When I sat down to write this article, I thought it would be challenging—but useful—to distill over 20 years of trading experience—and 25 years of specializing in brief therapy—into ten lessons that I have learned while working with traders (including myself!). In that time, I’ve written two books on trading and worked with dozens of professional traders at a proprietary trading firm. What has this taught me? Let’s break it down:
1. Trading affects psychology as much as psychology affects trading – This was really the motivating factor behind my writing the new book. Many traders experience stress and frustration because they are trading poorly and lack a true edge in the marketplace. Working on your emotions will be of limited help if you are putting your money at risk and don’t truly have an edge.
2. Emotional disruption is present even among the most successful traders – A trading method that produces 60% winners will experience four consecutive losses 2-3% of the time and as much time in flat performance as in an uptrending P/L curve. Strings of events (including losers) occur more often by chance than traders are prepared for.
3. Winning disrupts the trader’s emotions as much as losing – We are disrupted when we experience events outside our expectation. The method that is 60% accurate will experience four consecutive winners about 13% of the time. Traders are just as susceptible to overconfidence during profitable runs as underconfidence during strings of losers.
4. Size kills – The surest path toward emotional damage is to trade size that is too large for one’s portfolio. We experience P/L in relation to our portfolio value. When we trade too large, we create exaggerated swings of winning and losing, which in turn create exaggerated emotional swings.
5. Training is the path to expertise – Think of every performance field out there—sports, music, chess, acting—and you will find that practice builds skills. Trading, in some ways, is harder than other performance fields because there are no college teams or minor leagues for development. From day one, we’re up against the pros. Without training and practice, we will lack the skills to survive such competition.
6. Successful traders possess rich mental maps - All successful trading boils down to pattern recognition and the development of mental maps that help us translate our perceptions of patterns into concrete trading behaviors. Without such mental maps, traders become lost in complexity.
7. Markets change – Patterns of volatility and trending are always shifting, and they change across multiple time frames. Because of this, no single trading method will be successful across the board for a given market. The successful trader not only masters markets, but masters the changes in those markets.
8. Even the best traders have periods of drawdown – As markets change, the best traders go through a process of relearning. The ones who succeed are the ones who save their money during the good times so that they can financially survive the lean periods.
9. The market you’re in counts as much toward performance as your trading method – Some markets are more volatile and trendy than others; some have more distinct patterns than others. Finding the right fit between trader, trading method, and market is key.
10. Execution and trade management count – A surprising degree of long-term trading success comes from getting good prices on entry and exit. The single best predictor of trading failure is when the average P/L of losing trades exceeds the average P/L of winners.
Well, I’ve already hit ten and I have at least ten more I could jot down. Number 11 would be that successful performance mentors have content expertise in their particular domain. What I mean by that is that teachers of concert musicians themselves have experience as musicians; basketball coaches invariably have played the sport themselves. You learn trading by seeing your mentor trade and by having your mentor observe your trading. The right mentorship goes a long way toward shortening learning curves.
Figure it out: what proportion of baseball players, golfers, actresses, chess players, singers, or bicyclists can make a consistent living from their performance activities? Is trading really so much easier than those activities? The stark reality is that expertise in any performance field is the exception, not the rule, requiring dedicated practice and training. If you are emotionally prepared for the learning curve—and excited by the challenge—you are well ahead of the game. Start with finding the Three M’s: right methods, markets, and mentors. Those are the foundation of success, upon which you build skills and experience. Enjoy the journey!
Bio:
Brett N. Steenbarger, Ph.D. is Associate Clinical Professor of Psychiatry and Behavioral Sciences at SUNY Upstate Medical University in Syracuse, NY and author of The Psychology of Trading (Wiley, 2003). As Director of Trader Development for Kingstree Trading, LLC in Chicago, he has mentored numerous professional traders and coordinated a training program for traders. An active trader of the stock indexes, Brett utilizes statistically-based pattern recognition for intraday trading. Brett does not offer commercial services to traders, but maintains an archive of articles and a trading blog at www.brettsteenbarger.com and a blog of market analytics at www.traderfeed.blogspot.com. His book, Enhancing Trader Development, is due for publication this fall (Wiley).
Thursday, March 15, 2007
Ten Lessons I Have Learned in Working With Traders
Asian Morning Update
Dollar mixed to lower overnight
German February Final CPI was confirmed to be as originally reported at +0.4% MoM and +1.6% YoY. Food, healthcare and communications eased lower while rent and clothing moved higher. While the headline rate is not excessive it will not please the ECB which wishes to see the rate decline from the higher 2.0% band to allow for further price risks from energy and wage inflation. Note that the German number accounts for 40% of the total EU number. Indeed, the Euro-zone Final CPI for February was released unchanged and recorded the sixth consecutive month below the ECB’s 2% ceiling. As per Trichet’s comments on Wednesday the focus is now on containing wage settlements.
Plenty of ECB speakers on the day when the Monthly Report was published with the same message that rates remain accommodative and liquidity is still high. There was little difference between the underlying comments but were sufficiently strong to suggest that a 4% cap is by no means certain. Probably the likelihood is for a further hike thereafter. The Monthly Report highlighted the two risks to inflation – oil prices and wage inflation.
Possibly Weber provided the most notable comment by saying the market is still complacent to risks, noting that corrections, such as the current one, are useful reminders of the risks that exist. Furthermore, the hunger for higher yields has caused an under pricing of risks and that a rebalancing of the global economy is a pressing issue. He noted that complacency raises the chance of a disorderly correction, something that warrants close monitoring by central banks.
