the know-nothing investor

…money doesn't grow on trees, you know?

Tag: Trading Psychology

7.REALITY CHECK

I must say, after two years, I had mastered a trading system but I was not mentally mastered. After my wife told me that I didn’t have a great system, because I had letted profits turn to losses, I made real poor decisions and this happened because I was not sure what I was doing. The inception in my mind of a poor trading system and my lack of confidence led to fear and fear isn’t certainly a good decision counselor.

But there were other mistakes, such as I didn’t real understand time-frame of negotiation. When I was learning everything was static. Although I was analyzing shares based on their past performances I never realised how much time it real took for a price to evolve. This made me buy when a stock was high, sell it when I was losing and shortly after it would rebound. I just didn’t get the cycle of a stock and this mainly happened because I was aiming for the long run but trading based on short-term thrills.

Commissions, spreads and cost of borrowing money (because of leverage) were 30% of my total losses. This meant I didn’t keep my fees to a minimum and probably made too many trades taking in account my total capital. When I traded I would immediately lost 1.5% in fees, which is a lot. This was my third mistake.

When I made two consecutive winning trades I felt king of the hill and then I would make a new trade without proper study, like if I was so good that I didn’t need technical analysis anymore. As if my predictions were enough. This really went bad and here was where I lost more capital with this mood trades with no preparation.

Not everything was bad, I respected my hard limit and I stopped trading when it was hit, which shows some level of mental commitment and discipline. I understood that kind of trading behavior would end badly so I stopped to protect my capital and to rethink the way I was in the markets and that was clever.

I had 45% of winning trades, which is ok and if I had kept my profitable trade for more six months I would turn positive. This means that you only need few real good trades to bear many negative ones.

Translating this into a list would be like this:

  • Choose a trading system that suits you and not the other way around – don’t change your life because you think you need to follow real time quotes or to spend a lot of time scanning for the next big mover. Adapting trade to your life will reduce stress and you will have some level of detachment, which is good to make poderate decisions. Emotions aren’t compatible with trading;
  • Be consistent, don’t give up and remember that everything takes time – Write down what you need to see in a chart to open a new position. Read this before you open a new position and only if all ticks are checked you can click to purchase a stock. In the  beginning when we open a new position we are so thrilled that we forget our rules, writing them down help our brain to understand what are we doing and if we are doing it right. This will be a continuous learning process and you probably will fail a lot but stay in course and don’t give up. After some time you will trade without emotion or fear and return will start to appear, but this takes time. In the beginning I thought that I could get ritch or quit my job in medium term, which is silly because only few can achieve this. Is almost like winning lottery;
  • Reduce your trading cost to a minimum choose a broker with low commissions and don’t overtrade. In the long run this will make a huge difference in your performance;

  • Stay humble – When you are losing is real easy to be humble because it hurts, but if you are winning you think that you’re special and everything you touch will turn in pure gold. That silly pride will make you vulnerable in markets, because everyone involved don’t care about if you are a golden boy. What they want is your money, simple as that. So stay focus because out there there always be someone smarter, quicker and (probably) best looking than you.

Those were the lessons that I had learnt after almost a year trading. I understood how hard is to take money of the markets and I was not mentally ready to do it.

With no positions opened I had all time in the world to think without pressures and how it would be more suitable to be in the markets. I knew by then that trading system was not working for me, I was taking too many risks and paying a lot of fees. Because of my wishful thinking I was eager to make good money and that pressure didn’t give time for my position to settler higher. I sold profits to quick and let losses accumulate.

But I also knew that I had a lost battle not the war.  I wanted to continue involved in the game but this time would be nice to be part of the minority that takes profits. I just had to figure it out what was the best way for me to achieve it. So I started to study…

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6.10%

After I wondered if my strategy was the right approach to win in the markets, I held on to my backtesting and first months of trading. Certainly, I would in a frame of time go positive again, I just thought that I need to have more strength in my convictions and be more sharpened focus in my trading. What did this really mean? Going crazy and forget all about I had learnt. I started risking more capital per trade, about 3%, and during the trade I would change my stops influenced by market micro-swings. I was opening positions because I want a certain price action not because I had identified that price action. Believe in what you see not in what you want to see.

I started to feel anxious and having bad night’s sleep. I was going fast in stupidity lane. What happened to me? I was so good with paper trade account. The problem was real money. I had started to put money where my mouth was. That pressure was immense and I could handle it. All that wishful thinking, about making tons of money and quit my job, were being torn apart. I was having a reality shock. I was learning that trade is really difficult and learning it the hard way, with losses. With that kind of scares you read about ten thousand times, but we quite don’t understand it because we never feel it. Probably this kind of pain is necessary to avoid future mistakes and at some point grand majority of traders have or will experiment this.

