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Trading So You Want To Be A Trader

Discussion in 'Shares' started by Tropo, 22nd Feb, 2012.

  1. Tropo

    Tropo Well-Known Member

    17th Aug, 2005

    The typical evolution of a trader goes something like this.
    You have read a few magazines perhaps bought a few shares you may even have seen Wall Street on video.
    You go to bed Sunday night, wake up Monday morning and decide that you are a stock market trader.

    Not too implausible you think, after all you have probably been able to master a few skills in your life, why not trading.
    Well consider a variation on a theme, imagine that you have seen a few episodes of ER perhaps you have even been to the doctor once or twice.
    On the basis of this background you decide that you are more than adequately qualified to be a trauma surgeon. Sound silly, it is no sillier than deciding to trade the stock market without actually having any background as a trader.

    You may consider yourself a trader on the basis that you have made a little bit of money in the current market. But consider carefully the following questions, which are arranged in order of importance and see if you can answer them.

    1.What is your position-sizing algorithm, is it loss based or volatility based.
    2.What is your exit trigger, more commonly known as stop losses.
    3.What is your entry system.

    New traders face a variety of hurdles as they embark upon their trading career, what I will do in this article is touch upon a few of these problems and hopefully offer a few pointers that will assist traders.

    A lack of skill.

    One of the key problems that new traders face is that they confuse their skill with the luck of having entered the market during an extraordinarily powerful bull market.
    Most new traders are incapable of acknowledging that they know very little about the markets. Reconsider the first few questions I posed, these are some of the most basic of questions that all professional traders simply take for granted.
    If you cannot answer these questions then you should acknowledge that you do not know anything about the basics of trading.

    However, do not be too harsh on your self, most professional market advisors cannot answer these questions either.
    If there are any true secrets of trading they are to be found in these three questions. If you are to succeed as a trader it is essential that you be able to answer these questions and to understand their role in your trading system.

    A lack of a trading system.

    My own anecdotal observations would suggest that the vast majority of traders simply have no concept of what a trading system is. Your trading system encapsulates your approach to the market, it defines everything from your objectives as a trader to which markets and which time frames you will trade.
    Your trading system is in essence your business plan.
    It is imperative that as a trader you have a rules based approach to the market. It is important to have rules to guide you as you trade for two reasons.
    Firstly there are no rules for trading imposed upon you the market has no rules for how you should trade. Any rules you generate are your own as such they have to suit your objectives as a trader and you personal approach to the market.
    Secondly having rules removes the emotion from trading.
    Many traders have the wrong idea about trading, they assume that it is some testosterone driven environment where there is a lot of yelling and screaming each day is a confrontation that needs to be won.
    Nothing could be further from the truth.
    Trading is a calm, disciplined profession, the moment your emotions creep into trading you are lost.
    Certainly the popular image of trading is one of a very boisterous environment, generally dominated by males. This image is a false one but unfortunately it infects the psyche of a trader and leads them towards failure.
    It also acts a barrier to women who want to enter trading as a career. Such a development is unfortunate because the available evidence suggests that women are better traders than men.

    Traders must have a trading system, if you have no system you will fail.

    Information management.

    Much of a trader’s day is spent managing information. In trading there is no shortage of information. It is possible to track the opening and closing of all major world markets courtesy of cable television.
    The internet has brought the dealing desk into the home with vast information resources available via the pc. It is possible to subscribe to magazines from all around the world, you can even get the Wall Street Journal on line as it is delivered to homes in New York.
    You can even get research from broking houses although the available evidence suggests that you would be more profitable doing the opposite to what your broker recommends.

    There is a problem with all this information.
    It is largely irrelevant to the professional trader. None of it is provided by people who actually trade for a living (this includes stockbrokers who are commission sales people).
    New traders are unfortunately prone to trying to find as many sources of information as possible. As a consequence of this they suffer from two conditions the first goes under the traders euphemism of the paralysis of analysis.
    Too much information causes the trader to literally seize up and be paralysed into inactivity.
    The second problem with information overload is more insidious and probably more important.
    Humans have some unique idiosyncrasies when it comes to processing information. The first is related to our confidence in our decision- making ability.
    Let’s assume that we are trading NCP and we receive a single piece of information and we are asked to rate how confident we feel about any outcome based upon the limited information we have received.
    We can for the purpose of the exercise assign an arbitrary weighting to our confidence.
    Lets say that with one piece of information we are 10% confident. If we get another piece of information our confidence may go to 20%. This is reasonable we have doubled the information we have received so our confidence level doubles.
    However, if we get three sources of information our confidence level instead of going to 30% will suddenly rocket to 90%. Traders become disproportionately more confident with a slight increase in information.

