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Where Ego Dares #8: Position Size

Last time I talked about tilting and its severe effect on our trading mind.  While being wrong can stir our sensitive ego into an excited mode; there is nothing more inciting to tilting than a position size that is larger than you can handle.

And I’m not talking about the size of your wallet.  Sure, you can have a huge wallet but your mind may not be able to handle the psychological effect of the losses due to your position being too large.  What most people forget is that the size, like leverage, cut both way.

With a position size larger than you can handle, a small negative turn of the stock can appear to be quite large and uncomfortable to you in term of the losses or profit give-back you are witnessing.  Sure, it all looks good when the stock is heading in your favor; who doesn’t like to see the profit multiply in spade?  But the moment price action turns the wrong way and you don’t act fast enough, you will not only give back your profit, you will lose more than you are prepared for if you don’t have a hard stop to protect yourself.

The problem here is that the moment your trade has done well on the get go; most people cannot handle the give-back of the profit when the stock corrects.  They are seeing green, why should they close out their position to cut losses or break even when there is still possibility of green later on?

Mentally, it is much harder to take a small losses when you have already seen paper profit earlier.  There are two things working against you:

  1. You regret not taking your profit when you think you should
  2. You don’t like to take losses in such large amount (due to your over-sizing position) even though the stock only corrects within the daily ATR (average true range).

The first item is usually the most common and the remorse can be quite debilitating to your mental stage; sometimes to the point of impairing your normal trading process.

The second item above compounds to your mental stage from the remorse and may push you to tilting if you do not act to stop the bleeding when price continues to go against your position.

Over-sizing in your position can blind you to the true direction of the price-action.  By being more fearful when you normally would not when you are holding a normal size position, your emotion causes you to lose the objective observation of the price action.  You start to see thing that isn’t there.

From my experience on the SP500 trade I discussed last time, when I saw the losses that was six times more than my morning win, I couldn’t handle that sudden turn of event so I tried to double-down to make it right.  The interesting thing was that, hindsightwise, I was correct all along in the overall direction of the SP500 trade.  I was just wrong on the extent of the retracement.  If I had given my position more “room” to breath with a 2% maximum stop loss from my original size, I would have made a killing by the end of the day.  But my doubling down after seeing my third trade turned into a losses exceeded my comfort zone in the position size department, I lost my objective perspective of the price action.  Not only did I lost perspective, I lost my ability to apply money management by cutting my losses before it got me to tilt.  If I had just walked away from the losses even though it was six times my first win, it would still be a manageable losses.  Perhaps a 3% of the portfolio instead of 15% I ended up with.

But it is easy said than done when you see unexpected losses due to fast market or your hesitation to act that are larger than the normal losses you allow yourself.  If you happen to have a large position size when the sudden turn of event happens, you are one step away from tilting.

After I took my volunteered hiatus from trading to find myself, I realized that in order to play this market to win, I need to be honest with my strengths and weaknesses.

I see my strengths as:

  • being quick to act
  • finding stocks that fit my trading style

I see my weaknesses as:

  • susceptible to tilting
  • easily spook

So when I came back to trade, I began to tailor my trading style according to my strengths and weaknesses.  Knowing that I am susceptible to tilting, I swear off averaging down when I’m losing.  Knowing that I’m easily spooked, I will cut my losses quickly by taking advantage of my strength to act quickly.

I also started to build up my tolerance for position size.  In other words, I would start small and then build up the size in incremental level over a period of time so that when I was losing; it would not affect my objective observation.

Remember, position size is a very personal matter so you have to be truthful to yourself.  DO NOT ever compare your position size to anyone else.  What is big to me may be peanut to someone else and vice versa.

You have to find an optimal position size that will allow you to see the truth of the price action even though you are sitting on a loss.  Trust me, in time, your optimal position size will increase as you start to bank coin following your successful trading system.

For those who have been reading my ego series, you know there is a catch.

What is the catch?

Before you even get to the issue of finding your optimal position size for your trade, you need to do the following:

  • master your thought process to develop your trading mind
  • master your focus to help your trading mind overcomes your natural mind
  • master your chart reading skills with the technical tools that fit your trading style
  • understand your strengths and weaknesses so you can form a trading style that increase your ability to trade successfully

Only after you are proficient in the above steps do you even have to worry about your optimal position size.  In the meantime, trade small until you get the hang of it.  Otherwise, you may become another number that support the statistic that only a few percentages of the trader can ever win consistently in the market.

This is my final post on the Where Ego Dares series.

Ain’t you forgetting something?

Oh, you mean how can I forget to talk about greed when we are dealing with the subject of ego?

I’ve already discussed greed in my prior post so it will be redundant if I bring it up here again.  Please click here to re-read it if you want.

Hope you all enjoy it.

My 2 cents.

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Where Ego Dares #7: Beating our own drum

Everyone is different and unique; therefore, everyone thought process is different and unique as well.  We can all agree on the same subject, but how our thought processes arrive at the same conclusion is totally different.  Each one of us will react differently if the agreed subject matter changes its form.

It is my thesis that each of our thought process is an energy with its own unique frequency and wave pattern “fingerprint” so to speak. In other words, we all beat our own drum when it comes to how we think. Not only that our thought process is as unique as fingerprint, our overload level or “tilting point” is unique as well.   When we “tilt”, we arrive at the fight or flight mental stage.  This is the mental stage where our ego will bury us with extreme fear (flight/panic) or extreme bravado (fight).  Neither are productive for our portfolio management.

Our natural mind, or our need to be right, set a ceiling for our frequency range as well as its wave amplitude before we tilt.  As long as we don’t tilt, our natural mind will function like a normal mind that will allow room for our trading mind to take over if we are focused enough .  This normal range is what some people call the “comfort zone”. This is why when we meditate, our mind will be further away from our tilting point. However, the moment we stress ourselves out with thought processes such as fear, worry, greed, etc, we exceed our comfort zone and our natural mind will enter into an extreme mental stage which will put our portfolio into jeopardy.

Now, do you understand why we need to beat our own drum when we trade?

Suppose you follow trader X whose personality, tolerance, and experience provide him/her with a tilting point of 7 on a scale of 10.  Meanwhile, your tilting point based on your personality, tolerance, and experience has a level of 5.

What do you think will happen?

Trader X can hold on his trade against drawdown in a calm manner while you are already tilted over with extreme emotional reaction to the drawdown.  There is no telling what kind of revenge trading you will do to the trade which may cause severe damage to your portfolio.  At the end of the stock run, trader X may walk away from the trade with a nice gain while you may already have suffered severe damage to your portfolio due to your tilting.

I like to mention that success in trading does not depending on how high your titling point is.  In fact, the higher your tilting point, the faster you may lose your money if you don’t apply proper money management.

Tilting is the “out-of-control” stage where your decision making is based on extreme emotional thought process. An important part of being successful in trading is your ability to avoid tilting. You can have a tilting point of 3 and still succeed in trading because you have the awareness to trade only the type of investment vehicles that you know won’t push you into tilt mode.   Or you have the awareness to choose a trading style that will help you avoid the tilting point.

Let me give you an example of tilting from my personal experience.

I started my trading journey trading T-Bond in the futures market. Interest rate was dropping and I bought T-bond futures based on someone recommendation.  I made money on my first trade in the futures market and I was hooked.  Having a commodity broker account, I naturally traded other commodities such as pork belly, sugar, orange juice, cotton, SP500, etc  Because of their high leverage, I daytraded these commodities more than I held them for swing trade.   Due to the short-term nature and my lack of discipline at the time, I had a hard time holding to my profit.  If I made money one day, I would end up giving it back sooner or later.  Of all the trading vehicles in the futures market, the SP500 Index futures was the only one that made me tilt.

