Putting Together a Business Plan for Trading

Jay's outlook for 31st May, 2006 - US and European markets faced a large decline last night, and Asian markets are also down sharply today morning. Global markets have started falling again. We can therefore expect a somewhat large fall today.

Todays Learning :

Putting Together a Business Plan for Trading

Your business plan is your personal blueprint for trading success. It includes not only your goals, but a detailed plan of how you plan to get there. This plan should go far beyond the details of your trading methodology. It should include structuring not only your trading environment, but your whole life. Your mind and psyche are your main trading assets. How do you plan to protect them throughout the year?


Your business plan should be structured to motivate you to make higher highs in your account equity. This sounds like a given, but you must truly fight to come back from each drawdown. You must have allowances in your plan not to give back more than a minimal percentage of profits. Your trading plan must include all the details such as which markets you will trade, which strategies you will follow, and what type of leverage you will use. Only by having a trading plan will you be able to avoid emotional trading decisions.


I am of the belief that it is never too late to start thinking about working on a business plan for the current year. It is also never too early to think about putting together a business plan for next year. This is because it will take you some time to think about the things that I am going to say, and work on your own program.

Trading is abstract and there are so many questions and decisions to be made that come up during the day. Your goal as a trader is to execute your plan and leave the thinking out of it. A daily plan helps to aid in providing ritual, organization and structure.But before you think about how to construct your daily game plan, you need to first put together a broader annual business plan. In setting up your larger business plan, you will be designing a trading program for yourself. Many of the questions our office receives pertain to what type of trading patterns to follow, what time frames to trade on, how to place orders, and which markets to trade. Your business plan should address these issues.


When you setup up your program, you should think of yourself as your own best client. Your account is a client. Your goal should ultimately be to design the type of program you could trade several accounts on, or, think if you wanted to add just one client. You would need a very specific type of program to present to that client, and then, assuming they would be monitoring your trading activity everyday, you would be more conscientious about following your program. Leverage and money management issues would be addressed in this "program", as would markets traded, drawdowns, types of trades made, etc. I will share with you some of the ways I design my program. Before I do, the business plan includes so much more. It must also include goals and motivational factors, as well as rules, guidelines, and plans to keep you away from trouble areas or spots that you are weakest in.


I find that as a trader caught up in the markets, it is hard to take time off. So it is easy for me to hit the burnout point. I have a tendency to put too many positions on. Taking positions into the last day of the quarter seems to be my achilles heel and bite into my bottom line. So, I am making a very clear provision in my business plan for 2000 NOT to have big positions on going into the last day of the quarter. If you want to give yourself the liberty to take several weeks as you develop your plan to still break a few rules, think about it as you do it. Think which rules are really going to serve you best. This is why I said it might take some time to mull over a few things.


I will give you the essence of my program and then you will see how easy it is to design your goals around your plan. I have separate accounts, one for scalp trades, and one for position trades. Now It is easy to design different goals for each program. For example, if the SPs are the only market you are trading, one goal could be to include a range of expected activity level in making SP scalps. This could comprise your core program or be designated as supplemental activity. By having a goal to make a certain amount of scalp trades a week, you will challenge yourself a bit.


Will you include position trades, index options or GLOBEX activity in your program? Look at you past trading performance. It is easy to break down if you are more profitable sticking to short term scalps, or how much holding longer-term positions really adds to your bottom line. I like to keep my SP scalping activity separate, so for longer-term positions, I like using the NASDAQ futures or SP options as a separate trading vehicle. For trades made in the domestic futures markets, I try to hold trades anywhere from 2 - 8 days. Occasionally I will day-trade the bonds, but I try to play for overnight follow-through in most markets. This was my basic program carried over from my CTA program.


So, I essentially have three separate programs: SP scalping, short term swing positions based off classic chart patterns and 2-period Rate of Change pattern recognition, and long-term positions which can also include stocks, options, mutual funds, etc. You need to think about your mix that will work for you and be CLEARLY organized as to how you are going to manage your money. Each account should have a specific level of funding and number of contracts that can be traded in it.


