Newsletter
June 3, 2006
Enduring Success Requires Controlled Stress
Market & Sector Review
Survival
Largest Changes This Week
This Week's Economic Reports
Enduring Success Requires Controlled Stress
Trading can be lonely and very stressful, especially if one is trading from home and alone during market hours. When market conditions are optimal and in line with your methods, it can be a real "high" with one win after another after another. It is quite a different story however when you face seemingly endless setbacks, you begin to feel the strain yet attempt to keep going. As the markets go through cycles of up and down, traders often go through emotional cycles with feelings of excitement, frustration, and boredom; the traders' ups and downs. This may be one of the primary reasons many traders eventually burn out. I'm sure you've all heard stories of master traders who were at the top of their game in the 1990s, but are out of the business today. Trading is a profession in which you must cultivate a fighting spirit, in order to cope with new challenges and daily hassles. Trading the markets is stress provoking, if you don't watch out; you may collapse under the strain. By controlling stress, you can build up your psychological resources, combat stressful events, and endure lasting success.
Probably the first step in controlling stress is to maintain a balance between your work (trading) and your personal life. No matter what the percentage, you must devote a reasonable amount of time to family life. Trading should not be your whole life. Think for a minute; what good is all the money in the world without loved ones to share it with. Money just makes you more of what you already are. Make a good effort to form significant relationships with family and friends, this is very important. The relationships not only allow you to feel connected to others, but under some circumstances, they can provide much needed emotional support. Accepting help and support from those who care about you, and who also understand the pressures of trading, can help you ease stress.
Next step set goals that are in line with your experience and skills. Be very careful not to set goals that you cannot possibly achieve especially when considering your experience and skill level. Any skilled professional must go through years of school then more years of training before he/she is considered a skilled professional in their field. Trading the markets as a professional is no different it requires years of experience and learning. If you are relatively new to trading, learning goals such as reading new trading books make more sense than performance goals such as making a 20% return. Over time you will hone your skills by taking small concrete steps and that will help you cope with stress and ensure that you make steady progress toward achieving your goals.
Keep everything in perspective. Your long-term goals are to develop skills that will make you profitable over the long haul. Try to consider stressful situations, and minor setbacks, in a broader context. Avoid blowing events out of proportion. Don't make a big deal about minor setbacks. Setbacks should be expected. Focus on the long-term perspective: With time and practice, you'll become a seasoned trader. Stress can kill, especially in the markets. Winning traders try to execute trades calmly, logically, and effortlessly.
Getting yourself into this ideal mental state requires you to deal with stress. Take care of yourself physically; build up your psychological resistance to stress, dedicate time to family and friends. Find the time to engage in activities that are fun and relaxing. If you learn to cope with stress, you will sharpen your psychological edge and endure lasting success.
Market & Sector Review
Survival
During my tenure in the brokerage business I personally witnessed many trading accounts get blown out. It was not an easy thing to witness and in some instances the amounts were rather large. Most traders with blown accounts merely quit the stock market opting for savings accounts, CD's, and even real estate as investment alternatives. A select few rebuilt there cash over a period of time with the express intent of returning to the markets with a vengeance. In fact I have often heard said that a seasoned trader is not a seasoned trader unless he/she has blown out their account at least once. I do not believe that is a necessary prerequisite to trading success. However in order to avoid the pitfalls and potential disasters, we must learn from the mistakes of others.
I started the Prudent Trader site several years ago with the sole intent of helping traders understand some age old wisdom: such as developing a detailed trading plan suitable to your individual needs; as well as an introduction into a subject often misunderstood by traders, money and risk management. Your trading plan is the foundation upon which your trading house is built, and as Jim Rohn so aptly pointed out; "if you built your house without a plan, they will come from miles around, just to see". The money and risk management of your account is the roof; keeping out the unforseen elements that can destroy your house. Although the Prudent Trader has grown substantially and will continue to grow these articles located in the Learning Center is still an integral part. These articles alone will not make you or anyone else into a master trader; they will however, if understood and applied, help you avoid some of the pitfalls of others.