When we trade with our real money, some of our worst human feelings start popping out, greed, euphoria, panic, despair, self pity. These feelings cocktail  are so powerful that if you don’t have mastered your mind you’ll make real bad decision. You will act by impulse like if you are under attack and your rationality will be underpinned by your survival mode. The market is fighting me or market is controlled by big corporations to doomed the little guy were excuses that I used when I was losing.

But markets don’t care about your feelings. You’re not especial. You’re simple one more going with the crowd. If you lose it’s your responsibility.

I was immersed in overthink when I was saved by my hard limit. I was rational enough to hold on to my first and most important rule.

In ten months I had lost 10% of my total capital. It was time to stop…

 

5.TRADING DAYS

I had almost everything to start and the last step was to find a broker. In Portugal there is not much to choose from and commissions are almost the same between brokers. So I chosed an international broker with confirmed credits that was operating in Portugal for a few year

I also must say that, subliminar or not, I went for the one with the most appealing presentation. Is incredible how much decision we make everyday based on what matters the less.

After I opened the account I was really glad with myself. I was taking risks like an entrepreneur does when he starts his business. That made me feel very grown-up.

When I saw 10000 USD deposit in the account I was so eager to start I forgot a lot of my strategy. Of course I looked at some charts for identifying some trends, but I didn’t use the same setups that I had used in backtesting or even looked at screeners to find stocks based in my predefined parameters.

In fact I bought 9 different equity shares, 7 longs and 2 shorts, in the same day and I didn’t even care if they were near a new higher high and probably heading for a market correction.

I thought as long term trader it would not matter, but this was an excuse to be immediately part of the game. I could not control myself and I was not able to make a good market-entry timing. At that time I didn’t even notice.

Even stock picking was so bias, I chose basically blue chips that I am used to. Is incredible how I didn’t see it. I bought Visa, Mcdonald’s, Ebay, Starbucks, Unilever, Royal Dutch Shell, etc., companies that make part of my daily live. Why I didn’t I buy shares of a company that I’ve never heard before? I guess we tend to choose what we know best, it represents comfort and reliability. But what have these two adjectives to do with buying or selling shares? Nothing, I must say…

I was starting to accumulate really big mistakes, but I was still convinced that I was at the top of my game. Basically because in the two first month of trading I had a possible profit of 5% of my total account. I remembered thinking how could be that easy? Silly me…

Then Mr. Market when for a correction and I saw my virtual profit come down to 0% again. I tried to convince myself  “this is just a phase, as it went down will go up again”. At this time I was starting to doubt my trading system. I was accusing some pressure and I decided to talk to my wife about my wonderings.

Even though my wife was very supportive from the beginning, she is a bit sceptical about the risk involved in trading which is good to keep my feet in solid ground and it makes me more cautious avoiding failure – failure is always present you can only try to fail less.  So when I approached her to share my feelings I started telling her that my account had had an increase in its value of  500 USD in just two months, but now we were in a corrective phase and the account was back to square one. I still can remember her words “It doesn’t look a great deal of a system! Why didn’t you sell when you were making money?”

Those words really affected me. Now, I know why but by then I thought she had a point and I was starting to wonder if I was doing it right.

3.BEFORE TRADING DAYS

As I said before I spent almost two years studying technical analysis and how to behave in a trading environment. In that period,  I came across many times with two key ideas, money management and trading psychology behaviour.

I read some articles about money management and I understood its importance quickly. Every trader use it and every good system must have it. Why? Because in trading, especially in a learning process we can do much harm to our money. Money management is like our safety belt, we don’t drive to crash but it’s a possibility when we get in the car.

While I was studying I used a paper trade account and I achieved decent returns. I was admired how good I was and how I was making quick and easy money, but I tried to stay humble and I always remembered myself that it was only a paper trading account.

Every trader I read are always reminding how difficult is to succeed in the business, how hard is to have a system that gives you an edge and how you must keep a balance between winning and losing. You should not be to confident about your winning trades or completely devastated about losing money.

I read a lot about this in forums. Although I tried to stay humble, sometimes I thought to myself how can this douchebag make any money if he has an enormous ego and he never changes his opinion.  If he can I certainly will do better than he does.  But can people with big egos and zero tolerance to change their opinions do good in the markets? Of course it is possibly, but they will be a very small minority for sure and in the internet world we can say and we can be whatever we want.

Comparatively to others I seemed more focused, more eager to learn and most importantly more humble and I thought that this was a good mental setup to start trading. The plain truth is that you need to stay focus, be eager to learn and be humble if you want to succeed in the markets.

 PTEN