There should also be leverage guidelines and money management rules for each type of trade. Most of the time I do not use my full line. I trade 1 contract per "x" number dollars in my account. Determine a unit size for yourself. As your account grows, you can add another contract. These things should all be spelled out in your business plan.
As for goals, you can structure those two ways. Some people set a dollar amount goal for their trading activity. I have actually avoided doing this in the past, instead choosing to focus on maintaining a certain amount of activity level. I figured if I just did the best job I could each day, the profits would take care of themselves. Sometimes setting a dollar amount can be discouraging during drawdown periods or encourage you to force trades when nothing is going on. This year, I want to have my biggest trading year ever, so that is my goal.
But for some people, a better goal might be to do "x" number of trades on a regular basis, or try for "x" number of SP points per week. This helps to reach the larger goals. I would like to reach half my goal from my daytrading account and half from my position account. Now the question has come up, sometimes gains are unevenly distributed. If you set a target for yourself to make 3 SP points per day for each contract you trade, than do you quit when you make these three points? It doesn't quite work that way. When you are hot, you are in synch and should keep trading. If your 3 points come easy to you, than why would you quit on the day? You could very easily have a scratch day the next day...or even a losing day.
But you must have SOME sort of guideline. This will serve as your motivation to make a trade in the first place! You must have some reason to pull the trigger in the first place, because so many times it is too easy to hold back on being aggressive. Set a goal that you can not only reach, but that you can exceed. So again, if you are a newer trader starting out with a small account, perhaps your goal will be to take 8 SP points out per week. How are you going to achieve that? If you have a smaller amount of capital you do not want to trade on a longer time frame. You need to find 1-2 spots a day where you can go in and try for 2 points.


Now you are breaking your goal down into bite size pieces. How much can you risk on each trade? When I make "short skirt" type trades, I automatically risk no more than three points. If you decide that you can't risk more than 2 points, you are going to have to be very careful on picking your spot. You must be able to see your risk point before you go in. See the market turn and then enter "at the market" or as close to that turn as you can. So, that might be a "program" that you can start out with. Now, what might happen if you start out with your scalping program, is that for a few days, the markets might be dull, choppy, Perhaps you feel like you are behind your goal a bit. But then one day, your 2 point trade turns into a 5 point one...or, you get motivated and make a few more trades and exceed your goal. OK?

Don't put pressure on yourself to make x-amount everyday, but you must have a guideline for what you would like to achieve on a monthly basis. Then at the end of the month, you ask yourself, how is your performance standing up to your business plan? If it is falling short, what needs to be adjusted? The biggest things that keep a trader from meeting their plan are: getting sloppy a few times, forgetting to place a stop, or getting stubborn on one trade. These are the things I see. One mistake waiting to bite you in the rear.


But guess what...it is possible to make all these mistakes and yet STILL make money. Astonishingly, the markets can be more forgiving than we think. It just takes a bit of persistence. So, each month, set your goal to do a better job than the month before. All you have to do is work on making fewer mistakes.


OK!...on to some more parts of the plan - record keeping and structure. THIS IS AN EQUALLY IMPORTANT PART to your business plan. Here is why. Routines and rituals keep things automatic. Additionally, they help set up the daily Game Plan (which we will get to next). A trader needs to get to the point where picking up the phone is just one more thing he does during the day. At the end of the day, I log all my daily numbers. This might seem a useless endeavor since this data is already listed on my computer and I am merely writing it down on paper. But this ritual brings a certain amount of relief to me because I can shut down making all decisions and do some therapeutic grunt work. I thrive on menial tasks and grunt work because I do not have to think during this time. It is a ritual that wipes my mind clean of all the good and bad that happened during the day.


I also have sheets where I log each trade, and lately I am becoming more diligent about doing my P&L at the end of each day. I used to do this during the eighties but stopped the last few years. Part of my business plan for this year includes becoming even more involved in record keeping. I am monitoring the amount of slippage on each trade and the average holding time for each type of trade. You see, you must make it into as much of a detailed game as possible to draw yourself into the game, increase the intensity.


The object is not to burn yourself out either - wrong idea. You do not have to focus on every tick, but rather the opposite. Keep your monitoring of the markets a Zen type of thing, meaning stay loose and relaxed. Sometimes the best trades will happen out of the corner of your eye. For example, perhaps you have been watching a market for a few days. You have been doing your nightly homework watching a particular setup unfold. Then, when the market starts to act a certain way that confirms your analysis is correct, you should be all over it.


