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  1. We accumulate information, we learn- buying trading books, asking questions, maybe going to seminars and researching what really works in trading. We begin to trade with our ‘new’ found knowledge. We make profits only to give it back very quickly and then realize we may need more knowledge or information. We accumulate more information. We switch the stocks we are currently following and trading. We go back into the market and trade with our improved system. this time it will work. We lose even more money and begin to lose confidence that we can even be traders. The reality of losing money sets in. We start to listen to other traders and what works for them. We go back into the market and continue to lose more money. We completely switch our style and method. We search for more information. We go back into the market and start to see a little progress. We get ‘over-confident’ in a single trade and put on a big position believing it is a sure thing and the market quickly takes our money. We start to understand that trading successfully is going to take more time and more knowledge than we ever anticipated. MOST PEOPLE WILL GIVE UP AT THIS POINT, AS THEY REALIZE REAL WORK IS INVOLVED AND THAT THIS IS NOT EASY MONEY. We get serious and start concentrating on learning a ‘real’ methodology. We trade our methodology with some success, but realize that something is missing. We begin to understand the need for having rules to apply our methodology. We take a sabbatical from trading to develop and research our trading rules. We start trading again, this time with rules and find some success, but over all we still hesitate when we execute. We add, subtract and modify rules as we see a need to be more proficient with our rules. We feel we are very close to crossing that threshold of successful trading. We start to take responsibility for our trading results as we understand that our success is based on our ability to execute our methodology. We continue to trade and become more proficient with our methodology and our rules. As we trade we still have a tendency to violate our rules and our results are still erratic. We know we are close. We go back and research our rules. We build the confidence in our rules and go back into the market and trade. Our trading results are getting better, but we are still hesitating in executing our rules. We now see the importance of following our rules as we see the results of our trades when we don’t follow the rules. We begin to see that our lack of success is within us (a lack of discipline in following the rules because of some kind of fear) and we begin to work on knowing ourselves better. We continue to trade and the market teaches us more and more about ourselves. We master our methodology and our trading rules. We begin to consistently make money. We get a little over-confident and the market humbles us. We continue to learn our lessons. We learn smaller positions lower the volume of our emotions so we trade smaller and this surprisingly makes us better with our discipline. We learn that risk management is one of the biggest keys to winning as a trader, we start to understand that big losses will make us unprofitable so we finally trade a smaller and consistent position size. We stop thinking and allow our rules to trade for us (trading becomes boring, but successful) and our trading account continues to grow as we increase our position size only as our account grows. We are making more money than we ever dreamed possible. We go on with our lives and accomplish many of the goals we had always dreamed of. Money is our new tool to do what we have always wanted.
  2. I also want to thank my survey partners (listed below) who shared the survey with their audience and ensured that we had a wide and varied group of traders participating. As I said, the survey results were enlightening. There is a big disconnect in the trading community and we saw that it was consistent no matter how we sliced up the data. Take a look below at the survey demographics. The disconnect was evident regardless of age, gender, or geographic location. What’s the big disconnect? Here it is in simple terms: 97% of traders believe that psychology plays an important role in trading. 96% of traders believe emotions can negatively affect your trading decisions. 91% are able to recognize when emotions like fear, greed, anger, overconfidence and lacking confidence impact your performance. BUT… Only 34% have a system in place to manage those emotions. One of my first questions when I was looking at the data was “I wonder what these answers would have been 10 years ago?” My guess is that the percentage of those first three stats would have been much lower. Many fewer traders would believe that psychology is important or that emotions impact trading decisions. And even fewer would be able to recognize when emotions like fear, greed, anger, overconfidence and lacking confidence impact performance. The fact is, the experts in the trading psychology community have done great work in laying the foundation. Experts like Mark Douglas, Brett Steenbarger, Van Tharp, and Denise Shull have all helped traders to be more aware. And I would be that you wouldn’t find 90+% of people in other fields able to have that much awareness of the impact that psychology or emotions has on their job. I doubt we would find the same results from a survey of 1,200 engineers, teachers, lawyers, or doctors. Pivoting from Awareness to Action So the good news is that the trading community has won a significant battle. We don’t have to fight for awareness anymore. I was part of that wave in Poker a decade ago when my first poker book came out. In trading, it’s huge to get to this point. Stand up, high five, run a victory lap – it’s big news. And it’s clear of the next opportunity. Now we can turn our attention to closing that 56 point gap between awareness of emotions and a strategy to manage them. I’m excited by this opportunity. I’ve spent the last 16+ years honing a system that is strategy-based, practical, and repeatable. That said, while I’ve been working with traders privately for years, I understand that my work is brand new for many of you. Some of you are just beginning to work with my book, The Mental Game of Trading, and others are finding out about the book for the first time now. But rest assured that my goal from here forward is to figure out how to close that gap. What are the resources you need? What needs more explanation? Where do you need extra help? These are the questions I’m curious about and if you have thoughts, please email me directly. A Mental Game Quick Guide The first step that I’ve taken to help you all develop a strategy for trading psychology is to provide a quick guide for my system. The system is laid out in The Mental Game of Trading and some of my readers suggested this would be helpful. I shared drafts with a handful of traders who gave me feedback and I’m actually offering two different formats because some of you may appreciate one more than the other. You can find them on the worksheets page. I have other ideas of what might be helpful and in January will ask for your feedback in a follow up survey designed to help me narrow in on what will serve you best. If you want to participate, be sure to sign up for my newsletter. (Scroll to bottom of the page.) There will be plenty of space in the survey for you to share any ideas you have as well. Data can be very useful. Sometimes it changes the way you think about a problem entirely. Sometimes it validates a hypothesis you already had. For me, this survey told me I am in the right place at the right time. I am passionate about helping you perform at your best and I know improving your mental game is a key part of your success. Clearly we’ve got work to do and I’m excited to dig in and dramatically change that number in future surveys. Thoughts From Survey Partners I also asked some of my survey partners what they had to say about the results and what they think the industry needs. Here’s what they had to say: Morad Askar of Convergent Trading, recognizes the situations where retail traders tend to struggle the most with their emotions, it’s “Situations of extremely high or low market volatility, like we’ve seen in several indices recently. This kind of activity can cause traders to second guess themselves as changes in market behavior can be abrupt. Changing market dynamics can lead to an erosion of emotional capital, increased trading errors, and frustration. This is when accountability and peer group-support really matter.” Corey Lane from Traders Army, shared these thoughts on the survey, “Most traders tend to focus on mastering the mechanics of their trading. And while that is important, it’s clear that the skill that often gets ignored, is the mastering of one’s self, and their emotions around trading and investing. As educators, it’s not only an opportunity for us to focus on this with our students, we feel like we have an obligation to help train the student in the area of emotion management. Without it, it’s leaving the door wide open for a difficult road ahead for the student, no matter how well they’ve refined their trading strategy.” Kim Klaiman from Steady Options thinks the 34% may be even too optimistic, “We know that many traders overestimate their abilities.” And thinks that one of the reasons for this disconnect, however large, is because humans desperately want to believe there is a way to make money with no or little risk. That’s why Madoff existed, and it will never change. Steve DArgenio from Microefutures Trading Community worries, “Many members in our trading room feel, incorrectly, that spending mental capital addressing the emotional issues is time better spent mastering the technical aspects of trading. So the challenge we have is showing them the ROI benefits of working on the emotional actions items needed in tandem with the technical.” The power of a survey grows exponentially based on the size and scope of the participation. We would never have gotten there without our terrific partners. Big thanks to: Convergent Trading Anthony Crudele Traders Army Microefutures Trading Community Steady Options Cringle Academy Swing Pony Romulus Related articles: Q&A With Mental Game Coach Jared Tendler Are Your Emotions Trying To Tell You Something? 5 Stages Traders Go Through 10 Fatal Mistakes Traders Make Learning To Win By Learning To Lose How To Avoid Emotional Mistakes In Trading 10,000 Hours Of Trading
  3. Jared: Thanks for the opportunity. I’m Jared Tendler, mental game coach and author. My job is to help traders, investors, athletes, PGA Tour players, poker players and other professionals remove the emotions that negatively affect decision-making and performance. I have clients in 45 countries, including some of the top professionals in their field. I’m also the former head of sport psychology for the esport organization Team Liquid, where I was an integral part of recent championships across many of their teams. I got into the field from my own experience as an aspiring professional golfer. In college, I was a 3-time All-American and won nine tournaments, but continually choked in major national events. I didn’t find answers from sport or golf psychology, and as is common with a lot of entrepreneurs, my career was born from believing there had to be a better way. I got a master’s degree in counseling psychology and spent 3200 hours of supervised practice to get licensed as a therapist, but never with the intent to be a therapist -- instead, I wanted to understand how to better solve performance issues in golf. In 2005, I started working with golfers and quickly built up a roster that included players on the PGA, LPGA, and Korn Ferry Tour, as well as top ranked juniors. My success there has since led to work with poker players, traders, pool players, sports betters, lawyers, and entrepreneurs. QUESTION: Have you overcome any personal or professional challenges that enabled you to help others as a performance coach? Jared: I failed to fulfill my dream of being a professional golfer because of my inability to handle the pressure. For me, the natural selection of competition weeded me out and that drove me to create a system that can teach/train people to fix their weaknesses. Back then, if I had what I have now, I’m not saying that I’d be on the PGA Tour, but I would have had a legit shot. Having the experience of being a high-level competitor gives me an important perspective as I work with traders. Even though I’m not a trader, I know what it takes to be successful and how to help people, who have not yet made it, get over the hump and achieve their goals. It’s incredibly fulfilling. QUESTION: Great, thank you for that. Next, let’s take some questions from traders. Here’s the first: “I find myself continually jumping into trades that I know I shouldn’t. I know it’s irrational, but I keep doing it anyway. How can I stop?” Jared: A lot of people feel that their mistakes are irrational or illogical, but the reality is that these things happen for predictable reasons that you might not yet understand. They actually make sense when you realize how much emotion is at play. Even though you might be aware at the moment of what you ought to do, you can’t stop yourself. That's because your emotions are so intense, they are effectively paralyzing the part of the brain that’s responsible for higher level decision making and execution. The key is to determine what those emotions are -- fear, anger, greed, or some kind of confidence issue, etc. Once you identify the emotions that are blinding you, you’ll have a chance at stopping those mistakes before they happen. QUESTION: “I hate it when other traders are making money and I’m not. I see people making moves and posting about their massive returns on Twitter, but I feel like I am always 3 steps behind. What can I do to catch up?” Jared: If you feel like you’re always trying to chase the market, take a closer look at what that’s about. Is it something technical, like a weakness in your strategy? Because there are lots of opportunities out there, and at any given moment there will be lots of traders making money and lots of traders losing money. Copying the trades that others are making isn’t a viable strategy. From an emotional standpoint, is this actually based on a fear of missing out, or a fear of losing? Understanding what the fear is about will help you to correct it. In some cases, FOMO is actually a form of perfectionism, where you feel like making a mistake is unforgivable. Instead of trying to attain perfection, focus on how to make money reliably and focus on that strategy. QUESTION: “I hear what you are saying about perfectionism, but isn’t it necessary to have high expectations in order to be successful?” Jared: High expectations are an incredible source of motivation, so there’s nothing inherently wrong with them. But the problem with perfectionism is that you are expecting outcomes that you can’t guarantee, which can lead to a lot of self-criticism and negativity. That can eventually damage your confidence and even lead to burn out. This is a very common problem in trading, many high-level traders have encountered this. You need to realize that your psychological integrity is important, and give yourself some room to develop your skills and make progress gradually. Otherwise, it’s like you’re trying to climb a mountain without a rope. You need to give yourself enough room to handle set-backs. QUESTION: “I’m just coming off a peak equity high and am now finding myself in a big draw down. This seems to happen every time -- I hit a new high, and then I crash. How can I stop this pattern?” Jared: You’re obviously capable of doing really well, but beware of overconfidence. As you achieve some success, your parameters might start to get a little looser and you take on more risk. At first, you might rationalize to yourself, “it’s ok if I lose a little bit here,” but when the losses start to accelerate, it feels like you’ve stepped in quicksand, frantically trying to get out - by overtrading, for example - you make the problem a lot worse. At that point, you may be shocked at what’s happening and lose your confidence completely. In order to regain your execution, you need to find some stability. The simple answer to this problem is to spotlight your confidence and really learn to recognize how it is impacting your performance. Start small -- go back to your bread and butter trades and rebuild your account balance and your confidence slowly. Progress your skills so that next time you reach that peak, you’ll be stronger and able to avoid those same mistakes. Then, work on reducing overconfidence to prevent the cycle from repeating. QUESTION: “I work hard to keep my emotions under control, and I’ve even developed a meditation and mindfulness practice. I don’t feel like I’m emotionally volatile, yet I’m still struggling to make the right trades. What am I doing wrong?” Jared: Meditation is a tool to help strengthen your mind, but it’s not intended to suppress your emotions. You may feel very stoic, like you’re in complete control, but your emotions are still at work under the surface. It can be a challenge to re-engage with that emotional undercurrent, especially if you’ve been trying hard to control it. Try implementing some tighter risk parameters in your trading for a bit, while monitoring your own thoughts and reactions. Notice any tools you may habitually engage in in order to suppress emotion. For example, some traders become hyperlogical about their mistakes and missed opportunities to convince themselves that everything is okay. Try to be honest with yourself about what’s happening under the surface. QUESTION: “I feel like I’ve lost my focus lately. Is there anything I can do to get back on track?” Jared: If you lose focus, it might be because you’re not clear on exactly what you’re trying to accomplish. View the loss of focus as a signal to take a step back and review your objectives. If you find yourself really struggling with something – feeling annoyed, confused, etc. – writing can be a great tool to explore it further. QUESTION: “If I do what you are suggesting, will I be able to solve my issues once and for all?” Jared: My newest book, The Mental Game of Trading, is intended to help traders fundamentally correct some of their problems they experience with regard to psychology. If you are diligent and stay at this consistently, the answer is yes, you can solve these issues. When you are mired in the process of trying to control your emotions, it takes up too much of your mental and emotional resources. The real power of this system is to fundamentally correct these problems, which enables traders to free up their minds to evolve with the market and tap into new information to become a better trader. QUESTION: Thank you for your time. How can our readers learn more, or get in touch with you directly? Jared: Thanks again for the opportunity. You can contact me through my website:, and you can also download the first chapter of The Mental Game of Trading or get a free copy of my new eBook on intuition. Also, follow me on Twitter: @jaredtendler. About the Author Jared Tendler, MS, LMHC, is a leading expert in how your mental game impacts performance. His roster of clients spans 45 countries and includes esports athletes, financial traders, some of the top poker players in the world, a top ranked pool player, and several PGA Tour players. Related articles Are Your Emotions Trying To Tell You Something? Are You EMOTIONALLY Ready To Lose? Are You Ready For The Learning Curve? Why Retail Investors Lose Money In The Stock Market How To Become A More Profitable Trader 5 Stages Traders Go Through 10 Fatal Mistakes Traders Make Learning To Win By Learning To Lose How To Avoid Emotional Mistakes In Trading 10,000 Hours Of Trading
