Trading Tip #8: Avoiding Mental Sabotage

[tradingadvantagetm 10]

I have heard that 95% or more of all traders ultimately fail.

 

Have you ever wondered why?

 

Most traders will tell you it was the system or method they were using. They'll also tell you they had a few bad trades they couldn't recover from. Or their dog chewed through the telephone cord just as their computer crashed, and they couldn't get out of a losing trade.

 

Everyone has a different reason, but when you hear enough of them, a pattern begins to develop. I believe most traders fail because they sabotage themselves.

 

The markets work differently from other investing opportunities. There is probably more freedom in the trading business than any other industry in the world.

 

You can do what you want, whenever you want to do it. You can trade 1 contract or 100. Buy the market or sell it; it's up to you. The only thing that holds you back is running out of capital.

 

Most people are not accustomed to that much freedom.

 

If you can't control the market, the only thing you can control is yourself.

Trading is also very different than the things we do on a daily basis. In everyday life we exercise some control over our environment. If a room is too dark we turn the light on. If we want to go somewhere, we jump in the car and turn the key.

 

In trading you can't control what the market does.

 

No matter how much you want the market to go in a certain direction, there is nothing you can do to force that to happen. You can't turn a key or flip a switch. Hoping, pleading, screaming... nothing will make the market do what you want it to.

 

Embrace the uncertainty - plan for the best and worst cases

 

One of the most important things you can do to avoid the mental sabotage is to understand the lack of control you have over the market, and plan for every trade. Now I don’t mean a trading plan like buy a contract and then close the position when the market trades higher. I mean a real plan. That includes specific entry points based on certain market movements or conditions. It means exit strategies for when things go right and for things go really wrong. It means placing limits and stops and keeping your emotions in check. If you have a roadmap for your day, you are less likely to fall into that trap of mental sabotage.

 

Remember: if you can't control the market, the only thing you can control is yourself.

 

Successful traders all understand and embrace this concept. Unsuccessful traders continue to try to make the market conform to their wishes.

 

Dear Larry,

"Just a short note to say thank you. These past few weeks have been a real eye opener for me and thanks to you I'm making more money trading the S&P's than ever. I've been trading the S&P's for over 5 years and never have I had as much fun and without the stress. Using just the "One Time Framing Technique" and the 80 Percent Rule, I have made over 5,400.00 dollars in the past four weeks. Just today your 80 Percent Rule netted me 2,150.00 dollars. Not only am I glad I didn't return your course, now you couldn't begin to pry it from my hands. Many, many thanks for everything."

 

William P. San Ramon, CA

"It's not brain surgery, you just follow the techniques and you can make money. Larry's Program really works."

 

Fred C. Amityville NY (Testimonial from The Secrets of Floor Traders Course.)

 

_______________

Larry Levin

[SpearPointTrader 10]

Very interesting advise.

[xioxxio 10]

Interesting article. Thanks

 

The way I think about trading is accepting the loss before you trade. There is a random distribution between wins and losses. When you put money into a slot machine and you don't win, most people are not upset about the outcome, since they have accepted the loss before the handle was pulled. Trading is the same. Enter positions where you are prepared to accept the loss.

[SpearPointTrader 10]

Interesting article. Thanks

 

The way I think about trading is accepting the loss before you trade. There is a random distribution between wins and losses. When you put money into a slot machine and you don't win, most people are not upset about the outcome, since they have accepted the loss before the handle was pulled. Trading is the same. Enter positions where you are prepared to accept the loss.

 

I have found that NOT accepting losses works better for me. I have a bunch of signs that trades are turning bad, and I prefer to get out right away. I often exit with a small profit, rather than accept a loss.

 

I am of the belief that if you hit your stop loss, you did something wrong.

 

I have 8 set ups for entries, but over a dozen "Anti" set ups that either get me out of the market, or prevent me from getting in in the first place.

 

Willingness to accept losses, is how you get your account chewed up.

[xioxxio 10]

I often exit with a small profit, rather than accept a loss.

 

 

So just for the record, Are you saying you never make a loss? and if you do make a loss you don't accept it. Does your broker accept your losses on your behalf?

