Changing Mistakes Creates Long Term Success
In trading, as in life, reflecting on how we act, react or approach a new situation can be the difference between victory and defeat. Looking back a few years, I was not a disciplined adolescent. Countless parties, alcohol fueled binges, drugs and a turbulent childhood don't scream the word 'stability'.
Unfortunately, behavior learned in our formative years sticks with us. As we grow and learn, our minds form all kinds of patterns, belief systems and habits which last for entire lifetimes. This clouds our judgment and leads to impulse decisions and emotional responses to logical and objective problems.
If there is one place on earth where making objective and rule based decisions means confronting these issues, it is the market. Unlike our professional careers and relationships, the market does not give two fucks about you, your childhood and the baggage you bring to the table. Welcome ladies and gentleman to the ultimate equalizer - trading.
"You will continue to suffer if you have an emotional reaction to everything that is said to you. True power is observing things with logic. True power is restraint. If words control you that means everyone else can control you. Breathe and allow things to pass." - Fake Warren Buffet
The Good News
Like any skill or endeavor that pays handsome dividends (physical fitness, high paying jobs, quality relationships). Trading involves a long term commitment to introspection. Hard work and grounded principles need to be applied over and over again to succeed. Just as eating cake and guzzling a 2L coke won't get you abs. Trading like a chimpanzee throwing darts won't get you the house on the beach.
It is a skill set that over time, can produce immense freedom from social constructs, mundane jobs and the 9 to 5 shackles that keep you happy enough to do it over and over again (for 60 years) but not financially rewarding to pursue large goals. It is possible to overcome social norms and break away into a new stream of self-fulfillment. Trading is deep, it involves questioning all the assumptions you are brought up on. What a fantastic opportunity!
Luckily trading can be learned. Anybody can learn it providing they do the work, build the discipline and seek the truth. This truth extends to themselves and how they relate to reality. Once you understand that reality can be morphed into your own paradigm, you will see the truth of the market. The truth is simple, nobody knows what is going to happen. All you can do is put the stats in your favour and manage how much risk you take.
The Ultimate Challenge
To master the stock market, you need to master yourself. Mastering yourself should be the goal. It's not a destination, you aren't here for a quick buck. If you are dabbling in and out of trading or see it as a get rich quick effort - please find another site. This site does not have what you are looking for. Good things take time. Trading is no different.
To confront behavioral patterns and confront truth is the single most liberating endeavor you can pursue. Trading is the ultimate decider. Can you see the truth? Are you following the rules? How do you know you are following the rules?
Unlike any other roles in society, you have no rules other than the ones you create in the market. They are for you to follow and nobody will hold you accountable. This should excite and scare you beyond measure. Unlocking how you perceive the world and just how messed up you are from society, parents, religion etc. will bring some phenomenal insights and hopefully money. To decipher the market, you need to be open to reality.
“Win or lose, everybody gets what they want out of the market. Some people seem to like to lose, so they win by losing money.” Ed Sykota
And now, to my feature presentation. The below 5 Mistakes used to kill my trading account. No more! Well, maybe sometimes (I am human unfortunately).
1. Fear of Missing Out (FOMO)
If this was not first on your list, congratulations. Unfortunately as I child, I would have failed the Stanford marshmallow test.
What is FOMO
FOMO is the acronym for 'Fear of Missing Out'. Typically this fear translates into some terrible stock purchases at extremely high prices. You see a stock rocket up, the adrenaline kicks in and all of a sudden, you own this stock. Which only ten seconds ago you never knew existed! It's like an out of body experience which typically leads to trades which are highly risky and not very rewarding. That is the antithesis of trading. The objective of trading is to stack odds in your favour, not gamble away your wages on stocks that are 'Mooning'.
Why Does it Happen
FOMO happens because as humans, we want everything. We also want it yesterday. If someone else has everything then our primitive brain goes into overdrive. It is a direct result of running someone else's race. We look outside of our strategy to others for validation.
Once your primitive brain is engaged you act on impulse and the rest is history. By the time you have come to your senses, your down money and in far too many cases, will hold the stock until the point of maximum pain. End result, no payday, huge losses and self-destructive thoughts.
- Stop listening to financial news. Let the stock price action guide you. When it's in the news the move has occurred. News is history in action, the art of speculation is to bet on the future.
- Refuse to trade on tips from friends. The only exception is that they conform to all of your own trading criteria.
- Write down your plan, specifics. Entry, exit and why you bought the stock. If you haven't done this, you are going to always suffer FOMO.
- Take time before clicking 'Buy'. Breathe, make sure your decision is rationale and logical. Associate FOMO with pain, not gratification.
Over trading is fantastic - If you want to make your broker wealthy. You may have the added benefit of reducing your return. Truly a great deal. Wait, it gets better! Act now and you have the added benefit of self-doubt, anxiety and missed opportunity! This issue has cost me over $3k per year easily, it's also cost me missed opportunities and mental anguish.
What is Over-Trading
The name sort of gives this one away. Over-trading is the persistent buying and selling of stocks that could be part of your strategy, but may also be FOMO trades or random buys and sells you did not anticipate. It occurs where you buy/sell some shares, change your mind, sell/buy them and then do it all again time and time again.
This can happen when you take trades you thought looked okay and bought too soon or even too late. Another classic case of "I have no clear strategy".
