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  Michael Brook 9:50 am on January 30, 2012 Permalink | Log in to leave a Comment  

  Eliminating the Confusion Factor – Building a trading system that works 

  One of the curious things about trading is that it is a rule free place. There aren’t any real rules as to how you interact with the ebb and flow of price on a daily or minute by minute basis. There isn’t a policeman there to tell you that you are speeding or going the wrong way. There aren’t any stop signs telling you that you just about to drive into a highway on the wrong side when all the traffic is heading in the opposite direction. The trading environment is a rule free space.

  There’s a saying in german, “Wer hat der Wahl, auch hat der Qual”. Translated this means that if you have the choice you have the burden of the choice and it’s consequences.

  In a rule free space like trading you have to make a lot of choices repeatedly and the burden of those choices are yours and yours alone. Every time you think about a trade you are making a choice about that trade. Will you stay in or will you get out… what about the last time this happened?, what’s going to happen next? Etc, etc, etc…

  In such an environment, what is critical it to decrease the burden of the choices you necessarily have to make by virtue of being in the rule free space we call the market.

  The best way of doing this is to have a clear set or rules that you have for yourself that you have worked out works for you. My style of trading will be different to your style. My risk profile may be different to yours, my skill level may be different, the instruments I like to trade may be different to the ones you like to trade etc, etc,etc…

  Before you can trade successfully you need to make clear decisions about:

  • The instruments and markets you trade in
  • The timeframe you trade in
  • The level of risk you are tolerant of.
  • The amount of time you have to learn the skill.
  • The intention you have for learning how to trade.

  Each of those choices will affect your decisions and future profitiability and success.

  Some people trade intruments that are too highly leveraged for their skill level. It surprises me that many people will trade instruments with the highest risk (leverage) without considering the downside consequences of that type of trading first.

  This is akin to taking a learner driver and putting him behind the steering wheel a formula one race car telling him it’s going to be fine you’ll get there really fast. The predictable carnage is not easily explained away.

  Traders who able to make quick decisions can make better short term traders than others who take longer to make decisions.

  Once you have decided the things above you will need to do everything you can to reduce the amount of work that you will need to be doing in your decisions making.

  To reduce the confusion factor you will need to have a trading plan that has clarity. The more complex any system is the more things that can go wrong with it. System theory holds that for a system that has “n” components there are “n squared” possible failure modes of that system.

  So if you are building your trading system you want to make it as simple as you can.

  In order to make your trading system simple you need to:

  • Have it as simple as you can
  • Have a precise market (context) for each trade
  • Have a set of trades for each market.
  • Have a set of simple entry and exit rules.
  • Have a detailed review methodology

  If your trading is not working the probability is that either the decisions you made before you started trading have not stood up to your interaction with the market or the market is not favoring your trading system.

  If you trading system is not as simple as it needs to be or is dripping with complexity the chances are that you aren’t getting the results you want out of it. There is a reliable predictable path for most traders whose trading gets initially more complex then substantially simpler with time.

  Most expert traders have systems that are simple to implement.

  The path to trading success is much like sharpening a knife. You have test it out before you know if it’s sharp enough. This means sometimes you will get a cut or too in the process.

  The saying that the simple things in life are often the best is true particularly when it comes to trading systems.

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  Michael Brook 10:07 am on January 16, 2012 Permalink | Log in to leave a Comment  

  A year of firsts. Lessons to be learnt. 

  If we fail to learn from the past we are condemned to relive it. Nothing is more truthful than this saying applied to trading. This is why many traders, correctly so, look to previous patterns of price action to guide their actions in the future.

  However, the market is constantly changing and evolving. One year may not be the same as any other. This year has proven to be different from every other year there has been in the market. As traders we must evolve our trading to the changing market within which we operate.

  In 2011 there was unprecedented volatility in the financial markets. In 2011 we saw

  • The first year where the XJO (the asx S&P200) closed down 2 years in a row.
  • The first day ever when XJO moved a total of 11% within a single day on XJO (Aug 9)
  • The largest ever single day volume spike in the history of XMJ ( the Australian materials sector)
  • The largest every 4 day volume on the history of the DJI Aug 9-11
  • The first year ever with 100 days greater than 100 point moves on the SPY.
  • The first time in 41 years where the spy closed within 0.5% of its opening, (this occurred in spite of the fact that the DJI moved over 120% of it’s value in 11 major moves)
  • The first period ever where 80% of all volume on an exchange was algorithmic(this occurred through august on the DJI)

  The market this year was characterized by massive moves sparked by news announcements, natural and man-made disasters and ongoing concerns about debt in Europe and elsewhere.

