Trader Mindset

Frustration is the antithesis of confidence and euphoria. It can cripple you and distract you from your sense of persistence and determination. Unlike other teachers, I don't put a negative connotation on euphoria - as long as you don't abandon your trading rules, have at it. You can avoid frustration in the first place by "not" having expectations of the outcomes of anything (or any trades). This is not the same thing as Expected Value, but an emotional expectation about the result of something you're endeavoring - such as trading. One sure-fire way to decrease frustration in your trading is to make sure that you're protective stop is not placed inside the 20-day ATR of the instrument that you're trading. For example, say you're trading an instrument that has a 20-day ATR of 15 points. If you're long and the current market value is 535 and you've placed your stop at 530 because you have set 5 points as your max loss point, you are more than likely to get stopped given that you're stop is well within the ATR. Many times, traders with smaller accounts do just this because they don't want bigger losses. This is respectable and totally understandable. In our coaching and teaching, we've found that traders disregard the daily vol of the instrument their trading as if it was going to change because the trader put a trade on. We can't change the nature of things. The instrument that you're trading isn't going to change how it behaves just because you're in the trade. In the above example, you can trade a smaller position and give your smaller position a greater latitude by placing your protective stop at 520 (535-15). You can test this strategy. You might find that you are not getting knocked out of as many such trades and, if you are trading in strong trends, take the risk home overnight and let the market forces, time, and leverage work for you.

Bitcoin Bandits Although most people speaking about Bitcoin or crypto currencies can't tell you what the significance of blockchain technology is, I've read stories about people quitting their jobs to become bitcoin traders because of what they perceive as the opportunity of a lifetime. I remember the hubris during the dot.com boom very well. Regular Joes who had 9-5 type jobs were quitting their jobs and becoming day traders or SOES Bandits. Most eventually blew up. Some committed suicide or "went postal." They'd quit their jobs to become day traders and they used their 401k rollovers from the jobs they'd just quit to grubstake their trading account. You can read a good piece about SOES and the environment at Themis Trading. If you are considering this, please think twice - it's hard enough to get a good job that you like in the first place. You can be a trader by night and "keep your day job" so to speak. Trading is difficult even in the best of times and when the markets turn for the worse - and they will turn - traders who have not had years of experience across various market cycles and no training to boot, will be left holding the bag. Instead, learn to place your orders either the night before or the morning of the trading day. You can be sent alerts if your orders are filled at which point you can enter your protective stops. Although I don't do it myself, you can do much of this from a smartphone. I'd recommend doing this for a year before you make a big leap employment-wise. Many newer traders have a hard time paying their bills because they are trying to pay for their expenses from their trading profits. When the profits dry up as they do for every trader at various times during the year and career, traders can become reckless and take unsound risks because their actual performance is not what they had forecasted. Hard to make money when you're trading with scared money. It's best that you keep your funds segregated: keep money for your bills in a savings/checking account and your trading corpus in your trading account.

Stoicism can help you develop your overall philosophy and way of life around trading. However, you can't philosophize your way into emotional intelligence. Trading is experiential and that is the only way you'll be able to learn how to conjugate your trading rules with your tolerance for risk and your level of respect for the markets. A good site where you can learn a great deal about stoicism is Daily Stoic.

Randomness is omnipresent. It's everywhere in your life and in your trading. On any given trade, it's hard to determine if I had good or bad luck, if I have any skill, or if I'm in the right place at the right time. But once you have monthly returns from over several years of trading you can begin to run statistical analysis to get a better idea if you are good or lucky. If nothing else, the concept of randomness keeps me grounded or sober, in that "I am powerless over the markets." A great place to learn about the role of randomness in your life and trading is Nassim Taleb's Fooled by Randomness. I recently listened to the audiobook version after having read the hardcover book 6 times. I found that I (think I) heard things for the first time. Monte Carlo simulations show you how starting dates can alter your performance. If your first trade was on September 1 and that path led you to a 20% drawdown, you might find that someone trading the same system but starting two months later was up 25% by EOY, while you finished at breakeven. FYI - if you are working on a trading system, make sure that you include data from companies that went out of business, were taken over or merged, or instruments that were delisted, else you have only a list of survivors. For example, if your system would have had you long Enron, you'd like to know how that trade affected your P&L, as well as that of CMGI or any of the other dot.com stocks that blew up circa '99 and '00. If you would have traded Pork Bellies back in the day, you should run that data through your simulator also although the contract has been delisted from the CME in mid 2011 because of lack of interest and trading volume. Doing this will at least simulate the "worst case scenario" in your backtesting.

