Fibonacci Number

In mathematics, the Fibonacci numbers are the numbers in the following sequence:

By definition, the first two Fibonacci numbers are 0 and 1, and each remaining number is the sum of the previous two. Some sources omit the initial 0, instead beginning the sequence with two 1s.

In mathematical terms, the sequence F_n of Fibonacci numbers is defined by the recurrence relation

with seed values

The Fibonacci sequence is named after Leonardo of Pisa, who was known as Fibonacci (a contraction of filius Bonaccio, “son of Bonaccio”). Fibonacci’s 1202 book Liber Abaci introduced the sequence to Western European mathematics, although the sequence had been previously described in Indian mathematics.

List of Fibonacci numbers

The first 21 Fibonacci numbers, also denoted as F_n, for n = 0, 1, 2, … ,20 are:

F0	F1	F2	F3	F4	F5	F6	F7	F8	F9	F10	F11	F12	F13	F14	F15	F16	F17	F18	F19	F20
0	1	1	2	3	5	8	13	21	34	55	89	144	233	377	610	987	1597	2584	4181	6765

Using the recurrence relation, the sequence can also be extended to negative index n. The result satisfies the equation

Thus the complete sequence is

Source: Wikipedia

Putting An End to Self-Sabotage

“Every time Jack gets ahead as a trader, he sabotages his efforts. It comes about in many ways. He may feel guilty for getting ahead, and so distraught over his success that he doesn’t pay attention to market conditions. This leads to a few bad trades, wiping out a month’s worth of profits in a day. Other times he may seemingly forget to stick with his trading plan, which results in a significant setback. Then there are those times when he gets so ambitious that he abandons risk limits and strives for a return on his trades that is impossible to realize. He ends up mounting huge losses. He can’t figure out why he would allow such mistakes to happen. He knows better but seems powerless to prevent his unconscious need toward self-sabotage to get the better of him.

Not everybody has a need to sabotage his or her efforts. Some people feel they deserve success, work assiduously to achieve success, and relish every victory. But other people let deep-seated, unresolved conflicts sabotage their best efforts. In her book, “Self-Sabotage: How to Stop It and Soar to Success,” Martha Baldwin outlines the profile of a self-saboteur. Do you fit the profile?

According to Baldwin, a self-saboteur is motivated by fear, sorrow, hurt, isolation, abandonment, and anger, which often arise from the belief that it is vital to please others at the expense of one’s own personal needs. The message the self-saboteur heard as a child and still lives by as an adult is, “Don’t be who you are.” The self-saboteur is afraid of fighting against his or her parents’ wishes that were to completely satisfy their needs at the expense of his or her own. The mission of the self-saboteur is to thwart all efforts at success and independence. By staying inept and dependent, the self-saboteur will never threaten his or her parents and remain an innocuous, non-threatening do-nothing. Parental messages remain with the self-saboteur throughout his or her life. Self-saboteurs allow a part of themselves to criticize them. A cynical, fearful voice takes over, especially during stressful times. Rather than spurning the person to take action and make things happen, the voice deep within the psyche of the self-saboteur says, “Sit back and do nothing. Don’t make waves.”

Trading is a tough business. You don’t need to sabotage your efforts; the markets will do that for you. If you let your hidden motives for self-sabotage take over during critical moments of trading, you are bound to make trading errors. Don’t let self-sabotaging tendencies get the better of you. Be aware of your tendencies to give yourself pessimistic messages. Deep down, you may think, “I can’t really be a success, so I might as well not try.” There are many ways to avoid trying your best. You can neglect disciplined action, such as failing to make and follow a trading plan, or forgetting to monitor a trade and failing to see that the market has moved against you. Even apparently active efforts to win can be manifestations of self-sabotage. For example, you may decide to make a covert plan to fail. You may think, “I’ll raise my standards and trade on a larger scale.” On the surface, this looks like a strong drive to succeed, and it may reflect ambition, but only if you have the skills to trade on a larger scale. If you don’t have the skills, though, it’s a sign of self-sabotage. Why trade beyond your skills? The only logical reason is that you secretly want to fail. This is a common ailment: over-leveraging your knowledge and skill to the point that you end up losing. When you fail, you can assuage the nagging voice of the self-saboteur deep within your psyche: “I told you so. You’re a failure in the end.”

