And the best way to make it safe is to anticipate all possible adverse events and create a trading plan to let you to feel a little safer and a little more relaxed.

How can you cultivate feelings of safety? First, trade with money you can afford to lose. Second, trade positions that are so small that you may think, “What’s the point of even putting on the trade.” If you can minimize the personal significance of a trade, you will feel safer and at ease. With a minimal psychological stake on the line, you have almost nothing to lose, and you’ll feel less pressured. If you make sure that you limit your risk as much as possible, you’ll know it and you will feel safer. If you lose big on a single trade, it will take many more trades to build your capital back up to the previous level. You know this as a fact and it makes you feel uneasy. If you also know, however, that you’ve taken precautions, you feel better. It’s also essential to learn to cut your losses short. Don’t get stuck in a losing trade. Don’t hope that it will turn around. Just sell the loser quickly. Controlling risk will not only make you feel safe and secure, it will ensure your longevity as well.

It’s also important to trade with a detailed trading plan. Before you execute a trade, specify precisely how and when you will enter, the signals that indicate the market may be going against your trade, and how and when you will exit. Many traders feel anxious and uneasy because they don’t carefully plan their trades. They impulsively execute a trade and then think they can develop the plan as they go along. What usually happens, though, is that they panic easily because they don’t know what to do and when to do it. It’s hard to think on your feet, especially when you are taking risks. A safety net helps you feel better. And a detailed trading plan is one of the best safety nets you can have. The more clearly the plan is laid out, the easier it is to follow. And when the plan is easy to follow, it’s likely that you’ll stick with it. You’ll be disciplined and in control of your emotions and thought processes.

It’s impossible to find stocks that are guaranteed to increase in price, so when we trade, we always carry with us a feeling of uneasiness. We don’t have to let these feelings of uneasiness overwhelm us. By taking precautions, we can feel a little safer, a little surer, and trade a little calmer. And these feelings can make all the difference between winning and losing.

13 Likes

May 23, 2006

Never fear shadows. They simply mean there’s a light shining somewhere nearby.

  • Ruth Renkela -

Fear of Leaving Money on the Table

During the trading day there are often opportunities to make huge, profitable trades. The trouble is finding them! Some traders are so obsessed with looking for the ultimate opportunities that they spend most of their time looking for the most profitable opportunity, rather than actually trading. They don’t want to miss a potential once-in-a-lifetime trade. There’s nothing wrong with searching for a good setup, but constantly looking for the ultimate setup can be time consuming. Why do some traders spend too much time searching for the ultimate trade? For many, it is a fear of leaving money on the table. They don’t want to miss out on a rare opportunity.

The fear of leaving money on the table is natural. We desire profits, and we have a strong human need to strive for perfection. We want to believe that if we analyze the markets long enough, we’ll find the perfect setups and take home huge profits. But these assumptions usually do us more harm than good. We may spend all our time looking for perfect setups that don’t exist, and ironically, failing to trade available high probability setups. Many times striving for perfection can be “maladaptive” in that it restricts our actions, and often causes unwanted stress. And when we are overly stressed, we may stagnate rather than move forward. It is much more useful to aim for more modest goals. But many people work under the assumption that they must be thoroughly competent, adequate, and achieving in everything that they do. Renowned psychologist, Dr. Albert Ellis, claims that holding such a belief produces fear and anxiety, which for traders often produces hesitation and self-doubt. The development of this belief is understandable. As we grow up, whether it is at home, school or work, we often face adverse consequences for not being scrupulously proficient, and we begin to believe that we must be thoroughly competent, adequate, and achieving in everything that we do. And we believe that if we could just be perfect as a trader, we will make the most profits. Ironically, however, the opposite happens. If we believe that we must always be competent, we will expend all our precious psychological energy looking for perfection, rather than taking active, specific actions.

A more adaptive approach is to realize that it’s impossible as a trader to be thoroughly competent, adequate, and achieving all the time. Certainly, you should develop an extremely detailed trading plan and try to account for all adverse events that may go against your plan, but there are limits to what you can do. You don’t need to be perfect. You don’t need to trade the ultimate setups. You just need to make profits, even if it is just from trading mediocre setups. Searching for perfection can lead to stagnation if you aren’t careful. Don’t be afraid of leaving money on the table. Relax, trade instead of search. You’ll find you will take home more profits in the long run.

