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Psychology

The Death of Buy and Hold. Stop Investing and Start TradingEver since the invention of the Mutual Fund, then IRAs, or even going back to the ownership of individual stocks, the “common man” has been taught to “Buy and Hold” when it comes to their investments. Even today, investors are taught to put their hard earned dollars in a “lock box” and told to "let it grow"... We are told things like “Let time be on your side”… “Don’t worry about that downturn, the economy always recovers”... “Start when you are young” and most disastrously, “Buy strong companies in an uptrend, those who have demonstrated consistent growth...” This article may be a revelation. This article may make some people angry about the past decisions they have made. And some might also also say “That guy doesn’t know what he’s talking about.” To explain this I’m going to have us look at three things: a Paradigm, a Parable, and a Pair of Powers. =============== The Paradigm of the Financial Markets. =============== This might be the most important of the three concepts I will talk about in this article. When we understand this one concept, this one paradigm, this one way of thinking will transform us from being a “consumer” of financial products to a “trader” of the financial markets. As traders or investors, we are putting our money into an entity known as the “Financial Market.” Whether the vehicle you are using is a company, a commodity, or a currency… a stock, an option, a futures contract, or a ForEx pair, every single “in and out” represents a transaction between a consumer and a producer or supplier. Now, why is this global pile of securities collectively called a "market”? Well, like any other market it’s a place where “products” are bought and sold. Just like the smartphone market, the automobile market, the ice cream market, and the farmer’s market, the financial market is EXACTLY the same… only we deal in virtual products that we buy and sell by clicking buttons and moving our mouse instead of having to warehouse our inventory and provide a storefront. So, IBM, is a *product*; Tesla is a *product*, Oil and Natural Gas are *products*, and the Euro, Yen, and Kiwi are *products*, no different than a Ford Focus, an iPhone, or a pint of Ben & Jerry’s. Now, in any transaction in any market, who is it that makes money, the consumer or the store owner? You guessed it… the store owner! For *decades* now (going on centuries, actually) we have been conditioned to be *consumers* in a market when it’s the *producers* which are the ones who make the money! We have to switch our thinking. We need to think like a store owner or retailer rather than a customer. Now, how is it that any retailer, any store, whether it’s the ice cream man or Amazon.com, makes their money? They find a way to buy products (inventory) at *wholesale* and sell those products to consumers at *retail*. What do retailers like Amazon and WalMart sell? ANYTHING and EVERYTHING that they can get their hands on where they can buy at wholesale, mark it up, and sell it to the consumer at retail. So how can we make money in the financial markets? Just like Ben and Jerry do in the Ice Cream market. Just like Ford does in the automotive market. And just like Apple does in the personal computing market. We need to do as the Amazon do. =============== The Parable of the Retirement Industry (A Totally True Work of Fiction) =============== Once upon a time (1975, actually) there was a meeting of all the FatCat bankers. They all were having a grand time sipping their whiskey, smoking their cigars, bragging about their riches and success but they all agreed that they wanted even MORE. Looking back at the Stock Market they noticed that S&P really hadn’t moved much in the last 20 years. They said to themselves, “You know, all we are doing is trading all this inventory among ourselves and price is just SITTING there… How can we create a DEMAND for our product so we can see it go UP in value?” In comes New Kid on the Block, John Bogle, founder of Vanguard Securities. “Gentlemen,” he said, “I’ve got a great idea… Let’s give every working man in America a bucket… we’ll call it a Mutual Fund. And we’ll tell them that THEY have to fill it with all kinds of stocks: industrial stocks, medical stocks, automotive stocks, power company stocks, telecom stocks, and the more and more people start ‘saving for their retirement’, the more people will be buying our ‘products’, there will be more and more DEMAND every year and BOOM - the price of our products will skyrocket! (Insert sinister ‘Muwahahaha' laugh here…) So the word gets out to the street and into the business world: Your employees now have the opportunity to save for their retirement using their own money! (Which took employers off the hook from providing their own pension programs as the 401k industry began to grow.) So year after year, more and more Americans bought into the program, and as demand surged, so did the market. For the next 25 years the S&P would see a bull run like NEVER before! So what happens for these 25 years is a natural effect of Supply and Demand. As the limited “supply” of available stocks is becoming consumed by the American workforce, demand goes up. And it works great…. For 25 years. BUT… what happens when those 20-30-and 40-somethings who are working and buying, working and buying, working and buying, creating all that DEMAND… What happens when they become 40-50-and 60-somethings who begin to retire? They begin SELLING those stocks (creating monthly retirement income) and now we start seeing a REDUCTION in demand and an INCREASE in supply as the “balance of power” shifts and there are now more Sellers than Buyers - and the tide now turns in the epic cosmic struggle that goes on in the financial markets day after