All Entries Tagged With: "Risk"
Are You Willing to Lose, Part 2
June 2, 2011 at 10:27 am
Yesterday in Part 1, we discussed the idea that while losing is a part of trading, it still must be done the right way. We also talked about how a fear of losing can characterize our trading if we allow it, much to our detriment if left unchecked. However, as Mark Ritchie’s comment emphasized, a willingness to lose is fundamental to turning a profit.
I'm not a cat fan, but this one has guts!
The ‘food for thought’ question I left you with was along the lines of “what characterizes your trading approach: fear or confidence?“ Hopefully that’s a question you’re willing to honestly answer, so let’s move forward.
The best traders don’t allow their fear to dictate their success. Yes, they walk the line well. They respect the market and they keep risk in consideration, but they’re confident enough to act when their signal comes along and they move with conviction. They put in the work, identify their plays, and stick to those which are suitable for them. They know what they can lose, and then they go for it.
So, how do you get to that level?
Take Good Trades
Simple enough, right? But I should explain…
To take good trades doesn’t mean take ‘winning’ trades, because of course you can’t know (unfortunately) how they’ll turn out ahead of time. A crystal ball isn’t needed. What it means is take the trades which suit you, which are within the confines of your trading plan. If you don’t have a plan, stop reading this and go make one (anything is better than nothing). You can’t throw caution to the wind or lower your standards, but if all else is in line, then hit the good trades without hesitation over losses. If you’ve defined your risk and have a safety net in place, then be willing to deploy that capital.
Change With Care
Periodically, we all desire some sort of change. Out of impatience, we too often approach those situations the wrong way, and we should be careful.
For example, the trader who casts his fear aside and is willing to lose must still approach his trading the right way. For those aiming higher, a desire to make more needs to outweigh a worry of losing more, yes, but too many approach this adjustment from the wrong standpoint.
In his book, One Good Trade, Mike Bellafiore discusses the trader who wants to learn to make $5k by first losing $5k. Going out and losing $5k doesn’t mean you’re now prepared to make $5k, so don’t prove your willingness to lose by rushing out and widening your max loss – that’s not a solution to anything but taking bigger rips to your account.
Being willing to lose is about showing up prepared to trade confidently and responsibly, not recklessly.
Watch the Right Numbers
Trading is about two sets of numbers: the prices on your screens, and your P&L. Too many traders place their primary focus on the wrong numbers (P&L), and give their leftover, secondary attention to prices.
And they pay for it, too.
Some simply hide their P&L numbers, either for their account or for open positions in order to prevent giving their attention to the wrong numbers. Your job is to stay focused on the game, not the scoreboard!
The condition of your P&L will have some influence, yes, but make sure you’re not trading solely in response to it. Doing so will lead to costly mistakes, such as trying to go bigger when you’re struggling in an attempt to make it back. Instead, focus on the price action for clues – it will tell you what you most need to know.
Here’s the bottom line:
We all know we must accept risk in the markets in order to play and profit, but how willing are you to lose? It’s a question only you can answer, and for too many, their unwillingness to lose will ironically leave them either sidelined in fear, or fully-involved as a stuck holder in a position they should have long since closed. If you’re going to play this game, get your head right and show up ready to play – win or lose.
Trade Like a Bandit!
Jeff White
Producer of The Bandit Broadcast
Are You Willing to Lose, Part 1
June 1, 2011 at 11:26 am
In Jack Schwager’s classic The New Market Wizards, Mark Ritchie delivers a very simple but profound statement on the subject of losing:
“…I don’t think you can make money unless you’re willing to lose it…my willingness to lose is fundamental to my ability to make money in the markets.”
Losing is a part of trading, there’s no getting around it and everyone does it…but not the same way. The best traders lose like a winner.
Too many traders fear losing, and to be honest I’m often guilty of it too. Sometimes it’s a healthy fear and at other times a limiting fear, so it’s an ongoing issue each of us face.
The wrong kind of fear keeps us on our heels. It might cause us to dart out of good trades too quickly, cutting the legs off our winning trades (get it, so they can’t run?). Or it may leave us sidelined, unwilling to participate even when we sense the presence of opportunity. Sometimes we respond to our fear by trading too small, or simply by becoming far too stressed over trades which are small enough to be insignificant.
