Ana_Idkit

Cross ref www.tradingsuccess.com/blog
Mon 6 Jul 2009
Why ALL The Habits of Success are Critical

Posted by ray under Psychology
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BarroMetrics Views: ALL Why The Habits of Success are Critical

I call the three essential elements for long-term trading achievement “Habits of Success”:

Winning, Psychology (60%) x Effective Risk Management (30%) x Written Trading Methodology (that has an edge, 10%) = $UCCE$$

I received a post challenging my view. The author took the position that all that was needed was a Method with a high win rate (above 70%) that was profitable.

Readers of this blog know I take a diametrically opposite view.

I believe that while all three elements are essential, the least important is the method. The reason for my belief is found in the nature of the markets. At some point all methods encounter a period when market conditions do not suit the plan – what I call the Ebb State. During this phase it’s not a question of ‘if we’ll take a loss’ but ‘how much that loss will be’.

The effectiveness of our psychology and risk management will determine how large the losses will be. If we can keep them small during this phase, then we encounter the phase where we can do no wrong (Flow State), we’ll have a great bottom line; if our losses are large we may lose all our capital before we encounter the Flow or the profits from Flow may be enough to make up the losses.

I believe that the implementation of all the habits is so important that I hold the Habits of Success seminar at a nominal cost. At least it does not cost participants an arm and a leg if they decide that the habits are beyond them.

In answer to my correspondent, I could point to most trading catastrophes: Long-Term Capital Management, Sumitomo, Orange County (for a complete list of losses over US$10,000.00 go to: http://en.wikipedia.org/wiki/List_of_trading_losses): the failures occurred because of a failure to contain losses. But I can point to an even more interesting experiment.

With the help of a broker friend and 23 willing volunteers I began an experiment June 1 2009 to test my ideas about the importance of the Habits of Success. The volunteers had accounts ranging from U$10k to US$175k; none of them had shown a consistent profitable trading record. I agreed to provide entry, exit (stops, profit exits etc) and position sizing based on their account sizes. (The smaller accounts had to trade CFDs on futures). In return they agreed to execute only in accordance with my instructions. The experiment terminated on June 30.

In the testing period the recommendations showed a small profit in the two entries for the DX and a scratch result for the ES trades. Since the method was proven (and if all that is needed to succeed is a robust method), then the attendees ought to have shown similar results. Nothing could be further from the truth.

* One trader lost over 30% of his account. The only profit he made was on the first DX entry at 79.97. Thereafter his ES and DX trades bore no resemblance to the advice.
* The others all broke discipline(i.e. they more or less followed my instructions but did not follow the advice to the letter) and the breaches all resulted in greater losses than otherwise would have been the case.

The experiment is the best counter argument to focusing only on method. The point I am making is if you believe that all you need to succeed is a robust plan, tuck your money in your pocket and walk away from trading. Over the long-term your most likely result will be failure.

Available at http://LovingHut.com.sg

or Internationally at

http://lovinghut.com

We need to live wisely and in the present and Dr Janice Dorn has put out a timely post:

“The face you wear—the thoughts you bring—The heart may heal or break…” – Daniel Clement Colesworthy

Today, I had to admit a 35-year-old trader to the hospital. He complained of crushing substernal chest pain and collapsed at his trading desk.

He will most likely survive this horrible event. However, it is pretty clear that he will never be the same. No one gets out of this type of situation unscathed. The trauma will pass, and the immediate stress will dissipate. However, anxiety and post-traumatic stress will remain with him for years to come.

How does something like this happen? He was overweight and not in good physical health. Moreover, his stress level had been climbing over the past few months. He was trading badly and then began over-trading and taking larger positions. He was making larger and larger “tweaks” to his trading plan, and there was little or no discipline in the way he was acting, both during and after market hours.

This is never a good sign for a number of reasons, not the least of which is the drawdown on financial, mental, energetic and physical capital. This includes a “revenge it is” attitude that seemed to be setting in. You know what I mean: “I have to do something to get even with the market! I have to get back what I lost.” Again, not good. He had never seen this type of activity with some large positions that went heavily against him. The volatility of this week’s market was too much for him.