  So what is the significance of this information and how do we use this to our advantage?

  Firstly, we should never expect the past to be similar to the future. The speed and range of market movements is increasing and we should expect more of this in future markets. As the penetration of the algorithmic traders increases and the exchanges become more dependent on the income derived from those traders, the price movements will become more consistently larger.

  Secondly, traditional methods of trading are becoming more and more unprofitable. In such volatile markets last year’s where rapid movements of entire indices occur, tradition trading methods would have stops being hit all the time. Trend traders would be unable to make money because of the rapid swings and periodic clean outs of stops. Patterns would have difficulty making money as many patterns fail immediately after break out. The support and resistance line traders would have been worked over similarly as the volatility of the market pushes price briefly above and below support and resistance levels only to reverse once trades are entered into.

  Finally, the methods of trading that support shorter term profit targets that take advantage of the volatility will be the trading style that will be rewarded. Many retail traders like to hold positions for longer time periods. This is referred to buy and hold typically long trades. That strategy will have proven to be very costly in the past 18 months.

  As traders we must adapt to the new market and to use what the market throws at us to our advantage.

   

  An expertise acquisition perspective.

  The acquisition of expertise involves a systematic practice of the performance skill in many different conditions, so that when the performance is required in a new context it can be accomplished with skill.

  One aspect of training that is central to expert performance is the acquisition of flexibility to perform in different contexts. The performance skill is practiced in as many different possible environments to build flexibility into the performers performance.

  As traders, we need to have trading plans that are flexible that are able deal with different market conditions.

  By building flexibility into your trading you are able to function in profit in a market that is volatile.

   

  If you have flexibility as part of your trading strategy,

   you will never be in a market that you can’t profit from.

  So, how do you do that?

  Firstly, you need to have trade setups for volatile and non-volatile markets.

  Secondly, you need to have contingencies for each trade if the volatility of the market suddenly increases

  Finally, you need to know what sort of markets you don’t want to be in. If this isn’t it you should be out.

  2012 is likely to be as volatile as 2011. The causal factors of the volatility have not gone away and are likely to accelerate to their conclusion. If you are prepared you can trade profitably in any market.

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  Michael Brook 12:28 pm on November 28, 2011 Permalink | Log in to leave a Comment  

  Intelligent decision making and emotions – essential ingredients to a profitable trade. 

  Many traders believe that the more they control their emotions the more they can make better trading decisions and make more.  After making a lot of trades they will have experienced a range of emotions and they can come to the conclusion that the emotions are the problem. They may also have spent some time in different markets, some of which support their trading style and some of which don’t. This will sensitise the trader to the emotions of making money and losing money.

  Recent advances from the world of cognitive neuroscience have proved that emotions are essential ingredients to good decisions making. Much of this work has been done by Antonio Demasio. Studies have been done on people who have because of some form of  brain injury are unable to experience emotions.  They are able to make conscious rational decisions but are unable to experience any emotions about those decisions or an emotion about the outcome of the decision.

  The results of the study of these individuals reveals that they are unable to make even the simplest of decisions.  The lack of an emotions in the decision making process caused them to be paralysed in the face of data. One study of people who are unable to experience emotions called the 2 deck gambling game is of particular interest to us as traders.

  The game involved 2 different decks of cards, one had higher risk and reward and one had lower risk and reward. Each hand involved the winning or losing of money according to the deck that was chosen.  Normal people who play the game naturally gravitate towards the lower risk and reward as the emotional feedback mechanisms that are present in them seek to regulate the intensity of the experience. Individuals who are unable to experience emotions do very poorly at this game because the feedback mechanism is no present.

  The implications of this research are immense.

  Firstly, Intelligent decision making is impossible without emotion. The presence of the ability to experience emotions is fundamental to making good decisions regarding risk and reward for risk.

  The greatest implication is that evolution has handed to us a very rich automatic system of rapidly solving problems intelligently that we can be presented with that we can’t solve biologically. Emotions are automatic and they are essential to quickly solving problems. By using emotions to provide guidance to the conscious mind this allows problem solving to be rapidly sped up thus aiding survival. The lack of emotions stops good decisions making in it’s tracks.

  As traders we have to evaluate data rapidly and efficiently in order to profit from the patterns that present themselves in the market. It is the combination of our emotional responses to the information and our emotion process that enable us to make good trading decisions.

