2008.12.24 "Successful Trading" by Tom D'Angelo

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2008.12.24 "Successful Trading" by Tom D'Angelo

Postby TheRumpledOne » Wed Dec 24, 2008 3:39 pm

2008.12.24 Twenty-Five Facts, Topics & Aspects To "Successful Trading" by Tom D'Angelo

These Are Some Topics I Covered in a Seminar on Money Management I Recently Gave in San Diego

1. 95 % of all Futures, Stock and Options traders are long term losers

2. The 5% that win will earn the money the 95% lose since futures trading is a zero sum game

3. You must master three disciplines to achieve long-term successful speculation: a. Trading methodology (long or short-term, technical versus fundamental analysis, type of trading system, etc); b. Psychological discipline (controlling emotions of fear, greed and anxiety); c. Money management (risk reword decision analysis for each trading opportunity - when, where, why and how to bet on a particular event)

All three disciplines are necessary, but not sufficient individually - only all three combined are necessary and sufficient to achieve success.

You must develop a trading personality which integrates all three disciplines to achieve long-term success in speculation. If you do not, you will fail.

4. 95% of futures traders concentrate on trading methodology and ignore disciplines two and three. If you only focus on trading methodology, you will eventually fail in speculation. The only question is when you will fail, not if.

5. Psychological problems are caused mainly by uncertainty . . . which creates fear, greed and anxiety.

6. Uncertainty can be significantly reduced if the trader has information and knowledge which creates certainty rather than uncertainty. Certainty reduces fear of the unknown, greed, anxiety, and creates confidence and success.

7. 95% of traders are totally disorganized as to analyzing their trading results . . . and have no concept of how to organize their profitable and unprofitable trades.

Practical organization of trading results is a primary prerequisite in mastering the money management discipline.

8. Brokers' statements provide absolutely no value or practical use in mastering the three disciplines.

9. To master the money management discipline, the trader requires information which is: a. timely; b. accurate and; c. practical. All three tests are necessary and sufficient. Each individual test is necessary but not sufficient.

10. Futures trading is just like running a business. If you do not approach trading in the manner of a successful business, (such as IBM, Sony or Apple Computers) you will. Probably fail in the long run.

11. All three disciplines are inter-linked. If you make progress in one of the three areas, the other two areas will automatically improve.

12. 95% of all traders play as customers in a casino and not as the casino.

13. You must play as the casino and not as a customer to achieve long-term successful speculation.

14. The customer in the casino will always lose and the casino will always win in the long run.

15. Long-term success can only be achieved by playing a game with a positive expectation - (or playing a negative expectation game which you expect to become positive - a more risky technique)

16. The best approach is to play a game where you have a positive expectation and make small bets (playing as the casino). The 5% of traders who succeed fall into this category.

The worst case is to play a negative expectation game and make large bets . . . Most of the 95% traders who fail are in this category.

17. Before you make your first trade, you must establish your risk profile approach towards trading (conservative, moderate, aggressive). You must know who you are. This risk profile will determine your approach to the risk./reward decision making process.

18. Before you make your first trade, you must establish monthly, quarterly and annual goals for each profit center. These goals should be both operating and financial goals.

19. Nearly every trader who is successful was a consistent and/or heavy loser when he/she first began trading (paying their dues), losing significant amounts of capital in the process. This is a situation which stems from the fact that traders focus on the trading methodology and ignore the other two disciplines.

Losing significant amounts of capital can be avoided if the trader is making a sincere effort to integrate the 3 disciplines into his/her personality.

20. 95% of traders do not know where they have been, where they are or where they are going in their trading. They operate like a plane in a fog trying to fly with no instruments. They are disorganized, uncertain, anxious, fearful and eventually are forced out of the speculation game. If you emulate this 95% group of individuals, you will wind up equally frustrated and you will eventually fail.

21. The more you trade (daytrading), the more sophisticated your money-management discipline has to be.

22. The less you trade (long-term positions based on fundamental analysis), the less sophisticated your money-management discipline can be.