We had been working for a year to start a program to modulate his involvement with the markets and get him into a regular exercise program—weights, aerobics, yoga. He had also been working to improve his terrible diet.

We were developing a trading plan that allowed him to enter orders and stops mechanically so he would not be in sedentary stress all day, every day while watching the markets. These were all great ideas. Unfortunately, he procrastinated, agreeing to make the changes to his lifestyle, but, in the long haul, he did nothing but talk and ended up with a heart attack.

Living well and trading well are about commitment, execution, discipline and timing.

The best laid plans! He had the right ideas about changing his life, but he dragged his feet. He was over-executing his trades, getting sloppy and looking for the really big “30-40 bagger.” His drive for money got in the way of his life and health. For whatever reason, he could not follow through. He was literally falling apart. He allowed himself to break his heart, putting himself in cardiac intensive care.

I am sending every ounce of healing energy and prayer I have to him tonight and ask you to do the same. What good are all the ideas, hopes, dreams and plans you make to get right with yourself if you cannot start right now to do what you must? What is really important in your life? What are your priorities? How will you be remembered?

Start this instant to make the change you want to see in yourself. Go to the mirror and ask yourself “What is worth dying for?”

Insanity is doing the same thing over and over again and expecting different results. You, and you alone, have the power to take control of your life and of your trading. Do it now, before it becomes just another idea sitting around in a box somewhere.

“The secret of health for both mind and body is not to mourn for the past, worry about the future, or to anticipate troubles. The secret is to live in the present moment wisely and earnestly….” – Buddha

How important is it for you to be right? Let’s say I could guarantee that you would make money by the end of the year—lots of money—but you would probably lose money on 90% of your trades. Would you like that? Could you tolerate that? Would you accept that? Most people would probably answer “no” to all three questions. And if that is you, you probably are denying yourself the opportunity to make money simply because being right is more important than making money.

Some of you might be saying, “How could you be wrong 90% of the time and still make money?” The solution goes back to the golden rule of trading, “Cut your losses short and let your profits run.” Let’s say that 90% of your trades lose money and that your average loss is $100. On the year you make 100 trades so you end up losing 90 of them for a total loss of $9,000. However, let’s also say that your average winning trade is a big R-multiple. It’s an R-multiple of 100 or a $10,000 winner. You have ten of those in a year, so you end up making $100,000 on your winning trades. If you subtract your winnings from your losses, you’d end up with a profit of $91,000 at the end of the year. You make $91,000, yet 90% of your trades are losers.

My guess is that 99% of the trading population could not trade a system that would produce those kind of results. The reason is because they don’t get to be right enough. They have too many losing streaks. They have losing streaks that are longer than five in a row. Most people cannot tolerate long losing streaks. When they occur, they totally abandon what they are doing. In such a system you could easily have 25 consecutive losses. At that point you become certain that your system is broken, and you try something else.

Let’s look at the opposite end. Suppose you got to be right 90% of the time. Suppose your average win was $100 and that your average loss was $2,000. This means that you’d have a total of $9,000 in winnings and $20,000 in losses. You would lose $11,000. Would people trade that system? Yes, they would. They would probably trade it for a number of years until they went bankrupt. Why? Because they get to be right most of the time and that is very rewarding.

You might be saying, but how could people possibly tolerate losses of $11,000 after 100 trades? It is easy; they turn the losing trade into a long-term investment in their mind and say, “it’s only a paper loss.” For example, I’ve had workshop attendees who were probably way above average in terms of sophistication. However, I asked them to raise their hands if they had an investment in their portfolio that was only worth 50% or less of what they paid for it. Eleven people raised their hands—over a fourth of the class. And my guess is that among the overall population of investors, most people are sitting on a number of big losers, hoping they will come back. Why? Because they cannot stand to be wrong on an investment and they are waiting to be right on those losing trades.