I tilted only two times during my few years of trading the SP500 and it was two times too many.  Each time I tilted, I would lose about ten times more than I would normally allow myself to lose in a day.  While the amount I lost during tilting did not destroy my portfolio, it was a 15% loss compared to a 1.5% loss.  After I tilted the first time, I had the good sense to stop trading for a few months to take a break.

The trade would start out with SP500 taking a gap down at open.  I would then wait for the bounce to short.  The bounce came and I shorted.  Bang!  Right on the money!  I took profit and waited for the next bounce.  The bounce came again and I shorted again; only this time, price action continued higher.  Before I knew it, I was stopped out for loss that practically took away my earlier gain.  Seeing that it was a gap down at the open, I decided that price action for the SP500 index would eventually go back down again.  So, I picked the next resistance level to short.  Price went up to my sell stop and I got filled for the short trade.  At first, the trade would drop from the resistance and I won back my original gain on paper.  However, this day was unlike any other day, this day I wanted more.  I wanted a waterfall price action because my ego dictated that the SP500 had to fall further down.  So instead of taking my profit on my the 3rd attempt to short, I waited for the price to break the support and drop like a rock. No! Price action bounced from the support and headed higher.  The paper profit I saw vanished in front of my eyes and now I was seeing red.

I didn’t know it then but I was on the verge of tilting.  I got mad at giving back my paper gain so quickly.  So I decided to average down my losses by shorting more contracts.  Lo and behold, price did not fall.  It kept going up!   Suddenly, I was starring at a loss that was three times the size of my earlier gain.  I got really pissed.  Boom!  I tilted over!

I wanted to turn my loss back to gain as soon as possible.  So I figured if price really wanted to go up.  Fine!  I would then covered my shorts with twice the amount of contracts so I could go long.

OK! SP500, you want to go up!  I’m going up with you!  By this time, I didn’t care about my portfolio anymore, all I cared about was to be right about my trade.

Unfortunately, I reversed to go long right at the top of a giant retracement.  Holy F**K!  I was starring at loss that was now six times the size of my morning gain!  My emotion was going full steam.

No Fu*king way!  You are supposed to go up!

So I averaged down and bought more contracts.  But price kept on going down!

By the times I reached my pain threshold, I suffered a 15% loss on the SP500 trades due to revenge trading from tilting.

The 2nd time I tilted over on my SP500 Index future trades, I stopped trading for almost a year to find myself.

When I was ready to trade again, I chose stock trading instead.  It all started because my full service Merrill Lynch broker would recommend a stock and proceeded to lose money for me.  Yes, that was before Merrill Lynch went under and became part of Bank of America.  After multiple times of losing, I decided that I could do better using whatever skills I learned from commodity trading to apply to the stock market.  Lo and behold, probably due to the low leverage in stock trading compared to the high leverage in commodity, I have not experienced tilting ever since.

Now that I’m trading strictly on cash with no margin and with my commitment to avoid averaging down while losing, my odd of tilting is practically zero.  Oh yeah, cutting losses quickly play an important part as well.

The point I’m making is that you have to find your own tilt level and then beat your own drum underneath it .  You need to know how you can trade without tilting.  If you want to pick someone else stock pick, by all mean, but use your own trading style to execute the trade.  Otherwise, you are in danger of tilting.

Don’t worry about how other traders are doing with their multiple stock picks; just focus on the picks that you like.  Just because other traders make money with the picks you shy away doesn’t mean you miss your chance.  You may suffer tilting from other traders’ pick simply because the stocks are not right for your trading style. You must find the picks that you feel are aligning to the rhythm of your own drum beating.

Sometimes you may not have done the revenge trading like I had done with the SP500; but if you are sitting on a losing trade that make you nervous everyday, you may have already been tilted especially when you are asking everyone what you should do with the trade.  When you have to ask someone what to do with your trade, you are no longer beating your own drum.

You must take the time to find your own drum (the right market or the right stocks to trade) and the rhythm (trading style) to beat.  It will take some trials and errors before you find yourself.

To find yourself, you need to understand yourself.  To understand yourself, you need to look within yourself and be honest about your strengths and weaknesses.

And yes, I’ve never said beating your own drum is a walk in the park.  But to have a chance to win in this game, it pays that you learn how to beat your own drum pronto!

My 2 cents.

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Where Ego Dares #6: Surfing the wave

So far, I’ve discussed the use of focus to bring intensity to our thought-process so that we can outdo our natural mind in order to follow the proper trading process.

What is the proper trading process again?

While I’ve mentioned cutting loss being a major factor in the proper trading process; it is not the mean to an end.  In fact, cutting loss is only a part of the overall scheme in surfing the market wave.

Guess what, even for surfing, you have to deal with “wipe-out” which, to me, is no different than “cutting losses” in trading. Below is an excerpt from a lesson in wipe-out.

Get ready to wipe out. Wipe outs are an unpleasant but unavoidable part of the surfing experience. With time, you’ll get better at avoiding wipe outs, but for now, follow these basic steps to stay as safe as possible when one happens:

  • Stay calm. A wipe out can be dangerous, but if you keep your head there is usually nothing to fear. Think clearly and act decisively to minimize your risk.

Except for the dangerous part, the steps involve here are perfect for cutting losses.

Here is a rephrase:

Get ready to cut loss. Cutting losses are an unpleasant but unavoidable part of the trading experience. With time, you’ll get better at minimizing losses (by knowing when to enter a trade), but for now, follow these basic steps to stay as safe as possible when one happens:

  • Stay calm. A wipe out can be dangerous, but if you keep your head there is usually nothing to fear. Think clearly and act decisively to minimize your risk of taking a bigger losses.

“Act decisively” is a very important key point here.

Even a highly skilled surfer get wipe-out from time-to-time; on the same token, taking losses are what successful traders do to protect profit and their portfolio.

I must say that I’m not an expert surfer yet in the realm of trading.  As you can see from my daily journals, I’ve fallen off the wave plenty of times; but that does not preclude me from catching some nice waves from time to time.  I’m sure the dedicated surfers out there at the beach will agree with me when I say that I will accept any and all wipe-outs anytime any day just so I can have an opportunity to ride that big wave to the end when it comes.  Of course, in my case, I’ll take any small losses anytime any day just so I can have an opportunity to ride that big runner to the end when it comes.

Surfing the wave is an art and so is trading.  The great surfer, even though his/her technical skills are strong, has to know the when and where to surf to maximize his/her enjoyment of surfing the big waves.  They will travel to the proper beach at proper time to follow the big waves.

This is the same in trading.  We have to know where and when to trade to maximize our chance of finding the next big trends/runner.  Which beach to surf is as important as which sector to speculate.  A perfect example is the recent shift of money flow back to the solar sector which The Fly has keenly alerted us.

Are you catching my drift here?

If you are a dedicated surfer, your whole life is about looking for the next big wave to surf.  Your whole life is about improving your surfing skills.  You go to the beach whenever you can.  Your mind is always thinking of surfing.  And when you surf, nothing else matter.

Do you see the simple truth here?

When you make surfing your life interest, your thought process naturally is very focused on surfing; nothing else matter anymore.  Even your natural mind will be standing by the corner when you surf the big waves. For the surfer knows that the only way to ride the big wave is to be one with it.  Anything less and you will be wiped-out.

In trading, we call it trading “in the zone”.

There you have it.