  The truth about emotions and trading is that we should be relying on them more and not less.

  Expert traders know how to use their emotions to their advantage and know what to reward themselves for emotionally. They reward themselves emotionally on the execution of their trading plan and over much longer time frames.

  This is different to novice traders and how they use their emotions.

  Expert traders use their emotions to:

  • Reward themselves on the execution of their trade
  • Reward themselves on their execution of their trading plan
  • Reward themselves on the execution of their trading plan over a large period of time

  Note the difference between this and novice traders.

  Novice traders use their emotions to:

  • Get excited or depressed depending on their profit or loss on an individual trade
  • Get excited about their trading over  a short term.
  • Avoid creating a trading plan or don’t have one.

  This is covered in much more detail in the High performance trading course. Check out the Stockcourse and Trading State website for the next course.

  If you are experiencing difficulties with emotions in your trading, Trading State can help with coaching. Contact us to assist you with using your emotions in your trading in a more helpful way.
  Happy Trading!

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  Michael Brook 6:11 pm on November 3, 2011 Permalink | Log in to leave a Comment  

  The changed nature of the market and price manipulation on the ASX 

  Traditional forms of technical analysis have been practiced for decades with limited success. Most of the technical analysis methods taught to the public currently, have not changed much for many years.

  The entry points on patterns and trendline breaks are fairly easy to predict and the stop loss calculations most traders use are limited to a few methods.

  However, the nature of the market has changed and the speed with which price moves has made the implementation of a conventional trading strategy much more problematic than it used to be.

  Algorithmic trading has delivered an eightfold increase in the number of share transactions on the Australian stock exchange in just five years – but sharply reduced the size of each deal as disclosed recently by the ASX.

  Trading statistics published by the ASX show that close to 1500 transactions a minute are being processed, compared with barely 200 in 2005. The weekly range of motion or average true range of a stock like Rio Tinto has increased on average 4-5 times compared with its ATR in 2005.

  However those averages disguise peaks of activity, most often observed at market openings and closes. In 2006, the number of changes in the order books (buy and sell orders) peaked at about 2000 per second, while in the last year they hit 12,000 per second. For comparison, the current system has the capacity to handle up to 20,000 orders per second. If it continues to increase at the current rate, it will reach capacity by the end of this year unless computing power increases at a greater rate and the ASX stays ahead of the game.

  The ASX would like the trading market to believe that the steep climb in the number of transactions reflects algorithmic traders breaking up a buy or sell order into hundreds of smaller deals that can be executed simultaneously, so that the market price is not changed significantly by their activity.

  However, as this article will show, the other use of algorithmic trading programs is to create rapid movement of price to ensure that traders using traditional (known) trading methods are either trapped into bad trades or have their stops hit before the price rises.

  In short, algorithmic traders manipulate the price in order to disadvantage traders who are unaware of the danger to their trading balance.

  In conventional trading methodology, traders are taught to enter and exit a trade in a finite number of ways. Trading methodologies are widely taught and freely available in print and from trading educators. Entry criteria normally include breakouts from flags, pennants and triangles, falling resistance line breaks and rising support breaks.

  Exit criteria, including placement of stop points are also widely known. These include but are not limited to penetration of a rising support line or falling resistance line, the first major low preceding the entry point, and an average true range trailing stop. It is also widely known that most traders trade emotionally. After a trade has run past their entry level, many traders will put their stops at the entry levels to make the trade become  “risk free”.

  Given the limited number of trading methodologies that are commonly used, if you were in the position of a competitive algorithmic trader and you had the ability and capacity to move price on an instrument, you would move it to counter the commonly used methods, too.

  If you were a football coach and you had the opposition’s playbook, you’d use it, wouldn’t you?

  In today’s high frequency marketplace price can move very rapidly. This is often done to the detriment of traders using traditional methods as the following charts show:

  

  Above is the chart of Watpac (WTP.ASX). I would like to draw your attention to the price action on the 17^th and 18^th of January. In two days, the price moved from $1.90 to $1.95 down to a bottom price of $151.5.  That is a 28.7% movement in the price of a top 300 company.

  Did the fundamentals of the business change 28.7% in 2 days? Did the market segment interested in Watpac jump schizophrenically from euphoria to despair about its future value in 2 days? How would the valuers who determine the price to earnings ratio explain this? What possible explanation could there be for the rapid upward movement and rapid downward movement followed by settling at long term average, other than price manipulation?

