What is a good trader?

This is a good question that we should ask ourselves. Think about the first thing that comes to mind when you ask this question.

Is it being able to read a financial statement and come up with a good “Fundamental Analysis”?
Is being a good trader being a “chart wizard”?
Or does it mean having terrific “gut instincts”?

Those 3 examples are not the answer to the question. They are just different means that a person could use to base their trades on. They are just methods and not the definition of a good trader.

The answer is actually quite simple. A good trader is a person that makes money.

At the end of the day, week, month or year what it comes down to is whether a trader made a profit. If they didn’t then they will not last long as a trader. The sad reality is that most people are not good traders, and that many people lose money instead of making it.

A mother tells her young toddler to be careful because that pot on the stove is hot. But this child does not know what “hot” means. Yes, the mothers voice causes the child some concern, and for a while may prevent the child from touching that pot, but before too long the sounds of crying are heard in the house.

There are many things that can harm a trader, and like this young child we need to learn what “hot” means, and learn how to avoid the things that can harm us. This evening I want to talk about EXCITEMENT!

There is no denying the fact that it can get very exciting during the day.

Many people watch a lot of different symbols during the day so they “don’t miss out” on anything.
Many charting and trading programs / websites have a “quote” section that you can enter many symbols into and it will show the bid/ask, last trade, price change, and even other columns of data. Many of these will show different colors if the price is higher or lower than the last price or the previous day.

Add to the flashing lights, many of these programs have alert features that can sound a bell or alarm.

It is common to see a traders desk that has multiple monitors and even multiple computers. There will be a multitude of charts covering many of the screens. 10, 20 or more small charts on each screen, each showing a moving price and also the indicators that are placed on each chart.

Many people have a television running near their trading station, and it can be quite exciting to watch and listen to a segment where there are 3 or maybe 8 “guests” that are yelling and shouting to be heard as they try to state their opinion on the current topic at hand, not to mention the back and forth banter as they make their various points and try to discredit the other guests.

And quite honestly, it can be very exhilarating to have a large position that is going your way, where you are seeing $$ flashing in your eyes as your account balance increases tick by tick.

Sadly, this is providing an atmosphere that is more like a casino than a business. The flashing lights, the ringing bells/alarms, the noise of the crowd, and the thrill of winning a hand or seeing the right number come up on a pair of dice.

This is the type of environment that distracts people from making sound decisions. When a person is feeling emotions they have a hard time making good choices, and it is much easier for them to take more risks than they would normally take, and to have “hope” that riches are right around the corner just waiting for them. And this excitement can be addicting. People “feel” good each time they win. They want to feel good about themselves by being a winner. This is what makes them place bet after bet, each one with the “hope” that it will provide those good feelings again, all the while ignoring the risks that they take and the losses that mount higher and higher.

Sometimes, even without being aware of it, people become addicted to the excitement of trading. They want to feel that thrill and good feelings of having a winning position. They become addicted to all of the noise and activity as it provides then with a “rush” that they get as they try to take in all that they can to get the “edge” where they can get into the next winning trade.

Trading for excitement and to get a good feeling is not the way to make money at trading. It is gambling and one way to get burned.

In the previous segment I spoke about excitement and listed a few things that distract us, which is the focus of this next part of the discussion.

People like to think that they are good at “multi tasking”. But studies have shown that performance suffers the more people try to do. These studies range from the one in 2001 that was done by the University of Michigan and published by the American Psychological Association ( http://www.apa.org/releases/multitasking.html ) up to the studies that are mentioned in a New York Times article. http://www.nytimes.com/2008/10/25/business/yourmoney/25shortcuts.html )

Many people feel that they need to keep up with the latest news, so they have a television on near their trading station. But consider what happens when the person starts to pay attention to the TV. Perhaps our trader’s attention was caught by the multiple guests that are shouting to be heard. Perhaps one of the guests is saying something that re-enforces a thought or belief that our trader has. While this is taking place the trader is looking at the tv, and thinking about what is being said, and potentially feeling good about himself because someone on tv is saying the same things this trader believe in. During this time, the price of the stock or index that the trader has been following is beginning a new move, but our trader is not catching this because he is distracted.