Don’t sabotage your efforts. Acknowledge your tendency to thwart your efforts, especially when you feel stressed out. The best antidote to self-sabotage is to set realistic goals. When you set realistic goals, you will accomplish them and feel good about what you have done. And with these feelings of accomplishment will come an optimistic view of the future. There’s no reason to get a swelled head or to trade impulsively. If you set specific, realistic goals, you will trade like a winner and quell the self-saboteur that lurks deep in your psyche.”

- MentalMarkets ]]> http://www.ratiotrading.com/2010/02/putting-an-end-to-self-sabotage/feed/ 0 http://www.ratiotrading.com/2009/10/why-most-traders-lose/ http://www.ratiotrading.com/2009/10/why-most-traders-lose/#comments Thu, 22 Oct 2009 04:26:31 +0000 RatioTrader http://www.ratiotrading.com/?p=1515 Why Most Traders Lose

One way to change from a losing trader to a winning trader is to change the thoughts that preceded the actions responsible for the losses. It is difficult to alter the habitual thought processes that have embedded themselves deeply in a trader’s personality over a number of years, due to the powerful influence of three intertwined emotions: fear, anger and guilt.

Fear is an emotional state of anxiety due to the presence or perceived presence of danger. (Stress is often defined as anxiety from an unknown source.) Each newborn child has only two natural fears- fear of loud noises, and fear of falling. Most fears produce learned behavior to a specific set of conditions, called conditional responses. Pavlov pioneered this research with dogs in the 1920’s, then B.F. Skinner with human beings and animals in modern times.

Fear often impairs the rational trade decision-making process by emotionally relating the possibility of past financial losses to the future. Fear often immobilizes the trader’s decision-making process resulting in no trading decision, or a delayed incorrect trading decision response.

Fear will elicit a trader’s “flight or fight” response when he is confronted with methodology’s trading signals. The trader will either take actions as demanded by his trading methodology, or remove himself from the presence of danger. An acronym for Fear may be “false evidence appearing real.”

Attitudes determine actions -

Traders with positive attitudes have positive expectations, and take decisive goal-directed trading actions despite fear.

The winning trader accepts the possibility of losses or mistakes yet has the self-confidence to take action despite fear. Winners manage fear, and losing traders are controlled by it. The greatest mistake is to fear making a mistake. Trading success is based on knowledge of what works and what fails. Managing fear and accepting mistakes are an essential part of the trading educational experience that makes success possible. Winning traders learn from mistakes, losing traders repeat them.

Self-confidence naturally develops from self-discipline as a trader learns what actions should be taken from a given set of technical conditions. The more accurately a trader interprets price action, the better his trading results should be. Thought precedes both emotion and action, yet thoughts combined with emotions determine actions. Self-confidence comes from believing in one’s abilities, assessing and accepting risk, then taking actions. The winning trader knows personal or financial growth is impossible without risk assumption, which is part of an educational process.

Only emotionally healthy traders can adequately assume risks, because losses must be emotionally and financially acceptable to each individual trader. Each trader must define their own thresholds of pain for each, and develop the self-confidence to accept them. Fear of being wrong may be more important to a trader’s ego than fear of sustaining a financial loss.

In a similar manner, many traders can’t accept financial success, because it does not conform to their negative self-image as a losing trader. There are various ways fear can be creatively used for financial destruction by the losing trader, but the one common denominator is allowing fear to control trading actions.

It is important to analyze fear and determine its origin to learn why it is being experienced. Most fear is based on irrational beliefs adopted years ago. If fear of losing money is causing anxiety or loss of self-esteem, the trader may wish to simply stop trading until this fear is understood and positively accepted as part of the trading experience. Traders should never borrow money to trade, or risk money they cannot afford to lose.