    An additional traders quirk applies to how we process more and more information. The more information we get the more we focus on the superfluous and the irrelevant. What has been found is that traders become less accurate the more information they receive.

    Whilst it is psychologically comforting to feel that your opinions are validated by the opinions of others there is overwhelming evidence that you will not get rich listening to the advice of others.

    The new trader needs to manage the information they are receiving to ensure that they are receiving information that is only pertinent to them and is not tainted by the opinions of others. Traders need raw information not recommendations.

    Within this management of information the technical trader needs to be addressed. Technical analysts may initially assume that because they use purely price to dictate their actions then they would be immune from the problems of information management faced by other traders.

    Unfortunately for the technician this is not true. You will remember that the least important question that I posed in my introduction was what is your entry trigger.
    Entry triggers comprise probably about 10% of trading. Most technicians ignore this and scour the globe looking for the one perfect indicator, many buy software packages containing what is called the ultimate indicator.
    The most popular question I am asked at seminars is what is the magic number for my moving average. Yet when subjected to rigorous testing technical indicators are shown to under perform random probability in the validity of the trading signals they provide.
    There simply is no perfect set of indicators, your indicators should simply act to get you into the position and that is all, and that is the least important part of trading.


    I have saved the most important till last.
    Typically when a trader enters the market for the first time they start thinking about how much money they will make. The reality is that a new trader may never make any money because reward is a phantom that may never exist. The only constant in markets is risk.
    Despite the current vogue in stock market advertising there is no such thing as a risk less trade. Markets only operate because of the risk reward equation. No risk no reward.

    Risk can never be eliminated only managed.
    Professionals have always known this and it is reflected in the approach they take which is not to make money but to minimize the amount they can possibly lose.
    This is why the first two questions I posed relate to position sizing and exit triggers. These two techniques ensure a trader’s survival when a trade goes wrong.
    As such they are the most important questions in trading.
    Chris T.
  2. wdongli

    wdongli Well-Known Member

    31st Mar, 2010
    Question: what if you are lack in wisdom and always be mad or have not vision at all?

    Most of traders are not matured mentally, don't understand the life logic, and have little common senses. Why do you sell after damages have been done? Why did you hold your position after your portfolio have doubled or tripled? Why did you always hold the losers longer than it should be? Why did you always sell when it is extremely cheap? Why do you always do your business for losses and use the glory term "stop losses?" When could you stop your madness for profit?

    They don't understand they could not get all of the skills for all of market seasons. They don't understand all of systems could be crashed down to ground under some conditions. They don't understand all mean to choose. They don't know he should behave properly. All of systems could not work without fine tuned feedback and all of open loop systems with too much positive feedback would crash onto the ground.

    They don't understand the information management is not googling only to support their biases. They don't know what are the trivial or critical information. All they could do with the huge database, internet, are to find information and filter the information to support their biases. Why did so many market players cry so tearfully in the ruins and highlight one edge of the sword of leverage when another edge has turned out to sharpen or cut your future?

    Risks? Who really care about them when the crowd turns to be cheerful at the peak? How many could do their independent evaluation and analysis let alone self-reliance? Most of market players are people who copy the ideas from what they see in the ruins or the huge cakes in the sky.

    Do you know we have Autocad for house design and development but few could use it to get the profitable products or houses? System is one matter and use the system for profit is another mater. Do you think a mad man could use the system wisely? If you thought so, you are mad and would be the loser! Why? It is because you are illogical to the life and market.

    You are sick in mind and nothing could be traded for profit! So could you be a good trader without the brains for basic? What're the basics? Genius fall down to ground since they live in the castles on the air! Traders tend to have all but just having no wisdom in hands! They fail in tiny but critical matters and abuse the huge but hard-harnessed this or that system!