What is the cost of having losing investments in your portfolio? It’s major. First, you are using valuable capital up with nonproductive investments. Second, you are missing many good opportunities.

Why Being Right Seems So Important

There are two primary reasons why we focus on being right. First, we are conditioned to be right by the school system. Second, everyone in the trading industry gives people what they want—ways to be right—which tends to perpetuate the myth. Let’s take a closer look at these two reasons.

First, we are conditioned by the school system to the importance of being right. In school you are taught that there are right answers and wrong answers. What is a right answer? If you learned how to survive in the system, you learned that a “right” answer is whatever the teacher wanted.

Your performance is measured periodically through tests in which you are asked to pick the right answer. If you cannot get more than 70% right on the test, you are labeled a failure and ostracized. Your humiliation might even be in public in front on all your friends. And if your humiliation isn’t public, it certainly is semipublic. Your “poor” performance goes home in the form of a grade with a comment that “Johnny is a little slow or Johnny is bright, but he just doesn’t try.” Usually, at this point, the most important people in your young life get involved—your parents.

Even if you understand the system and work hard to know the right answers, you still might be taught that your performance is not good enough. It usually takes 94% right to get an excellent grade. But how many children go home and show their 94% test to dad only to get the response, “Why didn’t you get 100%?”

Thus, it is no wonder that traders want to be right all the time. And being right usually costs them dearly in terms of profits. Whether you’ve been through 20 years of schooling and have a graduate degree or less than 10 years of schooling, you still have the same conditioning about being right.

The second reason people want to be right is that service providers for traders and investors feed the bias to be right. First, software vendors tend to provide systems that can be highly optimized. Once you’ve optimized your trading, you can lay a line over the prices and see exactly where you should have bought and sold. It seems obvious. However, the same optimized system does very poorly when applied to the real world.

The Solution: Expectancy

What you must do now that you are trying to survive in the real world is learn about expectancy. My book, Trade Your Way to Financial Freedom is one of the best sources I know that covers this topic. By definition expectancy is how much you can expect to make, on the average, over many trades. Expectancy is best stated in terms of how much you can make per dollar that you risk. I cover this important topic as well as detailed instructions on how to calculate expectancy. My objective is to show you how to incorporate expectancy into a successful, profit generating trading system.

by Van Tharp

If you think about Peak Performance trading you could look at a market genius and how that person approaches their craft. However, you could also look at a genius from some other area and notice if some of their behavior could be usefully applied to trading. In that regard, I’ve been thinking about how Einstein would think about the modern markets. I learned that one of the things Einstein did so well was to dissociate. Which means he used imagery to step out of his body and assume another perspective.

This is an exercise in my Peak Performance Course for Traders and Investors Try it for yourself. During each part of the imaginary adventure that follows, notice what your thoughts are and what your experience is like.

Here is the first imaginary scene. See yourself (your whole body) on a movie screen skydiving. See yourself in the airplane with your parachute attached. Now see yourself getting ready to jump. After you jump, see yourself free falling for about ten seconds and then pull the ripcord. Notice what happens when you pull the ripcord; it’s like the parachute pulls you up in the air. Now, watch yourself gently floating down to the ground. That’s what’s called being dissociated.

Repeat the same scenario only now see it out of your own eyes. Notice your hands and feet as you are sitting in the plane getting ready to jump. Now, move over to the door, get yourself ready, and then jump. Notice yourself moving rapidly away from the plane as you free fall. After about ten seconds, see your hand as you pull the ripcord and notice what the experience of your parachute opening is like. Now, feel yourself floating gently down to the ground. That’s what is called being associated.

Notice that the scene was the same for both experiences—you were jumping out of an airplane. Yet the images, both of which were imagined, were quite different in each case.

We live most of our lives in an associated state. As a result, everything seems so real. Our feelings seem real. Our beliefs seem like reality. Yet that is simply because we seem to be part of it. What we are thinking seems to be all there is.