The SNB delivered as promised with a 0.25% hike following its quarterly monetary policy assessment. The next meeting is on June 14th and whether there will be a further hike will depend on the economic performance against their forecasts of a GDP of 2.0% this year with inflation rising to 0.5% while next year they expect it higher still at 1.4%. From previous statements the SNB has made its proactive stance on inflation and while there is any significant upward pressure the chances of a further hike must be quite high.
The BOE’s Sentance commented today that if inflation is to decline towards the 2.0% target then consumer spending must moderate. He said, “It is likely that more subdued growth in consumer spending will be required to keep inflation in check, at least for a while.” The implication is with the general hawkishness of the MPC that further rate hikes are most likely if the current consumer & housing boom remain on such a strong upward trend.
U.S. PPI rose by +1.3% in February and significantly firmer than the forecasts of +0.4%. Core prices higher by +0.4% and the YoY rate up by 2.5%. Vehicle prices were lower with tobacco, food, and energy all posting gains. With slowing production numbers the upward pressure on prices will be a concern.
The two surveys published yesterday did not make good reading with the Empire Manufacturing Index dropping off the side of a cliff by a huge 22.5 points to just 1.85. New orders were down by 15.79 to 3.14 while the fall in the employment index was less dramatic by 1.33 to 11.37. The Philadelphia Fed Factory survey saw a drop of 0.4 to 0.2 when forecast had been looking for a more positive number around +3. The number continues the poor run of releases over the first three months of the year.
U.S. Initial Jobless Claims were released at 318K and lower than forecasts of 328K while continuing claims were up by 48K to 2.576mn against forecasts of 2.538mn. While the numbers were slightly better than expected the trend remains higher and there is little evidence of strength coming from other statistics right now. Certainly it is not enough to reverse the general bearish sentiment for the Dollar.
Just to rub salt into the wound ex-Fed chairman Greenspan commented that there was a risk that rising defaults in subprime mortgage markets could spill over into other economic sectors. However, he did concede that the evidence was hard to find but added, “You can't take 10% out of mortgage originations without some impact.”
Overall the Dollar had a mixed day but with a general soft underbelly which appears to be thoroughly tested this morning in Asia as the Dollar falls against the Euro to above the 1.3258 prior peak towards the 1.2102-08 lows against the Swissie. This is broadly in line with forecasts with 1.3300-20 Euro and 1.2090-10 Swissie likely to hold on this move.
There is definitely more to go in this round of Dollar weakness but on a medium term outlook we appear relatively close to targets around 1.3367-82 Euro and 1.2026 Swissie. We should see the Dollar fall back a bit against the Yen as well today with a move to below 117.00 before it tries to test the 117.80-00 target.
More later when the analysis is complete.
The Asian economic releases expected today are:
Japan - January
Tertiary Index (MoM) +1.2%
Coincident Index
Leading Economic Index
Stealth Forex Systems Heralds the Release of Version 9i of Its Highly Successful Currency Trading System
Currency trading system developers Stealth Forex Systems www.stealthforex.com have implemented the latest version changes to their much acclaimed forex trading system. Version 9i became available on all downloads from March 1, 2007.
(PRWeb) March 15, 2007 -- Currency trading system developers Stealth Forex Systems www.stealthforex.com have implemented the latest version changes to their much acclaimed forex trading system. Version 9i became available on all downloads from March 1, 2007.
 but in the fluid world of forex trading, one needs to maintain an edge. We have been working on version 9i for some months and are extremely pleased with the results  |
Previous versions required the user to have at least some basic PC skills. When using version 9i, the set-up instructions arelaid out in pictorial steps which are extremely easy to follow, making set-up for the user virtually foolproof.
"There are also a few enhancements to the forex trading systemitself" said Martin Bottomley, one of the system developers. "We did not want to make change just for change sake", he said "but in the fluid world of forex trading, one needs to maintain an edge. We have been working on version 9i for some months and are extremely pleased with the results".
Stealth Forex Systems is fast becoming a household name with retail forex investors (also known as private forex traders). The company attributes much of their success to a well thought out and developed trading plan, an honest and hype free approach to trading on the foreign exchange and above all, to a reliableand effective customer support service.
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Tuesday, March 13, 2007
Moving Average
Simple Moving Averages are one of the most popular and easy to use tools available to the technical analyst. They smooth a data series and make it easier to spot trends, something that is especially helpful in volatile markets.
Let’s discuss MA (50). ‘50’ means that the indicator uses 50 latest days to make its average. And I use 1H of time scale in implementing the indicator. The moving average represents the consensus of investor’s expectations over the indicated period of time. If the instrument price is above its moving average, it means that investor’s current expectations are higher than their average ones over the last 50 days, and that investors are becoming increasingly bullish on the instrument. Conversely, if today’s price is below its moving average, it shows that current expectations are below the average ones over the last 50 days.
The classic interpretation of a moving average is to use it in observing changes in prices. Investors typically buy when the price of an instrument rises above its moving average and sell when it falls below its moving average. That’s it!
Take a look at the picture above. When market price crosses MA(50), it tells you that the trend will change. But unfortunately all moving averages are lagging indicators and will always be "behind" the price.
But however, I use MA(50) to help me indicating long term bullish trend and bearish trend. But please be very careful when you see sideways market like picture above. This is the weakness of using MA indicator.
[written by richie]
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