[SpearPointTrader 10]

So just for the record, Are you saying you never make a loss? and if you do make a loss you don't accept it. Does your broker accept your losses on your behalf?

 

Everyone takes losses. But my mindset is not to just accept them. I fight to prevent them, or minimize them as much as I can. The market has to force a loss on me. I am not going to just let them happen.

 

This is a mindset I am talking about here. If you have a mindset where taking a loss is acceptable, then you are going to take losses, because you are complacent.

 

If you have a mindset where losses are unacceptable, you will do everything you can to avoid them. This mindset will have you exiting before a turning market becomes a loss, and exiting as quickly as possible if you are experiencing one. This helps keep your account from being chewed up.

 

Preventing losses, and having more reasons NOT to trade, than to trade is more important that how much you make on winning trades.

 

You can make more than you lose as much as you want, but if you allow too many losing streaks, with the idea that that one big one will more than make up for it, you will be drained before you ever get to it. So for me, my first goal is to do everything I can to not lose.

[xioxxio 10]

Everyone takes losses. But my mindset is not to just accept them. I fight to prevent them, or minimize them as much as I can. The market has to force a loss on me. I am not going to just let them happen.

 

This is a mindset I am talking about here. If you have a mindset where taking a loss is acceptable, then you are going to take losses, because you are complacent.

 

If you have a mindset where losses are unacceptable, you will do everything you can to avoid them. This mindset will have you exiting before a turning market becomes a loss, and exiting as quickly as possible if you are experiencing one. This helps keep your account from being chewed up.

 

Preventing losses, and having more reasons NOT to trade, than to trade is more important that how much you make on winning trades.

 

You can make more than you lose as much as you want, but if you allow too many losing streaks, with the idea that that one big one will more than make up for it, you will be drained before you ever get to it. So for me, my first goal is to do everything I can to not lose.

 

 

Agreed. I think we are going around in a circle. My point is; you fully have to accept the the risk of the trade. By fully accepting the risk of a trade there is a possibility you may lose. We all have tools/signals that assist us in preventing such situations, but when it does happen, so be it. Trading is a business and you strive to be the best trader, just like an athlete strives to be the best athlete.

 

This is where I get off the bus.

 

Good Trading

[c0l$il 10]

Does your broker accept your losses on your behalf?

 

That is very funny:haha::haha:

[SpearPointTrader 10]

Agreed. I think we are going around in a circle. My point is; you fully have to accept the the risk of the trade. By fully accepting the risk of a trade there is a possibility you may lose. We all have tools/signals that assist us in preventing such situations, but when it does happen, so be it. Trading is a business and you strive to be the best trader, just like an athlete strives to be the best athlete.

 

This is where I get off the bus.

 

Good Trading

 

Yes, I can agree with that. Although accepting the risk, is different than allowing a mindset where you accept losses.

[joshdance 10]

If you have a mindset where losses are unacceptable, you will do everything you can to avoid them. This mindset will have you exiting before a turning market becomes a loss, and exiting as quickly as possible if you are experiencing one. This helps keep your account from being chewed up.

 

I understanding your point, but trading this way can also lead to the type of trading where any time the market goes against you just a little, or it comes to your entry after going in your favor a few ticks, you exit, and then miss what was otherwise a great trade.

 

I'm not saying one way is right or wrong, and I do agree that the best trades are the ones that go in our direction almost instantly and never come back. But when one is quick to pull the plug on a trade that has not yet had the opportunity to work or not, then it can lead to frustration.

[TheNegotiator 13]

I understanding your point, but trading this way can also lead to the type of trading where any time the market goes against you just a little, or it comes to your entry after going in your favor a few ticks, you exit, and then miss what was otherwise a great trade.

 

I'm not saying one way is right or wrong, and I do agree that the best trades are the ones that go in our direction almost instantly and never come back. But when one is quick to pull the plug on a trade that has not yet had the opportunity to work or not, then it can lead to frustration.

