Updates from November, 2011 Toggle Comment Threads | Keyboard Shortcuts

  • Michael Brook

    Michael Brook 12:28 pm on November 28, 2011 Permalink | Log in to leave a Comment  

    Intelligent decision making and emotions – essential ingredients to a profitable trade. 

    Many traders believe that the more they control their emotions the more they can make better trading decisions and make more.  After making a lot of trades they will have experienced a range of emotions and they can come to the conclusion that the emotions are the problem. They may also have spent some time in different markets, some of which support their trading style and some of which don’t. This will sensitise the trader to the emotions of making money and losing money.

    Recent advances from the world of cognitive neuroscience have proved that emotions are essential ingredients to good decisions making. Much of this work has been done by Antonio Demasio. Studies have been done on people who have because of some form of  brain injury are unable to experience emotions.  They are able to make conscious rational decisions but are unable to experience any emotions about those decisions or an emotion about the outcome of the decision.

    The results of the study of these individuals reveals that they are unable to make even the simplest of decisions.  The lack of an emotions in the decision making process caused them to be paralysed in the face of data. One study of people who are unable to experience emotions called the 2 deck gambling game is of particular interest to us as traders.

    The game involved 2 different decks of cards, one had higher risk and reward and one had lower risk and reward. Each hand involved the winning or losing of money according to the deck that was chosen.  Normal people who play the game naturally gravitate towards the lower risk and reward as the emotional feedback mechanisms that are present in them seek to regulate the intensity of the experience. Individuals who are unable to experience emotions do very poorly at this game because the feedback mechanism is no present.

    The implications of this research are immense.

    Firstly, Intelligent decision making is impossible without emotion. The presence of the ability to experience emotions is fundamental to making good decisions regarding risk and reward for risk.

    The greatest implication is that evolution has handed to us a very rich automatic system of rapidly solving problems intelligently that we can be presented with that we can’t solve biologically. Emotions are automatic and they are essential to quickly solving problems. By using emotions to provide guidance to the conscious mind this allows problem solving to be rapidly sped up thus aiding survival. The lack of emotions stops good decisions making in it’s tracks.

    As traders we have to evaluate data rapidly and efficiently in order to profit from the patterns that present themselves in the market. It is the combination of our emotional responses to the information and our emotion process that enable us to make good trading decisions.

    The truth about emotions and trading is that we should be relying on them more and not less.

    Expert traders know how to use their emotions to their advantage and know what to reward themselves for emotionally. They reward themselves emotionally on the execution of their trading plan and over much longer time frames.

    This is different to novice traders and how they use their emotions.

    Expert traders use their emotions to:

    • Reward themselves on the execution of their trade
    • Reward themselves on their execution of their trading plan
    • Reward themselves on the execution of their trading plan over a large period of time

    Note the difference between this and novice traders.

    Novice traders use their emotions to:

    • Get excited or depressed depending on their profit or loss on an individual trade
    • Get excited about their trading over  a short term.
    • Avoid creating a trading plan or don’t have one.

    This is covered in much more detail in the High performance trading course. Check out the Stockcourse and Trading State website for the next course.

    If you are experiencing difficulties with emotions in your trading, Trading State can help with coaching. Contact us to assist you with using your emotions in your trading in a more helpful way.
    Happy Trading!

     
  • Trader Lyn

    Trader Lyn 6:12 pm on October 8, 2011 Permalink | Log in to leave a Comment  

    Entering Bear Territory.. 

    20 of the 29 major world markets are in bear market territory. The US is in good company with the majority of major markets in the world in bear market territory and here in Australia we will not escape either.

    Looking at the history of America, they have never had a stable economic rebound without a recovery in the housing and construction market. So what’s going on since 2008?

    Let’s take a look at some recent facts. At the end of August, there were 6.4 million delinquent home mortgages. Combine this with a huge inventory of already foreclosed it’s a classic oversupply situation and 1 in 5 Americans (20%) with a mortgage, owes more than their home is worth, and $7 trillion of homeowners’ equity has been lost in the bust.

