The Trader’s Couch Series explores trading psychology and behaviors that undermine trader performance. Tips, tricks and techniques are offered as potential solutions to overcome these roadblocks to consistent profitability.
Champion traders, from all I have read and seen, have common traits. The list here doesn’t pretend to contain them all, but I think it is a great place to start. The thing that should jump from the page is that all of these attributes / methods are simple, straightforward, and free. Simple, however, does not mean easy. For example, unplugging financial and social media may be an impossible ask for some traders. Still, can we imagine a champion trader watching CNBC for good trade ideas? It’s up to you folks. Adopt these ideas and improvement will come!!
1. Consciously avoid Noise
In working with aspiring traders, and upon reflection of my own trading failures, one of the most often cited difficulties is an inability to resolve inner conflicts. I’d say that over 90% of these inner conflicts are generated by media and social media influencers. Take a careful look at the graphic. Whether your idea is to be long or short the market or a particular stock, there will be a great many voices telling you that you are not only wrong, but quite possibly stupid for holding that position.
With each media impression you subject yourself to, especially the one’s that run counter to your position, a seed of doubt is planted. Then the internal battle for control of your mind begins. Most often, when the first little price fluctuation comes, the trader will exit the position fearing the “voices” were right all along.
The best traders consciously avoid outside noise. Can you imagine a sharp Wall Street trader or Market Wizard at their desk, with the financial new network on, engaging in StockTwit debates, or spending hours combing through Twitter for great ideas? Hardly. What’s far more likely is that they are focused on their process and the flawless execution of it.
Aim to become a trading monk
I’ve got a challenge for you. It won’t be easy, but it will be worth it. Unplug from financial and social media for 60 days. Imagine how the clarity of your thinking will explode. No conflicting voices, way fewer internal conflicts. Just you executing your plan. I can see your results improving already.
2. Stop self – identifying as a bull or a bear
Going forward, I want you to try this. Stop self identifying as either a bull or a bear. Proclaiming to be a bull or a bear is limiting at best and harmful at worst. Do this instead. Look at individual stocks and the market as a whole in terms of “the path of least resistance”. For instance: Chris are you bullish or bearish $XYZ. “Well to my eye, the path of least resistance is lower at this time” . No emotional commitment, no ego, no time commitment, no psychological investment in the position….simply an observation at one point in time. If tomorrow, the path of least resistance is higher, I can easily migrate both my posture and market positioning to a bullish stance. If I am not sure, I can step aside. Absolutely no internal conflicts nor public conflicts to interfere with changing positions. Try it; it’s liberating.
Learn more about this HERE
3. Stop asking “Why?”
Given the massive disconnect between the real economy and the market, asking too many questions in regards to stock movement will either get you into trouble by trying to short strong stocks, or at the very least, keep you out of productive trades. No sane person would think the stock market “deserves” to be trading at current levels with the economy operating near Great Depression levels and with 20M ++ people out of work. Yet here we are. Thinking too much is one reason why highly educated, book -smart people often make horrible traders. They try to link logic to stock moves and from my experience stock moves often have little to do with logic. As the great Jesse Livermore says “what the dickens does it matter”. That about sums it up. Who cares if the reason is earnings, insider buying, Fed liquidity or that there will be a full moon next week. All you should care about is the movement of the stock; not the whys and what fores
I wrote a whole blog post on this topic. You can find it HERE
We talk about it all the time; be fluid, flexible and willing to adapt. Each morning we craft a game plan for the day. We look at a couple upside scenarios and downside scenarios as if we know what will happen after the bell rings. We don’t. The levels and plans are there to inform our trading, not dictate it. Learning when to toss out the game plan takes time in the chair and a willingness to do it. It is a skill that is learned. I am an engineer and therefore appreciate plans, rules, and laws of nature; rigid things. Being fluid and flexible hasn’t been easy for me. But over time I have gotten better at it. You’ll get better at it too; keep working at it. You’re likely making progress and don’t even realize it. Continue to practice being open to the message the tape is telling you.
Building on the idea of being fluid and flexible, here is a visual that will help you achieve it. Imagine market price action as a flowing stream. The stream can be flowing gently or more like a raging river. Your job as a trader, in large part, is to identify the direction of the stream and to a certain degree, it’s pace. Is it flowing gently higher in steady bull mode? Is it in waterfall sell-off mode or simply drifting lower? Now picture yourself as a leaf on that stream. A leaf is agnostic. A leaf does not care if the stream wanders left or right, up or down. A leaf has no bias or preconceived notion of where the stream ( price ) “should” flow. It is perfectly happy to ride gently on the surface letting the stream find its path of least resistance. You need to be the leaf. You should be perfectly happy riding along a bullish flow and then just as easily migrate to floating on a bearish flow should the currents change. For me, its a perfect analogy. The point where traders begin to let bias’, bull / bear labels, and narratives creep into their trading, is usually where the trouble begins. When I think back to my troubles in trading is when I’ve held onto ideas too long, and not being open to contrary price information.
