Archive | Trading Psychology RSS feed for this section

Delusions Every Trader Faces

Usually when we think of delusions we imagine mental disorders: someone struggling with schizophrenia or hypochondria. We may even imagine somebody we know–somebody who is high-strung with anxiety and convinced the world is out to get them. There are some pretty bizarre delusions out there:

  • Ever feel like you’re life is a movie? For people suffering from the Truman Show Delusion, they’re literally convinced that their life is a reality show they can’t escape from. This article on Buzzfeed reports that a man actually sued HBO for putting him on a secret reality show.
  • As if living your life in a reality tv show wasn’t bad enough, imagine your life was a video game! Want to score points to win? Steal cars, avoid police, and receive your instructions through your gaming headphones. Even if you’re arrested, it’s just another level to the game. (Source)
  • Do you know someone who lives their life in denial–to the point that they don’t even think they exist? A rare condition known as ‘Walking Corpse Syndrome’ is a delusion where the individual is convinced that they’re already dead or don’t exist. Some even claim to be able to smell their own rotting flesh.

I think most of us suffer from multiple delusions (hopefully not that serious, though). A delusion is a belief or impression that is firmly maintained despite being contradicted by what is generally accepted as reality or rational. I’d like to think that I’m connected with reality and don’t belong in an asylum (my family might tell you differently, especially when I’m even remotely lacking sleep), but as I’ve grown older I’ve been able to look back and recognize the delusions I used to live by. Most traders experience delusions as well.

Traders, both new and old, often experience delusions in the currency market. Some common ones we might face:

  • “If I just keep trading, I can make a little more money.” That’s a scary delusion. You can be following the charts all day making trades, but it’s not about how many it’s about how well. The quality of your trades is much more important than the quantity.
  • “I can make some quick, easy cash in Forex.” The economy is not a magic box where you put a little money in and get a lot of money out. Trading requires discipline and strategy–not luck.
  • “It’s going to come back soon…”  This delusion can bring you down. Fast. When you hit your stop loss, it’s time to get out. Trying to hang on to a losing trade is like trying to hang onto a hangnail–it’s a lot less painful to just cut it off.

We’re all at least a little guilty of these delusions, but a diagnostic is the first step to a cure. Review some of your past trades, and identify any delusions that affected the outcome. Then, find a way to overcome them; you can share it with a friend or mentor, keep a reminder next to your computer, or even watch a cheesy motivational trading video. Whatever you need to do, don’t let yourself be the reason you don’t succeed.
Happy Trading!

Comments { 0 }

How Running Has Helped Me Become a Better Trader

Ever been stuck in the slumps? Yeah, me too.

tired-runner

For the past couple of months I’ve felt like the man in this picture. When I ran, I was just going through the motions-just trying to finish my work out. Sure, there were some good days here and there, but I knew that I wasn’t reaching my potential as a runner. I also wasn’t feeling the happiness and energy I usually felt after a good run. I approached my coach, and he gave me some steps to help me out of this rut I’d gotten myself into. However, I realized that these steps wouldn’t just help me in my running; they could help me with my profession, my social life, and (of course) my trading.

  1. Set my sights higher than just the next race

I know you’ve all probably heard more than your fair share of motivational speeches centered on goal setting, but honestly there is something about a goal that just helps you focus on improvement. When I stopped and focused on what I was going to accomplish the racing season, I saw each race as a step to reaching my personal record. When trading, you have to look further down the road than your next trade.   What do you want to accomplish today?  This week?  This month? You have to set your sights higher than a single trade and discover what you can do to accomplish your personal best.

  1. Stop running so much

What? To improve running you need to stop running? To a degree, yes. Running daily is very important, but I always reserve one day of the week to resting and recovery. Without this break, I would end up running less during the week because my legs would become overworked. Sometimes, you need a little break from trading. Don’t spend all day with your eyes glued to the candles on your screen-go for a run or something 😉

  1. Track your mileage

I always track my mileage – along with how much sleep I get, and the food I eat. This not only helps me feel good throughout the season, but I can look back and see when I was struggling or doing good. By tracking my progress this way I can see what made me sick or tired and what made me feel good and energized. Track your trades. Notice what setups work for you, and what triggers an unwanted emotional response. Besides, whether your profitable or not, it always feels good to look back and see the progress you’re making.

