Trader Mindset

History is not going to repeat itself the way it did for my mentors and colleagues. Investment into the trading business is going to Artificial Intelligence and Machine Learning. If you are doing things by hand, you are putting yourself in a very disadvantaged position. You can't work orders on the floor anymore. There is no floor. How's that for a development?! Another example is the risk per trade in contemporary trading. Back in the 70s and 80s, it wasn't uncommon to risk as much as 2% per trade! That would be madness in today's environment, especially if you want to get an allocation from a global macro fund or if you want to work for a real prop trading firm. [A real prop trading firm will give you funds to run without your needing to add your own capital and you'll be able to take the risk home with you overnight and over the weekend, for example.] Take the humanity out of your trading. If you are looking at charts for subjective interpretation, more and more you'll be competing against trading machines that are "trained" to beat you. If you think trading is unfair already, in my opinion it's going to get worse. Whereas I think you should strengthen your sense of self through yoga and meditation, at the same time I think you should begin to extract yourself out of the trading equation by coming to understand that you are the weakest link in your trading. To put it in context, I think even if you had the self-knowledge and awareness of HH The Dalai Lama, you should still develop a set of computerized trading rules and manage risk systematically. Two good books on yoga are Light On Yoga: The Bible of Modern Yoga by BKS Iyengar and Yoga: The Spirit and Practice of Moving Into Stillness by Erich Schiffmann. Disclosure: Erich is a long time friend and my yoga teacher of 20 years.

Risk is an asset class. Keep in in your portfolio when it pays you to do so. That means overnight and over the weekend. When you day trade, you are churning your own account. In a recent interview with Chats With Traders, my friend Aaron Brown said that traders generally leave way too much money on the table. The real money is holding the best risks. You can define where you are going "risk off" by placing protective stop orders on your winners and Stop Loss orders on recent fills. Staying in good trades longer frees up time so that you can do more research, read, or go have fun doing whatever gives you pleasure. Exercise: Go to your best trades and enter them in a spreadsheet. Column A is your Entry. Column B is your exit. Column C is where it is now. Column D is what the worst price was between the prices in column B and C. Look at the percentage of those names where the price is Column C today is higher than Column B but also where the price is column D never went below Column A. This helps you understand the opportunity cost of short-term trading and how it works against you.

Value is what you assign to something, not an analyst. What others assign to bitcoin are none of my business. What others assign to speculation in general is irrelevant. There is no value per se in bitcoin anymore than there is in corn futures. Bubbles are what speculators (like me) pray for. Professionals know themselves and know how to express risk in a manner that is best for them (compatibility). Traders who have a systematized set of rules love to trade bubbles because although we cannot impose our will on an instrument, we can take advantage of the amateurs and day traders who don't know anything about managing risk. Trading is a voluntary action. Winning and losing is up to you. Buy the time the bubble pops, I'll be long gone...

Exits and entries are perfect compliments to your trading system. They are siamese twins that should not exist without one another - nor should they be separated at birth or otherwise. Risk management defines your P&L and the distance between your entry and exit is critical to how you manage risk. You can define that distance by calculating the ATR of the security that you're trading and using those as the entry and exit endpoints to your rules. Marry that with your position size given the size of your account and the volatility of security. So the three crown jewels to trading are entries, exits, and position size. They are all calibrated to work with one another and rely on one another to help you create alpha for you and your clients.

You cannot shield yourself from struggle. It's what helps shape your trading rules and over time turns them into a complete system. No psychologist, coach, or mentor can do it for you. You have to want to take a punch and learn to feel what it feels like to lose money and then use those emotions to affect your behavior accordingly. Very little of it is intellectual or logical. If you need things to "make sense" I think you're in for quite an education if you're open to it There are no external solutions to your internal issues. That should save you a ton of money in that you don't need a high clock speed computers, multiple monitors, nor televisions in each room. One way to generate peace in your daily activity is to start using stop orders to enter and exit trades. Professional traders use stops, not market orders. Buy stops are placed above the market and are used to enter trades long or to cover short sales and minimize risk. Sell stops are placed below the market and are used to enter trades short or to sell long positions and minimize risk. Stop orders show your conviction in your process. If you're trying to read charts or you've been sold on something amateurs refer to as "set-ups," you can absolve yourself from that lifestyle choice and at least act like a professional on your way to becoming one. Trading with a system will capture anything that is bullish or bearish and remove the need for your having to interpret charts. Plus, it's a lot less work as well so you save yourself a great deal of time. A third benefit is that you can eliminate having to trade frequently - something I believe is not necessary to becoming a professional trading. I think trying to read charts every day is exhausting. Moreover, if you are glued to your monitor, you might be giving yourself a false sense of security that you can avoid "the big loss" by doing so. You can't stop market volatility because you are sitting there hyper-vigilantly. What you can do is enter your stops are predetermined levels and let the market come to you. One benefit is that you won't find yourself chasing trades. Another is that if something unexpected does occur, your order will already be there to protect your capital. As a trader or speculator, job #1 is playing superior defense. By entering your stop orders ahead of time when things are calm, you also have the added benefit of avoiding the errors that can occur when you have to act under the gun and you're not used to doing so. Errors cost money and you can assume that if you make an error, it won't add to your P&L, but hurt you.