To bypass our natural mind to trade in the zone, what’s the better way than to take trading to the next level by making it a part of your life-goal?

It all comes down to your dedication.

My 2 cents.

 

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Where ego dares #5: Intensity

Last time, I talked about bringing intensity to the thought process in order to amplify the mind power.  While this is simple to understand in theory, it is going to take a lot more to pull intensity out of thin air to power your thought process.  In my Grand Canyon trip, it was a matter of survival; therefore, my will to survive bring forth the intensity I needed to push myself onward.  Without the will, I would just lie down and give up.

As a trader, how do we bring forth our will to raise intensity to our thought process so we can follow through with the proper trading process to succeed in trading?

Before I go on, I like to remind everyone that intensity in thought process is a double-edge sword.  If the intensity lies on good intention with a positive thought process, you can create wonderful things; on the other hands, it can bring darkness to your life that are filled with sadness, sickness, and destruction (of self and other) if the intensity lies on bad intention with a negative outlook of life.

We already know how to bring forth intensity automatically by getting emotional about things or events.  If we are happy, our day lightens up more than normal; that is intensity.  If you encounter a bad news that affects you deeply, your day is filled with sorrow, sadness, and anger; that is intensity.

Ok I get it.  So how do we summon intensity to help our trading mind without getting emotional about things.  As you’ve already told us zillion of times, emotion is bad for trading!

Knowing that you can summon intensity with the emotion gives you clue that intensity is yours to take if only you know how to tap into it.

Ok, how?

By using the power of focus on your thought process.  You summon your will to “focus”.  When you get emotional about something, your thought process is being “focused” on one thing.  The only one thing that you are emotional about.  Because of the mind & body relationship, the intense focus of your thought process spills over to your body and cause you to have a body reaction such as butterflies in your stomach, an ecstatic episode, etc.

Your will is your 100% commitment to a single thought process that overrides other thought processes in your head.  Even your natural mind (aka ego) do not have enough power to overcome it.

In my Grand Canyon example, I was 100% committed to survival.  I wanted to survive so much that I found a solution to fight off the weakness of my starving body by focusing only on my foot and the one step movement.  There were no other thought than my foot and the one step.  I was free of my ego and I didn’t even know it.  By the time I was at the top, I didn’t care how I look or how I appeared to others (caring about what other people think is the ego domain). I grabbed anyone who walked by me, which was something I wouldn’t normally, and asked for information.

However, in our normal trading day, we are far from fighting for physical survival.  We are only fighting for a number that resides in our banking system- money.  Most of us aren’t foolish enough to put 100% of the money into the stock market.  Most will put aside money for general living expenses and invest some into the market.  While losing the money allocated to the stock market may put a dent to your life-style, it is not going to kill you or put you on the street.  Hence, most lack the will to draw on the intensity to the thought process to improve trading success.

“Oh well, I don’t need the money right away, I can wait out the drawdown for all the stocks in the portfolio,” was the usual thought process for a lot of people.  Basically, a lot of us don’t mind being a bagholder.

Of course I mind!

Ok, let me clarify.  A lot of us prefer to take the risk of being a bagholder than to take the effort to do the right thing by cutting losses quickly.

Hey you!  What about your $AMRN and $LRAD trades?  Ain’t you a bagholder on them as well?

Oop! You got me there!

But there is one difference between my being a bagholder on $AMRN and $LRAD and most bagholders in general.  I’ve “assigned” $AMRN and $LRAD as  position trades with the express purpose of waiting out their fundamental success from the very beginning.

Yes, my position trades on $AMRN and $LRAD are underwater from my re-entry point but I’ve done my research and am willing to allocate a percentage of my portfolio for “speculation” purpose.

Meanwhile, s lot of bagholders hold ALL their stocks in their portfolio and ride the whole portfolio down along with the general market correction.  In my humble opinion, this is poor portfolio management,

Do you see the difference?

Like I said, most people only have their investment portion of their money in their portfolio; therefore, while they don’t like the pain of the drawdown of all their stocks in the portfolio, the drawdown won’t kill them.

“I can wait it out.” is the usual response.

It is your money and it is your freedom to  manage it the way your ego wants it.

But do you catch my drift here?

There is absolutely no incentive for most people to summon their will to become a better trader/investor.  Nada!

Simply because the effort is very hard.

It is very hard to focus intensely on the proper trading thought to overcome the ego desires to be right.

It is very hard to maintain the focus on the proper trading thought to overcome the ego desires to be right.

It is very hard because it will require a lot of your energy and commitment to stay focus.  Most people will prefer to engage in other forms of entertainment than to waste it on trading discipline.

For all I know, you work very hard during your day and you just don’t have the energy and time to maintain the focus for the trading effort.

The point I’m making here is that to have a shot at becoming a successful trader/investor, you have to take the extra miles to get there.  And most successful people know that.  Those who make millions or billions in the business world know that; that is why they hire the best money manager they can find to manage their money.  They know they don’t have the time to become a successful trader on their own.

But if you want to manage your own money, you have to step up.  You have to summon the will to focus on the proper trading process and do the right thing.

The intensity is there for you to take it to your trading mind.  You just need to take the effort to focus on it.

At the end of the day, the question you have to ask yourself is, “do you want to take the effort to overcome the inertia and your natural mind to become a successful trader?”

It is all up to you.

You are what you think.

Your reality is a sum total of how you think.

You can enhance your reality by bringing positive intensity to your thought process or you can let your reality stay the same by remaining in the same thought process you have now.

But even then, spending the time and hard work can only increase your probability of success.  It doesn’t guarantee success.  Your ego is a very powerful entity.  You may think you have it under control using the intensity I’ve discussed. But your ego has patience.  It can wait for your moment of weakness.  Jesse Livermore, one of the past great trader in our financial world, succumbed to his ego at the end.

Let’s not get ahead of ourselves.  Keep it simple.  Just bring enough intensity/focus so you can bypass your natural mind to cut losses quickly.  Cutting losses quickly is by far the most important and yet a simple action to perform on your way to become a successful trader.  As we all know, simple is not the same as easy.

My 2 cents.

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Where Ego Dares #4: Power of the Mind

In the previous post on Where Ego Dares series, I postulated how our dominant natural mind can weave havoc on our trading success by interfering with our ability to see the path the price action.is trying to tell us.  Our “need-to-be-right” natural mind only sees what it wants the price “should” be instead of seeing the trend of the actual price action itself.  This can create a dilemma for trader/investor alike if the money being used for stock market investment is not meant to be tied up like long-term real-estate investment.

Don’t get me wrong, the natural mind does not get to be where it is without reaping huge benefits for society as a whole.  It is through our natural mind that we are where we are in our technology advancement.  Our “need to be right” drives us to excel in many fields of study ranged from building a better mouse-trap to finding a cure to a mutated influenza.  Thus, it is no wonder our minds are preprogrammed by our society since birth to thrive in the “need-to-be-right” mode.

As you know by now, the ego  not only exercises control over our other thought process but also thrive to exercise control over another human thought process or group of human thought process.

How can one human exert so much control over another (or a whole country)?

Oop! We are getting off the tangent here.

Let’s get back to the trading world, how can we prevent the natural mind from interfering with our trading mind?  How do we effectively train our trading mind in the present of our natural mind?

To answer the questions, we need to understand the power of the mind.

Let’s go back to the basic:

Mind = continuous thought process

Now add some juice and you get:

Power of the Mind = continuous thought process x intensity

Remember the Power of Positive Thinking?

Every day, in every way, I’m getting better and better

How ’bout The Secret (as in The secret laws and principles of the universe)?

aka The law of attraction.