For example, you know that when you’re trading small enough that a trade’s outcome (win or lose) will result in virtually no change in your account value, and yet you’re fretting over it, it’s a clear signal that your fear is too great and you’re in no shape to be trading until you get a handle on it. I can say that because I’m familiar with the feeling!
Your Trading, Defined
The title of this post isn’t “Do You Want to Lose?“ It’s “Are You Willing to Lose?“ There’s a big difference, so let me be clear. This isn’t an approach where we face the markets each day hoping to shrink our account. Rather, it’s a mindset whereby we play only with that which we’re able to lose, and nothing more. It’s a mentality where we trade in such a way that we evaluate our risk, do our best to contain it, and then move forward boldly. We aren’t held back by worry over what might happen.
Tomorrow we’ll wrap this up with Part 2, but until then, let me give you a question to consider:
How would you characterize your own approach…are you defined more by your confidence or by your anxiety?
Trade Like a Bandit!
Jeff White
Producer of The Bandit Broadcast
Practice Winning
May 31, 2011 at 9:57 am
In my office hanging on the wall, I have a whiteboard, a plasma TV, some handwritten wisdom my grandfather penned in 1973, artwork from my 3-year old, and a Kenny Rogers poster. A bit random, yes.
Right alongside those things, however, is a large photo of Ben Hogan’s 1-iron approach to the 18th green in the final round of the 1950 U.S. Open at Merion. It set up a 2-putt par to put Hogan in a playoff the following day, which he won for his fourth major title. It’s black and white – which is classic – just like the moment it captures.
Preparation + Confidence = Performance
When I stare at the photo, I’m most impressed by Hogan’s focus. Perhaps the first thing you notice about this famous picture is the gallery lining the entire scene. Thousands had spent their day following him, and with the finish imminent, they stood silent, awaiting the outcome. And with history on the line, Hogan hit a masterful shot – just as he had practiced countless times – as if he weren’t nervous.
But he was human – and nervous indeed. He knew what was on the line. His confidence and preparation simply suppressed the effects of his nerves, so that he could perform his craft and execute with precision the same shot he’d hit many times in solitude.
It didn’t matter that he had to make par. It didn’t matter that he had to hit arguably the hardest shot in golf – fading a 1-iron against a right-to-left wind so the ball would land softer on crusty U.S. Open greens. And it didn’t matter that he was likely exhausted from walking 72 holes on legs which had been battered so badly in a near-fatal car accident just a year prior.
What mattered to Hogan was wrapping himself up in the process, ignoring the buzz around him, forgetting (if not thriving on) the pressure he faced, and relying on his preparation – both physical and mental – in order to produce a great result with controlled emotion.
Repetition is the Mother of Skill
Whether it’s sports or music or any other craft – including trading – there’s no substitute for preparation and practice. Hitting golf balls on the driving range can produce the “muscle memory” needed to groove a golf swing. Standing in the gym and shooting free throws every day will make you better. Watching the order flow, working the charts, and making trades on a regular basis will both train your eye and develop the gut feel you need as a trader. And such things must be done by those who want to get good.
But for those who want to be great, that’s not where it stops.
Both your skills and your mental game must be improved.
When it comes to skills, you have to hone your existing skills and tighten up any loose ends. Tighten your routine, and increase your discipline with what you know. But you must also build your cache of talents. Learn to operate on other timeframes. Get better at evaluating risk, managing money, and overcoming biases. Become more efficient by learning when to add to winning trades, hop on board existing trends, identify reversals, trade news, and execute with precision. Not surprisingly, these are the same skills which are taught in the Advanced Trading Course.
Beyond those things, your mental game cannot be ignored. Visualizing literally everything and mentally rehearsing situations and emotions is another key component. Hogan practiced for repetition, but he also practiced with purpose, picturing situations where he’d need to pull off a shot under pressure or with potential distractions.
You must do the same. Make the time every day to take a break and shut everything down around you. Make a list for yourself of situations you might face in your trading, whether a string of losses or wins, or monitoring multiple positions, or the urge to trade when nothing is setting up, or feeling left behind in a market move. Take them one at a time, and imagine what you will do and how you’ll respond.