  4. You stop trading on days your emotions are too high, until you can get your head on straight. You may even do the following: Move a stop to break even Walk away from an active trade so you don’t interfere with it Quit a session early to ensure a profitable day Review sticky notes on your monitor before entering a trade Talk to yourself to stay disciplined and motivated Constantly remind yourself of basic concepts, like “losses will happen; don’t let it affect you” Take extended time off from trading Or, conversely, perhaps you find yourself doing this instead: Moving your profit target out of a greedy attempt to make a killing Chasing the market from a fear of missing out Overtrading out of anger to make up for losses or mistakes Thinking you can outsmart the market because of overconfidence Sticking with a losing trade too long because your confidence can’t handle another loss The problem with all of these behaviors is that they minimize your profitability, as well as your ability to adapt and improve as a trader. Trading smaller, exiting earlier, and booking a profitable day in an effort to keep your emotions in check can significantly limit your upside potential as a trader. And making trades out of a mixture of anger, fear, greed and overconfidence or underconfidence can be downright dangerous. LEARN TO READ THE SIGNALS Let’s dig in a bit deeper. It’s a myth that emotions such as anger, greed, and fear are the problem causing your trading errors. These emotions are actually signals. This is a critical change in perspective. Rather than fighting your emotional state, treat your emotions as signals and get curious about what they’re trying to tell you. We do this all the time when it comes to physical ailments. And, like our emotions, sometimes the real cause is not always obvious. For example, let’s say you’ve been getting headaches at the end of the trading day. At first you think they’re caused by the stress from trading. Family and friends agree with you, but you still get them on the weekend and even after a weeklong vacation. You go to the doctor fearing it’s something worse, yet everything checks out. You’ve been taking over-the-counter meds for a few months now, trying to manage your headaches, but you still haven’t found the cause. Then, as you finish up your trade journal at the end of a trading day, you notice yourself squinting and decide to get your eyes checked. Turns out, your vision has progressively worsened over the past six months and eye strain is causing your headaches. Change your eyeglass prescription, problem solved. Headaches weren’t the problem—they were a signal, and it was your job to interpret what that signal meant. Similarly, negative emotions are signals of the hidden flaws that undermine your trading. For some people, these hidden flaws cause subtle problems. They’re like computer programs running in the background but not open on your desktop. They dull your sense of the market, reduce clarity in your thinking, and slow your reaction time. For others, the hidden problems are the cause of a barrage of error messages and blue screens. You make trades you know you shouldn’t, but you can’t stop. You stare at a textbook trade but can’t pull the trigger. You know you should close, but fear or greed blinds you. You know the right way to react, but can’t stop yourself from overreacting. Regardless of how much these flaws impact your trading, they must be identified and corrected to consistently trade at the level you expect or aspire to. Think of your emotions like the indicators you follow in the market. As a trader, you use signals all the time and, based on your level of expertise, you are more or less skilled in leveraging those signals to deploy your edge. MAP YOUR PATTERNS The good news is that your emotional reactions happen again and again for the same reason. There’s no randomness in the mental game. So, just as you spot patterns in the market and develop a strategy for taking advantage of them, you can identify the underlying causes of your emotions by mapping the patterns of your reactions. Many traders are blind to the patterns in their mental game, but recognition is a learned skill. And like any other skill, the more you work at it, the better you become. The key is to write down the details as they happen. Keep a record of your trading mistakes, noting what happens before, during and after. Make sure to note your thoughts, emotions, behaviors, changes to decision-making, and the nature of the mistake. For example, let’s say you quickly re-enter a losing trade out of anger. Here’s what you might want to map: Thoughts: I can’t believe this is happening. I’m not letting the market stop me—I’m going to get this trade right! Emotions: I want revenge when any trade I know has an edge doesn’t pay off Behaviors: I’m hyper-focused on one position and constantly looking at PnL Change in decision-making: I’m focused on getting revenge and getting my money back Trading mistake: I’m taking the same trade over and over, until it’s clear I’m wrong and getting nowhere Before the next time you trade, think back to previous instances where the errors happened, and start writing out those details as best you can. This way you can immediately avoid repeating some of these mistakes. As this process gets easier, start looking for earlier signals. What happened before? If you get too caught up in the day to remember to track your emotions, consider setting an alarm at some regular frequency that isn’t too disruptive (i.e., every 15, 30, or 60 minutes) to take stock of where you are. Some clients have also found meditation and mindfulness training to be beneficial in creating greater levels of awareness. It will take time, but if you do this consistently, you will eventually be able to recognize more and more of your signals and stop engaging in the behaviors that are getting in the way of your success as a trader. Just as you stop taking medication when your headaches go away, you won’t need to spend time and energy trying to manage or control your emotions, because they will stop getting triggered. The payoff can be huge. As one client told me “ Understanding yourself is even more important than understanding your charts. I used to carry around a lot of emotional baggage with me, without even knowing it. After using this system, I’m no longer a slave to the market – now, I’m able to make the market work for me.” To learn more, check out my newest book, The Mental Game of Trading: A Step-by-Step System for Mastering Trading Psychology. About the Author Jared Tendler, MS, LMHC, is a leading expert in how your mental game impacts performance. His roster of clients spans 45 countries and includes esports athletes, financial traders, some of the top poker players in the world, a top ranked pool player, and several PGA Tour players. The author of two highly acclaimed books, The Mental Game of Poker, and The Mental Game of Poker 2, Jared is currently writing a book on The Mental Game of Trading and is the host of the popular podcast, The Mental Game. In addition to his writing and 1:1 coaching, Jared also previously served as the Head of Sport Psychology for the esport organization Team Liquid. He was a key driver of their success as they won multiple championships, including The International 2017 (DOTA2), the Intel Grand Slam (Counter-Strike) and four League of Legends Championship Series (LCS) titles. Jared’s straightforward and practical approach to coaching has helped numerous clients solve their mental game problems and perform at their highest levels. After earning a Master’s Degree in Counseling Psychology (MS) and becoming a Licensed Mental Health Counselor (LMHC), Jared began his coaching career in 2005.
  5. Everything from casinos to supermarkets are designed to encourage us to think in a particular way or buy a certain item. It’s no secret, but even knowing this doesn’t make us immune to it. This is also true when it comes to the psychology of investors and investments. A quick search on Amazon or Google will bring up hundreds of articles and books about the psychology of investing. For those who make a living investing and trading, it’s a way to understand their own psyche and how they can best use this understanding to be financially successful. It’s all too easy to believe the stereotypes you are presented with on film and TV. Here, traders are usually always male, ambitious, driven, egocentric and a moral compass pointing directly at ‘sociopath’. Though some aspects of this stereotypical trader do ring true, the industry isn’t just filled with Gordon Gecko or Jordan Belfort types. For those people curious about getting into trading and wanting an insight into how psychology plays an important role. Psychology of trades Before diving into the exciting world of trading and investments, it’s a good idea to learn and recognize the psychological pitfalls behind your trades. Many platform demo accounts let you test your skill and put your newfound knowledge to the test before your start risking your own money. Trade Psychology #1 - Information Exposure Bias This type of trade is made based on information you are exposed to most often without checking the accuracy of the information. How to avoid it: Vet all information you receive and get confirmation from as many sources as possible. Don’t latch on to self proclaimed gurus. Trade Psychology #2 - Information Confirmation Bias This type of bias occurs frequently without us even realising it. In everyday life, it tends to take the form of forming an opinion of someone and then seeking a way to twist the facts or disregard them in order to support that opinion. We often do this with politicians and celebrities. Trading based on your biases is dangerous as you are not developing the skills of research and objective reasoning. If your trade comes off, then it only confirms your bias (even if it was luck). How to avoid it:Much like information exposure bias, you need to ensure that you aren’t acting on a hunch or a preconceived idea about something. Check all information for accuracy and try to look at it objectively. Trade Psychology #3 - Being Overconfident There’s a fine line between confidence and overconfidence. Confidence is essential but overconfidence can cost you a lot of money. Relying on your ‘gut’ rather than other information is a sure way to lose money. Going all in on a loser is bad enough, but then trying to chase a loss or hold on to trades for longer than they should. A few big wins might begin to give you the feeling they are invincible, but remember to temper your enthusiasm with a good research backed strategy. How to avoid it: Learn to admit that you can be wrong. Keep yourself open to embracing new opinions and information and the fact that someone might know more than you. Try and take your ego out of the equation and use a system to dictate when to get in and out of trades. Trade Psychology #4 - Trend Trading We’re always hearing about investors who got in early on opportunities such as Netflix, Uber, or other skyrocketing companies. Many inexperienced investors see that a stock is doing well and assume that it will continue to do so in the future. Stock prices don’t tend to increase exponentially upwards, and those who do make the money from it have usually been tracking the market for a long time and got in early. Don’t go chasing high returns when the company is starting to plateau off. How to avoid it: Chasing a unicorn is likely to end up in disappointment. Set your own set of criteria for when to get into a trade and when to exit it. Don’t waver from this. Trade Psychology #5 - Too Much Choice New investors can be overwhelmed by the choice. It is almost impossible to keep up with all sectors and markets. It can cause you to miss opportunities and make mistakes. Alternatively, you can be paralysed with too much information and be too scared to make a trade, worrying that you're going to miss something. How to avoid it: Choose only a few sectors or companies to concentrate on at one time. Trade Psychology #6 - Risk Aversion Being too risk averse doesn’t go hand in hand with successful trading and investments. Investors who are too cautious can miss out on great opportunities or cannot cut their losses by hanging onto bad stocks. How to avoid it: set limits of risk on every trade. Once an opportunity exceeds that limit, leave it. How to use psychology to your advantage In addition to learning the ins and outs of trading, learning the psychology and mindset behind them is just as important. By recognising the emotional driving forces behind your actions, you can start to devise systems to start removing emotion from your decision making. The best traders don’t just operate by their ‘gut feeling’, they base their decisions on the available information and learn how to use this information to make educated predictions. This makes their gut feeling more likely to be right as they are based (whether they realise it or not) on their prior experiences. Be open to changing your mind when new data is presented and always be willing to admit when you are wrong and cut your losses early, rather than trying to chase a win. This is a contributed post. Related articles Are You EMOTIONALLY Ready To Lose? Are You Ready For The Learning Curve? Why Retail Investors Lose Money In The Stock Market Why Simple Isn’t Easy Thinking In Terms Of Decades Can you double your account every six months? Top 10 Mistakes New Option Traders Make 5 Stages Traders Go Through 10 Fatal Mistakes Traders Make Learning To Win By Learning To Lose How To Avoid Emotional Mistakes In Trading 10,000 Hours Of Trading Top 10 Traits Of Successful Options Traders 40 Steps In The Trader’s Journey Buy High, Sell Low: Why Investors Fail How To Control Losses And Protect Profits 10 Tips: Trade Options Like A Pro And Keep Your Day Job
