What is the greatest risk you face in trading?

Is it loss of money?

Certainly, that's what most traders believe. I tend to disagree though. In my opinion we have something much greater at risk, that very few of us consider during the 'learning phase'.

The American political journalist and author, Norman Cousins, is quoted as saying, 'Death is not the greatest loss in life. The greatest loss is what dies inside us while we live.'

Along similar lines, I would argue that loss of capital is not the greatest loss in trading. The greatest loss is what we lose from within.

Loss of funds is recoverable. Losses of self-esteem, self-belief, or passion for the process of trading, are not so easy to recover.

So, think about that next time you feel tempted to widen your stop, or remove your stop. Think about it before you enter your next impulsive, emotion based trade. Think about it if you’re trading without a clearly defined trading plan.

If you suffer financial losses at these times, how will it affect your mindset? Will the losses that result from your amateur and undisciplined actions allow you to move forward to the next trade with greater confidence, or will they feed the forces of frustration, anger, depression and fear, further damaging your chances at consistent, confident and disciplined application of your trading plan.

Drawdown in your psychological capital is much harder to recover, than is drawdown in your equity balance.

So, manage your risk! Not so much to protect your finances, but in order to protect your much more valuable psychological capital.

Your whole trading future depends on it.

Lance Beggs
http://www.YourTradingCoach.com

3 losses in a row are tough. That’s about the most consecutive losses that novice traders are psychologically prepared to accept before they feel compelled to take action and ‘correct’ the situation.

If you’re anything but a total newbie, I’m sure you’ll recognize the symptoms:
Frustration – Why me? I’ve worked so hard. Everyone else in the forum appears to be getting good results with this strategy? Nothing ever works out for me.

Anger - That strategy developer is a liar and a crook. My broker is running my stops. Someone should be held accountable for this.
Doubt – What if the strategy doesn’t work? What if I can’t trade? How am I going to support my family?
Fear– I can’t lose more money, what will everyone say about me when they know I’m a loser? How can I tell my wife/husband that I’ve lost again?
And if that’s not enough, the novice trader will likely be afflicted with the crippling inability to pull the trigger on the next trade, in fear of hitting a fourth loss in a row.

Usually, there is one of two responses:
1) The strategy is tweaked to ensure that the modified version would not have triggered these losing trades, through:
a) Swapping one indicator for another,
b) Optimising indicator parameters, or
c) Adding an additional filter.
2) Totally abandoning the strategy, usually followed by returning to their favourite forum to find the next Holy Grail strategy that is designed to make their dreams come true.

Is this the right response though?
Typically, trading decisions which are influenced by emotions rarely result in the right action.

So, what should be done?
First, before we continue, you need to confirm that you do have a valid, proven trading strategy. Have you conducted appropriate testing to satisfy yourself that it provides a positive expectancy? If not, stop trading it right now and return to testing. I don’t care what reason you had for jumping straight into a live trading environment, but the fact is that it’s difficult to psychologically trade a strategy in a consistent and disciplined manner when you don’t have complete confidence in its rules. You need to conduct thorough testing.

But assuming you have a strategy that has proven itself through positive results either in a testing or live trading environment, simply refer to your testing results or past trading history, and you’ll confirm that three losses in a row is a quite normal occurrence. In fact, it’s quite normal to have a lot more than three in a row. And it does not mean that your strategy is flawed.
Let’s look at this from a purely statistical perspective.

The table above shows that given a trading strategy with a 50% win/loss ratio, the probability that you’ll get a string of three losses in a row somewhere within your next 50 trades is 99.8%.

Even if you’re achieving a win/loss ratio of 70%, you’ve still got a 73.1% chance of having a string of three losses somewhere within your next 50 trades.

It’s going to happen. It’s a normal occurrence. Accept it.
So, based on this, what’s a reasonable response from a trader following three losses in a row?

