Back in mid-2008, I had a friend who lost over 60%. I offered to sit next to him for one afternoon while he was trading and I made sure he was free all day. This was in early September. I told him to initiate short positions and “leave them alone for a few days”. He closed out the positions within minutes. He started freaking out because a swing trade was going 5-6% against him.
I told him to re-add all the short positions. I then told him to come over to the window where a large metal pipe was running, and I handcuffed him. You can imagine how berserk he went, calling me all sorts of shit while at the same time feeling hopeless. I uncuffed him after the close. If you’re thinking “What the hell is Chart Addict doing with handcuffs in some dude’s room”, well, chill the fuck out and keep reading.
This is sort of extreme, but it’s also a personal experience. Many years ago, I used to handcuff myself during trading hours to avoid impulse trading and succumbing to my emotions. If I had to go to the bathroom or eat, I had to call my neighbor to unlock me. I did this for two full weeks and it was one of my most profound experiences in my trading career. Psychologically, I had no choice but to withstand the pain and I forced it upon myself like a madman.
Now that I have students, I can’t cuff them, but I tell them to completely walk away from the computer if they get urges. Since I am primarily a swing trader, I can withstand bounces and giving up large gains in anticipation of closing out trades for 20%, 30%, even 50% or more. In fact, I could be eating a sandwich and watching Youtube videos while my gains fade away because I have my trade’s purpose and goal always in mind with the end result in focus. The psychological aspect of trading must be your foundation, for without it, you will not succeed as a trader.
It doesn’t matter what system you trade, what programs you use, or what you subscribe to in your search for the holy grail, or “THE” answer to trading. I found that keeping it simple was the best way for me. If you notice on my daily charts, I hardly ever use technical indicators and only rely on candle charting, price action, volume, and moving averages to make an informed decision. That is really all you need to find the best set-ups that produce highly successful and high probability trades with the greatest time value of employed capital.
I use the most unconventional methods in my trading as well. Many times, I do go 100% all-in, but in the best of circumstances. I believe I will be all-in this week, switched around from long then to short, mid-week. What I do may be risky, but I am so conditioned to take calculated risks that it is second nature to me. In addition, I don’t involve myself in conventional portfolio theory or asset allocation. That is a waste of time for my resources. I trade to get the biggest bang for my money in the shortest amount of time. I don’t fool around with 1-2% movers. That’s a waste of my day.
Everything I said above may or may not apply to you. What someone might do may not be appropriate for you and your tolerances. Most people are conservative and cannot or or are unwilling to employ the strategies that I use, all of which are 100% discretionary and technical and for some, proprietary. It is important for you to figure out what kind of trader you are, what your style is, how your personality fits, etc. This will not come overnight, but rather over months and maybe even years. You must know yourself before throwing your hard earned money in the market.
With that said, there are 4 stages of Learning:
- Stage I – Unconscious Incompetence: You have no idea what you know or don’t know.
- Stage II – Conscious Incompetence: You admit that you don’t know, and you want to know how.
- Stage III – Conscious Competence: You finally know how, but only if you think things through.
- Stage IV – Unconscious Competence: You fully know how and you instinctively take action.
During Stage I or Unconscious Incompetence, the trader doesn’t know what’s going on, and doesn’t know much about trading except for the fact that you could make millions! Also, these traders have no trading plan whatsoever. In fact, they don’t even know that they need one! Finally, the trader is unaware of the important aspect of trading psychology. We’ve all been here, done that.
During Stage II or Conscious Incompetence, the trader is all pumped up and excited about the potentials of trading. These traders look at charts all day long and flip through research reports. Finally, they open up a brokerage account anticipating great riches. This group probably reads 1 or 2 books, gets some kind of newsletter subscription, and they think they’re ready to run circles around the Market Makers. Not so fast. Unfortunately, these traders lose a lot of money and they realize that all the services and subscriptions and advice they got are no use to them This is also where the individual trader gets a taste of the emotions that come with trading (fear & greed).