23. You should classify any contemplated trade into one of the following five categories before putting on a position:

a. Entrance into congestion
b. A trade within a congestion
c. A breakout from a congestion area
d. A trend run
e. Trend reversal

24. The trader will have difficulty in formulating a successful and intelligent risk/reward (entry/exit) plan unless the trade is properly categorized before the trade is taken. The risk/reward parameters are different for each of the five types of trades.

25. Having timely, practical and correct information of trading results instantly available enables the trader to make rapid, unemotional and informed trading decisions.

Trading will then be less victimized by emotions and instead become more "scientific," unemotional and mechanical.

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Postby TheRumpledOne » Wed Dec 24, 2008 3:42 pm

Education of A Trader - Kent Calhoun

There are two types of education: learning obtained from books and seminars, and knowledge obtained from the experiences that life teaches. Formal education may or may not teach an individual how to trade, but allows the trader to learn from the mistakes of others. This is a good learning experience, since it would take the trader a long time to make all the same mistakes. Education from real life trading experiences teaches an individual survival instincts.

The final step to achieve success is to apply analytical evaluation to the actions taken in step three. This places emphasis on repeating actions that produce the desired results, and carefully examine closely what does not work. Once the reasons are clearly understood why some technical actions do not produce desired results, they should be adjusted, improved or discarded,

This basic approach of how to achieve success may leave the reader with the false impression that trading success is an easy process. Not so. General George Patton stated, "a warrior's greatest asset is self-confidence." This demands knowing what should be done, and why it should be done. This will be presented later, when I will examine the reasons that prevent most people from achieving success, and what can be done about correcting them.

The importance of a positive attitude, the two most important psychological laws, and the four steps to achieve success have laid the foundation for understanding the nature of personal change, why most traders lose money, and actions responsible individuals take to correct losing behavior.

The Three Reasons Why Most Traders Lose - One way to change from a losing t reader to a winning trader is to change the thoughts that preceded the actions responsible for the losses. It is difficult to alter the habitual thought processes that have embedded themselves deeply in a trader's personality over a number of years, due to the powerful influence of three intertwined emotions: fear, anger and guilt.

Fear is an emotional state of anxiety due to the presence or perceived presence of danger. (Stress is often defined as anxiety from an unknown source.) Each newborn child has only two natural fears- fear of loud noises, and fear of falling. Most fears produce learned behavior to a specific set of conditions, called conditional responses. Pavlov pioneered this research with dogs in the 1920's, then B.F. Skinner with human beings and animals in modern times.

Fear often impairs the rational trade decision-making process by emotionally relating the possibility of past financial losses to the future. Fear often immobilizes the trader's decision-making process resulting in no trading decision, or a delayed incorrect trading decision response.

Fear will elicit a trader's "flight or fight" response when he is confronted with methodology's trading signals. The trader will either take actions as demanded by his trading methodology, or remove himself from the presence of danger. An acronym for Fear may be "false expectations appearing real." Attitudes determine actions. Traders with positive attitudes have positive expectations, and take decisive goal-directed trading actions despite fear.

The winning trader accepts the possibility of losses or mistakes, yet has the self-confidence to take action despite fear. Winners manage fear, and losing traders are controlled by it. The greatest mistake is to fear making a mistake. Trading success is based on knowledge of what works and what fails. Managing fear and accepting mistakes are an essential part of the trading educational experience that makes success possible. Winning traders learn from mistakes, losing traders repeat them.

Self-confidence naturally develops from self-discipline as a trader learns what actions should be taken from a given set of technical conditions. The more accurately a trader interprets price action, the better his trading results should be. Thought precedes both emotion and action, yet thoughts combined with emotions determine actions. Self-confidence comes from believing in one's abilities, assessing and accepting risk, then taking actions. The winning trader knows personal or financial growth is impossible without risk assumption, which is part of an educational process.

Only emotionally healthy traders can adequately assume risks, because losses must be emotionally and financially acceptable to each individual trader. Each trader must define their own thresholds of pain for each, and develop the self-confidence to accept them. Fear of being wrong may be more important to a trader's ego than fear of sustaining a financial loss.

In a similar manner, many traders can't accept financial success, because it does not conform to their negative self-image as a losing trader. There are various ways fear can be creatively used for financial destruction by the losing trader, but the one common denominator is allowing fear to control trading actions.

