A Trade A Day

Here is a story from Scientific American on trading success and testosterone.

According to the story, the traders in the study had a higher level of testosterone in their saliva on days when they beat their daily average.

The story goes on to state that the increase in testosterone led to more confidence which in turn led to more winning.

I found it amusing that the researchers warned that longer periods of testosterone make traders prone to excessive risk taking which exacerbates a bubble. You know what caused the last bubble? Highly compensated traders making huge bets with little downside risk to themselves. I mean, really, how many years of multi million dollar pay checks does it take before you’re set for life, but I digress.

Before you go to your neighborhood gym to stock up on Andros or raid granny’s medicine cabinet, let’s talk about building trading confidence legally:

The most effective step I took to build confidence in the system I wanted to trade was to get a mentor. Someone who had been there. Someone who knew the ins and outs of my chosen style of trading. I had confidence in my mentor(s) and they gave me confidence in my system. I was able to experience a variety of trading situations through their combined expertise. I was able to avoid certain pitfalls and navigate through ones into which I had fallen.

In other industries, having a mentor is standard practice. You seek them out. The relationship may only last through a certain project or be for a specific problem. So why is it not common practice in trading? Perhaps, at least for the retail trader, there’s the desire to be on your own. Another big reason is the financial one. Mentoring relationships for retail traders can cost $$$.

I think blogs can be helpful as a mentoring tool, as a mentor and protege. I love to coach people and I enjoy answering questions. It forces me to really know what I’m talking about.

Commenting on other blogs as also helped me personally. Trying to understand how others view the market, analyze setups, control their emotions.

I am skeptical by nature. So, being a protege was difficult at first. I have a hard time taking what a person says without asking questions. So, when you do get that mentor, listen to what he/she has to say, but test. Trust but verify.

Finally, maintain strict risk management discipline. I’m always saying trade small, and I know it probably gets annoying. However, it is a fundamental building block of my trading operation, and even coaches in professional leagues teach fundamentals, right?

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Jeff White from thestockbandit.net has an excellent video on trading those breakouts that seem to go nowhere fast.

I routinely visit Jeff’s blog. The concepts discussed are always on topic and useful. I’ve never been a paid member of Jeff’s service, but If you’re struggling or maybe just need a boost I would be willing to be he can help.

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I wanted to bring your attention to a concept that the wild1 wrote about at his blog. The article is entitled Shave the Losses and the key sentence that still is in my mind is “If you are holding on to an investment/stock and you aren’t making any money off it, then why are you still holding on?”

The Wild1 made some good points about not cutting loses and that it’s important to work with losses within the context of a plan. Not cutting losses is a common problem. We all want to be right. But here’s something just as insidious. Stocks that break out and go no where. My method has a lot to do with breakouts and momentum plays. So volume and price acceleration are all critical. If the stock isn’t moving I don’t make money. If our trading capital is inventory, we need to turn it over!

The solution is as simple as adding a rule to your plan that states that X stock must move X percent within X timeframe or you exit the position. The hard part is coming up with the X’s. Testing is required. You could arbitrarily throw some numbers out there and “see how it works”, but that would be gambling.

Another way to combat a lazy breakout is to implement a rule that you will sell if the stock price touches your breakout price. A more sophisticated and potentially more effective rule might be to allow the stock to drift back into your breakout price and then add to your position when the stock reverses and heads higher. Again testing is required to come up with the best rule for your system.

The wild1 has an excellent blog that deals with investing, personal finance, and he’s even doing videos!. Make sure you check it out.

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Trader Death, by my definition, is when a trader’s career is ended financially. This can happen many ways, but typically it’s a big blowout ala my first big blowup. Or the “death by a thousand paper cuts” mode which seems to have claimed another casualty in Trader Bubs. Whether voluntary or involuntary, trader death sucks.

If you have experienced trader death or are close to experiencing it, what can you do? Here are 3 steps you must do.

1. Stop Trading: What you are doing isn’t working. You need to stop the bleeding. For whatever reason, the system you have chosen is not working. It might not even be you. It could be the market you have decided to trade no longer “works” for your system. The problem could be psychological. We’re all vulnerable to cognitive biases that can wreak a perfectly good trading strategy. The point is to protect your capital and live to trade another day. But what if you’re already “dead”?

2. Get a job: Ugh, I know. No one wants to do the 9 to 5. Working in a cube would be ultimate failure. Firstly, if you treated trading like a 9 to 5 job, then that’s part of the problem. To be a successful trader, you must be the worst boss you ever had. Trading should have been a 14 or 16 hour job when you’re learning. I’ve been at it over a decade now, and I still spend ungodly hours in front of the screen. Researching, studying, analyzing my mistakes.

A job outside of trading doesn’t have to be seen as failure. There are many fulfilling opportunities out there. Besides, this job will help you fund your next attempt at trading which brings me to my next point.

3. Never give up: Have you ever heard the story of Thomas Edison? How he failed 9,000 times before he created the light bulb? The only thing that made him successful was tenacity. Think about this: How many opportunities do you allow a child to learn to walk? Do you let the kid try once then give up? “Nope, that’s it. Sorry kid. You tried it, you failed. I guess walking isn’t for you.” That would be ridiculous, wouldn’t it?

The point is that you should never give up. Each trade is an opportunity to learn and do better. Look over your trading journal or your blotter and do an analysis of your trading history. Where you went wrong and why.

So in conclusion:

Step 1. If you’re still trading and close to death, stop trading to preserve whatever capital you have. Or if you’ve already died then proceed to step 2.

Step 2. Get a job. It doesn’t even have to be in an office. Try something different. Go back to school. Instead of focusing on a job that pays well, how about a job that pays the bills and helps others?

Step 3. Never give up. Never, ever stop. Review your trading history and learn from your mistakes. That should give you some time to save some capital and get back in the game, at least in a small way.

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A CEO buddy of mine has an excellent saying. He’s always telling his employees “Hope is not a strategy”. I think he’s a pretty good CEO, but I guess I might wonder how well his company is doing if he’s constantly telling his employees to stop hoping.

In all seriousness, he’s got a point. How often do we go through life hoping something will happen. Hoping we find a wife/husband. Hoping we can pay our bills, hoping for a raise. You get the idea.

My life has no hope. At least as little as I will allow. My life is a project plan. I use goals and make plans. I’ve heard goals are good ideas with a timeframe. I can accept that, but I still focus on execution and use my goals to guide me.

My wife still has hope and I constantly try to get her to give it up. She’ll tell me…”I want to do X, or In 2 years I want to be here”. “Ok honey”, I say, “let’s sit down, map it out and detail the next 5 steps we need to do to make it happen and execute one of those steps right now!”

Usually, the conversation ends right there. I’m getting her to change her approach, but it’s slow going.

In the trading world, avoiding hope and fear have become cliche. The solution is the same. It all comes down to sticking to your method and execution. I’ve gotten more personal and career satisfaction from applying that same cliche to life.

Of course life likes to throw curveballs. It doesn’t always go as planned. It’s presumptious to assume that the secret to success is that easy, but you’ll get farther treating your life like a project with goals, timelines and todo lists than you will having hope.

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