WS Traders

2007-02-13T19:01:00.000-08:00

If you are looking for Internetrix's website. this is it! I am no longer maintaining the software.

Yuemin

2005-07-01T23:59:00.000-07:00

DR - Daily Reckoning - www.dailyreckoning.com
Innerworth - www.innerworth.com
TWPD - Trade with Pizza Driver - TradeWithPizzaDriver.com
NHF -Nap Hill Foundation - www.naphill.com

2005-06-01T16:26:00.000-07:00

NHF

May 31, 2005

WHEN YOU GET YOURSELF UNDER COMPLETE CONTROL, YOU CAN BE YOUR OWN BOSS.

We all have moments when we allow others to cause us to react emotionally, especially in anger. Often we regret our response later, and we vow we will never allow ourselves to behave in this fashion again. The next time you feel the anger rising, remind yourself that no one can make you angry or emotional without your consent-indeed, your active participation is required. Those who have learned to manage themselves are the individuals who are destined to be leaders. They are chosen to manage others because they have demonstrated that they can manage themselves. They are people of character.

2005-06-01T15:51:00.000-07:00

What is necessary to change a person is to change his awareness of himself.

- Abraham Maslow

Who dares nothing, need hope for nothing.

- Johann Von Schiller

2005-06-01T15:50:00.002-07:00

Innerworth 5/31/2005

Affirm To Win

Trading can be exhilarating. When you see a trading plan come to fruition, you cannot help but feel a little special. There are those times, however, when you feel frustrated and disappointed. You regret making a few bad decisions, and may question your ability to return to profitability or achieve enduring financial success. Your confidence can become shaken, and you can lose yourself in feelings of doubt and despair. At times of uncertainty, making affirmations can help you recapture a winning state of mind.

Affirmations are positive statements that motivate you. They remind you of your goals, what's important to you. For example, suppose you have just made a series of losing trades and are feeling disappointed and stuck in a psychological rut. You can recover quickly by repeating a series of positive affirmations: "I'm human. I can make mistakes. Losing trades are just part of the business of trading. My goal is to achieve enduring profitability. The big picture is all that matters. A few losses here and there are of little consequence for the big picture. Through hard work and experience, I'll achieve my financial goals." Affirmations remind you of who you are and where you're going. If you repeat the affirmations over and over again, you'll start to feel empowered. Even major setbacks suddenly seem unimportant.

You can make up a set of affirmations for any trading issue. For example, suppose you have trouble patiently waiting for a trading plan to pan out. Under these circumstances you might say, "I have willpower. I am in control. Winning traders are disciplined. I've made my trading plan, and I can follow it and wait to see what happens. I can learn to trade with discipline. The more I practice discipline, the more disciplined I will become. With each trading plan I successfully follow, I'll gain more self-control. Over time, I will become stronger, decisive, and able to control my emotions."

Affirmations can also address a more general issue, such as low self-esteem. Some traders manifest low self-esteem by defining their self-worth by their net worth. They may feel on top the world when they make a winning trade, but worthless and inadequate when they lose. Affirmations can help matters. A trader with low self-esteem may affirm, "I am human, and as a human, I have self-worth no matter how much money I have or how many losing trades I make. My worth is not defined by whether I win or lose. Trading is not my entire life. Winning or losing doesn't define who I am."

Affirmations are personal. What you write down and recite is up to you. Affirmations should inspire you, guide you, and motivate you. But whatever you write down and repeat to yourself, it should address your desires, goals, and reasons for trading. At first glance, repeating an affirmation over and over seems like an inconsequential solution, but try it. You'll find it does wonders for your motivation and your mindset. Soon, you'll find that you don't have to consciously repeat the affirmations; you'll think of the positive statements automatically. Over time, you'll train your mind to think positively. You'll approach trading with a winning mindset that will help you achieve enduring financial success.

2005-06-01T15:50:00.001-07:00

Innerworth 5/27/2005

Clear and Specific Goals

Trading can be tedious at times. Day in and day out you have to look for market opportunities, and once you find them, you have to put your money and a little bit of ego on the line, and suffer the consequences, good or bad. If your heart isn't in it, you'll eventually join the disillusioned minions who have left the trading profession. To make it as a trader in the long run, you must love the process of trading. You must think it's so exhilarating that you would do it for minimum wage if that were the only way you could trade. It's not about the prize. It's a calling, a noble mission.

Who would not want to be a winning trader? With complete financial freedom, you could do anything you wanted. It's necessary, however, to turn the abstract goal of becoming a winning trader into a specific, concrete plan. In their book, "The Inner Game of Trading," Robert Koppel and Howard Abell argue that your trading goals should be clear, precise, and well defined. You must also try to complete your goals within a reasonable time. You should state your goals in an empowering way, and your goals should be realistic. And it's also necessary to set a goal that is easy to quantify.

There are a variety of ways to define trading goals, according to Koppel and Abell. First, you can set performance goals in which you focus on how well you are doing in terms of your own personal standards. When trying to achieve a performance goal, you try to increase your physical and psychological skills related to trading. Second, you can set outcome goals. Outcome goals help determine what's important to you. They allow you to develop trading techniques and strategies that match your personality. Third, a motivation goal helps increase your effort, and allows you to focus your attention on honing your trading skills. Motivation goals allow you to maintain a high level of enthusiasm and confidence.