  The price action on the 17^th was designed to trap traders into poor long positions. The price action on the 18^th was designed to trigger any stops long traders may have had. This price movement on the 18^th was designed to take out all stops set below the long term trend line, any of the previous three major lows and any traders who had entered in the previous several months who panicked about being down by 20%.

  And it worked as shown by the volume traded on the 18^th.

  

  Another common pattern of price action that indicates that high frequency traders are manipulating price is the rapid price movement of an instrument prior to an upwards run. Find above a chart of STW Communications Group (SGN.ASX). I would like to draw your attention to the price action on 7 May in the centre of the chart. This price opened at 84 cents and plunged rapidly down to 76 cents before closing at 88 cents. The range of motion doubled the daily average true range.

  Since many traders set their stops at major lows, the major lows on the 22^nd of April, 24th of March, and 19th of March would all have been triggered by this rapid price movement.  Often these rapid price movements occur at lunch time when traders are away from their desks and are unable to prevent their stops from being triggered.

  This type of price action is frequently used as the trigger before an increase in the price. Its purpose is to shake out stops and pick up cheap volume prior to the price being marked higher.

  As can be seen from the above two examples, price can move very rapidly in the current market and is instigated often by high frequency traders. These are only two examples of the hundreds that can be found on the ASX.

  While this represents a grave threat to the uninformed investor, to the informed investor it represents an incredible opportunity. If the market manipulators change the price of an instrument in repeatable ways, then this can be used to the advantage of informed and educated traders. Currently, market manipulators do manipulate the price in a recognisable manner. Therefore, if a trader works in harmony with them, the trader can enjoy the benefits of the manipulations, instead of having their stops hit just before the price is marked up.

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  Michael Brook 2:18 pm on June 16, 2011 Permalink | Log in to leave a Comment  

  Hope – The Killer of Trading Balances. 

  For most traders, the process of trading is a highly individual experience. They sit in front of their computers, weigh up risk and reward, probability, pattern strength and other factors before committing themselves to a specific position. Often they experience a buzz of excitement when they are just about to enter the trade, followed by anticipation of profit or loss.

  Depending on the type of position a trader is in, what happens next can bring on a roller coaster of emotions and experiences. If the trade goes up, then typically positive emotions are experienced. If the trade goes does down, negative emotions are experienced.

  Expert and experienced traders set their stop loss positions and exit their positions with discipline.

  Novice traders or even expert traders who have had a few losses in a row, sometimes hold on to losing positions in the hope that those positions will come back to them. The lower the price goes the more intensely the novice trader will hold on to that hope.

  Often when novice traders are holding on in hope, they will do a number of things. They will research company reports and announcements to convince themselves that staying in is a good thing to do. They will look at comparisons between the fundamentals of their losing stock and those of comparable companies including relative valuations and stock prices. They will talk about the underlying upward trend of the commodity/market even when their position is going counter to the underlying upward trend. All of these behaviours are symptoms of traders attempting to justify to themselves, the hope that the price might come back to them.

  This rarely happens. Hope has destroyed far more trading balances than exuberance.

  From talking to many traders, the common response is that novice traders hang on in hope. This almost invariably destroys large chunks of traders’ trading balances (if not the whole trading balance) and they have to become a super trader in order to make back their losses. Trading then takes on a whole new level of difficulty for which the novice trader is normally unprepared.

  What to do if you are hanging on in hope.

  First, if you find yourself hanging on in hope for a position to turn around, ask yourself a number of questions.

  Has your losing position hit your 2% loss limit?
  Most trading educators recommend a loss limit of 2% of the trading balance. If the loss on any one position exceeds this amount, the position should be closed out. If the answer to the previous question is “yes”, you should exit it immediately.

  Does your trade conform to the rules of your trading plan?
  If you don’t have a trading plan then you should exit all your positions immediately and write one. If you do have a trading plan and it is within your rules, manage the position. If it’s outside the rules of your trading plan, you should examine closely what you are in the trade for.

  Finally, is the probability function with the trade or against it?
  The probability function is the probability that the trade will work. This changes constantly over time, hence it is described as a function. If the probability is against a trade succeeding, such as if you are going long into a falling market, then you should consider cutting your losses. If the probability is with the trade, as when the market is going higher and you are long, then you could be experiencing a temporary retracement and the position may be worth holding.

  If you are still holding the position after answering these questions, then you are probably either experiencing a manipulation pattern or you are clinging desperately to the hope that it will turn around and you will achieve the results you want from that choice.