As soon as you assume another position—dissociated—your experience changes dramatically. Your thoughts are different. Your experiences are different. Yet is this second experience any more or less real? No, it’s just another experience.

This quality of assuming other perspectives, especially this dissociated perspective, is common of many great people in many fields. Einstein is just one example. Great quarterbacks have claimed to have the perspective of being above the entire football field (even while they are playing) so they can see the entire field in a detached manner.

Imagine the perspective that would bring for anyone who could do that.

Michael Jordan has claimed to be able to imagine himself floating over the basketball court and from this perspective see everything that is going on. Perhaps that explains why he just seems to know where everyone is. Again, think of the advantage that such a skill would give you.

I did two interviews with former fund manager, Tom Basso. Jack Schwager who gave him the nickname, Mr. Serenity, interviewed him in The New Market Wizards. In my interview with Tom, he revealed that his ability to dissociate was one of the secrets of his success. Here’s a little of what he said:

“In situations where I felt I needed improvement or in which I wanted to improve my interactions with other people, I would just play key events back in my head—figuring out how others handled the situation…I’ve always thought of it as some Tom Basso up in the corner of the room watching Tom Basso here talking to you in this room. The funny thing about this secondary observer was that as time went on, I found the observer showing up a lot more. It wasn’t just at the end of the day anymore. As I got into stressful situations, as I started trading, doing more interacting with a lot of people, getting our business off the ground, dealing with clients, etc., I found that this observer was there to help me through it. If I felt awkward or uneasy, then I was able to watch myself do it. Now, I have this observer there all the time.” — Excerpt, Course Update #9, December 1990.

A fundamental presupposition of NLP (Neuro Linguistic Programming) is that if one person can do something, then everyone else can do it too. Since being able to move to another perceptual position is one of the critical aspects of genius and greatness, it’s important to start practicing.

Here’s an exercise for you. At the end of the day, replay the day in your mind, especially critical junctures in the day. Do it from a disassociated point of view in that you watch yourself going through the day. Once you’ve completed the exercise, write down what you notice about yourself.

I was going to complete my views on a ‘measure of contraction’ that I started yesterday. But this issue of Denise Shull’s (http://traderpsyches.com/) newsletter was one I wanted to share with you. She gives excellent advice.

Her site for all her letters is: http://community.icontact.com/search?q=trader%20psyches&in=all&age=week

—————–

A trader can read dozens of books and add scores of indicators to their charts. Some easily spend upwards of $20,000 or more buying indicators or courses yet still they are basically break-even (or worse) at the end of the month.

Why do only 5% of the traders who day-trade end up successful?

Two reasons – #1) Many just want an indicator that is going to reveal the market to them and it is too competitive for that to work.

#2) The vast majority don’t approach the challenge in a way that will work. To a large degree, this isn’t the trader’s fault because most do what they have been taught by scores of “experts”.

Here is what will work. Guaranteed.

1. Never forget that the only thing you want to do is predict that others will buy higher or sell lower in your timeframe.

2. Settle on a strategy (and set of tactics) that suits your personality and thinking patterns.

3. Plan to use your judgment in the midst of making decision and entering trades! You are not a robot and you will never become one. Your brain is going to kick-in with its built-in facility for decision making in uncertain situations. In other words, you won’t be able to stop it from making judgments and compelling you to act so… work with it.

4. Learn to optimize that judgment through simplicity, practice, keeping records and knowing your feelings and emotions.

5. Manage your Psychological Capital (Mental Energy) more carefully than you manage your trades.

The money will follow. Your brain will work, your pattern recognition will work and your plan (a realistic one) will indeed be realized.

—————–

Yesterday I wrote that investment success requires consistent execution of our risk management and trading plans. In ‘Taking It Seriously’ (April 3 edition of ‘Psych Cap Tips & Tricks‘), Denise Shull suggests that it is not possible to execute a plan without an element of discretion – unless you are running a mechanical system that executes using a robot or computer.