The first thing is to confirm all three trades were entered and managed in accordance with your plan. You should be doing this for every trade anyway, but if you’re a very short term trader then perhaps you don’t get an opportunity till after the session is over. If that’s the case, and you’ve get three consecutive losses which appear to be worrying you, pause to review them now. If they’re not valid trades, find out why you entered them, refocus on your plan and your goals and then continue trading. However, if they’re valid trades, you might want to consider the following action:

1) If you’re a mechanical trader, keep trading.
2) If you’re a discretionary trader, check to see if each entry is actually at the same setup area. If so, you’re possibly just not reading the market right at the moment. Consider halting your trading until the market action has changed and a new setup has developed.
3) If you still find yourself experiencing difficulty in pulling the trigger, get away from the markets for a while.
a) It’s time to take a break – relax, refresh and recharge yourself.
b) Review your trading plan and your historical results (either live or testing).
c) Carry out some visualisation and affirmation sessions, to prepare yourself for pulling that trigger once your break is over.
d) Return to the markets with the goal of correct application of your plan – don’t focus on the dollars won or lost, instead focus on the process of trading.
4) And if on returning you still find problems, well you’ve got some more serious issues that need to be worked through. I don’t mean that in a bad way, but you need to take a longer break to seriously review both your trading plan and yourself:
a) Are you taking too much risk per position? Reducing your position size can often make an incredible difference in your ability to trade in a relaxed and confident manner.
b) Do you really understand and accept the probabilistic nature of the markets? I’d suspect not. Read “Trading in the Zone” by Mark Douglas for a brilliant insight into these issues.
c) Are you consumed by fear of loss whenever it comes time to enter a trade? What is it you fear exactly? Maybe it’s time to delve into the world of trading psychology. “The Psychology of Trading” and “Enhancing Trader Performance” by Dr Brett Steenbarger would be my recommended starting point.

One final thing! If three losses in a row does not necessarily equate to a flawed strategy, then at what point should you stop trading and review your plan? Well, I don’t base this on a particular number of losses in a row, but rather on a level of drawdown. Only you can determine what should be considered a normal level of drawdown, based on your historical performance. But certainly, if you equal the historical maximum drawdown for your strategy (if not sooner) then you should be reviewing your strategy to confirm it’s based on sound fundamental principles that still apply to the current market environment. And at some stage of drawdown beyond this point, you need to have clearly defined STOP criteria. Don’t bleed your account to death. Stop, take a break if necessary, reassess the situation, conduct further testing and return stronger than ever before.

Happy trading,

Author:

Lance Beggs
www.yourtradingcoach.com

I get many emails from people frustrated with the challenges they face in learning to trade. Maybe you can relate to some of these problems:

“…I’ve done it again. Another loss held past where I should have exited, hoping for it to come back…”

“…It just seems too hard, juggling work, family and trading education. This things just not working for me.”

“I’m sure my broker is taking out my stops. This just happens too often to be a coincidence.”

“I make money one day. And then I give more back the next.”

Yeah, trading is hard! There’s no doubt about that. But let’s see if I can provide you with a different perspective from which to view these challenges.
What is causing you problems in your trading is part of the process of becoming a trader.

The problems you faced in the past, and overcame, were the part of the process that led you to where you are right now. The problems you face today – that you will overcome today or tomorrow – are the part of the process that leads to your trading future.

And that trading future, if forged through a process of self-improvement and overcoming trading challenges, can ultimately lead to only one possible outcome – trading success. The quicker you can identify the challenges and find the path to overcoming them, the quicker you will progress towards success. So embrace the challenges.

The only way you can ultimately fail is through failing to progress along the path to success, leading you to quit out of frustration. Failing to progress comes for most people through failing to accept the problems. Instead of identifying and facing the challenges, most people keep themselves busy surfing trader forums or testing indicator after indicator. Keeping busy creates the illusion of progress, when in fact the trader’s progress has stalled.

