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Ch. 3- Taking Responsibility

Chapter 3- Taking Responsibility
  • I am assuming your ultimate goal is consistency. If you are like most traders, you don’t realize the fullest potential of the opportunities available to you. To realize more and more of that potential, to make it more and more of a reality in your life, you primary goal has to be to learn how to think like a consistently successful trader. 
  • Bottom line is successful traders have eliminated the effects of fear and recklessness from their trading. 
  • Excellent traders have learned that it is essential to have internal discipline. 
  • The consistency you seek is in your mind, not in the markets. It’s attitudes and beliefs about being wrong, losing money, and the tendency to become reckless, when you are feeling good, that cause most losses, not technique or market knowledge. 
  • Attitudes produce better overall results than analysis or technique. Of course, the ideal situation is to have both, but you really don’t need both, because if you have the right attitude, the right mindset, then everything else about trading will be relatively easy, even simple and certainly a lot more fun. 
  • Reacting to Loss- 
    • Example of novice trader putting on winning trades and his attitude
    • What happens when the novice trader finally does lose? There are two possibilities in this case
      • In first case, if the novice trader is operating out of a belief that there’s no possible way to avoid loss, because losing is a natural consequence of trading- no different from, let’s say, a restaurant owner incurring the expense of having to buy food? Furthermore, suppose that he has completely accepted the risk, meaning that he has considered and accepted for all of what would otherwise be the unacceptable possibilities in the market’s behavior, both financially and emotionally. With these beliefs, it is unlikely that he would experience a deterioration of his attitude, and would simply go on to the next trade.
      • In second case, if the novice trader hasn’t completely accepted risk, he is going to feel pain- emotional pain.
  • The implications are that if we havent learned to accept the inherent risks of trading and don’t know how to guard against making these natural connections between our past and the present, we will end up blaming the market for our results instead of taking responsibility for them.
  • Only the very best traders have reached a point where they can and do accept complete responsibility for the outcome of any particular trade.
  • The market has no responsibility to give us anything or do anything that would benefit us.
  • Taking responsibility means acknowledging and accepting, at the deepest part of your identity, that you- not the market- are completely responsible for your success or failure as a trader. 
  • You have to learn for yourself how to get what you want out of the markets. The first major step in this learning process is taking complete and absolute responsibility. 
  • Although, it may feel as if you are fighting the market, or it is fighting you, the reality is you are simply fighting the negative consequences of not fully accepting that the market owes you nothing; and that you need to take advantage of the opportunities it presents by yourself , 100 percent and not one degree less.
  • The problem is that preventing pain by avoiding losses can’t be done. The market generates behavior patterns and the patterns repeat themselves, but not every time. So again, there is no possible way to avoid losing or being wrong. 
  • The solution is the embrace the responsibility and stop expecting the market to give you anything or do anything for you. If you resolve from this point forward to do it all yourself, the market can no longer be your opponent. If you stop fighting the market, which in effect means you stop fighting yourself, you will be amazed at how quickly you will recognize exactly what you need to learn, and how quickly you will learn it. Taking responsibility is the cornerstone of a winning attitude.

Summary

  1. Internal discipline- The discipline that you want will come when you totally accept responsibility and understand that there is no way you can avoid losses in the market. It’s all about believing in your edge and playing by the rules you create.
  2. The consistency you seek is in your mind and not in the markets. Believe in yourself that you can be consistent with your methods and apply them on a consistent basis. 
  3. Accept losing as a business expense which can not be avoided. Assume responsibility before every trade and accept the loss if it occurs even before it occurs. In other words, predefine your risk and accept it whether the trade goes in your favor or not. Calmly move on to the next trade. It is all about playing your edge over a long period to be successful just like a casino does. 
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Trading In The Zone (Ch. 2 Summary)

Chapter 2- The Lure (and the Dangers) of Trading

  • Trading is an activity that offers an individual unlimited freedom of creative expression, a freedom of expression that has been denied most of us for most of our lives.
  • The freedom is great. All of us seem to naturally want it, strive for it, even crave it. But that doesn’t mean that we have the appropriate psychological resources to operate effectively in an environment that has few, if any boundaries and where the potential to do enormous damage to ourselves exists. Almost everyone needs to makes some mental adjustments. 
  • To operate effectively in the trading environment, we need rules and boundaries to guide our behavior.
  • There are many kinds of trades in which the risk of loss is unlimited. To prevent the possibility of exposing ourselves to damage, we need to create an internal structure in the form of specialized mental discipline and a perspective that guides our behavior so that we always act in our own best interests. This structure has to exist within us, because unlike society, the market doesn’t provide it. 
  • In this limitless environment, virtually anything can happen at any moment and only the consistent winners define their risk in advance of putting on a trade. 
  • In trading, prices are in constant motion, nothing begins until you decide it should, it lasts as long as you want, and it doesn’t end until you want it to be over. 
  • This means that once you are in a losing trade, you don’t have to do anything to keep on losing. You don’t even have to watch. You can just ignore the situation, and the market will take everything you own and more. 
  • Problems when trading
    • The unwillingness to create rules– Each trader resists creating rules at one point or the another as it means that the degree of freedom he was expecting will be reduced by the rules but the truth in trading is that rules need to be created and you also have to have the discipline to abide by them. 
    •  Failure to take responsibility– The hard reality of trading is that, if you want to create consistency, you have to start from the premise that no matter what the outcome, you are completely responsible. The way to avoid responsibility is to adopt a trading style that is random (poorly planned trades or no planning at all). In this way, the trader doesn’t face the responsibility at all.
    • Addiction to random rewards– If you don’t know what works and keep on placing unplanned trades, you will never know what to do to repeat success. The rewards are random if the trades are unplanned and the trader is not aware of what works and when.
    • External versus internal control– The only control you have while trading is over your inner self. Market cannot be controlled. By praying, wishing or hoping for the market to turn around, you are incorrectly assuming that market will respond to your plea, but market is an external force and it is always right. The only control you have is over your own actions. 