day, year after year, minute by minute. So what happens to these retirees who have lost HALF their savings by the time 2002 rolls along? They have to stop the bleeding! They go back to work so they can (a) have income and (b) put MORE money into The System so they can reclaim the level of retirement income that they need to go back into retirement. So now they are no longer sellers, but they are once again buyers, driving the price of the ‘products’ in their portfolios back up to pre-crash levels as the balance of power shifts back into the hands of the buyers. Five years go by… The people went back to work see that their 401ks are back to pre-crash levels, they quit their jobs, and the cycle starts all over again when there are now more buyers than sellers. Ack!!!! Now come into the present day where the market is at all time highs. Price has been whipsawing for the last 24 months! What in the blue blazes is going on? The same thing that has been going on since the dawn of retail sales in an open market: products are being SOLD to customers at retail, and BOUGHT from them at wholesale. =============== The Pair of Powers =============== So how does this happen? The first power is the power of FEAR and GREED. When we master our fears and temper our greed we can make the RIGHT decisions in the market. What has the average investor been taught for DECADES? To buy strong, healthy, up trending stocks. “Look at that company… they’ve been up trending for 18 months.” “Look at *that* company… they’ve been showing healthy growth month after month for the last year.” “Don’t miss out… you’ve already let the stock go from 25 to 85… you don’t want to miss the boat, do you?” BUY! BUY! BUY! The Fear of Missing Out (FOMO) and the greed of wanting to “make it rich” lets the novice investor be a slave to the emotions of Fear and Greed. So they buy. And what inevitably happens… You guessed it, the stock starts to falter, starts to fumble, has some bad news come out, is affected by CoronaVirus or other event or excuse. So once the stock gets to a new low price, they get scared (FEAR) and sell back to the broker so they can “cut their losses.” Economically, what did the ‘customer’ do in this case? They BOUGHT a product at “retail” and they SOLD the product at “wholesale.” Just like they would if they were buying a car. Go to the local auto dealer, buy a new car for $30,000, and later sell it for $10,000 when you trade it in for the next year’s model. We need to start thinking like the RETAILER, or in this case, like the financial institution SELLING the products at RETAIL and BUYING them at WHOLESALE. Warren Buffett once said that investors need to be “fearful when others are greedy, and greedy when others are fearful.” Trading psychology in a nutshell. The second power is Supply and Demand. Everything on the planet from Beanie Babies to Cabbage Patch dolls to 1970’s-era Star Wars action figures and yes, Financial PRODUCTS in a financial MARKET has its VALUE determined by the simple market forces of Supply and Demand. =============== The Solution: Hiding in Plain Sight =============== So, all that to say is, Buy and Hold is not only dead (which indeed worked great from 1975 till 2000) but it’s pretty much the great American Lie still being told to this very day every time someone enters the workforce and is encouraged to “put a little away every paycheck toward your future”. The Financial Markets are the ONLY markets in which we are conditioned to pay full retail for a product (look at that uptrend, look at the strong growth!) and sell at wholesale (Well lookie there, you’re losing money… let’s get you out of those losers.) There is NO other market - be it the automotive market, the electronics market, or the farmer’s market - where we are happy to pay full price. I want my stuff on SALE, and that includes my investments! Still not a believer? Let the money do the talking. Looking at the Chart at the top of this article, (also posted below), if you started investing in 1997, you would have had a ZERO NET RETURN after 12 years. If you started investing in 2000, you would have quickly lost HALF your investment, and broke even for a ZERO NET RETURN after 13 years. “Hey, I was told that time is on my side… I just let a DECADE of my life go by with a ZERO return!” If you were unfortunate to begin investing in 2018, you would have experienced six vicious whipsaws in just 33 months. Who needs that kind of heartburn?!?! And where is the market going to go? Up? Down? Do *you* or your financial planner have a crystal ball? Remember: Every financial planner and investment firm has that oh-so-handy get-out-of-jail-free card: “Past performance is not an indicator of future results.” Buy and Hold is DEAD, which means that we can’t afford to be INVESTORS, which is as good as throwing your money into a casino. We need to be TRADERS where we can “follow the money” and see where the major financial institutions, the “movers and shakers” of the market, the “market makers” are CREATING those levels of wholesale and retail, of Supply and Demand, and BUY when prices are at wholesale and SELL when prices are at retail - the exact OPPOSITE of what we have been taught in the Financial Market but the very SAME thing that we do in Every. Other. Market. When we learn to be the store *owner*… When we learn to buy at wholesale to sell at retail… when we learn to “follow the money” using a PROVEN system of trading that identifies these levels of wholesale and retail, we will no longer suffer the whims of the market. Just like WalMart, just like your local grocery store, we will be able to see *consistent* monthly profits if we take *consistent* action and we learn to *control* our emotions and trade like a Vulcan. Trade like Spock. “Trade long, and prosper!” Buy and Hold is dead! Long live Supply and Demand!
