Sunday, December 27, 2009

Take the Name out of the Game

Why is trading so difficult for so many people? For myself and the millions of others who engage in the market the quest to be a good trader is an elusive one. Countless books could be dedicated to answering this first sentence. To get to the point consider other professions where you can make millions of dollars. In sports for example, you are competing all the time and only the best of the best get to the ranks of professional. It is similar with medicine and other accounting and law. You have to get qualified before you are paid for your services.

In trading that is not the case. If you have capital you can play. That is the lure as well as a pitfall. Something so attractive brings with it all of the psychological baggage that professional traders know all too well. The fear and greed. We are all afraid to lose and at the same time afraid to miss the move.

Unlike in other professions like sports where you specialize in offense or defense, or law where you are a prosecutor or contract specialist in trading people often have no idea what they are or why they are in the trade and simply become swept up by the excitement.

We buy Apple and all of a sudden decide we are an Apple investor. Trading and investing are completely different animals. You have to be able to distance yourself from the affection you feel for any company if you are to be a good trader. There ample opportunities to trade Apple on the long and short side.

So one of the best exercises I can show you in becoming a successful trader is as follows. Next time when you are in a few positions simply shrink the "symbol" column so you cannot see the name of the stock. Don't trade the name, just trade the money. This is one of the best ways to get yourself into the trading zone.

Monday, December 07, 2009

A Thousand Paper Cuts

Winning is not easy. It is not easy in professional sports and it certainly is not easy as a professional or active trader. When you hear people telling you that they have no losing trades this year, you should be careful.

In trading winning is process of managing losses. When we use our software to help us trade, we know that just because we see all of these great set ups, does not necessarily mean that we are going to make money.

In order to make money a trader has to learn how to lose. You have to learn how to lose and how to lose well. The problem with losing well is that it is very difficult. You can lose poorly in obvious ways like getting into a trade long or short and then just letting the trade go against you. That is the easy way to lose poorly, but the scientific way to lose poorly and something that we see happen to smart people all the time is the dreaded death by a thousand paper cuts.

Notice the wide angle wedges on the daily chart of the SPY. What that mean is that any technical trader that is trading this is easily prone to getting stopped out in either direction. It is a very tricky type of trading environment. The best advice to avoid the dreaded death by a thousand paper cuts is to divide your positions into 3's if you are trading 300 shares separate it out into 3 lots of 100 and slowly scale in. Often time you have to do the opposite of what is termed correct technical trading.

Using the OddsMaker we know that right now the strategy is to fade the high volume spikes, especially on the downside. There is good money to be made in either direction, just don't put all of your eggs in one basket let the market show you the path of least resistance!