Professional poker players know (as best they can) the expected values of every hand they play. The best of them know what hands to play from what position. Like traders, poker players have to make decisions under uncertain conditions with imperfect information. They know what the percentages are of their hands improving. For example, if they are dealt a pair of Kings, they know the probability of getting another King to make 3 of a kind (a set of Kings), or quads - four of a kind. They know what the probability of making a straight if they have two connectors or making a flush if they have two cards of the same suit. This allows them to the knowledge to know how to bet given the odds and the size of the pot. Yet it's still possible that they can do everything correctly and still lose the hand. That's going to happen quite a bit if you play a lot of poker. Like in trading, you can become emotionally invested in the outcome of a hand. If you have a pair of Aces, you can get beat from time to time despite Aces being a strong pair. Professional traders can learn a lot from this type of knowledge. If you trade long enough, you will get beat when everything looks to be in your favor. I've been long stock that beat earnings estimates, but was greeted with a down market because of some external factor that took everything down with it - including my stock. Not fair you say? No one cares what my definition of "fair" is when trading. Nothing is fair. A good way to become mindful of what you could be in for is to study the winning and losing streaks from your backtested results. Most of them will tell you what you longest losing streak is (duration) and how bad it effected your equity (magnitude). I think this will help you learn to build your confidence and put things into perspective. The losing streaks that you'll have by trading a system will pale in comparison to those that you'll need to endure if you are day trading or trying to ready charts or "set-ups." Those are a thing of the past. The modern trader - the trader who is going to set himself up to win for the rest of this decade and into the 2020s will have 100% of his trading rules backtested, know the expected values, and have rules to eliminate sub-optimal trades, and have rules built-in to trade for the marathon of the next 20 years. That does not now nor will include trading based upon charts nor intraday data. Firms are investing tens of millions of dollars to trade against the short term lovin' traders as they are easy to pick off and bully. Plus, in that space, there are a million suckers born every minute so you've been warned: don't be one of them. Trading simulation software will allow you to vary start dates, the instruments that you are trading at any given time, how to measure volatility, and how to cut risk during losing streaks. A great book on how to understand what a poker player learns to contend with is "Getting the Best of It" by David Sklansky.

Go check out The Imitation Game on Netflix if you haven't seen it yet. It has many analogies to trading Good trading is about being able to distinguish signals from noise. In the short term, everything is noise though - even potential signals. When you don't have a plan, everything looks appealing. Any big move that you're not in gives you the emotional feedback that you've missed the move and that you should have. The Enigma code breakers had great motivation to crack the code: save English lives and end the war. Our motivation is to limit risk and be in high expected value trades. You can use price as your main signal, but admittedly, in the short run, it looks like noise. It's not until you look back to see the statistical significance of today's closing price to the past that you can begin to ascertain whether it's signal or noise. Your trading system is what you can rely on to decipher the data and create trading signals that you can rely on. Without a system, much of what you see can be construed as disinformation - even the price. This is especially true for short-term, intraday traders. This is why I think you're in for a life of frustration if you're trying to day trade: all the intraday data are random. If you're lucky enough that today's intraday data is aligned with significant weekly or monthly time frames, you might have a good trade. If that's the case, keep the trade though and let the momentum follow through overnight and over the weekend. That is the only way you can fight the manipulation that you'll otherwise suffer from the hands of the HFTs and their criminal counterparts - the exchanges. Keep in mind that most indicators only confirm what you already know the price is telling you. You can probably simplify your trading by removing all the overlays and indicators from your charts. Compare your daily data with weekly and monthly data levels to confirm your signals, not trading indicators, overlays, or lines that you feel compelled to draw on your charts. If you find yourself needing to do that emotionally, you're grasping for something that's not there. You can also test your models and from the ones that I've done, the tests that I've run without the technical indicators versus the ones that included them, the results weren't improved by having the indicators included. I wrote in The Inner Voice of Trading that I felt (and still do) that they are for the most part "emotional bandaids." Indicators won't help you "not" feel the feelings that are trying to teach you something. They will also add another layer of frustration to the mix and I've yet to see one that is foolproof. The best thing you can do is simulate your trading ideas over 10 to 20 years of data to see if they have any "rich" history.

