The Key to Success

I was fortunate enough to attend and speak at TradersACause charity event in Las Vegas this month. This was my second time at the event and in my opinion it is one of the ‘must-do’s for anyone taking trading seriously especially if they would like to network with like-minded traders and industry experts. In the event you will find real people, real topics, no egos & just pure learning and sharing experience…the way I like it!

The title of my speech this year was: ‘The Path to Self-Motivation & Success’. I didn’t want to talk about just trading but self-motivation and & success in general terms. My speech started with one of my favourite stories, let me share it with you here:

In the middle ages there was a young man who was living in a mountain village. He was a perfectionist and was obsessed with being successful. He wanted to be very very successful. He asked: “What is the key to success?”. People in the village tried to answer but none of the answers satisfied the young man. One of the elders in the village told him about a wise man who was living at the top of the mountain, in a cave, and he might be able to answer his question. However, he also warned him about the dangers of the journey. It would take several weeks and he would need to face wild animals and snow storms on the way up. The young boy didn’t even think twice. He immediately decided to go and find the wise man who could finally answer his question…

1442995-1920x1080-desktopnexus-comThe journey took several weeks and finally the young man arrived at the cave. The wise man was inside. He looked at the young man said “Come inside, Boy! Tell me what is in your mind?”. The young man was very excited to see the wise man and asked him the question at once: “What is the key to success? Please tell me!”. Wise man smiled, looked at him in the eye and said “Come with me, boy!”. They left the cave, walked some distance and arrived at a mountain lake. The water was crystal clear. The wise man went in the lake, water reaching his knees and said “Come here boy, the key to success is right here” pointing under the water. The young boy was so excited; he went in the water immediately. He kneeled down to see and find the key but he couldn’t see anything. The old man said “It is right there, can’t you see it?”. The young boy still couldn’t see the key and put his head right near the edge of the water to be able to see better. Suddenly, the young man felt himself seized by a strong hand at the back of his neck. His head was forced down under the water, and held there firmly. He didn’t know what was happening but he needed to breath. Fast! Just as he was about to give up hope, thinking he is going to die there, the hand on his collar let go. Violently leaping onto the shore, the young man drew in his breath in heaving gasps. Oxygen flooded his lungs. His vision grew clearer, the hammering in his throat slowed down, his hands finally stopped trembling. The wise man looked at him and said ” What was the most important thing that you wanted when you were under water”. The young man answered “It was air!”. The Wise man continued: “You wanted to know the key to success. Now you found it… Do you remember, just a few minutes ago, how badly you wanted to take that next breath of air? When you want success that badly, you will have it. That’s the secret of success. The Success is WITHIN you – it is not somewhere to be found or told, you just needed to realise that you already have it..” and then the wise man left…

Young man sat down there for a few hours. He now realised the power of self and self-motivation and became successful in everything he did in his life….

Ask anyone if they want to succeed or not, and you’ll get a firm ‘Yes’. But ask them what they’re willing to give up, sacrifice, suffer, accept, tolerate and forego for that success, the answer is generally not as clear…

I then continued my presentation with Triangle of Success.

capture1

To be successful in anything we do, we need to have 3 key ingredients: Skill, Attitude and domain knowledge. Due to time constraints, in my speech, I focused on the most important two sub-ingredients which are Goal Setting & Self Motivation…

I have written an article about importance of Goal Setting in the past. You can read it here. I sunmmarised that the most important things to do when we set goals are:

  • Writing them down (It is scientifically proven that you are much more likely to complete the goal if you write it down and make it tangible)
  • Visualising Yourself Completing That Goal Successfully
  • Setting Interim Goals (so you divide a big goal into digestible smaller goals)
  • Evaluating Your Goals (There are thousand ways to climb the same mountain, if one way is not working – find another way)
  • Achieving your goal and Rewarding Yourself (Part of your motivation)
  • Repeat

Setting Goals might be easy enough but how will you motivate yourself to complete that task? In my speech I mentioned about the Self Motivation Formula:

M = E x I x V

M = Motivation

E = Expectancy (Will my hard work result in measurable progress toward the goal?)

I – Instrumentality (How likely is that I will be rewarded or punished)

V = Valence (What is the size of my reward at the end?)

As it can be seen from the formula, Motivation multiplies with combination of the above. When setting goals, you need to think about the above ingredients and decide on the ambition of your goals.

And never forget, The only thing that will stop you from fulfilling your dreams is YOU. Believe you can & You are half way there…

I hope this helps.

Yours,

MT.

Some Useful Trading Tips

Here is a few tips to help you to become a better trader:

Cash is a positon too!

Most new traders think that a trader should be trading all the time, never miss a good opportunity! However, the reality couldn’t be more different. We are humans not algo traders. Day trader, momo trader or swing trader, quality is always more important than quantity. NEVER enter in a trade without a plan and certainly NEVER enter in a trade because of FOMO (Fear of Missing Out). Don’t ever forget that CASH is a strong position, too. It enables you to act when there is a good opportunity.

Consider Swing Trades

I personally like swing trades for number of reasons. I am a busy guy with number of Business interests. I don’t (and some cases can’t) spend my all day in front of a PC watching stocks. In swings, I generally look for good setups to enter in a trade, add, add more, hammer and exit. This tried and tested method generally works very well for me but wouldn’t work for most of the new traders (or traders with small account sizes) because of their account size and the maximum pain they can take in a swing positon. Perhaps starting small, testing the system and learning from it is the best for the new guys. I always have a plan while swinging. This plan includes where I enter, where I add, where I cover or if it goes against me where I exit the trade. Before entering into any trade, I always know what my maximum loss will be (NEVER change this during the trade!) and what I expect from the trade (i.e. how much I want to make from that trade – when reached, I am out). If it works against me and if it makes me nervous, I cut it out and move on to the next one. Sounds easy? Probably yes. However, in practice, this method needs immense discipline which you can’t develop overnight. It takes years for change to take place and constant practise to maintain it. Most new traders are looking for that magic formula to enable them being profitable overnight. Let me tell you: IT DOESN’T EXIST. If anyone telling you otherwise is after your wallet.

