Trader Mindset

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. 

Risk is an asset class. Keep in in your portfolio when it pays you to do so. That means overnight and over the weekend.

When you day trade, you are churning your own account.

In a recent interview with Chats With Traders, my friend Aaron Brown said that traders generally leave way too much money on the table.

The real money is holding the best risks. You can define where you are going "risk off" by placing protective stop orders on your winners and Stop Loss orders on recent fills.

Staying in good trades longer frees up time so that you can do more research, read, or go have fun doing whatever gives you pleasure.

Exercise: Go to your best trades and enter them in a spreadsheet. Column A is your Entry. Column B is your exit. Column C is where it is now. Column D is what the worst price was between the prices in column B and C.

Look at the percentage of those names where the price is Column C today is higher than Column B but also where the price is column D never went below Column A.

This helps you understand the opportunity cost of short-term trading and how it works against you.

Risk is an asset class. Keep in in your portfolio when it pays you to do so. That means overnight and over the weekend. 

When you day trade, you are churning your own account.

In a recent interview with Chats With Traders, my friend Aaron Brown said that traders generally leave way too much money on the table. 

The real money is holding the best risks. You can define where you are going "risk off" by placing protective stop orders on your winners and Stop Loss orders on recent fills. 

Staying in good trades longer frees up time so that you can do more research, read, or go have fun doing whatever gives you pleasure.

Exercise: Go to your best trades and enter them in a spreadsheet. Column A is your Entry. Column B is your exit. Column C is where it is now. Column D is what the worst price was between the prices in column B and C. 

Look at the percentage of those names where the price is Column C today is higher than Column B but also where the price is column D never went below Column A. 

This helps you understand the opportunity cost of short-term trading and how it works against you.

Value is what you assign to something, not an analyst. What others assign to bitcoin are none of my business. What others assign to speculation in general is irrelevant.

There is no value per se in bitcoin anymore than there is in corn futures.

Bubbles are what speculators (like me) pray for. Professionals know themselves and know how to express risk in a manner that is best for them (compatibility).

Traders who have a systematized set of rules love to trade bubbles because although we cannot impose our will on an instrument, we can take advantage of the amateurs and day traders who don't know anything about managing risk.

Trading is a voluntary action. Winning and losing is up to you.

Buy the time the bubble pops, I'll be long gone...

Value is what you assign to something, not an analyst. What others assign to bitcoin are none of my business. What others assign to speculation in general is irrelevant. 

There is no value per se in bitcoin anymore than there is in corn futures. 

Bubbles are what speculators (like me) pray for. Professionals know themselves and know how to express risk in a manner that is best for them (compatibility). 

Traders who have a systematized set of rules love to trade bubbles because although we cannot impose our will on an instrument, we can take advantage of the amateurs and day traders who don't know anything about managing risk. 

Trading is a voluntary action. Winning and losing is up to you. 

Buy the time the bubble pops, I'll be long gone...

Exits and entries are perfect compliments to your trading system. They are siamese twins that should not exist without one another - nor should they be separated at birth or otherwise.

Risk management defines your P&L and the distance between your entry and exit is critical to how you manage risk.

You can define that distance by calculating the ATR of the security that you're trading and using those as the entry and exit endpoints to your rules. Marry that with your position size given the size of your account and the volatility of security.

So the three crown jewels to trading are entries, exits, and position size. They are all calibrated to work with one another and rely on one another to help you create alpha for you and your clients.

Exits and entries are perfect compliments to your trading system. They are siamese twins that should not exist without one another - nor should they be separated at birth or otherwise. 

Risk management defines your P&L and the distance between your entry and exit is critical to how you manage risk. 

You can define that distance by calculating the ATR of the security that you're trading and using those as the entry and exit endpoints to your rules. Marry that with your position size given the size of your account and the volatility of security. 

So the three crown jewels to trading are entries, exits, and position size. They are all calibrated to work with one another and rely on one another to help you create alpha for you and your clients.

You cannot shield yourself from struggle. It's what helps shape your trading rules and over time turns them into a complete system.

No psychologist, coach, or mentor can do it for you. You have to want to take a punch and learn to feel what it feels like to lose money and then use those emotions to affect your behavior accordingly.

Very little of it is intellectual or logical. If you need things to "make sense" I think you're in for quite an education if you're open to it

There are no external solutions to your internal issues. That should save you a ton of money in that you don't need a high clock speed computers, multiple monitors, nor televisions in each room.

One way to generate peace in your daily activity is to start using stop orders to enter and exit trades.

Professional traders use stops, not market orders.

Buy stops are placed above the market and are used to enter trades long or to cover short sales and minimize risk.

Sell stops are placed below the market and are used to enter trades short or to sell long positions and minimize risk.

Stop orders show your conviction in your process. If you're trying to read charts or you've been sold on something amateurs refer to as "set-ups," you can absolve yourself from that lifestyle choice and at least act like a professional on your way to becoming one.

