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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 ( 8 )   

  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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  Trader Lyn 12:08 am on August 6, 2010 Permalink | Log in to leave a Comment  

  The Differences between Master and Narrow Spreads – Financial Derivatives 

   A key benefit of financial derivatives trading is the range of markets that are available to trade, often via one sophisticated online trading platform.

  Whether it is OTC or through an exchange such as Nadex, markets range from the familiar, like commodity and forex trading, to the new and innovative binary options.

  This article will help you better understand the nature of the spread contracts offered.

  Master Spreads

  The Master Spread is a one-day, variable payout contract with lower (“Floor”) and upper (“Ceiling”) strikes. These strikes are set at relatively wide intervals from the underlying market level at the time the contract is listed .

  The pricing of the Master Spread tends to reflect the underlying futures market or spot FX pricing. The Master Spread is a derivative contract and, like a wide vertical call Spread, it has a direct correlation to the underlying market. Because of this, Master Spreads tend to reflect the underlying price when it is trading well within the range defined by the Master Spread.

  So, as the price of the underlying market  moves toward the floor or Ceiling set by the Master Spread, the price correlation decreases typically.

  Although the Master Spread’s price levels can follow the underlying asset’s price levels, unlike the underlying product, the Master Spread’s minimum tick value is only $1.00 and a Master Spread contract can require substantially less capital than the initial margin required for a single underlying futures contract.

  The Master Spread’s capital requirement is the dollar value between (a) the buyer’s initial price level and the contract’s Floor or (b) the seller’s initial price level and the contract’s Ceiling. The Floor and Ceiling levels of the Master Spread act as a collar to the trading range. The market pricing of the Master Spread will never be quoted outside of the trading range of the Floor and Ceiling price levels.

  The actual underlying market may at times have market swings that move outside of this range but your risk exposure is always limited to the range between these two prices. In this manner, the Floor and Ceilings act as limiting your potential exposure against adverse market movements but also limit your ability to maximize your potential profit in positive market movements.

  Variable Payouts, where the value at expiry lies between the Ceiling and Floor levels, is a fundamental feature of all Spread contracts. This differs from the “All or Nothing” payout of a Binary Contract. If the expiry value is less than or equal to the Floor (for the seller) or greater than or equal to the Ceiling (for the buyer) then the maximum payout is earned.

  NARROW SPREADS

  In addition to the Master Spread, Nadex also offers several Narrow Spread contracts.  Like the Master Spread, the Narrow Spreads have lower and upper strikes, known as the Ceiling and the Floor. The range between the Ceiling and the Floor, is the basic difference between Master and Narrow Spreads, with Narrow Spreads covering a smaller range. Because the range is smaller, the contract value is less than the Master Spread, thus creating less risk of loss but also less profit potential.

  Narrow Spread contracts—just like Master Spreads, are never quoted outside of the Ceiling and Floor range pre-established. This holds true even if the underlying market is trading outside the range. Also like the Master Spread, positions in the Narrow Spread may be closed in the market prior to expiration or held until expiration.

  Additionally, the Narrow Spread’s tighter Ceiling and Floor levels means that the underlying market will often trade near (or outside) these levels. The Narrow Spreads typically reflect more optionality in their pricing than Master Spreads . This pricing is more reflective of a typical option call Spread, rather than a future. Therefore, the Narrow Spreads do not show as much correlation to the underlying market as the Master Spread.

  Narrow Spreads, therefore, are more reflective of optionality than Master Spreads’ pricing, but still reflect the risk/reward of that contract.

  Visit http://www.igmarkets.com/fx for more information.

   

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  Michael Brook 10:42 am on August 3, 2010 Permalink | Log in to leave a Comment
  Tags: stock market ( 8 ), Stockmarket Education ( 7 ), trader ( 8 ), trading plan ( 2 ), trading system   

  When everything is going awesomely well – A time of great peril. 

  
  

  Experts do the right thing and novices do the other thing…

  Expert traders have been through the draws down in their account and they know that taking profit is a very important part of trading.

  As part of their focus on continually refining their system and on the process of executing their trading plan, their trading system will get better over time. As their system improves they will go through periods where everything goes according to plan. They have a sequence of winners, one after another and their trading balance increases steadily.

  At these moments, expert traders know that are in great peril.

  When novice traders experience a series of good wins, they get excited. They tend to increase position sizes and take more risk because they know they are trading with profits.

  In these circumstances, novice traders throw out their trading plans and go for higher and higher risks and larger positions. This often leads to losing trades and their trading balance falls back to where it started before the series of winning trades. This can create a loss of confidence and many unhelpful emotions.

  In contrast, expert traders become even more focused on their trading plans and execute them rigorously. They know that success over time comes from doing what works and once they know what works they do not deviate from it.

  They reward themselves emotionally for correct execution of their trading plans and keep doing so over an extended period of time. A few wins in a row may be pleasing, but not an excuse for slippage.

  The more winning trades an expert trader has, the more carefully they follow their trading plan and the more attentive they are to the market.

  This is important information for novice traders. By learning to manage your trading emotions when you are doing well, you will ensure your trading yields long term success.

  How to use this information

  If you have had a series of winning trades, with each winning trade you should focus more on your trading plan.  The more you focus on the correct execution of your trading plan the longer you are likely to keep your winning streak running.

  If you have had a series of winning trades you should also pay close attention your risk profile. Resist the temptation to take large positions because you have had a series of winning trades. This is very good way of giving up your profits to the market.

  This topic and much more is covered in the “Clear Mind” trading course by Trading State Pty Ltd. Go to http://www.tradingstate.com.au for more information on the next course dates and cities.

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