SP:SPXEducation
by ocaptain
141
What it means to be a "Trader"...Fact; - The top 3 Hedge Fund managers, in excess of +11,000% net lifetime earnings, have no more than 3 trades, total, constituting >85% of their total, life-time earnings. - Every last one of the top life-time earners ("Trading Legends") - in excess of +11 000% (eleven thousand percent net return(!!) - have made their fortunes in Commodities and FX. (Soros, Druckenmiller, Jones, Lewis, Kwane, Trout, the Richies, etc.) No stocks / equities / or similar dog sh#&t! - None, nada, zero! Now, most morons attribute the above facts to the "power of leverage". Are you friggin kidding me?! That is absolute nonsense! In what universe does "leverage", in itself, contribute to trading success??... But if you want "fast money", know this; Commodities and Forex have real hedgers and therefore it is a positive sum game for speculators. Whereas stocks?... It is the same idiots trying to make money ripping each other off. It is truly a zero sum game, a pyramid scheme. To make any money on any of those bags of odorous excrement (20x, 100x, 200x earnings) one would have to not only hold them for years but also *** be right about the trade ***! Otherwise what?... Are you going to hold the bag on some dog crap for 5 years, at a time, just to learn that you were wrong?! Is that the plan?... At the same time a Commodity or a Forex trade will provide you with the "meat of the move" in days, weeks or a couple of months, max. You will at least know, right or wrong, about the trade's prospects, aeons before some garbage stock trader ends up holding the bag for the better part of his natural life. Traders are like snipers; They sit in wait for the right moment and are there for one, singular, solitary reason: For the kill! No more, no less. Whatever it takes. What Traders are not; A) Traders are not "investors"; B) Traders are not "scalpers", nor "grinders"; C) Traders do not exist to "forgive", to "let off the hook" or to "give back". Traders have zero problem to tear you from limb-to-limb and to eat your still beating heart in the front of you, as you watch. - And all that before ever breaking a sweat. ... because anything short of that is a loosing proposition! E.g. "trading" is not a forgiving business so you better be right! Man (as in: The Species) has two (2) fundamental and overwhelming driving forces: Fear & Greed. (Man is also territorial! E.g. trading is not a team sport.) Every time you enter a position you are taking on massive risks. That is the name of the game: The buying and selling of risk. Thus, being careful and selective is much regarded as in good form. Here is what you are up against; images-wixmp-ed30a86b8c4ca887773594c2.wixmp.com - In 2019 the 5 major FX Dealers have booked $147 Billion US in profits; - Top life-time earners, between 1980-2010, made: +11 000% (eleven thousand) - Total; - Top earners between 2010-2020 are currently earning: +3000% (three thousand) Annually(!!); - A typical, top FX Dealer (UBS) has ~210 traders, working in 3 shifts, 24/5; - A top FX Trader clears $6-$13 Million in bonuses, annually; - The average Trade Portfolio size (per trading floor) is $4.7 Billion US; - The average dealer risk limit per $100 Million is 3.5 pips. In short, these people do not get up every morning to let you take their Rolls Royces or to have their wife leave them because they can no longer afford the private schools for their children. They do not go to the office, day after day, to let you load your $50, $500, $5 Million, in the correct market direction, with nice tight stops, for you to sleep easy because little risk is involved. No Sir! Put yourself in their shoes! They must buy when you want to sell and vice versa. So when you spot that big, one-way move... So do they! - But they have no choice in the matter because that is what dealers must do - e.g. the opposite of what you have decided. So how could they ever make money? Simply, by taking that nice, tidy, one-way, mega move and shove it back up where the sun don't shine, as often as possible, all along the way. It is simple as that. So the next time you sit down in the front of the computer to make a trade just remember who is on the other side of that screen. Ergo, you better be ready - by whatever means - to do the same thing to them as they are sure to be about to do it to you! "... and when you see it, you bet the farm!" - Stanley Druckenmiller
Education
by Nemo_Confidat
4