50 Common Mistakes Most Traders Make

A survey of more than 500 experienced futures brokers asked what, in their experience, caused most futures traders to lose money. These account executives represent the trading experience of more than 10,000 futures traders. In addition, most of these Account Executives (AEs) have also traded or are currently trading for themselves. Their answers are not summarized because different traders make (and lose) money for different reasons. Perhaps you may recognize some of your strengths and weaknesses. Yet many of the reasons given are very similar from broker to broker. The repetitions stand to demonstrate that alas, many futures traders lose money for many of the same reasons. Perhaps these statements from experienced brokers can make a contribution to you, and make this sometimes fickle, often intricate, always interesting market place of futures trading possible.

Here is what they said:

1. Many futures traders trade without a plan. They do not define specific risk and profit objectives before trading. Even if they establish a plan, they “second guess” it and don’t stick to it, particularly if the trade is a loss. Consequently, they overtrade and use their equity to the limit (are undercapitalized), which puts them in a squeeze and forces them to liquidate positions.

Usually, they liquidate the good trades and keep the bad ones.

2. Many traders don’t realize the news they hear and read has already been discounted by the market.

3. After several profitable trades, many speculators become wild and aggressive. They base their trades on hunches and long shots, rather than sound fundamental and technical reasoning, or put their money into one deal that “can’t fail.”

4. Traders often try to carry too big a position with too little capital, and trade too frequently for the size of the account.

5. Some traders try to “beat the market” by day trading, nervous scalping, and getting greedy.

6. They fail to pre-define risk, add to a losing position, and fail to use stops.

7 .They frequently have a directional bias; for example, always wanting to be long.

8. Lack of experience in the market causes many traders to become emotionally and/or financially committed to one trade, and unwilling or unable to take a loss. They may be unable to admit they have made a mistake, or they look at the market on too short a time frame.

9. They overtrade.

10. Many traders can’t (or don’t) take the small losses. They often stick with a loser until it really hurts, then take the loss. This is an undisciplined approach…a trader needs to develop and stick with a system.

11. Many traders get a fundamental case and hang onto it, even after the market technically turns. Only believe fundamentals as long as the technical signals follow. Both must agree.

12. Many traders break a cardinal rule: “Cut losses short. Let profits run.”

13. Many people trade with their hearts instead of their heads. For some traders, adversity (or success) distorts judgment. That’s why they should have a plan first, and stick to it.

14. Often traders have bad timing, and not enough capital to survive the shake out.

15. Too many traders perceive futures markets as an intuitive arena. The inability to distinguish between price fluctuations which reflect a fundamental change and those which represent an interim change often causes losses.

16. Not following a disciplined trading program leads to accepting large losses and small profits. Many traders do not define offensive and defensive plans when an initial position is taken.

17. Emotion makes many traders hold a loser too long. Many traders don’t discipline themselves to take small losses and big gains.

18. Too many traders are under financed, and get washed out at the extremes.

19. Greed causes some traders to allow profits to dwindle into losses while hoping for larger profits.

This is really a lack of discipline. Also, having too many trades on at one time and overtrading for the amount of capital involved can stem from greed.

20. Trying to trade inactive markets is dangerous.

21. Taking too big a risk with too little profit potential is a sure road to losses.

22. Many traders lose by not taking losses in proportion to the size of their accounts.

23. Often, traders do not recognize the difference between trading markets and trending markets.

Lack of discipline is a major shortcoming.

24. Lack of discipline includes several lesser items; i.e., impatience, need for action, etc. Also, many traders are unable to take a loss and do it quickly.

25. Trading against the trend, especially without reasonable stops, and insufficient capital to trade with and/or improper money management are major causes of large tosses in the futures markets; however, a large capital base alone does not guarantee success.

26. Overtrading is dangerous, and often stems from lack of planning.

27. Trading very speculative commodities is a frequent mistake.

28. There is a striking inability to stay with winners. Most traders are too willing to take small profits and, therefore, miss out on big profits. Another problem is under capitalization; small accounts can’t diversify, and can’t use valid stops.