    Dog could not run the system designed for swans and after failures dog just wonder what could make the system for swan failed! They don't know they are dogs and never have the courage to admit they are not the swans. I am a market dog until now and I do know I could not run the systems for swans since I could not act as a swan!

    Dogs could get better life than most of dogs but they could not live as swans. If a dog has the brain, he could find a dog way for better life. What if it has not the brain? It is still OK but it will raise too much problems for him or his family if a dog doesn't think he is a dog!

    Root causes of failure in the market? Few could understand it is you and yourselves! Could a dog turn himself into swan? Possible but very painful, which should be obvious and evident. It needs the lucks and persistent efforts to change the bones and bloods even the appearance could not be changed without good surgery by someone else.
    Last edited by a moderator: 23rd Feb, 2012
  3. wdongli

    wdongli Well-Known Member

    31st Mar, 2010
    Laborious process...

    How do you think about the market? A place for quick and easy money or a laborious process to chase after reasonable chances or reward the most complicated system with the most advanced tech hands? What's the process? A so called computer system only?

    In my view it is a laborious process if you really want to get the reward without unaffordable losses. What's the risk in the market really? It is your buying which causes unaffordable or painful losses. Was GFC risky for you? No losses you were safe, didn't you?

    So it should be the most laborious and stressful points for buying.

    It is critical and high-consequent matter for any market players. In most of time your buying has decided the winners or losers. Stopping-losses is just a action to reduce the effects of the consequences. Selling is tricky but it is just for you to collect the losses or profits generally in range.

    Before you make your mind to buy, it is the time to put your assumptions and assertion into probing and ask the insightful questions. The perfect candidate for best profit would be chosen based on your evaluation or guess without matter you will get the losses or profits from your buying.

    Most of market players don't know or never give a room for a common sense or life logic: "what we aim for isn't what always happens."

    The highest paying win the buying without matter whether the buying would bring the best profit for your laborious works or buying. The biggest gap or discount for future price win the reward in future.

    Do you understand what I am talking about? No? You are selling yourself in discount unintentionally by the way you pay the unreasonable premiums for something not worthy for what you paid. Is it need system to understand and the skills to figure out? I don't think so.

    A lot of market players don't know another very important point: please do remember that we are only human. And so too are those who run the businesses.

    Some of us perform badly in buying when most of the market plays well. Sometimes all of us play badly. Some times we play well but the market play badly. There are times we go in poorly prepared. And occasionally, all do too. Sometimes we ask foolish questions. And sometimes all of the market ask wrong questions.

    Please remember whatever happens, don't be disheartened to curse but try to fine tune yourself for better solution around the buying. See every failed buying as a learning experience. If you are not successful, ring and ask for mental maturity by determining what you did well and where you need to improve.

    Don't use the big words when our mental framework could not leverage them for profits!
  4. wdongli

    wdongli Well-Known Member

    31st Mar, 2010
    Prepare to buy...

    Preparation is necessary to win even not sufficient to win.

    Market buying is a competition: there is rarely a prize for coming second.
    So you have to win.

    You need to prepare for it.
    You need to know the most valuable strengths, thinking along the lines of personal qualities.

    1. The ability to stay calm while other panicking;
    2. commitment;
    3. willingness to work long hours;
    4. lateral thinking;
    5. Process and behavior focus,
    6. Goal driving,
    7. Sense of humor.

    Confront some of your weaknesses for avoiding to put yourself into a unpleasant place.

    1. Don't need to share, but if you dare to admit you win half already
    2. Don’t land yourself in a place you will hate. We all think strong but we are sick to something.

    Buying should like driving to your destination
    • Plan how to pick up carefully.
    • Allow for delays and jams or support for price to your level.
    • Plan to get enough discount than the price you thought to be fair
    • Don't buy if the price is not good. Use the time to soak up your mind and don't worry if you don't buy you would miss the chances.

    In the buying, you're prepared, ready to convince yourself that the buying is you really want. You need to allocate a certain amount of time in which to convince yourself again it is better choice among all of candidates.