    It will take years for the housing market to recover and, hence, it will take years for us to see a meaningful economic recovery in America.

    Without jobs growth the US cannot recover it will take years to create new jobs and now the pain of Europe’s sovereign Debt is exploding fear unrest and uncertainty.

    Moody’s (the rating Agency) has now put Belgium on a warning of a downgrade. Spain and Italy have already been downgraded. This week 9 Portuguese banks have been downgraded along with 2 top British banks.

    The Bear Wrangler says be careful who you are taking advice from – always do your own homework.

    Spruikers, Brokers, Fund managers, and Financial Advisors can all have a vested interest for you to buy stock on dips, calling a bottom or a “bargain time to buy” and or to convince you to hold your current stock because they want their wages and commissions and are prepared to get it at any cost. You will pay them whether you win, draw or loose.

    The Bear Wrangler says “Watch out for the Bull Shi**ers, do your own research, make your own decisions.”

     
  • Trader Lyn

    Trader Lyn 3:28 pm on October 7, 2011 Permalink | Log in to leave a Comment
    Tags: , bear market trader, , european economy, market crash, market downturn, , us debt crisis   

    The Bear Market Wrangler.. 

     
  • Simon Euers

    Simon Euers 2:10 pm on August 1, 2011 Permalink | Log in to leave a Comment
    Tags: , , moving average, , ,   

    Trading isn’t easy…but it is simple! Have a kit kat. 

    Trading isn’t easy…….. But it is simple!!!

    Trading isn’t easy. You will never hear me say that it is. But it is simple, in the fact that it is just a process. In reality it’s just a set of rules that manage your behaviour.

    The problem is Traders make it complicated and that’s why it isn’t easy.

    Over the next few segments of Simon says well go through some of the things traders do that make trading difficult.

    The second section is called: Have a Kit Kat!

    One of the big examples of how traders make it difficult for themselves is that they don’t recognise when they should take a break from trading.

    Remember the old TV add – Have a break, have a Kit Kat?

    Well, there are many times when you need to take a break from trading, and knowing when, will help to consolidate your profits and enhance your mindset.

    Many traders fail to realise the whole idea of knowing when to take a break.

    I don’t care how good your trading system is or how well it has done for you in the past, the simple fact is that the market is a highly dynamic environment that is continually changing and no single trading system or strategy can possibly suit all its different personalities.

    This has been proven time and time again by the introduction of fully automated trading systems that look fantastic for a period of time (and everyone jumps into them) and then, for no apparent reason, they just implode – and lose everything.

    The simple reason is that the trading system or the strategies it used, didn’t suit the market at that particular time.

    The system simply shouldn’t have been in the market at that time, but being fully automated it just keeps going and going.

    Individual traders are just as susceptible to fall into the trap of believing they have to be in the market at all times.

    One of the main driving forces behind this destructive, obsessive behaviour is: the fear of missing out.

    The fear of missing out is so powerful that it can keep traders in the market even when they are clearly on a one way road to destruction. They fear that they will miss the chance to make it big! Or if they are in a hole, they feel they will miss the chance to get their money back.

    This fear, which is actually a type of greed by the way, keeps them trading even when all the evidence suggests they need to stop and adjust what they are doing.

    That’s why it is so important to recognise when to take a break.

    There are a number of signs you need to look for, to suggest you need to have a spell from trading.

    Remember how I’ve talked about getting good at trade recording and building a trading framework…. well here’s where it starts to help out.

    To start with, in your trading framework you should have some rules that tell you when not to be in the market.

    For instance: I won’t be in the market if the index is below my key moving averages (signalling a bearish entry) but the shorter term moving average I use is above my longer term moving average (signalling a bullish trend). These circumstances conflict the trading rules in my trading framework so I stay out of the market, until the rules I use are validated.

    I don’t trade when the market doesn’t suit me.

    Another way to signal that you shouldn’t be in the market is from your trades records themselves.