Set Trading Goals

I covered importance of setting goals previously in here. Setting goals for yourself will make you not only a better trader but also a more successful person in every part of your life. The goals you set should be achievable and measurable so it is crystal clear to you when they are achieved so you can move to bigger goals. If you are a new trader, your first goal should be not making profit but PROTECT your capital. If you can achieve this, then the sky is the limit…

Admit Mistakes and Learn From Your Mistakes

We are humans. We all have Ego. Admitting mistakes is not in our DNA. However, one thing you will notice from successful traders is they all admit their mistakes to themselves and to others. We all do mistakes daily. Important thing is learning from those mistakes and try not to do them again. It is a process and will take time. In trading, the same mistake can manifest itself in many different ways. The only way to learn is to experience it. You can ask, read or learn from others but the real learning only happens when you experience it in real life. The most important thing here is minimising the impact of your mistake. This in my opinion comes to admitting mistakes quickly, take action and always trade with correct trade size that you are comfortable with. You can read more about trade size here..

Constant Learning & Adapting & Having an EDGE

One of the most important things in life for me is constant learning. I am a student of life and I love learning new skills whenever and wherever I can. Similarly, I love getting more out of my trading and adding more ‘weapons’ to my trading arsenal by learning different types of trading, different types of trading vehicles and methodologies. Don’t forget, the market is constantly changing, there are number of different ‘cycles’ in the market. The best traders can see and analyse these cycles and make informed decisions about their positions and type of stocks in their portfolios. They scan stocks accordingly. They plan accordingly. One thing you need to do to become a better trader is ADAPTING. You need to adapt to the market conditions and change with the market. As a trader, you always need an EDGE. The change in market and your speed of adapting to that market is one way of having an EDGE. Information is another. Always KNOW what you are trading. Research the stock (or chart if more of a technical trader) and always know why you are trading it and what is your EDGE against other traders. If you can’t find the answer, move on to the next stock until you know you have an edge. And don’t foget any fool can enter in a trade, but only smart one knows when to exit a trade. Be smart.

MT

 

 

Some of my favorite Trading Quotes

“I think to be in the upper echelon of successful traders requires an innate skill, a gift. It`s just like being a great violinist. But to be a competent trader and make money is a skill you can learn”. – Michael Marcus, Trader

“Successful investing is anticipating the anticipations of others.” – John Maynard Keynes

“No profession requires more hard work, intelligence, patience, and mental discipline than successful speculation.” – Robert Rhea

“In bear markets, stocks usually open strong and close weak. In bull markets, they tend to open weak and close strong.” – William J. O’Neill

“The policy of being too cautious is the greatest risk of all.”– J. Nehru

“You don`t need to be a weatherman to know which way the wind blows” – Bob Dylan

“The market does not know if you are long or short and could not care less. You are the only one emotionally involved with your position. The market is just reacting to supply and demand and if you are cheering it one way, there is always somebody else cheering it just as hard that it will go the other way” – Marty Schwartz, Pit Bull

“More men have become great through practice than by nature.”– Democritus

“Volatility is greatest at turning points, diminishing as a new trend becomes established.” – George Soros

“I was seldom able to see an opportunity until it had ceased to be one.” – Mark Twain

“Panics do not destroy capital—they merely reveal the extent to which it has previously been destroyed by its betrayal in hopelessly unproductive works.”– John Stuart Mill (1806 – 1873)

“Superlative performance is really a confluence of dozens of small skills or activities, each one learned or stumbled upon, which have been carefully drilled into habit and then are fitted together in a synthesized whole. There is nothing extraordinary or superhuman in any one of those actions; only the fact that they are done consistently and correctly, and all together, produce excellence.” – Daniel F. Chambliss, Professor of Sociology

“Success consists of going from failure to failure without loss of enthusiasm.” – Winston Churchill

“Every trader has strengths and weakness. Some are good holders of winners, but may hold their losers a little too long. Others may cut their winners a little short, but are quick to take their losses. As long as you stick to your own style, you get the good and bad in your own approach.” – Michael Marcus

“The goal of a successful trader is to make the best trades. Money is secondary.” – Alexander Elder

“Vision without action is a daydream. Action without vision is a nightmare.” – Japanese proverb

“A great trader is like a great athlete . You have to have natural skills, but you have to train yourself how to use them.” – Marty Schwartz, Pit Bull

“One characteristic I’ve found among successful traders is that they function effectively when they’re not trading. When markets become very quiet and range bound, they occupy themselves with a variety of activities, from sharing ideas with peers to conducting research. Traders who do not tolerate inactivity well inevitably feel the need to trade, often when there is no objective edge present. For them, losing money is less onerous than experiencing boredom.” – in Trader Feed

“To be a super-trader, you’ll need an edge to overcome the laws of probability and the uncertainty of the marketplace. That edge comes from information flow, the ability to correct your habits in terms of the market’s characteristics, and being able to take risks, cut losses, expand your information network, ferret out ideas, and take recommendations.” – Trading to Win, Ari Kiev

Two rules for investing/trading:

Rule number one : most things will prove to be cyclical

Rule number two : some of the greatest opportunities for gain and loss come when other people forget rule number one

Howard Marks

“Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell. If you want to have a better performance than the crowd, you must do things differently from the crowd.” – Sir John Templeton

“Money won’t buy happiness, but it will pay the salaries of a large research staff to study the problem.” – Bill Vaughan

“A lot of people get so enmeshed in the markets that they lose their perspective. Working longer does not necessarily equate with working smarter. In fact, sometimes is the other way around.” – Martin Schwartz, in Pit Bull

“The markets are the same now as they were five or ten years ago because they keep changing-just like they did then.” – Ed Seykota

“I have been trading for decades and I am still standing. I have seen a lot of traders come and go. They have a system or a program that works in some specific environments and fails in others. In contrast, my strategy is dynamic and ever evolving. I constantly learn and change.” – Thomas Busby in Trade To Win

“Have no fear of perfection – you’ll never reach it.” – Salvador Dalí

“The ability to foresee that some things cannot be foreseen is a very important quality”. – Rousseau

“A handful of patience is worth a bushel of brains” –

Dutch Proverb

“Investing is no different. It is a game of repetition where hundreds of small actions result in one larger result. But most importantly, it is a game of risk management. It is not the home run hitter who wins in the long-run. Rather, it is that strategist who devises the best long-term plan who ultimately wins. While hitting home runs is sexy it is rarely a recipe for success in the investment world. Aim high, but play small. Over time, good risk management and patience wins. Power is no substitute for precision and patience. The same is true in the world of investing.” – in The Prag Cap

