Trader Mindset

Favorite Yoga Pose - Ardha Chandrasana You have to practice your yoga the most when you're off the mat and not in class. That's the whole point. Like great trades, you have to take them home at night. Time Blocking Trading begins the night before. I run my systems at 6 pm Sunday night for Monday's trading. Call in the orders by phone. The orders are worked during the day and all I do is wait for the phone to ring with a fill. If I'm filled, I give them a protective stop immediately. Sometimes the there are no fills, then I repeat the process the next day with the same orders. Most of the time I'm reading and studying. I don't have cable - I've cut the cord about 13 years ago. I practice yoga most days from 12 to 2 pm PT. Risk Per Trade In establishing a position, I risk 0.10% (10 basis points) per trade then it grows from there. I am willing to add continuously if the trade continues to work in my favor. By risk so little at the beginning, I couldn't care less about any trade at any given time. I add when I'm making money, and that's how I decide. We are powerless over the markets and how the instruments perform once we're long or short. With such small risk at the beginning, I'm not emotionally invested in the outcome of any trade. Even after adding several additional 0.10% units of risk, I'm still indifferent. For example, if I get to add 4 additional units, I'm only at 0.50% risk or 1/2 of 1%. Peace is a choice. Too many traders are emotionally invested in having to be correct. I'd rather focus on making money over longer periods of time, and if that means having a commodity futures position on for 3 months, so be it. That does't make me an investor. Sometimes, it takes that long for "high tide" to come in. FYI - I loathe having to look at a computer monitor or screen so I don't do it. My brokers are incentivized to fill my trades so I trust that I'll get filled when my stops are hit. That probably seems blasphemous to day traders, but I want to make money and have a high quality of life. Making trading look like blue collar despair is not what trading is about for me. It shouldn't be labor intensive. Hence most traders lack the emotional intelligence to be their own best coaches. If you're struggling or not making money, do yourself a favor in 2018. Stop looking at 5 minute bars and start thinking longer term.

If the average person cannot explain to you what the blockchain is, how is the recent level of bitcoin a bubble? I've seen this before in the commodity markets and although we're likely to see volatility that's uncommon in the markets, you can study the spread of viruses to get a better feel for this type of growth. You can control the effect of volatility in your portfolio by decreasing your position size. You can further minimize your loss potential by using low to no leverage. If Amazon or Walmart decide to take a crypto currency as a form of payment, demand for the underlying will explode as none are currently considered mainstream in terms of usage despite a steady stream of headlines about them. Once this happens, I believe the best opportunity for adding crypto currency risk to your portfolio will be via an investment, not a trade. No crypto currency has gone mainstream yet, so all the talk is about "the trade" and that means the majority of people will leave the majority of the money on the table. McDonald's went public in 1965 around its 10th anniversary. It was not mainstream until 10 years later and it still had a ton of growth to go. For example, they did not begin serving Chicken McNuggets until 1982, almost 20 years after IPO'ing. If you'd bought 25 shares of MCD at the IPO price of $22.50 (a investment of $562.50 in 1965), your position would be worth over $3 million today at a price of $175 per share and adjusting for splits. That's more than 5,400 times your money over the same time period. That's also 50 years ago, so who can tell how they would have handled the position. MCD has split 12 times since the IPO. Sure there had been some great trades along the way. There have also been some dead periods too, but when people who have not been trained to time the market or to trade, they leave the majority of the money on the table. I think the reason is the people like to seem reasonable. Let's say you invested in MCD and you sold your entire position when it had doubled. Maybe you felt at the time you didn't want to be greedy. Or you feared giving it all back... What is the opportunity cost of that lack of emotional awareness or mindfulness around your process (or lack of one)? Where is the opportunity in bitcoin or any crypto currency at this point? While I believe there will be parabolic moves, great trades, big drawdowns, the best bet is to invest in it and hold it for 20 years.

