Winning in Todays Hottest Marketplace_9

Chapter Psychology of Trading en years ago you would find, if you looked, perhaps one or two books written about the psychology of trading. Today there are nearly a dozen on the market. I think this is partly a function of the fact that almost everything that can be said about trading methods has been said. I say “almost” because I am constantly peppering my editor with proposals for more books! There is perhaps another reason. Traders are finally coming to the realiza-tion that a trading method—no matter how good—does not in itself lead to consistent success in the market. When you were a teenager, your mother or father probably accused you at one time or another of having an attitude. Traders have an attitude also, although probably not of the kind your parents meant. While trading methods are as varied and different as snowflakes, successful traders seem to share a set of attitude traits and money management techniques. In this chapter and Chapter 16, “Money Management Simplified,” I delineate and discuss these common traits and techniques. Much has been written about the power of positive thinking from Napoleon Hill’s classic Think and Grow Rich, to psycho-cybernetics, to the “Seth Material” and Abraham. My own belief is that our consciousness is an active agent in the unfolding universe, not the passive onlooker of most of Western philosophy. Imagine and visualize success in some concrete form or image. You may find the universe coming to you. 221 222 FIGURE 17.1 THE COMPLETE FOREX TRADER The Trading Pyramid The Trading Pyramid As I have mentioned previously, there are three components to a trading pro-gram: trading method, money management, and psychology or attitude. The vast majority of traders spend almost all of their efforts affecting a trading method. Ninety percent of market books are still trading method tomes. In fact, most successful traders will tell you, of the three components, the trading method is the least important. You are well advised to allocate significant thought and effort to attitude and money management. (See Figure 17.1.) How much you order their relative importance determines your trading pyramid. The diagram on the left is the correct pyramid—or at least some similar shape. The diagram on the right is the incorrect pyramid—giving too much emphasis to the trading method and too little to money management and attitude. “1” is Money Mangement, “2” is Psychology, “3” is Trading Method. Most traders place their trading method at the base as the most impor- tant and substantial. Money management is in the middle and psychology of trading gets little attention at the top. To my way of thinking money manage-ment must be the base, then psychology, and a trading method as a finishing touch. An argument could certainly be made that psychology of trading should be the base. Top traders share more attitude characteristics than anything else. Fear and Greed, Greed and Fear Fear and greed are the base emotions that drive every market. They are instinc-tive to humans and unless you use an automated computer program to trade, your goal can only be to control them and not to eliminate them. Since economic booms, busts, and bubbles keep recurring, year after year, century after century, it is clear evolution is not going to transfer the skills learned in one generation to another and, as Santayana warned, we seemed Psychology of Trading 223 doomed to repeat the past. People have short memories, and fear and greed keep returning; a hedge fund bubble was followed by the dot.com bubble, in turn followed by the real estate bubble in less than a decade. A second hedge fund bubble may not be far away. We tend to get greedy when we are making money and overstay our welcome; we tend to become fearful when we are losing and again overstay our welcome. These emotions cause us to mentally freeze and delay making critical decisions that would be in our own best, rational interest. Making a decision implies change and there is nothing more difficult for a human being. One successful trade can cause overconfidence and lead to what I call the King Kong Syndrome—the warm, good-all-over feeling that we can do no wrong. A large losing trade can cause enormous self-doubt, leading us to make revolutionary changes in our trading program when, in fact, a little time away from the market and a few evolutionary adjustments would put us back on track. The late Pete Rednor, office manager at Peavey and Company where I apprenticed as a commodity trader in the early 1970s, would wait for a trader to get the King Kong Syndrome. When the trader next placed an order, Pete would go to a telephone in the back office and place the identical order—but in reverse. He usually won, and when the trader lost it all and stopped trading, Pete lamented the loss of a trading system. The key is containing the emotions of fear and greed within a relatively slight area. To do that, you must in