It is important to analyze fear and determine its origin to learn why it is being experienced. Most fear is based on irrational beliefs adopted years ago. If fear of losing money is causing anxiety or loss of self-esteem, the trader may wish to simply stop trading until this fear is understood and positively accepted as part of the trading experience. Traders should never borrow money to trade, or risk money they can not afford to lose.

While fear may immobilize the trade decision-making process due to financial losses that may occur in the future, guilt may immobilize the trade decision making process due to financial losses that occurred in the past. Guilt emotionally associates past financial losses, and any negative emotions experienced with them, to the present decision making process.

Guilt is a form of self-punishment, a recrimination today for something that happened yesterday. There are two common trading mistakes that the beginning trader makes that often lead to experiencing quilt:

Incorrect price action analysis before entry, and failure to adhere to trading discipline while the trade was active. These common mistakes often lead to an unacceptable risk-reward assumption before entry, a delayed incorrect entry price and/or protective stop placements, poor stop re-adjustments, and taking profits or exiting losses prematurely.

The most important technical aspect of trading is knowing at what price the initial risk assumption is incorrect. A trader who does not know at what price his analysis is incorrect does not deserve the profits even if his trade makes money.

Before a trade is initiated, an acceptable trade risk-reward ratio must be defined by the trading methodology. A protective stop loss order must be placed upon trade entry, then readjusted according to the trading discipline until the method determines the trade is to be closed.

A winning trader is a winner before the trade is initiated, while the trade is active, and after the trade is exited regardless of the result to the degree he adheres to his trading discipline. There is no logic-based reason to ever experience guilt so long as the trader has executed the actions demanded by his trading discipline. Once a trader psychologically and financially accepts the worst outcome that may occur and does all he can to prevent it, fear and guilt become intellectually useless emotions.

Anger is a hostile emotional response either inwardly directed, or outwardly expressed towards others. Anger may result from confrontation with the guilt or fear aspects of the trade decision making process, or negative trading results. Rational trading decisions are very difficult to make when the brain is processing anger, due to physiological and psychological reasons.

A trader may choose to ignore a signal due to a recent loss, fearing another loss will result. If the trade makes money, guilt and or possibly anger is experienced for not taking the trade. Guilt is a natural response after anger has been vented. If the trade loses money, the trader feels justifiably rewarded for not taking the trade thus making it more difficult to execute the proper trading discipline required for his next entry signal.

Does this mean there is no subjective aspect to trading? Burton Pugh, who wrote excellent technical analysis trading commentary in the 1930's, stated "forecasting prices is a science, but trading is an art." Only a master trader, who can technically justify reasons for ignoring a trade, should override trading signals. One of the Calhoun Four Automatic Trading Rules, "always look to buy a market oversold into support," is expecting a sharp currency move mid-Sep 95, and current system sell signals are not being taken.

Resolutions to Solutions of Fear, Anger and Guilt - Four basic actions allow traders to manage fear, anger and guilt. First, forgiving one's self for past losses. Second, forgiving others associated with past trading experiences. A person is mentally healthy to the degree he may forgive himself and others. Forgiving one's self for past trading losses resolves guilt. Third, asking forgiveness of others who may have been injured from the trading experiences. Lastly, vowing to take full responsibility for all past and future losses.

The four-step resolution process allows any trader to begin to heal emotionally. By intellectually accepting the past, traders may view their actions with a new positive perspective. The past can not be changed, but its perspective must be changed from a negative experience whereby the trader sees himself a victim, to a positive learning experience that will allow the trader to achieve success. Until a trader positively resolves his past, he will not accept important learning experiences yet believe he is a person unworthy of success. Resolving the past demands taking total responsibility for it, and personal commitment to not repeat the same trading mistakes.

Recognizing a problem exists is necessary before resolutions can be examined. Anger is a financially self-destructive emotion that exacerbates fear and quilt by obscuring solutions to them, while creating itself as another problem. There is no such thing as justifiable anger related to the trading process. If a trader can financially and emotionally accept losses, execute proper trading and self-discipline, the powerful negative emotions of guilt, anger and fear should not become part of or create trading problems.