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grt…

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Very Nice Dude…

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It’s seems like article was written for me only describing my very recent experience. Very interesting suggestion Mr. Nitin, I will surely try to follow this.

1 Like

May 25, 2006

Slump? I ain’t in no slump… I just ain’t hitting.

  • Yogi Berra -

The Doubting Trader

It’s almost impossible to have rock solid confidence as a trader. Sure, some traders can’t be thrown off track very easily, but it’s natural to feel a little afraid occasionally. Let’s look at some of the reasons that you might feel shaken. What the markets will do tomorrow or next week is far from certain, and you don’t have a crystal ball. Your information is fallible. And without perfect information, you are bound to feel a little uneasy when your money is on the line. In addition, there’s always a possibility that something may go wrong. A media analyst may hype a stock you are shorting. And what about trading strategies? You can perfect a trading strategy only to see it fail when market conditions change without warning. If you lose your confidence occasionally, it’s understandable.

Even a seasoned hedge fund manager can lose confidence. Consider what Manny told us when we asked him about what underlies his self-doubt. “Fear of losing money and fear about the lack of validity of my research. It’s perfectly natural. Just like in sports, the difference between the physical abilities of the top pros is virtually nil. But the mental difference is huge. The guys at the top in tennis, for example, are mentally consistent throughout the whole match. It’s the same thing in trading. The psychology of professional traders allows them to stick to their strategies. They don’t stress out as much as rookie traders. I still make mistakes once in a while, but not as often as I used to. It’s impossible to eliminate all doubt. I still fall victim to doubt and other psychological pitfalls. I still have major doubts, but now I know how to control them better.”

How did Manny conquer his feelings of doubt? Gaining a wealth of knowledge is key. “It requires a combination of research and experience. After a while, making or losing a lot just did not seem to bother me. It became second nature. The other thing is learning to handle profits and the losses. With experience, you don’t get as excited over them. After a while, you expect to experience the natural ups and downs.”

When you experience self-doubt, don’t make matters worse by feeling bad about feeling bad. Everybody experiences doubt at times. It’s natural when trading something as chaotic as the markets. If you are a novice trader, feel solace in the fact that your self-doubt will subside after you hone your trading skills and gain a wealth of experience. And if you are a seasoned trader, it may be useful to remind yourself that everyone gets in a slump occasionally. Don’t worry. You’ll regain your momentum if you keep trading. The key to success is to remember that self-doubt usually leads to stagnation. When in doubt, don’t panic, calm down, and think rationally. You’ll eventually work through your self-doubt and return to profitability.

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May 31, 2006

In quiet places, reason abounds.

  • Adlai Stevenson -

A Quiet and Meditative Place

Do you ever feel the pressure to perform? If you are making a short-term trade during a hectic trading day, you may have trouble controlling your emotions. You may have a trading plan clearly spelled out, but when it comes to executing it during a rough trading day, you may abandon it. Here’s how Bo, a seasoned trader, described his early trading experiences to our Innerworth staff. “When I first started to trade, I almost had a few panic attacks. My pulse quickened. My hands sweat and I could not breath. This mental state clouds your judgment and you tend to make a lot of wrong decisions, like getting out at the very, very bottom after a stock has fallen. You’ve sort of denied reality that it’s falling and when you finally hit that level of pain, you get out and the stock then bounces. I was definitely in a negative emotional state and I had to break the emotional cycle and get back into reality and objectivity.”

When your emotions take over, it can be hard to think calmly and rationally. Your mind can be thrown completely off track. Bo described what happened when he lost control. “I’d come into a trade with a very clear, objective stop-loss strategy for exiting if things went wrong. But once I entered a trade, I started to second-guess myself. I would get a little bit of profit showing and want to take the sure bet right away, rather than letting profits run.”