Koppel and Abell list some important goals that novice traders should set. It's important, for example, to learn to control your emotions. Many traders act emotionally rather than rationally. They also have difficulty taking losses. It's necessary to take losses quickly and easily, rather than dwell on them. It's also important to develop a trading system that is consistent with your personality. All traders should also limit their risk. These are just some examples, but with each of them, it's essential to strive to achieve specific goals every day. On some days, you might just try to set a performance goal. You might practice a trading skill you're trying to hone based on a standard you personally define as adequate. On other days, you might try to achieve a specific outcome, and see how well you do. It's vital, however, to set clearly defined goals, and enthusiastically pursue them. Log your advancement, and reward yourself when you make significant progress.

Many traders make the mistake of trading aimlessly every day without trying to achieve specific goals. As Koppel and Abell put it, it's like trying to saw down a tree without making sure that your blade is sharp enough to cut wood. Goals direct and motivate. Without clear and specific goals, you're making a journey without a map.

2005-06-01T15:50:00.000-07:00

Innerworth 5/26/2005

Don't Be Afraid To Be Yourself

There isn't one right way to trade the markets. It's tempting to emulate your favorite "Market Wizard," but in the end, it's essential to match your trading style to your personality. Some traders, for example, carefully backtest a strategy before using it. They scrupulously estimate the probability of success for a trading strategy in an attempt to forecast how it will do under current market conditions. They are methodical and somewhat compulsive in their approach. But based on their personal psychology, they know that they are most comfortable when they have considered all possibilities and taken reasonable precautions to ensure success. Other traders are more easygoing. They take risk and uncertainty in stride, and aren't afraid to formulate their trading plans as they go along: "Backtesting is of little value. History only repeats itself occasionally. You've got to go out and find opportunities as they happen." Which approach is best? Again, the approach you use to trade the markets depends on your unique personality.

That said, the single most important factor for trading successfully is self-confidence. You can have a foolproof method, but if you don't have confidence, you can't use the method effectively. Developing a sense of confidence takes hard work. You must accumulate real life experience. You must live through various market conditions, and see how you react. Once you have rock solid confidence based on a wealth of experience, though, the way you approach trading is a matter of preference.

Some people are naturally optimistic. They tend to look at the world through rose-colored glasses, believing that all turns out well in the end. If you have proven skills as a trader, an optimistic attitude can keep you at the top of your game. By pushing yourself to the limits, you will consistently perform at your best. (On the other hand, optimism can hurt you if you don't have well honed trading skills. Many novice traders over-trade, abandon risk limits, and lose big when they are overly confident.)

But not all successful traders are extremely optimistic. Indeed, many successful traders are skeptical, cynical, and think, "If I'm not careful, I could lose capital." They are confident in their ability to trade profitably, but they know themselves. They believe in preparing carefully for a trade, and prefer to over-prepare. Before they execute a trade, they must be fully satisfied that they've covered all their bases. They think and re-think their strategy. They even worry a little about whether it will work. But in the end, they trust their approach, and they are confident that all their preparation and worry will pay off.

Research studies have shown that you must be yourself in order to achieve a high level of performance. Trying to be someone you aren't just because you think it's the "right" way to trade often does more harm than good. For example, if you take optimistic people and make them question their skills unnecessarily, their performance suffers. Similarly, if methodical, pessimistic people try to avoid going through the motions of checking and re-checking for possible flaws, their performance suffers. It is vital to remember that there is no one right way to trade. In the end, you must find what works best for you. Through trial and error, you must discover what you need to do to make profits in the markets. The only standards that matter are your own. In the final analysis, it's just you, the markets, and no one else.

2005-05-25T19:43:00.001-07:00

A man is rich in proportion to the number of things he can afford to let alone.
- Henry David Thoreau

2005-05-25T19:43:00.000-07:00

Innerworth 5/25/2005

Using the Success History Search To Cultivate a Winning Attitude

Making profits is often a matter of thinking and feeling like a winner. In their book, "The Mental Edge," Kenneth Baum and Richard Trubo (1999) argue that tapping into your history of success can put you in a winning mindset.

When trying to maximize your performance, it's useful to set your sights high. "The more you expect from yourself, the more you will achieve. Modest expectations produce modest results," according to Baum and Trubo. The images that come into your mind dictate your expectations. A baseball player who tries for a homerun is more likely to do better than a player hoping to merely hit the ball to first base. Similarly, if you don't expect to see a profitable opportunity during the trading day, you won't. On the other hand, if you think optimistically, you'll reach your potential: "If I study the markets carefully enough, I'll find at least one way to make a profit today." As a trader, your goal should always be to reach your potential. That isn't the same thing as unrealistically thinking you'll make a 500% return on your money on any given day, if you are a novice trader, but achieving your peak performance, whatever it is, each and every day.

Not everyone has the same abilities. It doesn't make sense for an amateur golfer to think that he or she can play like Tiger Woods. And it isn't realistic to think that an average trader can approach the success of a "Market Wizard." But whatever your skill level is, you should try to maximize it. For some, that may just mean putting on a few small trades a day to develop an intuitive feel for the markets. For others, it may mean making $1,000 a day. The main point is to maximize your performance. Try to achieve a level of performance that exemplifies the best that you can be.

