Being in control…

[rowes]

Hi,

Handling the emotional side of trading, I have read about this in a few books and have experienced it also with some earlier paper trades. I found that once I had taken a position and even though I had read certain things in books about what not to do panic and or greed seemed to override common sense and I would make a stupid decision. i’m curios how other people have overcome this as so far with me it seems to be one of the biggest hurdles to overcome. I intend to put my real money in the market soon but want to be as best prepared as I can. Any tips or advice would be greatly appreciated.

Cheers
rowes

[professor_frink]

Hi,

Handling the emotional side of trading, I have read about this in a few books and have experienced it also with some earlier paper trades. I found that once I had taken a position and even though I had read certain things in books about what not to do panic and or greed seemed to override common sense and I would make a stupid decision. i’m curios how other people have overcome this as so far with me it seems to be one of the biggest hurdles to overcome. I intend to put my real money in the market soon but want to be as best prepared as I can. Any tips or advice would be greatly appreciated.

Cheers
rowes
I think you need to find a way(through backtesting or papertrading,etc) to have complete confidence in whatever setup you are looking at. And by that I don't mean being confident that the trade will be a winner, I'm referring to stop loss/profit target placement.
When you are putting on a trade, you should be able to explain to someone else exactly what you will do- this is my setup to enter a trade, my stop is at x, which is below where the setup has failed, I will take profit if it trades at y(if you use profit targets), when price is between x and y, I will use z method to ensure I make a profit.
Having a stop that works with whatever setup you are looking at, and combining it with sensible position sizing will put you in a much better position to eliminate any emotional problems you may have.

Of course, you need a way of figuring all this out- the more

[zzkazu]

rowes,

have you read "Trading in the Zone" by Mark Douglas. If not might be a good read to help prepare you..

zzkazu

[yogi-in-oz]

:)

Hi Rowes,

Maybe this chapter on "trading the markets or emotions"
may help you some, as well ..... free download at:

..... trading the markets or emotions??? (http://www.authorsden.com/adstorage/11344/TradingPlanWozzat2003 .pdf)

have a great day

yogi

:)

=====

[coyotte]

rowes,

have you read "Trading in the Zone" by Mark Douglas. If not might be a good read to help prepare you..

zzkazu

A MUST read imo

But No.1 do not become ATTACHED to any share.
It is simply shelf stock, that you have like a retailer bought to resell @ profit

No 2: Do not form a opinion about any share or method -- ie: saying to yourself or others that this share WILL do this or that because of THIS.
Once you form a opinion, you then will tend to defend that opinion and not your position.

Better to go along the lines of this share MAY do this because of this -- U have then only commited money and not yourself.

No3: Remember at all times it's a game of PROBABILITIES

If you get your head around that everyday that a position is open you are actually placing a NEW bet that it will move your way ----- the size of the BET is your current STOP --- let the SP fall below that and you have increased the ODDS against yourself.


Cheers

[swingstar]

1. Understand that there are never any certainties.
2. In doing so, you'll never risk more than you can afford to lose.
3. Have an edge--a methodology/plan that makes you money overall.
4. Have a plan for every trade. Know what market activity will invalidate the reason for making the trade (this will be your initial stop).

[stevo]

rowes
What works for me is having a set of rules derived through back-testing.

I don't make any decisions - other than to follow the rules. To break the rules is unthinkable. It would be like driving on the wrong side of the road!

I have the rules coded in a system in Amibroker. The chart for each trade shows the buy signal and (when it triggers) the sell signal. I also have rules in terms of position sizing.

This mechanical approach to trading suits me.

[theasxgorilla]

Hi Rowes,

You have to continue trading (without over trading) and relentlessly continue to educate yourself and refine your methods of analysis and money management. Over time there will be less and less of your "gut" in the trade.

It's a simple thing and you may already do it, but you should trade out of a separate account and discipline yourself not to equate your trading money with consumption. ie. "stoploss for this trade will see me lose maximum $1,000. $1,000! ****, I could get a return flight to Thailand for that money!" etc. etc.