“The game taught me the game. And it didn’t spare me rod while teaching.”– Jesse Livermore

“I think it was a long step forward in my trading education when I realized at last that when old Mr. Partridge kept on telling other customers, “Well, you know this is a bull market!” he really meant to tell them that the big money was not in the individual fluctuations but in the main movements-that is, not in reading the tape but in sizing up the entire market and its trend.” – Jesse Livermore

Michael Marcus taught me one other thing that is absolutely critical: You have to be willing to make mistakes regularly; there is nothing wrong with it. Michael taught me about making your best judgment, being wrong, making your next best judgment, being wrong, making your third best judgment, and then doubling your money.” – Bruce Kovner, hedge fund manager

“Losing money is the least of my troubles. A loss never troubles me after I take it. I forget it overnight. But being wrong – not taking the loss – that is what does the damage to the pocket book and to the soul.” – Jesse Livermore, Reminiscences Of A Stock Operator

“I have learned through the years that after a good run of profits in the markets, it`s very important to take a few days off as a reward. The natural tendency is to keep pushing until the streak ends. But experience has taught me that a rest in the middle of the streak can often extend it.”– Martin Schwartz, in Pit Bull

“It is not enough to have a good mind. The main thing is to use it well.” – Rene Descartes

“A peak performance trader is totally committed to being the best and doing whatever it takes to be the best. He feels totally responsible for whatever happens and thus can learn from mistakes. These people typically have a working business plan for trading because they treat trading as a business” – Van K Tharp

“If somebody had told me my method would not work I nevertheless would have tried it out to make sure for myself, for when I am wrong only one thing convinces me of it, and that is, to lose money. And I am only right when I make money. That is speculating.” – Jesse Livermore

“The most important organ in the body as far as the stock market is concerned is the guts, not the head. Anyone can acquire the know-how for analyzing stocks.” – Peter Lynch

 

“I discovered, from the analysis of over 25,000 people, that men who succeed in an outstanding way, seldom do so before the age of forty, and more often they do not strike their real pace until they are well beyond the age of fifty.” – Napoleon Hill, Think & Grow Rich

“Obviously the thing to do was to be bullish in a bull market and bearish in a bear market… I came to learn that even when one is properly bearish at the very beginning of a bear market it is not well to begin selling in bulk until there is no danger of the engine back-firing.” – Jesse Livermore

“Beginners focus on analysis, but professionals operate in a three dimensional space. They are aware of trading psychology their own feelings and the mass psychology of the markets.” – Alexander Elder
“Money doesn’t always bring happiness. People with ten million dollars are no happier than people with nine million dollars.” – Hobart Brown

“Win or lose, everybody gets what they want out of the market. Some people seem to like to lose, so they win by losing money.” – Ed Seykota, trader

“To be a good trader, you need to trade with your eyes open, recognize real trends and turns, and not waste time or energy on regrets and wishful thinking.” – Alexander Elder

“Markets can remain irrational longer than you can remain solvent.” – John Maynard Keynes

“The markets are unforgiving, and emotional trading always results in losses.” – Alexander Elder

“When a falling stock becomes a screaming buy because it cannot conceivably drop further, try to buy it thirty percent lower.” – Al Rizzo

“Your ultimate success or failure will depend on your ability to ignore the worries of the world long enough to allow your investments to succeed.” – Peter Lynch

“There is only one side of the market and it is not the bull side or the bear side, but the right side.” – Jesse Livermore


“I know at last what distinguishes man from animals; financial worries.”

Romain Rolland

“Learning trading means living a few years of your life like most people won’t,so that you can spend rest of your life like most people can’t”

MonacoTrader

The Importance of Multiple Income Streams to Build Serious Wealth – Part 1

Dr. Stephen R. Covey once said: “Strength lies in differences, not in similarities.”

Let me make one thing very clear, for me, trading is a business – not a hobby. You open your shop with the market opens and close it when the market closes (well sometimes you do the odd pre-market and after hours trading, as well).

If we are talking about business, let’s look into this a little further citing some research papers for you to do further readings. There will be number of parts to this series so stay focused…

Granted, there are numerous ways to become rich in the world today. One can take a variety of approaches to obtaining this objective, from the traditional to the more unconventional methods. The reality of the situation is that in the 21st century, the days in which an employee stays with one employer—which has a dedicated interest in his or her welfare—for numerous decades and retires with a sizable benefits package that is financially advantageous are decidedly gone. There may be a few physicians or attorneys who are able to accomplish such feats, although the instances in which they do so are becoming more and more rare. Instead, it is necessary for people to frequently leverage a multitude of different means to obtain wealth. In this regard, there is a paramount importance in leveraging multiple income streams to build serious wealth. A diversification of business interests is often required to produce such an outcome, as an analysis of wealthy entrepreneurs reveals.

Perhaps one of the best examples of this notion is found in the life and legacy of Steve Jobs – one of my business heroes.  It is critical to note that initially, Jobs began his career as a manufacturer of hardware—specifically desktop computers—when he launched Apple (Johnson et al, 2012). Apple would go on to become one of the better known companies in the world today, years after the demise of its founder and charismatic leader. However, even a cursory analysis of Apple’s diversification of business interests illustrates the fact that such versatility is essential to ultimately become rich. Whereas once the company was renowned for its computers, today it is much more better known for its iPhones and forays in the telecommunications industry. Jobs made a dedicated effort to shift the focus of his company many times, and in doing so was able to successfully diversify its business interests. Apple has substantial business ventures in hardware, software, telecommunications and the entertainment fields in the form of movies and animation (Kalla, 2012); as such, it is apparent that Jobs made a decision to diversify his business interests.

Perhaps the most cogent reason to diversify one’s business interest is that if one business fails, or one line of business fails, one can always rely on another to continue to generate wealth. Jobs choice to steer Apple into an incredible diverse array of business opportunities certainly indicates this fact. When Jobs first started with this company, desktop computers were cumbersome things that were the focus of the computing industry. However, as computers gradually became smaller and more refined, desktops gradually became obsolete. Apple was able to offset the potential losses and revenues that these computing developments created by finding different lines of business to engage in. One of the primary ways in which it was able to do so was to tap into the fledgling MP3 market with iPods (Finkle and Mallin, 2010). Prior to its advances in this line of business, CD players and those that could play MP3s were fairly dominant in this market. Under the direction of Jobs, Apple was able to revamp the marketplace by making iPods more compact and equipped to carry more songs than these other options. More importantly, the emerging market that it was able to help pioneer allowed it to shift its focus away from desktop computers and towards iPods. Currently, the company is much better known for its innovations and placements of iPods than it is for its traditional desktops, which allowed Jobs to continue to build wealth while focusing his interest from one line of business to another.