  As traders, our results come from the combination of how well we are seeing the market and how well we are managing ourselves. By understanding the market and ourselves, we can profit from the limitless patterns that present themselves constantly.

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  Michael Brook 11:28 am on May 27, 2011 Permalink | Log in to leave a Comment
  Tags: pattern, resilience, Trading ( 9 ), volatility ( 3 )   

  How to Build Resilience into your Trading 

  Anyone trading in the Australian market, and other markets for that matter, over the 5 months would have noticed the see-saw movement of price and volatility that is present at the moment. The chart below consists of XJO over the past months. Since January 1 we have had a 2% downswing, a 5.6% upswing, the Japanese Tsunami crash of 9.4%, the bounce of the Tsunami crash of an 11.25% upswing and then a 7.8% downswing.

  This volatility presents problems for many traders. The rapid changes of direction of the market will present problems for trend following traders who will be unable to have a solid trend. This will be an issue for pattern traders who will trade patterns that rapidly fail after taking the entry. There will be many sharp movements of price that will be taking out lots of trader’s stops.

  In the face of such volatility, many traders have expressed to us exasperation as to how to trade this market and the fact that they are taking losses on a repeated basis. Given the trading environment, the ability to react to volatility and remain focussed and resilient in the face of such a trading environment is challenging many traders.

  This article presents one model of Resilience applied to the trading context to assist them in their trading success.

  A model of resilience.

  In many risk/performance fields, resilience is a required ability or quality to endure the challenges that the performance field throws at them.

  Can you imagine a martial artist being unable to handle the rigours of training being able to acquire a high level of skill? Can you imagine an endurance runner who stopped his running training every time it rained?

  Studies in the field of expertise and expert performance have focussed on the skill acquisition of experts and how they remain resilient through the learning journey. A number of consistent patterns show up in resilient individuals and how they approach challenging environments.

  A resilient individual in response to challenging environments shows:

  1.     The ability to learn from adversity and take a longer term view of events.

  2.     The ability to plan for contingencies. Having contingencies has your ability to have planned actions in the event of bad things happening in the market.

  3.     Robustness – They foster within themselves the ability to respond to the situation in the moment it is happening and execute their contingencies.

  4.     The ability to Recover –They have plans in place for recovery from the situation that they endured.

  Traders who are resilient show these very characteristics.

  Resilient traders are constantly looking to learn from every experience in the market. In adverse market conditions they are seeking to understand those markets because they know they will surely reoccur.

  Resilient traders know what their stops are and know when to stop trading. They have their drop dead points set and know when to pull out of the market all together and act on those plans when the conditions are met.

  Resilient traders know keep and honour their stops and don’t hesitate to act on them.

  Finally, resilient traders are focussed on acting the moment they sense the market has turned around and then maximise their recovery. Resilient traders know when their emotions are clouding their decision making skills and use that as a trigger to get out of the market.

  “Before you can have trading consistency, you must have emotional consistency”

  - Dr Brett Steenbarger

  The core of trading is the mindset of an intense focus on:

  •       Probability orientation.

  •       Pattern recognition.

  •       Decision making.

  A resilient trader is able to make timely decisions, recognise when the probability of a trade is not in his favour and the patterns that are presenting themselves in any market that represent opportunities at that time.

  How to build resilience into your trading plan.

  Every trader who is successful over the long term has a trading plan and they build resilience into their trading through their trading.

  Below are some ways that you can build resilience into your trading plan.

  Have a drop dead point.
  

  This is the point at which you stop trading all together. This acts as a circuit breaker to reduce your losses. If you don’t know what yours is then your probably should not be trading. At trading state we often deal with struggling traders who don’t have drop dead points in their trading. Successful traders know when to stop losing. Unsuccessful traders do not.

  Having trading patterns for different markets.

  By having trading patterns for different markets, either trending, freefall or rangebound, this builds in contingency planning and focuses on a trader on being able to respond to the markets that are presenting themselves in the moment..

  Using feedback loops.

  Having feedback spread sheets to track the metrics of your trading enables you to learn from every single trade even in a market that is difficult to trade in. This builds learning into trading process that allows you to learn from adverse market conditions.

  Use position size decay.

  Position size decay is the concept where with each losing trade the next trade becomes incrementally smaller. This progressively reduces your risk exposure and can substantially reduce drawdowns on your trading balance. The prepares you as a trader to be fully available for  the opportunities that will present themselves when the market turn.

  “You can’t change the market, but you can change how you respond to it.”