So, what can you do to continue to make progress on your trading journey?
Journal everything– trade statistics, reasons for entry and exit, notes on your personal performance with respect to the disciplined implementation of your plan and your trading psychology.

Review your journal regularly.
Find elements of your trading which are working well. Consider changes that could further enhance these parts of your plan, if any.
Find elements of your trading which appear to be causing problems, or producing less than ideal outcomes.
Seek a solution to these problems.
Implement the changes.
Test the changes, being sure to journal everything again.
Repeat.

The problems you face in trading are the process you must follow to reach success. The journal is the tool you will use to advance along this process. The recording and reviewing allows you to identify areas of weakness. Testing, along with further recording and reviewing, is used to confirm advancement along the path.

See your trading challenges in this way, and they’re no longer frustrating. Rather, trading challenges are a cause for celebration, because through recognizing them you’re now one step closer to your goals.

And finally, don’t forget this important point. While it’s great to hope that your current challenge is the last you’ll ever face, the fact is that this is a never-ending learning process. There are always more challenges ahead. So keep your chin up, and enjoy the challenges that trading provides.

Happy trading,

Lance Beggs
www.yourtradingcoach.com

I was driving in my car the other night with my twin daughters when the conversation somehow turned to what they wanted to do when they grow up.

Naturally, being only nine years old, they had many ideas. There were those that I was very happy with – an astronomer, a veterinarian, a professional soccer player, or a guitarist in a rock band. And there were some suggestions that I just didn’t like at all. Not that it’s my decision! I’ll naturally support them in whichever path they chose for their life, however let’s just say a nine year old should not know what a Forensic Scientist does.

I asked if either were interested in trading, to which Caitlin replied, “But isn’t trading just guessing?”

That was unexpected! I was a little taken aback and frankly quite annoyed that she thought that all I did was ‘guessing’. I replied by explaining that there was a lot more to trading than just guessing which way the market went. But the conversation quickly moved on to other areas, as appears normal when speaking with nine year olds.

That night I put a little more thought to our discussion, not so much out of concern about my daughter’s perception of my career, but rather my emotional reaction to her statement. Why should I allow myself to feel a little insulted by claims that all I do is ‘guess’ market direction?

What do I actually do in the markets?

I assume risk in the markets, with an expectation of profits. But surely it’s not just guessing, or gambling, or taking a punt. I take positions on my terms only. It’s a calculated business decision. Through skillful analysis of past and current price action and an assessment of likely future price action I am able to identify opportunities to profit from market trends. And I combine this with action designed to reduce or eliminate any risk while seeking to maximize that profit. This is no different to any other business.

I’ve been lucky enough to be involved in a number of other ‘cool’ careers, but nothing has satisfied that need within my soul for a meaningful existence like being a trader does.

And I certainly believe that the career of a trader does provide significant benefits for society (a subject for another future article perhaps).

But when you really get down to the nuts and bolts, is what I do any different from guessing?

The definition of guessing according to the American Heritage Dictionary is:

To predict (a result or an event) without sufficient information.
To assume, presume, or assert (a fact) without sufficient information.

The common point here is ‘without sufficient information’, a phrase which certainly applies to the world of market analysis.

A novice trader expects that certainty can be found through better analysis or better indicators or indicator parameters. And so they get stuck for several years on this search for the Holy Grail solution. It’s only when all attempts at this have failed and they’re willing to accept it as a misguided attempt to hide from their fear of uncertainty, and are willing to embrace that uncertainty, can they take the next step on the path towards professional trading.

The fact is that market analysis cannot predict the future. All future events cannot be known. And even if they could be known, then we still don’t know how these events will be perceived by the market participants and will therefore influence price.

A trader operates in an uncertain world. And all trading decisions are made without sufficient information, based on an assessment of the probabilities and a minimization of risk to protect your capital when you get it wrong.

Essentially, my daughter was correct – I ‘guess’ market direction.