    It's also worthwhile pointing out that any buying is good in the spotlight to an extent. Even the most thorough evaluation cannot tell you certain things about your buying. Don't forget Mr Market is selling something to you and he doesn't want you know the negative matters.

    We all just buy with impression we get the best choice. The first impression is always the strongest and most lasting even it hides some dangers.

    As a buyer, you don't need to curse anything which is to attract you to pay. You are doing your job for your self-interest only. To be suspect for what you see and hear and try to find truth to support your conclusions.

    If you don't want to buy due to the price could not provide enough margin of safety, you can move to next even sometimes later you could come back if the discount make your happy.

    We could be nervous since the market is booming, which make you worry if you miss it, you would see the train leaving without you. It does happen but it is nice to remember that you take a train which fall over the cliffs.

    Being nervous is normal and most normal market players understand this. And it rarely harms your chances if you acknowledge your nervousness.
    However, excessive nervousness can work against you, especially if you continually apologize for it.

    You need to be relaxed and confident for wise judgment. Market players tend to be overly active when nervous. If you fall into this category, try not to go off on tangents. Stick to the question you have to ask for your judgment and answer it concisely.

    You will control your nervousness more effectively if you have taken the time to practice answering questions before the buying. All of chances come from good questions.

    Buying usually isn't supposed to be grilling sessions. It tends to be over-excessive cheering around it.

    However you should not forget your intention behind a looking good time. It is to find out more about what you are buying. In other words, to get a good match between the price plus discount and future price in your holding horizon.

    Buying should be a two-way street, going forward or retreating without anything in hands. Probing, intelligent questions can help the buyer to evaluate your needs, cost, and return. You should believes that the buying will be mutually beneficial to the shares and yourself.

    You have to know you need to come prepared and are taking the opportunity seriously. You want to take efforts and if your efforts are enough, you should be rewarded by what you pay not what you get.

    Questions should be critical and high-consequent one rather than those which really don't matter for your return. Since you ask some very basic and high-consequent questions, you have to answer honestly and completely. Don't play or twist the words! It lets you feel good but confuse or blur your mind for the return or losses.

    Market players should avoid the temptation to overly embellish your experience, qualifications and abilities. It is your duty to question deeply about a fact that you've creatively enhanced. We all tend to feel we are better than whom we are.

    In the market there are few chances others would ask you critical questions. If there are, it is your lucky. Don't be felt to be intruded. Don't forget you would pay the costs and get the rewards. Don't be childish to protect your feeling. It is not a game to enhance your social status.

    Never try to avoid giving blunt "yes" or "no" answers for your buying. They reveal nothing. Certainly, a "closed" question ("Have you try all to pay less than the value?"), generally indicates an unskilled question. It is not about the trying but how for your winning. You could simply answer "yes" but this doesn't help you.

    However the closed question could be the starting point to sharpen your good buying. If you get a closed question, get more deep, and give a brief but comprehensive response. Use it as an opportunity to rationalize your buying.

    As a general rule of thumb, try not to ask question which need too much time without conclusion. You need to cheer yourself and let you feel the achievements. longer than two minutes at a time and never dominate the conversation. All of questions are to get good buying. A repeat of inverting of questions would help you get better judgment and good buying.

    Just remember never and ever complain in the market even we all have the time to complain for something.

    Complaining is the right of losers or people who feel they are dealt with unfairly. In the social life, something is just unfair to your efforts and contribution. Market naturally is fair generally and you could choose to leave far away from unfair deals. It is your responsibility you just buy which favor to your reward rather than damage your finance. It is always your own problems to pour the money on the fire.

    We have to avoid making negative judgements and criticisms to anyone except the activities of the crowd and our instinct to be one of the crowd, even if encouraged unless you want others to make the following judgements:

    • you're a "know-all";
    • you're a "buck-passer" who refuses to accept responsibility for your own performance;
    • you could curse or blame anyone and you could not be trusted.

    If you are not an idiot, you would have the world! We don't want to win against any of our mates but ruthlessly to beat the only enemy, ourselves, down to the light of the wisdom, intelligence, and reward from our fair hard work in the market.
    Last edited by a moderator: 23rd Feb, 2012
  5. wdongli

    wdongli Well-Known Member

    31st Mar, 2010
    Ask for the buying...