    You should have some type of rule that says something as simple as:

    If I have 3 bad trades in a row I will stop trading and revisit my whole trading game plan and work out I am doing wrong.

    Or

    If I have X amount of ‘Bad’ trades (could be 3,4,5) in a certain period of time (it could be a week, month or quarter depending on your trading frequency) then I will not trade for the next so many days or weeks or even better until I have made X amount of good paper trades and I know I am back in control.

    So, what do I mean by a bad trade?

    Well a bad trade isn’t a losing trade – if the trade has been managed correctly.

    It also doesn’t mean a trade that has abruptly blown through your stop loss due to some unforseen sudden news – a blindside.

    But it does mean trades that have not been managed and have ended up costing you more than your predetermined risk amount at the start of the trade.

    So if you have a number of bad trades according to your trading framework, you need to stop trading and regroup. You will need to go back over your trading structure or framework and find out where the problem is.

    It is important to stop.

    Trading is all about confidence. When you can trust yourself to make the right decision at the right time in any situation then your confidence sores and so does your ability to make money in the market.

    If you have a number of bad trades and just keep throwing good money after bad in the hope that somehow everything is going to magically change, you actually end up in a no win situation. Because even if you happen strike it lucky and get a big winner, you have no idea as to why or how you did it and you will just keep repeating the same gambling mentality until you have no money left at all.

    You will have absolutely no confidence in what you’re doing.

    It is important to realise too, that if your trading routine is has changed, you need to step back and not trade until you adjust to it.

    This could be due to you feeling run down or if you’re really busy outside the market with work or renovations on your house or you have some kind of personal issue in your life at the moment. All of these will just make it harder and will eventually force you to make poor decisions.

    You have to understand that the market isn’t going anywhere. It will always be there with its countless opportunities.

    You will find that once you have your trading framework and routine in place, you will actually have too many opportunities to trade and you will be looking for reasons not to trade them, rather than thinking, I’m going to miss out.

    So, take the time to get yourself and your trading together.

    That’s why Simon Says

    Trading isn’t easy….but it is simple

    Remember to have a Kit Kat.

     
  • Simon Euers

    Simon Euers 12:09 pm on June 27, 2011 Permalink | Log in to leave a Comment
    Tags: trade recording, , , , trading records   

    Winning is a Habit: Record Your Trades 

    For some reason most novice traders begrudge the fact they need to keep high-quality trading records. It’s another trap created by believing that trading is easy and every time we put a trade on it’s going to gang busters or, even if this one doesn’t, the next one will for sure. I just need to watch my bank balance going up and up! That’s all I’m interested in.

    When I work with traders, I hear it all the time, why would I waste time on keeping all those records? Or, the platform I use does it for me, why would I bother to do it again?

    Another reason for this apprehension (that amateur traders have about keeping trade records) is the fact that the results of our records represent the black and white, unemotional, truth of our trading AND that can be scary.

    Well the reality is it’s probably one of the main distinctions between professional traders and amateur traders.

    You think about traders working for a firm or a fund. Their trades are completely scrutinised by their superiors. The performance of their trading is analysed based on their trading records. Their entire employment is governed by them. Do you think they would be trading diligently?

    For individual traders, trade recording is one of the most underutilised tools available to them.

    That’s right, instead of looking at trade recording as a chore; you should be looking at it as a fundamental tool you can use to improve your trading. The correct use of trade recording is the main driving force of improvement.

    For instance if you give me 20 of your recorded trades, I can tell straight away weather you will be a successful trader or not. There’s no need to keep bumbling along, wondering if you’re ever going to make it as a trader. I can tell you straight away, just by looking at your past trades. I can also tell you exactly where you’re going wrong and what you need to do to fix it.

    You know if you haven’t got 20 past trades recorded in some form, then what does that say about your trading aspirations?

    But…Hey Simon gives us break I’ve only just started trading!! I haven’t had 20 trades yet!!

    They don’t have to be live trades. Paper trades should be recorded and analysed just like live trades.