The above two systems of thought require you to dial up the intensity of your thought process in order to be effective.

Are they effective?

It depends.

“Depend on what?”  you asked.

Let me give you a personal example of what the power of mind can do for you so you can understand what I mean by “depend”.

A group of us decided to hike down the Grand Canyon for a weekend trip.  I was the one responsible for bringing the tent. Hiking down the trail to the bottom of the canyon was a walk in the park since it was all downhill.  However, on the way back up after a day of rest at the bottom, the journey was one of life and death.  First, we didn’t bring enough food.  We had enough for one light meal of breakfast before our hike back to the top.  Seeing how quickly we were to hike down the trail from top to bottom, we figured it would add a few more hours to get back up to the top.

A few more hours was about right, what we neglected in our calculation was that the energy our body burned on our way up was x-times more than it burned on our way down.  Each one of our group was struggling to get to the top at our own pace without enough food; since I was the one carrying the heavy tent, I became the last one in the line of our group.

After making my way to 2/3 of the trail with 1/3 more to reach the top, my body was literally running on empty.  I couldn’t move anymore.  My stomach was craving for food where none was available.  My body felt like a puppet without a puppet master to direct its movement   I fell down and found the sandy trail a welcome comfort for a worn out body.  I closed my eyes and accepted that my life would end here in the middle of the Grand Canyon.  I wasn’t afraid of dying; in fact, I felt peace just for being able to lie down without moving.  I was drifting into a dead sleep without evening knowing it.  I did not know how long I was lying there until someone tapped my shoulder and asked if I needed water.

“I’ve water! But I need food…”

“Fella, you need to keep walking; otherwise, you will die here.” was the response I heard.  Since I wasn’t offered any food, I assumed the stranger did not have any to offer.

After the wake-up call, I began to think…

“I’m still in college, it is too young for me to die here and give up.”

From that point on, I forced myself to stand up and then I told myself to move one-step at a time.

“One step… One step… One step…”

My head was only looking at my feet.  I did not dare to look ahead for fear of thinking of the impossibility.

All my mind was focus only on making that one step and the next one step and the next one step and so on.

By the time I started to see sign of being at the top, I was more motivated but still extremely weak.

I reached a crossroad where I had to decide to turn left to the outhouse or straight ahead to the tram stop.

I grabbed the first person I saw and asked, “Is there food on the house to the left?”

“I’m not sure, I haven’t been inside that house.” was the answer.

I couldn’t risk wasting my last ounce of energy to reach the house that had no food; so I decided to walk to the tram stop where I knew a tram would take me to a visitor center where plenty of food would be available.

The whole point of my story was that it was my first hand experience to the power of the mind.  My body was not there but my mind was there to save me. What amazed me was that my mind knew exactly what to do.  One step at at time was the secret to keeping me alive.  If I was to attempt to walk the final third with my head up; I would have given up hope. The staving body would not be able to deal with the unknown distance to the final destination.  By looking only at my feet and moving one step at a time, my starving body could work with that.

All we need is to summon the intensity, redirect it to the thought we want to focus on, and magical thing can happen.  Magical in the sense that what we think cannot happen can actually happen.

“Man can form things in his thought, and, by impressing his thought upon formless substance, can cause the thing he thinks about to be created.” Wallace D. Wattles.

Remember, mind = continuous thought process.

Add the intensity, you have the power of the mind.

With the power of the mind in your disposal, you can impress your thought upon formless substance which, in turn, cause the thing you are thinking of to be created.

In the realm of the trading world, we call it the power of positive affirmation.

In other words, you are going to use the power of the mind to redirect your negative trading beliefs into a positive trading beliefs.

Do you know who is the perfect example in the use of power of positive affirmation here?

None other than The Fly himself.

Remember these sayings The Fly keeps on reminding us?

“The Fly” reigned supreme, magnanimous above his peers scolded and scalded them with hot wine and words that transfixed into scissors to cut off the lips of the uninvited.”

“The Art of Winning While Losing”

“I win a lot”

In summary, it is extremely important that we keep a powerful positive mental attitude in our trading mind.

One of my password to one of my computers is, “I am a disciplined trader”  Thus, every morning, I repeat to myself while I type in the password that I am a disciplined trader.

Ruth Barrons Roosevelt, J.D., whom I consider a pioneer in developing positive affirmation for trader, has the following statement in her website:

The three pillars of strength upholding your trading and investing success are:

  • first, a proven trading strategy or method;
  • second, a disciplined money management plan and practice;
  • and third and most importantly, your own individual mental and emotional trading self-mastery.

To achieve mental and emotional trading self-mastery, we need to add intensity to our thought process in order to make it stick.

In summary,

You have the power of the mind on your side.

As has proven by my Grand Canyon trip, you can call forth the intensity and harness your thought power behind the right mental attitude toward self-mastery.

Your ego respects power and will take a second seat if the intensity you call upon is focus on self-mastery.

To begin your journey, you only need to have the desire to improve and the tenacity to persist.

Good luck.

My 2 cents.

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Where Ego Dares #3: Training

My past posts support Osho’s contention that continuous thought creates the mind.  And when you have two conflicting continuous thoughts going on in your head, then you have two minds vying for your attention.  The battle for control of the two minds is what make an ego.

Ego = continuous thought #1 (mind #1) vs continuous thought #2 (mind #2)

As in any battle, the mind that has the most training will always win.  Since we are all by-product of our society, in the absence of new training, our preprogrammed mind will always win.  It is the “I’m right” mind. I call it the natural mind because it comes out automatically without any effort on our part.

Preprogrammed mind = Natural mind = Automatic mind = I’m right (or I need to be right)

If our natural mind is in charge while we are trading, then we are “blind” to what the price action is telling us.  In other words, what our eyes see and process when looking at the chart or tape is being shouted down by our natural mind.

Your brain processes the price action from the vision of your eyes and give you the following thought, “Whoa! Price is going down like a waterfall!”

“Ignore it! It is only a temporary. Price will go back up because my fundamental analysis says so!” your natural mind shouts at you.

But I wanna cut my losses!”

“Don’t you dare! I want you to buy more! Average down here ’cause I’m right!”

And so it goes…

And here is the rub.

Most of us are not even aware of this natural mind being our obstacle in the pursue of investment success; instead most of us are looking at the wrong direction.  We think that if we have a Holy Grail trading system, our natural mind will listen and obey its signal and we will be on our merry way to being rich.

You see, what you have forgotten is that our natural mind will have no part of it.  It will denounce the so-called Holy Grail trading system the moment it spits out some losing trades.

Just by being aware of this natural mind isn’t going to make you a better trader but it is a necessary first step.  From here, we need to train another part of our mind to become a winning trader.  A mind that is trained in the art of trading to displace our natural mind during trading hours.

Let me give you a parallel example to get my point across.

Before I learned the simple four movement in martial art as I explained before, I didn’t know how to defend myself correctly.  Hence, when a punch was going for my face, my natural mind would have me reacted in fear and my body helplessly unorganized to defend such a sudden attack.

In the same token, our natural mind is not prepared to deal with a situation when our belief of the stock is being challenged by price action going the wrong way after our buy order is filled.

After getting proficient of my four martial art movements from weekly practices, my trained mind and body automatically countered an attack before the natural mind even had a chance to get involved.

In the same token, when the stock goes the wrong way after I’ve bought, my trained mind (from the many hours of researching the statistical significance of supports & resistances, candlestick chart formations, moving averages, momentum indicators) automatically executes an order to close the trade to cut losses or lock in profit before the natural mind has a chance to say no.  Trust me, your natural mind is very adept in talking you out of taking the proper action to cut losses.