  6. I came across an excellent article by Brett Steenbarger, Ph.D. Here is an extract with some of my comments: We're hearing about record numbers of new traders opening accounts at brokerage firms lately in the U.S. and in Asia. Why? Commissions have dropped to near zero and trading from home suddenly looks appealing during a period of social distancing and increased unemployment. But the risk is that these new traders will start out by trading, not by learning markets. Enticed by self-appointed gurus, teachers, and coaches who offer little more than stale chart patterns and technical indicator readings as "edges", this new generation of traders is likely to take risks with their capital well before they have truly understood and mastered the markets and strategies they trade. Frustrated with their failures, many will turn to trading psychology for answers. But the answer is not just in psychology. The answer is that you have to learn the game before you can master the game. No one starts out as a musician by trying out for concerts at Carnegie Hall, and no one takes up a sport and expects to be in the Olympics any time soon. When we're trading, we're trading against career professionals and finely honed algorithmic systems. When you place a trade, you're stepping into the big leagues. So here's my advice to new traders: If you get a sales pitch promising big trading success without a rigorous learning curve, know that you're being mislead. Those making the pitch are selling hope, not trading expertise. The biggest mistake you can make as a new trader is to take short cuts in your learning process. How many years of playing golf does it take before someone makes the PGA tour? How many years of piano lessons precede a solo with a recognized orchestra? How many chess games are played and reviewed before someone reaches master and grandmaster status and wins tournaments? I recently mentioned that I will be posting how-to videos and content on proven psychological methods for peak performance. On a new website, I will also be laying out a curricular process that will help traders to learn markets from the ground up, drawing upon the actual learning curves of successful traders. No fees, no sales pitches, no promotions. If we can all do a little giving back during this time of health crisis, we will all be richer for our efforts. In sharing, we receive. I think this is an excellent advice. The Internet is full of investment gurus who promise To turn $12k to $4M or $250 into $16,000 in Just One Month without any effort. Those who take the bait find out very quickly that the reality is very different. The old proverb is: give a man a fish and he eats for a day, teach him how to fish and he eats for a lifetimes. Our trade alerts are the fish which are thrown around but the real value is in learning how to fish. This requires commitment and participation. As one of our veteran members wrote: Learning the new strategies was hard, I had never traded this way before. But, I also had to change my way of THINKING as a trader. Knowing the mistakes I had made in the past, I knew if I could get by those and develop a more rules based approach, and follow those rules, I could make this work. It's been a long journey, but I could not be happier. I only trade using the SO methods. My trading is much more stable, I'm a calmer trader, I don't get too excited about the winners, but I also don't get too letdown by the losers. 90% of retail traders lose money in the stock market. You know why? Because they give up too quickly. Success in trading requires long term commitment, determination and discipline. Unfortunately, many people concentrate on short term performance instead of investing in their education and build long term goals. New traders expect to make money with a new strategy after few months which is usually not realistic. If you are ready to start your journey AND ready to make a long term commitment to be a student of the markets, Start Your Free Trial Related articles: Are You EMOTIONALLY Ready To Lose? Are You Ready For The Learning Curve? Why Retail Investors Lose Money In The Stock Market Why Simple Isn’t Easy Can you double your account every six months? Top 10 Mistakes New Option Traders Make Price Of Options Trading Education How To Become A More Profitable Trader 5 Stages Traders Go Through 10 Fatal Mistakes Traders Make Learning To Win By Learning To Lose How To Avoid Emotional Mistakes In Trading 10,000 Hours Of Trading
  7. Unconscious incompetence This is the initial phase of a new trader when he is just getting his feet wet in the markets and looks at his trading platform for the first time. At that stage, a trader doesn’t know how much he doesn’t know, which can often be a liberating, but dangerous place to be in. His trading decisions are pretty much still a gamble and not backed by a sophisticated decision-making process; although the unconscious incompetent trader will never admit that – he doesn’t know any better yet. A few characteristics of the unconscious incompetent trader: He randomly opens and exits trades without a defined trading system He changes his “approach” on a trade to trade basis He does not apply risk management or position sizing principles He often changes his trade direction on the spot and chases price He gets motivated by winning trades and does not care much about losses Beginners luck is what keeps him going One loss often wipes out all previous wins At this stage, the traders with beginners luck are more likely to keep going and make it to the next stage. Often, however, traders lose money, get easily discouraged and acknowledge that trading isn’t as easy as clicking a mouse. Conscious incompetence Now it dawns on the trader how little he knows and he starts to understand that he has to put in the work and study more. Motivated by a few lucky winners, he studies everything he can get his hands on. A trader who still loses money consistently, even after spending a lot of time learning about trading, will often start blaming his tools, the wrong indicators, missing information or unfair markets; he is looking for external excuses. This stage of conscious incompetence is the one that lasts the longest. Some traders will never leave this stage, even after years of being involved in the markets. A few principles and questions can make you aware of potential problems in your trading mindset and general approach: Have I changed my trading system more than once in the last 6 months without really putting in the work? Am I actively reviewing my trades to find out what is going wrong? Am I still making impulsive trading mistakes that cost a lot of money? Do I repeat the same trading mistakes over and over again? Sit down and try to answer these questions. Be honest with yourself even if the truth hurts. Lying to yourself will keep you trapped in your current state and you won’t be able to improve and evolve as a trader. The Aha moment It sounds cliché but this is the time when the trader accepts responsibility for his actions. He understands that all his past mistakes and false behavior will not get him anywhere. If a trader is really serious about making this work, there is typically only one way and the following principles describe the “new” mindset: He stops changing systems and focuses on making the one he has work He starts monitoring his behavior to find negative behavioral patterns He follows a daily trading routine, starts keeping a trading plan and a trading journal He understands that entries are just one part of his system and that, in order to become profitable, he has to work on all components of his system Conscious competence The trader now starts to realize what trading is all about. Although trading is still not easy and his results are far from being perfect, he understands the importance of process-oriented thinking. He stops focusing on only the outcome of his trades. Traders at this stage are typically break-even traders and slowly start to turn their equity graph up. Discipline, emotions and adequate risk management are of utmost importance at this stage and a long-term approach will keep the trader from falling back into old habits. The trading journal becomes his most important companion at this stage because it provides an objective look at his performance and behavior. Traders at this stage are very likely to make it to the next and final stage. They can see that their work is starting to pay off, they stop system hopping and focus on their process-oiented approach. Unconscious competence This is when trading becomes boring – and trading should be boring! At this stage, the trader has spent years of looking at screens and taking the same setups hundreds or even thousands of times. He knows exactly how his preferred setup looks like and trading becomes a waiting game. At this stage, the trader has fully internalized that he can’t win every trade and, more importantly, he does not really care about losses as long as he has followed his rules. Trading is now an activity of pattern recognition, risk management and constant self-improvement. The unconscious competent trader has a thirst for self-improvement and constantly studies the markets. He evaluates the effectiveness of his method and he is driven by the success and his improvements so far. Which stage are you at right now? Being a trader is a life-long journey of self-improvement and self-discovery. The markets teach you something about yourself every day. In fact, a trading plan that makes money for a trader is simply the extension of his own personality with all its qualities and imperfections. Your task right now – if you are not a consistently profitable trader yet – is to sit down and take a deep look at yourself. Then try to answer the following question: which stage are you at right now? Try to answer this question as best and honest as you can. The moment you answer this question, and draw the consequences from it, you will be on your path to improving your trading bit by bit until one day you will finally reach controlled profitability. This article has been published originally on – Tradeciety’s partner site: original article here. Related articles How To Become A More Profitable Trader Can you double your account every six months? Why Retail Investors Lose Money In The Stock Market Top 10 Mistakes New Option Traders Make Are You Ready For The Learning Curve? If you are ready to start your journey AND make a long term commitment to be a student of the markets: Start Your Free Trial
  8. Colibri Trader

    10 Questions Traders Ask

    He took the time and courage to ask me questions, which might be considered by a lot very basic, but I think that exactly this type of questions are the ones you should be asking yourselves, even if you were a pro trader. The ability to ask ourselves simple (yet essential) questions is the epitome of good trading practices. What are good options trading questions to ask? Let me start off by sharing with you the questions I have been asked myself. This will provide you with a lot of material to think about. Question 1. How do you calculate your lot size / position sizing? Answer: That is not a difficult question to answer, although a lot of traders are underestimating the importance of it. In order to calculate lot size, you will need to determine the pip cost of a trade. Pip size might differ between different brokers, but that is pretty much how much you will lose or make per pip. As your lots increase so your pips cost. The opposite is valid when you trade smaller lots- your profit per pip will decrease, as well. This handsomely leads us to the next question… Question 2. How many percent do you risk for every trade? And do you also calculate the swap and commission included? Answer: Your position should not be more than 1-2% of your capital. So, let’s say your capital is 1,000GBP, you should not risk more than 10-20GBP per trade. Regarding the SWAP, each broker has its overnight swap rates based on the LIBOR % rate. I personally don’t risk more than 0.5-1.0% per trade. In my opinion, every time you risk more than 2% of your equity will lead to a self-destruction mode sooner or later. As traders, we must preserve what is most sacred to us- our capital. Since it is our only asset, we should treat it with more care than anything else- even the trading strategy. I believe traders do spent too much time on their trading strategies and almost zero time on thinking about their risk appetite. Question 3. Should we do trailing stop after we open position or just let the price running either hit TP or hit SL? Answer: It is thoroughly discretionary. I tend to use them 80% of the time, especially when price has moved and is about 50% away from my target. It will depend from one position to another, but this is something I have covered in my trading course in more details. Especially, how to stay in a winning position longer and cut losses faster. Question 4. For exit trade: do you set TP on S/R level or using fixed Risk:Reward 1 ratio or other tools? Answer: For exit, I do use TP based on a previous support or resistance area. I do also monitor price action around those major levels and am looking for a confirmation that the trade is exhausted and is about to turn. In case the price shows confirmation of strong momentum, I am not in a rush to get out of a trade. I always consult with price on the daily chart. All of my students that have taken my trading course know exactly what I mean. Sometimes, if a target is reached and price shows signs of exhaustion and a reversal pattern is in place, then I might even consider taking a position in the opposite direction. Question 5. How do you handle your losing streak position? Reduce position size? Or stop trading after some number of consecutive loss? Or…? Answer: If I have one losing position, I stop trading for the day. I try to be as disciplined as possible! Don’t forget that another opportunity will come along, but if you lose your emotional balance, it is much more difficult to come back to the ZONE. You need to be absolutely balanced and with no distractions when taking important trading decisions. Therefore, if you have already taken a losing position, chances are your ego might interfere and lead you to some wrong decisions. Knowing that already- will you be willing to take the risk and take another trade after a losing one? I don’t think so. Capital is your only asset. Hence, you need to think how to best preserve it. Take a break, step back, relax- tomorrow is another day! Question 6. Your main rule is to watch the Daily Time frame for Directional Bias and then trigger the entry on H4. If on H4 there is no clear pattern to trigger the entry, should we stay out or keep forcing the trade using D1 pattern as a trigger? Answer: The way I trade, I am always looking for a signal from the Daily timeframe. Then, I switch down to H4 to get a confirmation. If there is no confirmation from the 4H chart, I usually do not take a trade. Trading straight off the Daily chart is possible, but you need to use a much wider stop-loss. I still need 4H chart for my trading strategy, which allows me to maximise profits and minimise losses- which should be the goal of every trader! Question 7. What about handling draw downs? Is there any strategy for handling drawdowns condition? Answer: Take a longer holiday or time off the screens. If trading is the only thing in your life, then you should reconsider your work-life balance. Trading takes only 1/5 of my life-work balance. You should find other things that make you happy and self-fulfilled and not put in all of your efforts and time in trading. I hope you understand me right! Question 8: May i know. How many markets should we focused for learning phase? Watch all Forex Major pair or we need to focus on 2 or 3 pair first maybe? Answer: I am personally looking at all major and minor FX markets and some indices, as you have seen from my market analysis section. Sometimes you will receive a lot of signals from the daily chart, but that is the time to choose based on the support/resistance rule- which ones have the highest likeness of happening. Demo practice would be really welcome, so you can experiment as much as you wish. Usually, if you have a retracement to a major support/resistance level and a confluence with a price action signal and another pair with just a signal and no major support/resistance level in close proximity- this will give you my answer. I would go with the one that is showing more signs of confirmation, i.e. the former one. Question 9: Basically is there any good money management rule for maximum risk per day for open position? Answer: Again- you should not risk more than 1-2% per trade. If you already have open positions, you should add to only winning trades. Do not add positions to losing trades- this is called averaging down and is definitely not a place you want to be in. Question 10: If you had one losing position will you stop trading for the rest of the day? Answer: Yes, that is correct. On this topic, please go ahead and read two of my articles specially dedicated on that topic. Bear in mind that one of the biggest mistakes of beginner traders is overtrading- please don’t make this mistake. Here are the articles: ARTICLE 1 ARTICLE 2 Instead of Conclusion In the end, 10 questions that traders ask could be 100 or 1,000 but what is important to note is that trading is not a straightforward process. It takes time to master and patience to improve. If there is one thing that you should take from this article is that the basic questions that beginner traders ask are the essential ones that one needs to succeed in this hard field. Trading like a pro requires asking those basic questions over and over again! Trading like a pro requires one to accept that he/she is not perfect and is able and willing to change. Trading like a pro also means that you are able to put your ego and emotions behind your desire to make quick bucks. The 10 questions traders ask should start with simply the desire to learn and improve! About the author: Colibri Trader is a price action trader that is constantly looking for the apha. In the meantime, he does not forget to enjoy life, travel and even mentor other traders. This article was originally published here.