turn be able to anticipate the onset of fear or greed, and find methods for controlling them before they impact trading deci-sions. Biofeedback works for some people; mediation for others. Yoga, vigorous exercise, sedentary hobbies, and reading are other psychological health remedies. Never be afraid of the markets but always respect them. Never be hesitant to simply walk away for a few hours or a few days. The markets will not go away; they are happy to wait for you to return. Never trade when you are emo-tionally distraught. I had trouble dealing with missing a good trade opportunity for many years. Eventually I had the experience to see that good trades are always going to be available. It is common for new FOREX traders to be literally mesmerized by the movement of the prices as seen on charts. The short-term charts—1-minute, 5-minute, and 15-minute—move quickly up and down and carry your emotions right along with them. Profiling Performance Good records of your trading will help you build profiles you can review from time to time. Often a marked change in profiles will be a leading indicator of a bout of fear or greed. Monitor your trading results on a weekly basis. Use the 224 THE COMPLETE FOREX TRADER biofeedback form of Chapter 15, “The Plan! The Plan!” and again discussed in Chapter 16, “Money Management Simplified.” Look not only for how much money you are making—you cannot win them all—but look also to see the patterns in trade series that went well for you. Profit/Loss ratios, the currency pairs that worked the best for you, the types of markets—trading or trending—that worked well. How often did you move a stop or profit objective? Constantly jiggling stops-loss, take-profits, and your trading process are an early warning sign. “Know Thyself,” the ages-old Socratic saying, is a trader’s watchword. Only you know which factors cause emotional unbalance, and which do not. As I used to tell my schoolaphobic son, “Lay low, hang loose.” I know one trader who uses Camtasia from www.techsmith.com. He webcams his entire sessions and reviews them for his facial expressions and body language. Do not try to be totally objective—it is an unattainable goal for a human and not even a worthy goal. There are good instincts hiding in the subjective and you do not want to bury them in your subconscious. The Attitude Heuristic In Chapter 13, “The FOREX Marketplace,” I suggest a heuristic for your trad-ing method. I like to keep a mental chart of my emotions; an attitude heuristic. Imagine a graph going from 0 in the middle to 21 at the bottom and 110 at the top (see Figure 17.2). Greed is the top half; fear, the bottom half. Sure, it is exciting to make a trade. It is even more satisfying to close out a winner. And it 10 Losing Fear 5 Winning Greed 0 FIGURE 17.2 Charting Fear and Greed Psychology of Trading 225 is a disappointment to see a trade go bad. Do not expect your emotions to stay between 4 and 6; you are human. They will not. At least after tracking yourself for a few weeks you will know when you are in the danger zones, perhaps above 8 or below 2 or more importantly when you are headed toward a danger zone. Review these numbers vis-à-vis your performance. You will be surprised how much you learn and the ways you can benefit. If you can eliminate 1 out of 3 losing trades you will almost certainly be successful in the long run. The line between winning and losing can be razor thin. TIP: Use the Biofeedback Form in Chapter 15, “The Plan! The Plan!” to chart your fear and greed. Characteristics of Successful Traders No one has all these characteristics all of the time. But having known literally hundreds of traders, I can assure you that most of them share most of these characteristics—most of the time. · Successful traders tend to have control over their emotions—they never get too elated over a win or too despondent over a loss. · Successful traders do not think of prices as “too high” or “too low.” Prices are numbers; zeros are zeros whether there are three of them or seven of them. If the size of the trade makes you nervous, it is too large; scale down. · Successful traders do not get emotionally attached to a market or a trade. They do not anthropomorphize about the markets: “They’re going after stops now,” or “The market is nervous,” or “The market must know something I don’t.” Just thinking in such terms is an error. The market is not out to get you. · Successful traders do not panic. They make evolutionary changes to their trading program, not revolutionary changes. · Successful traders do not flinch at making a decision, pulling the trigger once everything has lined up for a trade. · Successful traders treat trading as a business, not a hobby or game— even if it is a hobby. · Successful traders stay physically fit. · Successful traders do not trade when they are emotionally stressed or under duress. · Successful traders hang up the DO NOT DISTURB sign when they are trading. ... - tailieumienphi.vn