  1. Mix it up

Contrary to what some may imagine of a typical cross country runner, I actually lift a lot weights. My core and upper body strength is just as important as having strong legs when I run. Sometimes, at the end of a race, if your legs feel like they don’t have the energy you can pump your arms, and ,crazily enough, your legs will follow! When you’re trading you need to be prepared for different market events. Learn to trade in long summer doldrums, as well as high votility markets.

  1. Change your attitude

One of my pet peeves is when I go to a race, and hear runners complain that they have to run. Don’t you run because you like it? If you don’t like it, then why are you here running?! I like feeling strong, the runner’s high, and swelling accomplishment that fills you up and makes you feel like floating. What do you like about trading? If you can’t answer this question, then you need to find out why you’re trading. Identifying why you’re trading will help get you through the slumps.

I hope if you’re feeling a little bit stuck in a rut in your trading, that you can try these out. Make trading enjoyable again, and go make some pips.

Happy Trading!

Comments { 0 }

Breaking the Trading Psychology Barrier: Fight or Flight

The Apiary Fund is helping people break the trading psychology barriers that are holding them back from success in the financial markets.  Each week we’re focusing on a different psychological barrier to help you better see it and beat it!

Today’s obstacle is the psychological phenomenon called fight or flight!

When faced with adversity, we all have an instinctive response:  some confront the challenge head-on while others run for hills. In psychology, it’s called fight or flight, and sometimes our instinctive response comes at odds with rational decision making in the financial markets.

Emotional traders will often allow their pre-programmed response to make the tough decisions.  Do you close the position?  Do you keep it open?  Do you double down?  Do you quit trading altogether?

The problem with emotional triggers is timing – the emotion does not always manifest itself at the right time.  So the instinctual response to the emotion of adversity is often ill-timed.

It would be nice if the emotional trigger and the right time to make a decision always correlated…  But they don’t, so the trick is to make buy and sell decisions when it’s a rational time to make the decision – not when the emotion is tugging you into a response.

One approach traders use to overcome the instinctive response of fight or flight is to identify when the emotions start tugging on the instincts.  You must learn to recognize it by documenting or making note of every situation where the emotion starts to express itself.

Once you recognize the emotion, then you can start looking for patterns.  At first you may only recognize the pattern as a losing trade, but you need to dig deeper if you can.  Is it a pattern to the size of the loss?  Or the duration of the loss?  Is it the opinion of another trader?  Is it CNBC?  Understanding the patterns that trigger the emotion will allow you to plan your trade better.

The final step is to make pre-defined decision points before you enter a trade.  In this way, you’ll know when to make a decision and when not to, irrespective of how you feel.  You’ll begin to develop confidence that these points work within boundaries of your natural instincts. It will save you from making a decision based on emotions and it will help you be more rational in your trading.

Stay tuned for the next trading psychology barrier:  Pleasure or Pain.

Comments { 0 }

Apiary Fund – Breaking the Trading Psychology Barriers

There are three obstacles Apiary Fund traders must overcome in order to get funded: trading knowledge, trading skill, and trading psychology. The toughest of these is trading psychology.

The next few Apiary Fund blog posts will focus on a different barrier we have in our trading psychology and present ways to break the barrier!

Trading Psychology Barrier:  Getting Something for Nothing

Most people like the idea of trading currencies because of the vast fortunes you can make with very little effort. Sadly, it’s not that easy. Trading currencies requires work – a lot it.  You must spend time learning and developing your skill. Like anything that requires skill, such as sports, music, or professional occupation, you should not expect to just walk in and experience instant success. The desire to make something from nothing leads to speculative behavior.  Speculative behavior leads to financial ruin.

Breaking the Trading Psychology Barrier:  Commitment.

Breaking the trading psychology barrier of getting something for nothing is as simple as making a commitment.

The usual excuse for the uncommitted is that:

–       “There’s something ‘better’ around the corner” – or –

–       “There’s no clear evidence of a win with what I’m doing.”