“Are you sure you want to cut losses here?  You do know that price will go back up after you cut losses, right?”

The truth of the matter is that the ego is not completely wrong here.  Statistically speaking, (even if it is only 10% of the time) we WILL from time to time cut our losses quickly right at the bottom of a correction.  And it is from this statistical event that our ego persists in haunting us in order to freeze us into inaction.

By training your mind in the art of cutting losses quickly, which will require a firm commitment on your end, you will transform yourself to cut losses automatically without thinking.  Remember, our ego is simply a dominant continuous thought process; thus any thinking on our part will automatically bring forth our ego. Hence, if you can cut losses automatically without thinking, you are way ahead of most traders whose natural mind is their dominant decision maker.

Nevertheless, our natural mind is a very powerful ego and can get really feisty if you ignore it too often.  Say you cut your losses quickly in one of those statistical event of getting out at the bottom before market takes off without you, your ego can do seriously harm on your psyche by blasting you with all kind of insult and emotional guilt and pain.  After a bout of this guilt-ridden episode from your ego, you may not be so sure about cutting your losses quickly next time.

And this is why it is important that we train ourselves in calming our ego with other form of exercises such as meditation, Tai Chi, yoga, chanting, etc.

Being aware of our ego messing up our trading is not enough, you must know how to cut your losses quickly in spite of the interference from our natural mind.  To do that, you must embark on a training like an ambitious Karate martial artist who wants to earn his 10th Dan black belt or someone who want to achieve the highest level of internal martial art like the Tai Chi master in the video below:

 

 

 

Remember, these are just friendly demonstration of the internal martial art.  To achieve the highest level of internal martial art, it is not the exercise and practice of the physical movement like Karate but a long and patient practice of cultivating chi.  Believe it or not, if you embark on a path to cultivate chi, you are also embarking on the path to minimize the impact of your ego as well since ego can prevent your chi from developing.  Thus, practicing Tai Chi is one of the routine I like to keep up on a regular basis.

My 2 cents.

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Where Ego Dares #2: Thought

Last time, in Osho’s essay, he postulated that The Mind is nothing more than a continuous thought process.

Key components: continuous + thought + process

Let’s start with thought.

What is thought, really?

The moment you utter a word in any language in your head, you have thought.

Why do we have thought?

I believe the three items below encompass the majority of the reasons

  1. we want something
  2. we describe something
  3. intuition

1) We want something

You are walking in the woods and you feel an urge to pee.  “I’ve got to find a place to pee.” becomes your thought.

2) We describe something

While looking for a place to pee, you’re thinking, “there are some tall bushes over there I can hide while I pee”.

3) Intuition

“Wait a minute, something doesn’t feel right over there,” becomes your thought as you approach the area.

I’m sure you can come with some other reason why we have thought; but most likely they can fall into one of the three categories above.

What if I’m solving a problem?

This is an interesting question!  You know why?  Because the thought involves in solving a problem can morph from one of the three to another.

First, you describe the problem, then you want the problem solves.  Later, your answer to the problem comes from your intuition.

While the three examples above are in extreme simple form, these three drivers of our thought are able to weave a continuous complex thought process in our head that gives birth to our mind.

Now, we have body and mind.

What is the deal with body and mind?

Well, our mind, being a complex thought process we weave together in the language of our creation, happens to be “floating like a cloud” as a result of the neuron firing process in our brain which is the command center of our body.

So, when the mind says jump, our body jumps.  When the mind says cry because it is thinking of a painful situation, tears come out of our eyes.

“Impossible! This sure-winner stock dropped like a rock right after I bought!”  When you think this, your body goes through the emotional state of disbelief and even anger and yet you decide to buy more to average down.

Here is another way to express your thought in the same situation, “Jeez stock dropped like a rock after I bought, I’m getting out right now!” Your body goes through the emotion of relief for getting out of the stock pronto.

You can obviously see the big difference between the two thoughts above.

How do one ends up picking either one of the above thoughts then?

Excellent question!

This is where your ego comes into the picture.

Before moving on with the discussion of ego, remember this from Osho?

If somebody is controlling the mind, then it will only be only a part, a fragment of the mind controlling another fragment of the mind. That is what the ego is.

So you have a thought process that creates a mind that says “this stock has to go up because my analysis of the fundamental is corrected” even though the stock price has been declining for the last month. This mind creates stubbornness in you..

Meanwhile, you have another set of thought process that creates a separate mind that says, “OMG! How can it be? My money is losing fast and I may be getting a margin call soon if I don’t do something!” This mind creates fear in you.

Now, you have “a fragment of the mind controlling another fragment of the mind”

– I am right against fear of loss

or

– stubbornness against fear.

When these two minds in us collide with equal force, you have created a “deer in the headlights” situation- you are effectively frozen in action.

Going back to the two earlier examples:

“Impossible! The sure-winner stock dropped like a rock right after I bought!”  When you think this, your body goes through the emotional state of disbelief and even anger and yet you decide to buy more to average down.

Which part of the mind has control in the above example?  Yes, the “I am right” mind.

Here is another way to express thought in the same situation, “Jeez stock dropped like a rock after I bought, I’m getting out right now!” Your body goes through the emotion of relief for getting out of the stock pronto.

Which part of the mind has control in the above example?  Yes, the “fear of loss” mind.

So, at the end of the day, it is all depended on which part of the mind has more juice to back it up.  In other words, the mind with more training and exposure usually win the day.

And which of the the mind do you think usually has control during the day?

You’ve got it, the “I am right” mind.

You know why?

It is how we are programmed to think by our society.  We mimic the “I am right” mind of our parents, the school teachers, and all authority figures we want to become when we grow up.

While this “I am right” mind works wonderfully in our society and in the business world, it can be a hindrance when it comes to trading.

Therefore, our task as a trader/investor is to train our thought process in the direction of “fear of loss” mindset along with the art of following price action.  In other words, we have to train this mindset so it becomes the dominant mind (aka ego) when it comes to making a final decision on the trade.

But it’s easier said than done. 

Let me show you how I make it works for me.

Overtimes, I’ve engineered my “I am right” mind to work on my position trades and keep it busy there while I train my “fear of loss” mind to cut losses during swing trading.  Yes, I disable the ability of the “I am right” mind to average down.  To do a conditional average down, my “fear of loss” mind will be the one to take that trade.

So far so good.

The beauty is that my “I am right” mind is not dominating 100% of my portfolio which will be quite dangerous if it is.

That is all for today.

Btw, I did not come up with all the above thought process on my own.  Since I’ve read many books in the past, I’m simply putting together thought processes from others in a way that works for me.

My 2 cents. 

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Where Ego Dares #1 – The Mind

Before we begin the discussion of ego and how we can make it work with us instead of against us, let me present a philosophical discussion by one of our deep thinker below regarding our mind:

What is mind?

Mind is not a thing, but an event. A thing has substance in it, an event is just a process. A thing is like a rock, and event is like a wave- it exists, but is not substantial. It is just the event between the wind and the ocean, a process, a phenomenon.

This is the first thing to be understood, that mind is a process like a wave or like a river, but it has no substance in it. If it has substance, then it cannot be dissolved. If it has no substance, it can disappear without leaving a single trace behind.

When a wave disappears into the ocean, what is left behind? Nothing, not even a trace. So those who have known, they say mind is like a bird flying into the sky- no footprints are left behind, not even a trace. The bird flies but leaves no path, no footprints.