Picture yourself in control, not in a way that everything does what you want, but in such a way that you’re not feeling panic or fear or distraction from your trading process. Imagine the intensity of each situation having the opposite effect by actually increasing your focus. Starting off, it may just be a couple of minutes, but as you practice and become more skilled at visualizing, you will add more time. And you’ll be amazed what follows.
As you think about your trading, are you able to approach big situations with supreme confidence? Do you need to know more or improve your techniques or get better equipment or become mentally tougher? Then what are you waiting for?
Trade Like a Bandit!
Jeff White
Producer of The Bandit Broadcast
Premature Evacuation from Trades
May 23, 2011 at 10:10 am
All of us have the occasional urge to jump ship early from a trade, but when is it the right time and how should that be done?
Let’s take a look at a conversation I recently had with a trader I was helping…
Hey Jeff,
I’m long ***, as it just looked like a nice setup. I went long 4 days ago, but it is behaving horribly. Currently I don’t see any pattern and would not make this trade now, but it is only halfway to my stop loss. I am unsure what to do. How do you approach trades you aren’t convinced of anymore, but have not been stopped out of?
Also, one of the mantras I read often is “cut losses short, let winners ride.” I am wondering how to interpret this “cut losses?” I find myself thinking, “I am not convinced in this trade anymore, but maybe it will turn around, it’s just half a position left to lose.” When my analysis of the situation shifts, and I wouldn’t take this trade anymore as of today, do I abandon my original plan and exit immediately or should I stay with the trade?
C.
==
Here’s what I told him…
C,
Let me start off by addressing the “cut losses short” question. I don’t have all the answers, but I can tell you that for me, cutting losses means having an exit plan on the downside with defined risks. We will all be wrong at times, but staying wrong is different – don’t stay wrong! Limit your losses so that they can be overcome with reasonable winning trades. Don’t dig a hole so deep you need a miracle to get out – that’s cutting your losses short.
Now let’s discuss early exits on trades like this where your conviction level has changed…
Occasionally you’ll find trades like this which don’t completely fail (stop you out), yet don’t work either (move to your targets). Instead, they just begin to stagnate and enter into a trading range where your funds are tied up. It can be a bit frustrating, simply because you’re left in limbo, wondering if the trade is in the process of failing or working. Each new red or green bar feels like the start of something meaningful, but they’re followed by the opposing color and you soon realize that price is simply showing indecision.
A key consideration to make when this happens is whether the character of the stock has changed. Stated otherwise, do you have a good reason to now lack conviction, or is it merely a mood shift for you?
A slow-moving trade is far different than one which may have just experienced an important technical event…
- Just because a trade isn’t developing quite as quickly as you would have wanted doesn’t mean it’s destined for failure.
- The stock may be building a new pattern which you simply haven’t identified yet.
- When I find myself in a trade which is starting to bore me, I know I’m overanalyzing when I start looking for signals which aren’t there.
- If I’m positioned in accordance with the overall market (ie: long in a market uptrend), and if my trading capacity isn’t restricted because of this position (I don’t need to free up capital), then what I need to do is stay with the trade until a technical reason prompts an exit. I likely need to stay patient, as this is still a trade which can pay me.
On the other hand, there are times when a premature exit may be warranted…
- When the stock has just seen a change in character as measured by a technical event (high-volume reversal, for example), an adjustment may be called for.
- If your trading funds are limited and you’d rather shift into a better idea, then you might consider closing out the trade in favor of another with more promise.
- When you find yourself positioned in opposition to the prevailing market trend (ie: long in a market downtrend), then you have grounds to at least lighten up. That can be done either by reducing your position while maintaining your original stop & target parameters for the trade, or by tightening both your risk and objective.
What else could help C. in this situation?
Trade Like a Bandit!
Jeff White
Producer of The Bandit Broadcast
Are you following me on Twitter yet?
Choose Your Discomfort
May 19, 2011 at 9:52 am
Trading is not easy.
There…I said it. As if you didn’t already know.
It can be simple, but that’s different. When you’re trading well, it might feel easy, but when the tough stretches arrive again (and they will), you’ll be reminded that it’s hard. As they say, “if it were easy…”
Contrary to what most traders think, the hard part of trading isn’t being right or wrong. Each of us will find ourselves in winning trades and losing trades at times – even random entries can produce (at least temporary) profits. Discomfort is the hard part.