Some people use a news ticker instead of a TV. But on this news ticker there are headlines flashing by, one after another. It takes a lot of attention just to read the headlines, judge whether it is something that could effect the markets or a particular stock, and then even more time to jump to the full story to see what is behind the headline. Once again, this is distracts the trader from paying attention to the index or stock that he is trading.

Another distraction is having multiple monitors filled with quote tables and a multitude of different charts. It takes time to focus on each quote and chart and digest what information it is providing.

Other common distractions we face are the phone, email, and other people coming into our working space to talk to us.

Each time we are distracted we have to take time to “catch up” on what is happening. We are not doing 2 or more things at the same time, we are constantly switching between the different task. Each time we are distracted we have to re-evaluate what the charts are showing. These distractions can make us miss an opportunity, and when we are too distracted they can lead to a wrong decision being made.

I know that we can not eliminate every distraction, but we need to evaluate our trading environment and remove as many distractions as possible and focus on the task of trading.

A good trader is a person that makes money. In these segments I have been examining different factors and conditions that interfere with a trader making money. Perhaps the trader is focused on excitement rather than focusing on a good trade, or perhaps the trader is just too distracted and misses the best opportunities. One of the most common things that I have seen that prevents a trader from making money is Forcing A Trade.

There are 3 main reasons why people force a trade. They may be bored and say to themselves “Nothing is happening today, the price just has to breakout out of this congestion.” The trader may be impatient and be thinking “We have a lot of warnings that a bottom should form, and the price is beginning to hold up, so this must be the bottom”.
These first 2 reasons are closely related to someone that seeks excitement, and a person that is being distracted by what they want to see happen rather than what is actually happening.

The most vicious and damaging way I have seen people force trades is when unrealistic goals are set and the person feels that they must place a trade to meet those goals. Such as “to make $100,000 this year I MUST make $400 per day”. When it is put this way it sounds so very simple and easy. But what happens is that on a quiet day where the price is just stagnate this trader will enter a trade hoping that the price will break out of that congestion. Or the trader will feel that they have to make the very best entry and they will “jump the gun” before a bottom or top has formed. And there are times when a good set up just does not work out and a loss is the result.
By forcing the trades and just a normal loss, the result is that the trader does not meet their goal for that day. Let’s say that the trader only makes $250 for the day. What this leads to is that for the next day they are “behind” and instead of just $400 they now have to make say $550 for the day to meet their goals. This means that they have to trade a larger position and be more aggressive. This increases the risk, and the situation quickly escalates until they have done some serious damage to their trading account.

The problem with forcing a trade is that the trade is entered just to be in a trade, instead of selecting a trade that presents a low risk and nice reward. A forced trade is one where the trader is looking to “force” the price on the stock or index to do what they say it “should” do, instead of focusing on what the charts say the price is actually doing. This creates a much higher risk, the risk that the price will not do what the trader thinks it “should” do.

When we prepare to place a trade we need to ask ourselves why we are considering making this trade. The TFI Charts are designed to show what the price is currently doing, and to give us clues as to when a change could come about. When we are looking to enter a new trade we want to ask ourselves if the charts are showing a valid reason to be in the trade we are considering, and if not, what conditions need to develop to present a low risk opportunity. We then look for those conditions to develop and be ready to act on them when they show up. And if those conditions do not develop, then it is telling us that we do not want to place that trade.

In the last segment I spoke about how forcing a trade can lead to entering a bad trade because the trade is entered without good justification for it. This leads us into this segment of things that prevent us from being a good trader. When a trade is forced it quite often leads to a bad trade that loses money. There are times that even when we have the odds in our favor with low risk conditions that the price just will not go the “right” way and it turns into a loss.