The mind is just a process. In fact, mind doesn’t exist- only thoughts, thoughts moving so fast that you think and feel that something exists there in continuity. One thought comes, another thought comes, another, and they gone… the gap is so small you cannot see the interval between one thought and another. So two thoughts become joined, they become a continuity, and because of that continuity you think there is a mind.

There are thoughts- no “mind.” Just as there are electrons- no “matter.” Thought is the electron of the mind. Just like a crowd… a crowd exists in a sense, doesn’t exist in another. Only individuals exist, but many individuals together give the feeling as if they are one. A nation exists and exists not- only individuals are there. Individuals are the electrons of a nation, of a community, of a crowd.

Thought exist- mind doesn’t exist; mind is just the appearance. And when you look into the mind deeper, it disappears. Then there are thoughts, but when the “mind” has disappeared and only individual thoughts exist, many things are immediately solved. The first thing is that immediately you come to know that thoughts are like clouds- they come and go, and you are the sky. When there is no mind, immediately the perception comes that you are no longer involved in the thoughts- thoughts are there, passing through you like clouds passing through the sky, or the wind passing through the trees. Thoughts are passing through you , and they can pass because you are a vast emptiness. There is no hindrance, no obstacle. No wall exists to prevent them; you are not a walled phenomenon. Your sky is the infinitely open; thoughts come and go. And once you start feeling that thoughts come and go, and you are the watcher, the witness, the mastery of the mind is achieved.

Mind cannot be controlled in the ordinary sense. In the first place, because it is not, how can you control it? In the second place, who will control the mind? Because nobody exists beyond the mind- and when I say nobody exists, I mean that nobody exists beyond the mind, a nothingness. Who will control the mind? If somebody is controlling the mind, then it will only be only a part, a fragment of the mind controlling another fragment of the mind. That is what the ego is.

Mind cannot be controlled in that way. It is not, and there is nobody to control it. The inner emptiness can see but cannot control. It can look but cannot control- but the very look is the control, the very phenomenon of observation, of witnessing, becomes the mastery because the mind disappears.

Mind is nothing but the absence of your presence. When you sit silently, when you look deep into the mind, the mind simply disappears. Thoughts will remain, they are existential, but mind will not be found.

But when the mind is gone, then a second perception becomes possible: you can see that thoughts are not yours. Of course they come, and sometimes they rest a little while in you , and then they go. You may be a resting place, but they don’t originate in you. Have you ever noticed that not even a single thought has arisen out of you? Not a single thought has come through your being; they always come from the outside. They don’t belong to you- rootless, homeless, they hover. Sometimes they rest in you, that’s all, like a cloud resting on top of a hill. Then they will move on their own; you need not do anything. If you simply watch, control is attained.

The word control is not very good, because words cannot be very good. Words belong to the mind, to the world of thoughts. words cannot be very, very penetrating; they are shallow. The word “control” is not good because there is nobody to control and there is nobody to be controlled. But tentatively, it helps to understand a certain thing that happens: when you look deeply, mind is controlled- suddenly you have become the master. Thoughts are there, but they are no longer masters of you. They cannot do anything to you, they simply come and go; you remain untouched just like a lotus flower amidst rainfall. Drops of water fall on the petals but they go on slipping, they don’t even touch. The lotus remains untouched.

That’s why in the East the lotus became so significant, became so symbolic. The greatest symbol that has come out of the East is the lotus. It carries the whole meaning of the Eastern consciousness. It says, “Be like a lotus, that’s all. Remain untouched and you are in control. Remain untouched and you are the master.”

So from one standpoint, the mind is like waves- a disturbance. when the ocean is calm and quiet, undisturbed, the waves are not there. When the ocean is disturbed in a tide or strong wind, when tremendous waves arise and the whole surface is just a chaos, the mind from one standpoint exists. These are all metaphors just to help you to understand a certain quality inside, which cannot be said through words. These metaphors are poetic. If you try to understand them with sympathy, you will attain an understanding, but if you try to understand them logically, you will miss the point. They are metaphors.

Mind is a disturbance of consciousness, just as waves are a disturbance of the ocean. Something foreign has entered- the wind. Something from the outside has happened to the ocean, or to the consciousness- the wind, or the thoughts, and there is chaos. But the chaos is always on the surface. The waves are always on the surface. There are no waves in the depths- cannot be, because in the depths the wind cannot enter. So everything is just on the surface. If you move inward, control is attained. If you move inward from the surface you go to the center- suddenly, the surface may still be disturbed but you are not disturbed.

The whole of the science of meditation is nothing but centering, moving toward the center, getting rooted there, abiding there. And from there the whole perspective changes. Now the waves may still be there, but they don’t reach you. And now you can see they don’t belong to you, it is just a conflict on the surface with something foreign.

And from the center, when you look, by and by the conflict ceases. By and by you relax. By and by you accept that of course there is a strong wind and waves will arise, but you are not worried, and when you are not worried, even waves can be enjoyed. Nothing is wrong in them.

The problem arises when you are also on the surface. You are in a small boat on the surface, and a strong wind comes and it is high tide and the whole ocean goes mad- of course, you are worried, you are scared to death! You are in danger; any moment the waves can overturn your small boat; any moment death can occur. What can you do with your small boat? How can you control anything? If you start fighting with the waves, you will be defeated. Fight wont’ help; you will have to accept the waves. In fact, if you can accept the waves and let your boat, however small, move with them and not against them, then there is no danger. Waves are there; you simply allow. You simply allow yourself to move with them, not against them. You become part of them. Then tremendous happiness arises.

That is the whole art of surfing- moving with the waves, not against them. With them- so much so, that you are not different from them. Surfing can become a great meditation. It can give you glimpses of the inner because it is not a fight, it is a let-go. Once you know that, even waves can be enjoyed… and that can be known when you look at the whole phenomenon from the center.

Just as if you are a traveler in the forest and clouds have gathered, and there is much lightning, and you have lost the path and you are trying to hurry toward home. This is what is happening on the surface- a traveler lost, many clouds, much lightning; soon there will be a tremendous rain. You are seeking home, the safety of home- then suddenly you reach there. Now you sit inside, now you wait for the rains- now you can enjoy. Now the lightning has a beauty of its own. It was not so when you were outside, lost in the forest, but now, sitting inside the house, the whole phenomenon is tremendously beautiful. Now the rain comes and you enjoy. Now the lightning is there and you enjoy, and great thunder in the clouds, and you enjoy because now you are safe inside.

Once you reach the center, you start enjoying whatsoever happens on the surface. So the whole thing is not to fight on the surface, but rather slip into the center. Then there is mastery, and not a control that has been forced, a mastery that happens spontaneously when you are centered.

Centering in consciousness is the mastery of the mind.

So don’t try to “control the mind”- the language can mislead you. Nobody can control, and those who try to control will go mad; they will simply go neurotic, because trying to control the mind is nothing but a part of the mind trying to control another part of the mind.

Who are you, who is trying to control? You are also a wave- a religious wave of course, trying to control the mind. And there are irreligious waves- there is sex and there is anger and there is jealousy and possessiveness and hatred, and millions of irreligious waves. And then there are religious waves- meditation, love, compassion.But these are all on the surface, of the surface, and on the surface. Religious or irreligious makes no difference.