The relationship of fear, anger and quilt is a very complex subject matter. The psychological problems of losing traders can not be expected to be adequately resolved in a cursory discussion of this nature, however all resolution to a trader's psychological problems must consider the key aspects presented in this work. Once traders make the critical adjustment from a losing to a winning trader, they often come to realize the psychological aspects of trading being equally important as correct price action analysis.

A degree in psychology may be more valuable than a degree in economics for a professional trader, because markets are value based yet emotionally priced. Understanding the psychological perceptions of market traders correlates directly to the what and how prices are recorded for any stock or commodity.

Preventing Future Psychological Trading Problems - There are many successful trading approaches, but all of them demand the trader develop a positive relationship with financial risk acceptance. Traders to whom money represents self-esteem or security suffer unduly when losses are sustained, because they see themselves as being punished by forces beyond their control. Professional traders do not spend time lamenting the money they have lost, they express gratitude for the many blessings they still possess. Again, a positive attitude makes the difference between winning and losing, or some cases even heaven and hell.

A samurai swordsman went before an esteemed Zen master and shouted in the temple he wanted to learn the difference between heaven and hell. The master looked at the samurai and shouted, "you mean they let a big, ugly fool like you become a samurai swordsman?" The samurai quickly drew his sword raising it high above the master's head. The master calmly raised his finger and pointed to the samurai's eyes, and said "that is hell." Slowly the samurai sheathed his sword, nodding his head as he knelt before the master, placed his hands together then bowed. "And that is heaven," stated the master.

Understanding and correctly analyzing price action is absolutely necessary before trading success is possible. Yet even with profitable trading methods, traders must develop a positive relationship with themselves, others and their trading environment before success may be achieved. The professional trader recognizes no one else may give him success, he must earn it by careful preparation, proper execution of trading discipline, and careful analysis of trading results.

Trading decisions based on scientific analysis of price action make statistically accurate price forecasts possible. Placing a protective stop loss order to exit the market at the price the initial risk analysis is incorrect is the best psychological asset. Even if the trade loses money, the trader adhered to his trading discipline. Statistically, a trade 60% accurate with payoff equal to losses may risk 5 percent of the total capital with only a 0.0085 probability of financial ruin.

Failure is a good teacher only to those who possess a positive attitude to learn the valuable lessons from their mistake. Accurate execution of trading discipline requires a protective stop placement on order to avoid failure, and diminish the negative psychological effects of fear and guilt. Self-discipline demands doing what should be done, when it should be done, whether or not a trader wants to do it. Self-confidence is born from self-discipline, and makes the risk acceptance process acceptable because potential losses are acceptable.

Developing a positive attitude is essential for human beings to successfully live life and achieve their maximum potential, since all other higher human values come from it. Respect for truth, honor, dignity, honesty, integrity, courage, loyalty, patriotism and wisdom is cultivated by an individual who recognize these values not only enhance the quality of his life, but the lives of all he encounters. His attitude states others are worthy of these values, just as he possesses enough self-worth to expect them to be returned.

The Green Bay Packers had three very basic plays they ran over 80% of the time. These plays reflected Vince Lombardi's winning philosophy and he expressed it very simply. "Son, the only thing you can do is to get off your ass and stop feeling sorry for yourself and do it! Work out your method. Work out your system, and execute it." Was Lombardi talking about playing football or trading? This simple philosophy inspired the Packers to two consecutive NFL Super Bowls. Not bad advice to conclude my "Psychology of Successful Trading."

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Postby Yosako Mimoto » Fri Dec 26, 2008 12:32 pm

About the percentage of Options traders "which lose money", I must make a comment about it, according to something I recently read in a book.
1) Some of the option traders are hedgers, so they aren't "losing money": they're paying for insurance.
2) Other traders are home run hitters, which can lose 70% or 80% of the time and still make money, since they adhere to the "forget about hit rate and shoot for the stars" school of though.

And about the stock market, 95% of failure rate is just plain unbelieveable, and more when the stock market has a upward bias over the long term.
I don't know where they got that statistic from, but it's as fake as a Monopoly banknote.

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