In many ways, Apple was able to achieve the same degree of versatility which kept its business from getting stagnant via its entry into the telecommunications market. In some ways, Jobs’ foray into telecommunications was related to his background in computers, since there were some components of the latter (such as operating systems) that were influential in Apple’s creation of the iPhone. Nonetheless, these gadgets that Jobs pioneered still serve a primary function as a means of communication in a manner that is much more direct and personal than that which conventional computers are able to provide. Telecommunications is a distinct industry from that of personal computer.

Therefore, even when sales of Apple’s desktops were lagging its diversified interests in both music players and iPhones were able to produce considerable revenue streams, if not help to create new additions to these respective industries (Austin, 2011). Jobs realized early on that the key to procuring personal wealth and that for his company was to simply expand and create as many different revenue streams as possible from different lines of business. He was highly successful in this endeavour.

An analysis of the business ventures of other entrepreneurs reinforces the viability of this concept as well. In some instances, there are wealthy people who have diversified their revenue streams to the point where that of some are completely unrelated to that of others. Let me give you an unlikely business example. Perhaps a salient example of this trend is found in activities of Sean “P. Diddy” Combs. Combs initially began his path to wealth and fame as an A&R at a record label, before eventually operating as an entrepreneur who founded his own record label, Bad Boy records. Although Bad Boy first started off by catering to the then-emerging market for hardcore rap, it would eventually expand its interests to include R&B and pop. Personally, Combs was able to internalize this concept and enter into a number of business ventures that were completely unrelated to music. He has acted in multiple films and has made a number of different television appearances. Additionally, although he started in the music business as an executive, he eventually became an artist and released several albums. The entrepreneurial spirit he exudes transcends entertainment (both acting and music), however. Combs has a plethora of restaurants, the most notable of which is called Justin’s. This restaurant has locations in both Atlanta and in New York City, my followers from these cities should already know the brand. What is most notable about this fact is that there is no correlation between working as a successful music executive and becoming a restaurateur, which Combs has done. These two industries are unrelated. However, it is clear that Combs engaged in both of them simply as a way to diversify his revenue streams. His forays into the fashion and clothing industry also underpin this notion. His clothing line, Sean Jean, has been featured in Macy’s for more than the past decades, and is found at other high-end retail establishments as well. Sean Jean itself is highly diverse, with numerous styles and subset clothing lines for everyone from teens (New York Daily News, 2016) to grandparents. Combs also has numerous real estate ventures. His path to attaining wealth is apparent–it is necessary to diversify one’s revenue sources so that one can have multiple means of generating income.

In summary, the true takeaway from an analysis of the sort of diversity of revenue that both Jobs and Combs were able to create is that there is a degree in autonomy in doing so. It is best for one to have such a diversification so that those revenue streams are actually independent of one another. That way, should one ever fail, one is greatly supported by the others. Additionally, the failure of one source of revenue should not impact the success of another autonomous revenue source.

In Part 2, I will go into my own experiences and discuss why I found business diversification as one of the most importanrt part of my personal and business growth. For those who would like to read further, please find below the references:

References
Austin, E.G. (2011). With Apple, the medium made the message. The Economist. Retrieved from http://www.economist.com/blogs/prospero/2011/10/steve-jobss-legacy
Finkle, T.A.; Mallin, M.L. (2010). Steve Jobs and Apple, Inc. Journal of the International Academy of Case Studies. 16(7). Retrieved from https://www.questia.com/library/journal/1P3-2200610411/steve-jobs-and-apple-inc
Johnson, K., Li, Y.; Phan, H., Singer, J.; Trinh, H. (2012). The innovative success that is Apple, Inc. Marshall Digital Scholar. Retrieved from http://mds.marshall.edu/cgi/viewcontent.cgi?article=1420&context=etd
Kalla, S. (2012). 10 leadership tips from Steve Jobs. www.forbes.com Retrieved from http://www.forbes.com/sites/susankalla/2012/04/02/10-leadership-tips-from-steve-jobs/#21626cd25a02
New York Daily News. (2016). Sean (Diddy) Combs launches new clothing collection with daughters for Sean John brand. www.nydailynews.com Retrieved from http://www.nydailynews.com/life-style/diddy-launches-new-girls-clothing-line-daughters-art

Top 5 Trading Mistakes and Practical Tips

We all do mistakes. It is part of the game. I wanted to compile Top 5 most important mistakes that traders (including myself) do and what to learn from them and how to avoid making the same mistake again. The most important thing is to realize the mistake and then take appropriate action to correct it.

Let’s have a look at the type of mistakes:

(New) traders expect too much too soon…

If you are in a new relationship, you know that relationships require commitment and hard work! You need to get out of your comfort zone and do things that you normally wouldn’t do to please the other half. In time, hopefully it gets easier, you know what your partner’s likes and dislikes (and you wouldn’t take her to Malaysian restaurant ever again if she has nut allergy – like I did it with my wife when we were dating). Trading is like relationships. You can’t expect too much too soon (if you do, you will get a slap!). You need to learn, absorb as much as you can and work on it. Things take time, trading is not a get rich quick scheme, in the contrary, it requires discipline, hard work and total commitment to make it a success. It is not uncommon for good traders to spend a few years to get to the top of their game. And don’t forget, as a trader, you are a student for life, constantly learning and adapting to ever changing market conditions. So next time when you think you traded for full 10 days and still can’t make top dollars, think about how much it would take to master anything in life. Tip: A trading diary is a good way of recording your lessons in trading. So you can go back and see what works what not for you. In time, you will see the changes and improvements which will motivate you and make you a better trader.