This is also where traders test various strategies. Stage II is especially difficult because the trader suffers disastrous losses and may become depressed or overwhelmed. His personal life may be severely affected. It is at this point that they decide to either move forward or quit trading. This is also where positive and negative judgments and thoughts are formed (“Am I too stupid to trade?, “Trading is too hard for me”). The trader has lost money, is afraid and confused, and has jumped into a financial and emotional abyss. You hear the statement, “90% of traders lose money”, right? This is the stage where it happens. Even if they can afford to take the financial losses, the psychological losses are excruciatingly painful for the new trader.
When the trader makes a conscious decision to take his losses and move forward, then they have reached Stage III or Conscious Competence. Usually, traders look into the abyss and somehow make it out alive. Whatever their motivation, they decided to pull themselves out. In the process, they have also accepted a few things:
- Trading is learned until the day you die. You never stop learning.
- Whatever they did in life, how well they did in their past occupation, and their previous successes do not equate to success in trading.
- Being wealthy or being really smart also does not equate to success in trading. In fact, some of the biggest losers are doctors, lawyers, engineers, scientists, programmers, analysts, business owners, CEOs, retirees, etc. Why? Because typically, these people have this desire to always be right and for some reason, they refuse to take losses until they are annihilated.
- They cannot control the markets or “will” it to do whatever they want. More importantly, they accept that they don’t need to “control the markets” to become successful in trading.
- They must have a trading plan. Seriously though, seeking advice from traders/websites/brokers/programs/ etc. as a primary method to trade is like trying to drive to Cali from DC without a map by stopping along the entire way asking all sorts of people for directions. You might end up at Sir Stanford’s gf’s house in Fredericksburg, VA.
- They must be psychologically prepared to trade.
Knowing where you are is important, because you now know where you need to be. Once Stage IV is reached, you must do several things:
- Create a trading plan. Goddammit. Would you start a business without a business plan? I didn’t think so.
- Test out the various strategies and see what “fits”. Are you a day trader, swing trader, position trader, a zombie buy-and-hold investor?
- Do not abandon any plans just because they don’t work. There’s always a time and place for everything in such a fluid market.
- Increase recognition and repetition. Practice, practice, and practice some more. Don’t bullshit yourself.
- Accept the fact that taking losses, is part of the game. If you don’t like losing, stop trading immediately. I mean it. You ‘ll thank me later.
- Do whatever is necessary to condition your psyche. Whatever is necessary, even handcuffing yourself.
After a while, you’ll be able to understand odds and probabilities, differentiate for market conditions, learn to capture the meat of profits, scale in-and-out of positions, accept multiple & consecutive losses, learn to hold positions during heavy pressure, develop the “trader’s intuition”, place trades without hesitation and finally, become consistently profitable, week after week, month after month.
Hope this helps some of you out there.
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Great article, thx
C/A That was an awesome post. It is just what I needed. This year has been tough for me and it all started with the rumors starting the end of January. I been off my game ever since. I am pretty sure I am not alone in this..
Chart Addict,
I just found this site and enjoy reading your columns and watching the videos. I am the quintessential Stage II trader. It has been a very difficult time for me incurring huge financial losses.
I am still young and want to learn more about trading. How did you learn about TA and other strategies you use today that you learned growing up? What can I do to learn more about trading? I want to learn and I understand that it is imperative to keep learning. Any advice is truly appreciated. Thanks
Great post. Thank you.
Brilliant. Since I am only just barely into Stage 3. Reading this alone, helped me to realize exactly where I am. Truly helped me clarify to myself I can’t believe how pretty much acurately the stages you described, in fact described me. Think I’ll skip the hand-cuffs though. My escape is I go clean something 🙂
Great post. It’s like Brett Steenbarger up in here!
Great post, had to read descriptions a couple of times to make sure I wasn’t lying to myself. This gives me hope that I can get past stage III.
Thank you
Handcuffs that is really funny and great you’d share it. I think tons of papertrading is the best way to not flop, although you stress when it gets real. Didn’t you make a few monopoly dollars way back CA? Great post, I’d add dude has some kind of trading room thing going.
Superb post! Helps put everything into perspective. I thought I was going crazy trying to manage emotions and find the right fit in this schizo market. I’ll skip the cuffs and walk away or take the kids out for a bike ride. Don’t want them telling their friends that Daddy was handcuffed to the bedpost!
