Watch lists
One common mistake I've seen over the years in working with traders, especially new ones, is an attempt to trade everything and anything. A common thread that I found was that they believed that if their “job” was that of a trader then they needed to be trading. Not true! Trading isn't the same as manual labor where if you're not working the job doesn't get done. Trading is about discipline and patience.
Discipline is needed to wait for the high percentage plays that WILL come your way and when they do, you pull the trigger. One of the greatest tools available to anyone is the watch list, yet few know how to properly use one. The easiest to manage are those of the electronic version and most brokerages have either a software or web based platform that includes a watch list function.
I've always taught that a watch list should be treated like a garden and that the soil will need to be prepared, seeds chosen for planting, water applied frequently and weeds to be removed as needed. To say the least, it's not as easy to keep a good watch list as you might think. In fact, the most common excuse I hear is that there are too many stocks to look at and keep up with on a daily basis. Let's break it down so you can see that it's not that difficult.
TILLING
The tilling of the soil is actually going out and using a scanning service to find the types of trade setups that work for you and your trading style. There are many great ones out there but I personally like to keep it simple and focus on a few highly probable setups.
- Ascending/Descending Triangles
- Bullish/Bearish Breakouts
SEEDS
I use the above mentioned setups because they fit my trading style and I like the odds of being successful. That doesn't mean you should use the exact same scans. I don't like tomatoes so I don't plant them in my garden but I do like spinach. Point is, like the seeds you plant in a garden, look for setups that match your trading style. If you don't like volatile stocks then stay away with stocks that have a beta over 1.5. If you prefer to be a longer-term investor then incorporate fundamental data. Perhaps a scan for moving average crosses is more your style, I don't know and nobody really knows but you.
WATERING
Take the time to invest in your future as a trader by looking at your watch list on a daily basis. Perhaps you can't or don't need to look at it daily but at the very least spend an hour on the weekend watering your potential trades. What good is a garden if it doesn't get the water needed. So too is the watch list as you may have trades that setup and you miss them.
WEEDING
Managing your watch list is just like weeding a garden—if it doesn't belong in there get it out. In other words, if the stock didn't setup the way you thought it would, take it off of your watch list. If you've got 50 stocks on your watch list you should be more than willing to weed it out and only keep those stocks that have potential.
A few other suggestions that might help in developing and maintaining your watch list are diversification and exploration.
I remember one client of mine a few years ago from California. He came to my office and opened up his brokerage account and his whole portfolio was in real estate/ home builders. He was from a tech background and struggled with the fact that his portfolio was so “volatile” and I chuckled inside. I went on to explain that diversification is done for a reason and offered suggestions as to how to diversify his portfolio.
Use the different sectors and find out which ones the stocks in your watch list belong to. Don't assume, verify! Get your feet wet and learn in the process as this knowledge will go a long way in helping you become a better trader. Grasp a better understanding of sector rotation and delve into macro economics a bit.
Take the time to explore and find new opportunities in the markets. You'll eventually gravitate to the sectors and setups that match your trading style. The key is that if you work at it the journey to finding what works for you will be a shorter. Once there, you'll have the ability to truly focus on managing both the trades your in and your watch list.
It’s what you do with what you have that counts
I’ve always been a market technician and have used levels of support/resistance from day one. I use charting to form my main thesis of what I see as the potential move in stocks. Funny thing about technical analysis is that there are literally hundreds of ways to interpret the data. I guess that’s what makes a market as well since multiple time frames are used to trade with and create the daily, weekly, monthly flow.
Back in my days as a therapist I would strive to help individuals overcome their obstacles by working from a psychology of use. At times, I’d see 3-4 clients in a day that were all suffering from the same mental illness. Oftentimes, the same or very similar dialogue would occur with each client but their progress would vary significantly. I referred to it as a failure to process. In other words, some folks would come just to come and talk while others came to “get fixed.”
The same thing can be said about the markets. Some people come to just trade, most lose some and win some but mainly stay stagnant. Others will come to the market each day looking to “get fixed” and profit from their progress towards mastery. Much like the dialogue in my office, the price action and market flow is similar for each participant. The key is, as the video below suggests, “There’s no inherent meaning in information, it’s what we do with that information that matters.” Trade well!