Undertrading or Overtrading

This is a common problem for newbie and also for experienced traders. Unfortunately, human nature is greedy. We are never satisfied with what we have (this is also part of what advances humanity as a whole). We don’t or can’t see ourselves overtrading until the session is finished. Then we review the day see that we have overtraded to make more money. Or perhaps over traded and took more risk to be able to finish the day in green (and most of the time you will end up more in red). In some circumstances, some folks are scared to take great trades and giving up easy potential profits because they are not willing to enter a trade when they see a good opportunity (undertrading). Both of these can manifest themselves in variety of different ways. I chat to many traders and see this often (including myself). Tip: The best way to overcome overtrading or undertrading is to have a trading plan for the day. You can write this down or tell to yourself that what do you expect to achieve from the trading session. This of course very much depends on the overnight scans and also morning action, so your plan will change according to this. Once you reach your trading goal for the day, make sure you are not starting to take trades are much riskier than your normal setups. When you are in Euphoria from your winnings, you tend to think you will win with any given trade (absolutely not good trading habit). This happens to me a lot and lately, I start to leave the session all together to give myself a small break to come back to planet earth! This way, I can think more sensible and take calculated risks again instead of any risk! Easier saying then done, still working on this and leaving the session for a break and go for a coffee or drive is my way of coping with it. Everyone is different, whatever works best for you. Find it.

Lack of Patience

It still amazes me how patient we can get in a losing trade (and not cut it off and take the loss – unless it is a planned swing trade it is completely different story) and if we are winning how impatient we can get…We just want to take that profit (although you know that it is too early!). This is a psychological phenomenon. If you are wrong, human brain tries to find reasons why you are right (i.e. you start looking at Twitter for supporting arguments for your loosing trade, you look at the internet and read anything available out there to prove your point to yourself and others) but the reality is you are wrong. Market is acting against you and you are wrong. Period. If you are winning, Fear of Missing the Profits, kicks in and you look for any excuse to get rid of that trade so you can proudly say you made money on that trade. Tip: Patience is a learned process. It can be developed as a trading habit. As a hyper-active person, I haven’t unfortunately blessed with patience. However, some of you following my trades know that I can be very patient when it comes to some swings (especially if I am convinced about the particular trade). I frequently make very good money on that patience (perhaps most of my largest wins come from patient trades).  One important thing here is not mixing patience with hope. They are completely two different things. If you are in a trade and ‘hoping’ that the price action will change and hopefully you make money, you need to cut it off there and then. Patience is acceptable when you have an edge. The edge that gives you confirmation and conviction of that trade. Otherwise simply let it go….

Size…Size….Size…

I have written about size control in my blog a few times. In my opinion, controlling trading size is the BEST thing you can do in trading. Most traders take too much risk with trading size compared to their account size. I am seeing too many (especially new) traders smoked with only one or two trades simply because they played too big!

Trade size is directly correlated to the risk of that position. The more size you have, obviously the more risk you are taking at a given trade. Most good traders chose not to go full size in a position but keep adding to a winner. In this way, you can just risk the profit and have a nearly risk-free trade. But we all know that, life is unfortunately not that easy and trades go against us. In this case, the importance of the trade size once again come to play….

Tip: For me it is very easy. If the trade is making you nervous (a bit of nervousness of course normal, what I am talking about is being very nervous / being scared from that trade – it can take you out if it goes against you) then you should be out of that trade immediately! Not later, do it now! Like the bees programmed to protect the queen bee, your number one job as a trader is protecting your trading capital. For most traders, if they are smoked, they don’t have another chance to come back to trading. That’s it. So next time when you trade, manage your trading size accordingly, if it starts to get you really nervous, you know what to do…And don’t forget, it will be your fault if you are nervous, because it means you are trading with wrong trading size!

Failing to accept responsibility against your own mistakes

Forget about accepting responsibility for your own mistakes, some traders do not even realize they have made a mistake (see some AVXL cult longs). Realizing your mistakes will make you one step closer to become a better trader. Accepting responsibility for your mistake is great for you for two reasons: 1) You know what you have done wrong so you will hopefully learn from that mistake 2) Now you know what works instead, next time you will use that to your advantage to make a successful trade. I am unfortunately seeing a big blame game between traders. A wrong trade is never their own fault! It is always someone else’s fault (someone told me to buy this, someone told me to sell this otherwise I wouldn’t, etc.). Tip: GROW UP! You are responsible for your own actions. It is all good that we share information via internet or other mediums but it is ENTIRELY your responsibility to enter a trade or not. If you do, you should have a PLAN in the first place – why you entered in that trade. Have you executed that plan to A to Z? If the trade went against you what was your risk mitigation plan? Don’t forget self-justifications distort reality and if you are not in reality you are not learning. So next time something goes wrong, first understand what went wrong, then accept your mistake and think about what you learned and what you will do about it next time. I also strongly suggest to write this down (we tend to forget mistakes easier than our success).

I always tend to take responsibility and announce my mistakes to my friends and followers. I like doing this because I am learning something new every time from my own mistake. I also have the upmost respect to people who do the same in our community. We are very blessed with great traders and we can also learn from each other’s mistakes.

Thank you for your time and I hope you found this useful.

MT

Trading Psychology and Emotions

Trading Psychology and emotions play the biggest role in your daily trading. Let me elaborate on this more in this article.

Dr. Van Tharp, a leading psychologist, is very well known for breaking down the trading process into three categories that affect traders. He categorises them by importance as follows:

  • Trading strategy (10%)
  • Money management (30%)
  • Psychology (60%)

The fact that trading strategy is the least important factor in Dr. Van Tharp’s trading process above, this suggests that regardless of how successful your trading strategy is, your psychology is the key to being successful in trading.

In one of my previous articles we looked at Fear of Missing Out (FOMO) and how it can affect your trading. Fear & Greed are the two emotions that have a negative impact on your trading journey. Experienced traders know that the greed makes you to try to take too much profit (when it is not there) and you end up with less profit or loss. Similarly, fear causes you to cut your positions quickly in loss or less profit where you could make much more.

Another important psychological factor is the ‘Ego’. We all have an Ego. We all want to be right. A trader highly influenced by his own ego will never admit that he/she is wrong. This means that, he will never be able to learn from his/her mistakes as he is unable to see those mistakes in the first place. This will ultimately result on more losses and get him/her out of the game all together.

Another aspect of emotional trading can be summarised as ‘revenge trading’. In revenge trading, the focus of the trading shifts from finding the best trading setups (according to trader’s own strategy) to fastest way of recouping losses. The trader focuses on winning the losses back (very similar to a loser gambler attitude) and ends up losing more money.