This is a point traders often overlook and it brings together 3 strands I have written about:

1. The fact that our hand-wiring leans us toward being systematic or impulsive. Both modes have advantages and disadvantages.
2. The trader’s preference for intra-day trading or end of day trading.
3. The trader’s preference for mechanical or discretionary.

I wrote about items (1) and (2) in Day Trade?

Let’s tie the three factors together. The shorter the time frame, the more discretionary the trading method, and the more  we lean towards the impulsive decision-making mode, the greater the element of our discretion in our decision-making. Knowing this, will allow us to identify the style that best suits us.

It’s important to do so because humans suffer from hindsight bias: once we know the result, we tend to think: ‘we always shoulda, and coulda known it’. As a result we tend to beat up ourselves with the consequent adverse effects on our trading.

Yesterday I was speaking with one of my mentor students. He was an ex-pit trader who periodically blew up and has the potential for doing so. The problem is not his decision-making style (his profile fits the description above) but the refusal to pre-define his risk. The fact that he does not blow up more often is a testimony to his natural talent.

To ’solve his problem’ he has resorted to trading within a given set of rules. As a result, when the inevitable large loss occurs, he points to the fact that he ‘broke his rules’ by not following his check-list.

But he is missing the wood for the trees. The only rule he needs to observe is to define his risk as soon as he has entered the trade – recall I said in Day Trade? that for the Impulse mode, the natural process is to act first, evaluate after. For this mode, the ’sin’ is not to evaluate.

The point I am seeking to get across is that our optimum decision-making is a product of our DNA and personality. It’s to our advantage to recognise what it is and work with it.

IDkit aka Ana

https://www.blogger.com/comment.g?blogID=19505137&postID=2138296258762910836

Brett

In a lighter vein:

According to the Singapore government, alarm over a low birthrate prompted the creation of the SDU in 1984.

Singapore’s Social Development Unit (SDU) and programs like it have helped earn this tiny nation a reputation as the ultimate nanny state.

The SDU provides subsidized mixers, trips, and computer matchmaking services to college-educated Singaporeans. It also runs seminars and campaigns on “marriage awareness.”

The SDU’s most recent innovation, however, is “speed dating,” a year-old program that challenges singles to get to know each other in seven minutes or less – and, hopefully, exchange phone numbers.

Perhaps, ’speed dating’ is what sticks on the wall!

Speaking for myself, I am quite happy watching the world go by.

At a time when markets are hard to read , stuck as we are in a ‘blah’ market, I would like to share what Dr Janice Dorn has to say as follows:

Which Came First – The Happiness Or The Success?- Dr Janice Dorn

What’s the deal with happiness and success?

Why is it that we live in such an amazing world, filled with blessings and opportunities, yet so few are happy?

You owe it to yourself and those who love you to be happy. You want to be successful for yourself and those who support and adore you. How do you do this? Where do you start? What comes first—happiness or success?

Studies show that it’s not an either/or situation. Happiness and success are connected in interesting and often counterintuitive ways. Talking about how success leads to happiness ignores half of the story.

Dr. Janice Dorn
The Trading Doctor

There is increasing scientific evidence that increasing happiness leads to success.

Let’s take this to trading and look for ways that success and happiness can be achieved and integrated. What can you do to get and keep both?

1. Talk to other traders. As a trader, you often feel isolated and alone. You think that no one really understands you or what you do. Get a trading buddy that you trust and can share with during the trading day. It really does help with the loneliness, and you might even teach each other something that can lead to profits. This leads to a bond of sharing that causes you to feel happy.

2. Have at least one person in your private life that supports you, no matter what happens during the trading day. This helps you get to the point where you feel loved and accepted whether you are winning or losing. When you get this kind of nurturing from another person, you feel happy and safe.

3. Make sure that you have other activities outside of trading. Exercising to a sweat is a fabulous way to stay happy and centered—and you can detox and increase “feel good” natural chemicals at the same time. The happier you are, the more you will want to be happy. Exercise and activities that bring joy to you are self-reinforcing.