When you strive to be your best, your confidence increases. Suddenly, you're enthusiastic and ready to achieve success. Baum and Trubo suggest using positive mental imagery to put you in the proper, optimal mood. They call this mental imagery task the "Success History Search." Here's how it works: Close your eyes. Let yourself relax. Now think of a recent time when you've accomplished something important, a task you're proud of. It could be a recent winning trade. Or it could be an athletic event you won recently. Perhaps it's a big business deal you closed, or even an A+ you received on a test in college. It could have happened yesterday or 10 years ago. The main issue, however, is that the event you remember should provide a clear image that inspires you, an event that makes you feel good about yourself, and makes you feel that you can do anything. Focus on the image. Try to remember the positive, optimistic thoughts that were running through your mind. Allow yourself to feel good about the experience. Remember how it felt like to win. Soon, you'll find that you become optimistic, focused, and ready for action.

Use the Success History Search before you start the trading day or when you are about to execute a trade. If you find that replaying just one winning accomplishment isn't enough, replay two or three until you cultivate a winning attitude. Images are powerful. By remembering vivid images of past successes, you'll feel optimistic and ready to master the markets.

2005-05-25T00:42:00.003-07:00

There's nothing remarkable about it. All one has to do is hit the right keys at the right time and the instrument plays itself.
- Johann Sebastian Bach

The task of beating the market is not difficult, it is the job of beating ourselves that proves overwhelming.
- Martin Pring

Take calculated risks. That is quite different from being rash.
- General George Patton

2005-05-25T00:42:00.002-07:00

Innerworth
5/24/2005

Trading With Discipline

Top-notch traders have unwavering discipline. Expert trader John Hayden notes, "Without discipline, you will be unable to master your ego, create empowering beliefs, have faith, and develop confidence in your abilities. The lack of discipline will prevent your skill as a trader from progressing." It may be tempting to trade by the seat of your pants, but if you don't develop clearly defined trading plans to follow, and follow them consistently, you'll have difficulty achieving enduring financial success.

What's the harm in abandoning a trading plan if you make a profit anyway? Making an occasional winning trade, even when you threw your trading plan out the window, may provide short-term pleasure, but entering trades haphazardly can adversely influence your ability to maintain discipline in the long term. When you stop following your trading plans, you become rewarded for a lack of discipline and you may start believing that abandoning a trading plan is no big deal. An unjustified reward may increase your tendency to abandon trading plans in the future. You may be prone to think consciously or unconsciously, "I was rewarded once; maybe I will be rewarded again. I'll take a chance." But the positive outcomes of undisciplined trading are usually short-lived, and a lack of discipline ultimately produces trading losses.

It's useful to distinguish justified wins from unjustified wins. A justified win is when a trader makes a very detailed trading plan and follows the plan. A win that results from following a trading plan is justified and reinforces discipline. An unjustified win occurs when a trader doesn't make a plan or drifts from the plan. He or she may be rewarded, but the outcome occurred by chance. The win is unjustified and can reinforce undisciplined trading.

Cultivating discipline is vital for consistent and profitable trading. Trading is a matter of getting the law of averages to work in your favor. One implements proven trading strategies, over and over, so that across a series of trades, the strategies work enough to produce an overall profit. It's like making shot after shot on the basketball court so as to accumulate a winning number of points. The more shots you take, the more likely you will amass points. But the winning player is the person who first develops the skill to make the shot consistently, so that at every possible opportunity, the ball is likely to go through the basket. To a great extent, consistency is key. If the player uses one approach one time, and a different approach at another time, performance is haphazard. It's the same for trading. One must trade consistently, following a specific trading plan on each and every single trade. This allows the law of averages to work in your favor, so that across the series of trades, you will make an overall profit. If you follow the plan sometimes and abandon it at other times, you throw off the probabilities, and you are likely to end up losing overall.

With discipline comes profitability. Don't let unjustified wins interfere with your ability to maintain discipline. Follow your trading plan, and reinforce the idea that if you follow your plan, you will end up more profitable in the long run.

2005-05-25T00:42:00.001-07:00

Innerworth
5/23/2005

Staying Calm Through the Ups and Downs

Many novice traders ride an emotional rollercoaster, feeling euphoric bliss after a win, but overwhelming disappointment after a loss. Experienced professional traders, however, stay calm and relaxed even after a series of losses. They don't let the natural ups and downs of trading impact their emotions.

Ideally, the winning trader stays rational and unemotional, but even a seasoned trader can fall prey to emotional ups and downs occasionally. It's natural to question your method at times. "It is easy to start doubting my approach and wonder about the validity of what I'm doing," said Manuel, a hedge fund manager Innerworth interviewed a few years ago. At the other extreme, it's also natural to become euphoric and feel omnipotent. "During winning periods, it is easy to become overconfident, and that can lead to trouble. While overconfident, I feel a false sense of security. I'm tempted to take unnecessary risks, and I start to think that I don't have to do any more research to find and figure out new ways to extract money from markets. It is easy to fall into a sense of complacency."