Modern psychology will tell you that ‘WHAT’ you commit to is secondary to ‘HOW’ you commit to it.  It is ‘how’ you commit to trading that will make you successful. Only the smallest part of committing is a passive process that evaluates whether or not something will work.  The #1 factor that will make the choice to trade currencies successful or not is what work you put into it.

Stay tuned for tips on the next trading psychology barrier:  Fight or Flight.

Happy Trading!

Comments { 0 }

20 Pips Equals Your Success

Ever dream of being that one investor? The one who predicts market events before anybody else knows they’re coming, and gets away with millions of dollars fitting nicely in your pocket? Well, it might be hard to stuff that much money your pockets… but I’m sure you would have no trouble finding a nice safe place to store your millions. Wouldn’t it feel great to make it on the list of legendary traders known for their cunning and incredible returns?

1929: Jesse Livermore shorted the stock market (predicting the crash) and made $100 million.

1987: Paul Tudor Jones shorted the stock market (predicting Black Monday), making an estimated $100 million.

The 1980s (after Black Monday): Andy Krieger shorted the Kiwi (predicting it was highly overvalued) and made $300 million.

1992: George Soros shorted the British pound, making $1 billion dollars (meanwhile Stanley Druckenmiller invested in the german mark and made an additional $1 billion for Soro’s Quantum fund)

2000: John Templeton made $80 million in a week shorting the Dot-Com bubble.

2003: Andrew Hall went long (like, 5 years long) on oil and made enough to land a $100 million dollar bonus.

2007: John Paulson and Kyle Bass both made $3-4 billion shorting subprime mortgages and mortgage-backed securities.

2009: David Tepper went long on banks (predicting they would recover from the financial crisis) and made $7 billion.

Of course, while some take opportunities in the market to make millions, you have to realize the enormous risk behind these trades. As investor Spidey-man would say, ‘With great returns comes risk of great losses.’ For example: Yasuo Hamanaka lost $2.5 billion shorting copper, Brian Hunter lost $6.5 billion in natural gas futures, and Jerome Kerviel lost an incredible $7.1 billion in European futures. Just this last May, China’s richest man lost $15 billion when his company shares plummeted. Ouch – somebody didn’t have their stops on!

The difference between us and them is as simple as a couple of zero’s. Say you make 20 pips with one lot, while somebody else makes 20 pips with 100 lots. You both made 20 pips, but the one with 100 lots made a lot more money. Honestly, it all depends on how much money you put into the trade. The more you practice hitting your 20 pips a day, the more comfortable you’ll become trading in the market. The more comfortable you become in the market, the more money you’ll invest in it. The more money you invest, the more money you’ll make (as long as you’re smart about it). Then, you’ll be hitting your daily 20 pips with 100 lots and making a lot more zeros.

Happy Trading!

Comments { 0 }

Non-Directional Markets

With all the talk about volatility and the dollar strengthening… it appears the dollar stalled out in January, and has gone nowhere since. On January 27, the dollar was trading at 1.13 against the Euro and it’s there again today – the dollar has essentially gone nowhere in 6 months.

What we’re seeing is an extended period of non-directional movement in the dollar. This is a situation where large dollar gains and losses are typical – with the media focusing more on the strong dollar than the weak giving us the illusion that the dollar is strengthening when it is really just drifting sideways for an extended period.

The root cause of the non-directional market is uncertainty. As traders, we understand that the only guarantee in the markets is uncertainty, but this type of uncertainty is different. For example, it’s easy to frame uncertainty during a rate decision – if the rates increase the dollar goes up.  If the rates drop the dollar weakens.  However, the uncertainty of having one fed meeting after another with conflicting economic data is much more difficult to forecast future movement.

Cross_roads

And there is a lot of this type of uncertainty in our world.  Among them is the uncertainty surrounding the Greek debt defaults and the Grexit from the Eurozone.  An exit could bring contagion to financial markets – the extent to which no one really knows.

Geopolitical tensions (such as ISIS, South China Sea, and Ukraine) also make directional bias difficult.  At any moment tensions could flare resulting in greater uncertainty.