One of the best post ever on IBC!!!
Good job. Informative and educational. The more I learn the better I trade, plain and simple. Emotions is something that every trader struggles with. Greed is the one that I struggle with.
Good job! trading is really quite simple sometimes… do you let the trade control you, or do you control the trade? That’s pretty much it. the hard part is that emotions can put us out of character. stick to the plan, or get handcuffed!
-gio-
Great post. I love the point about asking directions. It’s right on target.
Great Post! What is your trading plan?
ZINGO !
noice postus
Great post!!!
Thanks CA.
“Since I am primarily a swing trader, I can withstand bounces and giving up large gains in anticipation of closing out trades for 20%, 30%, even 50% or more.”
those percents on total equity or on 1 position of many?
withstanding those high % drawdowns before taking a smaller loss seems ridiculous when you can reenter if your thesis remains but price action is ‘temporarily’ telling otherwise.
“withstanding those high % drawdowns before taking a smaller loss seems ridiculous when you can reenter if your thesis remains but price action is ‘temporarily’ telling otherwise.”
@ pdf, I think those percentages are for each position. I totally agree with the author.
What you suggested here is basically that you try to catch every single small move in a possible big move. Your thoery is based on how accurately your system can generate entry signals.
My understanding of draw-downs is realized not on paper. BTW, Great Post.
Pretty much nailed it with this one CA. Thanks
I am actually very surprised by the number of 2’s and 3’s that we have on iBC. I figured that there would be a lot more 4’s. It doesn’t matter right now as long as you get there eventually.
I suggest a lot of the 1’s and 2’s, if their performance is suffering, to stop trading immediately and to start paper trading. A good site is Wall Street Survivor, a site where I am a contracted author/commentator. I tell my students, “if you can’t make fake money, how in the hell are you going to make real money?”.When you are consistently profitable, then start trading for real with small lots and move up to larger positions as you get more comfortable. This is the best way to avoid blowing up.
My trading plan is complex and proprietary, but generally, a plan must detail everything. It should answer the who, why, where, when, and why. It should state your goals, purpose, methodology, strategies, risk/money management, position sizing, stop loss, rules that you self-impose, etc. Anything and everything that comes between you and trading. It must be written.
I mentioned that I am a swing trader. I could care less about intra-day swings. My style is to not jump in an out on every intra-day move, but rather capture the multi-day trend. Do whatever you want to do. They are per position.
Also, if you’re constantly looking for stock picks and trying to follow people, then you are at a severe disadvantage. You will NEVER reach Stage 4 if this continues. Learn to trade for yourself without depending on anyone else.
Thanks. Off to handcuff a drunk chick to the bed post in the other room.
Thanks for this post.
I entered stage 4 this week, after 5 years of trading.
I could feel the shift coming.
What you have written is almost exactly the experience
that I have had.
My account is up over 53% this week alone.
One thing I have learned the hard way, is, when I am on a roll like this, I refuse to let it swell my head.The way I do this is next week for the first couple of days, I will reduce my positions sizes in half, and proceed with caution.
Trading is quite a process.
good article. i use to panic when trade went against me, but i just reevaluate the trade and see if i still like it
Excellent post. If I could just find the key, I really got to pee!
Excellent post CA! What would you suggest to someone who works full time for a living and is trying to learn how to trade on the side?
Great post CA.
I know one thing that has really helped me is to always write out a detailed analysis of each swing trade before I enter it. This helps keep all of the emotional type stuff from screwing it up.
If I ever have the strong urge to act intraday out of plan, then I pull it up re-read it. In a way it act’s as my digital handcuffs.
Awesome article John. Trading is all psychology, since any idiot can toss up an oscillator and trade off it (imo). I put myself as a three, by the way. Maybe I’m a four, maybe not, accountants ere on the side of conservatism.
Have you heard of the 10,000 hour rule?
“Scientific research has concluded that it takes eight-to-twelve years of training for a talented player/athlete to reach elite levels.