Novice traders are especially prone to experiencing an emotional rollercoaster. They may not use proper risk management. They are prone to risking too much capital on a single trade. And when they take big risks, they are likely to feel overly ecstatic when they win big, but especially beaten when large amounts of trading capital are wiped out after a big loss. Through proper risk management, however, relatively little is lost on a losing trade, and that helps minimize the sense of disappointment after a loss. It's easier to stay evenhanded in terms of your emotions when your equity curve is smooth, rather than jagged due to extreme losses. Trading is a business. It isn't recreational gambling. As a business professional, it's essential to maintain objectivity. The more objective you are, the easier it will be to creatively analyze market action and trade opportunities as they present themselves.

How does seasoned trader like Manuel control his emotions? He realizes that his trading performance moves in cycles. Sometimes he is profitable and sometimes he is not. Gaining awareness of this fact helps him control his emotions. "I realize that if I have a big winning period that I shouldn't get overly excited because, most likely, I'll have a flat or losing period just around the corner. That's the way the market works. No style of trading makes money all the time. The odds are that after you have a big winning period, you'll go through a period of losing money shortly thereafter. I try to make enough money to give myself a cushion to handle the losses when they come."

Trading can wreak havoc on your emotions unless you take precautions. Through proper risk management, though, you can control the extreme ups and downs that are inherent when you have your hard earned capital on the line. Winning traders, however, stay calm, objective, and rational. If you can trade in this optimal state of mind, you'll increase your chances of achieving enduring financial success.

2005-05-25T00:42:00.000-07:00

Innerworth
5/20/2005

Fighting Murphy's Law

While trading the markets, there are times when Murphy's Law says it all: "Whatever can go wrong, will go wrong." Does this sound a little too cynical? Perhaps, but only if you submit to pessimism. If you have a winning attitude, however, you're ready to tackle anything. You'll think, "Things go wrong all the time. So what, I'll take it in stride and move on." If you cultivate a winning attitude, you can fight Murphy's Law with ease.

In their book, "The Innergame of Trading," Robert Koppel and Howard Abell argue that trading knowledge is not sufficient to trade successfully. Sure, it's essential to have extensive knowledge and a wealth of experience with the markets, but trading with a winning state of mind is also necessary. Traders with a winning state of mind are anxiety-free, confident, organized, and have high self-esteem. Many traders, though, unnecessarily limit themselves. They aren't confident, but uncertain and easily shaken. They are vengeful, rather than enthusiastic about vast market opportunities. They are easily disappointed, and find it hard to get energized. And they face an adverse market event with frustration, instead of persistence and discipline.

Consider the difference between the limited trader with a pessimistic attitude and the resourceful trader with a winning attitude. The limited trader may think, "The markets are rigged, too risky, and don't let you win." The resourceful trader, in contrast, thinks, "The markets provide opportunity, and can be mastered." The resourceful trader realizes that he or she may not be perfectly skilled. Mistakes are bound to happen. The limited trader thinks, "If I get stopped out, it illustrates that I'm a loser," but the resourceful trader thinks, "If I get stopped out, then I have to reevaluate the trade." While the limited trader thinks, "If the market doesn't do what I expect it to, then I don't know anything," the resourceful trader thinks, "If the market doesn't do what I expect, then my analysis or timing has to be reconsidered." While the limited trader allows his or her emotions and feeling of low self-esteem to take over, the resourceful trader takes an active, problem solving approach and gets things done.

A winning attitude can do wonders. Rather than feel like a victim who has no control over the markets, a winning attitude allows you to gain realistic control of your thoughts and emotions. Rather than react emotional to a setback, a winning state of mind allows you to cope with an adverse event effortlessly, and manage risk in order to protect your capital. When you have a winning attitude, setbacks aren't a threat. You don't pessimistically blame the markets or market participants for a setback. Instead, you take responsibility for your actions. You think, "What can I do to make a winning trade? Maybe I can change my method. Perhaps I need to stand aside and study the current market action more closely. I'll learn from my mistakes and eventually master the markets." By not putting pressure on yourself to trade with perfection, you feel more relaxed, creative, and ready for action. So when setback after setback starts making you feel like Murphy's Law is true, question its validity, cultivate a winning attitude, take control, and master the markets.

2005-05-19T17:06:00.000-07:00

NHF

May 19, 2005

BANKERS OFTEN LEND MONEY ON CHARACTER, BUT SELDOM ON REPUTATION ALONE, FOR THEY HAVE LEARNED THAT NOT ALL REPUTATIONS ARE DESERVED.

When considering a loan, a banker attaches great importance to three things: the borrower’s ability to repay the loan, the borrower’s credit history, and the borrower’s character. The first two considerations can be calculated mathematically; the third requires judgment and experience. Prudent bankers have learned that persons of character are always a good risk because they take their obligations seriously while those who spend their resources on the trappings of success should be avoided at all costs. Protect your good reputation as you would protect your home, your investments, and your life. Once shattered, a good reputation can only be regained by those who have developed the courage and willpower to persevere in the face of great odds.

2005-05-19T17:03:00.000-07:00

Remember, today is the tomorrow you worried about yesterday.
- Dale Carnegie

I not only use all the brains I have, but all that I can borrow.
- Holbrook Jackson

2005-05-19T17:02:00.001-07:00

5/19/2005
Innerworth

A Good Mood Is More Important Than You Think

Have you felt under extreme pressure while putting on a trade, and found that you just couldn't think straight? You questioned your trading plan, and suddenly, you hesitated at a critical moment during the trade, a time when decisive action was needed. When you get like this, it may be hard to snap out of it. A bad mood has a lot to do with it. When you're in a bad mood, you'll be stuck and paralyzed. Your mood impacts your decisiveness. The better your mood, the more earnestly you'll trade.