Please considering leaving even a 2-sentence review. It would help spread the word about the show. You can eliminate the risks you can't see by removing names from your "watch list" or data that you've raked - the step before you run the data through your simulator. Carbon Monoxide of Trading Pro traders focus on "not losing" rather how much they can make. Of course we need to make money, but by preserving your capital and focusing on defense, you put yourself in a position to appreciate your money emotionally and financially. Two invisible risks that you should be concerned with are below: Correlation risk Volume and Liquidity You can reduce correlation risk by NOT having all the metals in your data source. You can "rule out" correlation risk by saying "if long gold, don't take trades in silver," for example. Or, you can set a max risk per group, ie, social media companies, metals, softs, interest rates, so that one group or name will not become unwieldy. When the markets turn, they will turn for the whole group. If you have large positions of highly correlated assets, you might be in a spot risk-wise to give back more than you want to...and that's having placed definitive protective stop orders in the market to get filled - it's worse if you use mental stops. Volume is what you saw traded yesterday. Liquidity is what you need to offset your position when you need to do so. Big difference. The invisible risk here is that thin markets move sharply. You don't want to be in a position to take larger losses when the market turns on you because everyone is on the same side of the market. That's the case with Bitcoin right now. When you're looking to sell, who will be there to buy? You can rake your data to include only names that have a set criteria of trading volume so that you avoid problems before they arise. Commodity markets like oats, lumber, and cocoa can be problematic in that regard. Cocoa is not necessarily thin, but it does not have a daily trading limit so your loss potential can be much greater than you'd imagined when building your system.

"Mental stops" are not really stops, per se, but thoughts. It's a price where you are losing money, but aren't emotionally ready to take the loss, so you don't take it. Maybe you're not willing to take the loss because you've done a lot of work to research the trade and you feel it's not fair that you didn't get paid. Well get used to it. Neither the market nor anyone cares about what you put into your trading. Long term success comes down to your consistent behavior: putting in the orders and taking small consistent losses. Mental stops are an emotional place where you want to re-evaluate the situation to figure out what to do. That's the point where your lack of conviction in your process is starting to work against you. I think that's especially true for chart readers and discretionary traders. System traders put in their stops, get stopped, and wait for the next order to be generated by the system. The reality is that you've lost money. End of story. You have lost the money regardless whether you've "locked it in." Don't let the accounting language dissuade you from trading the way that will impact your trading positively. Yes, taking consistent small losses actually impacts your trading positively. Amateur move. Put your stops in and take solace in the fact that you'll be automatically get taken out of the trade before I lose any MORE money. Being able to take small consistent losses is the hallmark of a pro trader. Losing money does not mean you suck or that you are a loser at trading. The stop price is the point at which you are willing to transfer the risk to someone else. If you want to be a pro, losing money is part of the business.

Challenge your own way of thinking and let other traders help you uncover your blind spots. We all have them. I'm looking for people who think differently than I do so I can learn. I don't have a monopoly on ideas and I can be a bonehead at any given time. I rely on systematized trading rules and by gaining new insight from other people (who are mostly much more intelligent that I am) I am better off because I can oftentimes reduce the wisdom into a trading rule to enhance what I already have. I couldn't do that on my own - not without a great deal of random luck or perhaps a big loss that helped reshape my thinking. Below is a partial list - there are more coming. Brian Lund Jared Dillian Todd Harrison Mark Yusko Moore Research Brynne Kelly ETF Global Chicago Sean McGlaughlin David Aferiat - Trade Ideas Tadas Viskanta - Abnormal Returns Steve Sears - Barron's Striking Price Options Insider Sal Arnuk Joe Saluzzi