Real religion is at the center, and in the perspective that happens through the center. Sitting inside your home, you look at your own surface- everything changes because your perspective is new. Suddenly you are the master. In fact, you are so much in control that you can leave the surface uncontrolled. This is subtle- you are so in control, so rooted, not worried about the surface, that in fact you can enjoy the waves and the tides and the storm. It is beautiful, it gives energy, it gives a strength- there is nothing to be worried about it. Only weaklings worry about thoughts. Only weaklings worry about the mind. Stronger people simply absorb the whole, and they are richer for it. Stronger people simply never reject anything.

If you have read all the way here, I congratulate you.  You have the motivation and interest to learn.

If you’ve skipped the reading, either half-way or from the beginning, then you are impatient and is only looking for quick fix that interest you.  From my experience, you may not have the commitment to improve yourself in a way that you can master the skill you need to trade successfully.

If you’ve skipped the material above because you already know the material (either from a book you own or borrow), a big congratulation is in order.

Ok, so how is the above discussion of the mind help me with trading well?

Good question!

Remember the part about centering?  That where we all want to go as a trader.  When you are centered, you look out the window and you see all the volatile price action; so, instead of being in the middle of a storm where you will be subjected to all sort of emotional responses which can prevent you to make the right decision, you are in the perfect calm stage to make the right decision by getting out when you see price action is going against your entry point.  In other words, you will be in a state of mind that allows you to cut your losses quickly.

I will discuss more of how we can approach our center in the future “Where Ego Dares” series.  Yes, I borrow the title from the movie called “Where Eagles Dare” starring Richard Burton, Clint Eastwood.

And for those who are interested, the philosophical discussion of the mind is an excerpt from a book by Osho.

My 2 cents

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The secret to the Holy Grail trading system

Before I tell you the secret to the Holy Grail trading system, let me tell you a story about my experience in learning kung fu when I was in high school.  There were quite a few bullies in my school and I wasn’t going to make it easy for anyone of them.

“There are only four basic movements I’m going to teach you,” said my teacher.  I was already depressed because four movements did not make an exciting repertoire here.  How am I going to impress my friends with only four movements here?  I was thinking to myself.

The four movements were deceptively simple.  You alternate the two attacking and two defending movements between your partner and yourself on a non-stop back and forth movements until the instructor tell you to stop.  To tell you the truth, it did get boring after awhile.  

“When am I going to learn the other variations besides these four movements?”  I kept asking the instructor.

“Don’t worry about the other stuffs, master these four movements first.”  was his reply every time.

“90% of the time, these four movements will get you out of the jam in any physical combat situation,” my instructor kept drumming it into my head.

But as I pushed through these weekly training, I began to realize the wisdom of the exercises.  My speed for the movements became faster and smoother.  One day, one of the bullies was trying to intimidate me by throwing me an air punch very close to my face; without thinking, one of my practiced movement came out to block the punch at the same time my body was already moving on to the next movement of attacking which caught him by surprise that he almost fell over backward.  It spooked the hell of the bully that he never ever wanted to get near me again.

My confidence shot up and I walked like I could take on any bully that came my way even though they were much bigger in size than I was.

In summary, by mastering these four simple movements, I became my own body guard.

Ok, great story, but what is the secret to the Holy Grail trading system?

Patience, grasshopper.

When you are your own body guard, your job is to observe and protect.  Thus, if you really know your stuff (like Bruce Lee), your experience and skill set, coupled with the powerful processing power inside your head, will turn you into an ultimate body guard that can defend yourself in any physical combat situation (that doesn’t involve gun, of course).  Your mind will size up the environment, the strengths and weaknesses of your attacker(s), and apply the proper fighting movements to counter the attack.  You become your own Holy Grail fighting machine.  Do you know Bruce Lee actually created his own fighting style?

Basically, my point is that the Holy Grail trading system is you.

To become the Holy Grail trading system, you need to master the basic movements of technical analysis in a manner of speaking.  Below are my personal take of the four technical tools/movements that we need to master:

1st movement: understanding price action.

2nd movement: understanding support and resistance

3rd movement: understanding moving averages

4th movement: understanding momentum indicators

1) Price action:

I prefer to use candlestick chart and all the candlestick patterns that have been identified by the Japanese for hundred of years.  Candlestick is just one of the price action tools, there are many other types available such as Heikin-Ashi, Three Line Break, point & figure, market profile, etc.

2) Support and resistance.

There are many way to look at resistance and support.  I like to use previous year, month, & daily high and low, pivot point calculation, high and low of historical valley and peak, high and low of consolidation areas, trend lines, and Fibonacci calculation.  I’m sure there are other ways to observe support and resistance that I’ve not mentioned here.

3) Moving averages

There are many variation of moving averages (ma) including those with offset.  I have tried ma offset (popular among Joe DiNapoli with his 3×3, Bill William’s alligator, etc) .  Offset or not, they all say the same thing, the less the number of days (or time units) you used to calculate moving average, the faster the line.  And the faster the line, the more cross you will see (either with another ma or price action)  But then the faster the line, the more whipsaw you will get if you take every signals.  And if you don’t take every signals, you will have to know which signals to choose from the multiple signals which is something you want to avoid.  Therefore, there is an optimal number for each one of you based on your personal preference and tolerance.  Personally, my choice of ma changes from time to time.

4) Momentum indicators

Momentum indicators tell you the strength of the current bull or bear.  By themselves, they do not tell you if the overall current trend is over or not.  It simply tells you that the bull may be getting tired or getting hyper.  The momentum indicator may also help you identify the development of peak and valley of an on going trend.  I like to use MACD and stochastics and I change the parameter on the indicators from time to time as well.

These four movements are my personal interpretation of what are important to me as a trader, it is not necessary the required movements to be successful.  Some greater trader may focus only on price action and nothing else.  Some may only use a few of the above.

I remember reading that the Grand Masters of Tai Chi Chuan was so powerful in their art that they were able to condense their skill to a few simple movements.  No matter how you attack them, all they did was to simply flip their hand, a simple shake of their body and you would end up flying across the room.  In the same token, a master trader can take one look at the chart (or the tape for those tape reading connoisseur) and know if the stock is a buy, a sell, or neutral and is correct 7/10 of the times.  They don’t even need to look at ma, indicators, etc. for these information are already absorbed in their observation of the chart.  In other words, just by looking at the chart, they know exactly where the ma line will be and where the level of momentum indicators are without having to see them visually.  Like a grand master chess player, he doesn’t need a chessboard to play chess, he can see all the possible moves and counter-moves all in their head.

If you’ve read “Reminiscences of a Stock Operator”, you know that Jesse Livermore could read the tape like a chess grandmaster read a chessboard.

Putting it all together

While there are many different styles of martial art; there are also many different variations and styles to each of the four type of trading tools discussed above.  We each have to find the style that match our personality.  How do you know which style best fits you?  The only way you will know is by trying out different technical tools you come upon until you find the ones you are comfortable with.  You will know which ones don’t fit you when you find yourself annoy by the indicators every times you open the chart.

Once you master the the technical tools mentioned above, that is when you come into the picture.  You are the quantum computer that will bring these four movements together and calculate the next action/decision to execute.  Your eyes, brain, mind, psyche, and your heart will process the data and alert you to a stock with a good risk/reward ratio.

I know some of you are keenly aware of this processing power because you’ve experienced it.  You saw the signal based on everything you learned.  You said to yourself, “price will take off from here“.  And Voila, price actually took off like you predicted.  Now, you might or might not have taken action based on this observation; but you know I’ve made my point here.