Mental Tips of TradingIntroduction - To lower stress levels, trade less and get away from watching every single price chance. Day traders could trade only the open and closing hour, swing traders could just take opening and closing signals. You could go from every tick to just checking in every hour or so if you have options or hard stops in. Most of the days, trading is random noise, and randomness will cause stress. Focus on your timeframe, and only the quotes that really matter when they matter. How to not be stressed while trading? - Only trade when the odds are in your favor. It is much less stressful trading this way. - Do not blame yourself for losses if you followed all your rules. The market giveth and the market taketh, just keep taking your entries and exits. - If you don't know what to do, DO NOTHING. - Do not listen to any unsolicited advice about the trade you are in. Follow your own plan and shield yourself from distraction. - Know yourself as a trader, and only take your kind of trades. Take trades that will leave no regrets because they were good trades, regardless of the outcome. - Believe in your ability to follow your trading plan. You must have faith in yourself to lower your stress level. - Keep your EGO our of your trading, run it like a business, with the profits and losses as your focus and not your ego. Coherence - Your brain and heart works the best when there is synchronization between all systems, this is called 'coherence'. Researchers throughout the '90s established that with every beat of the heart, intricate messages are being sent to the entire body. - As people experience emotional reactions like frustration, irritation, anxiety, or anger, heart rhythms become chaotic, which interferes with communication between the heart and the brain. - If you are not in tune with yourself, you can cause DORMANT fears of failure to awaken, and you will undoubtedly miss good opportunities through making IRRATIONAL trading decisions. Emotional Intelligence in Trading - The Emotional Quotient (emotional intelligence) is our ability to recognize and assess our own emotions, to manage these emotions in order to achieve our purposes. - EQ is also the ability to discriminate between different emotions of the people and label them correctly, by using the emotional information to guide thoughts and behavior. @here How does this apply to trading? - Emotional intelligence makes a great part of a trader's performance. It has proven that the human brain has the power to increase EQ by effort (trying, being persistent, following rules, backtesting strategies) and education (studying, performing research). - Self-awareness: Every trader should be aware of his/her qualities, strengths and weaknesses so then he/she could manage better his emotions and take right decisions when trading. - Motivation: Very well motivated traders are more challenged and are more abled to take right decisions in the market. - Self-control: Controlling emotions is a crucial element of the trading process. It is important for a trader to regulate his emotions by targeting them to a proper and emotionally balanced activity. - Being able to monitor our own emotions is perhaps the greatest skill we can have. Traders who can handle their negative emotions are the most successful ones. How to stop being impulsive and over-trade - Did you know that there is an actual ANATOMY to 'Impulsive Emotional Hijacking'. Wang was prepared. After careful observation and charting, he planned his trade - and knew what he was looking to do. Now he is going to trade his plan. He brought his charts up and declared, "I'm going to make money today.", he said it with the confidence of his winning mindset as he glanced at the P/L of his trading account. Just sitting there watching the pre-market activity, Wang could feel the excitement building :vince: . So much opportunity, and it looked promising. Wang was ready to take advantage of it, this time he was going to build his account up -- not blow it up. As the market opened, he sees that TSLA FB SPY just taking off like a rocket. "Man, that was sweet. I could have rode that one!" He muttered to himself as his excitement grew. He IMAGINED what the money would look like in his trading account. It felt good, then he saw another potential trade. "There was real opportunity this morning." he thought. Wang sits on the sideline while others were taking advantage of the action, and that got his competitive JUICES flowing. Then another one came up, not willing to let another one get away from him, he jumped on this one. Almost immediately, it took off. "YEESSSSIRRRRRR" Then suddenly it turned against him, heading for his stop. He caught his P/L in the corner of his eye taking a nose dive. WANG felt a surge of energy and resolve flow through him, "It'll come back. I'll give it some more room, I can feel it." So he moved his stop to let this one play out. It crashed right through and stopped him out. Now, after this loss... He wanted to get even, so he quickly found another setup that looked good to him and jumped in ready to win and vindicate himself. That trade turned against him almost immediately and stopped him out, sounds familiar? Over-trading, or impulsive trading (to be more