This is a Guest Post by AK of Fallible
AK has been an analyst at long/short equity investment firms, global macro funds, and corporate economics departments. He co-founded Macro Ops and is the host of Fallible.
AK speaks with Tyler of Macro Ops all about how important it is to avoid overtrading in the market. We also cover tactics you can use to prevent yourself from making this mistake. Make sure you watch the video above for the full conversation!
You have all probably heard that you need to treat trading as a business if you want to be successful. But what does this actually mean? Instead of letting it be just another meaningless phrase, let’s take a deeper look to fully understand it.
The ideas behind “treating trading like a business” are very important to get you on the right track and after we have taken a look at the different aspects, I am sure you will get some ideas on how to take your trading to the next level and treat it more like a business.
Every business has either physical/virtual products or services to sell in order to generate profits. The business, hopefully, knows everything there is to know about their products, where it is from, how it is built, what the benefits are, what the potential struggles are, how to keep improving their product, what their customers want, and how to use it in the best possible way. The business must be the #1 expert in what they are offering. Obviously.
As a trader, your setups and your strategies are your products. Your setups are a set of rules and triggers to help you find potentially profitable trades. Whether your setups consist of classic patterns, indicators, pure price action or a combination doesn’t matter here.
What is important is that YOU must be the expert in your setups and patterns. You must know every little detail, when the setup works best, during which market conditions it doesn’t work, in which markets and timeframes to use it, how to improve the odds, how to set stops and pick targets, when to move stops and how to manage trades, when to add to a position or take some off the table, when to stay out, etc.
Looking back, I now realize that what allowed me to finally establish consistency into my trading was not a better trading strategy or a different method, but something I never expected when I started out as a trader.
In today’s society where the average attention span has dropped to 8 seconds, where 140 character tweets seem too long (#TLDR) and people skip YouTube videos after just a few seconds, we easily lose the connection to ourselves…
The concept of “self-awareness” has a woo woo ring to it and most traders will not listen to you if you start a trading conversation by referring to self-awareness. However, if you really want to make this work and if you want to finally realize your goal of becoming a pro trader, you have to listen and I am 100% certain that you will be able to relate to my story as well.
Unfortunately, most people, and especially traders who are often numbers driven and very rational, associate the term self-awareness with something spiritual and connect the wrong assumptions with it. This is very unfortunate because I have never met a successful trader who is not also very self-aware. You’ll see soon that self-awareness is something very different from what you believe it is.
There are seven things that I believe are pretty common in the successful traders I have known, read about, and seen in action. Whether it is stock trader Nicolas Darvas in the sixties, commodity trader Ed Seykota in the twentieth century, or Jesse Livermore at the turn of the last century, many of their principles hold true to this day. The closer I get to these principles, the better I trade. The farther I stray from them, the worse I do. In trading, discipline pays. Adopt these seven habits of highly successful traders.
Over 90% over traders will end up losing money in the stock market. Chances are if you are reading this you are probably loser in the Market. In order to encourage you to quit before you lose all your money, I created a list below to make you realize you are terrible at trading and should probably find another dream to pursue.
A profitable stock trader’s success is not based on picking the right stock at the right time. There are dynamics that determine success other than entries and picks. Millionaires aren’t created because they have a magic system for trading through all market environments. There are a couple of things that influence profitable trading, and they could surprise you.
#1. Having the right mindset to win; psychology.
#2. Managing your risk exposure on each trade; risk management.
No system will work if you can’t trade it consistently. You must stick to your method when you are losing. Whether it’s to keep taking entries, to go to the sidelines and wait for volatility, or to settle down and wait for a trend to emerge.
You must stay in the game and be ready to take your entry signals. The primary reason that traders lose money is that they give up when things get tough because they don’t have faith in their system. A trader must persevere, never quit learning, never quit working, and always be ready to trade.
Having worked with highly skilled traders of financial markets at a variety of money management organizations, I’ve noticed one distinctive marker of success: the great traders leverage one or more great strengths in their personalities and in their information processing. Those strengths differ from one exemplary money manager to another, but in each case some distinctive strength is evident.
One portfolio manager, for example, is introverted and highly analytical. He works from an enclosed office that creates a quiet, distraction-free environment. His trading draws upon patterns in high frequency data not tracked by the vast majority of market participants. When those patterns appear, his software enters orders in the market, essentially eliminating any subjective elements from his decision-making. This automation frees him up to conduct new research for much of his day. By leveraging his analytical capacities and emotional self-control, he has created an approach to trading that has been successful for over a decade.
A second portfolio manager is quite different. He is quite extroverted and works on an open trading floor with a team of junior traders. He watches markets closely and continually communicates with market participants on the buy and sell sides. He is unusually skilled at distilling what others are thinking and feeling, particularly as markets are moving. He explains that his “edge” in trading is his ability to feel the fear and greed of others and exploit the biases in decision making that result from these emotions. For example, he detects unusual bearishness and risk-aversion among traders prior to a central bank meeting. When the meeting produces little surprise, he quickly takes the other side and accumulates a large position. By leveraging his social competencies, he also has crafted an approach to trading that has yielded long-term success.
The mind of a trader
Knowledge has to be improved, challenged, and increased constantly, or it vanishes – Peter Drucker
We couldn’t agree more, especially in the business of stock trading; the more you learn, the more you earn.
As such, much of the knowledge we share on this blog focuses on recapping technical chart patterns of past stock and ETF trades that led to successful, profitable outcomes.
However, equally priceless lessons can be learned by walking through losing trades that did not work as expected.
In this article, we share three insightful, psychological tips (or reminders for experienced traders) from our recent losing swing trade in $SQQQ.
Grab your notebook and continue reading to improve your success as an equities trader…
George Soros, founder of Soros Fund Management LLC
Traders tend to be overconfident and discount what they don’t know about the market and individual securities. They see patterns instead of random noise. And they have a hard time admitting their losses and focus too much on gains.
In summarizing the science of behavioral finance, Statman says we’re pretty much hard-wired to consistently make these mistakes — and lose money. Since we tend to think of ourselves as better than average on most everything from driving to investing, it clouds our rational judgment. A body of research has found this to be particularly true when it comes to amateur stock traders.
Statman said that average returns of frequent traders “lag those of infrequent traders and the average returns of infrequent traders lag average returns of investors who abstain from trading.”
I do not think traders start making money until they mature and understand the big picture. I have been on this journey myself and went through the wild excitement of the internet bubble, day trading and the experience of making a few hundred dollars in a few minutes the first time and the delusion of the get rich quit trading scheme and the expectations of doubling or tripling an account within a year. The game of trading has large amounts of money flowing through the markets that we want to capture for our accounts and can give rise to emotions that make us act immature through the delusion of ignorance, ego, and greed. We can easily become unrealistic and go down the wrong road, it is crucial for success that we stay on the right road.
1. Quit believing all the riches of people promising that you will be rich if you just sign up for their newsletter, seminar, or join their premium service. Look for realistic resources to learn from. The more hype the more the probability of a service being a scam.
2. Quit thinking you are going to double or triple your account in less than a year, even if you do that just means in almost all situations you are taking on too much risk. If you can achieve a 20%-25% annual return then you are among the best traders in the world, these are close to the annual returns of legends like George Soros, Warren Buffet, and Paul Tudor Jones.