  9. The Lazy Trader

    Why not do it yourself?

    Sorry to disappoint, nothing new to reveal. Let's start with the most criticized villains: hedge funds. According to Barclay (tracking more than 2,000 hedge funds), the average Hedge Fund return in 2015 was +0.04%. Of course, this is before management fees and everything else. More details here. It is a common practice in the industry to use the 2-20 scheme, meaning 2% management fee on your assets, plus 20% of your gains in the year. Needless to say, the average guy lost money. Let's move on to the second most criticized villain: mutual funds For mutual funds I decided to go with a sample of one of the most representative institutions when it comes to wealth management: RBC. I took a look at some of the most popular funds, those with catchy words in the name like "Balanced", "Value", "Global", "Income", "Growth". RBC Balanced Fund: 2015 return: +0.8%. Avg since inception: +6.4% annually. Management Fee: 2.16%. RBC Global Balanced Fund: 2015 return: +4.1% (Hey not too bad!! ) Avg since inception: +4.2% annually. ( Oh, well ) Management Fee: 2.21% RBC Monthly Income Fund: 2015 return: -3.4%. Avg since inception: +6.8% annually. Management Fee: 1.20%. RBC North American Growth Fund: 2015 return: +1.6%. Avg since inception: +7.5% annually. Management Fee: 2.09% RBC North American Value Fund: 2015 return: -0.3%. Avg since inception: +7.3% annually. Management Fee: 2.10% If we average out those 2015 returns, we have +0.56% among these 5 big pools. Never forget the average management fee is around 2% per year. Since inception, they average about 6% annual returns (not too bad), but the 2% management fees turn it into 3% to 4% real returns after when you factor in inflation,... yes, you guessed it. Finally the least hated, in fact most times venerated index funds: I just kept it simple with the super popular VTI (Vanguard Total Stock Market ETF) VTI's price at the beginning of the year was 105.94 vs 104.34 at the end of the year. With the addition of distributions it finishes the year slightly positive. According to Morning Star the total return in 2015 was +0.36% for VTI. Not beating the simple strategy of holding SPY is something I won't criticize in this article. I have talked about that before. I myself have under-performed the market in some periods in the past. However, one thing must necessarily be said: If these funds were delivering inferior returns BUT were protecting investors from severe corrections, then we could argue that they have a mission, that they play a vital role: They under-perform in exchange for protecting investors from serious corrections. It's the price to pay in order for our money to be safe. Yet, that's generally very far from being true. Most mutual/hedge funds generally under-perform during market rallies, and over-correct during market sell-offs. In addition, you are not protected against crashes, looking at the history of most mutual funds in 2008, they corrected between 30% and 60%, some even more. And I'm saying "most", not "all" simply because many mutual funds that we have today hadn't been born back then. This naturally leads people to think: "what the hell! I'm going to passively follow an index". It seems to be slightly better than giving your money to a Mutual Fund or Hedge Fund, but not by much. The index will not save you from the corrections and bear markets. And the saddest part of the story is that you are guaranteed to ALWAYS under-perform. It is mathematically impossible to match the index that you follow, whichever it is. Why? Well, to start off the vehicles you invest in in order to follow the index have a management fee. Yes, usually small, but still a management fee. That alone is enough to guarantee under-performance in respect with the index. Then you also have execution slippage, Bid-Ask differential. That, eats up a little more. Finally, you have trading costs, a.k.a commissions you pay your broker for facilitating the actual buying and selling of shares. When all this is included, index followers usually under-perform the index by 1% to 2% in the long run. As of this writing, VTI's average annual performance since inception is +5.88%. As explained earlier, the investor is guaranteed to be getting less than that. Why not do it yourself? Saying that nobody will take care of your money better than yourself is so cliche. But man it is so damn true. Yes, most individuals under-perform, but most individuals do not put the effort to improve their skills, to learn solid trading approaches with better historical risk-adjusted returns. Most people under-perform, but you are not "most people". Imagine what this world would be if every successful person stopped fighting and improving just because "the majority fails". What would Lebron be if at some point he'd stopped to think: "Why bother? Most aspiring basketball players don't make it to the NBA". What if Joe Di Maggio had said: "Screw it. I'm not even going to make the effort. Most baseball players never get to play Major League Baseball". Every successful entrepreneur, every successful musician, every successful writer, surgeon, engineer...Mathematically speaking, they all started with huge odds against them, just based on the results of the general population. Most people are lazy by nature, and prefer to invest their time browsing pictures of hot photo-shopped girls on Instagram. You are not like "most people". Even if you browse for some hotties on the Internet, the single fact that you are reading this site demonstrates you are not like "most people". After all, it takes a special kind of liver to be able to read this annoying site for a prolonged period of time. Why not grow your money yourself, with calculated risks and action plans instead of the constant nervousness produced by the concerns that the markets will always crash tomorrow and I have no idea how the hell my fund manager will react? Why significantly reduce your returns due to paying someone for the privilege of this constant fear? The numbers, the numbers don't lie. This article was originally published here by Henrik aka The Lazy Trader. Henrik trades Iron Condors, Credit Spreads, Dividend Growth investing, Cash Secured Puts, Covered Calls, ETF Rotation, Forex. He likes to share his passion with others, educate and learn something from everybody. You can follow Henrik on Twitter.
  10. They Are Properly Capitalized – A very common mistake for beginner traders is not being properly capitalized. Beginners see the power of leverage option trading offers and think they can turn $2,000 into $20,000 in a matter of weeks. Before they know it, a couple of losing trades have completely wiped out their capital. I must admit I was also guilty of this. I was living in Grand Cayman and had just started options trading. I think in my first 6 months I broke just about every trading rule possible. I had a couple of small positions in the Australian stock market, one a utilities company and the other a REIT (real estate investment trust). Both of these positions had a low beta, meaning that the stocks did not move as much as the general market. So, through lack of knowledge and understanding I thought I would sell some call options on the main ASX index to hedge and protect my long positions. I obviously didn’t understand my net exposure was now hugely short as the short calls easily outweighed my stock holdings. Sure enough the market rallied, I refused to admit my mistake and take my losses and hoped and prayed that the position would come back my way. Next thing you know my capital has been completely wiped out and I had to send money via Western Union and have my brother deposit the money in my account the next day. Not a great experience for me, but one that I certainly learnt from! They Have A Low Tolerance For Risk – Another important aspect of successful options trading is having a low tolerance for risk. The best options traders will only trade when there is a low risk high reward scenario. They want to have the odds skewed in their favor as far as possible. The best option traders will not try to hit home runs with every trade.o the Stock Repair Strategy They Trade Only When The Market Provides An Opportunity – One quality all great traders have is patience. Successful investors will only enter into trades when the odds are stacked in their favor. They would much rather be the house rather than the average guy on the street trying to win big. They are focused on the bigger picture and are willing to wait and have the patience to only trade when the right opportunity presents itself. Some of the best traders often talk about sitting idle and just watching the markets, waiting for the perfect time to make a trade. Amateur investors find it very hard to not trade and are captivated by all the red and green numbers on their screen and feel like they are missing out on the action. Can you think of times in your trading when you have experienced this? Are you able to sit on the sidelines and just watch the market without jumping in? Knowing what cycle the market is in, is key to knowing when to trade and which trades to make. The best resource if have found for knowing what cycle the market is in is Investor’s Business Daily. Each day they publish a Big Picture article which states whether the market is in a confirmed uptrend, the uptrend is under pressure or if he market is in correction. I have found them to be incredibly insightful and you would do well to follow their advice. Their advice is to only buy strong stocks when the market is in a confirmed uptrend and this has been a time tested method for market outperformance. While it’s still possible to make money on the long side while the market is in correction, the odds are stacked against you and you would only want to be buying leading stocks such as those in the IBD 100. They Have A Trading Plan – Before opening an account, everyone should have a trading plan. This shouldn’t just be something in your head either, you need to write it down! By writing it down, it is clearly defined and you can refer back to it at any time. It will also be more real if you write it down and you’ll be much more likely to stick to it. Like anything in life, in order to be successful you need to have a plan and think things through rather than just flying by the seat of your pants. When I first started trading I would just place random trades based on how I was feeling at the time. I’d put on a bull call spread, then I’d try shorting stocks I thought were over valued and then I’d be making volatility trades. Needless to say I was not very successful during this time. While some of my trades were winners it was like I was taking 1 step forward and 2 steps back. All the great traders have a clearly defined trading plan. This is crucial to your success as a beginner options trader. They Have A Risk Management Plan – Only trade what you can afford, don’t risk money you can’t afford to lose. Trade defensively, rather than think of what you can make, every time you make a trade you should be thinking about the worst case scenario. What could you lose and how you are going to handle the position if things go badly? Beginner traders have trouble getting a handle on how much to risk on each trade. When starting out you do not want to have 90% of your capital tied up in one trade. One thing for beginner traders to consider is to split your trading capital in half, place half in an interest bearing account and use the rest to trade. This way, no matter what happens, you will never lose all of your capital. Another good risk management rule is to set a fixed percentage of you capital as your risk per trade. A common method would be to set 5% as the maximum capital to risk per trade, but for beginners you could even make that lower. Once a trade is placed you need to continue to monitor risk levels, you can’t just have a set and forget policy, you have to stay on top of your positions and your total portfolio risk. Having a risk management plan is crucial to success as a trader and something that should be done before you start trading. Everyone wants to make a great trade and make lots of money, but you should never take risk management too lightly. What risk management rules fo you have in your trading plan? They Can Control Emotions – Options trading is an incredibly emotional journey and one that you cannot fully appreciate until you have your own hard earned money on the line. The best traders are able to control their emotions not just when times are bad, but probably even more importantly when times are good. In my experience, and I’m sure this is the same for most traders starting out, some of my biggest losses have come when my confidence has been high. The best traders can keep their ego out of the equation and are able to stay grounded even in the midst of tremendous winning streaks. Also, when one of their trades turns out to be a loser, they are able to admit they were wrong and close out the trade. Great traders never get attached to a trade or a particular stock. A bad trade could turn out to be ok, but sticking to your pre-defined trading rules is crucial. You can be 100% right on a particular trade, but you also need to have the right timing. If your timing is off and your trade breaks your stop-loss you should always stick to your trading rules and keep your emotions out of it.Get Your Free Covered Call Calculator They Are Incredibly Disciplined – Successful option trading takes a great deal of discipline. Beginner option traders may find it incredibly difficult to just sit and wait for a good opportunity to trade. Waiting for the right opportunities may mean you don’t trade for a while, but trading out of boredom or excitement is one of the worst things you can do. Having a money management and a risk management plan is one thing, but in order to be a successful trader, you need to have the discipline to stick to it. You also need discipline to stick to the types of trades you are successful with and not start trading strategies that you are not an expert in. They Are Focused – For beginner options traders it is very easy to get carried away and get excited by all the green P&L numbers on their account statement. Keeping a level head is essential. Staying focused can also be hard when there is so much news on the markets and so many experts, each with a different opinion. The most important thing is to stay focused on your goals, your trading strategy and your rules. Don’t try to copy someone else’s trades or go against your trading rules just because of something Jim Cramer said. Get to know yourself as a trader as well, I have had a few periods when I wasn’t focused and that led to some big losses. I now can recognize those periods and I know those are the times when I really need to refocus my energies and review my trading plan. If you find yourself losing focus, or getting too distracted and stressed with everything going on, it can be a wise move to close out all of your positions and take break for a while. Sometimes that is the best medicine and will allow you to come back with a clear head, more relaxed and more focused. They Are Committed – Options trading takes a great deal of commitment. Any time you have