Discomfort in trading can be tied to either profits or losses.
For example…
Our minds seem hardwired to shun (perceived) failure, so some traders struggle in a big way to close out a losing position and instead spend waste time hoping for a turnaround which may or may not ever happen. It’s uncomfortable for them to admit defeat and accept a small loss, so they usually pay big to try and avoid that.
Our minds can also have recency bias, so after a string of losses, it’s tempting to book a winner – no matter how small – just to stop the bleeding and have a taste of success again. It can be uncomfortable to let open profits ride when you’re clearly on the correct side of a trade – what if you give them back?! You need this winner, right? That often leads to booking smaller gains as compared to what you were on track to get paid, and that adds up big over the course of your month, or your year, or your career.
Discomfort can also be tied to our preferred trading timeframe.
Some can’t stand the erratic price action found on the intraday charts, and they tend to respond with late or forced entries when day trading. They get spooked out of good trades, opting instead to focus on the most recent 5-minute bar rather than the overall direction that’s taking place.
Others can’t stand to give a stock an appropriate amount of wiggle room when swing trading, so they choke off what would be a good trade in favor of a stop that’s too tight. Instead of positioning themselves smaller in order to weather the short-term shake-outs, they essentially overtrade by reacting to insignificant moves within the context of a bigger trend. Profits aren’t allowed to pile up, and their skittish approach keeps them frustrated by the big moves they were once a part of but missed out on.
Here’s my point:
Risk involves discomfort, so if you’re constantly avoiding discomfort, you’re avoiding risk – and by definition, risk must be taken in order to profit in the markets. The key is to manage that risk appropriately, which also means managing your discomfort appropriately.
There’s no getting around discomfort in trading. Everyone has it, regardless of directional bias or timeframe preference or the market being traded.
Either you’re uncomfortable with the results you’re getting (e.g. overtrading, not sticking with good trades, staying too long in poor trades), or you’re going to face some discomfort while denying yourself as you stay with a good position. That’s going to include enduring pullbacks, watching some profits evaporate, and being patient while waiting for an acceleration move to occur.
In an instant-gratification society like ours, it’s no wonder most traders fail. Have the courage to choose your discomfort ahead of time, so that by expecting it and mentally rehearsing what you’ll likely face, you’ll in turn be able to respond with good decisions.
Trade Like a Bandit!
Jeff White
Producer of The Bandit Broadcast
Are you following me on Twitter yet?
Walking Away
March 3, 2011 at 3:31 pm
I caught Joey Fundora’s post today called It’s Okay to Take a Break From Trading. He brings forth some excellent points, so go check it out. And while Joey primarily addresses backing away when you feel you lack an edge (rightfully so) or when going on vacation, it got me thinking about the times when trading just becomes a little too important, and perhaps even a self-imposed staycation might be warranted.
When the Scales Are Tipping…
Trading is one of those activities that can put you on top of the world, or completely bury you – if you allow it. And by “if you allow it,” I’m not referring to making or losing money. After all, every one of us will have some good trades and some bad trades – that’s not what I’m talking about. I’m talking about allowing trading to be the all-important activity in your life. If it’s sitting on that throne for you, then unfortunately, your daily satisfaction will hinge upon the color of your P&L.
That’s a really tough spot to be in. It magnifies your mood swings from day to day, and honestly, it’s not healthy. It’s no fun either. If you’re driven (as I am), the up day’s don’t carry near the weight in satisfaction as the down days tend to carry in dissatisfaction – regardless of if you’re making more than you’re losing. (Go back and re-read that sentence, because it’s a little confusing if you breeze through, but it’s of utmost importance.)
Stated otherwise, if I’m making good money on my up days and giving back only a portion of it on my down days, I’m net positive. But if I’m allowing my personal happiness to be based upon my performance today (or yesterday or tomorrow), I’m in for a world of hurt. I’m experienced, and I’ve been at this since the 90′s, so I have high expectations. Taking the aforementioned personal-satisfaction-based-upon-P&L approach, when I make money, I’m pleased but I expect to. When I lose money, I’m upset and the mood pendulum swings too far in a detrimental direction.
That’s a mistake which every one of us will at times make – but do not let it become a habit.