The final aspect of emotional trading is over trading. This mainly happens after big wins and the trader greed kicks in for more profits. The whole situation ends up with losing the previous gains or accumulating big losses in the process. This is a Greed based human behaviour that can be seen in experienced and inexperienced traders. Difficult to control but not impossible.

So how can we cope with our own Psychology and Emotions? You heard the trading term: “be like a robot” that comes to mind. Easier said than done! The trading algos are much more profitable than humans (when they are using a profitable strategy) for one reason only, they cut out the emotion from the equation!

As a human trader, your only weapon is discipline. You might know about what to do but applying discipline to your trading will require time and experience. As good old Warren Buffet says: “You can’t make a baby in a month by getting 9 women pregnant”.

My personal advice is as follows:

  1. The start point should be working on your ego. When you are wrong, admit that you are wrong. This will be difficult at first, but in time you will see the benefits of doing so. You will be able to see your mistakes. What went right and what went wrong with that particular trade.
  2. Have a trading diary. We are humans, we forget! My suggestion to especially new traders is having an excel sheet and note down every single REAL trade that they have done (not interested in paper trades as they do not reflect the emotion of losing real money). Make sure to have a separate column for your notes, note down everything why you entered in that trade, why you exit? did you follow your initial plan (this is very important), if not why not? Take as much notes as possible so you can go back and see what happened to your trade. What went well and what went wrong. The pattern will start to emerge when you have at least 100 or more trades, you will be able to see the bigger picture. I Cannot stress this enough, HAVE A TRADING DIARY (even if you are an experienced trader).
  3. Be DISCIPLINED! Once you have a working strategy, follow it to the letter! It is not always easy to do so, but you will get better in time if you apply discipline. Also make sure to have some trading goals (my article on setting goals can be found here)
  4. Set your expectation accordingly! Trading is not easy, do not expect easy money. Know that you will have to work for your money. A lot of hard work needed to be a successful trader.
  5. Find out what works for you. Be honest with yourself. If you are overtrading, what is the best thing to do? Some people can control themselves in front of the PC, some simply cannot. After a successful trading session, I often take a coffee break to clean up my mind and more importantly my emotions. If it is a particularly good trading day, I go for a drive in my car. Whatever works for you. Perhaps go dip in the water, have a coffe, drive, call a friend, etc.
  6. Enjoy what you do! Yes, trading is hard work but there is nothing more satisfying then knowing your strategy works, you were disciplined and executed that trade according to the plan (or avoided that big loss successfully).

I hope it helps. Have a great weekend.

MT

 

 

 

Introduction to Options Trading – Part 2 – Options Strategies: Butterfly Strategy

In the last Options Trading blogpost (Introduction to Options Trading), we looked at the basics of options trading: what does options trading mean and I’ve explained a few examples how you can trade options. If you are new to options, please start from part 1 here.

In the next few weeks, I will cover some of the best options strategies that works for me.

In this post, we will specifically look at Butterfly Options Trading Strategy. Please note that this is by no means a complete strategy guide for options or butterfly type of trades, just the strategies that I utilise when trading options. Again, this doesn’t mean that these are the best strategies in options, just take them as new tools in your trading toolset.

Butterfly Options Strategy

This is an advanced ‘neutral’ options strategy that requires you to find stocks that trades in a very tight price range. When I utilise this strategy, I look for stocks with a change of 5% for the last 3 months and shows similar type of price change in the last 12-18 months. You also need to make sure there are no major news or results are expected before the expiration date (so there is no big change in the price of the underlying stock).

A typical butterfly trade, consists of at least 3 options trades to be done at once. Just like statistical arbitrage trades, this means that you will lose in two options trades and win in one option trade. As you rightly guessed, your winnings should be higher than your two losses to make money on this strategy. Also note that, both your risk and reward are limited in this type of strategy.

Let’s look at an example, as below.

LONG Call Butterfly Options Trade Example

MonacoTrader (MT) finds a good candidate stock (XXX) for a Long Call Butterfly.

Stock XXX – Today’s (DEC) stock price: $100

MT enters a Long Call Butterfly by purchasing a JAN 95 CALL for $11 per share and sell x2 JAN 100 call for $4.50 per share, and buys JAN 105 call for $0.80 per share. (you will remember from part 1, there are 100 shares in 1 option contract).

So just to summarise:

when I buy 1 Contract JAN 95 CALL, I pay $11 x 100 = $1,100 (needs to be paid immediately to the broker to cover the purchase)

When I sell 2 Contracts JAN 100 CALL, I pay $4.50 x 200 = $900 (will get paid immediately to your brokerage account as you sold them)

When I buy 1 Contract JAN 105 CALL, I pay $0.80 x 100 = $80 (needs to be paid immediately to the broker to cover the purchase)

MT’s Gross Cost:  $1,100 – $900 + $80 = +$280

Now I know that my maximum possible total gross loss in this trade will always be $280. The trade will be a loss only if the market price of XXX was above or below the max loss point at the JAN Expiration date.

In other words, the net premium paid at open is the maximum possible profit that the investor can gain from this strategy, and the difference between the net loss reaped between the long and short calls or puts minus the initial premium paid is the maximum possible loss that the investor can incur as shown in the example above.

The maximum profit on a Butterfly Spread is at our Short Strike, in the example above, it is the 100 Strike. In some Butterfly Spreads, the maximum profit at expiration can reach over 250% (waiting for this comes with its own risks!) but I generally only hold Butterfly trades for 15 to 21 days, and then exit. If all goes well, expect to exit with a handsome profit of 10% to 20%. Of course if you wish to hold it to the expiration date, you can. But any news or major event can change the price of the stock dramatically and it can turn into a loss!

Another way of looking how to profit on a Butterfly Options trade is through the reduction of Time Premium of our Short positions during the 15 to 21 days period. Since one of our Long positions is ‘In The Money’, almost all of the cost of that Option will be ‘Intrinsic value’. However, the amount that the position is In The Money, the value of our Short Positions, will be almost all Time Value. As we get closer to Expiration, we will be able to sell our Long positions for about what we paid for them. However, it will cost us less to buy back our Short positions, and we end up with a profit. In essence, we buy the Butterfly at a low price, and then sell to close it later at a higher price.