4. Resolve any and all conflicts in your life as quickly as possible. You will feel like a weight has been lifted from you. Talk it out, get it over with and let it go. If you do not resolve conflicts, they can turn into soap opera dramas and you will act them out on the stage of the financial markets. You will not be happy with the results. Why? Because the markets don’t know you. They don’t care about your conflicts and dramas. They see these as weaknesses and will exploit them. They see you as weak and attack you by taking your money. This is a self-sabotaging cycle that leads to more and more losses. Now, you are playing in the big bad markets and acting out your emotions of anger, abandonment, resentment or sadness. The markets will give you more of what you already have—misery. If you resolve your personal dramas, you approach the markets in a happier state of mind. You telegraph happiness into the markets and they leave you alone to do trade your plan and make money. Markets see happiness and positivity as something they really don’t want to mess with. Sadness and desperation—yes—they can and do mess with that.

5. Help others. When you are in a good mood, you are more likely to display what psychologists call “prosocial behavior.” Help other traders if they ask for help. Help other people who genuinely need help. Be generous with your time and money. What you give comes back to you, often in ways that you least expect.

6. Eat food that elevates your mood. Food changes the chemical transmitters in your brain. Fish, chicken, beans and tofu contain tyrosine that leads to increased mental alertness. The folic acid in a glass of orange juice or a cup or spinach has antidepressant effects. Selenium in brazil nuts, sunflower seeds and tuna fish boosts happiness. Avoid fried food, junk food and most fast foods. They may feel “comforting” at the time, but are nothing but a quick fix that makes you fat and clogs your arteries. Blood must flow freely to the brain for peak performance, and clogged arteries block this flow of blood and oxygen.

7. Be more playful and creative. The brain thrives on novelty. Getting away from your daily routine causes new pathways to form in the brain. Even simple things like drying yourself differently after a shower or bath (first notice how you dry yourself the same way every time, then do it differently. It may surprise you and wake up your brain). Trading is an extension of the games we played as children. The best traders I know excel at some sport or game- chess, racquetball, dancing or poker. Playing games or sports causes the brain to make new connections. When the brain makes new connections it is better able to perform complex tasks like trading. Playfulness and competition enable you to develop your own edge in the markets.

The way you think about happiness and success profoundly affects your life. If you think that success mainly leads to happiness then you focus more on success to the exclusion of happiness. You assume that, once you are successful, you will be happy.

Research shows that the instruction is to pursue both—not one to the exclusion of the other. Feeling better in the moment is not only more pleasant but it will open your brain to opportunities in your trading, your play and your relationships.
Recognizing and taking these opportunities will lead you to success and happiness—not necessarily in that order—but you will eventually get both!

ON A LIGHTER NOTE:

I was going to write about the markets today but a couple of pieces in the Strait Times convinced me otherwise.

The most important news was tucked away on page A6. Quoting Bloomberg, Associated Press and France-Presse, the ST article header read:

“US govt to tighten control over executive pay: Report”.

I did a double take – surely not so early in his presidency? I had expected Obama to make this move given his past legislative history. See attached Bloomberg report. But, I had expected it later in the term – as his policies exacerbated the recession, he’d use the excessive pay issue as a foreign adventure – throwing a popular issue to distract from his failures.

Instead we have the issue raised now: if the New York Times report is to believed, the Fed Reserve would oversea executive compensation not just for the companies taking government funds but for all banks, Wall Street firms,’and possibly’ other companies’ (!!).

This is a measure I may have expected from the Rudd government (Australian Labour Prime Minister) but in the US, the home of capitalism and individual rights? It seemed like a story right out of Atlas Shrugged. If the report is accurate, the US is losing whatever semblance it has of being a free-enterprise country; it is rapidly becoming a socialistic state; it is moving away from a country where reward is determined by the owners of capital to one dependent on the ‘aristocracy of pull’.

Scary.

My question to the Republican Senators is this: are you going to ensure to this piece of nonsense ends up in the dustbin where it belongs or are you going to cave-in and horse-trade?

curbing-executive-pay-2009-03-24.PDF