29. Some traders are on an ego trip and won’t take advice from another person; any trades must be their ideas.

30. Many traders have the habit of not cutting losses fast, and getting out of winners too soon. It sounds simple, but it takes discipline to trade correctly. This is hard whether you’re losing or winning.

Many traders overtrade their accounts.

31. Futures traders tend to have no discipline, no plan, and no patience. They overtrade and can’t wait for the right opportunity. Instead, they seem compelled to trade every rumor.

32. Staying with a losing position because a trader’s information (or worse yet, intuition) indicates the deteriorating market is only a temporary situation can lead to large losses.

33. Lack of risk capital in the market means inadequate capital for diversification and staying power in the market.

34. Some speculators don’t have the temperament to accept small losses in a trade, or the patience to let winners ride.

35. Greed, as evidenced by trying to pick tops or bottoms, is a frequent error.

36. Not having a trading plan results in a lack of money management. Then, when too much ego gets involved, the result is emotional trading.

37. Frequently, traders judge markets on the local situation only, rather than taking the worldwide situation into account.

38. Speculators allow emotions to overcome intelligence when markets are going for them or against them. They do not have a plan and follow it. A good plan must include defense points (stops).

39. Some traders are not willing to believe price action, and thus trade contrary to the trend.

40. Many speculators trade only one commodity.

41. Getting out of a rallying commodity too quickly, or holding losers too long results in losses.

42. Trading against the trend is a common mistake. This may result from overtrading, too many days trades, and under capitalization, accentuated by failure to use a money management approach to trading futures.

43. Often, traders jump into a market based on a story in the morning paper; the market many times has already discounted the information.

44. Lack of self-discipline on the part of the trader and/ or broker creates losses. Futures traders tend to do inadequate research.

45. Traders don’t clearly identify and then adhere to risk parameters; i.e., stops.

46. Most traders overtrade without doing enough research. They take too many positions with too little information. They do a lot of day trading for which they are under margined; thus, they are unable to accept small losses.

47. Many speculators use “conventional wisdom” which is either local, or “old news” to the market. They take small profits, not riding gains as they should, and tend to stay with losing positions. Most traders do not spend enough time and effort analyzing the market, and/or analyzing their own emotional make-ups.

48. Too many traders do not apply money management techniques. They have no discipline, no plan. Many also overstay when the market goes against them, and won’t limit their losses

49 Many traders are undercapitalized. They trade positions too large, relative to their available capital. They are not flexible enough to change their minds or opinions when the trend is clearly against their positions. They don’t have a good battle plan and the courage to stick to it.

50. Don’t make trading decisions based on inside information. It’s illegal, and besides, it’s usually wrong.

It’s interesting to see that at a time like this, a time of economic concern, a time of confusion, that many people (including traders) get caught up in information that doesn’t serve them in any way helpful.  What do I mean by this?  Well, if you look at most financial news networks or most financial news services out there, how often of the time are they serving us information that is helpful in any way to our trading?  I listen and talk to traders on a daily basis and it amazes me how much overwhelming economic information they know.  However, when I ask them how it’s serving their trading, I never seem to get a clear answer.

I’ve been lucky enough to talk to some of the most successful legendary traders out there and really pick their brains to see how they think.  If you’ve ever had the chance to read Market Wizards and New Market Wizards, there is some real wisdom in those books that most people don’t seem to pick up on.  In New Market Wizards, Jack Shwager interviews a very successful trader.  During the interview he asks him:

“Can you tell who will be a successful trader and who will not?”

The traders response is very interesting.  He goes on to say:

“Yes, on a less technical level, I can say that after years of studying traders, the best predictor of success is simply whether the person is improving with time and experience.  Many traders unconsciously acknowledge their lack of progress by continually jumping from one system or methodology to another, never gaining true proficiency in any.

As a result, these people end up with one year of experience, six times, instead of six years of experience.  In contrast, the superior traders gravitate to a single approach-the specific approach is actually not important-and become extremely adapt to it.”