This is called the ten-year or 10,000 hour rule, which translates to slightly more than three hours of practice daily for ten years (Ericsson, et al., 1993; Ericsson and Charness, 1994, Bloom, 1985; Salmela et al., 1998)
Unfortunately, parents and coaches in many sports still approach training with an attitude best characterized as “peaking by Friday,” where a short-term approach is taken to training and performance with an over-emphasis on immediate results. We now know that a long-term commitment to practice and training is required to produce elite players/athletes in all sports.”
If that doesn’t sum it up….
A tip, similar to your handcuffs that helped me innumerably was the stop watch.
Take a stopwatch, and time the number of seconds you get “that feeling” in your stomach when you put on a trade, when the trade goes against you, and when the trade goes for you.
The goal is to have the number of seconds be Zero, no matter what. Usually the feeling is the strongest when the trade goes against you. That trains you to recognize bad emotions bc you are actively participating with your body’s sympathetic nervous system.
You know you’re on the way when you stop keeping score, and realize that you don’t give a shit about making or losing money. That’s, ironically, when it clicks. It’s when you care too much that everything seems to come up snake eyes.
Congratulations. I wish you much profit.
If you are working full-time, then you should swing or position trade. But if your personality fits as a day trader, then swing trading won’t work, you see? Even then, there are so many reversals in the market, one usually must be at the computer for most of each day. I recommend using smaller positions, hedging techniques, and swing trading, if possible.
I keep a printed out copy of my trading plan & plan for the day (daily to-do list) right in front of me at all times. Most people should do this. Voluntarily inflicting pain on oneself is not normal.
also, similar to your other point, I make my posts or NLs BEFORE I read other bloggers I whose opinions I respect.
I suggest others form their own ideas, and then compare that to others’ ideas rather than doing what you said with the driving analogy.
“Voluntarily inflicting pain on oneself is not normal.”
sometimes it is
–> skateboarding, going to the mall with a girl, etc
That’s an excellent add-on Danny. I’m too stubborn and a stop watch wouldn’t have worked for me. Too many traders are too comfortable in their pleather chairs just sitting around, chillin, watching the market. The true test is how a trader reacts when shit is hitting the fan.
RE: Inflicting pain on oneself -> Not if your Max Mosley. Far from normal.
Danny’s newsletter is the shit! I give it an A+. I can’t say the same for the load of bullshit subscriptions out there.
RE: Going to the mall with a girl -> Not if you get some ass in the changing room.
Btw, are you going to stick with accounting or trade full-time?
Best Post I’ve read in a long time. I’ve been trading for about 1.5 years, and wow how painful the growth was from stage 2 to stage 3. I seriously had to cut all my losses and spend about 6 months seriously paper trading, reading, refining, back testing, studying, etc. And I only really consider myself truly involved in stage 3 within the last 3 months. I am continuing to lay out my business plans, but have only recently finalized my trading strategies. Thanks for the excellent post, and for the comic relief as well!
The handcuff thing kind of freaked me out about ol’ CA for a minute, but in reading the rest of your post I saw myself in your impulsive friend.
Danny has said more than once that you really have to work to overcome your emotions when trading.
Really helpful post, thanks. Another one to print out and read daily.
Thanks for the complement on my NL.
“The true test is how a trader reacts when shit is hitting the fan.”
Exactly. it also shows how personal trading is, bec the very method that wouldn’t have worked for you was the one that worked for me!
I want to trade, but also want my CPA. So work it is! Mainly, I want to ball out of control, while trading and stuff. So if I work, trade, and maybe do a little consulting on the side, I got a pretty nice salary for a dude my age.
I don’t necessarily expect the next two months to go like the last two, but I did earn in Jan and Feb trading is approx double what I would make monthly as an acct.
On the other hand, sitting in my room all days leaves something to be desired…
How did you pursue what you do? Hand someone your statement and say look, I made money? if you don’t mind sharing, bc what you do is like what I would want to do.
Mainly, I want some “regular” income, so there is less pressure TO TRADE. Whether that regular income comes from acct., trade consulting, managing, or selling my body to wealthy and lonely heiresses about town, I don’t care.