Adding to the uncertain cauldron, is the presidential race in the US, where we have an ever-expanding pool of candidates with no candidate showing any real sign of strength.  There is also the dysfunctional relationship between the Whitehouse and Congress, and their inability to settle on any meaningful fiscal policy.

All these factors make forecasting future trends foggy at best.

What do you do in markets like this?  The easiest solution is to use different models.  Fading the outside of the range is an effective strategy.  Reversals will tend to yield better results than breakouts.  Smaller timeframes will still have directional bias – albeit with smaller returns. And taking small incremental profits is better than hitting home runs.

Traders can survive periods of non-direction if we remember the rules are different and it requires a different book of play.  Don’t forget the rule of volatility – the market oscillate from periods of high volatility to low.  We are in a low volatility period so the next move is to an increase…  Clarity on any of the issues mentioned in this article could be a catalyst for that shift and you need to be prepared!
Happy Trading!

Comments { 0 }

Our Philosophy On Success

I was on facebook the other night, and I ran into an article, “Will Your Child be Rich or Poor? 15 Poverty Habits Parents Teach Their Children.”  I read the article, and was surprised by Habit #4. It stated,

“62% of the wealthy floss their teeth every day vs. 16% of the poor.”
 

Now that may seem like a silly statistic about an unrelated field.  I mean, how does flossing your teeth connect with the size of your bank account?  As I started to think, it hit me as to why it was #4 on the list. Successful people are creatures of habit, but not just any habits: Successful habits.

If you want clean teeth you need to both brush and floss.  I don’t think I am saying anything too ground breaking here.  I mean, we’ve all been taught the benefits of dental hygiene from a very young age.

So how will dental floss help you in your trading?

Habits.  We, by our life experience, create habits on how we act when different things happen to us.  When people see the market falling they are naturally fearful.  When people see the market raising they are naturally greedy.  It is not the emotions that define who we are, it is what we DO with those emotions.  Do you let fear take control of you?  Do you cut your winners short?  What we have found in the Apiary Fund is that the most successful traders are the ones who have a set of rules, and apply those rules consistently every day.  We all have times in trading where the market does not go our way.  The question is what do we do at those times?

Remedy: Know your rules and follow them.

That might seem like a nice trite remark, but what do I mean by know your rules?  Step one is to write your rules down on paper.  I know most of you have your system that you follow in your head, but if you can’t write it down then you can’t measure it.  If you can’t measure it you can’t improve it.  Once you know it, you have to follow it.

Seems like a simple enough recipe for success, but then again so does flossing!

Comments { 1 }

Fear of Failure

A 2014 study conducted by Babson College revealed how fear of failure stops some people from engaging in activities where failure is a possible outcome – including the activity of learning. The study concluded that the fear of failure negatively influences a person’s motivation to learn and their attitude toward learning.A mature business man giving a presentation to some colleagues.

This study has direct implications on the mission and purpose of the Apiary Fund. At its core, the Apiary Fund teaches a person how to manage an investment portfolio – an activity where risk of failure is very real. We accomplish the goal through a progression of classes, simulation, and the eventual management of a small portfolio in live market conditions.

At every step, Apiary works to mitigate the elements of risk and teach a person how to properly analyze and make decisions that include risk. We strive in every possible way to give a person the greatest chance of success in learning how to manage an investment portfolio.

The irony of this study is that when fear of failure prevents a person from engaging in an activity that will make them better, it almost assures their failure in that activity. And when that activity is learning how to manage our finances and investments, the cost of failure can be high! Imagine living your life and avoiding all investment decisions – it is likely to leave you broke for retirement. Imagine giving all those decisions to someone else – it leaves you vulnerable to fraud, mismanagement, and high costs.

We know that many of you join Apiary Fund for the opportunity of trading our money. It is a wonderful incentive – one I wish I had when I was first starting! However, what you really gain through your Apiary experience is a skill and an ability to make intelligent decisions that involve the risk. That is a skill and an ability that has far a greater reach and value in your life than any amount of money you could trade for Apiary Fund!

Happy Trading,
Shawn

Comments { 0 }

Will The Dollar Continue To Strengthen Through 2015?