In an innovative experiment, psychologists Benie MacDonald and Graham Davey (2005) showed that seeking extreme perfection is a function of two factors: a bad mood and a belief that mistakes have dire consequences. College students were asked to complete a task that consisted of identifying 100 spelling and punctuation errors. Participants were randomly assigned to one of four experimental groups. Some participants were told that if they made a mistake on the task, they would receive a slight form of punishment, while for others, making a mistake had no consequences. Some people did the task while in a good mood, while others did the task in a bad mood, which was induced experimentally by the researchers.

The participants who were in a bad mood, and thought that they would be punished for making a mistake, tended to unnecessarily check and recheck their work. In other words, they tried to achieve an unrealistic level of perfectionism. Why did this group of participants obsessively strive for extreme perfection? According to MacDonald and Davey, these participants allowed their mood to dictate their behavior. They thought, "I'm going to look for mistakes until I feel satisfied." When you're in a bad mood, however, this isn't a very useful strategy. A bad mood doesn't dissipate very quickly, and so if you check and recheck your work until you are satisfied, you'll check and recheck longer than necessary. Since you're in a bad mood, you'll never feel satisfied, no matter how much checking and rechecking you do.

This experiment explains why people seek out extreme perfectionism while in a bad mood. If you are prone to experience self-doubt, your confidence will be especially shaken when you are in a bad mood. As you try to execute your trading plan, you'll question whether it is viable or whether current market conditions are optimal. You'll never be satisfied and think, "Something doesn't feel quite right." At these times, it is vital to do one of two things. Either avoid trading while in a bad mood, or don't let your mood guide your actions. Remind yourself that when you are in a bad mood, you will be especially prone to question your actions, and may act irrationally or impulsively. If you are aware of the psychological mechanisms that influence your decision-making, it's possible to work around them. If you think, "I'm in a bad mood, and thus, I'm irrationally questioning my trading plan or my abilities," you can try to ignore your mood, and persistently and logically try to follow your trading plan with discipline. But whatever strategy you take, don't underestimate the powerful influence your mood has on your thoughts and decisions.

2005-05-19T17:02:00.000-07:00

5/17/2005
Innerworth

Abandoning Risk Limits

Winning traders manage risk. Risk management is vital for their survival. But financial risk management doesn't come naturally for most people. Behavioral economists have shown that people can be extremely undisciplined when it comes to risk control. After a big win, they can become overconfident to the point of exuberantly taking unnecessary risks. And after a big loss, they have a strong desire to recoup their losses. Gaining awareness of these human decision making biases can help you neutralize them, and prevent them from shattering your trading discipline.

In a classic study, behavioral economists Richard Thaler and Eric Johnson asked participants to take two gambles, one after the other, using real money. In the first of the two gambles, participants either won or lost money. The point of the study was to see what people would do in the second gamble. Would they enthusiastically take another risk or would they shrink away, averse to risk?

When participants won on the first gamble, they were willing to take a chance on a second gamble. But participants who did not win on the first gamble refused to make a second bet. Behavioral economists call this finding the "house money effect." When people obtain a windfall, they don't mind losing it. They don't see the money they won as their own and are willing to risk it freely. It's like gambling with the casino's, or house's, money. They think, "It's not my money. It doesn't matter if I blow it all."

When participants lost money on the first gamble, in contrast, they were not willing to make a bet on the second gamble. It's like when a snake or a spider bites you. Once you've been bitten, you're afraid to get bitten again. You don't take a chance in the future. You're too afraid. People don't want to take a risk when they have a clear image in their mind that they are going to get hurt. Behavioral economists call this phenomenon the "snake bite effect."

When losses are especially great, however, people easily overcome the snake bite effect. There is a strong and pervasive tendency to recoup losses. In the "break even effect," people are willing to go double-or-nothing to make back what they have lost. They will take especially risky gambles on the chance that they can break even quickly. But riskier bets often mean even bigger losses in the long run.

Managing risk is essential for long term survival. But traders are human, and humans can behave irrationally. Overconfident online investors who have made big wins, for example, tend to over-trade and take riskier trades than are prudent. And when novice traders have a long series of losers, many are tempted to make bigger, riskier trades in the hope of recouping what they've lost. Instead of falling prey to these biases, it's vital to steadfastly manage risk no matter what. Don't let common decision making biases compel you to abandon your risk management plan. Winning traders manage risk. If you can control your impulse to react irrationally and emotionally, you can easily manage risk, and achieve enduring financial success.

2005-05-18T18:27:00.000-07:00

Look, fortunes are going to be made. But the biggest risk is what you cant see today. Thats why life is the ability to step outside yourself, to see that something you cant see TODAY, something that one day you will hit yourself on the forehead and say "Why didnt I see it that way ?". You wont be able to imagine not having seen it, except that you will remember not having seen it

Lloyd Blankfein, COO, Goldman-Sachs

To different minds, the same world is a hell, and a heaven.
- Ralph Waldo Emerson

Success is getting what you want. Happiness is wanting what you get.
- Dale Carnegie

I not only use all the brains I have, but all that I can borrow.