One of the biggest things that people do that prevent them from being a good trader is that they do not set, or they do not honor a stop. They see the position becoming a loss and they just “HOPE” that it will turn back around in their favor. And what usually happens is that their hopes are dashed on the rocks as the price continues to move against them and the loss becomes even larger.

This is one of the most destructive things a trader can do to themselves. It causes major damage to both the trading account and the persons emotional well being.

Another factor that prevents people from becoming a good trader is that they want to “go with their gut” and “fly by the seat of their pants”. This is the person that does not have a plan in place, they are jumping from one trade to the next doing what ever comes to mind at that time. There is truth in the old adage of “Fail to plan, plan to fail”.

There are many things that interfere with being a good trader. One of the most insidious is self deception.

It is natural that we want to feel good about ourselves and be proud of what we do. But sometimes this leads us to view ourselves with “rose colored glasses” as we tend to overlook short comings and view accomplishments better than what they actually were.

For any given task picture a standard bell curve. There is a small group that does exceptionally well, and at the other extreme a small group that does very poorly. The majority of the people make up the middle group. Each one of us would like to thing that in a given task that we would be if not in the exceptionally well area of performance, at least closer to it than to the middle, and we certainly do not want to think of ourselves as being part of the segment that does very poorly in the task.

Each one of us has a “gift” or talent where we would be part of the exceptional group for that specific area. Some people can sing quite well. Some people think they can sing but other people don’t want to be around when they do. What makes self deception so insidious is that we fool ourselves into thinking that we are better at something than we really are. “Hey this me we are talking about,,,, I don’t have a problem with distractions, I am pretty smart and can multi task with ease,,,,, I don’t have a problem with honoring a stop,,,,,” But in reality, we just do not realize how easily we can be distracted by the TV and miss when a good opportunity appeared during the day. We think we can multi task, keep up with a multitude of charts, quote screens, level II feeds, news feeds, a web browser, email and the TV. But we do not realize how much time is lost in focusing on finding a good opportunity while we shift focus from one task to another.

We like to think that we make good decisions when it comes to placing a trade. But we do not realize that when it goes against us we do not want to acknowledge that we were wrong, or that the trade is just one of those that is not working out. Because we came to a conclusion we do not want to accept that the facts have changed, and that our bias is no longer valid. We are afraid that to do so would mean that it would hurt our self esteem and show we are not as good as we thought we were.

I want to challenge you to perform a self evaluation. The goal is not to tear down your self esteem, but rather to honestly identify what is interfering with being the best trader possible. Evaluate your trading environment, and yourself. Are you a good trader? Are you the best trader you can be?
Take a look at your trading account, does it provide the proof to support your answer?

Do you seek excitement? Do you feel you have to be in a trade all of the time, or can you stand aside and not place a trade if you feel the risk is too high for your comfort? Do you have the discipline to wait for lower risk conditions to enter a new trade? Do you have problems with forcing a trade, whether it is from boredom or from having unrealistic goals? Do you have a trading plan? Do you set a stop and honor it? Are you dealing with too many distractions? Are you really the best trader that you can be?

This evaluation is not meant to be easy. It can be very hard to be honest with ourselves. But you will find that once you are honest in acknowledging a weakness, that you can then begin to work on correcting the problem and improve the situation. One thing that helped me was the thought that by finding my weaknesses I would become a stronger person where I would know what areas I am weak in and know to pay close attention to those areas, and to work on improving them. Trading is not easy. If it were, each one of us would be a good trader, and we would all be making a lot of money.

A while back I was watching the movie “Renaissance Man” starring Danny DeVeto. In that movie he was instructing a group of “misfits” and he made the following statement: “The choices we make dictate the life we lead”.

Each one of us has to make a choice. We can choose to identify our weaknesses and work on improving them, or we can choose to ignore our weaknesses and continue to struggle and not be the best trader that we could be.

This month I have spoken about things that prevent us from being good traders. In April I will be focusing on how to be a good trader.