You can't force the trades, but when you are relaxed you will see them better. The best way to stay relaxed and loose is to be involved in some sort of ritual. Like the tennis player who bounces the ball up and down a few times before he serves, does a dance with his feet and wipes his brow - these are all rituals to keep his serve loose. The same tricks apply with trading. You can doodle and make swing charts on paper during the day, write down periodic readings of the ticks, or note extreme price levels.


I hope you are getting the basic idea so far, because I do not want to elaborate to the point of overkill. But here is one more example. The person I worked for when I first traded on the Philadelphia Exchange had been a physicist. He spent 1 1/2 hours at the exchange before the market opened and would be there for an hour and a half after the close. He was very methodical and organized, writing out tickets and orders in advance. He was quiet and unassuming, and as I found out later, he was also one of the most consistently profitable traders down there. The person who first backed me when I traded in San Francisco taught me to chart the 3/10 oscillator every night using Security Market Research charting service. He also taught me to log the daily trin, tick, breadth figures, etc., in addition to writing out orders for the next day. Both these guys are still trading today.


These are some of the common traits I have noticed among those traders who succeed. They all have daily routines and rituals. You must balance out the abstract conceptualizing process the market requires with some tangible activities.


Your business plan should include making a daily Game Plan for each day's trading. What type of strategy are you going to use for the next day? Is the market due for a consolidation type day, one that starts to form a small trading range? Or is it poised for a breakout, a potential trend day? Is there an opening play for the morning? For example, if there is an early morning sell off, will it setup a buying opportunity? Or should rallies be shorted? Your game plan could include looking to sell a test of the previous high or buy a pullback to the hourly moving average.
At night, it is easy to note where the hourly grail patterns might be in other markets. Write down imaginary orders..."Buy Silver at such and such a price if it retraces to EMA". You will be more likely to make the trade if you follow this practice. Perhaps there is a particular market you have been following with a directional bias. Write down the previous day's high or low and use that as your pivot.


When managing longer-term trades, you will be more likely to stay with them if you write out clear instructions for trailing a stop. Write down your stop level and continue to move it as the market moves in your favor. My favorite way to trail a stop is to use a two-bar channel stop, or to use hourly support and resistance levels. In a downtrend, I will trail it just above the last hourly swing high, but in an uptrend, I will give it more room and trail it beneath the hourly low of two levels ago. Trail your stop not on the last swing low but the one before that one. This is because up-trending markets are more prone to A-B-C type corrections. There is not a perfect way to trail a stop - they all have their flaw. A 2- bar trailing stop works well, on paper, but personally, I hate the give back on any trailing stop and usually look to exit on some sort of buying or selling climax.


Sometimes, trading in another market can be a good diversion to keep you from taking profits too early on a position that is working. You have to let time work FOR you in winning positions.
Game plan - Business plan - overall trading environment structure...just start thinking about the way you really go about things. Get yourself down to a one day at a time type of process. Even if you are a position trader, your job is not to think about too far into the future, it is still to take one day at a time, even if it is just a monitoring process. The tape is always in the here and the now. Your goal should be to do the best job you can that DAY. Follow your rules and your game plan for that day. If the market moves in ways that were not in your game plan, that is OK. The wrong game plan is always better than no game plan at all. At least if your game plan is wrong, you will know it fairly quickly and that in and of itself has forecasting value.
It is OK to miss a million trades, but it is not OK to miss one that setup on your game plan you have been waiting for. You can also adjust your game plan midday. Perhaps you were looking to sell a rally back to the hourly moving average, but the market blasts on through. It is OK to say, "because the market failed at that benchmark, it might mean there is a stronger move in the opposite direction". Perhaps then it would signal to switch gears and start looking for the first 5-minute grail buy. You get the idea!


Here is a list of some of the types of things you can include in your annual business plan. This will give you something to work on. Start thinking about putting together a professional program, comprised of bite size pieces.


