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Tips and Good Habits

Get yourself into a relaxed, confident, and controlled state of mind before you make any kind of trade or even analysis.We’ll cover more on this under the heading “Your Optimal Mindset” later in this chapter.
 A well-known statistic makes the claim that 80% of trading success is down to psychology, and 20% down to technical ability. I don’t know how they calculated that, but the point is well made. Whatever your technical capabilities or knowledge, your state of mind is absolutely vital to the success of your business, and you must be in a good frame of mind to do yourself justice.
Create your Trading or Investment Plan and write it down in specific and precise language before you trade.Don’t confuse trading rules with a black-box system. Your trading plan should be a set of Rules, which you follow implicitly time and again. Sure, you can build in some flexibility, combinations and permutations to these Rules, but write them down and understand them. Also keep them handy, particularly when you’re trading or making an investment decision.
 A mind map is the best way of achieving this in a succinct and visual way. A mind map is simply a drawing, like if you imagine a series of branches off a central tree, where you’re using different colors and symbols to depict the rules, as opposed to simply writing them down in a list. Ideally, you should do both.
 We’ll cover this area in more detail during the next chapter, but the Rules need to embrace when to enter, when to exit, when to use a specific options strategy, and when to activate your Stop Losses (which may change according to the strategy you’re trading).
Only use Risk Capital that you can stand to lose.This is another golden rule. Do not use capital that is essential for your food, rent, or mortgage. The stakes are already high enough without you increasing them by using capital that you simply can’t afford to lose. Additionally, don’t use capital that would cause problems between you and your partner if you were to proceed.
 If you’re starting out on your trading career, believe it or not, you’re a major success if you’re still in the game after two years. If you’re making profit at that point, then you’re in the major leagues. The trading and investment world is littered with the corpses of former traders who either burned themselves or their capital out! Start with reasonable expectations and keep your Risk Capital low initially. As you make consistent progress you’ll be able to steadily increase your Risk Capital with comfort.
 A rule of thumb is to never risk more than 5% of your trading capital on any one trade. For smaller accounts under $20,000, then 10% is fine.
Don’t overtrade.Only have as many trades on as you can handle without going nuts! If you can handle 20 trades on at once and be relaxed, confident and in control, then that’s fine. We’re all different and we all have different styles of trading. Honestly discover for yourself what suits you, both in terms of portfolio and your preferred time frame. For longer-term investors, a larger portfolio may be more manageable. For shorter-term day traders, one or two live trades should be enough.
Stick to two to three strategies you like and that work!Believe it or not the very best and most successful traders in the world only use a couple of trading strategies. There are many things to consider when making an investment decision, so why complicate the matter? There are really only three eventualities—the price will go up, down, or sideways. The only other parameter to consider is timescale, that is, how long is it going to take to go up or down or how long will it remain static or range-bound. This is enough to be thinking about without having to consider a whole myriad of strategies as well!
 Different people like different strategies, and that’s why there’s a selection included in this book. When you understand what you feel comfortable with and you’re being successful, stick with it and don’t try to be too clever!
Do not fall in love with or hate a stock and don’t get wedded to a position.This is one of the big rules. A stock does not make you money. Your decision makes your position profitable, and you only bank that money when you exit that profitable position.
 Similarly, a stock doesn’t lose you money, so there’s no point in trying to “even the score” on a stock where you lost money in the past! At the same time, just because you may have lost with a stock in the past doesn’t mean you can’t make money with it in the future, should the appropriate triggers be signaled according to your Rules. And, of course, just because you made money with a stock in the past, doesn’t guarantee you success next time, although if you get to know a stock’s personality, your chances of success can be enhanced, provided you’re willing to see both directions, up and down, as profitable opportunities. If you find yourself saying something like, “I invest in XYZ Corp. It simply has to go up because of blah blah blah,” then pinch yourself hard and think again. It may well go up, but make sure that you’re making an impartial judgment and stick to your trading plan. Make absolutely no exceptions whatsoever. So many times I’ve heard the agonized wailings of “I just can’t understand why the stock keeps going down!” Well, if it broke your Stop Loss or violated any of your Rules, then you should have exited the position anyway, so you can’t get hurt more!
 Stocks, commodities, and all securities in general are just instruments that you can buy and sell. Some people only trade one stock, index, future or commodity. This is fine because it’s not the same as being wedded to a position; they’re simply using that security as their preferred instrument to trade both up and down.