It’s essential to remember that your mind and body are closely related. When you are trading under stress, your body reacts physically with agitation. Your thoughts start racing and you cannot easily slow them down. You either must get up and leave the trading arena, or calm down before making a trading error. The best way to calm down is to use a form of meditation. A simple form of meditation is to close your eyes, concentrate on your breathing, and repeat a favorite phrase that will calm you down, such as “Everything will be all right.” The main idea is to get your mind to slow down and allow your thoughts to move away from the market action that is shaking your focus. Once you regain your composure and can concentrate fully, you can return to monitoring your trade.

Bo had a novel way of getting his mind to move into a meditative state. “I play the drums. When you’re playing the drums, you have all four appendages going at once and usually independently. You’ll have both hands doing a different pattern on a cymbal and a snare drum and your feet are both going in different rhythms as well. Something about that touches something deep inside me and takes me to a meditative place where I feel a sense of flow.” Bo discovered he could quickly bring forth this meditative state during the trading day. “One day, I started juggling and it brought me into that same state I felt as a drummer. So I started to use that as a tool to break away from the almost hysterical emotional response I felt while trading, and returned to a place of more objective, dispassionate observation.” So how does juggling work? “It requires so much focus. If you’re going to throw those balls around and not drop them, you have to take your mind away from the stock and your fears, and focus on that moment, namely, where the balls are going and where your hands need to be. It’s almost a meditative state when you get that flow going and are in the zone.”

Trading requires an optimal mental state, but many times the markets just don’t cooperate. The stress wears down your ability to maintain self-control. When that happens, it’s vital to calm down and return to a focused, meditative state.

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June 1, 2006

Experience tells you what to do; confidence allows you to do it.

  • Stan Smith -

Free and Easy Trading

Throughout the day you make everyday decisions that mean little to you. You drive your kids to school and along the way, you make a host of decisions about which route to take, where to turn, or when to stop off for gas. Each decision is made with little thought. Later in the day, you may decide to stop off at the grocery store. You decide what to buy for dinner and how much you will spend. Do you obsess over these everyday decisions? You probably don’t. Why should you? What’s the big deal? The implications of the decisions are almost nil. But tell that to someone with obsessive-compulsive disorder. They have a different perspective regarding the significance of such decisions. Even minor insignificant everyday decisions are a big deal to individuals with such an ailment. Aren’t you glad that you don’t have obsessive compulsive disorder? If you are a novice trader that has trouble making trading decisions, though, a seasoned trader may think you have a kind of obsessive compulsive disorder. Whereas you sell early or abandon your trading plan because you are impatient or frustrated, seasoned traders have no problem making what they see as everyday decisions. To them, it’s no big deal; it’s just a decision that must be made. Wouldn’t it be nice to trade with such a free and easy trading style?

Traders can often take the decisions they make during the trading day too seriously. It’s natural. When your money is on the line, you can’t help but worry about losing it, and you want to protect it, even if it means obsessing over minor details or reacting with extreme emotions. Some people even personify the markets by viewing a trading decision with the same emotional intensity as they do with their interpersonal relationships. In “Trading In the Zone,” for example, Mark Douglas points out that traders often equate losses in the markets with their parents punishing them for breaking rules. When the markets are viewed in this way, losses take on a great personal significance. But it doesn’t help to make such a big deal of things.

It’s much better to take a more detached, objective approach. How can you do it? First, don’t think about, or obsess about, the outcome of a single trade. Think of the bigger picture. You may lose on a single trade, but across a series of trades you will come out ahead, if you have a trading strategy that has a high probability of success. Successful traders plan on executing many trades, rather than just a few key significant ones. As they trade, they know that not all trades need to be winners in order to increase the equity in their accounts. It’s your success overall that counts. Keeping this fact in mind takes some of the pressure off. Second, it is vital to use proper risk management. Successful traders risk only a small percentage of their trading capital on a single trade. Limiting the risk on a single trade further relieves some of the pressure to feel that every trade needs to be a winner, and thus, some of the personal significance is reduced.

There’s no need to imbue a trade with great personal significance. By limiting the amount capital you risk on a trade, the actual consequences of the trade are limited, so what’s there to worry about? You might as well trade free and easy.

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June 2, 2006

The time to relax is when you don’t have time for it.