The difference is that some traders guess market direction without any real plan or guidelines for formulating that decision, with an inadequate appreciation of both risk and opportunity and with an undisciplined, unprofessional and emotionally influenced execution of their trade. And their losses feed the account of those who guess market direction based on a documented, tested and proven plan which is designed to contain risk when they’re wrong and maximize opportunity when they’re right, combined with consistency in execution of their plan.

I guess market direction, but I do so within a framework provided by my business plan and an understanding of the probabilistic nature of the markets.

I had assumed I was at a stage where I was comfortable with who I was and what I did. It appears now that this assumption was false and I have more work to do on myself. It makes sense – personal growth shouldn’t be expected to ever end.

Why was my ego bruised at claims that I’m just a ‘guesser’? There are many possible reasons that I need to address in more detail:

At a deep level I really want my daughters to be proud of me. Perhaps for a moment I suspected they weren’t?
Maybe my own self-importance was inflating at too rapid a rate (finally reaching an overhead resistance for a great shorting opportunity)
Maybe at some level I still have concerns that being a trader is a Way of life that adds limited value to society?
Maybe I still have some doubts about my long-term survivability in this industry, and so feel that by ‘guessing’ I am gambling my family’s future?

Who knows? I’ve got more work to do in understanding this.

Your beliefs about what trading is and why you do it are fundamental to the success of your trading business. You cannot expect to operate in a consistently profitable manner if you have conflicting beliefs about the value of yourself, of your chosen career or of your ability to succeed at it.

So when your ego takes a little hit from someone’s comments about trading, take the time out to examine your own beliefs. It doesn’t matter what the comment is:

Suggestions that it's impossible to profit from the market.
Claims that you'll never be able to make it.
Cutting comments about how those losses could really have been better used elsewhere.

If it produces an emotional response in you, take some time out to ask why? What does your emotional response mean in terms of your beliefs about yourself and your chosen career as a trader?

That self-examination may reveal the breakthrough you were seeking, to take you to the next stage of your career or personal development.

Happy guessing,

Lance Beggs
‘Chief Guessing Officer’
www.YourTradingCoach.com

I once heard a statement by Rebecca Fine of www.scienceofgettingrich.net that says something along the lines of “If what you’re thinking about isn’t something that you want to have happen in the next three minutes… get rid of the thought and think something else.”

While that’s a great way to live your whole life, and I certainly try to do so, it equally applies to the process of trading, specifically ensuring that we maintain focus during the conduct of our analysis.

Maintaining focus can be difficult. Not only will you face distractions from external sources, such as the phone ringing right during a prime setup, or your partner asking for a lightbulb to be changed, or your children asking for help with their homework, but you also face internal distractions from your negative fear-based trading mindset. These internal distractions may be less obvious to the novice trader, but the results can be devastating for your profitability.

If you have not yet mastered your negative fear-based trading psychology, then you are going to face never ending distractions that divert your focus from the job at hand – consistent implementation of your trading plan.
Regardless of how these fears manifest within your trading – complacency, boredom, doubt, procrastination, denial – they will lead only to inconsistent and unprofessional application of your trading plan. And that cannot lead to long term consistent profits.

How do we deal with this negative fear-based trading psychology? Well, that subject cannot be addressed in one article. I’m currently working on a complete home-study program on the mastery of trading psychology, which will provide you with the tools, strategies and techniques for overcoming these issues.

However in the meantime this statement from Ms Fine provides you with a really simple tool to add to your trading toolkit, to ensure you maintain focus during your analysis despite any internal or external distractions.
The process is similar for both long term traders and short term traders. But let’s talk short term first, because that’s primarily what I do.

As a day trader, your success comes from consistent application of your trading plan. Success comes from conducting analysis on a regular basis throughout the trading session, either on the close of each candle or on a price-alert as price reaches a certain preset level, and then acting appropriately to enter, manage or exit your trades.
What do you need to do to ensure that your focus remains on the process of trading?