accurate), is a common problem. It blows up trading accounts too many times to be counted. It is common 'wisdom' that a trader needs to plan his/her trade and then trade his/her plan. But just like WANG in the example, traders end up jumping into trades that they have no business being in. They know what to do... They just cannot do it in the heat of the trade. It's perplexing. WangYesterday at 7:56 PM Notice, initially, WANG starts with the best of intentions. He does his homework, studies his charts, and planned his trade with the intention of trading his plan. We know that he did not do that in the heat of the trade, but we do know what he started out with a credible plan. Then something happened, but what? He started out by ATTUNING to the market so that he had a feel for it. Then he took the first step into his personal abyss - He declared "I'M GOING TO MAKE MONEY TODAY." This is an affirmation and visualization that many traders make as they prepare for their day and it is a mindset that they keep engaging in throughout the day. Their minds are focused on making money today, you can hear the urgency - TODAY. The problem with this line of thinking is that you DO NOT control whether you win or lose in trading. If you keep pushing that you are going to win, when you have ABSOLUTELY NO CONTROL over your declaration, what do you think is going to happen? Your survival brain eventually REBELS against you. Let me take you down the rabbit hole again --> WANG is an alpha personality, he believes that his will should prevail and that he can make winning happen. He came by that attitude honestly as he was a man who always strived for success, and now he has focused that energy on trading. In his other approach to life prior to trading, he knew how to win, to make things happen, and (especially) not to lose. It served him well, until now. WANG's identity is built around winning - not managing probability. His determined and forceful attitude molded his personality. The problem is that this mindset, forged by winning repeatedly, did not prepare him for trading environment where randomness of the markets prevails. The toughest part, though, was losing. WANG hated to lose, and that trait manifested when he revenge traded. His grit simply would not let him lose, he would attack even harder and determined to get his losses back no matter what. What I am asking YOU to see is the short fuse on the alpha's winning mindset. It happened so fast and the hijackings was so natural to him that he never noticed it - until after the damage was done. Yep, he done blew up his account. :cryroll: How do you fix this mentality in trading? It comes down to self-mastery, where winning becomes focused instead solely on landing on the right side of the probability and losing only means that you have landed on the wrong side probability. Are you ready? ---> - While trading, there is no thrill of winning, nor agony of defeat. It was only probability - either way. What matters is the mind you bring into the moment of performance. This is the game changer, it is the psychological edge where you are no longer PROVING yourself. - You are only performing, that is the mind that gives you the edge of what's possible. A new kind of mentality has to rise from the impulsive blunders of the past. This one is rooted in PATIENCE. - Instead of stalking opportunity, the new WANG waits in ambush for the opportunity to COME TO HIM. Like I always say, be a sniper and not a machinegunner. Trading is about embracing uncertainty, while the brain you brought to trading is wired for certainty, prediction, and control. Rewiring your brain begins with calming the emotions that coordinate action/behavior between the trader and the environments of the market. "I was doing so good, my mind was in the zone and it felt like a state of flow. I made $1200 in the morning and stopped for the day, just like my trading rules dictate. Couldn't have been happier. Wow, this was really working!" The very next morning ---> "I'm in a good mood and ready for the day, then I turned around and gave all my profits back - and then some. It's baffling, I thought I had my head together but before I knew it - I got stuck into a vortex that sucked capital right out of my wallet. Why does this keep happening? It's a common problem. - Most "students" of trading seek consistent profitability on a regular basis. You get some momentum going and begin to see your trading gel. Your confidence begins to grow, showing that you can, indeed, make consistent money by trading. Then it just blows up right in your face, not only do you lose the gain you made - you lost some more. Often a whole lot more, one minute you have a growing confidence that you can do this trading thing. The next minute, that confidence burns down and frustration grows from the ashes. So, what's behind the