 

Hmm. As much as we want to avoid losses or avoid missed opportunities, if either is your mindset when you're in a trade then I think you'll have issues. The way I see it is kinda like what was said in the op. You research your edge and you formulate a plan to take advantage of this edge. You watch an opportunity develop and decide to trade it. Once you are commited to a trade (and this can be before you pull the trigger), your job is not to make money or avoid losses. It is to trade your plan. You can lose money and have performed superbly or you can make money but have acted recklessly and stupidly. But if your mind is always drawn to the $, you'll not develop the ability to perform consistently.

Edited June 7, 2012 by TheNegotiator

[SIUYA 11]

I understanding your point, but trading this way can also lead to the type of trading where any time the market goes against you just a little, or it comes to your entry after going in your favor a few ticks, you exit, and then miss what was otherwise a great trade.

 

I'm not saying one way is right or wrong, and I do agree that the best trades are the ones that go in our direction almost instantly and never come back. But when one is quick to pull the plug on a trade that has not yet had the opportunity to work or not, then it can lead to frustration.

 

Good point.....

I read a book over the weekend (the power of habit - Charles Duhigg -- not a bad read, light easy - more about the discoveries of how the brain works - its not a self help book) (plus two thumbs up for kindle - new toy....where have you been previously baby)

 

in it they talk about a section whereby casinos rigg the slots so that the "near" miss has a profound effect on people. Check out The Near-Miss Effect | Wired Science | Wired.com

 

as per usual its each to their own and what every works - probably why its always recommended to keep a journal to work out where your strengths and weaknesses lie.

 

Mental sabotage is a slippery little complex subversive little f....r. Stick to the evidence.

[darvasfan 10]

Spearpoint, if you wouldn't mind, I would like to explore what you are saying a little further.

 

I've been trading for almost 10 years, mostly very unsuccessfully. After blowing out a small futures account, blowing out several paper accounts, moving on to stocks and seriously damaging that acct. (20% loss over 4 years), I am at the point of either giving up or doing something different - obviously. In my stock acct., I have never taken a loss on any single trade greater than 1% of my equity, and usually, it has been less than that - .5% for example. Thus, I've never had the "big" loss that wipes an acct. out. My losses have been a very long, slow bleed. I usually use a stop that appears to be at a logical point of S/R. When I use a bigger stop to give it "more room", the stop invariably gets taken out anyway. When I use a tighter stop, either it was correct and I am stopped out before a much bigger loss would have happened, or I get stopped out only to see the market run in the opposite direction. The end result is a "relatively" small loss wither way. The problem is that those small losses add up to big losses. Unfortunately, I have not had consistent or substantial gains to offset those.

 

Now, to your point, I would be interested in hearing further about how you avoid losses by your mindset. I have often had that thought, but have never done it because of the huge amount of trading info. saying to set your stop at logical points, give the trade room to work, don't take small profits, etc., etc.

 

Thanks for any addl. help you can offer.

[TheNegotiator 13]

Spearpoint, if you wouldn't mind, I would like to explore what you are saying a little further.

 

I've been trading for almost 10 years, mostly very unsuccessfully. After blowing out a small futures account, blowing out several paper accounts, moving on to stocks and seriously damaging that acct. (20% loss over 4 years), I am at the point of either giving up or doing something different - obviously. In my stock acct., I have never taken a loss on any single trade greater than 1% of my equity, and usually, it has been less than that - .5% for example. Thus, I've never had the "big" loss that wipes an acct. out. My losses have been a very long, slow bleed. I usually use a stop that appears to be at a logical point of S/R. When I use a bigger stop to give it "more room", the stop invariably gets taken out anyway. When I use a tighter stop, either it was correct and I am stopped out before a much bigger loss would have happened, or I get stopped out only to see the market run in the opposite direction. The end result is a "relatively" small loss wither way. The problem is that those small losses add up to big losses. Unfortunately, I have not had consistent or substantial gains to offset those.

 

Now, to your point, I would be interested in hearing further about how you avoid losses by your mindset. I have often had that thought, but have never done it because of the huge amount of trading info. saying to set your stop at logical points, give the trade room to work, don't take small profits, etc., etc.