Here is a key reminder to this Holy Grail trading system- there is NO SHORTCUT.  Meaning you need to work very hard to achieve this.  If you think you can read a few books, watch a few video, spend little to zero time in reviewing the charts, and still become a Holy Grail trading system, forget it.  Working hard means you spend hours and hours going over the charts to see how price action interacts with the ma/indicator you are interested to become a master of.  You spend hours and hours of reading charts to see the relationship b/w price action, ma, indicators.  You raid the bookstores and libraries to find related subjects on the technical tools you are interested in; you also want to read up on the thought of other professional traders to see how they think.  You research for a software charting program/package that fit your needs so that you can practice, practice, and practice trading using the simulation module in your charting program during off-market hours. You document your progress by daily journal so you can become aware of your own strengths and weaknesses. You never stop learning from others because you are always interested in seeing things from a different perspective.  In fact, it becomes a continued education that you are never tired of.  In other words, trading successfully is your life goal.  It doesn’t matter how early or how late you start your trading endeavor, you need to make this your life goal.

For those of you who are/were doctors, lawyers, CPAs, and professional in all manner of occupation, you know what I’m talking about.  You need to put the kind of commitment to trading you’ve put into your career.  Do you know there are doctors out there who are successful traders?  They are successful because they’ve invested the kind of commitment to trading as they’ve done to being a doctor.

Having said all the above, there lies the ultimate obstacle to implementing your Holy Grail trading system successfully- your EGO.

Ego = greed = fear = I’m right and the market is wrong!

Eventually, Jesse Livermore, despite being a Grandmaster who possessed the ultimate quantum computer in tape reading in his head, were doomed by his ego.

So how do we deal with the ego?  It won’t be easy; why do you think the giant hedge fund invested so much into quantitative trading?  The way I see it, if we can put our own ego aside, there is no computer out there that can do a better job than the quantum computer inside our head.

The ego issue will have to be dealt with more posts in the future.

My 2 cents.

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The destructive power of Greed

How many of you bought $AAPL at $4xx.00 in Jan 2012, watched it climbed all the way to to $644 in three months. endured the correction to $522 in one month, cheered the resumption of the meteoric rise to $705 in four months, and then suffered the persistent and painful downdraft all the way back to $4xx?

I did not buy $AAPL so I missed the whole meteoric rise but I had witnessed a friend who did all the above.

“It is going to a $1,000!”

“But the market cap is north of half-a-trillion already!”

“Don’t matter, they are not making enough iPhone to supply the demand!”

“But the chart is heading south, why don’t you put a sell stop at $680 to lock in profit?”

“Hmm, I will think about it.  But I will sell some at $800 to lock in some profit.”

But the price never climbed back above $705 since then.  $AAPL began its descent week after week.

“Did you sell at $680?”

“No, I know $AAPL will go back up.  I’m afraid if I sell at $680, I will miss the bounce back to my $800 profit target.”

“But the price has been going down week after week and it doesn’t look like it is stabilizing yet.”

“Do you know that they cannot make enough iPhone to sell?  I hear of iPhone shortage everywhere.  Besides, if they nail the big China phone company, price will go back up to $1,000 in no time.  However, I won’t be greedy, I will sell at $800.”

“You do realize that for each week $AAPL drops in price, it will make it that much harder for you to sell for profit because you’ll be telling yourself you may be selling at the bottom, right?  Basically, you may freeze yourself up from selling if price continues to decline.”

“No worry, $AAPL is not going to go back to $400.  It is an opportunity to BUY!  If you do not have $AAPL share, this is YOUR opportunity to buy some now on the cheap!” He gave me that sly look as if he was letting me in on his special secret.

Needless to say, I’ve to witness my friend gives all his gain back to the market.  Since his average cost is around $4xx; he allows a phenomenal 75% gain evaporates in front of his eyes.

There was another case I witnessed that happened at the time when Linux was the talk of the town.  There was an IPO on a company that sell and support the use of Linux launching in a week.  My friend and I bought some shares of another company that also sell Linux OS in a disc.  I forgot the name of the company.  Anyway, when the IPO was launched, the company we bought did not move much even though the IPO was opened at $100+ on a $28.00 IPO price.  Seeing that there was no following the coattail with our stock, I took my profit and ran.  I also told my friend he should take profit as well.

“Did you take your profit?”

“Well, my hand was on the phone and I was about to dial my broker number; but I could not move.  I was sweating and it was as though another force was preventing me to call.  I could not go through with the phone call.  No, I did not sell yet.”

“Why don’t you try again tomorrow?  Watch the market open and sell if price begins to fall off.”

The next day came and I asked my friend if he had gotten out.

“I couldn’t get up in the morning to watch the market open.  Obviously, I missed the gap-up but the prices fell off afterward and is now down 7% for the day, so I don’t see the point of getting out now.  I think I will wait for it to go back up.  After all, Linux is the new wave.”

Price did not climb back up and eventually my friend had to give back 50% of the gain before he finally sold.

There was another case which I mentioned before in one of my Biotech posts.  After I sold my lot and locked in my 360% gain, I told my friend of the possible unreliable data being promoted on the web, he brushed me off and thought I was being too “weak”.  And to prove his point, he later told me he bought more at the high of the day (which happened to be the historical high of the stock).

Now, this friend was quite intelligent in his own right but he was ignoring all the red flags because he was too consumed by his greed on this particular biotech stock. He was like a different person when I talked to him.  He defended his stock like a star-crossed lover defending his/her loved one when others were trying to warn him/her of the “integrity” of the person he/she was loving.

Needless to day, he lost money on the stock instead of multiple gain he should be taking home with. He later confessed to me that he was already dreaming of an early retirement, planning for his world traveling, etc at the time I was alerting him of my sold-out position.

Such is the destructive power of Greed.

I was not immune to this emotional force as well.  I had my share of being possessed by greed and lost money as a result instead of a gain.  However, I also believe that if we don’t learn from our past mistakes, we are doomed to repeat them again and again.  Hence, instead of putting my past “possession by greed” experience in a far-away corner in the remote part of my brain, I put it on a pedestal in front of me to “remind” myself of the debilitating effect of greed.

This, from my experience, is the only way to control this monster.  As long as we are human, we are always one-step away from falling into the abyss of Greed and be possessed by it.  And once you have fallen, there is no exorcist around to help you escape.  And the only cure available is that the stock you are possessed by get bought out by another company and thus force the gigantic gain on you or that the stock actually reaches your lofty price target and you come to your sense to take it.   Sure, it can happen to you but you need to look at all the corpses around you who have tried the same thing but are not as lucky as you are.

Here is a litmus test to see if you are possessed by Greed:

Stock shoots up and begins to climb

“Ha! Ha! Ha!  It is going to the moon!” (you may be possessed)

“Wow! Go! Go!  Let me move my trailing stop just in case.”  (it’s ok to be excited since you are not a robot; however, you have a plan so you are not possessed)

Stock retraces by 50%

“I’m buying more!  What’s an opportunity! It is gong back up higher!” (you may be possessed)

“Sh*t! I’m going to watch the support, if it get taken out, I will sell some to lock in profit.” (you certainly have a right to be pissed off to see your gain drops by half; but you are not possessed since you have a plan to lock in some profit )

In summary, we have all been possessed by Greed at least once; therefore don’t put that experience away since we have paid dearly for it.  Instead, put it in front of you to remind you of this lesson.  Tell yourself you won’t repeat it again.

It is working for me and I believe it may work for you too if you can acknowledge the destructive power of Greed.

My 2 cents.

ps. Here is a classic example of controlling greed by The Fly himself:

The Fly loaded up on VHC because he had reason to believe it would go much higher; however, after seeing price action languished for too long when it should be going up, he decided to sell his positions in pieces until he sold his whole lot to lock in his gain.  Enough said.

 

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