Safeguarding Techniques
In Adlerian psychology there are what's known as safeguarding behaviors and they have a place in trading as well. Basically, we as humans want to protect ourselves from three threats to the self.
- Physical harm - we might get sick, die, etc.
- Social threat - we might not look good in the eyes of others.
- Loss of self-esteem - we might not look good in our own eyes.
What follows are the six primary safeguarding techniques that we all use to protect ourselves from the threats listed above.
Symptoms
Developing symptoms provides an opportunity to avoid an instance where one might feel threatened. As an example, if I were to get a headache on Sunday night knowing that the markets were open the next day and I've been short during a 40 point bull run.
Nobody enters a trade hoping to lose money. Rather, we all trade to win and that's what successful traders strive for. If headaches, fatigue, day-dreaming or other symptoms manifest themselves regularly then perhaps a little self-analysis is in need.
Excuses
We are typically aware of the excuses we use and everyone has a favorite. Often times as traders we fall prey to this “if only” game and it can be debilitating. As an example, I might find myself saying “if only the FOMC statement wasn't so hawkish I wouldn't have lost so much money.”
Excuses are most likely done consciously whereas symptoms may be more from the unconsciousness. Therefore, the key is to recognize excuses that you might be throwing out there that are hindering your ability to succeed in trading. Take charge of your own actions and be accountable for each trading decision you make.
Aggression
There are several ways that aggression can manifest itself in life and it's typically a secondary emotion. Depreciation is where we might put others down to make ourselves feel better. Accusations are a common form of aggression. Self-accusation and guilt are a few other examples. The point is that aggression is a no win situation in which objectivity is often tossed out the window. Trading on emotions is one of the worst things you can do.
In poker, when a bad beat has occurred, the player has the tendency to become aggressive and seek revenge. This is often referred to as playing on tilt and the same thing occurs in trading. A certain stock took us for a few dollars and we might cuss at the monitor or throw the mouse. Next thing you know, we're back in their looking for a new entry and probably armed with twice the trade size that should be used.
Aggression is common and it's not a bad thing to be aggressive. In fact, aggression is needed to be successful in trading. The key is that you don't want it to become debilitating and causing you to trade on tilt. Focus on aggression more as fuel rather than a force as you need to be in control and work the throttle.
Distance Seeking
- Relating to movement, we can find ourselves doing some pretty bizarre things when we step back and take a look. Here are a few “styles” of distance seeking that we all might have seen once or twice.
- Backward movement-actually moving away from the challenge. The inability to step off the curb and pull the trigger on a trade.
- Standing still-entails buying time. As an example we might not have all 483 indicators lined up correctly to place the trade.
- Hesitation-failure to pull the trigger again, but more from a procrastination standpoint. Maybe the account hasn't been funded yet. OK, but ask yourself why it hasn't been funded and perhaps you can get at the root of the need for distance.
- Creating obstacles-examples of this distance seeking tactic would be waiting for outside variables to hinder your trading. I need to get that 42 inch monitor so I can see the charts better.
Anxiety
In my tenure as a therapist I dealt with clients who had debilitating tendencies that were often related to anxiety. What's a better way to safeguard self-esteem than to become so afraid of life, people, etc. that you can't even function. By taking the time with my clients to find out what it was they were trying to avoid they were able to manage their anxiety without meds.
As a trader we can become so anxious about losing money or having others know about our losses, etc. that we choose not to trade at all or trade poorly. One of the basic tenets of Adlerian psychology is that we all strive for perfection or superiority. As traders we sometimes put undue pressure on ourselves by saying things like " I need to make $800 per day trading to meet my outflow." What happens when that "goal" isn't met? The result is often times manifested in performance anxiety and once again objectivity has left and larger than normal trade sizes start to appear. All the while striving for that $800 daily goal and the end result is anxiety.
Exclusion Tendency
In order to avoid future events I look to narrow my approach to trading so I focus on fewer strategies or setups and become extremely rigid. The end result is that I may only make 1-2 trades a month and that puts a lot of undue pressure on those few trades to be successful. The rigid, inflexible trader is easily broken as they are unable to adapt to a changing market environment. Many of the above mentioned safeguarding tendencies will manifest themselves and it can be painful both to the account and the ego.