From it’s low in May of 2014, the dollar has posted 32 weekly highs against the Euro.  Most experts are predicting the strong dollar rally to continue through 2015, but can the dollar continue it’s impressive rally?

Reasons for the dollar rally to continue

The dollar is currently the only major currency with improving growth prospects:

  • The Commerce Department has revised the estimate for GDP growth to 5% – the highest rate in 11 years!
  • The growth is coming from personal consumption and business investment, which are the largest and most influential components of GDP.
  • The consumer is happy – recording the highest level of consumer sentiment since 2007.
  • Lower gas prices are giving the consumer a shot of financial caffeine by freeing up more cash that is being spent in other sectors of the economy.
  • The current unemployment rate is 5.6% and trending lower.
  • The Fed has implied they might begin to raise interest rates as early as April 2015.  Higher rates in the US mean more demand and higher prices for the dollar.
  • Most major economies are stagnant, slowing, or both.  Europe is on the brink of another recession. Japan continues trying to jump-start its economy with more stimuli.  China shows signs of slowing growth. Britain is mired in stagnant growth.

These signs are real, and investors across the world are buying dollars at an extraordinary scale.  With such a strong case for buying dollars, you may be wondering, ‘why is Shawn writing this article?’

Reasons why the dollar rally may not continue in 2015

Well, in reality, the dollar may not be as sure a bet as most pundits are pedaling.

  • The strong economic projections have already been priced into the market.  The dollar index has strengthened over 9% since May of 2014.
  • Sequentially stronger economic reports in the form of “stronger than expected” data will be needed to keep the trend alive. With data coming in as expected, the dollar is just as likely to drop as it is to go up. Reports that are worse than expected will surely have a negative impact on the dollar.
  • It is not certain whether the Fed will raise rates this year. The Fed will only raise interest rates when the economy nears full capacity and inflation starts heating up.  Currently, the five-year forward projection for inflation is the lowest it’s been since 2011.
  • Unemployment numbers have been dropping partly because a large number of workers between the ages 25-50 are leaving the workforce. There is evidence that that trend cannot continue, and those people will be re-entering the job market-putting greater pressure on wage growth.
  • Financial turmoil in the global economy could flare at any moment.  Any financial problems abroad could put downward pressure on the dollar as governments that hold US treasury debt start dumping bonds to support their domestic currency and stabilize their financial system (a flood of selling in the bond market would drive up yields, and put the brakes on growth in the US).

With all the uncertainty in the global financial system, it is difficult to project over long time frames. This is an argument for a good short-term analysis with nimble response. Try not to let your opinion be swayed by the experts.  If you are quick to recognize momentum shifts, you should be able to weather the storms that are sure to happen!

Comments { 0 }

Smart Bees During Fall

Fall is here and this is the last chance for bees to prepare their winter supplies. Flowers are rare, wind is getting stronger and temperature drops. It’s not a good condition to collect honey. As a smart species, during hard time like this; specially in cold, rain ,or windy, bees will stay in their hive. They don’t want to take high risk moves that give them very little benefit.
During the Fall, bees fix all cracks on the hive and reduce entrance size using propolis. It’s a smart action for little bugs. The egg laying of the queen bee tapers off or stops completely as the temperature drops. As the temperature getting colder, the bees will form tight cluster to keep the brood (eggs, larvae, pupae) warm. Bees are smart and hard working creature , but they emphasize smart above hard work. When the weather is too windy or cold, bees will stay in the hive. During winter, bees will form cluster to warm each other, the colder the weather the tighter the cluster.
Same like bees, traders should observe the market prior to trading execution. We need to recognize profitable trading hours, understand market volatility, plan trade strategy, know pair characteristics, etc. For example, when the market is quiet and in consolidation pattern, it’s not a good ‘weather’ to trade breakout strategy. It is wiser to stay out of market and make preparation for incoming volatility. Same like bee; bee’s job is to find flower and collect nectar, not grow the flowers. Trader’s job is to identify market trend and volatility, not to move the market.
Traders are supposed to work smart same as bees, not only work hard. Trading is supposed to be something to enjoy, not stress up.

don't Fall Beehind

Comments { 0 }