Now, most traders would read that and think nothing of it.  But look at how he talks about how most traders jump from system to system, never really gaining true proficiency in any.  This is something I have come to observe as well within most traders.  When I try to understand why this is happening it seems that it’s the same reason each time.

As traders learn more and more about different indicators and patterns  in the market, they become more and more desperate to find this “holy grail” system that will produce some astronomical winning results.  Not only that, but they continuously jump from doing one thing to another.  One day they’re trading moving averages, the next day they’re trading a bear wedge pattern, the next day a double top; they’re just all over the place.  Why is this?  It goes back to the quote up top.  Instead of focusing on ONE methodology and mastering it, what happens is as soon as a losing streak comes along or a trade doesn’t work out the way they would have liked, they begin to think that something is wrong with the system, when in fact the real problem is the trader himself.

I often talk about how trading is a business and how it needs to be taken seriously if you want to succeed.  A lot of traders approach the markets like they approach Las Vegas, with hopes and dreams.  You fund your brokerage account and you think that you’re going to hit the “jackpot”.  You sit down at the computer and you have no plan and no rules, and then you’re surprised when you start losing money.

The only way you’re going to be successful at this game called trading is by doing what successful traders do.  What do they do?  All the ones I’ve talked to have very specific rules to entering or exiting the markets.  They know where their stop is before even getting in.  They know where they are taking profits before they get it in.  They don’t jump in and just “see what happens”.  Just as important, they all have a very specific systematic way of trading.  They operate from an if/then scenario.   They think from a probabilities perspective and they know exactly what their odds are every day,week, month and year.

Here are a couple of things you should ask yourself:

1. How far have I progressed as a trader?

• Have I mastered a system?
• Can I perform it consistently without effort?

2. What am I doing to insure my growth and success?

• How will I measure success?
• Am I constantly growing and developing?

So as you go into your trading, I want you to remember that successful traders are constantly improving with time and experience using a single approach or methodology.  It’s important to realize that without that mindset, you are likely to get caught in the same trap that most other traders get into.  That is no plan, no rules, and no success.

Today we frequently hear stories about traders blowing out their entire accounts or about people who started with 100k only to have it near 20k within a very short period.  Time and time again, when I talk to people about trading or my career, I often hear phrases like “Its way too risky for me..”  or “the market is scary right now, how’s it treating you?”  Usually my response to that is “It’s not how the market is treating me, it’s how I’m treating the market.”

What most people and most traders have not realized is the importance of having a plan for trading.  Having a plan means a lot of things.  In fact, the people who are successful at other careers generally all started with a plan.  Trading is like a business and it must be treated that way.  When a person is seeking a loan for a business or seeking for help in starting a business, most of the time you’ll hear the opposite party say “Ok, let’s see your business plan” or “what do you have planned?”  People want to know where you are headed.  The same thing goes in trading.  Why would you want to risk your hard earned money in the markets without knowing what could or couldn’t happen?  The markets don’t care about you or your feelings.  It will gladly take your money in the blink of an eye, so it is extremely important that you have a plan of action.

Here are a few things you should write down:

• What market will I be trading?  (i.e. Stocks, Futures)
• How will I be trading it? (daily, intraday, monthly)
• What percentage of my capital will I be risking per trade?
• Do I have a plan that produces a positive expectancy?
• What is my risk to reward profile per trade?
• What are my monthly/quarterly goals?
• What is my year goal?

After you’ve written down those questions, spend some time fully answering them.  You should really do this because it WILL CHANGE how you trade.  Now, if you get to a question, and you don’t have an answer, like Do I have a plan that produces a positive expectancy?, what you need to do is really take the time to research and find ONE PLAN and MASTER IT.  If it’s one of your own plans that you created, have you tested it?  Back-testing is by far one of the most CRUCIAL parts to being a successful trader.  Why do I say this?  Here is an example.  If you owned a business, and you wanted to hire someone, would you just let the first person who walked in the door get the job?  Most likely not.  What you are going to do is interview a few candidates and figure out which person best suits your business.  But what are you really doing when you are interviewing though?  Well, what you are doing is you are subconsciously figuring out or analyzing if this person is going to produce a positive expectancy for your business.  Are you going to hire someone who is going to make you lose money and/or driveaway customers? Of course not!  The same thing goes in trading.  You want to find a trading model that is going to be a net POSITIVE overall.  You cannot take a losing system and turn it into a winner.  This is why it is very important to test a model.  After testing you will KNOW what to expect.  If say you test 200 trades, and you find that 130 of them were winners and that your winners were 1.5 times larger then your losers, what does that tell you?  It tells you that you have a positive trading system.  So now when you start trading with real capital and out of your next 200 trades, you lose 70 of them, it should come as NO surprise.  Losing trades is part of the business daily, weekly, monthly, yearly.