What methodology or patterns are you going to trade? It is OK to have a "library" of setups, but most people do best concentrating on a niche or particular technique.Learn to do one thing consistently well instead of trying to master too many styles.
Which markets are you going to trade? If you trade equities, think about keeping a "stable" of stocks to follow. Don't get caught up in scanning a database of too many issues that you are not familiar with. It invites unfortunate situations where there may be pending issues or reports in the company that you are unaware of. If you have not had much success trading soybeans or silver in the past, why try to continue to trade them in the future?


How much capital are you going to put into your trading accounts? Something I have to add here, stay away from looking at percentage returns when evaluating performance statistics, such as percent return or drawdowns, on your personal account. Concentrate instead on dollar amounts. What is your dollar amount tolerance? My stomach turns at a specific dollar amount drawdown. Percentages vary too much according to how much money you keep in your account. You might have a net worth of 1 mil and keep 100,000 in your trading account and your situation will be entirely different than a person who has 5 mil and keeps 100,000 in trading account. The person with the higher net worth will feel freer to use a different type of leverage. So think in terms of dollar amounts...how much are you willing to draw down to?
How do you plan to enter, exit, and manage trades? I like dividing my contract size into two units. Sometimes I go all in and then scale out in halves. Other times I put half on and look to add the other half. Some positions I keep half on as a core and use the other unit as a scalping unit. Whatever style you choose, it should be written down into your plan.
What is your plan to manage drawdowns? How will you evaluate when you need to take time off?


What are your monthly goals? Are you going to strive to make a certain number of trades each week or perhaps a certain number of SP points? Remember, these are guidelines by which to measure your progress. Some months will be better than other months. The end of the month is a good time to do a periodic review. Most businesses do this on a monthly or quarterly basis.
Include a daily routine in your overall business plan. How are you going to evaluate your performance each day? Keep a notebook of the things you do RIGHT. Pat yourself on the back for small moral victories, such as exiting a losing position in a quick fashion. Note the small incremental improvements you make.


Create an office environment designed to facilitate performance. Eliminate distractions and outside influences. Reduce glare and get a comfortable chair. Invest in good equipment. Invest in an excellent data feed.


Include a provision that will keep you from trading if outside circumstances create an unusual stress, such as health, divorce, or a major move. You might as well just write a check out of your trading account and kiss it goodbye. This is a hard thing to recognize before it is too late. People LOSE money during times of 10 major stresses: death, taxes, divorce, moving, health...you get the point. Trading is a performance-oriented discipline. If you can't perform well, cancel the show... If a tennis player severely sprains his ankle, he cancels the match. Why do damage to your ratings? Why mar your statistical record with sub-optimal performance?
Record Keeping - Rate yourself on your routine and structure and nightly homework. Do you do research or have way of logging results? What type of research is included in your program or plan? My problem is I stack too many projects up on back burner. I need to streamline this area for myself. Or, I get diverted doing research, go off on a tangent late at night and stay up way too late. Then I am not in optimal condition the next day. My business plan includes a bedtime. I promise myself to adhere to it.


Rewards! All work, no play makes Jack a dull boy. You must have outside interests or hobbies to get your mind off the markets at the end of the day. You must treat yourself to something you really want. If you spend money on your self you will eliminate subconscious poverty thoughts. I am serious. Treat yourself like a million bucks and you will be worth it soon. Maybe after a good week you treat yourself to a massage, or buy something you really want. I already have something in mind that I will do for myself if I meet my goals next year. It is something that does not cost too much but that I could never justify spending money on because it might seem frivolous. But the money comes from my trading account so nothing is frivolous!
LASTLY, What plans do you have to continually improve yourself? See yourself as a top-notch person, health-wise, performance wise, and attitude wise. How do you keep advancing in life? You know the old saying, if you are not going forward, you are going backward. Educational pursuit such as books and study courses are important, but don't neglect spiritual pursuit, or outside projects...perhaps building your own website, starting your own trading network, writing your own book on all the trails and tribulations of the business, or working with a charity.
All the above subjects are more important to your long-term success in staying in this business than any trading indicators or setups! People do not lose money from entering on bad setups. They lose money from getting sloppy in their trading and sloppy in their habits and life. They allow emotional trades to creep into their program because they have not done their homework and are not prepared. Your business plan is a contract with yourself. It is a contract to treat yourself as your own best client. Surrounding yourself with guidelines, rules, and an overall structure can be the vehicle that brings you freedom from performance anxiety and gives you the confidence that you can take your trading to the next level.

