Saturday, 29 March 2014

Quote for the day

“Conservatism in moderate doses is a critical characteristic for market success, but conservatism may be carried to profitless extremes just as easy as radicalism. A healthy mingling of decisiveness and conservatism is the ideal mixture for the successful trader, as for most other careers as well.” -  Richard Schabacker

New Traders and Rich Traders Speak Different Languages

New traders and rich traders speak different languages. They see the markets differently. New traders see the riches and rich traders see the risks. New traders see the possibilities while rich traders see the probabilities. New traders want to get rich quick while rich traders got rich slowly. New traders love to imagine potential profits while rich traders always do the math. There is a language barrier. 

Here are the big differences in their vocabulary and how they see the markets.

New traders have ‘picks’, rich traders have “high probability entries”.

New traders “make great calls”, rich traders have robust systems.

New traders have ‘conviction’, rich traders follow price action.

New traders have ‘opinions’, rich traders follow trends and chart patterns.

New traders look for tips, rich traders look for risk/reward ratios that are in their favour.

New traders ‘like’ certain stocks, rich traders like to make money.

New traders make predictions, rich traders have quantified entries and exit levels.

New traders ‘go all in’, rich traders have maximum bet sizes.

New traders are gamblers, rich traders are casinos.

New traders have hope, rich traders have mathematical probabilities.

If trading psychology is a issue for you

If you talk to many very successful traders they know the importance of trading psychology. But they are not consumed by it. In last 10 years I have interacted closely with many successful traders, few market wizards , and some hedge fund people, none of them had ever hired a trading psychologist. And most of those people are at top of their game. The key to their success is their belief system.

But if you talk to struggling traders they often think trading psychology is important and some claim it is the most important thing. If psychology is an issue for you and you think it is affecting your trading , what concrete steps can you take to resolve it.

There is lot of talk of trading psychology , but what exactly are the 3 or 5 things you can do to improve your psychology.

If you want to increase your muscles you go and lift weight

If you want to improve your stamina, you go and run daily

If you want to reduce weight you eat less and exercise more

What exactly do you need to do to improve your psychology.

First starting point if you want to improve your psychology is by examining your beliefs

You can only trade what you believe in.

Your beliefs drive your behaviour.

If you believe only way to trade is using mechanical methods ( that is a belief) and as a result all your behaviour will flow from it.

If you believe one should only trade triple ETF and not waste time on individual stocks (that is a belief) and as a result all your behaviour will flow from it.

If you believe that only way to trade is with big risk (that is a belief) and as a result all your behaviour will flow from it.

Every trade has deeply held beliefs. The bundle of deeply held beliefs drive what kind of set-up they will trade, what kind of time frame they will trade and also all elements of trade like entry, exit , risk,  and number of positions held.

Beliefs are not necessarily based on science or logic. In trading there are many beliefs based on to others pseudo-science . Personally I would never trade based on Elliott Waves , because it is not in line with my belief system. I believe it is not scientific and hocus focus. But there are traders who build their entire trading around it.

Your beliefs drive your trading actions. If you want better results in your trading you start by examining your beliefs about market, how they operate and about your trading and beliefs behind those trading decisions. A critical study of them might show you where you need to fix things.

It is  difficult to change beliefs. Contrary to what self help books and many motivational authors and speakers will tell you it is not easy to change beliefs. Beliefs persist for lifetime in some people. So much of human behaviour is driven by beliefs. Religion survives because people are driven by beliefs.

But psychologists who have studied beliefs know it is difficult to change deeply ingrained beliefs. There are no magical technique or method which will change your beliefs overnight.To change beliefs you need to educate yourself , expose yourself to new way of thinking, get rewarded for new beliefs.

When you are kid you have many simple beliefs, like monster exist or eating sweets will lead to cavities, or my parents are going to be forever, but as you grow and get exposed to science your beliefs change.

New knowledge and new discovery leads to change of beliefs. Same thing with markets and and trading. More you educate yourself and expose yourself to different beliefs you will re examine some of your deeply held beliefs and start changing them. Your surroundings and people you interact with also helps to change or reinforce your beliefs. If you want to change beliefs change your surroundings, friends, family and incentive structure. 

For traders same thing applies. If you hang around with traders who all the time whine and "believe" market is manipulated, you will also imbibe same beliefs, you will get rewarded in that setting for those beliefs. If you change that and say start interacting with a highly motivated trader with 10 year plus track record and no negative years , your beliefs will change. In that setting you will not be rewarded for your beliefs about manipulation.

First starting point if you want to improve your psychology is by examining your beliefs

Align your beliefs with market structure by educating yourself about how markets work. Align your belief with what has shown to have worked in the market based on history and statistics. Align your belief with a style of investing growth, value, contrarian investing. Align your belief with time frame (day trade , swing, position). Align your belief with right kind of market paradigm

Lot of time people claim they have discipline problem, but the basic problem is wrong beliefs and as a result wrong behaviour. If you fix the beliefs discipline is comparatively easy.

Quote for the day

"When events have thinking participants, the subject matter is no longer confined to facts but also includes the participants’ perceptions. The chain of causation does not lead directly from fact to fact but from fact to perception and from perception to fact." -  George Soros