In the book Trading In The Zone, Mark Douglas makes some great statements that I truly believe are important.  He states:

I AM A CONSISTENT WINNER BECAUSE:

• I objectively identify my edges
• I predefine the risk of every trade
• I completely ACCEPT the risk or I am willing to let go of the trade
• I act on my edges without reservation or hesitation
• I pay myself as the market makes money available to me
• I continually monitor my susceptibility for making errors
• I understand the absolute necessity of these principles of consistent success and, therefor, I always follow them with confidence and joy.

What you’ll notice about his statements is that it is he is assuming that you have already done the first set of bullets up top; that you have already created a plan and you already have a set of RULES.  Now you might ask, how do I know if my set of rules now will work next month or next year? GREAT question. The market dates back all the way into the late 1700’s.  There is literally a few HUNDRED years of data.  That’s why I say that back testing is KEY.  Now that doesn’t mean that you need to back-test 200 years of data.  Not even close.  You want to back-test a reasonable time depending on your time-frame of trading.  For example, if I plan on trading based on a daily system, then I might back-test the last 5-6 years.  If I’m going to trade based on an intra-day 3 minute chart, I would probably backtest about a year.  There is no way to KNOW what is going to happen, but trading really boils down to probabilities.  Time and time again the same things tend to repeat themselves.  Why do you think the markets tend do to the same things over and over.  Why does it seem that certain stocks that are in the same class look the same from a chart perspective?  How come a company will report great quarterly results, but still go down? It’s because there is a greater number of traders that BELIEVE that this is where an equity is too much or too little.  Why do you think there are people who are talking about a “recession” right now?  Again, it’s because the same things seem to be occurring that did prior to a previous recession and people have that BELIEF.

So what does all this mean?  What can you gather from all this?  Well, a few things actually.  One is to make sure you create, find and organize a PLAN for trading.  Think about it as if you wanted to open up a company.  Do the research and find out how some of these traders got started and what they did.  Once you’ve done that, write down your plan and look at your questions from up top.  Once you can answer ALL of them, then you are moving toward being a consistently profitable trader.  Then take a look at what Mark Douglas wrote.  You have to own these statements mentally.  You have to truly believe that you are a consistent winner because of all of the statements above.

“Plan your trade, and trade your plan” – Anonymous

Where Do I Start?

So, what is the first step to change? How can we change our trading habits or any other habit we may have that we aren’t particularly fond of?  What really makes successful traders, entrepreneurs, athletes, and other people successful? and what did they DO to get there?

Well, if you look at many successful people, traders and so on, you’ll notice that most of them had one thing in common.  They always had someone who they wanted to emulate.  If you asked many successful people today about their stories of success, a lot of the time you’ll find that they were inspired by others who did the same thing.

Here’s a thought.  Why do you think people spend hundreds of thousands of dollars to open a franchise?  Why would someone rather spend the money to open a Subway instead of creating their own sandwich stop which would probably cost less money?  The reason is because all you’re doing when you buy a franchise is REPLICATING success.  They tell you exactly what to do from start to finish.  What color the walls should be, to how big the store needs to be, location, times of operation, everything!  You just follow their instructions and in doing so you have a pretty good idea based on demographics and such, how well you should do.  The same goes for traders.  If you want to be a successful trader, then your first step is to find someone who has achieved or is achieving what you WANT to achieve.