[coyotte]

Actually Rowes

To ask this Question is showing you that you are not as yet ready to trade.

The first hurdle to over come is your mindset


imo drop the paper trading but keep your position sizes modest.(large enough to sting but not do any financial damage)
and see how you react to a few adverse situations.

Remember the battle is with yourself and not the market.

Cheers

[theasxgorilla]

As you venture out into the world of trading with real money something else you might like to consider is rate-limiting your monthly trading account draw downs (aggregated account losses).

For example, if you begin with $20k and you determine that you will risk 2% of your account size every trade, thats a $400 maximum draw down per trade.

If you rate limit yourself to having 2% of your account at risk each month then you can place one trade per month. Before you can place your next trade one of two things must happen. The first trade must be in profit and your trailing stoploss adjusted to breakeven, or you must reach the beginning of the next month.

2% is an arbitrary figure. You can adjust it to suit your situation.

[MichaelD]

1. Keep paper trading until it becomes dull and boring. Just keep doing the same things over and over again until it's totally routine and emotions no longer come into play since each individual trade just blends into the overall mish mash.

2. After you reach this point, start trading with small amounts of capital. Limit your exposure by;
- risking a very small % of capital per trade (eg 0.25% risk)
- limiting yourself to only 1 or 2 positions open at a time
If you wonder when you put on these real trades why you even bother with such small position sizes, then you've got the sizes about right.

At this point, no matter how smooth and routine you got with paper trading, your emotions will come flooding back to impair you. After all, it's now REAL money that's on the line. Fortunately, since you're trading so small, the damage done to your trading capital will be minimal but the lessons learned will be invaluable.

In time, you will be able to scale up unemotionally.

[rowes]

I really appreciate you all taking the time to reply, Definitely the idea is to be detached so to speak with positions and be more clinical/methodical with decisions and to STICK TO THE PLAN.

My last few paper trades have been quite successful but i am also aware that when i put the real money in it will be a completely different ballgame.
I am very excited about taking the plunge and a little apprehesive as well.
I do have a structured plan in place where i have my entry, stoploss, profitlocking, whatiffactor in place, it would appear just not the discipline to stick to it. (Am working on that but am happy that i have picked up on this now and not later ,"Trading in the Zone" by Mark Douglas is my next book on the list for sure)

Thanks for the advice.

[Lui]

I really appreciate you all taking the time to reply, Definitely the idea is to be detached so to speak with positions and be more clinical/methodical with decisions and to STICK TO THE PLAN.

My last few paper trades have been quite successful but i am also aware that when i put the real money in it will be a completely different ballgame.
I am very excited about taking the plunge and a little apprehesive as well.
I do have a structured plan in place where i have my entry, stoploss, profitlocking, whatiffactor in place, it would appear just not the discipline to stick to it. (Am working on that but am happy that i have picked up on this now and not later ,"Trading in the Zone" by Mark Douglas is my next book on the list for sure)

Thanks for the advice.

Another thing is .. adhere to your investment risk profile.
Me too i m about to leap into trading with my real money, my self managed super fund and don't want to loose the money to retire on. I went thru the same pondering as you have and went to see a financial advisor who prepared me a risk profile. Apart from the timing of buying and selling stocks you also need to adhere to your investment risk profile, otherwise you would take on more risk than you should.
I come across this bit of info below that seems relevant. I m investigating it. You should have a look too.

http://www.google.com.au/base/a/1487459/D12474481860908604327

[cuttlefish]

Money management will help to ensure control. In its simplest form that means have a budgeted amount that your prepared to lose on trades (the generally touted figure is 2% of capital).

On any trade set two stops - the 'trade' stop - that matches what you think/hope will go on with the trade - and the money management stop - the level that protects your capital via your money management criteria. The trade stop might be rubbery (i.e. you might adjust it for emotional reasons though in theory you shouldn't) but don't adjust the money management stop for any reason.