- Woodrow Wilson

2005-05-18T18:26:00.000-07:00

Innerworth 5/18/2005

Risk Tolerance: Knowing Your Limitations and Working Around Them

Winning traders know how to tolerate risk. Trading outcomes are far from definite, but they don't mind. They have no problem putting on trade after trade and doing so with grace and nonchalance. Not everyone can live up to this standard, however. Many novice traders have trouble taking a risk, even a small one. They either avoid executing a trade, or when they do, they find it excruciating to monitor the trade as they wait to see if their profit objective will be reached. Depending on your background and personality, you may have trouble tolerating risk. But don't let it dash your hopes of making profits. You can develop a way to work around a low tolerance for risk.

When you find risk taking particularly fearful, it's hard to concentrate. You are continually on edge and tempted to close out a trade just to end the uneasiness. Part of risk tolerance is biological and part of it is socially learned. Some people are easily agitated and once they become anxious, they find it difficult to calm down. They continue to remain anxious and on edge, even when a threatening event has passed. If you are easily agitated, it's useful to take precautions to reduce your propensity for over-stimulation. The mind and body go together and there are many ways to reduce your overall level of agitation. For example, if you exercise, avoid caffeine, meditate, eat nutritiously and get plenty of rest, you will stay more relaxed. That said, it's hard to fight biology. If you've always been the kind of person who gets anxious easily, you'll have to find a way to work around this aspect of your personality.

If you find taking risks especially difficult and extremely anxiety provoking, you may need to adapt your trading style to fit your physiology. There's no one right way to do this. It depends on your preferences. But one issue to consider is the length of time you stay exposed to risk. The longer a trade, the more risk involved. Scalpers, for example, take minimum risk. They get in and get out of the market as fast as possible. Some anxiety-prone people may find this kind of fast-paced trading especially stressful, but others may find it appealing. You don't have to wait very long to see how a trade turns out.

At the other extreme, long term investing can be another option. Some companies have relatively consistent long-term trends. By doing some simple homework, you can identify a few solid companies and use a buy-and-hold strategy. After you buy the stocks, make a conscious decision to restrict the number of times you look at the price. You might decide to look only a few times a year, for example. Looking at how the stocks are doing can be a lot like looking at a slot machine or roulette wheel. When you look at it, you'll feel anxious as you anticipate what might happen. But if you avoid looking, you'll see the grain of truth in the saying, "out of sight, out of mind." That's not all you need to do, however. You will also find it useful to put a stop loss in place to limit your risk. Defining the amount of risk you are taking up front will help you tolerate risk. (Remember, though, that you must account for volatility over the course of the trade. It's impossible to completely eliminate all risk. You must find a happy medium between getting stopped out too early or allowing your investment to fall in value to an uncomfortable level.)

There's one last thing you can do: Accept the fact that should the market go against you, you will definitely lose the portion of capital that isn't protected by your stop-loss. In the end, you must accept that you may lose. One of the main reasons people have difficulty taking a risk is that they are afraid of the consequences of a potential loss. They wonder what they would tell their spouse or their parents should they lose. They wonder what they would need to do to make back the lost money. It is vital that you trade with money you don't mind losing. If you can truly believe that losing the money is no big deal, you'll be able to tolerate the risk, even if you have extremely low risk tolerance. But if you can't afford to lose the portion of your capital you are risking on the trade, don't risk it. You will never be able to convince yourself that it is a good idea, and if you have low risk tolerance, you will just be putting yourself in agonizing pain.

Extremely low risk tolerance can severely hamper trading, but if you take the proper precautions, you can still trade profitably. By finding a trading style that suits your personality and only risking money you can afford to lose, you'll feel calm enough to trade freely and profitably.

2005-05-18T18:25:00.001-07:00

5/13/2005
Innerworth

Media News and the Behavior of the Masses

As a short-term trader, your goal is to stay ahead of the crowd and let their money flow from their pockets into yours. The better you can anticipate the behavior of the masses, the better you'll be able to capitalize on their irrational decisions. The masses are notorious for over-reacting to media news. In an innovative study, behavioral economist Dr. John Nofsinger studied how media coverage influences the masses. It's not as straightforward as you might think.

A popular theory in behavioral economics is that buying and selling by the masses is motivated by a powerful tendency to avoid regret and seek out pride. These emotional tendencies often lead to irrational investment decisions. Many investors, for example, hold on to a losing investment because they don't want to face feelings of failure and regret. Keeping losses on paper postpones the inevitable. Good news raises stock prices, and when prices rise as a result of good news, most investors can't wait to sell, take profits, and bask in the glory of success. Dr. Nofsinger's study, however, reveals that things may be a little more complicated. It may depend on the kind of news investors hear, rather than whether it is good or bad. He studied how investors reacted to two kinds of news, news about specific companies and news about the economy in general.

Good news, whether it is about a specific company or about the economy in general, increases stock prices. And one would think that regardless of what kind of news raises a stock price, the impact on the masses would be the same. But Dr. Nofsinger found that the kind of news does matter. If the good news is about the specific company, the masses tend to sell, but if the good news is general economic news, they hold on to their positions. Bad news about the economy similarly has little effect on what the masses do according to Dr. Nofsinger.