How to take a Loss

Jay's Market view for 30th May, 2006 : American commodity and stock markets were closed yesterday(Monday, 29th May) for Memorial Day, and FTSE (London) was also closed for the Spring holiday. Other European markets were open, and both the German and French indices declined by about half a percent. Asian markets are also down today morning. This should have negative effect on our stocks.

Todays Learning :

How to Take a Loss :


There are quite a few books written on how to make money in the market. Some of them are even written by people who have made money as traders! What you don’t see often, however, are books or articles written on how to lose money. “Cut your losers and let your winners run” is commonsensical advice, but how do you determine when a position is a loser? Interestingly, most traders I have seen don’t formulate an answer to this question when they put on a position. They focus on the entry, but then don’t have a clear sense of exit—especially if that exit is going to put them into the red.

One of the real culprits, I have to believe, is in the difficulty traders have in separating the reality of a losing trade from the psychological sense of feeling like a loser. At some level, many traders equate losing with being a loser. This frustrates them, depresses them, makes them anxious—in short, it interferes with their future decision-making, because their P & L is a blank check written against their self-esteem. Once a trader is self-focused and not market focused, distortions in decision-making are inevitable.

A particularly valuable section of the classic book Reminiscences of a Stock Operator describes Livermore’s approach to buying stock. He would sell a quantity and see how the stock responded. Then he would do that again and again, testing the underlying demand for the issue. When his sales could not push the market down, then he would move aggressively to the buy side and make his money.

What I loved about this methodology is that Livermore’s losses were part of a grander plan. He wasn’t just losing money; he was paying for information. If my maximum position size is ten contracts in the ES and I buy the highs of a range with a one-lot, expecting a breakout, I am testing the waters. While I am not potentially moving the market in the way that Livermore might have, I still have begun a test of my breakout hypothesis. I then watch carefully. How are the other averages behaving at the top ends of their range? How is the market absorbing the activity of sellers? Like any good scientist, I am gathering data to determine whether or not my hypothesis is supported.

Suppose the breakout does not materialize and the initial move above the range falls back into the range on some increased selling pressure. I take the loss on my one-lot, but then what happens from there?

The unsuccessful trader will respond with frustration: “Why do I always get caught buying the highs? I can’t believe “they” ran the market against me! This market is impossible to trade.” Because of that frustration—and the associated self-focus—the unsuccessful trader does not take any information away from that trade.

In the Livermore mode, however, the successful trader will see the losing one-lot as part of a greater plan. Had the market broken nicely to the upside, he would have scaled into the long trade and likely made money. If the one-lot was a loser, he paid for the information that this is, at the very least, a range-bound market, and he might try to find a spot to reverse and go short in order to capitalize on a return to the bottom end of that range.

Look at it this way: If you put on a high probability trade and the trade fails to make you money, you have just paid for an important piece of information: The market is not behaving as it normally, historically does. If a robust piece of economic news that normally sends the dollar screaming higher fails to budge the currency and thwarts your purchase, you have just acquired a useful bit of information: There is an underlying lack of demand for dollars. That information might hold far more profit potential than the money lost in the initial trade.

I recently received a copy of an article from Futures Magazine on the retired trader Everett Klipp, who was dubbed the “Babe Ruth of the CBOT”. Klipp distinguished himself not only by his fifty-year track record of trading success on the floor, but also by his mentorship of over 100 traders. Speaking of his system of short-term trading, Klipp observed, “You have to love to lose money and hate to make money to be successful…It’s against human nature what I teach and practice. You have to overcome your humanness.”

Klipp’s system was quick to take profits (hence the idea of hating to make money), but even quicker to take losses (loving to lose money). Instead of viewing losses as a threat, Klipp treated them as an essential part of trading. Taking a small loss reinforces a trader’s sense of discipline and control, he believed. Losses are not failures.

So here’s a question I propose to all those who enter a high-probability trade: “What will tell me that my trade is wrong, and how could I use that information to subsequently profit?” If you’re trading well, there are no losing trades: only trades that make money and trades that give you the information to make money later.