The first rule to making money is to not lose money. Don't ignore signals - both fundamental and technical. If having difficulty battling an emotional attachment to a trade, and the position size is large enough - you can always lighten rather than selling out completely - this applies both to taking a loss and to taking profits. Sometimes lightening will also help to achieve the same effect as going flat - it will ease the emotional pressure and let you look at the trade more objectively and you might find that you decide to exit it altogether anyway.

[cuttlefish]

Just to clarify the money management side of things and the 2% figure I mentioned above:

Lets say your total trading capital is $100K*

2% of $100K = $2000

So on any individual trade you're able to lose $2K but no more.

Lets say you buy 10,000 shares in ACME at $1.80 per share ($18,000 dollars worth). Your money management say's you can't afford to lose more than $2000 on any trade. $2000/10,000 = 20c - so your money management stoploss would be $1.60 a share. Now if your trading strategy comes up with a lower stop loss then you need to allocate less capital to the trade in order to satisfy your money management criteria.



(*I'd recommend using an unleveraged figure for this amount- i.e. 2% of your unleveraged capital)

[omad]

I really like the way Nick Radge looks at money management, working backwards from the risk to determine how many shares to buy. Using Cuttlefish's example;

$100k account (no leverage)

2% risk = $2000

You want to buy ACME at $1.80 and looking at the chart or however you determine where to place your stop, you decide to place it at $1.65, 0.15c risk. Now divide your total risk ($2000) by your stop loss amount (0.15c) to give you the amount of shares to buy.

2000/.15=13333 shares or $24000

Pretty much the same as Cuttlefish wisely suggested but you are working backwards from your risk to determine position size.

If you are trading CFD's for leverage, say 10%, the calculations are exactly the same, only instead off using $24000 you only need to use $2400, but you are still only risking 2% ($2000) of your total account.

So this is not really anything new but hopefully someone will get something out of it. I personally find having solid money management rules as part of my plan eases the emotional pressures.

[theasxgorilla]

On top of this, for what it's worth, I recommend to any beginner that they decide on some method of rate-limiting monthly losses.

With $100k and 2% exposure per trade you could let our your entire line ($20k x 5) and lose $10k in a very short period of time. How much, as a beginner or otherwise, do you lose in what period of time before you call it quits for a while??

[cuttlefish]

Guppy offers sensible advice in one of his books about splitting up the capital and allocating part to blue chips/low risk trades (yeah we all know blue chips being low risk is a myth but it has an element of truth to it) and a smaller proportion of the total capital to more speculative trades. That would *hopefully* reduce the risk of 5 unlucky picks.

Also as well as limiting the amount of loss on a trade, having some rules about a maximum total amount of capital that will be allocated to any particular trade is also important because fat tails can hit any of them and blow the money management out of the water. i.e. if allocating $20K to a trade - even though theoretically money management is limiting the loss to $2K the acknowledgement that an unpredictable event could cause loss of the entire $20k allocation must also be built into the plan.

I prefer to decide the amount of capital to allocate to trades based on how I perceive the risk profile of the trade - so won't automatically allocate the full amount that money management would allow. (I use fundamentals heavily in my trading decisions, then use charts/volume/price/liquidity as secondary tools - but a combination of all of those components will be taken into account in assessing the risk of a trade).

[tech/a]

On top of this, for what it's worth, I recommend to any beginner that they decide on some method of rate-limiting monthly losses.

With $100k and 2% exposure per trade you could let our your entire line ($20k x 5) and lose $10k in a very short period of time. How much, as a beginner or otherwise, do you lose in what period of time before you call it quits for a while??

This is exactly the point.

Before trading you should know ALL these figures based upon the way you trade---whether that be fundamental OR technical OR a combination of both.

Win loss ratio
Most consecutive losses over say 5 yrs
Average $ return.
Reward to risk ratio.
Initial maximum drawdown
Expected peak to valley drawdown over say 5 yrs.
Average winning trade/Average losing trade.

Seriously without this information all your doing is this sort of thing---


That would *hopefully* reduce the risk of 5 unlucky picks

You cant trade on HOPE or LUCK.
Your putting your hard earned $$s into this Business.
Pretty well all traders are under prepared so they at BEST underperform.

