Trader Mindset

Group your positions for better risk management.

You can have stops on each position. Put them on the groups and sectors as a whole as well.

For example, you might have a stop on your open gold trade limiting a decrease in your equity by 1% from the current market level. You might have the same for Tesla or Apple Inc.

Consider putting stop on all the metals in your portfolio so that collectively the aggregate risk across all of them is set at 2% for example.

You can test for the best level for you. The question is “what is the probability that I’ll be down 5% for the period if I’m already down X% given the backtest?”

That means, if you have 4 metals trades on in gold, silver, HG, and platinum, you may stop out of all your metals although a particular stop on any one of them was not hit.

That’s one way you can improve your performance and lose less.

Another way is to put a stop on your overall equity for the day, week, or month.

I think there was one time in PTJ’s career that he didn’t want to be down more than 10% in any given month, so he put a stop on his overall equity of such.

It’s key that when you hit that spot and get stopped, you actually stop trading. In the case of PTJ, he’d be done for the rest of the month. That might be hard for you if you like the action. Most professionals or aspiring professionals want to be experts in managing risk, not making frequent transactions.

In order to deploy any of these strategies, you’d have to offset your positions manually and then go in and cancel your existing stop orders - and I would do it in that order. Stop losing money first. Cancel open orders second.

The one surefire way you can become the best you can be - they way you become great - is to focus on Rules not Patterns

Head and shoulders patterns are not carved in stone. They look recognizable but must be interpreted. Like the Chinese language, there are more than a dozen dialects to this pattern.

Humans like us are bad at estimation and prediction. Read Phil Tetlock.

For every well-known "chartist" there are 25,000 guys who tried the same and blew up or didn't make it. It's also emotionally and mentally draining to have to replicated each day.

Recognizing a chart patterns are no different to me than recognizing an odd number from an even number. What do you do with it? What's the context of the information?

When I moved to LA from Manhattan, we all got a book of street maps called the Thomas Guide. It's a spiral bound book of maps that we all kept in our cars. GPS was not included in smart phone plans and you had to get it separately, but it was expensive.

If you don't know where you are going, having a Thomas Guide in your car is not going to help you. It will help you get wherever you want to go, but you need to come up with the destination. Same with trading. You need to know when to enter and exit and how much to own (or how fast to drive).

If you "recognize" a pattern, you don't know where to enter, exit, or position size. That's why I don't consider charting as a long-term methodology to trading for the majority of aspiring traders.

Whereas a certain chart pattern might appear bullish, you know you're bullish when you have an order in to buy an N-Day high and that the expected value of that trade is 4 times your risk unit - regardless of the pattern. Trading rules supersede all chart patterns and remove the paralysis from analysis, the interpretation, and the uncertainty that comes from not having a decisive plan.

In fact, the way most good traders become "great" or even just better, it's by letting go of charts and focusing on process and trading rules that are not derived from chart patterns.

Go from good trading to great trading.

The one surefire way you can become the best you can be - they way you become great - is to focus on Rules not Patterns

Head and shoulders patterns are not carved in stone. They look recognizable but must be interpreted. Like the Chinese language, there are more than a dozen dialects to this pattern. 

Humans like us are bad at estimation and prediction. Read Phil Tetlock. 

For every well-known “chartist” there are 25,000 guys who tried the same and blew up or didn’t make it. It's also emotionally and mentally draining to have to replicated each day. 

Recognizing a chart patterns are no different to me than recognizing an odd number from an even number.  What do you do with it? What’s the context of the information?

When I moved to LA from Manhattan, we all got a book of street maps called the Thomas Guide. It’s a spiral bound book of maps that we all kept in our cars. GPS was not included in smart phone plans and you had to get it separately, but it was expensive.

If you don’t know where you are going, having a Thomas Guide in your car is not going to help you. It will help you get wherever you want to go, but you need to come up with the destination. Same with trading. You need to know when to enter and exit and how much to own (or how fast to drive).

If you “recognize” a pattern, you don’t know where to enter, exit, or position size. That’s why I don’t consider charting as a long-term methodology to trading for the majority of aspiring traders.

Whereas a certain chart pattern might appear bullish, you know you're bullish when you have an order in to buy an N-Day high and that the expected value of that trade is 4 times your risk unit - regardless of the pattern. Trading rules supersede all chart patterns and remove the paralysis from analysis, the interpretation, and the uncertainty that comes from not having a decisive plan.

