Trader Mindset

Price targets cut your profits. Let the market tell you when the move if over. 

Price targets are about predicting the future and human beings are horrible at that at best.

Read Expert Political Judgment by Phil Tetlock to get an idea of what I'm speaking about.

Intraday data is not statistically significant, so uptime your charts and begin to focus on daily, weekly, and monthly time series. Longer time frames remove the randomness of price.

Don't trail structure when you put on the trade. Focus on percentages - that's what professionals do. Once the trade is working in your favor, then you can trail structure if you want. But make sure you're looking at weekly or monthly support, not cloud-like chart patterns that change when you breathe on them. 

When you let go of price targets, you'll focus on "best practices" and that means financially letting your winners run, emotionally letting go of control (you don't have any in the first place), and spiritually living a life that's worth living. 

Look at your equity curve like a price chart. You want the slope to be positive and upward. What the trajectory? Your equity curve can help you target your goals.

Start by putting all your trades and the costs into a spreadsheet:

Column A is today's Date

Column B - Entry

Column C - Exit

Column D - Commissions

Column E - Fees

Column F - Final Balance

Then you can chart the last column against the Date - Columns A and F. Do that every day and update the chart. You can study the results at the end of the month.

Your Equity Curve shows you the efficacy of your process and trading rules. What does it tell you if you are afraid to create one? Not worth your time? My guess is that the truth might be hard to acknowledge and we can bullshit ourselves to eternity.

The first step in getting healthy and making better trading decisions is to discover your truth. Nothing illustrates a failed or successful attempt at trading better than an equity curve.

Drawdowns are not failure - they just delineate those times when your system was out of sync with the market. This will happen frequently, but if you've backtested your rules, stick with them as you'll trade yourself back to new highs by sticking to your rules.

I find that day traders are fearful of this process. Position traders will find that their equity curves make the biggest jumps. Let the market and leverage work for you and you'll see those efforts and results on your equity curve.

Look at your equity curve like a price chart. You want the slope to be positive and upward. What the trajectory? Your equity curve can help you target your goals. 

Start by putting all your trades and the costs into a spreadsheet:

Column A is today's Date

Column B - Entry

Column C - Exit

Column D - Commissions

Column E - Fees

Column F - Final Balance

Then you can chart the last column against the Date - Columns A and F. Do that every day and update the chart. You can study the results at the end of the month. 

Your Equity Curve shows you the efficacy of your process and trading rules. What does it tell you if you are afraid to create one? Not worth your time? My guess is that the truth might be hard to acknowledge and we can bullshit ourselves to eternity. 

The first step in getting healthy and making better trading decisions is to discover your truth. Nothing illustrates a failed or successful attempt at trading better than an equity curve. 

Drawdowns are not failure - they just delineate those times when your system was out of sync with the market. This will happen frequently, but if you've backtested your rules, stick with them as you'll trade yourself back to new highs by sticking to your rules. 

I find that day traders are fearful of this process. Position traders will find that their equity curves make the biggest jumps. Let the market and leverage work for you and you'll see those efforts and results on your equity curve. 

Use your breath to control your breathing. In the process, you will quiet your mind over time and not need to fill your day with kinetic energy.

For me, that includes making too frequent transactions. If you're in good trades, keep them, take them home with you overnight and over the weekend.

First Technique:

Inhale on a 4-count and exhale on a 4-count. You can increase your breath to a 6 or 7-count if you can slow things down enough.

A variation of this is inhale on a 4-count and exhale on a 6-count. Yogis and buddhists find that if you can slow your breath down, you quiet your mind in the process.

Second Technique:

Inhale on a 7-count, hold your breath for a 7-count, and exhale for a 7-count. It might take you a few times to "catch your breath" so to speak.

Try this for 2-3 minutes if you can and do this 3 times per day. You might try this for 2 weeks before you feel anything material - it's different for everyone - but you should feel more relaxed, calm, and more energized.

Smartphone Meditation Apps

1. Insight Timer

2. Aura

3. Omvana

4. Stop, Breathe, Think

5. Calm

Use your breath to control your breathing. In the process, you will quiet your mind over time and not need to fill your day with kinetic energy. 

For me, that includes making too frequent transactions. If you're in good trades, keep them, take them home with you overnight and over the weekend. 

First Technique:

Inhale on a 4-count and exhale on a 4-count. You can increase your breath to a 6 or 7-count if you can slow things down enough.

A variation of this is inhale on a 4-count and exhale on a 6-count. Yogis and buddhists find that if you can slow your breath down, you quiet your mind in the process. 

Second Technique:

Inhale on a 7-count, hold your breath for a 7-count, and exhale for a 7-count. It might take you a few times to "catch your breath" so to speak.

Try this for 2-3 minutes if you can and do this 3 times per day. You might try this for 2 weeks before you feel anything material - it's different for everyone - but you should feel more relaxed, calm, and more energized. 

Smartphone Meditation Apps

1. Insight Timer

2. Aura

3. Omvana

4. Stop, Breathe, Think

5. Calm

Enter Buy Stops above the market and let the market come to you.

Do this for every trade you have and then sit back. The good news is that you don't have to look at the chart once you're Buy Stop is entered. This is huge in that it frees up your time and energy.

You'll get an alert once the order is filled. Then place your protective Sell Stop at your predetermined price level.

Don't use price targets either. Once the underlying is up 2 ATR, move your protective Sell Stop to breakeven and let it ride. Make sure that you are not looking at intraday data either.

The key to all of this is to take yourself out of the equation. The more you are hyper-vigilant the less you're going to make on the trade. The more you watch the chart, the more you're likely to impose your will into the trade and cut yourself at the knees.

The overall markets are in strong uptrends, so let your trades run in this type of environment. Let go of trying to guess where the move is over - the market is much smarter than all of us and humans are horrible at best at prediction.