  • Sidney J. Harris -

Don’t Forget to Take a Break

Reality is subjective. There are different states of reality in the same way that there are different states of mind, or different states of emotion. After a series of setbacks, for example, the world can look bleak. Yet after a series of big wins, in contrast, you can feel euphoric, even omnipotent. So which is the true reality? This is a hard question to answer. Perhaps it is best to consider that there are multiple realities, and that some are more conducive to optimal trading than others.

One reality is that you must make profits. If you don’t make enough winning trades, you will blow out your account. As true as this fact of trading is, however, forcing yourself to make trade after winning trade can actually make you choke under the pressure. While trading the markets, it is best to put this reality out of your mind. The more you can stay focused on your ongoing experience, rather than dwelling on your performance, the better. The more you just don’t care, the better you will trade. Psychologists call this phenomenon the paradox of control: You have to give up control to actually gain control. If you feel that you can lose money and survive, you’ll actually make more money. It sounds strange, but it’s true. That said, it is hard to forget about your financial needs, aspirations, and expectations. If you are serious about the trading profession, you are probably the type of person who has high aspirations. You seek out success and you are ready to do whatever it takes to make your mark. But again, it can be difficult at times to forget about your expectations. It can be difficult to avoid putting pressure on yourself.

If you want to trade in a peak performance mindset, however, it is vital to get away from it all, psychologically, that is. You need to let your mind relax. You need to let your thoughts slow down. You must occasionally get away from the competitive world of trading. Everyone has his or her approach. Some use meditation. Others work out at the gym until they let off pent up energy and are fully relaxed. And many people get a massage to relieve physical tension. The key is to shake your mind out of one reality and put it into another. Here’s one method that can really give your mind the shock it needs. You can immerse your body in warm water (hot but not scalding and preferably at a professionally operated spa) for two minutes and then jump into a pool of cold water. When you immerse your body in a pool of hot water, all you can think about is coping with the heat. It’s a little painful and so you must maintain concentration to avoid jumping out. It’s a great way to focus. Your mind can’t actually think of anything else but concentrating on how you will cope with the intense heat surrounding your body. You soon enter a meditative state. You aren’t thinking at all about how well you are doing in the markets! Next, you immerse your body in a pool of cold water. The rapid change in body temperature allows your mind to slow down. You feel relaxed, and somewhat in a daze. By repeating the process a few times, you will be able to fully relax. You will be in a new reality. From a psychological standpoint, getting into this new reality can have rejuvenating effects. You will put things in perspective. You will see that trading activities, and the high standards you try to attain, are only one aspect of your life. This realization can provide solace during a stressful trading day. You’ll remember that there are other realities in the midst of chaos. But more importantly, you will feel relaxed and ready to tackle the stresses and strains of the markets with renewed vigor.

Trading is inherently stressful. As much as we try to avoid it, our ego is often on the line with our money. It’s essential to psychologically get away from it all. Whether it is meditation, exercise or a vacation on a tropical island, it’s vital to shake up your reality, rest, and rejuvenate.

14 Likes

Wow, these are some gems that every trader must read. Thanks for sharing @nithin.

1 Like

6th June 2006

Sometimes something worth doing is worth overdoing.

  • David Letterman -

Rising to the Occasion

Trading is a challenging profession. Many seek out success, but few make it. The markets don’t always cooperate with your plans. You can trade all day, and work hard at it, but you can still end up losing money. Thinking of the big picture helps ease the pressure. You can calmly think, “What’s there to worry about? It’s just one trade among many. It’s just one day. There are many more days to trade.” Thinking of the bigger picture is a great thinking strategy that you can use to calm down. It’s also useful to realize that you can’t control everything. All you can do is persist in the face of uncertainty and hope for the best. You may not win all the time, but you deserve to win, and you should trade as if you are a winner.

In the end, all you can do is work hard. The final outcome of your trading efforts may not be in your control. All you can do is gallantly try to overcome obstacles and trade as if you deserved to win. That isn’t to say that you should give up and assume you couldn’t win. Indeed, trading to win is far from that. You must work so diligently that regardless of the outcome, you will feel at peace knowing that you did your best.

