Mind Games for Trading

One of my colleagues once conducted an informal creativity session as part of a qualification he is studying for. And there was one mind-trick that I found particularly interesting. Its much easier to experience it, than it is to explain it. Take some time to actually do the exercise and don't read past what you are supposed to do. So here goes.

For the first part of the exercise: For 2 minutes, think about as many ways you can use a paperclip. e.g. Ear-rings, hook...etc. See how many you can come up with.

Now, do not proceed until you have taken 2 minutes to do the first part.

For the second part of the exercise: For 2 minutes, think about as many was you can about what a paperclip cannot be used for.

What happened? If you were like me and many others, you would have found many other ways you could use the paperclip for! Interesting isn't it?

I'm going to apply this little negation technique to trading, and actually, its not really new to the trading world. Many of us look for reasons to trade, and many times our mind distorts our reality, and we "see" things that aren't really there. Sometimes, we end up fabricating what we want to see. And admitted so... that's also a challenge I face.

So if we apply the little negation technique, what happens? The negation technique can be used to eliminate some of these badly thought-through trades. Instead of looking for reasons to trade, look for reasons not to. If you can find 3-5 reasons not to trade, then perhaps its more prudent not to. If you can't find any reasons not to trade, then perhaps there you have a good opportunity.

Another way some people do it is to list the reasons to trade, and reasons not to trade. Then depending on which side has more reasons, decide if its a good opportunity to trade.

Of course, when it comes to trading, its a different environment from brainstorming. In trading, you have much less time to react. Weigh your options for too long, and you made find that the window of opportunity has already closed. Nonetheless, its sometimes a useful mental exercise to go through to keep ourselves in check.

What do you think?

What type of trader are you?

Mac1 from Singapore Forex Forums shared this Tharp Trader Test which is very interesting. Do check it out if you have the time.

My results are below. :)

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Planning Trader

You tend to be decisive and to the point. You'll quickly assume leadership when it is called for by the circumstances around you. You have the ability to quickly develop and implement trading systems to meet your needs. You can easily spot logical inefficiencies in the market and take advantage of them, especially if you are pointed in the right direction.

You enjoy long-term planning and goal setting and seem to enjoy learning, expanding your knowledge and staying well-informed. Consequently, you should have no problem developing a sound business plan for trading successfully.

You are excellent at planning in advance especially when you have specific trading goals in mind. You are good at keeping both your short term and long term objectives in mind during the planning process. You like to be effective and efficient and will quickly abandon procedures that do not help you to accomplish your goals. Your dislike for repetition in error will probably help you with trading, because uncovering and fixing any mistakes that you make is an important task of trading.

You are probably quite career focused. Thus, if your current focus is on trading, it's probably because you've had a major disappointment or frustration with your initial career of choice. However, you need to be careful with trading/investing because it tends to be a solitary activity and you love to organize others and pass on your knowledge.

Nevertheless, you tend to have the three important qualities that we look for in top traders. Thus, if you apply yourself, develop a business plan for trading/investing, and really work to understand what trading success is all about, you have the potential to be hugely successful.

Trading Strengths

1. Originality and drive; willingness to follow your ideas through to completion.
2. Quickly see patterns and possibilities, with the ability to rapidly hypothesize and generate low risk trading ideas.
3. You could probably generate a trading business plan and trading systems quite easily and naturally.

Trading Challenges

1. Probably so logical that you don't recognize when emotions are causing you to self-destruct.
2. Your willingness to take action based on rapid insights may result in premature actions, which may create tension with your risk management system especially if you really believe in your rapid insights.
3. You may be susceptible to the loss trap. Therefore you may not honor your stops because you want to be right about your trades.
4. May become bored with routine systems, even if they are performing to standard, and seek excitement to "stay in the game."
   

Example Trader Ed Seykota Ed Seykota is an MIT graduate who became one of the first computerized trend followers in the 1960s. Ed also really understood position sizing and used it to accomplish his objectives in trading. I cannot imagine a bigger edge - it's like going back in time with today's technology. But when I met Ed in 1990 all of his software was written in assembly language. Ed might easily be called the Bill Gates of trading. And Bill Gates, if he were a trader, would be a fine example of a planning trader.

Has Cash Been King for the Past 10 Years?

If you're like most investors, you've been nearly brainwashed with conventional market "wisdom" that stocks are the best way to grow your portfolio.

You would be crazy not to have your money in the markets, right?

But when markets drop, as we've seen in this credit crisis, it's amazing how quickly the story changes.

Steve Hochberg and Pete Kendall, editors of Elliott Wave International's Financial Forecast, challenged the notion of stocks' superiority years before this latest downturn.

Learn how cash has been king – and will remain so – far longer than the latest news headlines may have you believe in this free excerpt from Elliott Wave International's Credit Crisis Survival Kit.

Elliott Wave International has also made the full Credit Crisis Survival Kit available free for a limited time. In addition to this excerpt, it contains 14 other articles, reports, and videos that reveal how to survive and prosper during the credit crisis. Visit EWI to download the kit, free.