    Have you applied a good job and done a lot of preparing works for it? Good job with good paying is to get good return for what you have paid before.

    As you have to ask for jobs, don't be afraid to strongly communicate your desire for what you want to buy. There are too many market players turn very cold in the market after they lost their shirts again and again.

    Why did you say "poor becomes poorer?" Why did you highlight the crisis and the damages so heartily? Acting cool won't get you anywhere. An interested buyers always gets the offer over the non-interested candidate. The reward needs the offer even you have to get the offer at reasonable discount.

    Chasing the opportunities is the only way you could get reward even it could be true only if the price you paid is full of margin of safety.

    It is not easy to ask the right questions for your buying. So we need ask some tough questions to ourselves for buying.

    There are questions to which the honest answer is completely out of the question.

    Why were you out of the market and stay at the sideline? It usually means you fail to get what you want from the market.

    You must have a sound and feasible explanation for this one. Don't attempt to gloss over this question, as it's an issue that Mr Market would take seriously.

    Are you seriously considering your next move, rather than just brainlessly follow the crowd to cheer. Pause and stopping is not issue but the root causes are very important for your market playing.

    You enjoy your work in the market and are determined that the next buying you take will be one where you can get a big enough margin of safety and make a solid long-term contribution for your profit.

    "Reasons for the buying and what will make your selling?"

    Hopefully you'll have an acceptable reason for your buying and selling which is vital for your profit. If not, could you put time and efforts for good reasons for your future buying and selling. Don't forget to ignore the reasons due to your mood and feeling in the market. Mr Market is not normal human. He doesn't care about.

    • Challenge:

    You weren't able to grow your profit or return any more from a buying. You weren't able to get enough discount as margin of safety, which would increase the cost economically. You were wrong to evaluate the discount and the market moved against my judgements. Why don't take stopping losses as the reasons? They should be reasons for buying and selling but the tools to correct your mistakes.

    • Location:

    You bought at wrong price corresponding to the future price based on the market average base line or value. Your mind is less independent and you follow the crowd too much. You fail to find the right mechanism to evaluate the mood and don't know the psychological patterns of the crowd in this stampeded seasons. Your reward is big enough or far more than the buying deserves!

    • Advancement:

    There was nowhere for you to go but buying or selling.

    You had the talent, wisdom, and disciplines, but there were too many people could see what you see. The money could not stay in the hands of the crowd too long.

    You feel the miserable of the life in ruins. You know there are too many losers there. The war is at the extreme stage and most of consumable warriors have been consumed.

    There are a extremely depression point of crowd sentiment. The policy makers have no options to play the game which governed by the game theory. They have two options only: survival or die collectively. It is the limitation of the game theory.

    GFC crashed to March 2009 made a extreme point with two options only.

    • Money:

    You were not rewarded enough for what your preparing since you were not lucky. It was the consequence to disappoint you not anything else. It is the unaffordable risks made your selling decision.

    Losses themselves are not risks. The excellent rewards could come from the extreme fluctuation of the market price. Stopping the losses which were the cost for better chance for great reward in affordable cost is stupid.

    • Pride or prestige:

    I could buy better company at better discount for better reward so that I sold and bought for exchange.

    • Security:

    The company was not stable and highly speculative even its price is extremely lower than its remaining value. Could you protect your portfolio even it loses the door? I do worry that since I put too much money to buy this speculative chips.

    This company was fantastic one but all know that and the price is unreadable high. I don't simply stop loss but I do stop what I could not afford. I do stop to mingled in the ruins for my portfolio as a whole. I do want to build the last defensive line for my portfolio but not 3% of my money in the market.

    Things can be very complicated and system usually is cold to know all you could and decide what you could do for better rewards.

    We all need to prepare our responses in the market and practice it before we buy and sell. It may take a few tries to convince yourself that you're being honest and spontaneous, which are necessary to be disciplined, analytical, visionary, passionate, and self-reliant.

    Get your mind ready and then use your system for your ready mind and targeted reward. Life is good and really good if you could change and reward you.
    Last edited by a moderator: 23rd Feb, 2012
  6. TraderBob

    TraderBob New Member

    26th Oct, 2009
    Great post!