Lessons Learned March 31, 2008

At Chart Swing Trader, Mac looks back over his first quarter of trading for the year, and has some valuable (in my opinion) thoughts to share on the challenges of trading:

As we end the first three months of the year, one thing I wanted to do for my own personal growth as a trader was to examine my trading so far this year and what I need to do to be better. Obviously this has been a very difficult environment to trade in, even for bears, since the middle of January. I have been bearish throughout the year, but that bearishness has not always paid off as well as I had hoped. I am still up overall for the year, but not nearly as much as I was after January 22. Some lessons hopefully learned so far include:

• Overtrading is a recipe for disaster – I have definitely been guilty of this so far this year. I had nice positions that I closed early because I couldn’t sit still, and I took bad positions because I couldn’t sit still. I go back to what I saw in a Dan Zanger interview when he said the market presents about three or four money-making opportunities per year that allow you to make tremendous returns, and the rest of the time is just choppy trading that cause most traders to lose a significant amount of money. January 1 to January 22 was one of those nice opportunities to make money if you were short, and I don’t think we’ve had one since. Perhaps this just takes time to learn and as I progress, I will be able to recognize these profitable times and also show the discipline to sit on my hands if there is no real edge to be found.
• Emotional trading is a recipe for disaster – Looking at my gains and losses for the year, I have noticed that many of my losses came from trades that were taken during the middle of the day or from trades in which I changed my original plan after the trade was taken. I am really focusing on making trades only at the end of the day and also not watching the intraday action too heavily, especially in a volatile environment like February. I also need to do a better of job of setting stops and sticking to them, rather than adjusting them after the trade has been made, which usually just led to bigger losses.
• Avoid trading right before or right after decisions by the Fed – for some reason, I thought it would be smart to make a lot of trades around January 30-31. I closed a total of nine trades those days, and only two were winners. Several were stocks I was stopped out of the same day. These days of course correspond with the first Fed decision about interest rates, which led to an extremely volatile trade that I would have been much better off staying completely away from. I plan on doing this from now – I will not be making any new trades during the few days after Fed decisions, at least not in the current environment.

Basically, I feel I am putting in the necessary work to be a successful trader, and I feel my chart-reading abilities are fairly strong, although I can still improve in both areas. I still need to tighten my overall system and trust some of the indicators I use more. For me, it is still some of the psychological difficulties that I am having, and I know those are issues for many traders. You can’t become a master trader until you’ve mastered trading psychology, trading discipline, and your own personal emotions. These are the hardest skills to develop and master, but I will keep working on them and hopefully improve as we enter this second quarter.

Well said Mac. Thanks for sharing those thoughts!

Take Your Time March 25, 2008

Gary Kaltbaum, on his radio show today:

“Take your time. There are moments in time where you walk into the market and you open up the chest, and there’s a ton of treasure in there. Then there are times you open up the chest, and you get skeletons. And then there are times you open up the chest and it looks good — and then the next day it doesn’t.

Do not ‘over take‘ what the market is giving — or it’s going to carve you up like there’s no tomorrow. And that’s what this market has been about.”

Learn To Sell March 6, 2008

We’ve talked about this subject before here at BMB, and you know that our mantra is to “Never Lose Big”.

To avoid big losses in the market — and to protect profits — you need to learn to sell. Here’s Gary Kaltbaum on his radio show today:

You know, once you’re down 25-30 percent, you’re in that emotional ‘web’. That you think, “Man, it’s gotta come back”, and you know, “if it just comes back a little bit, I’ll sell”, and then it doesn’t and then you’re down 40 percent. And then it comes back to only down 30 percent, and you’re saying “ok, I’m going to sell it when it comes back to down only 20 percent”, and then it goes right back down.

And then once you’re past 50 and 60 percent, you know what you say to yourself — you know the words, you’ve had it happen to you before, right? “Aaah, screw it, I don’t care if goes to zero!” Right? Isn’t that what you say once you get into ‘the web’?

So don’t let that happen to you. There’s a simple word to protect yourself from big losses in the market. Easy word — “Sell.” “Sell.”