    Isn’t it a better concept to paper trade, record and analyse those trades and then modify and improve technique according to the results of the analysis?
    Most people don’t want to go through that process. They just want to jump straight in and start making money…. and lots of it.  Well the statistics tell the story; Less than 10% of the individual traders who come to the market, actually last long enough to learn to become successful traders.

    Noticed I said learn to become successful traders.

    Trading is a skill. It’s behaviour. It can be taught. Assessing and modifying your past actions refines your trading process.

    “Some of the best lessons we ever learn are learned from past mistakes. The error of the past is the wisdom and success of the future.”

    Your records should be a complete log of all trades plus involve current account balances which are used for correct capital allocation.

    There are two components when you are recording your trades.

    1. When a trade is opened the position is should be recorded, as an open position. This is to remove the allocated funds from our trading bank.

    2. When the trade is closed the information is entered which closes the trade and adjusts our trading records and balances accordingly.

    This readjusts our total balance for correct allocation of funds to other trades.

    Here are some things that you may want to record, depending on what you are trading;

    Account Balance, Risk Allocation, Open date, Ticker Symbol, Type (Call, Put or stock), Strike, Expiry date, Option Price, Number of Contracts, Price stops, Profit targets, Total Trade Outlay, Close date, Number of Contracts Closed, Close Price, Amount Received, Brokerage Costs, Profit/Loss on Trade, Return on Trade, and Return on bank.

    So correct trade recording helps us allocate the right funds to each trade and then can be used as an analytic tool to identify and repair possible flaws in our trading routine.

    Make trade recording and evaluating a habit in your trading.

    Simon says Winning is a Habit.

     
  • Simon Euers

    Simon Euers 12:08 pm on June 27, 2011 Permalink | Log in to leave a Comment
    Tags: charts, indicators, , , Trading diary   

    Winning is a Habit: Keep a Trading Diary 

    Once you have a trading framework or structure written down it allows you to focus just on your game plan. It gives you some direction on what you should be doing. In other words, if you have a framework to trade options on the US market then there is no point looking at CFD’s on the Australian market or four X trading on currencies, what you want to focus on is options on the us market.

    Now, I’m not saying there doesn’t come a time when you want to expand your trading BUT you should only be doing so once, you have your trading well under control. Too many traders swap from instrument to instrument hoping to find the special secret one that’s going to hit home runs all the time….well to be honest, it just isn’t there. It is also important to note that one is not better than the other. Remember, it doesn’t matter what you trade, it’s how you trade it!

    So you have your over all game plan written down.

    Now a good place to put it is in what I call a Trading Diary.

    A trading diary is basically a recorded journal of all the things you need to watch to trade according to your trading framework. So you have your plan, you now need to observe the market conditions to identify trading opportunities that fit your plan.

    Write these observations down in your diary.

    This should be on a daily basis and it always should be done when the market is closed.

    Doing this type of work when the market is closed allows you to limit the impact of emotions and helps in reading the current market conditions without any bias.

    What we want to do is to set ourselves up for the next trading day, with clear and precise objectives. (If xyz stock hits this price I will do this.)

    But hey Simon, what do we actually look at?

    Well, that actually depends on what market you are trading but here is an example…

    Firstly, I record what I see in my charts. I actually write down what I see in my charts.

    That’s on the Dow, Nasdaq, S&P 500.

    Where is each day’s closing price is in relation to yesterdays?

    Where is the close in relation to the indicators you use? I use moving averages but you may use Bollinger bands. So, you would record where the price closed in relation to the bands. Is it pushing on the top band? Has it broken through the middle band? Or, is it resting on the bottom band?

    I also record the actual relationship of the moving averages I use. That tells me what direction the current trend is in and how strong it is.

    Some other things I record are things like..

    The advancing/declining issues, the up volume and the down volume, the new 52 week highs and the new 52 week lows and the Equity only put call ratio.

    If you are day trading or short term trading, you may do the arms index or the trin.

    I also look at what’s happening with the sentiment indicators: the vix, vxn and the qqv.