Why Does it Happen
In the information age we can buy practically anything online. Trading is no different. We are programmed into the instant gratification mindset which has extended to trading. It is as easy as clicking a button which could change our fortunes - at least that's what we think. Click after click, we line the pockets of our brokers and throw our rules out the window. Stare at the screen long enough and you can justify just about any purchase.
- Understand position sizing and how much risk you will take per position.
- Take smaller positions and wait for them to work out, scale into them slowly, be patient.
- Understand the math and expectancy in your system. You have to believe your system will work. To believe this you need to know why.
3. Bag Holding or Selling too Soon
Holding losing stocks or selling winners is the trademark of both professional money managers (that lose money) and rookie traders. Luckily, it is also a hallmark of being human, so don't feel to bad.
Think back to situations in your life when you held onto toxic relationships, old relics in your household or worse yet, traumatic memories from your past. Now contrast that to all of the phenomenal things that have occurred in your life. Unfortunately, as a species we tend to hold onto the bad and get rid of the good for a quick profit. The psychological term for this is known as the disposition effect.
Why Does it Happen
Simply put, hope and fear. When we buy something, we attach ourselves to it. Stocks are no different. Our ego has to be 'right' and if not then we bruise our sense of self-worth. The result is holding onto a stock that has violated our sell signal.
On the flip side, selling a winner feels good. We see profit on the table and take it off as soon as we get a chance. Usually this is followed by a huge price run up with us left on the sidelines. This is a fear based reaction. Most notably, the fear lost losing something we have gained.
- Trading is paradoxical. Cut losers, hold winners. See the truth in numbers.
- Have a trading plan, the cure for all of these ailmants
- Set stop losses and automate sell orders. Make no exceptions, always set your stop losses. Do you drive your car down the road with no brakes?
- Leave your belief system at the door. Follow the price action and what the stock is really doing, not what you wish it would do.
4. Trying to Predict the Market
"He who lives by the crystal ball will eat shattered glass". - Ray Dalio
If Ray Dalio's comment above doesn't convey this message clearly enough, I would like to emphasize and reinforce the mantra:The nature of stock market speculation is to identify trends and place a bet in the right direction of that trend. If it fails, you move out of its way. If however you try and 'predict' where the market is going, it lures you in to a sense of 'right' and 'wrong'. The very nature of the market is random. The news and media however try and establish constant certainty by 'predicting' the next crash or bull run. How many CNBC news anchors make a living from trading? Not many.Betting on the direction of the market is fine, predicting it is not. Your bet is determined by the direction of the trend and price action of the stock, not by flashing news articles and opinions of others.
Why it Happens
Predicting things is our natural response to uncertainty. As the market is pure uncertainty manifested in a 2D chart, it makes sense that we would try and 'sort it out' and compartmentalize it into neat little boxes which are easy to file away and classify. The ironic part is that nothing is certain. The stock market of all places is a testimony to that. Without having a rational prediction in front of us it can be hard to make decisions.
- Make sure your trading system thrives on change ie. a trend following system. It needs to be adaptable and the numbers must account for this.
- Follow specific stock and price action vs the indexes. Indexes do not lead stocks, stocks lead indexes.
- Leave your ego at the door. Be quiet about your results and stick with the process. The process is what matters, the money follows.
- Tune out the news and social media.
5. Breaking your Trading Rules
Let me precede this write up with the following statements:
"It's different this time".
"Oh just this once".
"I'm up so much, what's the worst that can happen".
"I'll set my stop loss tomorrow".
Breaking my rules has ensured that I stay employed for someone else for far longer than anticipated. It's also the reason I missed a €2.5 million trading opportunity on Cryptocurrency in 2016 when I sold too soon. Am I angry? Not at all! Was it a very expensive educational experience. Well, maybe just a little upset.
Why it Happens
The list of psychological and emotional reasons for breaking rules will hopefully form the centerpiece of my first trading book "Stop being a fucking idiot" or volume II "follow the rules dumby" . For now though, let's just move to acceptance phase and acknowledge that we all break rules. It's normal, it happens to the very best in the business and don't be too hard on yourself.
It's important to remember that trading is a solo sport. You and you alone are accountable for following your rules. Like any good coach, if you punish yourself and beat yourself down, you will not attain personal and trading success.
We break rules because we think we know better. Our brain is trying to create new options and control circumstances that are beyond our control by adjusting parameters and being creative. It simply doesn't work in a trend following and systematic environment. Adopting a military style here is far more rewarding. If you make mistakes, admit your human, move on. Next trade.
- Make sure you write down your rules
- Create a checklist and only trade once the checklist is ticked
- Read more about the psychology of discipline or behavioral psychology. The numbers are easy, sticking to the rules is hard.
- Reward yourself for sticking to the rules.
- When you break the rules, write down why, introspect and overcome.
I hope you found this article useful. Even just today I broke a trading rule. I bought a stock below the 200 day moving average. I sold it within 5 seconds for a $27 loss. This being a result of a rushed environment and little time to plan my trades being on the road.
I'm telling you this because I am human and far from perfect. In spite of this I still make money in the market and trade well most of the time.
Realise that trading is life in motion. All of our thoughts, feelings, hopes, dreams and fears are tied to our decision making ability. The more objective you can stay, the higher success rate you will have in the game.
Remember: Trading is very simple. It's just not very easy.
In my next blog I'll recommend a few books that helped me reflect on what I was doing wrong psychologically. Please comment or share these articles. Help get the truth out to the masses!