If I want to have washboard abs, and big arms so I can walk on the beach with my shirt off, what am I most likely going to do?  I’m going to find someone or a group of people who ALREADY HAVE washboard abs and big arms and do exactly what they did.  I’m going to eat what they eat, I’m going to run as much as they run, and I’m going to do the necessary exercises in order to get there.  Again, the same goes in Trading.  Find someone who have achieved success in these markets, and find out how they started and what they did.  A coupleof  great books I recommend are called Market Wizards & New Market Wizards.  In these books the author Jack D. Schwager talks to several traders (over 35) and asks them about their first trades and how they got to where they are now.  They TELL you what they did! They don’t talk about their systems really, but they do explain how important it is to stick with it.  They talk about how focus and determination can get you anywhere you want to be.  The important thing is that we have people who we can emulate, and that is a key factor to success.

Did you know that Michael Jackson didn’t even create the moonwalk?  It was actually called the “back-walk” that he saw people in his neighborhood doing. He decided that he wanted to learn it and he had someone TEACH it to him. After practicing over and over and over, he got it RIGHT.  Then during one night early in his career while singing Billy Jean, he showed the whole world what he called the “moonwalk” and ever since, people refer to it as that and most people think he created it.  Again this example shows, that emulation is a key part of success.  You too can be great at trading or anything else you want to do in life, but in my opinion the surest way to get there is to find someone who already is there, and find out what they did or are doing.  Again I can give you many examples of emulation, but it has to come from within.  Once you’ve done that, find people who are where you want to be and do what they’ve done.

“Thinking is the hardest work there is, which is the probable reason why so few engage in it”

- Henry Ford

What are some of the common trading errors that we all seem to have had, or for some of us, are still having?  Where do errors come from? How do they occur?  Well, we all have habits, and habits tend to occur because of repetition.  Think about anything you do in life.  Most of the time it’s a result of conditioning yourself through repetition.  Have you ever set your alarm clock for a particular time to wake up, only to find yourself waking up without the alarm clock a few weeks later?  I know it’s happened to me! Then you look over and it’s about 5 minutes before your alarm is supposed to go off and you say…”just…5…more…minutes” Why do you think that happens?  It’s because you’ve conditioned your mind and body to wake up at a certain time, and then you become accustomed to doing it because of the repetition.

Repetition has the same effect in trading. For example, if you begin to take impulse trades, or make decisions that are outside your trading model, then what you’re doing is beginning a new pattern of behavior.  The problem with starting a new pattern of behavior is that first off, you haven’t even tested this new behavior to see if it’s profitable, and second, you are now introducing a new action into your trading career which can severely alter your thoughts and emotions in trading.  Now you could say “yeah, but I made money”….the WORST thing that can happen.  Why’s that? Because you just made money by breaking your rules and then you may start to think that you are smarter than the system, and then you do it over and over and over again with no testing whatsoever only to find yourself saying “If I had just followed my rules from the beginning, I wouldn’t be in this mess”

When you conflict your subconscious and conscious mind with different trading habits, it’s only going to make your trading career that more difficult.  Now, that’s not to say that you can’t have two different types of trading models as a trader. You absolutely can and still be an effective trader. However, what’s important is that you develop the unconscious competence level.  In other words, it’s important that you master one method of trading before introducing a secondary method so that there is no conflicting information.

Now, what can we do if we’ve introduced bad habits into our trading?  How can we break those patterns of behavior?  There are many ways of course, but here are some of the more effective ways that I believe really work. Studies show that it takes eighteen to thirty days to break a habit and then another eighteen to thirty days to introduce a new one.  So what we’re going to do here is introduce a few simple techniques that can help change your thought pattern in trading.  Before we go on, let me state that if you are trading and do not have any of the habits described above, these techniques are still a great exercise for you.