 

Thanks for any addl. help you can offer.

 

Are you sure you even have an edge?

[SpearPointTrader 10]

I understanding your point, but trading this way can also lead to the type of trading where any time the market goes against you just a little, or it comes to your entry after going in your favor a few ticks, you exit, and then miss what was otherwise a great trade.

 

I'm not saying one way is right or wrong, and I do agree that the best trades are the ones that go in our direction almost instantly and never come back. But when one is quick to pull the plug on a trade that has not yet had the opportunity to work or not, then it can lead to frustration.

 

Yes, I can agree on this. What I do, is have key signals that tell me to get out. For example, one thing I do a lot is look for divergence between the 4 bar moving average, and the outer bollinger band. If I see that, I exit.

 

Since I am only in to scalp small amounts anyway, this often ends my trade, and I don't care if it takes off again after the correction is over. I may, or may not get back in.

 

My average trade, both in sim, and real life is $80 to $90. That is all my wins and losses added up, and divided by the number of trades being counted. Since this is the case, I often exit as soon as I surpass that window either way, and call it a day.

 

I rarely make more than a couple hundred a contract. It seems the more I go for, the more often I lose.

[SpearPointTrader 10]

Spearpoint, if you wouldn't mind, I would like to explore what you are saying a little further.

 

I've been trading for almost 10 years, mostly very unsuccessfully. After blowing out a small futures account, blowing out several paper accounts, moving on to stocks and seriously damaging that acct. (20% loss over 4 years), I am at the point of either giving up or doing something different - obviously. In my stock acct., I have never taken a loss on any single trade greater than 1% of my equity, and usually, it has been less than that - .5% for example. Thus, I've never had the "big" loss that wipes an acct. out. My losses have been a very long, slow bleed. I usually use a stop that appears to be at a logical point of S/R. When I use a bigger stop to give it "more room", the stop invariably gets taken out anyway. When I use a tighter stop, either it was correct and I am stopped out before a much bigger loss would have happened, or I get stopped out only to see the market run in the opposite direction. The end result is a "relatively" small loss wither way. The problem is that those small losses add up to big losses. Unfortunately, I have not had consistent or substantial gains to offset those.

 

Now, to your point, I would be interested in hearing further about how you avoid losses by your mindset. I have often had that thought, but have never done it because of the huge amount of trading info. saying to set your stop at logical points, give the trade room to work, don't take small profits, etc., etc.

 

Thanks for any addl. help you can offer.

 

Well, this is a tough post to reply to. In the course I was going to sell, I layed out a 2 year training program, before you even think about trading real money, so there is no real answer that can be given in a quick reply to a post online.

 

That said, the absolute most productive thing i ever learned was from an old trader at the Merc, when i took some charting courses there back in the mid 90's.

 

He had stopped in at the beginning of the break to check in on the teacher. As we were leaving he was greeting everyone as they left the classroom for go find snacks, or water, or whatever. For some reason he and I, out of the entire class, struck up a conversation. In that, he told me that the secret was in the relationship between the bollinger bands, and the 3 main moving averages. He said this with a look on his face like he had just given me the secrets to the universe, and was sure it went right over my head.

 

It took me years of study, and forward testing (Not back testing. The live constantly fluctuating nature makes back testing useless in this case) to figure it out.

 

That short conversation was the prime, pivotal point that brought me from the realm of failure, to developing a solid, consistently successful system.

 

I have 8 main entry setups, both with, and counter to the trend, as well as a bunch of exit rules and reasons not to trade in the first place, These are based off of how the price bar, the moving averages and the bollinger bands relate to each other.

 

To best help you, I would suggest that you start watching the markets with just those indicators, in real time, so you can watch how they all relate to each other as time and action unfolds.

 

Because the price movement bends both the bollinger bands, and the moving averages back testing will not work. You will see a ton of setups in back testing, that you just can't see moving forward. You have to do your study moving forward, and watch it all unfold in real time to see the ones you would actually be able to catch for real.

[darvasfan 10]

Are you sure you even have an edge?