    So don’t you think that once you do that, you would have a good understanding of the current market conditions? And, if you do that on a daily basis would it not make trading decisions easier?

    Once I have an understanding of the current market conditions, I can then look at the charts of the open positions I’m holding. I do the same thing in relation to the closing price of the instrument I’m trading. Where is it in relation to my indicators and more importantly where is in relation to my individual trade plan for this trade?

    I write down what action I will take if certain things happen the next trading day. For example, if it closes below my key moving average, or if it hits my profit target or trailing stop I will exit the trade.

    That’s my open positions taken care of…I know exactly what I’m doing no matter what happens the next day.

    I then go through my watch lists and write down any stocks that look like they are setting up for my entry triggers.

    I tend to keep these in three separated columns, bullish, bearish or confused.

    All that information then is ready for me when I go live into the market.

    Do you think that sort of approach takes some of the emotion out of trading?

    Keeping a training diary over a period of time helps us to see what’s happening in the market well before most of the other market participants.

    When you make this a habit it starts to give you an inside view into the market.

    It starts to develop an awareness or sixth sense of where the market is heading.

    Now let me just stop on that point for a moment….It’s very important, in fact critical that we don’t make that awareness into a preconceived notion and get locked into thinking that the market will do what we think it will. That is a trader’s biggest blunder.

    By keeping a trading diary as a habit will help us to look at the market objectively as each day we are adjusting to the actual current conditions as they happen.

    That’s why……

    Simon Says

    Winning is a Habit!

     
  • Simon Euers

    Simon Euers 12:01 pm on June 27, 2011 Permalink | Log in to leave a Comment
    Tags: framework, fundamentals, ,   

    Winning is a Habit: Building a Trading Framework 

    This first series I have called…Winning is a Habit!!!

    What do I mean by that? What I mean is that ultimately it’s your habits that create your results.To win you need to have winning habits.

    In this series, in each blog post, I want to give you a number of different actions that that you can immediately start to incorporate into your trading.

    You can start these things straight away, even tonight or tomorrow. This post is focusing on Building a Trading Framework.

    This is like your business plan for trading. You should spend the time to write it down. When you write something a whole new commitment to the process takes place.

    So this is a written plan of all the different components that make up your own trading style.

    It needs to address three key elements:

    1.  Indentifying the trend.

    2. Choosing the right strategy.

    3. Money management rules.

    It should Answer Questions like:

    What type of stocks are you going to trade? Are you going to trade just the biggest companies on the Dow Jones or are you going to trade the guys that make up the S&P500? Or, Do you like penny stocks on the bulletin board?

    If you are trading options then what type of options strategies will you use? Will just buy and sell put and calls? Will you use spreads, covered calls or other types of combinations?

    What will help indentify stocks in an uptrend or down trend?

    What indicators are you going to use? Moving averages, Stockastics, Macd’s, Bollinger Bands, Volume, price movement?

    Will you use Fundamentals as part of your analysis or just use charts and technical analysis?

    If you do use Fundamentals, what are the key ones you look for? Is it PE ratios, earning results, current debt or market capitalisation?

    How much money will you allocate to trading?

    How much to options? How much to any one single trade?

    What are you prepared to risk on any one trade?

    When will you cut your losses?

    When will you take a profit?

    What time of the day will you watch the market? What time will you trade?

    How often will you scan for new stocks?

    You need to know the answers to these types of questions. These and more all need to be part of your trading framework.

    They are the Guiding principles that help take out some of the emotions created by traders who simply don’t have a game plan and are more related to gamblers rather than traders.

    Fear and Greed run the market. If we have a trading structure it allows us to think independently of the herd mentality of the market. That’s not saying we going to trade against the trend. We always make the trend our friend, but it is saying we can independently make our own decisions based on our own trading structure and our own framework; not on what other people are saying or doing.

    Once you have a written trading framework, you then need to focus on implementing it into your trading routine. As you go, you can fine tune it but it is important you don’t just throw it out after a short period of time, give up on it and just go and try something else.