Reading copious amounts of theory tested or not wont guarentee consistent profit.
Douglas/Van Tharp/Weinstien/Guppy/Radge----------I'll guarentee ALL of these traders WILL know the above.

They dont trade blindly. Once your money is in the market YOU HAVE LOST CONTROL of it. The markets got control---the ONLY control you can have is if YOUR TRADING is fitting within the known parameters of the way your selecting to trade.

If you dont have any "Known Parameters of the way you trade"
then you have absloutely NO control over anything.

The MOST important part of consistantly trading profitably is missed by the majority more concerned with jumping in the River than what they are going to use to stay afloat in it----and most importantly wether it WILL ACTUALLY STAY AFLOAT

Most use a boat but pretty well all boats havent a safety report---most find out they are full of holes when its time to bail out!

[insider]

They say "when you get nervous, just picture everyone naked"... this never worked for me... What works for me is new experiences... What?! well when you collect enough experiences you will gain more control over the emotions so if you're nervous at the moment just start paper trading and get experience... and well 'Michael D' did said it all...

[barney]

Actually Rowes

To ask this Question is showing you that you are not as yet ready to trade.

The first hurdle to over come is your mindset


imo drop the paper trading but keep your position sizes modest.(large enough to sting but not do any financial damage)
and see how you react to a few adverse situations.

Remember the battle is with yourself and not the market.

Cheers

Howdy Rowes (and Coyotte),

This is good advice Coyotte, ..... (Rowes) you need to know when you are psychologically "ready" to tackle the market .......... I've been on the worst of both sides of this ...........if you are not sure you are ready to handle the psych. pressure of a difficult situation, you should be questioning whether you should be entering the position at all ! .......... Some people imo are just not cut out for trading , and should simply consider "value investing" over the medium longer term ............ I am still trading (even after some extreme losses) , but I do this because I believe I am developing the mindset to cope with the pressure ........... but, if you are suffering "stress" while paper trading, I would suggest a longer term investing strategy may suit you better ...........Only you can sort this out, but don't risk too much capital while you assess your "situation" ....... All the best, Barney.

Great advice here from many so far

[cuttlefish]

You cant trade on HOPE or LUCK.

All trading is based on hope and luck. That a trading plan is based on historical empirical evidence to the otherwise doesn't change that fact - back testing and trading plans are simply an attempt at improving the odds in the hope and luck game.

Which is why rules about protecting capital are important - just in case the luck (no matter how carefully calculated) runs out.

[tech/a]

That a trading plan is based on historical empirical evidence to the otherwise doesn't change that fact - back testing and trading plans are simply an attempt at improving the odds in the hope and luck game.

The more effort and research I place into these areas the LUCKIER I GET.

[coyotte]

The reasoning i can not follow is that some Analysts will condemn Indicators because they are based on "past results", yet go ahead and build a trading plan (SYSTEM) based on "past results".

This is the mentality that "racing system" developers used to thrive on.
As Don Scott points out in his book Winning any method built "around/fitted" to past STATISTICS will eventually fail when the condition/conditions change --- by the time the developer has gathered and analysed the data then developed the plan/system the conditions are most likely all ready in their final stages.

Scott maintained that the KEY to development was to find the COMMON DENOMINATOR.



Cheers

[theasxgorilla]

As Don Scott points out in his book Winning any method built "around/fitted" to past STATISTICS will eventually fail when the condition/conditions change --- by the time the developer has gathered and analysed the data then developed the plan/system the conditions are most likely all ready in their final stages.

Scott maintained that the KEY to development was to find the COMMON DENOMINATOR.

This is why my current area of system development at the moment is geared more towards economics rather than analysing indexes or individual shares. There have been combinations of economic conditions which historically have been positive for the sharemarket (eg. high growth/low inflation). That is the common denominator that you speak of. As those factors change I am hoping that it can give a fore-warning answer to the question, "is this market the place to be right now?".

[tech/a]

Coyotte.