In fact, the way most good traders become “great” or even just better, it’s by letting go of charts and focusing on process and trading rules that are not derived from chart patterns.

Go from good trading to great trading.

Trading is a lot like poker. You're trying to made smart decisions under great levels of uncertainty with imperfect information.

That has been the case since the beginning of speculation. In many bubbles and manias, there sometimes isn't any fundamental information that's worth knowing. In that regard, you have to trade against the crowd or herd.

Chart reading as a skill is lot like trying to understand spanglish. Most of it is about interpretation.

You need to automate your data scanning asap to make things easier on you. Not doing so will exhaust you over time. I know it might be fun to scan the markets by hand, but you're going to find that you can't compete with a computer and a scanning service.

The downside of doing things by hand is that after a great deal of manual scanning with no results, you become desperate in thinking that you are missing out because "the markets are moving."

If you're a directional trader, volatility does not equal opportunity. If you're putting "today's big movers" on your screen - what are you looking for? A clue on how you could have gotten in before the move?

Don't be a piker - automating your rules is the first step to avoiding that scenario. No pro is "doing it by hand" - that's how retail traders do it because they don't know any better and they've bought into their trading platform's features as being benefits. They are not.

A good tool to use is called "Unfair Advantage" by CSI Data. It's a premium service, but I've used it myself and I vouch. I don't benefit financially for saying so.

Forget the charting, UA has a built-in portfolio manager and a correlation study and these tools are much more valuable to help you make decisions based upon expected values than looking at charts.

Become a "Super-Mind" Trader

Trading is a lot like poker. You're trying to made smart decisions under great levels of uncertainty with imperfect information. 

That has been the case since the beginning of speculation. In many bubbles and manias, there sometimes isn't any fundamental information that's worth knowing. In that regard, you have to trade against the crowd or herd. 

Chart reading as a skill is lot like trying to understand spanglish. Most of it is about interpretation. 

You need to automate your data scanning asap to make things easier on you. Not doing so will exhaust you over time. I know it might be fun to scan the markets by hand, but you're going to find that you can't compete with a computer and a scanning service. 

The downside of doing things by hand is that after a great deal of manual scanning with no results, you become desperate in thinking that you are missing out because "the markets are moving." 

If you're a directional trader, volatility does not equal opportunity. If you're putting "today's big movers" on your screen - what are you looking for? A clue on how you could have gotten in before the move?

Don't be a piker - automating your rules is the first step to avoiding that scenario. No pro is "doing it by hand" - that's how retail traders do it because they don't know any better and they've bought into their trading platform's features as being benefits. They are not. 

A good tool to use is called "Unfair Advantage" by CSI Data. It's a premium service, but I've used it myself and I vouch. I don't benefit financially for saying so. 

Forget the charting, UA has a built-in portfolio manager and a correlation study and these tools are much more valuable to help you make decisions based upon expected values than looking at charts. 

Become a "Super-Mind" Trader

Sitting on your hands is sometimes best. Like the Red Sox should have done with John Farrell.

Only trade when you have an edge. Casinos in Vegas never close because they "never" don't have the edge (in most games).

Exiting Winners can be a hard trade. You don't want to get out too early, and you don't want to overstay your visit so to speak.

In order to make the most money and have total sanity around winners because you'll be executing the same trade effectively for each winner you have. That leads to consistent behavior. Consistent behavior in trading leads to consistent and profitable trading.

No second guessing yourself.

Sometimes you'll get knocked out.

Sometimes you'll get to stay in the trade and it will continue to grow.

Don't isolate your trading to fret about one winning trade. Think in terms of how you'll be in this situation 1,000 times in your career and now you'll have a plan to handling exits with your winners.

The LAST place you want to be is to have to make decisions around handling winners each time you find yourself in a winner. That's emotionally exhausting.

Know what you're going to do BEFOREHAND and follow those rules.

Here are three potential techniques to exit winning trades:

1. Sell an "N-Day Low" for your Longs where N is the number of days in your look-back. N can be 5 days, 10 days…you get to set it.
2. You can wait for the shorter term moving average to cross below the longer to generate a sell signal. For example, when the 5-Day crosses below the 20-Day moving average, you sell your long.
3. Employ a "time stop" where if the security does not resume its uptrend in "N days," you sell.

Learn about yourself and become the best trader you can be.

Get your free copy of The Inner Voice of Trading audiobook.