For those of you using Interactive Brokers (IB), they have a quite a good (but not excellent) Options Strategy Builder comes with their TWS. It is relatively easy to use tool where you can create spreads and analyse potential profit, exit, break even points. You can also create multi-legs for even more complex options strategies. I suggest you try and see yourself.

My Ultimate Trade Setup for Butterfly Option Trades:

Time to enter the trade: 35 days until 25 days prior to expiration

News: There are no major news or expected, no earnings news, no mergers or acquisitions, no major sector movement for the chosen stock.

Time in Trade: 15-21 days. You can hold it until expiration if you wanted to (perhaps waiting for expiration and not take the profits when available is riskier strategy)

Stock Price: At least $60 or above – If the price is underlying is too low then the price of the options will be too low. Hence the potential profits will be low.

Summary QA

Q: When should I use this strategy
A: When you think the price of the underlying stock will be stagnant or will change very little before the option expiration date.

Q: What are the advantages of Butterfly Options Strategy?
A: 1) Good profit potential with low cost entry 2) Risk and Reward parameters are set before entering in the trade 3) Quite a large number of underlying stocks can be found to utilise this strategy.

Q: What are the disadvantages of using Butterfly Options Strategy?
A: 1) Depending on your broker, larger commissions might be applicable to these type of trades 2)This strategy is more appropriate for experienced traders who can watch the markets during trading hours and thoroughly understand the potential risks and rewards involved.

I hope this helps. Let me know your comments or questions on twitter (@MonacoTrader).

Have a nice weekend.

MT

Roulette and the simple way of maximising your chance of success (Martingale Betting System)

I hope you are all having a great weekend. A blogpost about something different today. Let’s look at Martingale Betting System and its use in Roulette, the table game.

Let’s make one thing very clear, I DO NOT gamble unless it is for a social occasion. I have nothing against people gambling for having some good time (more for socialising purposes) but I have zero respect for people who can’t control themselves and lose a lot of money unnecessarily to the casinos.

Living in Monaco comes with its perks. After all, Monte Carlo is the place where it all began. The funny thing about Monaco is Monaco citizens (note not residents – means two different things) are not allowed to gamble. This is almost ironic, basically giving the message that Monaco will entertain you the max, take your money and then will send you home where your bank manager is waiting to have a word… (a bit like Vegas – perhaps a bit more classy way of taking your money). And that is exactly what happens in the Monte Carlo Casino.

I socialise and go to the casino quite frequently. My wife and I are members of number of societies in Monaco where after a great meal in Hotel de Paris, the night generally ends in the Casino. The only game I would ever play to socialise with the crowd in the casino is Roulette. There are number of reasons for this, which I will explain below.

Now let’s go back in time, all the way to 18th Century. We are now in rural France. You are looking at a house lit with oil lamps and a man is working hard on advanced probability theory. This is the Martingale Betting System. It is originated with the betting on heads or tails using a coin. In classic Martingale system you double up the next bet after each loss and as soon as you win you reduce your bet the initial amount after each win.

You will never leave the casino penniless with this system – the winnings will cover all your net losses of the previous bets (all IN THEORY!!!).

Let us use an example to understand how it works. Let’s say you are playing classic or European roulette (so we have RED, BLACK and only one GREEN colour on the roulette). This means, as a player, you can bet to the colour RED or BLACK. If you win you will get win double your bet.  Let’s say you always bet to RED colour. To win you need RED colour (any other colours such as BLACK or GREEN means that you will loose the bet).  By the way you can bet to RED or BLACK this doesn’t make any difference. The probability for both are exactly the same.

Let’s say, You bet 1 dollars to RED and lose the bet, the next time you now have to bet 2 dollars (this is how Martingale System works, you need to double your loos). If you happen to lose your 2 dollars, you must bet 4 dollars the next spin. If you lose again, do not give up! Bet the increased amount of 8 dollars! When you win (Let’s say at $8 bet – now you have won $16) you should reduce your next roulette bet to the starting amount of 1 dollars. As a result, you will always have a minimal gain. In our example it is 1 dollar minimal gain: $16 – ($1+$2+$4+$8)=$1. Well, using Martingale system, in theory, you can’t loose. Sooner or later you will get the colour of your choice and you will at least win the minimal bet amount.

Let’s have a look at your probability of losing under Martingale System, here is a chart:

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If it sounds too good to be true, it generally is!

As the old sayings go, in the long run the casino will always win. Because they have an advantage, the GREEN (0) to their advantage. The catch is you’ll get red *less than* half of the time (as seen above), since there are black and green spaces on the wheel. You can keep doubling your bet and eventually you’ll win a whole $5, or eventually you won’t have enough money to double your previous bet and you’re screwed. Or you will hit the table maximum. Most online casino do not let you to bet more than $1000 on a roulette table. Some do but they will always have a maximum limit to stop you winning. This means that if I bet on RED and if I start with $1, I will only have 10 chances to get RED ($1, $2, $4, $8, $16, $32, $64, $128, $256, $528, $1016). It sounds like 10 BLACKS and/or GREENS in a row looks like a small chance, it happens all the time. The more you play, the more likely you will get this in a row. Trust me, it WILL happen!

Once I first discovered Martingale Betting system years ago, I straight away wrote a software programme to automate Martingale and make a million! It worked successfully and bet exactly how I wanted but at the end of the day (was trying demo accounts only of course), I was always the one who was losing at the end of the day. It is simple mathematics.

In the short term, the system will very likely to work. So if you want to impress your friends or family, it is a great trick in the casino. Take your winnings and never play again that day. That’s what I do.  One thing is for sure, trying Martingale in a demo account is so much fun. You want to test it? Follow the link and have some weekend fun (DON’T LOOSE ANY MONEY!):

http://casino.williamhill.com/ (choose European Roulette)

If you like the article, let me know on twitter.

Have a nice weekend.

MT

The importance of setting goals

This article is not intended to being just another boring article about setting goals. The aim of this article is to share some of my knowledge and expeirnce on how I use goal setting to my advantage.

The research about goal setting is popularised by Locke in 1968 (LOCKE, E. Toward a Theory of Task Motivation and Incentives. Organ. Behav. Hum. Perform, 3, p. 157-189)

He argued that setting goals effects the individual’s performance in 4 main ways:

  • focuses attention

  • mobilises effort in proportion to the demands of the task

  • enhances persistence

  • encourages the individual to develop new strategies for achieving their goals

Similarly, another research (click here to read the paper) shows that those who clearly decide on their goals and/or write their goals down accomplish significantly more than those who do not decide or write down their goals.

