TRADING PSYCHOLOGY

LUNCH WITH A FRIEND

" I am not sure I have the right personality to trade."

This is a quote from one of my very favorite people I have been fortunate to be close friends with. He was assessing his own trading results over lunch with me yesterday. He is a person who has had tremendous success in his life time making millions of dollars in all sorts of different endeavors. He is one of those people who lives for the action and just can't wait for difficulties to develop in negotiating deals. This is where he thrives. However, this is also why his trading is not very good.

In the life of deal making and constantly moving, reassessing, shifting strategies, one might think this is good training to be a trader, I don't think so. The very instincts that tell you to completely change course out of the blue to save a "deal" are the same instincts that are going to drive you into exiting and entering trades right at the wrong time. His single biggest problem is that he has a new strategy to trade with about every 30 days, I have one about every several years as a contrast. He is always recommending new books to me to read that teach different approaches on top of all the different newspapers and newsletters he reads. He has so much clutter in his mind that he winds up trading with no plan at all.

He also has unrealistic goals expecting to make hundreds of percent per year in all his accounts. There is nobody not one single person on record, who has made 100% a year or more every year for 10 years in a row, KNOW ONE! Does this mean that is not someone who in the confines of some obscure place in hiding has not done it? NO. The point is that there are not all sorts of people doubling their accounts every single year. There are plenty that do it during any given year and I have certainly done that but not every single year. Do not set unrealistic expectations or you will wind up falling so short of them you will wind up chasing your tail like me friend does.

If you have a $50,000 trading account and were to increase it 50% per year each year for 10 years you have about $5.5 Million in your account. As a result do not get too carried away with all these stories of great riches. They have been made but you can get there just staying consistent.

I did tell me friend I thought he should not be trading because he was never going to be able to follow any rules for any period of time. I told him that he should not worry about developing rules or asking me what mine are because he won't follow them anyway. This is part of assessing your own personality as I discussed in my Newsletter a couple of months ago. My friend should either be a floor trader or not trade.

As for short term trading, my mechanical system has signaled a short for today in the Bernanke's so I am short as I type this. It is a short term trade. This does not mean I am really bearish on stocks, it means I have a signal in a system so I took the trade like I always do with them. There is no opinion, no assessment, no commentary, no anything. When I trade mechanical systems I just take the trades as they are spit out. What would be the logic in spending months developing things to then not follow them once they are implemented? If the system winds up doing poorly I will try to adjust it as I go along. If it does really poorly I will shut it down by the rules I use to determine this. It really is that simple. 

I don't care what a 3 period RSI or a MACD or a Wave Count says we should be doing unless the system I am using is based on any of these in which case I would care a lot. I get people at times asking me about the trades if once in them what I do if some indicator reading gets to a certain level? The answer is nothing unless the trade was entered based on that indicator. If it was then I follow the rules for acting at certain readings in it. If not why would I care? How would I know for example if a trade entered based on one variable would acted based on another variable that was not considered?

Trading is not easy as we all know and it is also not simple. However, in your execution things need to be simple. You can have all the fancy reasoning you want behind how your signals get generated, but once it comes to executing the trades keep it simple. This will enable you to trade in a disciplined fashion.

Here is a chart showing some of the recent trades the Emini System has made and the indication to short today at the market on the opening which is what I did. You will notice something interesting that is NOT stated on this chart because it is something you should NEVER do:

The rules do not say "Once in the trade death watch every tick on a 75 tick chart, look at every oscillator you can find along with reading 15 different opinions on the market on the internet. Also, get excited about every tick in your favor and discouraged by each one against you."

I think everyone gets the point. This trade will succeed or fail based on it's own merits, I am not going to interfere with it. I like to get out of the way not in the way.

I have had a lousy week, I was looking the wrong way in a few things and just missed some good moves and did not trade much. I talked about the energy shorts but my rules were not met to short today, so I missed that move. Sometimes this is the way it is for me. I don't nail every move or trade every day. Sometimes there is not much to do when you stay disciplined like I am.

Have a nice weekend