    It takes time to build your framework into a routine that you trust, you believe in and which becomes automatic behaviour, or in other words ….. a Habit.

    Simon Says – Winning is a Habit.

     
  • Michael Brook

    Michael Brook 11:28 am on May 27, 2011 Permalink | Log in to leave a Comment
    Tags: pattern, resilience, ,   

    How to Build Resilience into your Trading 

    Anyone trading in the Australian market, and other markets for that matter, over the 5 months would have noticed the see-saw movement of price and volatility that is present at the moment. The chart below consists of XJO over the past months. Since January 1 we have had a 2% downswing, a 5.6% upswing, the Japanese Tsunami crash of 9.4%, the bounce of the Tsunami crash of an 11.25% upswing and then a 7.8% downswing.

    This volatility presents problems for many traders. The rapid changes of direction of the market will present problems for trend following traders who will be unable to have a solid trend. This will be an issue for pattern traders who will trade patterns that rapidly fail after taking the entry. There will be many sharp movements of price that will be taking out lots of trader’s stops.

    In the face of such volatility, many traders have expressed to us exasperation as to how to trade this market and the fact that they are taking losses on a repeated basis. Given the trading environment, the ability to react to volatility and remain focussed and resilient in the face of such a trading environment is challenging many traders.

    This article presents one model of Resilience applied to the trading context to assist them in their trading success.

    A model of resilience.

    In many risk/performance fields, resilience is a required ability or quality to endure the challenges that the performance field throws at them.

    Can you imagine a martial artist being unable to handle the rigours of training being able to acquire a high level of skill? Can you imagine an endurance runner who stopped his running training every time it rained?

    Studies in the field of expertise and expert performance have focussed on the skill acquisition of experts and how they remain resilient through the learning journey. A number of consistent patterns show up in resilient individuals and how they approach challenging environments.

    A resilient individual in response to challenging environments shows:

    1.     The ability to learn from adversity and take a longer term view of events.

    2.     The ability to plan for contingencies. Having contingencies has your ability to have planned actions in the event of bad things happening in the market.

    3.     Robustness – They foster within themselves the ability to respond to the situation in the moment it is happening and execute their contingencies.

    4.     The ability to Recover –They have plans in place for recovery from the situation that they endured.

    Traders who are resilient show these very characteristics.

    Resilient traders are constantly looking to learn from every experience in the market. In adverse market conditions they are seeking to understand those markets because they know they will surely reoccur.

    Resilient traders know what their stops are and know when to stop trading. They have their drop dead points set and know when to pull out of the market all together and act on those plans when the conditions are met.

    Resilient traders know keep and honour their stops and don’t hesitate to act on them.

    Finally, resilient traders are focussed on acting the moment they sense the market has turned around and then maximise their recovery. Resilient traders know when their emotions are clouding their decision making skills and use that as a trigger to get out of the market.

    “Before you can have trading consistency, you must have emotional consistency”

    - Dr Brett Steenbarger

    The core of trading is the mindset of an intense focus on:

    •       Probability orientation.

    •       Pattern recognition.

    •       Decision making.

    A resilient trader is able to make timely decisions, recognise when the probability of a trade is not in his favour and the patterns that are presenting themselves in any market that represent opportunities at that time.

    How to build resilience into your trading plan.

    Every trader who is successful over the long term has a trading plan and they build resilience into their trading through their trading.

    Below are some ways that you can build resilience into your trading plan.

    Have a drop dead point.

    This is the point at which you stop trading all together. This acts as a circuit breaker to reduce your losses. If you don’t know what yours is then your probably should not be trading. At trading state we often deal with struggling traders who don’t have drop dead points in their trading. Successful traders know when to stop losing. Unsuccessful traders do not.

    Having trading patterns for different markets.

    By having trading patterns for different markets, either trending, freefall or rangebound, this builds in contingency planning and focuses on a trader on being able to respond to the markets that are presenting themselves in the moment..

    Using feedback loops.