Work Hard & Let Go
Trading is hard. Really, truly difficult. Getting paid from your positioning takes real skill and experience, and that means you have to apply yourself to acquire those things. You don’t acquire them without true desire and hard work, which means you’re invested…with your time, your money, and often times your esteem on the line.
Just this week I had a day where I hit my peak of frustration. I didn’t smash any keyboards or scream at my computer or kick the dog, but I was running hot – and I hated it. I carried it with me, and later realized I’m giving trading too much weight. Yes, trading is what I do, and yes I have as strong of a desire to be successful at it as anyone else, but when I let a bad day bring me down the way I did, I’m giving it too much weight. Trading’s an activity, it’s not who I am. I have far too many other blessings in my life to place trading above them, but sometimes I need a reminder.
Maybe you need that reminder today as well – and here you go! Work hard with your trading, aim high, but keep it in its rightful place. As my buddy Bella says, Move On After a Trading Session. If you’re struggling to do that regularly, just walk away until you’re ready to return with a clear head and the proper perspective.
Trade Like a Bandit!
Jeff White
Producer of The Bandit Broadcast
Are you following me on Twitter yet?
Lessons From a Life-Long Speculator
January 26, 2011 at 11:43 am
I caught a clip from a recent 60 Minutes interview in which a Las Vegas gambler named Billy Walters was profiled. This is a man who, at 64 years old, understands risk and edge as well as anyone. As a result, he’s been dubbed “the most dangerous man” by Vegas sports books.
Walters has been a life-long speculator, betting on golf courses and in pool halls, and of course he wagers regularly on football and basketball games. He’s no stranger to streaks, having mentioned he’s been broke more times than he can recall, and yet the show stated he’s currently worth “hundreds of millions.”
The interview is embedded below, and you’ve got to see it, but before we get there I just want to point out a few things Walters clearly does exceptionally well. As traders, and therefore speculators in a different realm, we can all learn from him.
Success isn’t about making one big bet. Note in the clip below how Walters never lets it all ride on one game, instead he spreads out his capital across multiple opportunities. He’s confident in the outcomes, but by operating in different games and even different sports, he also helps to protect his outlay from unforeseen events. For the trader: don’t put your entire account into one idea.
Success goes hand in hand with passion. Walters’ net worth is said to be in the hundreds of millions, so why does the show depict him placing more bets of a few hundred thousand or mention he’s up $1M that week on his games? Because he’s passionate about it, he loves it. For the trader: if you don’t love the game, it’s going to be hard to get through the tough times and persist.
Get bigger when you have an edge. Over the years, Walters has increased his bets along with the expansion of his bankroll. But beyond that, when Walters sees a line that’s vastly different from his own, he bets very aggressively. He trusts his edge, and looks to exploit it most when that edge is biggest. For the trader: when your home-run setups come along with defined risk, size up.
Be creative. Walters used to be small enough he didn’t move the lines in the sports book when he placed his bets, but over time, he’s become a major player. That’s required him to adjust his system along the way, utilizing his team of associates to place bets for him. He also may push a line one way, then bet big on the other side. For the trader: don’t get stuck trading only one way, keep looking for a better approach.
Be persistent. A guy who claims he’s been broke many times clearly exemplifies persistence to not only still be in the game, but to be such a huge success. When the proverbial (or literal, in his case) chips were down, Billy Walters hung in there and kept fighting. He expected success, and he kept working until he got it. For the trader: stay in the game and don’t give up.
Surround yourself with sharper minds. Walters admits his team is made up of people who are all smarter than he is. That doesn’t mean he isn’t confident, but rather that he relies on others to provide assistance where he feels his skills are lacking. He’s no doubt the biggest success among them, but he attributes that to the bright people on his team. For the trader: if you’re not getting where you want to be on your own, get some help.
Play for meaningful stakes. One doesn’t amass a fortune by accident, and Walters hasn’t gotten rich by nickel-and-diming it along the way. He recognizes an opportunity, gauges the size of his edge, and then puts his capital at risk in expectation of a sizeable payout. For the trader: once you understand how to trade, allocate capital in such a way that you stand to make a fair amount when you’re correct – and never overtrade.
Here’s the clip:
Trade Like a Bandit!
Jeff White
Producer of The Bandit Broadcast
Are you following me on Twitter yet?