Having your Buy Stop orders entered will always have you in the right place at the right time. Why? Your orders are already in when the market moves and momentum hit and you can't possibly enter that many orders by hand in the heat of the moment.

You're already positioned. If the moves don't rise to your Stop levels, you won't get filled - and that's a good thing. At the end of the day, the orders will cancel because they are only good for the day.

Enter Buy Stops above the market and let the market come to you. 

Do this for every trade you have and then sit back. The good news is that you don't have to look at the chart once you're Buy Stop is entered. This is huge in that it frees up your time and energy. 

You'll get an alert once the order is filled. Then place your protective Sell Stop at your predetermined price level. 

Don't use price targets either. Once the underlying is up 2 ATR, move your protective Sell Stop to breakeven and let it ride. Make sure that you are not looking at intraday data either.

The key to all of this is to take yourself out of the equation. The more you are hyper-vigilant the less you're going to make on the trade. The more you watch the chart, the more you're likely to impose your will into the trade and cut yourself at the knees. 

The overall markets are in strong uptrends, so let your trades run in this type of environment. Let go of trying to guess where the move is over - the market is much smarter than all of us and humans are horrible at best at prediction. 

Having your Buy Stop orders entered will always have you in the right place at the right time. Why? Your orders are already in when the market moves and momentum hit and you can't possibly enter that many orders by hand in the heat of the moment.

You're already positioned. If the moves don't rise to your Stop levels, you won't get filled - and that's a good thing. At the end of the day, the orders will cancel because they are only good for the day. 

Develop a systematized set of rules that you can count on. You can calculate your levels the night before and execute the rules the following morning.

The key is that you don't want to have to think in the morning - just focus on executing the plan. That means entering your buy stops to enter long and sell stops to protect your equity.

Here are the components of a complete trading system:

Breakouts - trading above previous highs or below previous lows;

Trailing Stops - to protect your equity after your initial order and also once the trade starts working out in your favor (see Exiting Winners);

Position Sizing - calibrated for volatility and your overall account equity;

Adding to Winners - systematized so that you don't join the hubris or factors that you can't prove scientifically;

Exiting Winners - getting out with the majority of your unrealized equity;

Also to consider is the correlation risk between the instruments that are in your universe.

These must all be conjugated to work together. One without the other is nothing - they are just data points. Think of them as a perfect complements to one another, like the starting 5 of your favorite basketball team or 9 players on the baseball diamond.

For example, your position size only matters to the extent you know how much you are willing to risk per trade, where you get in and where you exit.

Knowing how much silver is correlated to gold or how much or Facebook is correlated to Amazon will help you see the unseen risk in your portfolio before you add it.

You can't get this level of thoroughness from chart reading or understanding set-ups such as cup and saucer. It's only achieved from backtesting through a simulator that lets you simulate at the portfolio level, not one instrument at a time.

Examples of those are Mechanica and Trading Blox.

Develop a systematized set of rules that you can count on. You can calculate your levels the night before and execute the rules the following morning.

The key is that you don't want to have to think in the morning - just focus on executing the plan. That means entering your buy stops to enter long and sell stops to protect your equity.

Here are the components of a complete trading system:

Breakouts - trading above previous highs or below previous lows;

Trailing Stops - to protect your equity after your initial order and also once the trade starts working out in your favor (see Exiting Winners);

Position Sizing - calibrated for volatility and your overall account equity;

Adding to Winners - systematized so that you don't join the hubris or factors that you can't prove scientifically;

Exiting Winners - getting out with the majority of your unrealized equity;

Also to consider is the correlation risk between the instruments that are in your universe. 

These must all be conjugated to work together. One without the other is nothing - they are just data points. Think of them as a perfect complements to one another, like the starting 5 of your favorite basketball team or 9 players on the baseball diamond. 

For example, your position size only matters to the extent you know how much you are willing to risk per trade, where you get in and where you exit.

Knowing how much silver is correlated to gold or how much or Facebook is correlated to Amazon will help you see the unseen risk in your portfolio before you add it. 

You can't get this level of thoroughness from chart reading or understanding set-ups such as cup and saucer. It's only achieved from backtesting through a simulator that lets you simulate at the portfolio level, not one instrument at a time. 

Examples of those are Mechanica and Trading Blox. 

History is not going to repeat itself the way it did for my mentors and colleagues.

Investment into the trading business is going to Artificial Intelligence and Machine Learning. If you are doing things by hand, you are putting yourself in a very disadvantaged position.

You can't work orders on the floor anymore. There is no floor. How's that for a development?!

Another example is the risk per trade in contemporary trading. Back in the 70s and 80s, it wasn't uncommon to risk as much as 2% per trade! That would be madness in today's environment, especially if you want to get an allocation from a global macro fund or if you want to work for a real prop trading firm.

[A real prop trading firm will give you funds to run without your needing to add your own capital and you'll be able to take the risk home with you overnight and over the weekend, for example.]

Take the humanity out of your trading. If you are looking at charts for subjective interpretation, more and more you'll be competing against trading machines that are "trained" to beat you. If you think trading is unfair already, in my opinion it's going to get worse.

Whereas I think you should strengthen your sense of self through yoga and meditation, at the same time I think you should begin to extract yourself out of the trading equation by coming to understand that you are the weakest link in your trading.

To put it in context, I think even if you had the self-knowledge and awareness of HH The Dalai Lama, you should still develop a set of computerized trading rules and manage risk systematically.

Two good books on yoga are Light On Yoga: The Bible of Modern Yoga by BKS Iyengar and Yoga: The Spirit and Practice of Moving Into Stillness by Erich Schiffmann. Disclosure: Erich is a long time friend and my yoga teacher of 20 years.