What are the psychological dynamics behind the behavior of the masses? In their pursuit of pride and avoidance of regret, the masses continually monitor their positions and deliberate as to whether they have made a good or a bad investment. If the news is bad about a company, they tend to blame themselves for choosing the wrong company in which to invest. They tend to believe that they could have cherry picked a better company had they done their homework. When they hear good or bad economic news about a company, it bears on their original decision to invest in the company, and they react emotionally. On the other hand, it's hard to blame yourself for a poor economy. What could you have done? A poor economy impacts all stocks, so the only thing you could have done was to avoid investing in the market altogether. It wouldn't matter what company an investor decided to put their money in since all companies are affected by a poor economy. In this case, the masses forgive themselves, and do nothing.

The influence of emotions on the masses is powerful. By seeking out pride and avoiding regret, they allow their emotions to overpower their logic. As an astute trader, however, it's vital that you stay objective. Don't let your feelings of pride or regret influence you. Let the masses over-react. And when they do, capitalize on their irrational behavior and profit form it.

2005-05-18T18:25:00.000-07:00

5/12/2005
Innerworth

Sunk Costs in Everyday Life and in Trading

Have you ever put your time and money into a project and received nothing for it. Perhaps it's a classic car you've been meaning to restore that's been sitting in the garage for 10 years, or your grandparents' antique sofa that you put in a storage unit until you can find a way to fit it into the décor of your living room. It has sentimental value and you just don't want to part with it. It's worth the $80 a month to keep it in storage, right? Maybe you can give it to your children, but at $80 a month for 10 years? That's $9,600! Is the sentimental value worth it? That's up to you, but for some people, $9,600 is a lot to pay for sentimental value. We can get overly attached to our possessions to the point that we do whatever we can to keep them, rather than just let go of them. This attitude can transfer to the trading realm as well. People can become so overly attached to a stock that they act emotionally, as if the stock has sentimental value. But stocks aren't for owning and keeping. Stocks are for trading, and making money.

Sunk cost effects are powerful. Our time and energy are precious, and when we devote valuable resources to an activity, in everyday life or a trade, we want to believe we didn't squander the few assets we have available. When we make a trade, we want to believe that we made a good decision. A nagging voice in the back of our minds whispers, "Why did you risk resources if you did not think that you could make a decent profit?" Your first inclination is to shout, "I didn't." But you may have, and it's all right if you did. When you make a trade that isn't working out, don't be afraid to admit it. Don't try to justify your decision.

Everyone makes mistakes, and winning traders make a lot of them on their way to enduring profitability. Don't place more meaning on a trade than necessary. It's just a business deal, and when you do make a poor trading decision, don't be afraid to admit it. Don't be riddled with guilt or regret. Many times, we avoid admitting that we made a poor decision because we are afraid of the emotional consequences. We see ourselves as competent and astute, and when we make a mistake, it can make us feel inept and obtuse. It's easier to try and ignore it, and save face. For example, you can leave a losing trade on paper and hope that market conditions will improve and you'll recoup your losses. It's usually better to just face the loss, though. Just accept your limitations, and move on. It can be difficult, but you can make it easier by remembering the motto, "Don't feel bad about feeling bad." So you made a mistake. Make light of it and move on. Rather than react emotionally with guilt or anxiety, it's better to stay objective. When you objectively look at a trade, you'll be less afraid to study the consequences in meticulous detail. You'll monitor your trades, look honestly at how well you're doing and neutralize the sunk cost effect. The sunk cost effect is powerful. It's the demise of many traders who fruitlessly try to ignore what they did wrong, and in doing so remain stuck and uneasy. But if you find the courage to objectively acknowledge when you were wrong, you can take setbacks in stride, and move on to the trades that make you a winning trader.

2005-05-09T23:12:00.000-07:00

5/9/2005

Innerworth

Pick Yourself Up and Move On

Are you having a bad day? Has media coverage spoiled your trading plan? Perhaps you are just feeling a little off? When you encounter an unexpected setback, you can feel beaten down. You might be tempted to just stay knocked down, stuck, and unable to get back up. "I'll never make enough winning trades to recoup my losses." Ever have these thoughts, when you feel beaten? It's natural, but you can't stay down too long. You have to get back up and try again.

When a wild animal searches for water in the middle of a desert, it doesn't wallow in self-pity when all the watering holes are dry. It keeps on searching until it finds water. Continuing the search is a matter of survival. There's no time for worry and disappointment. When you encounter a setback, it's wise to similarly search for new market opportunities. Think optimistically. Don't retreat. Engage your primal instincts to survive.

Art Linkletter once said, "Things turn out best for people who make the best of the way things turn out." You may have expected a trade to turn out profitable yet lost. Some may see the loss as a sign of personal inadequacy, but the winning trader takes the loss in stride. He or she asks, was there something to learn here? Sometimes there is and sometimes there isn't. A good trading plan can often fail for no good reason. What winning traders don't do, though, is mull over a setback too long. They make the best of it and move on. That can mean executing the same trading plan under more favorable market conditions or it could mean searching for a new trading opportunity. Whatever is done next, stagnation is not an option.