your hard earned money at risk, you should be trying to get the most out of your investment strategies and controlling your risk. You need to be on top of your game all the time. Any time you stop paying attention to the market, you will get burned. Not only do you need to keep an eye on your trading performance, you need to be staying abreast of the current news, market cycles and investment outlook. Some of the great resources I use, that allow me to keep up to date on the markets and take up the least amount of my time include: Alpha Trends – Brain Shannon from is a market guru and author of one of the top 10 trading books ever written – “Technical Analysis using Multiple Timeframes”. Brian does a free video analysis of the markets a couple of times a week. In the first 5-10 minutes he goes through the current state of the general stock market and the various market indices. Watching this video only takes a few minutes each week, but you will receive expert analysis on the market from a trader with 17 years experience. Later in the video Brian goes through examples of specific stocks of interest which can be a great source of trading ideas. IBD – Investor’s Business Daily is the news service the market pros use. It only takes a minute each day to read their Big Picture article to see what cycle the market is in as well as how the some of the market leading stocks have been performing lately. IBD is listed as the 4th most visited site by Charles Kirk of The Kirk Report. If you’re a beginner options trader and find you’re struggling with the commitment required to keep up to date with the market, or find you are suffering from information overload, try these 3 sites out. You will be able to get opinions from multiple experts and it will take you less than 10 minutes a day! They Have Back Tested Their Strategy – Backtesting is a key part of developing your trading plan. This involves evaluating your trading strategy against the historical performance of the market to check the past performance. Of course past performance does not guarantee future performance, but it will at least give you an idea of how your strategy has performed in different time periods and market conditions. The average investor may not have the capabilities to run these calculations on their own but there are a number of software providers out there that will be able to perform backtesting. In addition, most brokers such as TD Ameritrade have backtesting software that is free to account holders. Backtesting allows you to evaluate the pros and cons of your strategy and also provides scope for improvement or tweaking of the strategy. However, a few things to consider are: Make sure you are using an appropriate time period – If you are testing a long only strategy between 1995 and 2000, you are likely to get some very favorable results. The same strategy may not have performed so well between 2007 and 2009. It’s a good idea to test a strategy over a long time period. Take into account sectors – If your trading strategy is solely focused on a particular sector, your backtest sample should be taken from that sector. However, in all other cases it is best to use a large sample size from all sectors. Take into account commissions – commissions can seriously erode your returns, so you need to adjust for this expense, especially if your strategy involves frequent trading. Past performance may not be a good guide to the future – While your chosen strategy may have worked in the past, there is no guarantee it will work in the future. A good idea is to paper trade for a month or two, just to make sure your strategy still works in the current environment. Some great resources for backtesting can be found at and While I have not used these resources personally, they come highly recommended from other industry professionals. So, those are my Top 10 Traits For Successful Options Trading, what do you think? Can you think of any other important traits required for successful investing? Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. He likes to focus on short volatility strategies. Gavin has written 5 books on options trading, 3 of which were bestsellers. He launched Options Trading IQ in 2010 to teach people how to trade options and eliminate all the Bullsh*t that’s out there. You can follow Gavin on Twitter.
  11. There are many reasons to that. Barbara A. Friedberg mentions few of them: People lose money in the markets because they don’t understand economic and investment market cycles. People lose money in the markets because they let their emotions drive their investing. People lose money in the markets because they think investing is a get-rich-quick scheme. Some people will claim that it is related to lack of skills, poor risk management, poor selection of strategies etc. But the simple fact is that it is mostly related to human psychology and human emotions. Still need a proof? Fidelity Investments conducted a study on their Magellan fund from 1977-1990, during Peter Lynch’s tenure. His average annual return during this period was 29%. This is a remarkable return over the 13 year period. Given all that, you would expect that the investors in his fund made substantial returns over that period. However, what Fidelity Investments found in their study was shocking. The average investor in the fund actually lost money. How is it possible? Lynch himself pointed out a fly in the ointment. When he would have a setback, for example, the money would flow out of the fund through redemptions. Then when he got back on track it would flow back in, having missed the recovery. This isn't about trading skills. The only skill those investors needed was to stick around. But what they did basically was "buy high sell low". If this is not about human emotions, then I don't know what is. The main reasons for the poor performance of individual investors are: Human Psychology: Individuals make decisions everyday with their emotions assisting their judgment. Performance chasing: Investors who chase performance are highly likely to lose money over the long term. Casino Investing: Many people think they can make money by winning the lottery. The “me too” lemming investment strategy: This is a common strategy of people who don’t know what they are doing with their investments. Fear and Greed Investing: Those are the most powerful motivations for investors. Unfortunately, investors tend to alternate between these potentially destructive emotions. A recent Dalbar study showed how investors are their own worst enemy. From 1997 through 2016, the average active stock market investor earned 3.98 percent annually, while the S&P 500 index returned 10.16 percent in returns. The reasons are simple: Investors try to outsmart the markets by practicing frequent buying and selling in an attempt to make superior gains. Again, if anybody still needed proof that 90% of success in investing comes from human psychology, Fidelity and Dalbar studies provided that proof. Here is some advice from Barbara: To avoid losing money during a market-wide drop, your best bet is to just sit tight and wait for your investments to rebound. To avoid losing money in the markets, don’t follow the crowd and don’t buy into overvalued assets. Instead, create a sensible investment plan, and follow it. Don't follow the outrageous claims of penny stock and day-trading strategies. Similar behavior applies to trading services as well. As soon as a few losing trades and/or a drawdown of any kind occurs, some members hit the eject button and continue in their search for the Holy Grail strategy that always wins. They often come back after the next winning streak, missing the recovery. Isn't it the very definition of "Buy High, Sell Low"? Barbara A. Friedberg's final advice: To avoid losing money in the markets, tune out the outlandish investment pitches and the promises of riches. As in the fable of the Tortoise and the Hare, a “slow and steady” strategy will win out: Avoid the glamorous “can’t miss” pitches and strategies, and instead stick with proven investment approaches for the long term. Though you might lose a bit in the short-term, ultimately the slow-and-steady approach will win the financial race. Drawdowns are a fact of life for a trader. They happen. Big Drawdowns Are Part Of The Game. Apple, Amazon, Microsoft and Alphabet… All among the largest and most revered companies in the world. All have returned unfathomable amounts to their shareholders. All have experienced periods of tremendous adversity with large drawdowns. Apple investors from the IPO would experience two separate 82% drawdowns. Amazon experienced a 94% drawdown. Microsoft largest drawdown in history occurred over a 10 year period, a 70% decline from 1999 through 2009. Google had a 65% decline from 2007 through 2008. If you sold those amazing stocks during the drawdowns, you would miss their incredible gains. Conclusion There will be bad days and bad weeks and bad months, and periodically even a bad year. Focus on following your trading plan not the short term results of it. Robust strategies are profitable in the long term time frame. Please do not become part of the next Dalbar statistics. If you found a solid strategy, try to stick around. Related articles: Are You EMOTIONALLY Ready To Lose? Are You Ready For The Learning Curve? Why Retail Investors Lose Money In The Stock Market Why Simple Isn’t Easy Thinking In Terms Of Decades Can you double your account every six months? Learning To Win By Learning To Lose How To Avoid Emotional Mistakes In Trading 10,000 Hours Of Trading
  12. It is really hard to imagine trading separated from time. For a lot of you this might sound esoteric, but the long and the short of it are that time is essential. For some traders, it could be important because they have incorporated time as part of their trading strategy. For example, they only close a position after a certain “X” number of days. For other traders, time equals trading opportunities. Scalpers will understand what I mean. For a third type of traders, time gives them a better horizon to maximise their profits. As Jesse Livermore has put it- cut losers fast and let winners run. You can clearly see from this quote that time is all it matters. So why is this crucial element of trading so unrepresented? Why nobody talks about it? To make this article more interactive, I have asked a group of traders of what they think of time. Some of the traders did not even understand the question (as expected), but three traders understood me perfectly well and their answers stood out. Here, I am going to share them with you. I have decided to keep their names anonymous, but still wanted to credit their work. Here are the answers that struck me most with their ingenuity: Trader 1: Time is called theta. It’s really important especially when/if you are trading options. If you're going to sit in something you want it to move. The work you put in to a position and all that it entails to carry is not worth it if you just sit in it burning the option's theta. Trader 2: Absolutely time matters. Any and all statistical analysis for time-series data of financial instruments depends on the time-constant for the X axis. Without it you would just have a bunch Ys, and what kind of statistical relevance would that provide; there would be no such thing as charts, trends, or “black swan events”… Whether traders realize it or not – time is the most important factor because without it there would be no context for price movement. >>>And finally, the last trader gave the answer that really struck me: Trader 3: The role of time in the markets and price movement is one of my favourite topics to think about lately! There’s not much opportunity to discuss it though, so my thoughts are fairly unorganized. I think that the key paradox of time is that you can not understand how the market operates without considering the time factor. At the same time, you can be a successful trader without paying any attention to time at all. Consider Point & Figure charts, and Renko charts. Both time honoured approaches that remove time from the analysis completely. More commonly though, are all of the traders who enter based on a particular price level, hope that price will move to their target level, somehow, and at some time, without really factoring in time considerations, save for events (eg the weekend, NFP). That’s not a criticism, if anything it may be a strength, by reducing the number of variables that need to be considered. Other people deal with the time issue more obliquely. Consider the DOM trader who is trying to run the big money orders. Their “time decision” (i.e. when do I enter), is largely solved in an instant. Most people will not want to hold a trade ‘too long’ but often the need for patience (a time related attribute) is the dominant song. When you think about it though, there aren’t many common tools for dealing with the time aspect: when to enter, how long price should take to move, how long to wait for it, when to exit. Gann cycles and Fib time intervals are esoteric, and possibly useless. Elliott Wave Theory postulates that price action should unfold over time in a certain way, but makes no quantifications. Yet despite all this, when you start looking at the market as a reflection of the real world, it’s very hard to escape time. The open of each trading session inspires periodic injections of liquidity and activity. These sessions even influence which pairs are more active. Also many major players have specific time constraints on how they operate – you can’t sit on client orders forever, you have to get them filled! We know that people use charts that are divided into arbitrary periods, and that they are likely to take action as these periods turn over, and less frequently in between. Known is the fact that the spot market interacts with time-based derivatives (options). More importantly, we know that major action can begin from well traversed price areas. But there’s something that promotes a breakout this time. Time is intensely interwoven into the basic structure of the market, yet it’s hard to really pin down how to work with it from a trading point of view, other than working with known key time points (opens, closes, news releases). CONCLUSION- Does really time matter As a matter of fact- yes! No matter how underestimated or badly expressed it is, time continues to be a leading factor in trading. Without time trading cannot exist. The reason why this crucial factor is so underrepresented in the literature still eludes my mind. Maybe there will a brand new trading strategy purely based on time. Probably you have some thoughts related to time that want to share with the rest of us in the comments below: One way or another, time is taking a great place in our trading with or without our realisation. That is one of the main reasons why I have decided to create this article. Time takes a central role in price action trading and that is one of the major reasons why I trade with New York Close charts. About the author: Colibri Trader is a price action trader that is constantly looking for the apha. In the meantime, he does not forget to enjoy life, travel and even mentor other traders. This article was originally published here.