Calibrate the risk that's appropriate for your account and your emotional constitution. Normalize risk across all instruments so that you can create risk units. This way, every instrument will be the same in terms of the risk that you'll represent in your portfolio. Many commodity traders use the 20-Day ATR (Average True Range) in order to calculate the daily dollar-volatility per instrument. Then, they divide that into the percentage of capital that they are willing to lose per trade. If the Gold ATR is $2.50 (it's not) then the daily dollar vol is $250 since the gold contract is 100 troy ounces. If you have a $100,000 account and you only want to risk 1% per trade, you can figure out the maximum number of contracts to trade. $100,000 x 1% = $1,000 Daily Dollar Vol on Gold = $250 ($2.50 x 100 oz) Therefore, you can only trade 4 Gold Contracts since $1,000 / $250 = 4 contracts You can also trade only 2 contracts and give them $5 of risk between your entry and exit. Then to manage the risk, if you enter the gold market long per your entries at X Price and place your protective sell stop $2.50 (the Gold ATR value) below the entry price. Keep in mind that measuring ATR can be done with a computer and you can backtest all your entry and exit rules with the risk across all instruments normalized. In doing so, you remove all the guesswork. You have the added benefit of not falling in love with any one instrument risk management wise since each trade will be the same percentage risk in your portfolio (at first, if you don't add to your winners). More importantly, you won't want to jump off the bridge when you lose money on any one particular trade since they all represent the same risk and therefore you'll not be married to the outcome of any one trade. It's hard to remain objective, especially if you are looking at the headlines of the day for your trades. Trading a system can remove all of that for you, but you'll still have to a) put on the trades and the protective stops; b) not over-ride the system and "not" take the signals; and c) not over-ride the system and put on trades that were not system generated. If the volatility in the commodities markets are too great for outright trading, you can consider trading intra-commodity spreads. In a spread, you are simultaneously long and short two contracts of the same underlying but of different expiration months. Instead of trading for an up or down directional trade, you trade the relationship between the two contracts for them to narrow or widen. You are afforded lower margin with spreads, so if your account is smaller, it might be a good fit for you to get going in commodities. The good news is that most professional traders know the spread markets very well so it's a good idea to learn them anyway at one time or another. You typically have lower risk since you are long and short at the time time and the seasonality of physical commodities tends to be very reliable. We have some free educational training videos for you on this topic. Go to MartinKronicle and set up your Free Account to get access.

You have to plan for 10-baggers in your portfolio and position yourself tactically and psychologically. Two things need to occur regularly: 1) big moves don't typically happen intraday 2) you have to believe that you are capable of doing it emotionally and psychologically Tactically speaking, you need to let time and money work for you for best results. A 10-bagger has to have been a 4-bagger first. Don't cut the 4-baggers at the knees. Place a trailing sell stop order and let the trend continue (if long). Don't impose your will on the trend. Sit on your hands and let the market forces work for you. Think in terms of percentages and not dollars. If you risk 0.50% per trade and it's a 10-bagger, you'll add 5% to your overall portfolio. What will that do to your Incentive Fees? If you're smartly abandoning day trading (smart move), you need to find a better way to deal with the discomfort that you feel when you don't take short-term winners at the end of the day or before the weekend. What is the discomfort trying to teach you? For each of us it's different. nwiUllingness to feel the discomfort in your trading is also denying the the feeling of what you'd feel by having a 10-bagger in your portfolio. In other words, the feeling of having a 10-bagger is on THE OTHER SIDE of not taking short-term profits. Why don't you want to feel the feelings around getting a 10-bagger? Aren't you worth it? I think you are...you are willing to do the work - you might as well get paid as much as you can for it. You can release that discomfort in yoga class or in your Trading Tribe - and replace the satisfaction you get and not sabotage your trading and still get to feel the feeling that you seem to want to have (because you're seeking it everyday - you must love it, unless you're a masochist.)

Here is chapter 2 of the Audiobook version of Inner Voice of Trading.