As most long time subscribers are aware I read a plethora of stock market sites and blogs. I also frequent several high quality message boards. My view of all this reading is; if I pick up one profitable trading idea, the time has been well spent. A few weeks ago I came across the following thread and I believe this thread to be of major importance to newer as well as more experienced traders. I can think of no market commentary more important than what you are about to read. Pay attention and learn! Let's begin with the problem (for privacy all names and monikers have been eliminated):
"Over the last two years I have observed the trading of many good traders and the results I believe can be no much better than breakeven, and most likely unprofitable because of the many false starts and bad calls. The ones that have made money are the ones that stayed in a position more than a year.
I know I have had a bad run of calls now and then but I have called some important turns before the fact, and a bunch of them too. And still I can't generate profits on a consistent basis. Maybe it has been because of the narrow range trading, but no excuse, bear markets are much more difficult to navigate. I think most that trade all day every day, already had money from something else;
they don't need to work so they just trade for fun.
After losing 60K in the 90's, I made my mind up to never dump a chunk of money in the market again, in hopes of doing well, so I've been trading with less than 2-3K at a time to see what I could do. Well I'm getting close to another blown account, but mainly because I loaded up long at the top. But I recognized my error quickly and reversed, still it did not help much.
I have a strategy that was working decent with options but the gaps eventually would get me. I'm not adding any more money to my account for options, cash only or futures, and it may be awhile as this market is very dangerous right now, let a major piece of news hit the tape (to back up this recent move) in the overnight and a stop might not save you.
I would like to not miss any more secular lows like Oil in 1998 and Gold in 2002, 10K in those should be close to 100K by now, but I did not participate because I was focused on the short term. I may add some good long term advisory services to help spot the fundamental shifts.
Even though I plan on diversifying, almost all my money is in real estate property and I plan to add more, land, not houses, I want low maintenance, at least land won't expire worthless in 30 days. CD's are becoming very attractive right now at 5% and moving higher with no risk. Build a cash position to buy a 20-30% correction in the market, and or secular lows in select sectors."
Some of the best and most informative responses:
This is the kind of realization that often marks the beginning of a successful trading career.
I'd wish you good luck, but it's not about luck.
Well said. Before one can discover what works, (s)he must first find out what doesn't. Then (s)he can begin the journey.
Thanks for posting this ... FWIW ... agree. After playing around with short term trading, for about 2 years (and doing poorly some good wins AND pathetic losses) ... outlook now on a longer time frame. And still only risking a max of 2% at any one time.
A couple of observations:
Years ago I was a registered options principal with a large brokerage firm. I also traded some money for the firm in the options area. So I was in a position to see the success or lack thereof of large numbers of options traders. I saw none who were successful buying options....which sounds like what you have been doing. Some of the reasons for this back then were the large commissions (they are lower now), the bid/ask spreads, and the idea that you are always bucking time erosion. I would always hesitate to say that something can't be done, but trading options in a directional sense is quite difficult, and for most, impossible. So that you know, I don't trade options for my own account.
But that brings me to another point. One of the reasons that people typically trade options is that they have a small amount of capital. If this is true, this almost assures you of becoming another losing statistic. And using a few thousand dollars in my mind is no capital at all. You don't define "short term trading"....so I don't really know what you're talking about. But I would tell you that trading in general, whatever the time frame, takes certain qualities, both intellectual and psychological. Not everyone has them. I don't know you, but certainly after a decade of what you describe as unsuccessful trading, it's time to assess both yourself, and what you're doing.
I don't think that simply because you lengthen the time frame anything gets easier, as you seem to believe. I would tell you that you may be laboring under the "other pasture is always greener" syndrome. It's mighty easy to look at gold today, and look at were it was a few years ago, and think about how you "could" have, "might" have, bought gold then and held it until now. Easier said than done my friend. There were many reasons not to buy, many reasons not to hold, and many shakeouts to test your conviction. And don't be too quick to claim you could have done it. You could have gotten into gold years before for many of the reasons that might have led you to get into later....with no benefit at all.