We often feel trapped when the internal dialog we have with ourselves is pessimistic. When we feel particularly stuck, we can talk ourselves into a rut. It starts out innocently enough. You may think, "I'm disappointed. I needed this trade to be a winner." Your next thought, however, gets you into a bit of trouble. You may start thinking, "I'll never get this right. I'm just fooling myself." Then you start remembering how your best friend warned you that you'd never make it as a trader in the long run. You then remember the other failures you've had in your life and the financial obligations you have this month. Soon, you've talked yourself into a psychological rut. All seems hopeless. When you get this way, it's vital to get back your optimistic, fighting spirit.

How can you recapture your optimism? First, focus on the big picture. You might remind yourself, "I'll make the profits I want someday. It may not be today. It may not be tomorrow, but if I keep at it, I'll eventually reach my financial goals." You might also daydream a little to improve your mood. Imagine a time in the future when market conditions are just right, and you are there enthusiastically ready to take advantage of them. And how can you get ready? Practice and experience. The more trades you make, the more practice and experience you'll have, and when the time comes, you can easily make a killing in the markets. You might also want to make a list of past winning trades to help you pick your spirits up when you're down. If you read the list at the slightest sign of disappointment, you'll be able to pick your mood up before it starts on a downward spiral. Remember the times you've made big wins. If you did it in the past, you can do it again.

Merely getting yourself in a good mood may not guarantee that you will suddenly return to profitability, but it will increase the odds. There's no way you are going to find profitable market opportunities if you are pessimistic. When you are optimistic, you'll think more creatively and freely. And this optimal mindset will give you the mental edge you need to master the markets.

2005-05-09T23:01:00.000-07:00

5/6/2005

Innerworth

Dare To Be Average

When you put your money on the line, there's a strong need to seek out perfection. Many novice traders believe they can get everything just right. They believe that they can locate infallible information, find the perfect setup, and execute every trade flawlessly. In "Trading in the Zone," Mark Douglas notes that many traders are so consumed with making the perfect trade that they never get around to executing enough trades to make a profit. It may be difficult to accept for the overly compulsive trader, but trading is not a profession where you can persistently demand perfection. There's no such thing as a sure profit. Information is often inaccurate. You can plan a trade methodically only to have it fail because an unanticipated adverse event thwarts your trading plan. It's natural to strive for perfectionism. You don't want to be a sloppy, impulsive trader. That said, you don't want to be an extreme perfectionist either.

"The harder you strive for perfectionism, the worse your disappointment will become," according to Dr. David Burns (1980). Perfectionism has more disadvantages than advantages. When you strive for overly exacting standards, you feel so tight and nervous that you actually aren't very productive. You are unable to take risks because you fear failure. You tend to hold back rather than make new discoveries. Trading is a profession where you must take risks and explore new market opportunities. If you continuously strive for perfectionism, you'll never feel satisfied. You'll always think, "I could have done better."

Is your perfectionism out of hand? Here's an exercise Dr. Burns suggests for learning about the impact of your perfectionism: Dare to be average. Feel what it is like to be average and see what happens. Rather than search for the ideal setup, why not just find a profitable setup? What happens when you just make an average trade? Sure you won't make as much profit, but you might feel better. You will probably feel relaxed. Compare what it feels like to strive for high standards, moderate standards, and low standards. You may find that merely going for moderate standards makes you feel better. You may also find that you put on more trades, and achieve greater levels of profitability. Trading can be a matter of probabilities. To get the law of averages to work in your favor, you must make trade after trade. If you manage your risk, and put in a moderate effort, you can make enough trades to come out ahead. As long as the setups are reasonable, and you are using sound trading strategies, you can get the losing trades "out of the way" and focus on the winning trades. But if you are an extreme perfectionist, you'll always be on edge and unable to make trades. And because you are so concerned with overly high standards, you may never discover and take advantage of new, profitable market opportunities. By easing up, you'll feel more relaxed and creative. Ironically, you may end up more profitable by daring to be average, instead of striving for absolute perfection. So dare to be average and see what happens. You may be surprised at what you find.

2005-05-09T22:59:00.001-07:00

NHF

May 9, 2005

PROFANITY IS A SIGN OF INADEQUATE VOCABULARY OR UNSOUND JUDGMENT-OR BOTH.

Mark Twain once observed that "the difference between the right word and the almost-right word is the difference between lightning and a lightning bug." It is never appropriate to use profanity, especially among people you do not know well. Instead, build your vocabulary by reading and studying so that you can express yourself simply and eloquently. When you expand the number of words you know, you also expand your mind, because understanding the words and their meanings necessitates understanding the concepts behind them. Make sure you allow time each day for study and reflection. words, but actions speak for themselves.

2005-05-09T22:59:00.000-07:00

NHF

May 8, 2005

BOASTFULNESS IS GENERALLY AN ADMISSION OF AN INFERIORITY COMPLEX

Really capable people don’t have to boast about their achievements; they let their actions speak for them. When you boast about your accomplishments, you are telling others that you are unsure of yourself and your value in the world. Baseball manager Tommy Lasorda once noted that there are those who watch things happen, those who wonder what happened, and those who make things happen. Strive to be one of those who make things happen. If you show others what you can do, they will respect you far more than if you had simply told them what you’d done. Anyone can quarrel with words, but actions speak for themselves.