Invaluable Advice from Market Wizards : Part 2

Jay's Market Outlook for 26th May, 2006:

European markets are up strongly, and the US indices also finished with good gains. Asian markets are also doing well today morning, and the global short-term trend has finally turned up. This should help our stocks improve further today.

Todays Learning :

I used to try to will things to happen. My attitude was that I figured it out, therefore it can't be wrong. What is the ultimate rationalization of an investor in a losing position? "I’ll get out when I'm even." I became a winner when I was able to say, "To hell with my ego, making money is more important." -Marty Schwartz

My Marine training helps in investing. They teach you never to freeze when you are under attack. -Marty Schwartz

Generals always fight the last war. Portfolio managers always invest in the last bull market. -James B. Rogers, Jr.

I have lived through or studied hundreds, possibly even thousands, of bull and bear markets. In every bull market, whether IBM or oats, the bulls always seem to come up with reasons why it must go on, and on, and on. It’s always the same cycle. My mother calls me up and says, “Buy me XYZ stock.” I ask her, “Why?” “Because the stock has tripled.” The whole process repeats itself on the downside. -James B. Rogers, Jr.


The biggest public fallacy is that the market is always right. The market is nearly always wrong. I can assure you of that. -James B. Rogers, Jr.

Be aware of change. Buy change. You should be willing to buy or sell anything. So many people say, “I could never buy that kind of stock.” -James B. Rogers, Jr.

If you make 50% two years in a row and then lose 50% in the third year, you would actually be worse off than if you just put your money in a money market fund. Wait for something to come along that you know is right. Then take your profit, put it back in the money fund, and just wait again. You will come out way ahead of everybody else. -James B. Rogers, Jr

. The biggest mistake I made was having a specific target of what I wanted out of an investment. The target should be determined by market analysis, not by the amount of money you want to make. -Mark Weinstein

I don’t lose much on trades, because I wait for the exact right moment. Your strategy has to be flexible enough to change when the environment changes. The mistake most people make is they keep the same strategy all the time. They say, “Damn, the market didn’t behave the way I thought it would.” Why should it? Life and the markets just don’t work that way. -Mark Weinstein I learned that an opinion isn’t worth that much. It is more important to listen to the market. -Brian Gelber

Most traders who fail have large egos and can’t admit that they are wrong. Even those who are willing to admit that they are wrong early in their career can’t admit it later on! Also, some traders fail because they are too worried about losing. I’m not afraid to lose. When you start being afraid to lose, you’re finished. -Brian Gelber

The psychological factor for investing has 5 areas. These include a well-rounded personal life, a positive attitude, the motivation to make money, lack of conflict [such as psychological hang ups about success], and responsibility for results. -Dr. Van K. Tharp (a psychologist specializing in working with traders)

The composite of a losing trader would be someone who is highly stressed and has little protection from stress, has a negative outlook on life and expects the worst, has a lot of conflict in her/her personality, and blames others when things go wrong. Such a person would not have a set of rules to guide their behavior and would be more likely to be a crowd follower. In addition, losing traders tend to be disorganized and impatient. -Dr. Van K. Tharp

Many people actually want to lose on a subconscious level. -Dr. Van K. Tharp

The realization that you are responsible for your results is the key to successful investing. Winners know they are responsible for their results; losers think they are not. -Dr. Van K. Tharp

Invaluable Advice From Market Wizards :Part 1

Jay's Market Outlook : 25th May, 2006 : European markets declined yesterday, while the US indices finished with modest gains. However, Asian markets are down sharply this morning, and the global short-term trend is down again. This is likely to lead bit of recovery in Indian Markets today. But this cant be seen as another leg of move in upward direction.