  13. Champions have trained themselves to react in the heat of a game, concert, or competition and does what is needed without having to take out a handbook, ask for advice, or look up an answer. Their practice and training have taught their mind and body what to do in the pressure of the moment. When a champion is learning proper technique at first it is a very mechanical and thoughtful process. Do ‘A’, then ‘B’ and you will likely get ‘C’. Speed in action comes from knowing exactly what to do on a deeper subconscious level. Once you know the right thing to do in your professional field the only thing left to do is to get really good at doing the right thing over and over with discipline, perseverance, and many times faster than your opponent. Habits are created only after knowing what you want to do habitually to move you toward your goals of being the best. New traders must first learn what they need to do in order to be profitable. The first step is to know the right questions to ask to get on the road to profitability. Building up their comprehension and vocabulary to understand what traders are talking about is a learning curve. Trading methods, trading systems, trading plans, risk/reward ratios, win rates, letting winners run and cutting losers short can sound mysterious to new comers to the financial markets. All traders have to find their own edge over other market participants. There is a buyer for every seller on every trade. The person on the other side of your trade thinks they are right and you are wrong. They think they are making the right decision at the same time you are. The quickest edges that a trader can develop is to first study and do homework and learn about what works and what does not work in trading the markets. So few market participants actually do any research before they start their buying and selling that you can beat the majority by simply doing some homework on price history, the psychology of the market and its participants, and how the math works for creating long term profitability. The habit of learning every day through chart studies, back testing price patterns, interacting with experienced traders, and reading great trading material is one of the very best habits a new trader can develop. Traders need to develop the habit of wanting to be better today than they were yesterday and even better tomorrow than they were today. Growth comes from work not leisure. We will only get out of trading what we put into it, there are no easy short cuts only short paths to learning what you need to know. The second way to give you an advantage over others is to trade in a disciplined matter with a trading system and a set of rules. Most traders are trading based on their own predictions, opinions, and emotions. Emotions, egos, and predictions may be the very worst trading signals and market timing indicators. This is the very reason that market price action is so counterintuitive. The very best signals of buying dips into key long term support areas and entering trades on breakouts of price ranges are the very things that traders find difficult to do as they believe that the support will not hold at a time of maximum fear and that a breakout entry is buying too high or selling too low at the beginning of a trend. Trading rules help you take a more scientific approach to your trading; replacing your opinions with trade signals, your ego with position sizing, and your emotions with a trading plan. Once you have the right set of rules and follow them for a long enough period of time they will slowly become part of your trading personality and style. You will eventually rememorize them and follow them on a subconscious level. Your rules will eventually become second nature and it will be even uncomfortable to break them. Your trading rules are meant to keep you safe from making bad decisions in the moment due to your ego, fear, and greed. The goal is to make your trading rules more powerful than your impulses to make bad decisions with your trades during market hours. You want your logical and rational mind to write the trading rules when the market is closed that your emotions and ego have to follow while the markets are open. Better decisions and plans are generally made before prices start streaming up and down and real money starts to evaporate and grow. You want your trading decisions made with logic and reason in a neutral environment not by the fight or flight response in the heat of danger or profits. Once you have learned the right questions to ask to be a profitable trader and written your rules based on the answers you found you follow them until they have stopped being just rules and are now your trading habits. First you quantify your trading system for entries, exits, position sizing, and risk exposure. Then you create rules for implementing your system. You write down all these rules. You will have rules for methodology, risk management, and psychology. One of the hardest things to do is to actually follow these rules in real time, it will surprise you that you will not want to take an entry out of fear and will not want to take an exit out of greed. Your ego will make you not want to take a loss because you want to prove you are right about a trade. Your trading plan has to be designed to give you rules to force you to cut losses, take quantified entry signals, and take profits when it is time. While a trading journal is a teacher that teaches the trader about themselves a set of trading rules is a body guard that protects the trader from themselves. The goal is that one day your trading rules become your trading habits. That is the day you become a professional with the natural tendency to do the right thing in your trading without having to look at your rules because they simply became what you do.
  14. 10% Trading System 30% Money Management 60% Psychology Many years later, Tharp admitted that they were wrong. Now he thinks that Psychology accounts for 100% in trading success. We can argue about the exact percentage, but there is no doubt that options trading psychology plays HUGE role in trading success. If you still have doubts about the role of Psychology in trading, consider this: Recent study by DALBAR shows that investors consistently underperform the broad markets by significant margins. For the 30 years ending 12/31/2013 the S&P 500 Index averaged 11.11% a year. A pretty attractive historical return. The average equity fund investor earned a market return of only 3.69%. What other explanation can you give to this huge difference if not Human Psychology? I just finished reading Van Tharp latest book Trading Beyond the Matrix. This was fourth Tharp's book that I have read (after Super Trader, Safe Strategies for Financial Freedom and Trade Your Way to Financial Freedom. Honestly, I have a hard time to decide which one is the best - they are all excellent and worth reading. Here are some extracts from Trading Beyond the Matrix. Every word is gold. "Trading is not easy to do, but becoming a trader is easy. There are no obstacles whatsoever to anyone opening a trading account. I’ve said for a long time that if trading were easy, Big Money would monopolize it. They’d do so by making the entry requirements so steep that it would be impossible for an average person to trade, perhaps through an education and exam system that would weed out most people. If you want to know Big Money’s rule, just watch the financial media for a week or so. They’ll imply that: Selecting the right investment (i.e., picking the right stock) is everything. When you find the right investment, buy it and hold it for the long term. You must spend a lot of time analyzing the market to find the right investment. You should listen to experts for advice, including newsletter writers, brokers, and investment gurus on television. My experience indicates that those old rules are what cause most people to be net losers in the markets. Through my modeling work with top traders and investors, looking at what they do and how they think, I’ve come up with a new set of rules." We call these rules Tharp Think. Let’s look at these rules. First, you must understand that trading profitably and consistently is not easy. Sure, you can go into a brokerage company and open an account; that part is certainly pretty easy. As the e-trade baby says, “See, I just bought stock.” And the industry wants you to think it really is that easy—that even a baby can do it with the right trading platform. Can you imagine being allowed to perform open-heart surgery simply by strolling into an operating room and declaring that you want to do so? Of course not. It doesn’t work that way. Similarly, can you imagine building a bridge just by reading a book and then being put in charge of a construction team? Or, worse yet, giving a few orders to the construction team and then going along on your merry way? Again, it doesn’t work that way. Big Money wants you to think otherwise. They want you to believe that you need only turn on some financial program and listen to the stock picks." So what are Tharp Think rules? The first new rule is that trading is as much a profession as any other. It takes significant time (several years) and a deep commitment to become a successful trader. The second new rule is that trading reflects human performance just as much as any top athletic endeavor. You must understand that you are responsible for the results you get. Thus, you should devote significant time to working on yourself in order to be successful. The third new rule is that objectives are important. Furthermore, you achieve your objectives through position sizing strategies. The quality of your system just tells you how easy it will be to use position sizing strategies to achieve your objectives. Most people don’t even think about objectives, except that they’d like to make a lot of money and avoid losing, and they don’t have a clue about position sizing strategies. They learn that asset allocation is important, but they never understand that what makes it so important is the “how much” factor, which is what position sizing strategies are all about. Dr. Tharp is also talking about the importance of taking responsibility for your results. In other words, if you decide to trade based on newsletter recommendations, and lose money, it is your fault, not the newsletter’s fault. You chose the newsletter, and you chose to invest based on its recommendations. You decided to trust the newsletter’s published results, showing they won 75 percent of the time. You decided not to paper-trade the recommendations for six months to confirm the results before starting to trade real money. You didn’t stop to find at least one independent source who had confirmed the newsletter’s track record before trading. You, you, you! If you want to become a better trader, I would highly recommend reading Van Tharp's books. Start Your Free Trial Related Articles: Are You EMOTIONALLY Ready To Lose? Why Retail Investors Lose Money In The Stock Market Are You Ready For The Learning Curve? Can you double your account every six months?
  15. That’s why you should be prepared to expect them and if possible not make them. Easier said than done you would say and you will be completely right. That is why I have compiled that list of trading mistakes that you should be trying to avoid. Real life trading will show you how “easy” that could be. 1. Trading without having a predefined trading plan The first of the 10 fatal trader mistakes often made is trading with no plan. Having a written predefined trading plan will help you for two reasons. Trading depends on several aspects, which include the situation in the markets around the world, the status of overseas markets, the status of index futures such as Nasdaq 100 exchange-traded funds. Considering index futures is a wise option for evaluating the overall market conditions. Make a to-do list and build a habit of researching the market before calling your shots. This will not only keep you from taking unnecessary risks, but it will also minimize your chances of losing money. 2. Over-leveraging Over-leveraging is the second mistake of “what are the 10 fatal mistakes traders make”. Over-leveraging is a two-edged sword. In a winning-streak it could be your best friend, but when the trend changes, it becomes the greatest enemy. Recent talks about banning leverage higher than 1:50 for experienced and 1:25 for new traders in the UK have been a result of a lot of traders losing their money too fast. Whether it will happen next year or not is a matter of time for us to see. This is good news for most of the inexperienced traders, because it will somehow limit their exposure. It will allow them to follow their money management rules easier. For greedier and more impatient traders, this is terrible news. Fortunately, this might lead to a better result on their performance in the long term, as well. Over-leveraging is a dangerous way to believe you can make more money quicker. A lot of traders are mislead into this way of thinking and end up losing all their money in a short period of time. Some brokers are offering insane amounts of leverage (like 1:2000) that can lead to nothing more than oblivion. Therefore, one needs to be extremely careful when selecting those levels and the brokers that represent them. That’s why diversification among different brokers is probably the best strategy. 3. Staying glued to the screen a) Set entry rules Computer systems are more effective for the purpose of trading because they don’t have feelings about the things that go into the trading environment and they are neither emotionally attached to the factors that are in one way or the other related to trading. Moreover, computers are capable of doing more at a time as compared to mechanical traders. This is one of the several reasons that more than 50% of all trades that occur on the New York Stock Exchange are computer-program generated. A typical entry rule could be put in a sentence like this: “If signal A fires and there is a minimum target at least three times as great as my stop loss and we are at support, then buy X contracts or shares here.” Computers are more rational when it comes to taking quick decisions following a set of rules. No matter how experienced traders are, sometimes they tend to be hesitating at taking a decision no matter what their rules state. b) Set exit rules Normally, traders put 90% of their efforts in looking for buy signals, but they never pay attention to when to exit. At times, it is difficult to close a losing trade, but it is definitely wiser to take a small loss and continue looking for a new opportunity. Professional traders lose a lot of trades each day, but they manage their money and limit their loses, which leads to a profitable trading statement for them. Prior to entering a trade, you should be aware of your exits. There are at least two for every trade. First, where is your stop loss if the trade goes against you? This level must be written down. Mental stops don’t count. The second level is your profit target. Once you reach there, sell a portion of your trade and you can move your stop loss on the rest of your position to break even if you wish. As discussed above, never risk more than a set percentage of your portfolio on any trade. 4. Trying to get even or being too impatient What are the 10 fatal trader mistakes? Rule number 4 is patience. Patience in FOREX trading eventually pays off as it allows you to sit back a bit and wait for the right trading setup. Most traders are too eager to jump in and trade whenever any opportunity arises. This is probably due to our human nature and the eagerness to make a “quick buck”. But if there is one thing that ensures a high probability of winning, it is having the patience to grasp all the necessary information before you trade. This apparently will take time as there are many factors involved in it, such as the forming of trends, trend corrections, highs and lows. Impatience to look at these matters could result in loss of money. It could be helpful sometimes to take a break, allow oneself to have the time to look at the bigger picture, instead of focusing too much on one aspect. Remember that a single transaction might resonate in a series of future losses if executed at the wrong moment. It takes time and patience to wait for the market correction, before you commit to a trade. BUT IT TAKES TIME…Some traders fail to realize that to be successful will take time. They often fall prey to their own impatience in the hope of earning fast money. It could be a rough environment, and charts might be hard to read, so it is wise at times to step back in order to avoid costly mistakes. Don’t rush things out, or try to enter in a trade at all costs by just following your gut. The market could be quite tricky and often does send out the wrong signals. Wait patiently for the best opportunities to align themselves and then act mercilessly. 5. Ignoring the trend “The trend is my friend“- another cliche sentence, which has helped me stay on the right side of the market for as long as I am a trader. If you think about trading the way I do, it could be a boring business, but at least one that makes money. I am not really interested in quick returns. I am not interested in penny stocks. I am not interested in the most popular trades that everyone is talking about. I like to do my own analysis. The more boring a trade looks, the better for me the trade is. Always consider the trend before placing the trade! 6. Having a bullish/bearish bias Folk wisdom says that if you throw a frog in a boiling water, it will promptly jump out of it. But if you put the frog in lukewarm water and then slowly heat the water, by the time the frog realizes that the water has become boiling, it will already be too late. Studies of decision making have proven that people are more likely to accept ethical lapses when they occur in several small steps than when they occur in one large leap. This statement also explains nicely the unfortunate process of unprofitable trading. Once you are in a losing position, you don’t realize if it slowly accumulates into a big loss. You have your own bias and it might lead you into obscurity. That is why one of the most important elements of successful trading is objectivity. It is also one of the hardest elements of mastering the field of trading. Inattentional blindness is definitely not helpful to the human psychology and when it comes to trading, it could be detrimental. 7. Little preparation or lack of strategy Make sure that you close any unnecessary programs on your computer and reboot your computer before the day begins, this refreshes the cache and resident memory (RAM). Several trading systems allow you to set up the environment according to your needs, set it up in a way that allows for minimal distractions and help you keep an eye on each in and out, alongside. Keep in mind that a flaw in the trading system can be costly. Make sure you have a valid proof that your trading strategy does return positive results on a consistent basis. Do not rush into trading before that. 8. Being too emotional Trading the markets is like stepping into a battlefield- you need to be emotionally and psychologically prepared before entering the field, otherwise, you are stepping into a war zone without a sword in your hand. Make sure you have checked three things before you start trading: 1)you are calm, 2)you had a good night’s sleep and 3) you are up for a challenge. Having a positive attitude towards trading is extremely crucial. If you are angry, preoccupied or hung-over then you are at a bigger risk of losing. Make sure you are completely relaxed before you step into the market, even if you have to take yoga classes, it is totally worth it. 9. Lacking money management skills Rule number 9 of “What are the 10 fatal mistakes traders make” list is money management. Risking between 1% to 2% of your portfolio on a single trade is the best way to go. Even if you lose while betting on that amount you will be capable enough to trade some other day and make up for your loses. The amount of risk a trader can take is the amount he thinks he will be able to get back the next day. It is a wise option of start with a smaller amount and slowly and gradually increase the percentage. You can come back to point number 2 “Over-leveraging” and read it again. Having the right money management skills is probably one of the most important traits of the profitable trader. And of course- it is one of the most common mistakes among the losing traders. 