  As traders we live in a world that is inherently risky and uncertain on a daily basis. Few other professions or occupations have the same degree of uncertainty.  This is something at we are unable to change.

  We can however be prepared for bad markets as well as good ones. We can’t change the market but we can change how we respond to it and what we do in each moment

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  Keith Kong (ZTrade), and Trader Lyn are discussing. Toggle Comments

   
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    Trader Lyn 11:39 am on May 27, 2011 Permalink

    Thanks Mike for another great article!

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    Keith Kong (ZTrade) 12:33 pm on June 3, 2011 Permalink

    Hi Michael,

    Thanks for sharing. It is a very good article. “You can’t change the market, but you can change how you respond to it.” I couldn’t agree with you more. I’ve seem so many people to response to the market use the “buy and hold” strategy and to be exact they are “pray and hold”.

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  Michael Brook 9:42 am on May 5, 2011 Permalink | Log in to leave a Comment  

  The Correlational Tendency – If you don’t know what it is, it could be costing you lots of money. 

  As a trader, you are required to sift through huge amounts of data in order to make good decisions. There are a very large number of choices you could make in terms of the instruments you trade, whether it’s indices, commodities, equities or futures.

  Consider just the ASX for a moment. There are approximately 3500 listed companies on the ASX and that does not include derivative instruments built around those companies. Each company produces a stream of data from which the aggregate of traders’ responses becomes the trade volume, price and the chart patterns that are formed.

  Even if you reduce the data to the five primary pieces of information on each listed equity on end of day data, that is; open, high, low, close and volume, you still get 87,500 pieces of information a week that can influence your trading decisions. Considering there could be many other options, warrants and futures associated with just the Australian equities, the volume of data you have available for influencing your decisions is very large.

  When making a decision about what to trade and when to take it, the data needs to be sorted with reference to your trading plan and trading style. Once a trade opportunity is identified, then the trade is executed.

  What happens next is critical to your success as a trader.

  Many traders do everything right up to this point but never achieve the success they desire.

  Having made a decision about a trading opportunity, then they search the data stream to find material that confirms the correctness of their decision. This is called the correlational tendency.

  Humans have a tendency to look for data that confirms previous decisions in all areas of life. This can continue long after the passage of time has actually proven an original idea or decision to be incorrect. In trading, this is manifested by holding on to a losing position long after you should have exited the position.

  Here is a real life example of the correlational tendency.
  Several years ago, a sniper was shooting people randomly around Washington in the US. The offender’s vehicle was originally reported as a white van, so the police started looking for a white van at their roadblocks. Subsequently the offender was apprehended in a blue sedan. The police chief gave a press conference saying they were still looking for a white van driven by someone who may have helped him, even though he had already been arrested in a blue sedan.

  The police chief refused to believe that they had been wrong and was looking for something that was never there to correlate with his previous belief. Traders often do this to their cost.

  The correlational tendency operates without deliberately directing our attention as well. If you have ever bought a new car of a relatively unusual make or model, you have probably observed that all of a sudden, the roads seem to be full of them. In fact, there are no more than usual, but your attention has been redirected by your interest in that particular vehicle so that you notice them instead of ignoring them.

  Trading skill is a function of:

  • Probability Thinking
  • Decision making ability
  • Pattern recognition

  As a trader, you make a successful trade when you have a good understanding of the probability of the success of the setup, if you have made clear decisions about the trade and subsequently decided to keep it or get out of it and you recognise when the pattern of data really is in your favour.

  If you are attempting to correlate the data with your previous decision as is the normal human tendency, you will tend to stay in trades too long and keep trading into a market that is not rewarding your trading style. Either of these two outcomes is death to your trading balance.

  How to change this?

  As a trader you need to ensure that you are looking at the data without correlating it to your previous decisions.  You can do this in a number of ways.

  First, if what you are doing isn’t working, take a break. Trading is entirely voluntary. You don’t have to do it. If you are not seeing the data correctly, get out of the market and take a break.

  Second, talk to someone else, preferably a coach about your positions. If you can explain cogently what you are doing to someone else and it makes sense to them too, than you will probably be looking at the data with minimal bias. If your coach or knowledgeable person has a different opinion, you need to consider how you have been thinking about that position.

  Third, assume you may be wrong with your idea and consider that possibility at all times.

  Finally, develop the ability to manage your emotional and decision making state so that you can consider a number of points of view of the data simultaneously.