Goal setting for me is not just about identifying what my achievement will be, but more importantly identifying  a clear plan on how to get there. I like taking a complex problem, analyse it and then slice it into digestible chunks. This means that I have an overall GOAL but also interim goals to get there. This in my opinion is extremely important. Many people set big goals for themselves and then get demotivated as the task is too big to achieve. Setting big goals is great and important but you should also plan how to get there and have interim goal to achieve this, get motivated and conquer the overall goal.

I use this methodology daily in my private life and also business life. In business, I have multiple business interest. I have a Venture Capital organisation that have number of identified goals for this month, this year and in the next few years (overall goal is sliced into smaller goals as described above), similarly I have an international  Property Development business where I have number of models such as: build to sell, build to rent, buy to rent or buy to sell. In each model, there are number of set golas needs to be achieved so I can decide to move to the bigger position or re-evaluate the business for efficiency and consistency and modify my own goals.

In trading it is the similar story. I have weekly, monthly and yearly targets that I set as my own goals. If the goals are not reached after a certain amount of time, then I keep re-evaluate and set a different path to achieve the same outcome. Don’t forget there are thousands of ways to climb the same mountain – If there is a will, there is a way.

In my personal life, I set goals to learn new skills. Each year, I set a goal to achieve something non-business related. Some of  these goals can be as small as learning how to play poker (2009 goal) or bigger goals such as getting a Private Pilots License (PPL – achieved in 2012), etc.

When we are setting goals, the important thing is having achievable goals and not to have too many goals at once (this will affect your focus) and making sure that you have identified measurable outcomes. You need to know when your goal is successfully achieved. If you for example say this month I will become better in trading, there is no measurable outcome in this. What does ‘better’ mean? It means you wont loose money? does it mean you will make money? If so how much more than normal? Think about this before setting any goal.

If you are new to goal setting, I strongly suggest writing them down somewhere so you can go and check your progress. Once you get used to goal setting, you will probably not need to write them down anymore as they will become part of your everyday life and keep you in the direction of your set goals. Once you start to achieve your goals, this will become almost a habit and will push you to set more goals in your life hence more achievements to follow…

I hope this is helpful. If you like the article or if you have any comments, please let me know on twitter (@monacotrader) – I am interested in your feedback and your achievements using the methodology above.

Have a nice weekend.

MT

 

 

Trading Psychology – FOMO (Fear of Missing Out)

There are number of ‘Fears’ that a trader will experience in his/her career. The most important three fears that often manifests themselves are: Fearing of Missing Out (FOMO), Fear of Loosing Money (FOLM) and Fear of Being Wrong (FOBW). In this article, I will specifically focus on FOMO, what it is, how it can affect your trading and how to prevent it (as much as you can).

Fear of Missing Out (FOMO):

Fear of Missing Out is a well researched psychology topic that is not only true for trading but also for every day life. Most scams (and well scripted marketing) work due to recipients’ FOMO ‘triggers’.

If you want to understand FOMO better, I strongly suggest reading two research paper by Kernis (2003) and Ellion (2007). They argue that self-determination theory (SDT) a macro-theory of human motivation provides a useful perspective for framing an empirically based understanding of FoMO. According to SDT effective self-regulation and psychological moods are based on the satisfaction of three basic psychological needs:

  • competence – the capacity to effectively act on the world,

  • autonomy – self-authorship or personal initiative, and

  • relatedness – closeness or connectedness with others.

Today’s retail investor is a social animal. We are following each other on social media (twitter, facebook, instagram, etc.) and also bombarded by emails and other media channels. We are being sold ideas and concepts every single minute of the trading hours (and pre-trading and after-hours). What we are really trying to do is to feed the three psychological needs above and/or try to get confirmation (and comparison).

We follow each other, we hear news that this is the must have stock (or the stock that needs to be shorted immediately). We see so many people are doing the same thing and we feel left out (the feeling is: everyone will make big bucks and if I am not doing anything! I will simply loose out on a great trade!) or worse,  in some circumstances, you might be already in the trade but you start doubling your position (just because everyone else is doing the same) and pay the price later. We all know that if everyone is doing the same thing, the trade becomes crowded and thinks start to turn for the worse…

Realization and Action

As traders, we need to realise something very important as early as possible  in our trading career. We simply can’t catch every stock move and we can’t trade stocks every minute of every day. This is a fact! If you can accept this fact then you have ultimately accepted that you will miss some trades (this is perfectly OK!). The real rule to be successful in trading is to have a working strategy. Everyone trades differently, no two traders trade exactly the same way so your strategy will be different then my strategy however there might be similarities that puts us on the same set (i.e. short trader, long trader, momo trader, stock trader, fx trader and so on..). Don’t feel like an outsider or feel being wrong just because you are trading differently to someone else or to a group of people. Don’t forget there is money to be made  in so many different ways from the same stock.

All traders struggle with FOMO time to time. If someone is saying they don’t struggle, they are simply lying to you. Trading experience of course helps with this immensely. My simple rules that help me to stay in check are:

  • The Action Plan: Always have a plan before entering in a trade. Ask yourself what is your edge for entering in this trade. You need to KNOW why you are entering, what size you will be using,  when you will be exiting and what you will do if the trade goes against you. You are not going into this trade just because some guru or a friend thinks it is a good idea. KNOW your trade and KNOW what you want from it EVERY SINGLE TIME YOU TRADE!

  • Be Disciplined: As you now have an action plan, the truth is executing that action plan is more difficult than to have an action plan in the first place. This requires discipline and determination. Don’t forget that HFT algo that you are trading against doesn’t have emotions and will follow rules to the letter. You should try to do the same (as much as you can).

  • Learn to be happy with your achievement: We all want to make a killing from a trade. Reality is trading is extremely difficult. Once you have executed your plan effectively, either you made a profit or a loss. Either way, you have done what was necessary for the trade and successfully filtered out the noise – well done on that. Even though it was a loss, you cut it on time as per your action plan. This is great news. If your trading strategy is profitable, in the long term you will make serious money from trading. As you are following your rules, you WILL be consistent and you will achieve consistency in trading.

I hope this helps. Have a nice weekend.

MT