Todays Learning :

Some Invaluable Advice From Market Wizards :

Good investing is a peculiar balance between the conviction to follow your ideas and the flexibility to recognize when you have made a mistake. -Michael Steinhardt

I advise you to always use stops. I mean actually put them in, because that commits you to get out at a certain point. Another thing is that if a position doesn't feel right as soon as you put it on, don't be embarrassed to change your mind and get right out. -Michael Marcus

I think the leading cause of financial disablement is the belief that you can rely on the experts to help you. Investing requires an intense personal involvement. -Michael Marcus

Fundamentalists who say they are not going to pay any attention to the charts are like a doctor who says he’s not going to take a patient’s temperature. -Bruce Kovner

In a bear market, you have to use sharp countertrend rallies to sell. -Bruce Kovner

Place your stops at a point that, if reached, will reasonably indicate that the trade is wrong, not at a point determined primarily by the maximum dollar amount you are willing to lose. -Bruce Kovner

The most important rule of investing is to play great defense, not great offense. Every day I assume every position I have is wrong. Always question yourself and your ability. Don't ever feel that you are very good. The second you do, you are dead. Always maintain your sense of confidence, but keep it in check. -Paul Tudor Jones

You need discipline, patience, and courage. You must have a willingness to lose, but a strong desire to win. -Gary Biefeldt

Investing is like poker. You should only play the good hands, and drop out of the poor hands, forfeiting the ante. -Gary Biefeldt

Fundamentals that you read about are typically useless as the market has already discounted the price. -I call them "funny-mentals." However, if you catch on early, before others believe, then you might have valuable "surprise-a-mentals"” -Ed Seykota

Pride is a great banana peel—as are hope, fear, and greed. My biggest slip-ups occurred shortly after I got emotionally involved with positions. -Ed Seykota

I tend to cut bad trades as soon as possible, forget them, and then move on to new opportunities. The elements of good trading are: (1) cutting losses, (2) cutting losses, and (3) cutting losses. If you follow these three rules, you may have a chance. -Ed Seykota

I have a cousin who turned $5,000 into $100,000 in the option market. One day I asked him, “How did you do it?” He answered, “It is very easy. I buy an option and if it goes up, I stay in, but if it goes down, I don't get out until I am at least even.” I told him, "Look, I trade for a living, and I can tell you that strategy is just not going to work in the long run." In his next trade he put his money in Merrill Lynch options, only this time, it goes down, and down, and down. It wiped him out. -Larry Hite

Coping With Risk and Uncertainty

Jay's Market Outlook 24th May, 2006: There is unprecedented volatility in market. There is no direction, even though the trend is clearly downwards.

In this situation it will be a big mistake to be long, so Investors should either be Short or on Cash.

Todays Learning :

Coping With Risk and Uncertainty


Note: A version of this article was submitted to the Trading Markets site on 10/15/05.