Cash's Invisible Reign Made Visible

[excerpted from Elliott Wave Financial Forecast, August 2008]

With respect to cash and its status as the preeminent financial asset, however, we are starting to wonder if investors will ever come around to our point of view, which, as we explained in the March special section, is that there are times when "the phrase 'focus on the long term' means "get out and wait.'" As we also pointed out, the last eight years are clearly one of these times, as cash has outperformed all three major stock averages over this period. A July 3 USA Today article shows how this outlook is actually becoming more farsighted as the bear market intensifies:

3-month Treasuries Beat

S&P 500 for past 10 Years

The article says, "Investors who bought stocks for the long run are finding out just how long the long run can be." But the farther back in time cash's dominance stretches and the rockier the stock market gets, the farther investors seem to move from ever taking anything off the table. After stating that "there can be times, long times, when stocks won't beat T-bills," a professor and popular buy-and-hold advocate is cited as "optimistic that the next 10 years will be better than the past decade." In March EWFF stated, "Cash will continue to outperform until stocks are no longer fashionable." There is no sign that such a condition is even close to happening.

It's somewhat amazing that cash is not capturing anyone's fancy because a tremendous society-wide thirst for cash is spreading fast. "In a deflation," the Elliott Wave Financial Forecast has stated, "Rule No. 1 is to unload everything that isn't nailed down. Rule No. 2 is to sell whatever
everything remaining is nailed to." The banking system is surely deflating, because, echoing Elliott Wave Financial Forecast's wording again, "Desperate American Banks Are Selling Everything That Isn't Nailed Down." SunTrust is selling its stock in Coca-Cola, an asset the bank held for 90 years. Merrill Lynch sold its founding stake in Bloomberg as well as various other subsidiaries.

Meanwhile, "Americans are selling prized possessions online and at flea markets at alarming rates." Pawnshops and auction sites are booming. At Craigslist.org, the number of for-sale listings soared 70% in eight months. This fits with our review of Craigslist's prospects when it was getting started in 2005: "This is just the set-up phase. Once the global garage sale really gets rolling, truly astounding volumes of dirt-cheap goods will be available on-line and
elsewhere." The global garage sale is on. The chart of the U.S. savings rate shows that the bull market in cash has come to life.

A 30-year downtrend in savings rates ended at minus 2.3% in August 2005. In May 2008, the savings rate skyrocketed to 5%. This jolt may be somewhat overstated due to the arrival of the government's stimulus checks, but the burst should be the start of a critical new mindset among consumers. When the government showered the economy with $600 checks, many did something they never would have thought of through most of the bull market: They put the money in the bank, which is exactly what the administration did not want. In fact, federal, state and local governments are desperate for the tax revenue that a little ripple-effect spending would have generated.

According to the National Conference of State Legislatures, states must close a $40 billion shortfall in the current fiscal year. "The problem today is that tax revenue is vanishing," says a story about the sudden appearance of the worst fiscal crisis in New York since 1975. Even cities like East Hampton, New York, where someone paid $103 million for an oceanfront house last year, are out of money. "Nobody understands how it happened," says one resident. The pages of this newsletter show otherwise. If we are right, a deflationary decline is depleting and destroying cash flows in novel new ways that no one alive has experienced before.

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The previous analysis was excerpted from Elliott Wave International's
Credit Crisis Survival Kit. The kit, featuring 15 free resources
to help you survive and prosper during the credit crisis,
is available free. Visit
EWI to download the kit, free.

Trading is a Journey of Self Discovery

I'm doing my second round reading of The Disciplined Trader by Mark Douglas. Fantastic book, and I'm picking up some additional stuff out of it.

I'm less than half-way through the book, but one of the key things I've gotten out of it this time round is this - How well you are able to control your emotions when trading depends on the meaning you attribute to your wins and losses.

Do I hear some of you going "huh?". Well, basically, its not the event of winning or lossing that is critical, its our interpretation of what those events mean to us that's important. A person who attaches the meaning that "I'm a loser" to a losing trade, reacts very differently from a person who attaches the meaning that "I've interpreted the markets wrongly this time." The former is a global and permanent statement at the identity level, the latter is a specific and temporal statement at the behaviour level. Who do you think would be in more control in his trades?

One side issue that this brings up, is also that of self-acceptance. The more self-accepting one is, the more one is able to accept the mistakes. In Mark's book he says

"Taking responsibility is a function of self-acceptance. You can measure this degree of self-acceptance by how positively or negatively you think of yourself when you make what you perceive as a mistake. The more negatively you think of yourself, the greater you tendency to avoid taking responsibility, so you can avoid the pain of your harsh thoughts, thus generating a fear of making mistakes."

Well, I always say that trading is a journey of self-discovery. The better you know yourself, and are able to control your emotions, the better trader you are. And that's one reason why I believe, good traders who have undergone the necessary "training", generally tend to be of better character. Self-control is an important character to develop when you are a good trader... it shows in your trades, and your interactions with people.

Poll: What do you want to see more of on this blog.

Firstly, many thanks to all readers out there, and for the many encouragements. I'd love to know more of what you wish to see on this blog and I'll do my best to provide it. I've placed a poll on the right side, please take a minute to let me know what you would like to see more of.

If the option you want that isn't there, just leave me your suggestions as a comment here.

Thanks again!

AUDUSD Trade

My AUDUSD position has been stopped out, possibly proving my wavecount wrong. But we recall that flat corrections can make new price extremes.

The non-farm payroll data was 'unexpectedly' low. -159k actual vs -100k expected.
I say unexpected in quotes because I was expecting USD to weaken further. And besides that, many companies especially banks have been laying off staff.

In anycase, technicals are of key importance to me. So I'm taking my losses and waiting for the next opportunity. Its always painful to take losses, but necessary sometimes.

Take care and becareful out there.