Focus on process and stay out of the results. Performance will show up if you trade a system with positive expected values. By focusing on the process or your system, you become the casino. Each time your system is open for business [trading], you are making money. You should strongly consider investing in a backtesting simulator. When I started trading, I put a high level of emotion of making money on myself. That became expensive and I became frustrated about doing things that weren't paying off. They were never GOING TO PAY OFF, but I didn't know it at the time. I live by the adage that hard work will pay off...it was my turn. The thing is, I wasn't working smartly. And worse, I had no definable trading edge. The funny thing is that as soon as I detached from the money spiritually, my trading improved in leaps and bounds, both emotionally and financially. Nowadays, I think of the money as points in a video game. I don't actually play video games, but I still look at the net equity as how to keep score. As in poker, your money [chips] are your ammunition. I know when I make bad bets, I will most likely lose. Once in a blue moon, I'll get random luck and split a hand or everyone will fold to me. That's not a good business to be in though. I can remember that as soon I had become emotionally invested in the outcome of a trade before I put the trade on...I could feel the disappointment before I offset the risk. Such Betrayal. Losing Money But Making Good Mistakes One good thing that I can say about this time was that I was risking real capital - not paper trading. I also was taking the risk home with me which is what I always advocate. New traders should not be focusing on 5 minute bars. Focus on the intermediate to long term moves, and once you master those [in 2-3 years] come back to shorter time frames risking 0.10% on trades so you don't do any lasting damage to your portfolio. Holding a trade for three months doesn't make us investors. It says that we have stepped aside and let forces that are much more intelligent and powerful than us take over. All we can do is enter our stops and let the market go where it's going to go. If you find yourself trading 100 shares but offsetting them before the market close, consider trading 20 shares and taking them home if you making money on them at the close. You will learn about your emotions from the experience which is invaluable and can only be done by living it. If 20 is too painful, try 10. But I also ask you to do this: why the lack of trust? Is it you don't trust yourself or you don't trust your process? Where does that come from, meaning, what scientific study did you read where it delineated that you should offset winners NO MATTER WHAT at the close and go home flat? If you take home 10 or 20 shares of a winning trade, you'll learn a lot about yourself emotionally as a trader. That wisdom is priceless to us. Learn and understand what your emotions are trying to teach you. They want to be advocates, not antagonists. If you feel the opposite is true, your process is likely the reason why.

The measurement for volatility takes into account the magnitude of the vol, not the direction. You obviously don't want to be in high vol, directionless markets, unless you are trading option butterflies or condors that can take advantage of those types of markets. For equities, you can deploy what's called a "pairs trade." Anyone can gear their portfolio for 100% RoR, but you have to be willing to endure a 40-60% drawdown both financially and emotionally. Hard to do. Slower and steady growth might be a better fit for your tolerance for risk as well as what you are looking to do professionally, such as running public money. [I have a documented 100% monthly return, however I was in fact coming off of a 40% drawdown so my starting equity was only up 20% by the end of that reporting period/month.] Spread trades are about relative performance between the two instruments, meaning your are looking for the long to outperform the short. There has to be high correlation between the two instruments else there is no relationship. You can find good candidates for these types of trades by looking in each sector and going long the "best in class," and shorting the dog. I wrote about pairs trading in Inner Voice of Trading where I was Long MSFT and Short NSCP figuring that Netscape was going to have a hard time getting clients to purchase a premium, albeit superior browser, while MSFT was giving Internet Explorer away for free. One trade I'm in right now is Long PYPL and Short SQ in the mobile payment space. You have unlimited loss potential by being short a stock fyi. You can learn a lot about commodity spreads at Moore Research. Commodity spreads are a great way for newer commodity traders to get involved with those markets as you are both hedged and you are afforded lower margin requirements since you are simultaneously long and short the same commodity, but in different months. By trading equity pairs or intra-commodity spreads, you cut the volatility in your portfolio yet keep the directional bias that will bring the alpha.

By trading a complete trading system, you solidify places in your trading where your success can break down. Relying on system-generated trades, you get to focus on high expected value trades and eliminate the sub-optimal trades. Benefits of a complete trading system: A good cure for daily set-ups is a systematized set of rules. It takes out all the uncertainty around your decision making process. That can give you a sense of confidence and self-esteem. You get to trade from a place of personal power. Hard to make money trading long term without confidence. You won't have to interpret any chart patterns: the price will pick up anything about the instrument that is bullish or bearish. You will therefore be cured of the need to massage charts all day and night, thereby freeing up hours of time each day and the brain power that goes with it. You can trade any market around the world. You can blend several trading systems like an asset allocation to smooth out your equity curve. For example, you can put 40% in a breakout system and 60% in a moving average system. Or, you can put 50% in a short to intermediate trend following system, and 50% in a long term trend following system. Possibilities are endless. You don't need subscriptions, chat rooms, or premium research. Systems and Emotions Systems don't remove emotions from your trading although that has been included in many marketing materials. I believe that began by a clever marketer who doesn't trade and wouldn't know if that statement was true or not. You still have to put on the trades, and if you experience fear around losing money or greed around not making enough, you can hijack the system and blow up. Ed Seykota set up the Incline Village Trading Tribe for traders to get in touch with their feelings and psychology around trading for this very reason. We never spoke about trades, set-ups, or chart patterns. It was not only a complete snooze to do so, those don't help a trader become profitable. They do, however, provide fodder for good conversation and for building relationships and bonding I guess, but you can do that without becoming a trader if that's what your real goal is - to bond with people. Lastly, I think trading a complete trading system can provide you with a great quality of life. It makes no sense to beat the crap out of yourself to make it as a trader. Martyrs don't get paid and as Jim Morrison sang, "...no time to wallow in the mire..." Build yourself a simple system that takes care of your entries, exits, and position sizing, and in doing so you'll remove the weakest link in your trading: you.