Here’s what I do:
1. Document the analysis and decision making process. Have clearly defined actionable steps that you need to carry out every candle to reach your decision to hold, enter, exit, or adjust your stop loss or profit targets.
2. Set an alarm to go off prior to every candle. If I trade off 5 minute charts, I have an alarm go off 30 seconds before the close of each candle to allow me to pause and check my thoughts. If my thoughts are not related to the objective analysis of the market and the correct implementation of my plan, then they’re discarded. My focus is then returned to the documented trading process.

This works regardless of timeframe. If I was trading off one hour charts, I’d set an alarm to activate just prior to the close of each one hour candle. If I was trading off one minute charts, I’d still set an alarm to go off just before the close of each one minute candle. If I was just waiting for a price setup at a particular price level, and had no intentions of trading until price hit that level, then I’d just set an alarm for price hitting that target.

Setting an alarm for timeframes of 15 minutes upwards is certainly a great idea, as you won’t necessarily be sitting watching the screen the whole time in-between candles. However, you might ask whether it’s really necessary for very short timeframes, such as one minute charts. The fact is though, that it is necessary, and it does work. It is amazing how often I find my mind wandering elsewhere. More often than not, it’s thinking about something unrelated to my trading plan. The alarm interrupts this thought pattern, and allows a return of thought and focus to what’s important.

Try it, and if you find yourself suddenly wondering what the MACD shows, and it’s not part of your plan, discard that thought – it’s irrelevant to this trade. If you find yourself suddenly thinking that you need to win this next trade to get back to breakeven, discard that thought – it’s irrelevant to this trade. If you find yourself wondering where you should go next holidays, discard the thought. Once again, it’s irrelevant. Interrupt any unwanted thoughts, and think something else that will help you trade your plan in a consistent manner.
Oh, and so that you don’t burn out through having an alarm go off every minute for an eight hour trading session, let’s add a step 3:

3. If you are trading a very short timeframe, program breaks into your session, to get away from the markets. Relax, recharge and refresh yourself, so that you can keep up this pace.

For longer term traders, let’s say someone trading off daily charts, the problems are the same. In your case, you have a process that needs to be followed to come up with your decisions to enter a trade, exit a trade, or modify target or stop levels.

In this case, you still need to implement step one, documented actionable steps that allow for consistent application of your plan. Consider something like a checklist, or flowchart.

You can probably dispense with the alarms, as you only need to complete the process once. However for longer term traders, I’d recommend including statements within your documented process to remind you to check your thoughts, and return them to the process of trading.

Perhaps prefix every step with a documented reminder such as, “I am a professional trader, and a professional trader trades their plan in a consistent manner”. Then, the act of commencing each step of your nightly analysis, will serve as a regular interrupt to unwanted thoughts, and a return of your focus to the job at hand.

This way, there’s no need to be going and checking other indicators for further confirmation, when it’s not part of your plan. There’s no need to be checking other news sources for further justification of your decisions, when it’s not part of your plan. There’s no need to be emailing or phoning your friends to seek their thoughts on a particular stock or chart, when it’s not part of your documented process. These are actions of people who have lost focus, and whose trading destiny is being led by their fear and greed.

As a professional trader, you simply follow your steps. And use your alarms, or documented checklist steps, to interrupt any unwanted thoughts, and return your focus to the business of trading.

So, if you don’t already have a checklist or flowchart set up for all actions that must be carried out during your analysis, then create one. And place in it reminders to monitor your thoughts, and reject anything that is unrelated to the current task at hand.

And if you day trade, set up an alarm, either price based if you simply wait for price to hit certain levels before making trading decisions, or a countdown timer if your decisions are time-based. Then reject any thoughts that are unrelated to the process of trading. And follow your plan with consistency.

Wishing you happy, and focused, trading,

Author:

Lance Beggs.
www.yourtradingcoach.com