Ever heard the phrase, “Winning is the only thing”? Winning is important, but ironically, it can’t be “the only thing.” A more apt saying for success is, “It’s not whether you win or lose, but how you play the game.” If you trade with resolution and discipline, you’ll be more likely to achieve success. You must respect trading and the markets. You can’t impose your will onto the markets. The markets will do whatever they want. You must be ready to accept what the markets have to offer you. It’s vital to enjoy the process of trading. It’s intellectually challenging. You can use your creative abilities to identify trading opportunities, and feel a sense of accomplishment by solving difficult problems. Sometimes you’ll win, but many times you will lose. But each trading opportunity has a little something to teach you about yourself, the markets, and trading. It may be just a little thing, like how you can accept taking a loss after a fluke ruined a perfectly good trade. Or maybe you will merely learn something about your current limitations. There’s always something to learn. Whatever you do, though, don’t get caught up focusing entirely on winning. You can’t completely control whether you win or lose and when you think about winning, you just get distracted.

Enjoy the process of trading. Fight hard; try to overcome every obstacle. But do it because you love it, not because you need to win. If you can step away from the idea that winning is all that matters, you’ll be able to control your emotions. When you encounter a setback, you won’t experience self-doubt or inadequacy. Instead, you will actively and creatively think about what you can do next. What is the next step you can take to bring you closer to your goals? It’s hard to do. In modern society we are driven to win, but ironically, the people who actually win in the long run aren’t consumed with winning. They are consumed with the process of trading, honing their skills, and gaining a sense of peace knowing that they have worked to the best of their abilities. They feel satisfied just knowing that they have put in a noble effort.

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June 7, 2006

The ideal attitude is to be physically loose and mentally tight.

  • Arthur Ashe -

Independent Minded and Carefree

Novice traders are often puzzled by their inability to put on winning trades. Everything seems plausible in the planning stages of a trade, but when it comes time to execute the trading plan, they choke. Why? Many times it is because of performance anxiety. When their money is on the line, they worry about how well they will do, and they can’t get the idea of losing out of their mind. What’s the solution? If you can think like an independent-minded trader, you will trade freely, creatively, and profitably.

Going against the crowd isn’t easy. We have a natural human, adaptive tendency to follow the crowd. Following the crowd usually keeps us safe, like fish that swim in schools for protection. The old adage, there’s safety in numbers, is true most of the time. As adaptive as conformity is, however, it prevents us from looking inward for guidance. We have a habit of looking outward and thinking of what we “should” do rather than what we want to do.

It’s amazing how conformist humans can be. Have you ever been at a party and done something you would never think of doing just because everyone else was doing it? It’s hard to break away from the crowd. It is difficult to look completely inward for direction. But, ideally, we should be able to look inward and not care what anyone thinks. For example, imagine going to the financial district during lunch hour, taking off all your clothes, and walking around nonchalantly (believe or not, you can actually see this happen in San Francisco occasionally). It would be difficult to do, but if one were completely independent minded, he or she would have no trouble doing so. He or she wouldn’t care what anyone thought. If only we could always be so secure that we naturally traded like rugged individualists.

Rugged individualists are not driven by money, fame, or recognition. They are resilient and persistent. At their core, their self-esteem is genuine and unwavering. As Dr. Nathaniel Branden observes, “When we appreciate the true nature of self-esteem, we see that it is not competitive or comparative. It is not about making myself higher by making you lower. It has nothing to do with you. It is the joy of my own being.”

Winning traders are extreme individualists. They see trading as an art form. They aren’t concerned with the status and prestige that riches may bring. They love what they do and enjoy the benefits of working for themselves and being accountable to no one. They go their own way and know deep down that they are meant to be traders. It’s not just a job; it’s a calling. The more you can think like an individualist, the more you’ll be trade freely and creatively. The profits will soon follow.

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Thank you very much for this wonderful article.