10. Lack of record keeping Keeping records is a key to being successful at trading. If you win a trade, you should note down the efforts and the reasons that pulled you towards the trade. If you lose a trade, you should keep a record of why that happened in order to avoid making the same mistakes in the future. Note down details such as targets, the exit and entry of each trade, the time, support and resistance levels, daily opening range, market open and close for the day and record comments about why you made the trade and lessons learned. You should save your trading records so that you can go back and analyse the profit or loss for a particular system, draw-downs (which are amounts lost per trade using a trading system), average time per trade (in order to calculate trade efficiency) and other important factors. Remember, this is a serious business and you are the accountant. Conclusion What are the 10 fatal mistakes traders make?? Successful paper trading does not ensure that you will have success when you start trading real money and emotions come into play. Successful paper trading does give the trader confidence that the system they are going to use actually works. Deciding on a system is less important than gaining enough skills so that you are able to make trades without second guessing or doubting the decision. There is no way to guarantee that a trade will return profits. This is the actual beauty of trading and being consistent is based on a trader’s skill set and his/her eagerness to improve. Keep in mind winning without losing does not exist in the world of trading. Professional traders know that the odds are in their favour before entering a trade. It is a continuous process of making more profits and cutting down loses which might not ensure a win every time, but it wins the war. Traders or investors who don’t believe in this adage are more viable to making loses. Traders who win consistently treat trading as a business. While it’s not a guarantee that you will make money, having a plan is crucial if you want to become consistently successful and survive in the trading battle. About the author: Colibri Trader is a price action trader that is constantly looking for the apha. In the meantime, he does not forget to enjoy life, travel and even mentor other traders.
  16. I came across an excellent article by Colibri Trader. Here are some gems from the article. The question of what it takes to become a master in any field (sport or business) has been in the epicentre of research for many years. It has occupied psychologists and philosophers alike for decades. Is it the innate talent what matters or a skill can be mastered with practice. What does it take for professional athletes to become first among others with inborn talents… Almost fifty years ago Herbert Simon and William Chase summed up a groundbreaking conclusion that is still echoing with importance: After Simon and Chase there have been numerous psychologists and authors testing this hypothesis and proving and disproving the rule of “The 10, 000 Hours“. For example, John Hayes researched the works of over 70 of the most famous classical composers and found that almost none of them did create a masterpiece before they have been composing for a minimum of 10, 000 hours. There were just a few exceptions and they were Shostakovich and Paganini, who took them only 9, 000 hours. In trading, it seems to be the same or at least really similar. I don’t know a lot of other traders, whom after an honest conversation have not shared with me that have spent years of losing money consistently before becoming profitable. In my trading career I remember just one trader who told me that was successful straight from the very beginning. He was sharing with me that it only took him 3 months on a simulator and with the help of his trading mentor, he became successful. He is an exception because in his case- he managed to save a lot of costly mistakes by following his mentor’s trading approach. But most traders are doing it alone and that is why it takes them such a long time. Trading, as any other highly competitive sport discipline, takes a lot of hours in front of the screens and practice. In a book that I recently read (Focus: The Hidden Driver of Excellence), Daniel Goleman reveals the complex truth behind the popular 10,000 rule: The words of Ericsson cannot be more true regarding the trading field. Professional traders know that going out of the comfort zone is what makes a difference in the long-run. Imagine you are doing the same trading mistake over and over again. The only way to get rid of your bad habits is to get out of your “comfort zone” and do something differently. Even if you are not sure where your mistake is, you should put all of your efforts into trying to find it. Only then and after long hours of practice, you would be able to become profitable. What matters in this case is not only the time invested in trading, but the quality of the time. It appears that even if you stay 20,000 hours in front of your screens, it won’t make a difference if you are doing the same mistakes repeatedly. It seems obvious and simple, but modern education is build on the premise of sheer time investment. That is why it is important to emphasize on the fact that success is “deliberate practice”, concentrated training with the sole aim of personal improvement, many times accompanied or guided by a professional and skilled coach or mentor.That is how I became successful myself- I have been mentored by one of the biggest and most successful traders in London. Before I had the chance to meet this important person to me, I was making too many mistakes- 80% of which I was not even aware of! That is such a striking number when I look back at it now. According to Goleman, what I have found also applies to other disciplines: That is completely in-line with trading field. You need an objective feedback from somebody, who can monitor your performance. Human beings tend to be subjective when it comes to measuring their own performance. That is why, it is crucial that you have a profitable trader helping you along the 10, 000-hours of trading journey. It is imperative that you are coached by a real professional or at least somebody with years of trading behind his back. No wonder that every world-class sports champion has a coach. If you keep on trading without a feedback from a proven profitable trader, you won’t be able to get to the very top. In the end, it seems that the trading strategy that you are using is not the most important element of becoming a master trader. It is the feedback that you receive from really experienced traders and the quality of the time invested in improving you own mistakes. Now stop thinking how good you are- start seeing how you can improve through concentrated trading effort. Some quick tips and facts My good friend Kirk Du Plessis from OptionAlpha lists few things to consider as you write down your expectations and goals. More traders lose more money than they make. The figures are a little off depending on who you talk to, but it is 80% to 90% (maybe more) who end up losers and leave the business altogether. Only a small percentage of retail traders are profitable. The numbers get even smaller if you look at a 3-5 year average which measures consistency. Don’t get discouraged, we all fell off the bike before we learned to ride it right? Paper trade first with a small amount of money. I always recommend members to paper trade everything first. This applies not only to new traders. Even if you have some experience with options, it always takes some time to get used to new strategies. This way you learn how to enter orders, adjust trades, and more importantly learn you’re your mistakes without losing real money. Then when you are ready to invest real money, keep it small. Prove yourself that you can make money with 10k, then increase it to 20k and so on, but do it gradually. You will have losing trades. Too many people quitting after a streak of 4-5 losing trades. Losing money is part of the game, the trick is to keep the losses as small as possible. Don’t expect to become financially independent. Don’t you think it’s completely unrealistic to expect a small account, say under $5,000, to generate consistent income to replace your regular job? I aim for many singles instead of few home runs. Those are all great quotes. I suggest remembering them when you get frustrated and overwhelmed by the amount of information and learning curve required to become a successful trader. Related Articles: Why Retail Investors Lose Money In The Stock Market Can you double your account every six months? How to Calculate ROI in Options Trading Performance Reporting: The Myths and The Reality Are You EMOTIONALLY Ready To Lose?
  17. Learning how to win by learning how to lose in trading - just stop for a second and think about it: To most people it is, and that is why they end up being bad traders and consistently losing! To market professionals, it is a fact of life- losing is the cost of doing business in this field. If you can’t accept it, probably trading is not a field for you. Market professionals do not lose sleep if a given trading position ends up in a loss. In fact, they are concerned with far more important factors: A) what is the net result of ALL their trading efforts and B) where they will call it quits if some of their positions are moving against them. The Way to Approach the Market As can be seen from a few of my latest articles, I have been misled by the market on a few occasions. Let’s say the last DAX trade. I was expecting more buyers to push the price up and the German stock index to continue its climb. What happened was that buyers’ enthusiasm was extinguished by more sellers pushing the price down from the resistance area of 9800 and this led to a massive sell-out. In fact, the candle just after I did give the trading signal was an inside bar, which indicated the hesitance of the buyers. Even before that happened, I did spot a few worrying signs from the intraday charts that were hinting for a reversal. Learning how to win by learning how to lose is the key ingredient for a consistent and successful trading. In my experience, one thing I have learnt the hard way and it is the last sentence: Having learnt from my mistakes, I can bravely claim that the hardest thing still remains to cut losers fast. The second hardest is to let winners run for as long as possible, but without those two qualities no trader could ever succeed in the long-term. We all have heard about the large-scale cycles of nature: day follows night and summer follows fall… just like a cycle in the stock market. But not everybody appreciates how cycles at every scale (from atomic to astronomic) are the hidden rotors of the splendid phenomena of nature. Just like a Fibonacci sequence, they do tend to reveal a wonderful microcosm of repetitive patterns that drive major changes and rule trends. Two brilliant inventions– the internal-combustion gasoline engine (by Nikolaus Otto) and the diesel (by Rudolf Diesel) have changed the world. They both exploit cycles and just like in trading they follow a pattern- four strokes for the Otto’s engine and two strokes in the Diesel cycle before they come back to the initial stage. Just like a price action pattern, which has tested resistance two or four times and returns back to the initial level from where it started… numerous links could be found between nature and trading. Cycles tend to repeat themselves and the details of these cycles have been “optimised” by an R&D cycle of repetitions centuries old. At an absolutely different scale did our fathers discovered the efficacy of cycles in on the great advances of human prehistory: the role of repetition in manufacture. Take a stick and rub with it a stone and nothing happens. Take the same stick and rub the stone a hundred times and again- nothing. Start all over again and repeat the process a thousand times- you will have a sparkle. By accumulation of imperceptible increments, the process creates something completely new. You are probably either asking yourselves what is wrong with me or by this time you have already closed this page. In case you are still on the same page as me, I will continue with my description of trading when you are in a losing position- learning how to win by learning how to lose. This could be a completely novel way of seeing the market for a lot of you, but in my opinion even with the best trading strategy, if you don’t acknowledge the importance of objectivity, you are doomed. Ego, greed or fear– they don’t have place amongst winning traders. Although cycles do tend to repeat themselves as discussed earlier, they are sometimes very hard to discern. That is why, objective trading is the most important skill a trader can gain over the long-haul. You can’t make money in the long-term by strictly abiding to a trading strategy without having strict rules when to cut a losing position. That is what I have been sharing with all of my followers that have known me for a while. I would like to help traders become profitable and that is why I keep repeating that you can’t keep averaging down or throwing good money after bad. Traders keep repeating the same mistakes over and over again. What drives us to that destructive behavior: Traders in general think that if they pick a big winner, they are a genius, but if they pick a loser, they feel stupid. In my opinion, neither are right. In the case of a winning trade- it could have been because of a poor tactics, which turned out to be a home-run. In the case of a losing trade- it could have been a perfect trade, but bad on timing, even though you have followed a disciplined approach. Playing the market with the sole aim to brag about at cocktail parties is probably the worst way you can look at this business. Invest your time in getting the necessary knowledge and then wait for the “stars to align” in your direction before pulling the trigger. The destructiveness of the ego could be seen day after day. Go in any broker house and listen to the daily conversations that the sales department is having with their clients. You will hear clients talking to their account managers that they will sell their stock when it comes back to where they are even. You will hear traders making deposit after deposit in order to maintain their balance, so they are not margin called. You will see traders that keep on adding positions to a losing trade (averaging down) until they are broke. For ego-driven traders/investors, “break-even”=”not dumb”. All they can see is their winning or losing positions. They stop thinking objectively and forget that the most essential factor in making money in trading is looking it as a business. Winning How does emotions influence decision making in trading? Researchers involved with trading have made important progress toward understanding how specific emotions influence our trading judgements and objectivity. The research was based on how positive and negative moods affect objectivity in trading. For instance, it was found that a good mood increases the likelihood of a more biased judgements. On the other side, bad mood decreases this likelihood. A number of scholars found that bad moods can trigger more thoughtful processes that could reduce biases in judgement. A few scholars have even shown that sad people are more likely to be affected by obstacles in trading or a losing streak and thus will make worse trading decisions. On the other side, those ones in a happier mood would be more likely to make better trading decisions. Specific Emotions Emotions are the same across different cultures. Basic emotions such as happiness, sadness, fear and anger are the same for people from different cultures. Each of these are making traders from different cultures to respond to certain market conditions in the same (or very similar) way. For example, fear makes traders’ minds sensitive to risks. Sadness makes traders to focus on the self and motivates them to look for a change. Anger is a particular emotion. Although it is a negative emotion, it does share a lot with the features of happiness. Some of the shared factors are increased confidence and decreased sensitivity to risk. Therefore, for a trader it does not really matter if he/she is losing/winning. The feelings of anger or happiness are distorting his/her objectivity in the same way. Let’s take an example- I am going long the GBP/USD today. By the end of the week I am 1) up 200pips or 10,000GBP 2)down 200pips or 10,000GBP. Obviously in the first case, I would be extremely happy and ready to take even higher risk. In the second case, I would be really “neck-down” and will be looking to break-even as soon as possible, thus increasing the size of my next trade. In both cases, my reaction will come across as overconfident to market participants. In the first case, this would be due to my “happy mood” and in the second, it would be due to my “angry mood”. In both cases I am making a mistake. I am trading with blurred objectivity, which is prone to big trading mistakes. This leads us to the next point: The above explored example is very similar to the “endowment effect”. Endowment effect is described by the value traders place on a certain commodity they own. The value is greater if they own the commodity than if they don’t. As deduced by Bazerman&Moore: This study is confirming once again how traders are making decisions based on their emotions. It is imperative that you understand how your emotions are shaping your trading decisions, before you become a winner in this zero-sum game. Emotions are so much ingrained in our daily reflections that even the weather can influence our moods. For example, pollsters have gathered information that people report to be less satisfied with their lives on cloudy than on sunny days. It has been shown by researchers that this effects even extends to the stock market. Thus, prices are more likely to go up on a sunny day in New York than when it is cloudy. These final examples are key to understanding our own psyche better. If we want to achieve success in trading, more important than anything else is to first start with ourselves and building a trading plan. Experience has taught us that even with the most prone-to-errors system with the highest risk:reward ratio, there comes a moment when its reliability is tested. What I am trying to show my readers and the people who have taken my trading course is that a trading system is not the only essential factor for making the right trading decisions. A variety of factors play essential role, but understanding our own psychology is one of the crucial factors. What builds successful traders in this zero-sum game is more than discipline- it is a total control of our own feelings. About the author: Colibri Trader is a price action trader that is constantly looking for the apha. In the meantime, he does not forget to enjoy life, travel and even mentor other traders.