    Having feedback spread sheets to track the metrics of your trading enables you to learn from every single trade even in a market that is difficult to trade in. This builds learning into trading process that allows you to learn from adverse market conditions.

    Use position size decay.

    Position size decay is the concept where with each losing trade the next trade becomes incrementally smaller. This progressively reduces your risk exposure and can substantially reduce drawdowns on your trading balance. The prepares you as a trader to be fully available for  the opportunities that will present themselves when the market turn.

    “You can’t change the market, but you can change how you respond to it.”

    As traders we live in a world that is inherently risky and uncertain on a daily basis. Few other professions or occupations have the same degree of uncertainty.  This is something at we are unable to change.

    We can however be prepared for bad markets as well as good ones. We can’t change the market but we can change how we respond to it and what we do in each moment

     
    • Trader Lyn

      Trader Lyn 11:39 am on May 27, 2011 Permalink

      Thanks Mike for another great article!

    • Keith Kong (ZTrade) 12:33 pm on June 3, 2011 Permalink

      Hi Michael,

      Thanks for sharing. It is a very good article. “You can’t change the market, but you can change how you respond to it.” I couldn’t agree with you more. I’ve seem so many people to response to the market use the “buy and hold” strategy and to be exact they are “pray and hold”.

  • Trader Lyn

    Trader Lyn 5:07 pm on April 4, 2011 Permalink | Log in to leave a Comment
    Tags: mindset, mission, , , , , trading mission   

    Your Trading Mission 

    One of the things we have done recently here at Stock Course, is gained intense clarity around our mission statement. This has had a huge impact on aligning our values and vision and as a team.

    In doing this process, it occurred to me, as traders, how often do we think about what our mission is? When it comes to setting a Mission, I believe the same principles apply in trading as they do in life. Having your purpose and intent clearly defined will really set the benchmark for your results and propel you to where you want to be.

    Unfortunately, when I talk to traders about what they want to achieve, often they are not clear on what it is they want to get out of trading, and how they are going to get there. How can you get where you want to be, if you have never stopped to decide where that really is? In the words of a great mentor of mine, Dr John Demartini, “If you don’t decide the things you want to achieve, the universe will decide for you”.

    Having an overall idea of where you are going as a trader clarifies and shapes your goals for each month, each week, even down to each day. Depending on what kind of trader you are, these goals are very powerful and important.

    There are a few key questions to ask yourself when setting your mission. The first is, Why is my intention for trading? If you can identify exactly what it is that is driving you, and what you hope to achieve, this will underpin everything you do.

    The next question to ask is, what is my trading profile? eg. Do you want to trade Fulltime, part time for extra cash, or are you working on building a retirement portfolio. Ask yourself what kind of trader you would like to be, including how many hours a day you wish to spend on it. (Remember you need to be realistic, if you are just starting out day trading for example, chances are you need to spend a lot more time on it while you are still learning. Anything you want to excel at, whether it be trading, playing an instrument or dancing- requires skill, and that requires practice.)

    The first step is know what you need to earn. How much money do I need bring in each month, that will cover my expenses and savings? And then break this down, if you work out what you need each month, how much will you need, on average, each week, and each day?

    What kind of methodology must I use?

    Answer these questions to get a sense of your planning. Do you have a methodology, or system that you can use over and over again?

    If you have more than one trading system or strategy, it is best to repeat the questions separately for each one.

    Then we need to ask ourselves, how well does my methodology perform?

    • Out of the past 20 trades how many were winners?
    • How many were losers?
    • What was the average win (total profits for the winning trades divided by the number of winning trades)?
    • What was the average loss (total losses for the losing trades divided by the number of losing trades)?
    • What is the average profit made per trade? How much trading do I need to do each day?

    How much can I risk per trade?  (no more than 2% of your Trading Portfolio per trade if often suggested)

    How much capital do I need? Again this will depend on your Trading Profile and the amount of capital you have, make sure your goal are aligned and realistic.

    Which market could provide the opportunity to realize my goals?