I think that all short term trading does versus longer term trading is compress the time frame within which you have to make a decision. But one thing for sure, whatever the time frame, you should understand that you're competing against some of the brightest people in the world in the trading arena, and they're all out to take your money. For you to be up to this task, you need to have the right mental qualities, the right psychology, and a sound plan with enough money behind it. Otherwise, you are probably wasting your time.
I have a brother who has bought stocks and held them for years and years. He is not a trader. In fact, he rarely sells anything. He has done very well over time. And it fits with his personality...a kind of stick to it type of personality that sticks with a stock through thick and thin. He mainly buys quality stocks, buys them based on fundamentals. He held quite a number of oil stocks (he was in the oil industry), so he knew them fundamentally. Not that it did him much good because they didn't do much for years. But he's sure cashed in recently. In other words, he was there when lightning struck.
I mention him because I think there are lots of people like him in the stock market, who are not watching prices by the minute. They do well because they give themselves time to do well.
Good luck with it.
The institutions want to sell you the concept of buy and hold because they are not interested in you learning anything about the market, but to put your faith in them and their ability to magically suck money out of your account while still underperforming the S&P. I forgot the statistics, but something like 80% of the funds under perform the S&P while still taking management fees, special huh?
You should look into a mechanical system. Some stupidly simple ones like buying x-overs on MA50 or MA200 work well as long as you are disciplined to sit with it.
Again, mostly its money management which is what gets most people because they scale in too much too fast and in one big basket. Gotta hedge. If you have $50k account, put $25k in bonds, earn interest, put the other 25k in trading account, and never put more than say $5k per position, never in similar vehicles, etc. to hedge your bets. Always pocket your earnings, do not increase trade size even if you earn more, until you're way too comfortable with it.
Whenever I get out of sync with the market, I just sit back and paper trade, not putting $ into it, until I build confidence enough to actually dump cash into it again
You're a good timer - I've read your posts, seen your calls. I know you are. I think XX hit it on the head - options are often a losing game. Even the best timers have trouble turning a profit with them. I've known a couple who could trade them well. But I've known a lot more who couldn't.
The market isn't a place to make money quickly. Well, for most of us. If you hit a bull market right, you can. But generally, it's not a place to get rich quick. I think that alone makes people lose money - they have expectations that are unrealistic. They take risks without fully understanding who they are trading against. The big players and the insiders will always be the house. I will always be the sucker at the table.
As long as I realize that, I've got a chance.
I don't have the stomach for long term investing. I tried it but I was terrible at it. I'll tell you about the one that got away. If I had only held a year longer, I probably would never come to this board. I wouldn't have needed to. I got shaken out just above the bottom and instead lost half my money. That's the problem with long term investing. You have be right and sit tight and it's not easy. If you don't do both you lose money. It got so brutal I lost confidence that I was right. So I didn't sit tight.
I trade short term now in the funds. I do better this way. I had to adjust my goals from getting rich to making a steady profit and letting compounding do it's magic. Wealth is built slowly. No matter what time frame or vehicle you find is right for you. And there are a million. You're already a good timer. You just need to find your time frame with the right vehicle and you'll be amazed what a little time will bring you.
You're trading/investment plan is the foundation of your trading/investment house, managing money and risk is the roof that helps keep out hazardous elements, and your trading/investing strategy is your houses mid-section. Eliminate or minimize any one section and your house is in danger of crumbling. Don't put your house in danger! Learn not only from your own mistakes but from the mistakes of others. If you have not been doing well lately it's time to reassess yourself, your strategies, and your plan, if you've been doing well lately well keep up the great work.
Largest Changes This Week
This Week's Economic Reports
Have A Great Week!
Bill
Disclaimer: Trading in securities, of any type, may not be suitable for all individuals. The contents of this newsletter are not a solicitation to buy or sell securities. The opinions expressed are solely that of the author. You must do your own research, contact your own financial advisor for suitability of any investments. Data gathered is from sources believed to be reliable, but NO guarantee as to their accuracy is made.
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