It's impossible to imagine the value of the blockchain and crypto currencies, so I'm a long-term investor at this point. I think the value is in my process, not the instrument that I'm trading. Two, I'm not going to let any one security put my trading process in jeopardy. I've talked before about what I look at and how I rake the data to include instruments within my trading system. I'm not going to change those rules for any instrument. I have not traded bitcoin futures and I won't be in the near term. There is not enough data and I don't know who has basis risk. It seems like the market is dominated by speculators and not hedgers, and they are heavily biased long. When the market is lop-sided and fickle, it makes for a poor trading environment. That's why I'm invested and not trading at this point. It's too easy to lose money when I'm trading well... The best that will happen is that I'll add it to my system and trade it among all the other instruments that are in there. It's not getting any special treatment, nor am I going to try to develop a dedicated system to trade bitcoin. Use cold storage for your crypto currency investments - that means offline. You can use a USB drive and drop that into a safe deposit box. You can also use what's called a "hardware wallet" such as those below instead of an online wallet and exchange such as Coinbase or another online digital wallet that can be hacked. KeepKey Ledger Nano S Trezor Lastly, keep your mouth quiet about owning bitcoin or any other valuable cryptocurrency and how your store them. No one needs to know your personal business. Don't brag or bring attention to yourself (about bitcoin, art, or collectibles) so you don't tip off anyone to come and rob you.

Goals need to be realistic and attainable. You also need to consider the growth in competing areas of trading. If you're making money, how do you know it's not random luck or a bull market? I'd love it if everyone could turn $10k into $1,000,000 but the majority who try will lose all their marbles. Those that do will be lucky having been "in the right place at the right time." Think of it's this way: if you turned $10k into $1 MM this year playing the lottery, and you had to live your life over 100 times, you'd never replicate doing that ever again. Same for following a set of rules that don't make money [have positive expected value]. You can trade those all day, and you'll do nothing but lose money on average over the long term. You'd have a better chance of making 20% YoY if you followed a systematized set of rules with positive expected values and traded them over and over. I'm sure Taleb and Ariely have said as much. Goals and systems need to be reviewed. You might not have hit your financial goals even though we're in a bull market. That might have to do with your risk per trade, overall risk in your portfolio, or markets to trade. It's possible to have too little risk as well as too much risk. You can trade good rules and lose money. That's bad luck, not a bad system. Keep a goal for minimizing losses. Let your upside goals run, like your profits. There are forces at work right now that are working to undermine your trading, more so if you are trading intraday or short term. Your trading should evolve with the markets. As Victor Sperandeo said in one of my interviews with him, "the markets are always evolving to try to kill you." He would know - he's been trading since 1968. I am continually testing my models to find my blind spots. I'm also looking to see if I can minimize my risk to achieve the same expected return. I'm also looking to make sure that what I trade hasn't become too correlated with each other so that I don't have the effect of a concentrated position in my portfolio. Don't be reasonable with your upside. Yes, "the market can remain irrational longer than you can stay solvent," but it also means that bull markets can run (while you're long) much longer than you think they can. How many people called market tops in 2017? They were all wrong. And these are smart people. My guess is that they felt the market had gone up enough so the "market callers" published their feelings about risk and what is reasonable to you in the form of a market call. Remember, your emotions and psychology effect your attitude, your attitude effects your behavior, and your behavior predicts where you end up in life. From a trading perspective, how and what you trade can predict your net worth over time. What you can do in 2018 to positively impact your financial future and net worth: 1) trade less frequently thereby decreasing commissions and slippage; 2) increase your holding periods by letting your winners run longer; 3) diversify across more markets to cut your overall risk; 4) learn to trade a new asset class to impact your reward to risk ratio; 5) rely on a system and stop drawing lines on charts thereby decreasing subjective reasoning in your financial decisions; and 6) make friends with 5 new people who are leagues smarter than you

Whenever you have a margin call, offset the instrument that is generating the margin call. Don't meet a margin call with cash. CTAs with margin to equity ratios of 12-15% are considered aggressive in today's day and age. Margin is set by the exchanges, but can be made more stringent by the IB or FCM. Margin levels are set to protect investors as well as the integrity of the exchange mechanism. Margin is considered a good faith deposit on the full notional value of the contract.