  This is one of the topics to be explored in the Clear Mind Trading course to be held in Sydney on the 4-5 June 2011.

  Our Sydney Seminar last year was attended by Ray Barros. Ray has been an expert trader and educator for many years. Here is what Ray had to say on his Blog

  “I’ll comment on a workshop I attended on the weekend hosted by Trading State. For me it was a great experience. “Clear Mind Trading” emphasizes the psychological aspects of trading with experiential learning. If you are looking for a workshop where you sit, listen and take notes, then this workshop is not for you. But if you want to come away with a clear understanding of the issues facing a trader and with tools that you have experienced using that will assist, then this is a fabulous workshop.”

  Our Upcoming workshop is on the 4th -5th of June at The Adina on Crown in Surry Hills. The investment is $1650.
  Places are Limited. Call us on 0432 681 321 to book your place.

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  Michael Brook 9:39 am on August 31, 2010 Permalink | Log in to leave a Comment
  Tags: Psychology of Trading ( 3 ), Results, Risk ( 3 ), Trading ( 9 )   

  Trading to Win Vs Trading to Avoid Losing
  The search for consistency can be a troubling journey for many traders. When we talk to trading educators, they often express frustration at the variability of the results their students get. The educators have system that they know work because they have been running their systems for a long time. Yet when they teach a system, their students get a range of results from very good to very poor.

  Trading educators have told us repeatedly that learning to manage the psychological aspects of trading accounts for between 60% and 80% of difficulties associated with trading.

  To put it another way, trading educators consistently say that
  understanding the psychological elements of trading is 3-4 times more important than the technical analysis side of trading.

  When we work with traders who want to improve their performance, we see similar patterns between traders at different stages of development. For example, it is common when traders succeed, to see them become successful for a period of time and then go into a slump, which they cannot explain.

  Often, the slump happens after a number of losing trades in a row. A run of losing trades will be experienced by anyone in the market if they are there for long enough and they need to learn to accept and handle this eventuality. The laws of probability state that over a period of time you will have a sequence of winners and a sequence of losers.

  A common reaction to a sequence of losing trades is for traders to change their trading behaviour, sometimes quite radically.

  They will do one or more of the following:

  • Increase their position size substantially.
  • Opt for much higher risk in their trades.
  • Increase their trading frequency.
  • Get into and out of trades at inopportune moments because they don’t want to take another loss.
  • Double their losing position size hoping for a turn around.
  • Get out of winning trades as soon as they go into profit just to break their run of losing trades.

  These trading behaviours are symptomatic of Trading to Avoid Losing, as opposed to Trading to Make a Profit.

  Occasionally a trader may pull this off. More often than not, this behaviour compounds their losses and drives them more deeply into the problem states they experience when losing.

  What to do when you are trading to avoid losing.

  The first and most useful thing to do is stop trading. You can’t lose if you are not in the market. This will give you time to examine your trading system, the market and your emotional states so you can figure out where the problem is.

  This is what expert traders do and it is not commonly seen in novice traders. Expert traders have no hesitation in stepping out of the market until they can read the market properly and make clear trading decisions.

  For many people, stopping trading could be perceived as anxiety inducing and unproductive. For those traders, they should consider decreasing their position sizes, reducing their market exposure and back testing their system. These actions will help them to understand the probabilities of their trades and the clarity of their decisions.

  This is covered in greater detail in the Clear Mind trading course. For more information go to http://www.tradingstate.com.au.

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  Michael Brook 11:36 am on August 17, 2010 Permalink | Log in to leave a Comment  

  The Perpetual Motion Machine – Knowing when to stop. 

  As some who worked in the field of machinery diagnostics, I was often asked to give my opinion on the timeliness of a machine’s maintenance and when to take a machine off line if it wasn’t performing properly.

  This was done to make it possible to do the necessary maintenance on the machine, replace worn parts, lubricate and align the machine. The machine was then tested before applying the power and putting it back on line, where the consequences of failure can be very high.

  When working with traders who are having difficulty with their trading, one of the first questions I ask is; “Where in your trading plan does it say when you should stop trading”?

  Most traders don’t have conditions set down to identify when they should stop trading.

  This represents a big problem. Their plan (if they have one) states, or at least implies, that they should keep trading forever, without reference to losses or profits or other (changing) conditions. It doesn’t matter how bad their results might be, if their plan assumes or tells them to keep going.

  Those same traders would take their car to a mechanic immediately if it started making a horrible noise. Yet when their trading balance is being hammered they don’t stop trading to figure out what is going wrong.