The inability to adapt to such changes finds traders trading what they feel rather than what they see. If I'm holding up 3 fingers and asking how many you see...the answer should be 3 and not you asking me to hold up 4 because you feel as though that's what I should hold up.
Conclusion
There's nothing wrong with not wanting to look like a fool in front of others or not ever wanting to lose on a trade although the latter is highly unlikely. What is wrong is if you perform some of these safeguarding behaviors and they themselves hinder your ability to trade objectively. Often times traders are unaware of all the baggage they bring to the market on a daily basis. Unfortunately, most have to take a sizable hit and reach for the proverbial "rock bottom" before they figure out that something has to change.
One of the most underused and often overlooked tools that any trader can use is the trading journal. I suggest that if you don't have one then get one now. If you do have one and don't use it, kick yourself in the pants and get busy. Learn, trade, grow, share!
Re-framing
As a former therapist, one of the areas I would focus on with clients is the way in which they would perceive their situations. Using a technique called re-framing; I would help them see their "problems" from a different perspective. Often times, clients would be able to overcome roadblocks simply by combating their negative perception of situations. This was quick and a huge relief for my clients and similar techniques are used elsewhere.
In my wife's marketing career she would work on value re-framing with products for the company she worked for. In other words, she would bring about new value to an existing product simply by finding a new market or context for that product. Drug companies often use this same technique during clinical trials of drugs where the drug didn't do A, but it sure did do B. Rather than scrap the research done on the drug; they simply market it as a solution to B.
How can this be used in trading? After a trade is completed go back in and diagnose the trade. I suggest doing it several days after the trade is completed as this will help in bringing clarity as most emotions will be in check as time passes. Here are a few questions you can ask yourself as you diagnose your trades.
- Was it an income trade or a business expense?
- Did you practice proper risk management?
- Was the income/expense larger than you expected?
- What did you do right and what was done wrong?
- Was your stop too tight and the stock ended up going the way you thought?
- Did you exit too early and leave some money on the table?
- Was the target met?
- What would you have done differently?
- Used a wider stop
- Given a more aggressive target
- Checked sector/market performance
- What did you do that you would do again?
- Used proper risk management
- Used time (theta) to my advantage
Be honest with yourself and learn what you did wrong and, more importantly, what you did correctly. This process will allow you to discover new strengths and weaknesses that you might have. The idea is to focus on the positive and then negative. It's easy to focus on the negative so avoid doing that first but rather after you've built yourself up. Here's the key...Turn the items that you've deemed as negative into a positive light. It may be difficult at first, but worth it.
You might find that, over time, you are just no good when it comes to a certain stock or sector and thus you can avoid that stock/sector, etc. As an example, I found out that over a period of time that some of my biggest losing days were Fridays; regardless of the asset. As a result, I turned that into a positive by doing two things-not trading on Fridays and doing core research instead. Both of these activities increased my equity curve!
Trading Journals
The image to the left should be recognizable by most of us as the American alphabet. It is from these 26 letters that billions of people are able to communicate on a daily basis. We learn the alphabet early on with rhymes and rote memorization so that we may contribute to society through our interactions. We all progress at different speeds, but eventually we all get to the point where we can recognize all the letters in the alphabet. It is at that point that we build upon that foundation and begin to spell words like C-A-T and T-R-E-E. These words are then combined to form sentences which consist of several words. From those sentences we form paragraphs and so on until we are able to write and communicate with others through pattern recognition.
This ability of pattern recognition isn't anything new or even earth shattering--it's common sense. Just like the alphabet, which is in a pattern, we can discern the different patterns in lots of things. Take a look at the image below and you can recognize a pattern as well where there are higher highs and higher lows. Unlike the alphabet and some other patterns that have a beginning and an end, some patterns are continuous. Such would be the case for a chart that shows price action in a publicly traded company.
We could begin to see patterns in the line above and learn to predict or assume what has the higher probability of occurring next. As an example, looking at this pattern above we might safely assume that the odds are greater that the line will move lower from here as it has in the past. This does not necessarily mean that it will, but the odds are in the favor of such a move. It is this assumptive process that will serve not as an ends, but more of a means to and end. This pattern recognition assumes that the next move would be lower and thus helps us to proceed further. Information that we've gathered from the past can help us predict what the future may hold and this is the basic tenet of technical analysis.