Danny, I am also a CPA with a full-time SEC related consulting practice in the corporate world. Right now my biggest challenge is to try to trade when I cannot monitor my positions all day long. So I am sitting on the sidelines reading and learning in the meantime. Just curious, how do you manage it? What is the focus of your NL?
Currently I manage bc basically all I do is trade. I don’t think my preferred style of trading would be greatly affected by work, but I would need some intraday access.
The focus of my NL is me writing out what my hours of HW each day tell me about market direction tomorrow. This is to benefit others and solidify my own thoughts.
It’s like what John said. Not only did I make a plan, I wrote it out –> better believe Im going to stick to it. So in a sense, writing helps my discipline.
Each day I post the summary of my HW, relevant supports and resistances in the SP, and my custom charts of indicators I made. Some are wholly proprietary and unique, others less so. Nearly all of my trades occur under backtested, high probability setups of >70% success rate.
I would consider myself a good “chartist” but my strength is in taking high-odds setups.
The main index I follow is the S&P, and second to that the QQQQs/Naz and Russel indices.
Here’s is my NL dump site, which has all the archives and performance data.
I would recommend reading them if you are interested more in my indicators, techniques, and methodology, because I break that down specifically in there.
Norcal, look into mechanical system trading. It will really help with the emotions, and it will cause less grief when you cannot monitor everything as you will have a pre-defined entry/exit strategy. More than that, you’ll have a good idea that if you stick with the system, without over-riding, how much you’ll end up makeing.
Really, trading shouldn’t be about monitoring positions unless you are day trading.
A good swing trader will have a pre-defined entry, exit, and probably a stop. Once you’ve entered, you wait for the exit or the stop. If your system produces a positive expectancy, the more opportunities you have, the more $$$ you’ll make.
Where’s stage 5?
To all the the stage 2 and 3—before you lose going long INTC–See how a stage 5 does it!!!!
INTC directly affects the price on the Q’s, and INTC is going down to $10
I got lucky. My dad runs a construction firm and built a condo building (where I run my fund) here outside of DC. Each unit goes for $2.5M-$15M. Anyway, every single person in the building was an accredited investor, some who are high-profile. Before then, I already built up a trading track record, which was the #1 most important asset I had because it did all the selling/pitching/talking. I’ve been running my fund ever since. Your track record is absolutely vital, much more than what school you came out of or what designations you have or what firms you previously worked at.
I defied the nearly impossible by starting my fund at 21, before I got a degree, and without any designations or experience at any financial firm. The majority of people in the world are constantly seeking better ROI. After a while, you’ll have no problem raising capital from investors. Also, have friends/network within the industry to develop a large contact base. They will help you in the future.
——–
I did forget about mechanical trading since I am 100% discretionary. Go to Wood’s blog. There are great benefits to both styles, one of which that will fit more with your personal needs.
cock addict
This has to be the most over-simplistic, naïve, pubescent advice I have ever read. You owe me for the time I spent here.
John – looks like you have 2 spam to delete.
Thanks a lot for the reply. I had an idea it was something like that, and pretty much, I plan on letting my record do most of the pitching one day. Good shit.
I don’t owe you a motherfucking thing.
Absolutely phenomenal article, well written, and so accurate that I have printed it out and posted it on my bulletin board. Stage II is, without a doubt, the toughest stage to trek through. It’s like you’re walking in quicksand up a vertical hill while getting beaten down by the elements. Everyone who reads iBank, is on iBank, and has made a name for themselves on iBank, have all been there. I myself have just exited the realm of Stage II in January. I got absolutely massacred, losing half of my ass in a matter of two weeks. I was dying. Sweating every night, lacking sleep, didn’t eat well. You get to a point in your life after taking that big of a loss where you sit yourself down and say, “What the fuck just happened?” From here, you begin to diagnose what went wrong and why you lost as much as you did. Many of us at this point reach a fork in the road, with the left side being the side that is telling you to let the pros do it for you and to find a new career, and the right side being the side that is telling you that if a pro did it and lost ALL of your money, you’d be pissed that you quit.
