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Monthly Archives: October 2013

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.