Technical analysis can even be performed on your own trading account and patterns begin to emerge where you can recognize when your trading is "on" as your account grows and when the dollar amount pulls back you can assume that your trading is "off." This ability to recognize the patterns as your account fluctuates in price is a decent beginning, but nowhere near the wealth of information that can be gleaned from your trading history.
Trading journals are one of the most underused indicators that every trader has at their disposal. Why is it that such a powerful indicator is underused? I'd venture a guess that a majority of traders don't keep a trading journal because of the time it takes to keep one. I could be wrong, but over the years as I've mentored traders from all walks of life, time was the number one reason for failure. Second on the list was not knowing what a trading journal was so after reading this article, you now have no excuses as to why you don't keep a trading journal.
Below is a list of what I'd recommend to have in a trading journal and, as with anything in life, you'll get out of the journal what you put into it.
If you are able, ATTACH CHARTS TO ALL ENTRIES! Remember the pattern recognition? Something may not have stood out in the heat of the moment, but several weeks later you may see similar chart patterns to this one. It is at that time that you begin to find common threads and themes of your trading which will allow you to exploit those things you do well and avoid those things you do poorly.
The above should be easily done and would suffice for the most part. However, if you really want to excel at this then a comment section is where the real clarity comes from as you listen to yourself. Take a moment and run through questions like this to get a better understanding of what's going of for you at that moment and document it. Here's some examples of what you could ask yourself:
Write as often as you can in your trading journal and get into the habit of writing in it on a daily basis. When you close a trade, income or expense, take the time to capture your emotions at that point. A good idea is to come back and revisit your journal entries on a quarterly basis and add to them as you are now emotionally removed from them. You might even begin to sense a change in emotion as you read your prior entries...run with that and profit from recognizing your patterns.
Irrational Beliefs
While pursuing my doctorate in '99 I had the opportunity to see Dr. Albert Ellis give a lecture in Pittsburgh and will always be grateful for that. He was the old curmudgeon and everything that I expected. For those that don’t know, he created rational emotive behavior therapy (REBT) and I used it with several of my clients over the years.
REBT is a cognitive therapy and thus focuses mainly on thought processes and works from the assumption that, for the most part, we as humans are our own worst enemies. I for one can attest to this notion as I’ve seen it play out in my own life on several occasions.
One of the key pitfalls that we tend to fall into is what Ellis called “musterbation.” When you hear yourself saying things like “I must get into shape” or “I must make $ 1000 a day trading” you are musterbating.You can substitute "should" "need" and other similar words and get the same result.
The cliff notes version of REBT can best be summed up in the image below. The belief (B) that we have about the musterbation statement (A) leads to an emotional consequence (C). It's the irrational belief (B) that is screwing you up and that's where the work needs to begin (starging with D).
At times, the beliefs become debilitating in that confidence suffers and focus becomes less objective in favor of the irrational beliefs. As I mentioned earlier, a belief that I've heard numerous times as a mentor was something like "I need to make $ X a day." It's good to have goals, but it's what happens if those goals aren't met that causes issues. If I don't make $ X then I'm not a good trader and I'll have to move to the next strategy/market to become a better trader. If I don't make $ X today then I'll have to assume more risk tomorrow and make $ 2X . Before long, that $ X per day becomes your worst enemy as it saps your mental energy.
This is just one example of musterbation and I'm sure you've thought of a few while reading this post. The worksheet above was created by other cognitive behaviorist to help their clients overcome the irrational beliefs. I used something similar with my clients back in the day and thought you might find it useful.
Bottom line is that with the New Year upon us I know many people like to create goals and tend to set the bar a bit too high at times. One suggestion I'd have for those that focus on making $ x/day is to rather focus on stopping trading if $ x is lost/day. Think about that one for a minute. How about a goal of becoming a better trader by doing X,Y,Z? It could be managing risk better, practicing a strict stop strategy, keeping a trading journal, whatever. The point is that if you become a better trader then the $ X/day takes care of itself and you avoid putting undue pressure on yourself.
I'd love to get your thoughts/feedback on this. Perhaps you have something that works for you, let me know what it is. Whatever goals/aspirations you have for 2010 I hope that they contributes to a better quality of life for you. Let's roll!
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