This is what you are going to need:

• Notebook or a writing journal
• Either 3×5 index cards, or even better the jumbo index cards
• Sharpie or a dark marker
• Pen

Once you have these items, we’re going to do a few exercises:

1. In your first page of your journal or notebook, write at the very top in BIG LETTERS, “WHY DO I TRADE?”. Once you’ve done that, I want you to list a few reasons why you trade.  Take the time to REALLY think about it.  Is it the money?  No…It’s what the money represents to you.  Maybe it’s time freedom.  Maybe it’s so you can give back.  It could be many things.  However, before you list the reasons why you trade, the very first reason should be: I TRADE TO BE CONSISTENTLY PROFITABLE. Feel free to write as many reasons why you trade.  If it takes a few hours, GREAT.  If it takes you 10 minutes, that’s fine too.  Just list down all the reasons you trade.

2. Once you’ve done that, on a fresh new page write the following:

• I trade what I SEE, not what I think.
• I cannot control the market, I can only control MYSELF.
• My trading mindset is the key to being SUCCESSFUL.
• I will not be biased as where the market is going.
• I BELIEVE the markets are 100% psychological.
• I strictly adhere to my RULES.
• Losing is a part of the business.
• Trading is a business and I am here to PROFIT.

Take a minute to re-read what your wrote and understand the meaning of each statement.

Now, after you’ve done that, I want you to memorize the words in BOLD.

They make a statement: SEE MYSELF SUCCESSFUL, BELIEVE RULES PROFIT.

Or you can abbreviate using the first letter of each word: S.M.S.B.R.P.

Take the above statement or abbreviation and write it down with your marker on your 3×5 or Jumbo index cards. After you’ve done that, tape it to the bottom of your monitor.  We’re doing this because seeing and reading this statement with REPETITION is going to change the pattern of your conscious and subconscious mind when you think about trading.  When you train yourself by looking and listening to yourself repeat the statement SEE MYSELF SUCCESSFUL, BELIEVE RULES PROFIT or S.M.S.B.R.P. over and over you WILL BELIEVE and OWN (I’d use a different word) these statements.

Think about words and phrases you’ve learned throughout your life.  Something as simple as “The wheels on the bus go…” I’m sure most of you knew to say “round and round” Or if I say “Mary had a little…” Again, for most of you I’m sure the word “lamb” came to mind.

Can you remember a time when you or a friend got something, and immediately you began to notice other people with the same thing?  I remember a friend of mine bought a very unique Volkswagen a while ago that I had never seen before.  It was actually a pretty rare car that was made from 1988-1993 in the US, and it was nice.  After seeing it, driving it, touching it, I began to notice when I saw other ones on the road.  I would be driving and sometimes I would see one far in the distance and I would speed up and think it was so cool that someone else had the same unique car that my friend had. Then I would frantically call him and say “Guess what?!, I just saw someone with the same car as you!” How come this happened?  It’s because seeing his car almost everyday, driving it, washing it, OVER AND OVER made a connection in my conscious and subconscious mind, and with that mental representation now there, it became much easier to notice the same unique car in different parts of the area.  It’s been over 7 years now, and I still can notice that car from a distance.

What this exercise is meant to do is create a new pattern and help you break any bad patterns or habits you may have in trading.  Take the time everyday and read WHY DO I TRADE? Then take the time to read the second set of statements.  As you read them think about how it applies to your trading.  Think about the perfect setup that you saw on a chart and when it worked exactly as you expected.  Think about how you took that trade without any hesitation.  Look at the index card with your statement S.M.S.B.R.P. and re-read it OVER and OVER again.  Then think about how your trading career will be profitable as long as you follow your rules and do exactly what you are supposed to do every single time.  Again, I am assuming that you have back-tested and you have a PLAN.  Remember, everything we do is a result of repetition and conditioning.  Now think about how you can condition yourself to succeed as a trader and BREAK those bad habits!

Now you may be wondering, what are you going to do with the rest of your journal.  What I want you to do is begin to make daily entries.  It can even be a checkbox if you want.  But each day that you follow your rules, write it down, and write down how it FEELS, regardless a profitable or a non-profitable day.  Remember, that losing trades is a part of the business, and it WILL happen, but what is most important is that you follow your rules.  A profitable plan and a set of rules will in fact prevail.