 

No, I'm not "sure" of anything. I use a somewhat modified CANSLIM approach which utilizes Raschke's 3/10/16 MACD oscillator. Only trade with the trend, usually pullbacks but also breakouts after periods of consolidation.

[darvasfan 10]

You will see a ton of setups in back testing, that you just can't see moving forward. You have to do your study moving forward, and watch it all unfold in real time to see the ones you would actually be able to catch for real.

 

Thanks for the reply. I agree with the statement above completely. Seeing setups of your plan in the past is really easy. The hard part is seeing them develop in real time, being patient for the correct setup, and not taking something that sort of looks like the setup just to trade.

 

I'm curious about your loss prevention plan though. Is that controlled by your setups and "anti" or, once you're in a trade, do you simply not stay in if it starts to move toward a loss?

[joshdance 10]

Are you sure you even have an edge?

 

Define "edge" ......

[TheNegotiator 13]

No, I'm not "sure" of anything. I use a somewhat modified CANSLIM approach which utilizes Raschke's 3/10/16 MACD oscillator. Only trade with the trend, usually pullbacks but also breakouts after periods of consolidation.

 

You have to have a strategy which resonates with your personality. Does it feel right? Then it has to resonate with your account size. You must have a comprehensive trading plan which covers as much as possible so you can properly implement your strategy. The bottom line is, if you don't believe in what you're doing it'll probably end in one way.

[SpearPointTrader 10]

Thanks for the reply. I agree with the statement above completely. Seeing setups of your plan in the past is really easy. The hard part is seeing them develop in real time, being patient for the correct setup, and not taking something that sort of looks like the setup just to trade.

 

I'm curious about your loss prevention plan though. Is that controlled by your setups and "anti" or, once you're in a trade, do you simply not stay in if it starts to move toward a loss?

 

I have exit rules, that basically tell me if the relationship between price, moving averages and bollinger bands changes (especially to previously established anti set ups), I exit regardless of any other factor. I do miss a lot of good run ups this way, but I feel preventing losses is much more important.

 

I wrote a whole chapter on what I call the "rubber band effect". To sum it up, there is support, resistance, and the tension on the rubber band. As far as i know, I am the only one that recognizes that the rubber band effect exists. It explains sudden price reversals that occurs even though the price never got to a support or resistance level. It also explains why these reversals are often faster and more powerfull than the price movement with the trend.

 

Learning to see them, is a whole other thing though. I would not even begin to know how to teach it.

[TheNegotiator 13]

Define "edge" ......

 

Really? Okay.

Anything which gives rise to the opportunity to take more money out of the market than it takes from you.

[darvasfan 10]

You have to have a strategy which resonates with your personality. Does it feel right? Then it has to resonate with your account size. You must have a comprehensive trading plan which covers as much as possible so you can properly implement your strategy. The bottom line is, if you don't believe in what you're doing it'll probably end in one way.

 

I agree with this statement completely. I believe I am finally in that strategy now, but have not mastered it. Mental sabotage issues are present as well. I've arrived here after exploring everything from Gann to Elliott Wave to pure TA to candles to Murray Math to MA crossover stategies to price pattern strategies, etc, etc. And yes, I realize that I've been down a crazy road. I'm settled on a strategy now, but still not sure that I can make it work successfully.

[darvasfan 10]

I have exit rules, that basically tell me if the relationship between price, moving averages and bollinger bands changes (especially to previously established anti set ups), I exit regardless of any other factor. I do miss a lot of good run ups this way, but I feel preventing losses is much more important.

 

I wrote a whole chapter on what I call the "rubber band effect". To sum it up, there is support, resistance, and the tension on the rubber band. As far as i know, I am the only one that recognizes that the rubber band effect exists. It explains sudden price reversals that occurs even though the price never got to a support or resistance level. It also explains why these reversals are often faster and more powerfull than the price movement with the trend.

 

Learning to see them, is a whole other thing though. I would not even begin to know how to teach it.

 

Thanks. I understand what you are saying.

[joshdance 10]

Really? Okay.

Anything which gives rise to the opportunity to take more money out of the market than it takes from you.

 

Specifically, can you give an example of an edge?