1 Like

June 9, 2006

A man who suffers or stresses before it is necessary, suffers more than is necessary - Seneca

Background Versus Foreground Stress

Jack suddenly decides to close out a trade, take the rest of the day off, and go to the beach. In hindsight, he ponders the reasons for his unexpected emotional outburst. As he thought back to the moment he closed the trade, he remembered that he hadn’t liked how the stock was moving. It was going sideways, and he just couldn’t patiently wait for it to start moving up. He impulsively closed the position. But Jack was still puzzled as to why he reacted so emotionally. He thought, “Who cares if the stock wasn’t going up? It wasn’t going down, so why not wait?” Sometimes the explanation for an emotional outburst may not be apparent when one merely looks at the foreground. It may be necessary to also look at the background.

How you react to the markets can often be a matter of both foreground and background factors. For example, when we look at Jack’s background stress, his emotional reaction makes more sense. Jack had been trading the QQQQ aggressively for the past month and it was in a steep downturn. The losses he had mounted over the past few weeks were in the back of his mind. He wasn’t sure how he was going to make back the profits he had lost. In addition, he was behind in his house payment a month and the next payment was due in two weeks. And the worst part of the whole thing was that he was keeping these problems from his wife, telling her instead that he was doing great in the markets and that they had no worries. She was planning a trip to the Caribbean for the end of the summer to celebrate his recent success. Looking at what’s going on in the back of Jack’s mind, it’s no wonder that even a minor trading setback could set him off.

Maybe you don’t have as many psychological issues roaming your subconscious as Jack, but you probably have a few issues gnawing at you. And when you do, these background stressors are likely to influence your performance. Also, when daily hassles in the foreground start adding up, you may really lose it! So what can you do?

It is almost impossible to eliminate all background stress, but you can greatly reduce some of it. Consider Jack’s options. He can do a few things to ease some of the strain, like tell his wife about his troubles, borrow some money from family or friends to catch up on the mortgage and postpone the Caribbean trip, but for the most part, Jack’s situation would be greatly improved if he made more money in the markets. This quandary is often experienced by many traders. Finding a way to trade under pressure is vital. The first thing to do is admit that you may be in a little trouble. It takes more energy to pretend that you don’t have a problem than to merely admit that you may be stuck and that you should just admit it and devise a game plan to get out of it. The second thing you can do is to cultivate a detached, unemotional mindset. It’s hard to do when you really do need to make winning trades to get out of a financial slump, but you have to calm down and think creatively. You must focus on the process of trading, even when your trading outcomes do matter. The key is to take it one minute a time. Don’t mull over the past or worry about the future. Just focus what you can do one step at time in the current moment you are living. Once you appreciate each moment, and enjoy the intellectual challenge trading offers, you will calm down and trade more freely and creatively. Finally, always remember to run your own race. Don’t try to live up to other’s expectations, and don’t set unrealistically high expectations. Accept what the markets give you. If you live by your own rules, and accept whatever profits you can take out of the markets, you’ll feel better, trade better, and you’ll take home more profits.

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June 12th 2006

The happiness of a man in this life does not consist in the absence but in the mastery of his passions.

  • Alfred, Lord Tennyson -

Staying Successful

Psychological factors play a vital role in maintaining long-term success. Many people believe they should devote all their energy to achieving one goal. Some traders, for example, believe that they should put all their energy into trading. Drs. Laura Nash and Howard Stevenson argue that this single-minded pursuit can lead to burn out, however. A pursuit of a single goal cannot satisfy all of a person’s complex needs and desires. It is necessary to address both aspects and a few more.

After studying hundreds of high achievers who maintain lasting success, Drs. Nash and Stevenson discovered that they share a set of common characteristics. They make a positive difference and enjoy the process of their endeavors. They also have a complex, in-depth understanding of success, and what success really means. By understanding the factors that produce lasting success among high achievers, you can apply this framework to trading, and strive to achieve long-lasting trading success.

Lasting success is emotionally renewing, not anxiety provoking. It isn’t about pursuing a goal for monetary rewards. Enduring success has four components. First, successful people feel their work is pleasurable; they feel content. Second, they believe that their efforts accomplish something; they feel as if they are mastering a set of challenging skills. Third, they feel they have made a positive impact on people they care about, and fourth, they believe they are creating a legacy; their efforts will somehow help others also find success. Nash and Stevenson argue that unless all four components are addressed, one doesn’t feel that their success is real. They will experience what Drs. Nash and Stevenson call the “wince factor.” That is, you may feel that you are going in the right direction, but you won’t truly feel successful. You’ll be preoccupied with trying to satisfy components of success you have ignored.