  A trader once told the author:

  “I started with $250K, I’m down to $50K and I’m going to keep on investing till it’s all gone.”

  If a trader is unable to stop trading, it normally happens for one of several reasons. The most common is that they are addicted to the excitement and the emotional rollercoaster of trading and losing.

  Alternatively, they are so attached to the goal of becoming a trader that they don’t know when to stop trading when they are executing their plan well.

  Frenetic activity isn’t necessarily progress.

  In contrast, expert traders know when to stop trading and when they need to step out of the market. They don’t feel compelled to be trading at all times. They know when they are most effective and when the risk present in the market is not acceptable to them.

  How to use this information

  A well formed plan should have exit criteria and contingencies built into it. An essential part to any trading should be conditions for stopping trading.

  Possible criteria for stopping trading are:

  • A set number of losing trades in a row.
  • A major drawdown on your trading balance to a set percentage.
  • A major change in the market that represents excessive risk.
  • The market conditions do not support your trading style.
  • Something in your life is stressing you and you are unable to make clear decisions.
  • You feel you are unable to trade well.

  All of these things should be possible exit criteria for stopping trading until you feel you are able to trade effectively.

  Once you take time out, your re-entry to the market should be dictated by the market conditions being supportive of your trading style, the work you did when you weren’t active in the market and the risk profile you have chosen.

  This and other topic relating to trading plans are covered in the Clear Mind Trading Course. For more information go to http://www.tradingstate.com.au

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  Michael Brook 9:07 pm on August 9, 2010 Permalink | Log in to leave a Comment  

  Your Risk Relationship – The primary cause for trading emotionally. 

  Your risk relationship – the most important relationship in your trading life

   You may be able to remember when you learnt to ride a bicycle. At first you started off on training wheels getting a feel for your balance in real time and space. You probably started off in a small space, then in a larger space maybe the backyard, going faster and faster.You had to learn when to go fast, when to brake, when to brake in advance of things moving around you.You were probably aware of the potential for an accident but the risk associated with it was probably not in your mind.

   But…. After your first big crash you became very aware of the potential for pain from your new activity. each moment you are on the bike represents the potential for fun and rapid movement to your destination and the pain of an accident. You learn to manage the risk while enjoying the rewards

  So it is with trading, Whenever you are trading, risk is present…how you relate to that risk will define both your trading  and your emotional states. It doesn’t matter if you are trading forex, trading equities, trading cfd’s, trading options or trading indicies. When you engage with risk emotional states are generated.

  By properly understanding your risk relationship you can:

  • Find an appropriate trading methodology that works for you
  • Define your position sizes
  • Define your trading frequency
  • Define your instrument/market of choice
  • Define the degree of leverage you are using.

   An important understanding about your relationship with risk.

  Your relationship with risk is constantly changing.

  IT may change when:

  • You have had a string of winning trades.
  • You have had a string of losing trades.
  • Your personal circumstances have changed, if health and relationship issues.
  • You have changed your trading instrument and methodology.
  • You have improved your trading skills substantially.
  • You have started a family or your family has increased.

   As you can see, you risk relation change frequently and consequently the emotional states you experience in your trading will correspondingly change frequently.

   How to use this information:

   Awareness of a problem allows you to mitigate against the problem.

  Understand the fact that your risk relationship changes frequently means you can monitor how you are relating to risk and when that relationship changes.

   If you risk tolerance decreases after some of the above mentioned events you should consider some of the following actions:

  •  Ceasing trading until your ability to tolerate risk has returned.
  • Paper trade until you are comfortable with the execution of your trading plan
  • Reduce your positions size or trading balance.
  • Decrease the frequency of your trading or the time frame of your trades

   If you risk tolerance has increased after some of the previously mentioned events you should consider some of the following actions:

  • Increasing your position size.
  • Consider increasing the leverage you are using in your trading.
  • Consider paper trading a more highly leveraged instrument
  • Increase the number of trades you make.

  Your relationship to risk is continually changing and you need to adapt your trading to your risk tolerance. If you are clear about your risk and manage your relationship will you can trade with a  clear mind and follow the execution of your trading plan well.

  This and many more useful topics are covered in the Clear Mind Trading Course. For more information please go to http://www.tradingstate.com.au.

  We have upcoming courses on Tading Psychology coming to Brisbane on the 28-29th of August and 4-5th of September in Sydney.

  Copyright Trading State Pty Ltd 2010 all rights reserved.

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