With options, make sure you understand your risk profile before executing any trade.However simple the options strategy is, please ensure that you fully understand your risk, reward, and breakeven scenarios for the trade you’re considering before you make the trade. These figures and their respective charts are your eyes on the trade. Trade with your eyes open and use the tools that help you achieve this.
Keep a trade journal.Get yourself one of those big diaries and make it your habit to write down your stock picks (and reasons why) every day. You want to write down the stock symbol, the direction in which you surmise it’s heading, the reason for this (that is, the Technical and Fundamental Analysis that is backing your judgment), and the appropriate time frame during which you anticipate the move to occur.
 When you make a trade, also record the time of the trade, the strategy, and any other relevant details you think might affect your decision making performance. I know some highly successful traders who take a note of the weather, what they’ve eaten and drunk, and all manner of other details, which they subsequently use to analyze their record and make adjustments to their trading plan.
Visit an exchange.Spend at least a day and see first-hand what happens at an exchange. For those of you who live in a major financial center, there’s no excuse! It will help you see what actually has to occur for your order to be processed. An appreciation of the market mechanics is all I’m suggesting here, not an in-depth thesis.
 In the open-outcry system events are happening so fast you’ll get to appreciate that the floor-traders (locals) aren’t actually that bothered by your individual trade. Some day traders become paranoid that (somehow) the floor-traders are part of a conspiracy to hunt down their stops. Two solutions exist here. First, stop being paranoid; it’s not the right frame of mind in which to trade anyway. And secondly, take care in where you set your stops...(read on).
Set stops (at least in your head).Placement of stops is an art, but it is also very personal to the individual. Try to avoid the obvious place where everyone else is and place it slightly beyond that area, hopefully just out of reach of the savvy locals who will invariably gravitate to a congested area of stop orders.
 What we’re trying to accomplish here is to avoid the gambling mentality where discipline is thrown out of the window. You can imagine the scenario where a husband comes back home from the casino to his long-suffering wife. He’s promised her that if he gambles at all, he’ll only put a total of $100 at stake. Yet he comes back home with his tail between his legs, sheepishly admitting that he’s actually blown $1,000, only to then triumphantly announce, “But don’t worry, dear, I’ll win it all back tomorrow night!” This is the stuff of nightmares. Do not become a gambler; do be disciplined in all aspects of your trading, from analysis, to entry, management, and then exit.
Where possible, don’t fight the market.If you’re making a directional trade, then make sure you’re not at odds with the market. It’s more powerful than any one stock! You should always bear in mind what’s going on in the wider marketplace before entering your trade.
Loss of opportunity is preferable to loss of capital (Joe DiNapoli (1988) Trading with DiNapoli Levels).Don’t kick yourself over lost opportunities (the one that got away!) and definitely do not refer to them as times when you “lost $XXXXXX.” All you lost was an opportunity; nothing actually happened to your bank balance. You neither spent money, lost money, nor made money, so there’s no point in crying about it. If you spotted a great opportunity and didn’t act on it, ask yourself why and at least give yourself credit for spotting it in the first place. The market provides opportunities on a daily basis. You’ll find another one, and next time you’ll remember that, provided it’s consistent with your rules, you’ll act on it with more certainty and with the benefit of past experience.
Avoid tips from friends, family, or friends of friends unless you play them as a Straddle, Strangle, or a Synthetic Call.Virtually all of us have taken a stock tip, haven’t we? And we’ve also been burned by them too, haven’t we? Well, accepting the fact that we’re all human and that we could be tempted to listen to a red-hot tip again, here’s the way to play them:
 Only play a tip as a Straddle, Strangle, or as a Synthetic Call (where you buy the stock and a put option). So often, these red-hot pieces of information end up going in the opposite direction and fast too! By playing the Synthetic Call, you’re at least buying some insurance when you buy the stock (see section “Synthetic Calls” in Chapter 5, “Two Popular Strategies and How to Improve Them”). And by playing the Straddle or Strangle, you’re making the assessment that the tipped stock will move wildly in one direction—you’re just not sure which way! (see section “Straddles and Strangles” in Chapter 8, “Two Basic Volatility Strategies”).
Avoid penny stocks and illiquid securities.Don’t be fooled into thinking a cheap stock is necessarily good value. Also do make sure that whatever you buy you can sell too. Illiquidity generally leads to volatility in the stock price and a wide jump between the Bid and the Ask. Avoid these kinds of securities and stick to those stocks with at least 500,000 Average Daily Volume (ADV).