So True March 6, 2008

Another ‘trading truism’, seen in the Schwab ad at the top of the page on Minyanville:

“It’s not how much you make trading. It’s how much you hold onto.”

Indeed. Risk management and capital preservation skills are key, especially in difficult times like these.

Getting Back Up March 3, 2008

Good stuff — Quint Tatro on how to recover from those rough times, when the trading gods have decided to knock you down:

Sometimes in trading you have to pick yourself up and dust yourself off. It is the simple truth and anyone who has been involved in the game for longer than a cup of coffee will tell you the same. There will be times when you are caught with a blow up, caught in a squeeze or simply caught leaning in the wrong direction but over the years what I have learned is it is always about getting back into the ring for another round.

—

It’s important to have a routine for handling those times when not only your financial capital gets bitten but your emotional capital sinks as well.

1) Reposition:  Whether you are caught in a downturn or short squeeze, removing the position is often the best way to remain objective. So often when people start to see a position run against them they freeze up and start to rely on hope rather than remaining in control of the trade. When I see stocks breaking down or acting poorly, they are sold immediately and I am able to start fresh.

2) Check the Charts and your Bias:  I have written many times before that price action is never wrong. If you are caught on the wrong side of price action it is a must to re-evaluate the charts you are viewing and check any bias you may have. It is imperative to embrace the prevailing direction and avoid seeing what is not there. Having raised cash and avoiding any further significant draw, take a fresh look at the action and once again analyze your position accordingly.

3) Embrace the New Day:  Trading is unique in that each and every day presents a new opportunity. This must be embraced as it is one of the features that makes trading so great. Rather than dwelling on the past, embrace the future. Each and every day presents new opportunities but not unless you are looking for them.

4) Move Slow and Small:  Most people make the mistake in believing that restoring financial capital will improve emotional capital when I would argue it is actually the opposite. One can only trade at peak performance when his emotional tank is filled and confidence is high. Regardless of how long you have been trading there will be times when this tank takes a dip and before moving on to make any new financial progress, it is imperative to restore the emotional side first. The best way to do this is to move very slow and small. Rather than taking full positions, take quarters or even tenths. Paper trade if you need to and analyze results. As time goes on your emotional capital will be restored and you will soon have the confidence to re-enter the game at full speed.

If you trade, one thing is for sure, you will have good times and you will have bad times. The best way to handle the bad times is to know they will come and have a plan in place to follow so that you may bounce back quickly and put them in the past.

Making An Expert March 2, 2008

Some interesting stuff on what makes an ‘expert’ trader, from Brett Steenbarger via The Big Picture:

What makes an expert? And how can traders develop their own expertise? Three elements:

1) “Measures of general basic capacities do not predict success in a domain”
Experts cannot be distinguished by superior intellects or other cognitive talents.

2) “The superior performance of experts is often very domain specific and transfer outside their narrow area of expertise is surprisingly limited”

Being an expert in one domain does not predict expertise in others; a person can be a highly accomplished trader, but not expert in other areas. Think “niche” — the successful trader has found a particular sphere of success that expresses his skills and interests.

3) “Systematic differences between experts and less proficient individuals nearly always reflect attributes acquired by the experts during their lengthy training”

The expert is one who has undergone a structured, deliberate process of training that builds competencies, offers extensive feedback, and draws upon intensive effort over time to internalize knowledge and skills.

So what might this mean? Here are the good doctor’s conclusions:

1) The majority of traders are looking for expertise in all the wrong places. Learning to trade does not involve finding magic indicators or systems.

2) The vast majority of offerings in trader education are not structured for expertise development. Seminars, books, Web articles and blogs, weekend courses–all can be useful in imparting information. But expertise development is not simply about the accumulation of information; it is about skill development under realistic, challenging conditions.

3) Most traders fail because they never enter a path of expertise development. What does a trader need to progress from being a novice toward becoming competent toward exhibiting expertise? A curriculum: a structured process, that begins with information and understanding and then progresses steadily through skill development.

Then there’s the way Dave Landry puts it:
- Trading is all about making decisions.
- Making good decisions comes with experience.
- Experience comes from making bad decisions.