For God’s sake people, we blog and comment on this site not to diss on each other but in order to educate the community and teach other’s the mistakes you made and the corrective measures you utilized in order to nullify those mistakes and come out on top. I have to hand it to John, for he’s been a total inspiration to me due to my somewhat young age (I am probably the youngest person who comments/blogs on this site, just to make a guess). I have to hand it to iBank in general, however, for not only getting me to laugh everyday, but for providing me with a lot of educational tips, allowing me to hit the market with optimism and the mindset to succeed. I just wanted to thank you for putting this article up here because it summarizes the procession most traders go through in order to become a great trader.
ZM
@ yo – Fuck off. You probably suck.
yo,I would tell you to shut your mouth but that would fuck up
your sex life.
CA, I appreciate your thoughts- it’s nice to hear what the next steps could be if I can hold the course. For the record I’m probably a month into II stage. I feel a cautionary twinge as I read your views though. Truly I can’t tell if it is a projection from my sociopathic dad or if it is a valid insight. The meat of it is that I’ve come to believe that anyone banking the equivalent of six figures should check out some form of therapy for a while for no other reason than it’s pocket change for types of freedom they may have never known they were missing. Blessed be that many people get onto good tracks while young and don’t technically need it to find release from broken childhood patterns. My own issues aside, the insights it gives me into others’ experience is fascinating and disturbing. You seem to be awesomely blossoming in a lush field and that’s great-no doubt maybe all such a thing could offer you is new ways to enjoy your vast banked coin when youre bored. Livermore killed himself after all and for the vast majority of his career he was the best.
Oh and take no advice on the subject from The Fly: no therapist will take him given what the last three who tried ended up doing to themselves with honey and puppy food. My friend who takes care of one of them is almost sure he’ll be able to feed himself again in mere months although he sadly may never be able to blink voluntarily again.
huh? I am confused as hell. Can you elaborate?
ca, awesome post. printed, and next to on the wall of truths. you mentioned you have students? do you teach in person? or via the internets.
CA, Danny, Wood – Any thoughts on an ETF-only daytrading strategy?
I am on the West Coast, so I have an opportunity to trade during 2 windows (Open-11am and sometimes the last 1.5 hours before market close). I have no desire to keep money in the market overnight in this environment. Also, by focusing on the sectors and market indexes via ETFs I don’t have to spend time screening the entire universe of stocks to find plays. And with the Ultras there is enough % range to profit. From what I understand, ETFs are best traded on a purely technical basis. My challenge to date has been identifying and acting on patterns and “set-ups” (and dealing with fear when the trade turns against me). It seems so random to me. I use triple MA’s and Pivot Points. I have yet to incorporate multiple time-frame analysis… need to study up on that.
Your thoughts?
Norcal, I have yet to write an intraday strategy, but it is something I’m willing to take a look at.
For the ETFs, you should use the underlying (as much as possible) for your TA. For example, if you want to trade DDM, look at DIA and INDU for your TA.
It sounds to me you might be better off with an end-of-day swing strategy…With the ETFs, especially the non-leveraged ones, the risk holding overnight is much less than with common stock.
Your fear as the trade turns against you is because, as you state, it all seems so random. What you need is system with predefined entry and exits that you can trust to provide an edge. That way, when it goes against you, you’re okay because you are already expecting that a certain percentage of your trades will be losers.
For a daytrading strategy, your schedule is probably not going to allow enough time. Not being a big daytrader, I could be wrong. I’ll others chime in about that.
Of late I have noticed that ETF market seems to have two major moves…the open until noon or so and then the closing 1-1.5 hours. In the middle of the day it seems range bound.
I suggest swing trading as well, but make sure positions are small. I’d say no more than 5% of your portfolio each? The less money you have in play, the less stress and risk. I recommend taking it slow. I love putting on my swing trades within minutes of the close because I can identify the final completion of the candle pattern.
dude, wear can i find handcuffs. without feathers.
haha, not into that stuff, Gio?
i wrote an article covering the same stages. would love to hear your thoughts: http://bit.ly/vtyQp
I love it. Great that you applied the stages on a macro scale.
Sadly, I am still in stage II.
Really realized it is hard. And I have not done well.