In hindsight it is easy to look back at a chart and “see” all of the moves that are made and think that each one would have been perfect for a trade. One of the hardest things to learn is that not every little wiggle on a chart is a tradable opportunity. And what is even harder to learn is that there are even some moves that occur that due to how they develop a decent tradable opportunity is not presented.

There are two types of risk, the risk of how much money a position could lose, and then there is the risk that the price of a stock or index will not do what is expected and a position that is based on those expectations would turn into a losing position. This second definition is the one that I use when I am evaluating the charts, I am looking at the prospects that the charts will live up to the “expectations”.

One thing I learned in the years of development of the TFI Indicators is that there are times when a chart will act in a predictable manner, and these are the occasions that present the best (lowest risk) conditions for a new position. And there are times when there are conflicts and the charts are showing uncertainty, or the charts will be showing conditions that are not normally sustainable. This is when we have a higher risk that a position based on these conditions could turn into a bad position.

One interesting thing I have learned is that sometimes it is more important to identify what type of a position we do not want to be in. Whether or not the charts are showing a low risk situation for a new position, the facts of what the price is doing at the time can tell us that if we are in a certain type of position it is clearly “wrong”. Such as with a breakdown, whether or not the breakdown is showing prospects of being a low risk situation, the new low tells us that a “long” position is losing money and we do not want to be in one.

I am sure everyone is familiar with the game of Black Jack, which is also referred to as “21”. At a casino to play this game you have to place a bet, then you see your cards, and you can make choices as to getting more cards to try to reach 21. If you go over 21 you have lost. Then after all of the players have their turn the dealer shows his/her cards and then it can be determined if you beat the dealer or not. The gamble is that you have to place your bet before you see the cards and you might get a good hand, you might not. And even if you get a good hand, there is the chance the dealer could have a better hand.

You have to be careful in how you play your hand, especially when you ask for additional cards. If your hand totals 18, you know that it is going to be almost impossible to ask for one card and for it to be a 3 or lower. Anything higher would cause you to “bust” and lose the hand. So to hit on 18 it would be a very high risk situation as you are almost assured that you will lose. This is an example of knowing what you DON’T want to do.

Consider this for a minute. You go to a casino and see a “new” Black Jack table, and what makes this a new table is that the rule of when you bet has been changed. Instead of having to place a bet before the cards are dealt, you can now see the cards in your hand, you can even “hit”, and then decide if and how much you want to bet. You still have to bet before you see the dealers hand, so there is still the chance the dealer could tie or beat your hand.
I can say that for myself I would play on this “new” table in a heartbeat without a second thought. It has been years since I have even gone into a casino, but if they introduced this type of a table I would be one of the first ones there. Because with these new rules I could sit out all of the bad hands, the ones where you know that it would take a “miracle” for you to win. Sure, there would be some hands that I sit out that the dealer would “bust” or have a very bad hand and I could have won that hand. But when you take a look at the averages and the results over an extended period of time, by choosing the best hands to play and sitting out the bad hands, your odds of leaving the table a “winner” have risen astronomically.

Trading offers us the advantage I described concerning the “new” game of Black Jack. By using the TFI Charts we can identify when the chart is acting in a predictable manner and is showing a “good hand” that present a low risk. These are the occasions we want to take advantage of. There is still some risk that the “dealer” could turn up a better hand, so we still must use good money management practices of position sizing and set a stop and honor it.

What is so hard to do is to pass up the “bad” hands. There are times when we will sit out for a considerable period of time because one bad hand follows another. And there will be times when one of those bad hands turns out to be a “winner”. This can be hard to sit out the next bad hand, but if you track what happens every time a bad hand occurs, you will see that over the long run the bad hand that turns into a “winner” is the exception, not the rule. It just takes a lot of discipline and patience to wait for the good hand to appear. This is even harder to do for the person that craves excitement, is bored, or has set “goals” that makes them feel they “have to” be in a trade.

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