    Once you go through these questions, you will begin to treat trading like a business. You will have targets that you must reach, and you will have expenses such as transaction costs to take into account. It is critically important that you know how to execute your strategy to consistently give you a profit.

    You will need to keep impeccable records so you can refine your trading skills and develop positive feedback loops. You need to reflect to make sure you are on track and should review this at least once or twice a fortnight.

    By applying your mind to the design of a mission statement for your trading business, you will be building a professional trader’s mindset, which is the only way to become successful. Planning and preparation are important steps in becoming a trader, both for the short term trade, as well as the long term goals of your trading business.

     

    • John P 11:34 am on June 2, 2011 Permalink

      Thank you for this article Lyn. Raises some important questions to ask ourselves. I agree with treating trading like a business, it’s the only way to stay accountable.

  • Trader Lyn

    Trader Lyn 9:33 am on February 17, 2011 Permalink | Log in to leave a Comment
    Tags: option, profit, , , strike price, vertical spread   

    Trading with Options can be safer than shares…. 

    Have you wished you could profit from a stock price rise without owning the shares?

    Then let me show you a way, using options, which will limit your losses and carries less risk than owning the shares outright.

    How would you like to rent that option out at the same time, receiving additional income, and reducing the amount you have at risk even more?

    Let me introduce you to a “Vertical Spread”.

    It’s a bull-call spread option trading strategy, so when you think that the price of a stock will go up moderately in the near term, you can reduce your risk.

    To construct a Bull call spread you buy an at-the-money call option and sell an out-of-the-money call option, of the same expiration month. It is also known as the “bull call debit spread” as a debit is taken upon entering the trade.

    The maximum gain is reached for the bull call spread options strategy, when the stock price moves above the higher strike price of the two calls, and it is equal to the difference between the strike price of the two call options minus the initial debit taken to enter the position.

    To put it simply, a Vertical Spread is an options trading strategy with which a trader makes a simultaneous purchase and sale of two options of the same type that have the same expiration dates, but different strike prices. The widening or narrowing of the difference between the option premiums on the two positions, determines the profits.

    The formula for calculating maximum profit is given below:

    •    Max Profit = Strike Price of Short Call – Strike Price of Long Call – Net Premium Paid – Commissions Paid

    •    Max Profit Achieved When Price of Underlying >= Strike Price of Short Call

    The bull call spread strategy will result in a loss if the stock price declines at expiration. The maximum loss cannot be more than the initial debit taken to enter the spread position.

    The formula for calculating maximum loss is given below:

    •    Max Loss = Net Premium Paid + Commissions Paid

    •    Max Loss Occurs When Price of Underlying <= Strike Price of Long Call

    Bull Call Spread Example

    If you believe that XYZ stock trading at $42 is going to rally soon, you buy a March 40 call for $300 and sell a March 45 call for $100. The net investment required to put on the spread is a debit of $200.

    If you bought the equivalent of 100 shares your investment would be $420.

    The stock price of XYZ begins to rise and closes at $46 on expiration date. Both options expire in-the-money with the March 40 call having an intrinsic value of $600 and the March 45 call having an intrinsic value of $100. This means that the spread is now worth $500 at expiration. Since the debit was $200 to enter the trade the net profit is $300.

    If the price of XYZ had declined to $38 instead, both options expire worthless. You will lose the entire investment of $200, which is also the maximum possible loss.

    If you owned the shares at $42 and it is at $38.00 you would incur a $400 loss so using the option has reduced your loss.

    To find out more about this strategy, join our 3-hour vertical spread training webinar, including 4 weeks of follow up live-trading sessions, starting on Wednesday 222nd February.

    This is an excellent opportunity to expand your knowledge and have another strategy available to make you a more profitable trader. We hold these training webinars only once a year and run them live to keep the information current and relevant to the market right now. This is great strategy for a conservative trader with limited funds. You will learn how to create a trading plan using the strategy that suits your risk profile. Visit https://www.stockcourse.net/wl?3i9=7t16325 to learn more.

     

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