A few things.
Firstly lagging indicators (in my view) are fine for positioning a stock/index/commodity in a pre trade condition. For trade execution I use price itself combined with pre trade conditions being met.

Entry is the least important part of a trade the longer term the trading method is.
It becomes more important as the timeframe shortens. Very short term methods can and are based purely on NOW price action.Swingtrading/Support resistance methods,Elliot,Steidlmayer etc.

True all methods will run into conditions not found in the sample of testing,a situation that ALL traders will have to deal with at the time it occurs,wether trading a system or in a discretionary manner.

If you can get your head around the following it may help.

"Systems are based around a vast number of singular trade events the positive and negative results of individual trades have very little effect on the short term success of the system or method. So in themselves they are only a snap shot of an overall event---the event being the positive performance of the trading system or method.

During the course of trading the system the overall performance will move from over performance at times to underperformance at other times. However whilst the method which is a singular trading event in itself---overtime it will win or lose---just as any singular event within it--

Each trade within a method OR system has a criteria which governs Entry/Stop/Exit/Moneymanagement rules,their success or failure is governed by their performance relative to those rules.

So to is a System as a singular event.
It has a Blueprint and like an individual trade event if the systems or method falls outside the blueprint it can be seen as failure---and yes it can occur.
However that failure can still mean that the performance of the method was well over the performance of random selection or say an Index benchmark.

Its failure in a situation (which once found can be included in refining of the method) can be alerted well before ruin--purely because the parameters in the Blueprint are clearly known."

As an example.
Maximum Peak To Valley drawdown of a method maybe 20%,is a system or method found itself trading at a 23% P/V drawdown all system trades would be terminated with a realised loss from peak open equity of 23%.

Still profit and far from ruin.

Same for initial drawdown.
If you start a method with a maximum say 12% initial drwadown then find it at 14% your out! 14% loss of capital but not ruin.

I follow 4 systems all have performd within their trading Blueprint over the last 4 yrs and if and when they all fail due to outlier conditions not seen in testing all will still be very profitable.


"is this market the place to be right now?".

This question is answered when a system or method falls outside its blueprint.
Once breached then the answer is NO.---relative to the particular trading system method your trading.
Until an event can be found that has a negative effect outside those which were included in any test period it cannot be forseen and or included in the design. Once it has then it can be included.

[coyotte]

This is why my current area of system development at the moment is geared more towards economics rather than analysing indexes or individual shares. There have been combinations of economic conditions which historically have been positive for the sharemarket (eg. high growth/low inflation). That is the common denominator that you speak of. As those factors change I am hoping that it can give a fore-warning answer to the question, "is this market the place to be right now?".


I could be wrong but i don't think this is what Scott was referring to .
What i think you will find he was was referring to to is similar to below.


Thoroughbred Racing has common factors in each race :
Class -- Weight-- Distance

Stock Analyst (T/A) has common factors in each stock :
Price -- Volume -- Trend


What Scott done (Worldwide, Racing is now based on this) is to take Weight as the Factor which could be used to bring everything else to a level playing field --- all other factors where given a WEIGHT adjustment .

It was there for decades but it took Scott to see it and nut out how to apply it.

As with Stock Analyst now at the time there was dozens of ways to analyis , there where even Patterns , Trends , Cycles -- this made them all redundant.



Just another approach Tech/A -- some future Wizz Kid will eventually do a Don Scott .


Cheers

[tech/a]

some future Wizz Kid will eventually do a Don Scott .

There are offices full of them as we speak.

Working for banks,Fund managers,Financial planners etc.
University graduates with more degrees than a heat wave.

On the Domestic front
TOP DOWN ANALYSIS has been around for years.

Its is a type of ranking.

Find the strongest Index then trade those stock performing the strongest in that index.

I have a number of searches which can do this using metastock.
qualifying outperformance can be done in many ways.

As Yet Ive not found an edge with this approach as by the time you can identify the outperformance the opportunity to take advantage of it has past.
If the outperformance continues then you can take advantage of it.

What you need then is continuing out perfomance to benifit.