Summary

  1. Rules and Boundaries with discipline to abide by them are needed to operate effectively in the trading environment. 
  2. Before placing any trade, risk must be predefined. 
  3. You are solely responsible for everything that happens in your trading. Plan all trades and be consistent. 
  4. Market doesn’t care what is happening with your P&L. It is purely doing what it is supposed to do. You can be wrong on any trade and must accept that before placing any trade.
 
 

Game Plan 02/12

I have 4 long positions open

  1. AAPL- Bought a 500 call when the stock was near 483.50 (resistance). Stock dropped below 480. 484.94 was the high of the day. 476.25 is my stop on this. Once hit, I will exit my position.
  2. LNKD- Bought a 155 call when the stock price was near 155. Looking to exit near 158 area. 158.9 was the high of the day. Stop at 153.49. 
  3. PCLN- Over 700, it can rip higher to 710. Looking for a target of 710 on this if the market is strong. Will bail on these if it doesnt move much tomorrow. 693.3 is the stop loss.
  4. VMW- Small position, will keep it until friday and let it expire. Still in a tight range. Needs to get over 79.5 to see upside on this.

Take profits and losses. Do not let your emotions take decisions for you. Be objective and work according to your plan.
Your plan is to take profits and cut losses short tomorrow. 

 
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Posted by on February 12, 2013 in Trading Plan

 

Watchlist 02-11 to 02-15

Watchlist
Bullish

  1. WYNN- Looking for breakout over 127
  2. LNKD- Keep close watch for pullback
  3. VMW- Keep an eye on it
  4. CRR- Over 87, 91.82 is the next area
  5. DECK- Looks good for 50 over 44.16
  6. TSCO- Over 104.50, 110 next target. 
  7. CELG- Over 102.29, new ATH

Bearish

  1. AMZN
  2. YUM- Can go either way.
  3. NFLX

WYNN, LNKD, AAPL, GOOG, VMW, PCLN, AMZN, NFLX, PXD, CRR, DECK, REGN,CELG, TSCO, CF, MPC, YUM

COMP– 3196.93 can act as resistance here as it is the 10 year high. Consolidation required here before the next push higher. Support below at 3175 area and below that 3160 and 3130 area.

SPY– Closed at new 52 week highs. ATH is 156.70. 155 area can act as big resistance.  First support level at 151.30 and 149.50 below that. 147-147.3 area is a bigger support on the daily chart.

AMZN– A test of 255 is possible here. Break of 255 would lead to a test of 250 and 242-243 area below that. 265-267 area is the resistance above. If the market is weak then this stock can test the 255 area again. 50d at 260.38 and low from Friday was 260.55 area. Below 260, look to buy some puts.

GOOG– ATH at 786.67, support below at 780 and 772 area. 765 area is a bigger support level. Over 786.67, a test of 800 should come soon.

AAPL– 478.81 high and 470.25 low. Over 478.81, next target is 483.38 and over that 497 area s/be tested. Below 470.25, 465.73 s/be tested again. 20d at 475.03 can act as resistance here.

WYNN– B/O over 127. Target 129.5 area.

LNKD– Support at 150, it can easily climb higher here to 160 area after the huge volume breakout from its earnings.

VMW– Over 79.50, it can go into its earnings gap and fill it. Buy calls at 80 strike price.

PCLN– Next resistance at 710 and 720 area. If market is bullish, it can test 710 and 720 area again this week.

NFLX– Pullback to 172 area is possible as support 10d MA. 185 area is the resistance above.

REGN– Sitting at support level here. 165 area if broken would bring 154 area into play.

TSCO– Looks good for higher prices from here. 104.83 is the ATH. 110 area can be easily tested in the coming days. 100 area should act as support level below.

CRR– Can rip higher here over 87 area. 91.81 is the first resistance and over that 96 area and 100 area. Support at 83 area.