Sitting on your hands is sometimes best. Like the Red Sox should have done with John Farrell.

Only trade when you have an edge. Casinos in Vegas never close because they "never" don't have the edge (in most games).

Exiting Winners can be a hard trade. You don’t want to get out too early, and you don’t want to overstay your visit so to speak.

In order to make the most money and have total sanity around winners because you’ll be executing the same trade effectively for each winner you have. That leads to consistent behavior. Consistent behavior in trading leads to consistent and profitable trading.

No second guessing yourself.

Sometimes you’ll get knocked out.

Sometimes you’ll get to stay in the trade and it will continue to grow.

Don’t isolate your trading to fret about one winning trade. Think in terms of how you’ll be in this situation 1,000 times in your career and now you’ll have a plan to handling exits with your winners.

The LAST place you want to be is to have to make decisions around handling winners each time you find yourself in a winner. That’s emotionally exhausting.

Know what you’re going to do BEFOREHAND and follow those rules.

Here are three potential techniques to exit winning trades:

1. Sell an “N-Day Low” for your Longs where N is the number of days in your look-back. N can be 5 days, 10 days…you get to set it.
2. You can wait for the shorter term moving average to cross below the longer to generate a sell signal. For example, when the 5-Day crosses below the 20-Day moving average, you sell your long.
3. Employ a “time stop” where if the security does not resume its uptrend in “N days,” you sell.

Learn about yourself and become the best trader you can be.

Get your free copy of The Inner Voice of Trading audiobook. 

It's been a big week on behavior... You have to be willing to feel all your feelings around trading. What might be holding you back from great success could be your reluctance or lack of willingness to feel new feelings around techniques or trading styles that are different from what you're currently doing.

Go back and listen to the "Rituals and Routine" episode. You might understand a trading technique or style intellectually, but you don't know it thoroughly until you've experienced it emotionally and psychologically.

Ed Seykota taught me that "the feelings that I don't want to feel have as much power over me (my trading) as the ones I do want to feel."

When you are willing to feel all your feelings, none of them can control you. They are all trying to teach you something. Are you open to listening at least?

You can test a new system (feeling) with 5 or 10% of your capital. If you trade enough, you'll realize that certain trading styles and techniques are there for the sole purpose of generating the emotions you are willing to feel, even if the trading strategy is an economic bad - day trading, for example.

You might be married to your current methodology not because it's the best one for you, but because you like how executing it feels. I suspect this is how most aspiring day traders feel.

You get to hang out with other guys, talk shop, have a sense of community, yet practice a belief system around trading that is not effective for long-term success.

It's been a big week on behavior... You have to be willing to feel all your feelings around trading. What might be holding you back from great success could be your reluctance or lack of willingness to feel new feelings around techniques or trading styles that are different from what you're currently doing.

Go back and listen to the "Rituals and Routine" episode. You might understand a trading technique or style intellectually, but you don't know it thoroughly until you've experienced it emotionally and psychologically.

Ed Seykota taught me that "the feelings that I don't want to feel have as much power over me (my trading) as the ones I do want to feel."

When you are willing to feel all your feelings, none of them can control you. They are all trying to teach you something. Are you open to listening at least?

You can test a new system (feeling) with 5 or 10% of your capital. If you trade enough, you'll realize that certain trading styles and techniques are there for the sole purpose of generating the emotions you are willing to feel, even if the trading strategy is an economic bad - day trading, for example.

You might be married to your current methodology not because it's the best one for you, but because you like how executing it feels. I suspect this is how most aspiring day traders feel.

You get to hang out with other guys, talk shop, have a sense of community, yet practice a belief system around trading that is not effective for long-term success.

Your Daily Process Can Be Killing Your Career or the prospects for your trading career. Professional traders bifurcate their trading day into preparation and tactical.

After the close, pros get prepared for the next day in terms of research and running their models.

During the following day, they spend their time focusing on trading tactics and managing risk.

This type of focus on your behavior provides a platform for enhanced performance due to your focus.

If you try to do 14 things at one time while trading, the lack of focus can lead to your making errors, missing trades, or taking small losses.

This is a short list of what can happen... I would not try to find trades "on the fly."

That's amateurish and chasing trades or markets is not a sound strategy in order to build a long-term track record on your P&L, nor is it behavior that you can replicate for years and years energy-wise.

Do your work the afternoon or night before, and spend the next day executing the plan.

Don't waver from this discipline. It will serve you better.