Avoid forecasting.Even analysts, with their tremendous back-office and high-tech support, constantly get their forecasts on stock direction wrong. Notwithstanding a cynical viewpoint that analysts’ main raison d’être is to attract corporate customers as opposed to correctly forecasting price movements, it’s important that you don’t get sucked into constantly making predictions about where the market is heading.
 Now, you may ask the question, “But isn’t trading and investing predicated on making price forecasts in the first place?” Well, that’s a good point, but your emphasis shouldn’t be on forecasting so much as reacting quickly to the information supplied by the market, whether via Technical or Fundamental Analysis. It may be semantics, but by getting entrenched into constantly making predictions for your buddies, you run the risk of altering your psychology and start to become wedded to your own predictions even if they turn out to be wrong. What we want to achieve here is a totally pragmatic approach to trading, treating it exclusively as a business enterprise and using high-probability trading techniques. As Jeff Yass (Schwager, 1992) of Susquehanna Investment Group puts it “...if you can give up your ego and listen to what the markets are telling you, you can have a huge source of information.”
Take full responsibility for your actions.Whatever the circumstances of a trade, always assume responsibility for it come rain or shine. Ultimately, it’s your money, so you must be responsible for pressing the button, even it is your broker who’s advising you. By taking responsibility, you give yourself control to either continue making good trades or correcting any bad decisions or strategies. This rule applies to life in general and not just trading! Those who continually blame other people or circumstances (we’ve all met this sort) are never able to resolve their problems or issues mainly because by doing that they absolve themselves from any ability to rectify their situation in the first place.
 Taking responsibility is not the same as self-flagellating! You want to avoid the sort of self-defeating phrases such as “If only I’d done such and such ...I’m such an idiot!’’ Far healthier is to look back on your trade and ask yourself honestly whether you followed your Trading Plan and if not, how you will rectify that problem next time around. Could you make your plan more compelling, for instance?
Avoid message boards like the plague.The vast majority of these are dangerous places where innocent newcomers get manipulated by “pumpers” and “dumpers” who have nothing better to do than spend all their time either hyping or slamming a stock. Emotions run high within Message Boards, and we know that wildly fluctuating emotions have no place in a serious investing or trading mindset. There is so much misinformation within the chatroom forums that my advice is for you to avoid them like the plague. At best, they are frequented by well meaning but highly emotional traders/investors; at worst they are fraudsters’ playgrounds. Either way, you’re best advised to stay away. Sure, there may be the odd decent one, but from what I’ve seen they can be extremely hazardous for the uninitiated and uninformed.
Do your homework on so-called gurus and teachers.The problem isn’t that there’s not enough education in the field of trading. The problem is that there’s too much but much of it is worthless! Please be careful of those advertisements that are selling you a dream, because that’s precisely what they are selling you, except that it can turn out to be a nightmare! There simply needs to be some more integrity within this industry. Yes, you can master the knowledge and practical application to become a successful investor/trader. If you’re new to all this then it’s not going to happen overnight and you are going to have to make this your hobby. It’s a fact of life, but part of discovering what’s really good and useful is also finding what’s dross along the way.
 I’ve looked in on seminars where I was appalled at what I was hearing. It’s astounding what people have been getting away with in this field and it’s the ones who are selling 100% hype who are the most distasteful. I’ve seen conferences that were really little more than pumped-up jamborees of organized mass hysteria, crammed full of misrepresentation. I’ve also met the delegates of these conferences weeks later, totally confused and not knowing where to turn, particularly as they’ve just gone and blown their risk capital while they were still on a high.
 Brash newcomers with no tangible experience are also dangerous. You should ask to see their credentials, such as do they have any financial experience whatsoever, either academic or commercial? I’ve seen people set up courses when not only did they have absolutely no financial background whatsoever, but they had (in their tiny investment experience of only a few months!) also lost their entire trading capital, hence setting up the course in order to generate income! Incredible but true.
 Don’t dismiss those with academic backgrounds, provided they have the communication skills to sustain your interest! Academics understand the theory and are generally less inclined to misinform about “amazing new discoveries.” The trick is to find someone who not only understands the subject matter in depth, but can use and communicate this knowledge to practical effect in making profits on the markets.