Trading with a system will capture anything that is bullish or bearish and remove the need for your having to interpret charts. Plus, it's a lot less work as well so you save yourself a great deal of time. A third benefit is that you can eliminate having to trade frequently - something I believe is not necessary to becoming a professional trading.

I think trying to read charts every day is exhausting. Moreover, if you are glued to your monitor, you might be giving yourself a false sense of security that you can avoid "the big loss" by doing so.

You can't stop market volatility because you are sitting there hyper-vigilantly. What you can do is enter your stops are predetermined levels and let the market come to you. One benefit is that you won't find yourself chasing trades. Another is that if something unexpected does occur, your order will already be there to protect your capital. As a trader or speculator, job #1 is playing superior defense.

By entering your stop orders ahead of time when things are calm, you also have the added benefit of avoiding the errors that can occur when you have to act under the gun and you're not used to doing so. Errors cost money and you can assume that if you make an error, it won't add to your P&L, but hurt you.

You cannot shield yourself from struggle. It's what helps shape your trading rules and over time turns them into a complete system.

No psychologist, coach, or mentor can do it for you. You have to want to take a punch and learn to feel what it feels like to lose money and then use those emotions to affect your behavior accordingly.

Very little of it is intellectual or logical. If you need things to "make sense" I think you're in for quite an education if you're open to it 

There are no external solutions to your internal issues. That should save you a ton of money in that you don't need a high clock speed computers, multiple monitors, nor televisions in each room.

One way to generate peace in your daily activity is to start using stop orders to enter and exit trades. 

Professional traders use stops, not market orders. 

Buy stops are placed above the market and are used to enter trades long or to cover short sales and minimize risk.

Sell stops are placed below the market and are used to enter trades short or to sell long positions and minimize risk.

Stop orders show your conviction in your process. If you're trying to read charts or you've been sold on something amateurs refer to as "set-ups," you can absolve yourself from that lifestyle choice and at least act like a professional on your way to becoming one.

Trading with a system will capture anything that is bullish or bearish and remove the need for your having to interpret charts. Plus, it's a lot less work as well so you save yourself a great deal of time. A third benefit is that you can eliminate having to trade frequently - something I believe is not necessary to becoming a professional trading. 

I think trying to read charts every day is exhausting. Moreover, if you are glued to your monitor, you might be giving yourself a false sense of security that you can avoid "the big loss" by doing so. 

You can't stop market volatility because you are sitting there hyper-vigilantly. What you can do is enter your stops are predetermined levels and let the market come to you. One benefit is that you won't find yourself chasing trades. Another is that if something unexpected does occur, your order will already be there to protect your capital. As a trader or speculator, job #1 is playing superior defense. 

By entering your stop orders ahead of time when things are calm, you also have the added benefit of avoiding the errors that can occur when you have to act under the gun and you're not used to doing so. Errors cost money and you can assume that if you make an error, it won't add to your P&L, but hurt you.

Professional poker players know (as best they can) the expected values of every hand they play. The best of them know what hands to play from what position. Like traders, poker players have to make decisions under uncertain conditions with imperfect information.

They know what the percentages are of their hands improving. For example, if they are dealt a pair of Kings, they know the probability of getting another King to make 3 of a kind (a set of Kings), or quads - four of a kind.

They know what the probability of making a straight if they have two connectors or making a flush if they have two cards of the same suit.

This allows them to the knowledge to know how to bet given the odds and the size of the pot. Yet it's still possible that they can do everything correctly and still lose the hand. That's going to happen quite a bit if you play a lot of poker.

Like in trading, you can become emotionally invested in the outcome of a hand. If you have a pair of Aces, you can get beat from time to time despite Aces being a strong pair.

Professional traders can learn a lot from this type of knowledge. If you trade long enough, you will get beat when everything looks to be in your favor.

I've been long stock that beat earnings estimates, but was greeted with a down market because of some external factor that took everything down with it - including my stock. Not fair you say? No one cares what my definition of "fair" is when trading. Nothing is fair.

A good way to become mindful of what you could be in for is to study the winning and losing streaks from your backtested results. Most of them will tell you what you longest losing streak is (duration) and how bad it effected your equity (magnitude).

I think this will help you learn to build your confidence and put things into perspective.

The losing streaks that you'll have by trading a system will pale in comparison to those that you'll need to endure if you are day trading or trying to ready charts or "set-ups." Those are a thing of the past.

The modern trader - the trader who is going to set himself up to win for the rest of this decade and into the 2020s will have 100% of his trading rules backtested, know the expected values, and have rules to eliminate sub-optimal trades, and have rules built-in to trade for the marathon of the next 20 years. That does not now nor will include trading based upon charts nor intraday data.

Firms are investing tens of millions of dollars to trade against the short term lovin' traders as they are easy to pick off and bully. Plus, in that space, there are a million suckers born every minute so you've been warned: don't be one of them.

Trading simulation software will allow you to vary start dates, the instruments that you are trading at any given time, how to measure volatility, and how to cut risk during losing streaks.

A great book on how to understand what a poker player learns to contend with is "Getting the Best of It" by David Sklansky.