Price targets cut your profits. Let the market tell you when the move if over. Price targets are about predicting the future and human beings are horrible at that at best. Read Expert Political Judgment by Phil Tetlock to get an idea of what I'm speaking about. Intraday data is not statistically significant, so uptime your charts and begin to focus on daily, weekly, and monthly time series. Longer time frames remove the randomness of price. Don't trail structure when you put on the trade. Focus on percentages - that's what professionals do. Once the trade is working in your favor, then you can trail structure if you want. But make sure you're looking at weekly or monthly support, not cloud-like chart patterns that change when you breathe on them. When you let go of price targets, you'll focus on "best practices" and that means financially letting your winners run, emotionally letting go of control (you don't have any in the first place), and spiritually living a life that's worth living.

Look at your equity curve like a price chart. You want the slope to be positive and upward. What the trajectory? Your equity curve can help you target your goals. Start by putting all your trades and the costs into a spreadsheet: Column A is today's Date Column B - Entry Column C - Exit Column D - Commissions Column E - Fees Column F - Final Balance Then you can chart the last column against the Date - Columns A and F. Do that every day and update the chart. You can study the results at the end of the month. Your Equity Curve shows you the efficacy of your process and trading rules. What does it tell you if you are afraid to create one? Not worth your time? My guess is that the truth might be hard to acknowledge and we can bullshit ourselves to eternity. The first step in getting healthy and making better trading decisions is to discover your truth. Nothing illustrates a failed or successful attempt at trading better than an equity curve. Drawdowns are not failure - they just delineate those times when your system was out of sync with the market. This will happen frequently, but if you've backtested your rules, stick with them as you'll trade yourself back to new highs by sticking to your rules. I find that day traders are fearful of this process. Position traders will find that their equity curves make the biggest jumps. Let the market and leverage work for you and you'll see those efforts and results on your equity curve.

Use your breath to control your breathing. In the process, you will quiet your mind over time and not need to fill your day with kinetic energy. For me, that includes making too frequent transactions. If you're in good trades, keep them, take them home with you overnight and over the weekend. First Technique: Inhale on a 4-count and exhale on a 4-count. You can increase your breath to a 6 or 7-count if you can slow things down enough. A variation of this is inhale on a 4-count and exhale on a 6-count. Yogis and buddhists find that if you can slow your breath down, you quiet your mind in the process. Second Technique: Inhale on a 7-count, hold your breath for a 7-count, and exhale for a 7-count. It might take you a few times to "catch your breath" so to speak. Try this for 2-3 minutes if you can and do this 3 times per day. You might try this for 2 weeks before you feel anything material - it's different for everyone - but you should feel more relaxed, calm, and more energized. Smartphone Meditation Apps 1. Insight Timer 2. Aura 3. Omvana 4. Stop, Breathe, Think 5. Calm

Enter Buy Stops above the market and let the market come to you. Do this for every trade you have and then sit back. The good news is that you don't have to look at the chart once you're Buy Stop is entered. This is huge in that it frees up your time and energy. You'll get an alert once the order is filled. Then place your protective Sell Stop at your predetermined price level. Don't use price targets either. Once the underlying is up 2 ATR, move your protective Sell Stop to breakeven and let it ride. Make sure that you are not looking at intraday data either. The key to all of this is to take yourself out of the equation. The more you are hyper-vigilant the less you're going to make on the trade. The more you watch the chart, the more you're likely to impose your will into the trade and cut yourself at the knees. The overall markets are in strong uptrends, so let your trades run in this type of environment. Let go of trying to guess where the move is over - the market is much smarter than all of us and humans are horrible at best at prediction. Having your Buy Stop orders entered will always have you in the right place at the right time. Why? Your orders are already in when the market moves and momentum hit and you can't possibly enter that many orders by hand in the heat of the moment. You're already positioned. If the moves don't rise to your Stop levels, you won't get filled - and that's a good thing. At the end of the day, the orders will cancel because they are only good for the day.

Develop a systematized set of rules that you can count on. You can calculate your levels the night before and execute the rules the following morning. The key is that you don't want to have to think in the morning - just focus on executing the plan. That means entering your buy stops to enter long and sell stops to protect your equity. Here are the components of a complete trading system: Breakouts - trading above previous highs or below previous lows; Trailing Stops - to protect your equity after your initial order and also once the trade starts working out in your favor (see Exiting Winners); Position Sizing - calibrated for volatility and your overall account equity; Adding to Winners - systematized so that you don't join the hubris or factors that you can't prove scientifically; Exiting Winners - getting out with the majority of your unrealized equity; Also to consider is the correlation risk between the instruments that are in your universe. These must all be conjugated to work together. One without the other is nothing - they are just data points. Think of them as a perfect complements to one another, like the starting 5 of your favorite basketball team or 9 players on the baseball diamond. For example, your position size only matters to the extent you know how much you are willing to risk per trade, where you get in and where you exit. Knowing how much silver is correlated to gold or how much or Facebook is correlated to Amazon will help you see the unseen risk in your portfolio before you add it. You can't get this level of thoroughness from chart reading or understanding set-ups such as cup and saucer. It's only achieved from backtesting through a simulator that lets you simulate at the portfolio level, not one instrument at a time. Examples of those are Mechanica and Trading Blox.