 Those with a purely commercial background are probably more likely to be the ones selling a fantasy. They might have a decent trading record (often on the back of a bull market), but you’d be surprised how many so-called gurus have a miserable trading record! I’ve actually witnessed well-known teachers trade first hand and I’ve seen some not very pretty sights! Swearing and screaming at the computer screen for a fill, thumping the desk in agitation as they incurred a drawdown! Not exactly great trading psychology, there! That’s not to say that those who can’t do can’t teach. But my chief objection is to the misrepresentation that they actually practice what they preach, when in reality they don’t and their own poor results bear that out. I’ve seen courses where the instructor admits he doesn’t trade. That’s fine, provided he admits it. Then it’s up to you, the delegate, to try the taught material and then make up your own mind.
 Ultimately, you want to get a reference of some sort about any guru or teacher you’re looking to go and learn from. Try to find ex-delegates or those who’ve read their material and ask them:
  • whether they learned anything useful;

  • whether they implemented the lessons; and

  • whether those teachings worked in practice (that is to say, results).

Black-box systems don’t work forever...For the sake of clarity, what we’re talking about here is the type of system where you, the user, are required to do nothing whatsoever, but simply take the automated signals as your decision making guide.
 I’m not into black-box systems myself and I’ve tried dozens of them, all with great enthusiasm! They tend to work for a limited period of time, and then they stop. The problem is that they’re by definition static in design and rigid in their construction, which is exactly what prevents them from automatically adapting to constantly changing market conditions. You’ll save yourself much valuable time by staying away from things like “the answer to all your prayers!”
 The real key to being successful with that sort of thing is to jump on it when it’s actually working for that limited period of time. Then you can make a fortune provided you quit when it stops working! How are you going to get on board at the beginning and time it just right to get off just in time when it becomes ineffective? Well, that’s the $64 million question! And most of the time the sell-by date will have already passed once you get to see it!
 Remember, you should treat investing and trading as a business. Typically, this will require you to put in some effort. So steer clear of anything that claims you can make wild successes doing nothing. I’m not suggesting you have to become a rocket scientist to get the hang of this. Far from it. But you will have to put in the effort yourself, so be prepared. You can certainly do it, and the rewards will be all down to you.
Beware of advertorials that sound too good to be true!There are many adverts and publications that claim unprecedented levels of successful results with headings such as “The Automatic Way to Unbeatable Profits!” I’ve seen such “systems,” and invariably there’s a catch. The most outrageous ones I’ve seen so far are that the so-called unbeatable systems haven’t even been tried live but were simulated with an optimization function! A system that bases itself with the advantage of hindsight has no value whatsoever because as traders we don’t have that advantage. Not only that, but look for the caveats in the small print that admit that the “results” of the system are based only on mid prices and take no account of the bid-ask spreads. That is no way to test any plausible system.
 Paper trading is a valid research exercise for any system you may choose to adopt. However, you must paper trade as if you were trading. This means that you buy at the Ask and sell at the Bid, you add the correct amount of commissions, and you are completely honest with yourself. Paper trading is not the same as trading with real money at stake, so honesty with yourself becomes a vital ingredient for its usefulness and validity to you.
 Hard work is one of the keys to your success here, and I’d be more inclined to investigate a methodology that advised me about hard work first.
Do get involved in physical activity.Trading and investing typically involves being at a computer much of the time. It’s imperative that you get out and about and get the blood flowing in a healthy way. I’m not suggesting running marathons, but you really should seek some fresh air and some form of physical exercise, even if it’s walking the dog. If nothing else, it’ll free the mind up. I know some traders who go fly-fishing. I tried it too, just to see what all the fuss was about, and discovered the secret. It was that when you’re doing an activity such as fly-fishing, it’s so absorbing and takes so much concentration that it’s impossible to think about anything else. And that’s extremely healthy for you. The last thing you want to be doing is thinking about trading (and the one that got away) all the time. Find an activity, any activity that you can escape to so that you can get away from work and strike some balance. As the saying goes, “Change your body, change your mind; change your mind, change your body.” For me, it’s swimming.
 Energy is a vital ingredient in this game, so you should also consider what you eat. I’m not advocating anything too specific here, but exercising some moderation is going to be a good thing! Personally I now avoid caffeine. Not because I don’t like it, but because I can really feel the buzz it gives me and that’s not something I find helpful for being calm. So I’ll drink decaf instead! Whatever works for you is the right answer, but do ensure that it is working for you. What tastes fantastic isn’t always working for you!



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