How can traders address each of the four components? Let’s consider a few suggestions. First, you must view trading as pleasurable; you must enjoy the process of trading, and be motivated by the inherent satisfaction you receive from trading. You can’t be overly consumed with the potential monetary rewards. Second, you must focus on how trading requires mastery of a challenging skill. You must feel that as you build up your trading skills, you are continuing to master even more difficult challenges. Many traders can easily address the first two components of enduring success. But the second two components, significance and legacy, can be a little more difficult to address. Although one can make the argument that trading is socially significant because traders provide liquidity, many traders find this argument weak. Many traders want to do something more in order to impact society. One solution to the problem is to donate some of their winnings to charities, so that they feel that they are using their talents as traders to make significant contributions to society. Creating a legacy as a trader can also be difficult. Many traders, however, find that they can create a feeling of significance and legacy by becoming trading instructors or trading coaches. By helping novice traders learn the ropes, they feel they can significantly contribute to the benefit of others and feel they are building a legacy by helping train a new generation of traders.

Drs. Nash and Stevenson present an interesting framework for understanding the factors that contribute to maintaining long-term success. As a trader, it’s in your best interest to make sure you feel your trading activities are pleasurable, challenging, significant, and help you create a legacy. If you address each of these issues, you’ll be able to maintain the enduring success you deserve.

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June 13th 2006

Every calamity is a spur and valuable hint.

  • Ralph Waldo Emerson -

Are You Preparing For a Crash?

The market seems to be going down. Is it time to think about gloom and doom? Perhaps. At least some market analysts seem to think that the masses have lost confidence in the economy, and these perceptions contribute to the bleak outlook many traders hold of the future. High interest rates have made many think of running. Many are ready to duck and cover. If the economy is ready for a downturn, it may be time to start thinking like a contrarian.

Is it time to stand aside until things improve? If you prefer to follow the masses, it may be time to stand aside. But if you are a rugged individualist who does not mind going your own way rather than following the masses, it may be time for you to step up to the plate and hit a few homeruns.

There’s no right or wrong way to trade. Some traders prefer safety. They prefer to trade only during a solid bull market where everyone is enthusiastic and the indexes go nowhere but up. But the markets don’t always go up, and there are times when you have to think creatively and go your own way. To trade like a winner, you must think outside the box, guessing what the crowd will do next, and anticipating how the movement of the masses can benefit you. The astute trader knows when to follow the crowd and when to go against it. The crowd is usually right, until the market trend turns. Some analysts are saying that we are in a turning point right now. It may be that an overvalued market is correcting or it may be that the economy is going to head south. Whatever it is, many are planning for a crash, maybe not a big crash but a little one at least.

The challenge is deciding if we are in a turning point, and if we are, developing a trading plan to capitalize on it. How do you do that? A contrarian thinks creatively. For example, during the Great Depression, radio became a big hit. People didn’t have money to go out on the town, so they stayed home and enjoyed “free” entertainment on the radio. If you are a creative trader, you must anticipate which stocks will go up as a result of an economic downturn. Obviously, in 2006 radio isn’t going to be the hot, new industry that suddenly makes the big profits that bolster stock prices. But there will be some new industry that is going to be the next big thing. If you think outside the box, you can identify sectors that will move upward in the future.

This all sounds great in theory, but in practice, it is difficult to anticipate which stocks will move upward in the future. How can one predict the future without a crystal ball? It is almost impossible. All you can do is to make an educated guess, but at the same time, be ready to admit that you may be wrong. Whatever you decide, however, you must temporarily have full confidence in your method, put money on the line, and act decisively. Sometimes thinking independently is lonesome and scary, but in order to be on the winning side, you have no other choice but to go your own way. So think optimistically. Do not run away like most people. Give it your best shot and think of ways to make a profit while the masses are fearfully and hopelessly getting ready for a crash.

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