6. Don’t fight the trend
It is an amazing fact that quite a large number of traders repeatedly try to short stocks in strong up trends or worse at / near all -time highs or buy stocks at 52 week lows. It is a very expensive habit ( ask me how I know ). I think there is some dynamic or allure of being the trader who calls the top tick or bottom tick in a stock. I think it has to do with proving that you were right kind of thing. Resist that temptation. Trends can and do go farther than you may expect. There is a good axiom in the trading world that will serve you well. Buy Strength; Sell weakness. There is also this quote from Livermore that holds truth.
“The first eighth and the last eighth are the most expensive eighths in the world for any trader”
The big money is made staying long or short in the meat of the trend, not in calling tops or bottoms
You can find out more about this in a recent Lessons from Livermore blog post HERE
7. Keep it simple; Trade like a 5th grader
Most of the “Market Wizards” and books on trading wisdom suggest that the simpler your trading process is, the more success you will find. What if we boiled down our trading process to the point a 5th grader could follow it? A strategy as simple as “buy support and sell resistance” has stood the test of time as a trading principle. Trading and price movement is all about supply and demand. These areas of support and resistance can be easily identified on any chart in under 5 minutes. Sounds simple, and it is, but we often can’t or wont do it. How come? Evidence is piling up that we would be much better off emulating the average 5th grader in our trading. Why? Because an average 5th grader’s thinking is unadulterated, uncluttered, and pure.
- No fear of success nor of failure.
- No ego to protect; no need to prove they are right
- No overlay of comparisons to other traders whom promote their last “killing” but fail to mention getting “run over”.
- No relentless gathering of information that often only clouds our judgement with conflicting signals.
- No association between trades and money gained or lost
Do you have any whisper of doubt that if you showed a 5th grader support and said “BUY HERE ” and resistance and said “SELL HERE” that they would not be able to follow that instruction? Of course they could do it. In fact they could do it and would do it over and over again. Yet we can’t or don’t because we overlay that decision making process with a ton of nonsense that doesn’t have anything to do with trading.
Trade like a 5th Grader
- Elevate your trading by thinking like a 5th grader. If a stock is going up its bullish; if a stock is going down it’s bearish. To many that may sound stupid but you’d be surprised how many people try to short rising stocks and try to buy stocks that are falling. Don’t be one of them.
- Can a 5th grader understand my trade? If they cant understand it, it’s too complicated. Refine it further without all the what-ifs and what-fores you’ve layered on.
- When facing buy / sell decisions, Ask yourself “What would a 5th grader do?” A 5th grader will not go through mental contortions to either stay in or to exit a trade. If you can answer the question, do what a 5th grader would do. My bet is that it will be a better answer than we could come up with.
You can find more on this topic HERE
8. Adopt, then crystallize, a Defensive approach to Trading
Every trader I have either worked with or have known well, including myself, have had gut-wrenching “near death” experiences as a trader. In fact, if you read the profiles of great traders in “Market Wizards“, you’ll find almost all suffered the excruciating pain of blowing up multiple accounts when they were young, aspiring traders. Through that pain, they learned the absolute necessity of a defensive approach to trading that respects risk and does not allow for a catastrophic loss. Take the ideas below and incorporate them into your trading style.
- Guarding trading capital is your number one obligation as a trader. If you guard your capital it will help ensure you have the time to learn how to become a consistently profitable trader.
- Approach all your trades the same way by not risking more than 1%-2% of capital on any one trade. If you do this, you won’t get hurt by a mistake and you won’t become emotionally attached to a “monster position”.
- Know where you’re getting out before you get in and respect your stop.
- NEVER add to a loser.
- If ever you are uncomfortable with a position for any reason, simply close it.
- Most winning trades work right out of the gate. If a trade begins poorly, take a quick and small loss, then reset for the next opportunity.
- The allure of being a swashbuckling trading gunslinger is powerful. Unfortunately your trading life will be short-lived if you adopt that style. If you aspire to be a long-time market participant, internalize the fact that there are no old, bold traders. Think deeply about that fact.
- Lastly, think about how long it took you to accumulate your trading capital. Understand that it is very easy to quickly lose it all. Unless you plan to hit grandma up to recapitalize your account when you implode, guard that capital with your life. When it is gone, you are out. That should be your greatest motivation to become a defensive trader.
I recently wrote a blog post on Defensive Trading. You can find it HERE
Pulling it all together
Let’s crystallize these ideas as bullet points.
- Consciously avoid noise: Rid your environment of the outside noise created by financial and social media and 90% of the “voices” of conflict will disappear.
- Be neither a bull nor a bear: Tightly holding onto beliefs blinds you to new and potentially very profitable information.
- Stop asking “why?” Our job as traders is to trade price; not to discover the reason why. Asking too many questions will keep you out of many profitable trades.
- Be fluid and flexible, like a leaf on a stream. Be more than happy to follow the stream ( price flow) either higher or lower with no internal or external conflicts to prevent you from making a fluid shift from bullish to bearish as price leads the way and dictates your market position.
- Don’t fight the trend. Resist whatever force within you that makes you want to fight the trend. It is a losing proposition.
- Keep it simple. The simpler your trading process the more apt that you’ll be able to execute it flawlessly. If a 5th grader can’t understand it, it is probably too complicated.
- Adopt a defensive trading approach. Having anything other than a defensive approach leaves you vulnerable to going bust before reaching consistent profitability.
I hope these ideas help you to have much improved trading results in the second half of 2020!! Reach out if you have questions.
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