DECK– Over 44.16, 49.5 is the next target above. Support at 42 area below.

CELG– 97.30 area is support and over 102.29 is new ATH.

 
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Posted by on February 11, 2013 in Watchlist

 

Trading Code/ Rules

  1. Stop loss/Risk Management- Cut your losses and take profits at resistance.
  2. Patience- My rule on patience is that I will wait for the right time to get into a position. Even if it means waiting forever. 
  3. Edge
    • Support and Resistance- S/R work more often than not. It pays to be patient and wait for the stocks to setup.
    • Breakouts- Usually breakout points are tested before making a push higher.
  4. Follow the trend- I will not go against the trend. Trend is my friend until it breaks.
  5. Time frame- A position taken based on a 5 min. chart will be exited based on a 5 min. chart and not longer term chart. 
  6. Checklist- I will only enter a position after looking at the chart and checking my checklist for the following items
    • Are you following the trend or going against it?
    • Where is the support and resistance?
    • Are you violating any of your rules if you take a position here?
    • Where is your stop loss?
    • What if the position goes into a loss right after you buy it? Where will you sell it?
  7.  Buy support/Sell resistance
 
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Posted by on February 6, 2013 in Rules

 

Watchlist 02/04- 02/08

SPX– 30 min. chart- Support at 1508, 1502 and 1497. Over 1514.41, it can run higher.
COMP– Next resistance at 3198 above. A test of it can bring some resistance. Support at 3160 area below.
GOOG– This stock can easily run to 800 from here if the market is strong in the coming days.

AAPL– Over 460, 465.73 and 484 are the next resistance levels. Below 448.35, next support at 440 and 435 area.

PCLN–  678 and 673 (20d) area are support levels.
CMG– Over 315, 327 is the next resistance.
AMZN– Needs to hold 262 level here. 258 is the 50d MA. Needs some time here to consolidate before the next move up. Some overhead resistance at 269, 275 and 284 area.
NFLX– Needs to consolidate. Support at 160 and 156. R at 170 and 175.50 area.
VMW– Keep eye on it. Big support here. Over 80, it can run higher to 85 area.
CF– Over 232, new ATH. Support at 228 area below.
BIDU– Look for a breakout over the desc. TL.

 
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Posted by on February 4, 2013 in Watchlist

 

Qualities present in all successful traders

Below are some qualities that I think are present in all successful traders. I believe that if a trader is missing on any one of these qualities then it will be difficult for him/her to succeed in the trading career.

  1. Discipline– Discipline includes a lot of things like:-
    • Completing Homework every night
    • Game plan for next morning
    • Religiously following the rules
    • Sticking to the plan and not diverging away from it
  2. Cutting losses short- I cannot even think of even a single successful trader whose first and most important rule is not risk management or cutting losses short using stop losses. Trading is a career where cutting losses and learning to take small losses is the most important thing to learn. Successful traders know how to lose gracefully and accept it as the cost of doing business.
  3. Acceptance of different emotions and situations in the market- Best traders are able to separate themselves and accept what they get from the market. They do not try to force a position. They accept that they can be wrong a lot of times and still be profitable in the long term.
  4. Self Awareness is the answer to controlling market emotions– Stock market is a place you get to see a lot of emotions everyday. It is full of greed, fear, hope and regret. 
    • Greed- Be self aware and notice when you are feeling greedy. Replace the feeling of greed with looking at the chart and taking a decision objectively. Don’t push away from the feeling, just let it come and decide to take action.
    • Fear- Fear usually arises when I have a lot of unrealized profits on the table and also when I see my setup hitting but not able to push the button to take the trade. Once again you want to become self aware of these situations and whenever they arise you need to take control and take a decision objectively without letting your emotions rule over you. Remember that you can always stop your losses and keep them minimum if the trade doesn’t work. Fear also comes in when you see a lot of volatility and don’t want to miss the profits. You take the position too early without any setup and it immediately shows a huge loss because it reverses immediately either from the breakout or gap up. Realize that this is the game that market makers play every day with human emotions.
    • Hope- When the trade is taken and it reverses on you, the feeling of hope sets in. You start hoping for position to reverse and show you a profit. What you need to do in this situation is to close the position and go on to the next trade. Don’t waste emotional capital on trades that are not working. Self awareness is the answer.
    • Regret- Regret sets in when you see a setup but you don’t take it and it keeps going higher. Another reason for regret is when you close a position only to see it going higher and then you start calculating your gain on the position had you not closed it. You need to accept that it is better to concentrate on other setups rather than regretting the decisions that have already been taken. Stock market is full of opportunities and if one goes away there is always the next one around the cornet. Be patient.
  5. Patience– The best traders have a lot of patience to wait for the best setups and take them when they come. They know when to get involved in the market and put money in. 
  6. Game plan and Strategy– The best traders know what their edge is and stick to it to make profit in the market. Define your trading style, your strategy and game plan. Do what suits your personality.
 
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Posted by on February 2, 2013 in My best, Rules