self-sabotage? - Winning makes you feel good, and you want to win - to make money. When the trader in the example "wins" $1200 in a single trade, it made him feel good. Why? Because winning triggers a hormone called 'dopamine' (at the center of the reward chemistry of the human brain), and that is the problem. - The euphoria of "feeling good" is an emotional state that causes thinking to become skewed into believing that the good times are going to roll on forever and that he/she (trader) has the power to control the outcome of the trade. However, winning (in this trader's understanding) produces this sense of power that is dangerous to the management of uncertainty. - The emotion of euphoria that appeared when the trader won also warped the kind of thinking and analysis that he/she was capable of producing as a trader. - The winning trade led not to power, rather, led to euphoria --> over-confidence --> then caused the trader to believe he was making the winning happen. - Factors that give rise to an effective trading mind are: Discipline ; risk management ; courage ; self-soothing ; and impartiality. Feeling GOOD has ABSOLUTELY NO PART in a profitable trader's mind. First thing to accept as a trader is that "feeling good" is not desirable as a trading emotion. - You have to be able to notice if and when "feeling good" has started contaminating your trading mind, and that is way easier said than done. Many traders believe that if they could get past their fear of loss, they would not have problems in trading. But you would then only be able to deal with losses, you need to learn how to deal with winning and the over-confidence that can easily develop when a trader starts winning. You have to learn how to deal with the euphoria associated with winning. It's just the evolution of the trader beginning to adapt to the demands of successful trading. Most impulsive trading is primarily rooted in the emotions of LUST, rather than 'greed'. Many traders experience the awakening of 'lust' (wanting more, more, and more) after winning and pocketing in money. Greed is about wanting more than your reasonable share, so there is a balance between lust's "wanting more, more, and more" and greed's wanting more than your reasonable share, which plays into the phenomena of "giving it all back and more". The potential of a successful trader's mind is in the balance and mastering the mind. You can be the designer of the mind you bring to the engagement of uncertainty and risk, rather than its hostage. No matter what you have been told, the brain/mind that you brought to trading CANNOT bring you success in trading. In fact, it will lock you into failure. Rebuild the brain/mind against the WILL of your survival brain, because it is built for SHORT TERM SURVIVAL and gives you the signal that you need to be in control which you cannot due to market's uncertainty. Your survival brain is freaked out by the uncertainty, risk, and speed of day trading. You experience this as fear or aggression in your trading that takes over rational thinking in moments of stress. This will not change with experience or trying harder or trying to exert control. -- Your brain has to be RE-TRAINED. If you can get your brain unstuck, your emotional part of the brain can be developed to engage uncertainty, risk, and the speed from a patient and disciplined response rather than the reactive response that is common among traders. 'Emotional Regulation' and 'Mindfulness' are the essential skills needed in order to adapt your brain/mind for performance in trading. When trading, focus on what you can control. Let your MIND manage your performance. We all understand that losses are hard. But the year is young, and there are lots of opportunities ahead to make it all back. The only thing is that the opportunities will ONLY appear to those that are PREPARED and able to MAINTAIN a sober mind. Train yourself to approach trading in a way that's sustainable as opposed to letting it be something that consistently plays with your emotions and wears you down. Meaning... 'Risk management and 'mindset management'. It is crucial that you understand the market is NOT A CASH COW you get to milk whenever you want. The market is its own beast, remember that. There comes a moment when a "struggling" trader has to acknowledge that what they are doing is not working. Your trading performance is not going to change until this realization humbles you to the core. You have no control over whether you win or lose - but most traders are consumed by winning and losing. They are possessed by something that they can never control. What you can learn, though, is to control the mind that you bring into trading performance. Let go of the illusion of 'control over outcome' and embrace building the mentality that you need to be managing uncertainty.
AMEX:SPYEducation
by TradeAtEase
46