  18. This is sad, because without a suitable size for the positions any method of negotiation will be incomplete. Many people avoid monetary and risk management issues because they realize that controlling risk will not get rich. But the fact is that you will not get rich at all if you do not learn how to manage money. One of the pillars of the industry is the search for the holy grail and in fact the industry is in love with the trading systems. Many traders, especially those who go through that initial phase of frustrating losses, are looking for mechanized trading methods that simply generate input and output signals to follow without asking questions. However, they rarely seek a "monetary management system" capable of generating clear "signals" about how to adjust and manage the size of positions. But the reality is that these techniques exist and, despite being mechanical, are much more effective than the signal generators of buying and selling. Have you ever considered the following: If money is earned through trading systems, why do the vast majority of traders end up without profits or losing money? This is not due to the lack of consistency of forecast resources or services that are available for every trader. This is due to monetary management, which is practically a last minute idea for many traders. Just Bad Luck or an Immutable Mathematical Law? Let us now turn to the playing field of the negotiation: here, the percentage of Winning Operations and Profitability can vary with the change of market conditions. The only parameter that the trader can effectively change is the risk. We will use the example of the launching of a coin to present some fundamental concepts of risk management. When we flip a coin, our luck is equal to a 50% winning transaction percentage. The risk is the amount of money that we play, and therefore put at risk, on the next release based on the payment ratio. In our example, our "luck" and our payment remain constant. Following the example of coin tossing, it does not matter in what order the faces and crosses appear. If we first take 50 crosses and then 50 faces, the result would be the same as if we took 50 faces and then 50 crosses. In options trading, the order of the operations that are performed, as well as the result of any operation are almost always random. Therefore, from a risk control perspective, it is not advisable to stick to or emotionally the result of an operation or a series of operations, nor financially risking too much. To understand that what appears to be an unlikely outcome is, in fact, possible we need the help of the Law of The Large Numbers. The Large Numbers Law tells us that a random event is not influenced by previous events. This explains why the percentage of Winning Operations in a system does not increase even if the system has recorded 20 consecutive losses. While it is true that recent operations affect the overall percentage of Winning Operations, many operators enter the market thinking that a corrective move should occur, simply because they have had several consecutive winning or losing trades. In doing so, they are expressing the belief in the so-called "gambler’s fallacy". This brings us to the next point: imagine that you think you are unlucky after a really bad loss streak when it seemed like you had found a winning system. If there was a way to know how long a streak will last … Well, if you know the probability of an event (percentage of Winning Operations) and how many times the event will take place, there is a mathematical formula that will indicate the maximum number of winning and losing streaks. But in trading the number of times the event occurs is not known, since it can cover your entire life as a trader. If we knew the number of operations that you will perform during your life, you could calculate the maximum number of consecutive losses, provided that the percentage of Winning Operations remains exactly the same. By varying the percentage of Winning Operations, the number of consecutive losses will improve or worsen. But it is impossible to know both numbers in advance. The Ralph Vince Experiment Ralph Vince conducted an experiment with 40 doctorates without previous training in statistics or trading, which were given a simulated computer trading environment. Each of them started with $ 1,000, a percentage of Winning Operations of 60% and they were given 100 transactions with an Expected Payment of 1:1. At the end of 100 tests, the results were tabulated and only two of them earned money. 95% of them lost money in a game in which the odds were in their favor. Why? The reason they lost was the belief in the gambler's fallacy and the resulting poor monetary management. Greed and fear were used to calibrate operations. The aim of the study was to demonstrate how our psychological skills and our beliefs about random phenomena are the reason why at least 90% of people who have just reached the market lose their accounts. After a series of losses, you tend to increase the size of the bet by believing that a winning operation is now more likely - that is the gambler's fallacy, since the odds of winning are still 60%. If you want to learn how to treat options trading as a business and put probabilities in your favor, I invite you to join us. Start Your Free Trial Related Articles: Why Retail Investors Lose Money In The Stock Market Are You Ready For The Learning Curve? Can you double your account every six months? How to Calculate ROI in Options Trading Performance Reporting: The Myths and The Reality
  19. This article will show you 3 major human behavior errors as well as the strategies needed to avoid them. But who can really guarantee that he will always be focused and will not be guided by his emotions? The so-called "Homo economicus" derives from the eighteenth-century concept of Adam Smith and forms the basis of the neoclassical theory of the capital market. It is assumed that man always thinks and acts in a rational way so that, when he makes his trading decisions, he seeks to maximize his own profit. Human feelings such as fear, avarice, joy, desire for control, and so on, will not be taken into account in this model. However, options trading can hardly be separated from the person who carries it out and from their feelings. The trading day would probably be much more relaxed if one could easily switch to Homo economicus during trading hours. In fact, it would be as difficult to avoid trading feelings as to avoid physical reaction to pain. Brain and body reaction to trading But what actually happens in the human brain for the trader to press the buy or sell button of a particular value? Already in the 50's (1950) researcher Paul D. MacLean discovered that there are different parts of the human brain that are responsible for the different tasks we do. The so-called limbic system is considered by neuroscientists as an "emotional center of the brain". Emotions, memories, but also motivation arises in this functional unit of the brain. The pre-frontal cortex, which is closely linked to the limbic system, also exerts some control over it. Therefore, actions such as planning, judgment, or selection are attributed to this part of the brain; In other words, financial decision-making. Winning If you get a benefit, a part of the limbic system is activated at the "pleasure center" or Nucleus accumbens and releases the hormone of "happiness", dopamine. This in turn sends positive signals to the prefrontal cortex and, therefore, increases the sensation of euphoria. The brain longs for this form of reward, but soon gets used to it: if dopamine is distributed after a high benefit, you will be less inclined to repeat the same experience with the next gain. In order to experience the so-called "Lust Kick", the dose of dopamine must be increased, which will make investors willing to take on increased risks. Losing The other side of the coin is fear. It arises in the amygdala and is the nucleus accumbens or part of the limbic system of the human brain. Here, situations of imminent danger are examined. Situations classified as dangerous result in increased alertness and a willingness to escape or defend oneself. In this context, it is interesting to note that the brain distributes exactly the same hormones in the event of a loss during trading of securities as in the case of a threat. Neuroscientists have also discovered that a market crash triggers activities in the same brain area as physical pain. Neural reactions in the brain showed that the suffering caused by a loss works exactly the same as the sensation of physical pain. Heuristic 1: Selective perception Selective perception is a heuristic that occurs during the acquisition of information. To achieve the greatest possible harmony, only information is perceived and respected, which is the most appropriate way to maintain our attitude, personal opinion and to be able to confirm them. The information that goes against the opinion already established will be ignored or even we will oppose it according to the motto: "The exception confirms the rule". Consider the following example. If you are an investor familiar with technical analysis and have been analyzing an asset over a long period of time your indicators and technical patterns may suggest a rise in the asset price. The purchase decision is made and the order prepared. A day later, he reads a fundamental analysis that classifies that action as a possible "sale." What would you think and feel? Was he worried? Or would he simply ignore the analysis? Solution: Choose a solid strategy! You do not have to read any disturbing analysis that, in the worst case, will make you feel nervous. You need to develop a fixed set of rules. Choose a strategy that suits your mindset. Are you able to establish clear buying and selling conditions with your strategy? If so, try again and gain the necessary certainty about how well your system works and what phases of the market work worse. Are you a part-time trader? In this case, make sure the strategy you choose does not take too long. Heuristic 2: The illusion of self-assessment and control If you rely on your own capabilities or if investors value your accumulated experiences and competencies as being particularly high, there is a risk of self-assessment. One consequence of this is that their ability to predict market movements is overestimated and risks are increased. The illusion of control lies in the context of self-evaluation. It occurs mainly when investors have the opinion of themselves that they are able to dominate a certain situation. Control of illusion is a direct consequence of self-evaluation and often manifests itself after a series of gains. The feeling that markets are controllable grows. Solution: Keep a trading journal! Instead of trying to dominate the markets, you could practice with self-control. In addition to a profitable rule-based strategy, monitoring your own actions is also important. By keeping a trading diary, you can monitor the performance of your strategy. Conclusion There are many psychological pitfalls in which you can fall into trading. The heuristics presented in this article have been only a selection of the most typical and essential errors according to behavioral finance. But do not look insecure and maintain your trading strategy. If you are a technical investor, you will also be able to have your strategy implemented with an automated trading program. A trading robot always adheres to the rules and does not get tired. If you can not code a program, you could hire an experienced computer professional by programming robots. Keep a trading diary and write your trades on it. This will not only help you maintain an overview, but also helps you learn from your mistakes. Related Articles:Are You EMOTIONALLY Ready To Lose?Why Retail Investors Lose Money In The Stock MarketAre You Ready For The Learning Curve?Can you double your account every six months? If you are ready to start your journey AND make a long term commitment to be a student of the markets: Start Your Free Trial