How do you cope with the risk and uncertainty that are built into markets, and are you coping effectively? In this and my next article, I will be tackling these important questions.
The topic of coping actually begins with the notion of stress. Stress is a characteristic set of physiological, cognitive, and emotional responses to threat. Generally, these responses speed up such bodily functions as heart rate, galvanic skin response, muscle tension, and rate of respiration. For this reason, the stress response has sometimes been called the "flight or fight" reaction. In the face of threat, our bodies prepare us for action: either to attack the source of danger or to run from it.
What constitutes a source of stress is highly dependent upon our perception. If we define something as a threat, we will experience it as threatening, and that will trigger a stress response. For some people, public speaking is an everyday activity, not to be feared at all. It might even be something enjoyable. Others view public speaking as a potentially humiliating event. Their perception of threat triggers the stress response that we call performance anxiety. Cognitive psychologists, however, remind us that it is not the public speaking event itself that is generating the anxiety, but rather our processing of that event. Take away the perception of threat and the anxiety diminishes.
Some of us view the world through lenses that emphasize the threat in life events. Perhaps we grew up in an unstable home, perhaps we were overprotected and never experienced life's hard knocks, or perhaps we learned to anticipate negative events as a way of handling multiple setbacks during a difficult period of life. All of these scenarios can lead to situations where stress becomes a way of life. Once we acquire habitual thinking patterns that emphasize life's dangers, we fall into a chronic mode of flight or fight. Continually mobilized, we can experience ongoing high blood pressure, muscle tension, and jitteriness.
Psychologically, chronic stress is experienced as dis-stress. Anxiety, depression, and anger are common consequences of viewing the world through the lenses of threat. These emotional reactions, in turn, produce typical behavioral consequences, such as indecision, lack of self confidence, impulsivity, and interpersonal conflict. We know from cognitive neuroscience research that high levels of distress shift regional cerebral blood flow away from the frontal cortex--our executive center of judging, planning, and reasoning--and toward motor regions. This is why it is so difficult for people under chronic stress to calmly work out their problems. Their perceptions of threat create physical and emotional arousal, which in turn make it difficult to access the cognitive capacities most needed at those times. Every trader knows how easy it can be to abandon a well thought out trading plan in the heat of adverse market activity!
The term coping refers to the actions we take to deal with sources of threat. Broadly speaking, there are three coping styles:
Emotion-focused coping - Dealing with dangerous and threatening events by processing one's emotions and engaging others for support;
Problem-focused coping - Handling threats by focusing on the situation and ways of dealing with it to reduce danger
Avoidant coping - Avoiding sources of threat or choosing to not think about or deal with a problematic situation.
None of these coping styles are good or bad in and of themselves. Each can be used effectively, and each can be misused. We know that a coping style is effective when it reduces threat and produces positive outcomes. There are times when it can be effective to sort out our feelings and deal with these, such as after the loss of a relationship. There are occasions when it is very helpful to be problem focused and directly deal with an immediate emergency. Other times, we need to suppress feelings of upset and problematic situations in order to get by in a job or as a parent. In many respects, the best coping style is one that flexibly incorporates all three ways of handling situations.
While all of us do cope at times by dealing with feelings, attacking problems, and removing ourselves from situations, most of us have characteristic ways of dealing with threat. Those are our typical coping patterns, and they are integral to our personalities. For instance, if I have a significant problem, I very often will cease interaction with others and become extremely task focused. At such times, my attention narrows considerably and is concentrated on the problem at hand. This is useful in that it generally accelerates the resolution of the problem. It is not useful in other respects, particularly if it leads to others feeling shut out in a team-based work situation. If I become locked into particular ways of coping that worked for me in one setting--or during one period of life--and then bring these to new situations, there is a real risk that the coping will no longer ward off threat and may even create new conflicts. My colleagues at work who feel shut out by my problem focus, for example, may stop collaborating with me at times when I want and need their assistance.
This situation is much more common than people realize, and it is a source of untold trading problems. Coping strategies that worked well at one time or in other situations are brought into the trading arena, where they wreak havoc. Very often this occurs when the emotions evoked by our perception of trading situations (perceptions of failure, danger, invincibility, etc.) trigger coping actions from an earlier life period where those emotions were problematic. Perhaps, for example, I felt like a failure in my growing up years because I could not make friends or develop relationships. This led me to cope by avoiding social situations and retreating into my own fantasy world where I didn't have to deal with others. As a child, this may have helped me through a painful and awkward life period. Now as an adult, however, responding to market losses with feelings of failure--and then retreating into fantasy--is not constructive.
Very often, our most problematic coping occurs when we deal with threatening situations in ways that greatly differ from our normal coping styles. During normal trading, I might be highly problem focused. In a volatile stretch of trading where I take large losses, however, I find myself coping by exploding emotionally and then feeling guilty over my outburst. Such out-of-the-ordinary coping generally is a sign that an earlier coping mode is being activated. Something about the day's trading is triggering old memories, feelings, or conflicts. As a result, we're no longer using our constructive, adult coping capacities. Instead, we're mindlessly repeating a pattern from the past.
If you find yourself overreacting to a situation, there's a good chance it's not really an overreaction. You are reacting to the situation--*and* to something previous in your life that is being stimulated by the situation. The first step of progress you can make in this circumstance is to remind yourself that you're not really reacting to the situation at hand. "This isn't about trading," you tell yourself. "Something else is going on." Such a reminder does not, by itself, eliminate the threat response, but it starts the process of putting threat in perspective. That is important. Remember: threat--and stress--are functions of perception. As you alter your perception, you alter your responses.In my next article, I will focus on some ways of modifying stress responses and improving coping. Until then, I invite you to join me for a free online chat that will cover stress, coping, and much more. The Hotcomm session is sponsored by Woodie's CCI Club and will be held Thursday, October 20th at 5:00 PM EST (4:00 PM for us Chicago types). If you're not familiar with Woodie's group, I heartily recommend you check it out. You'll find hundreds of traders helping traders. And that, after all, is a pretty effective way of coping!