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Mind Over MarketsTM - May 24, 2002

IW Daily

Diaries

Interview

Insight

Methods

Assessment




October. This is one of the peculiarly dangerous months to speculate in stocks. Others are November, December, January,
February, March, April, May, June, July, August, and September. -Mark Twain


Insights

Commitment
“When I was in college, my impression was that people who were really smart could do very well, even if they didn’t work that hard, and people who really worked hard could also do very well, even if they weren’t outstandingly bright. In contrast, in trading, I think you need both elements. The best traders I know are really quite brilliant, and they all work very hard - much harder than anyone else.
“By the way, when I talk about working hard, I mean commitment and focus; it has nothing to do with how many hours you spend in the office. These traders have tremendous commitment to the markets - to their craft, so to speak. They develop scenarios, reevaluate scenarios, collect information, and reevaluate that information. They constantly ask themselves: What am I doing right? What am I doing wrong? How can I do what I am doing better? How can I get more information? It’s obsessive.” [Bill Lipschutz]
-The New Market Wizards, by Jack Schwager, p.63






Master Interview - Power Dressing!

Michael Parness
Do you prepare yourself in anyway, mentally, at the beginning of the day?
I have a routine where I dress up in black underwear and a black tee shirt, black socks often, and consider myself a Ninja trader. (Laughs) To me I have to look at it like war. It?s me versus the market and I?m going to win. There?s only one winner and the stocks are going out in body bags. The money is going into my account.
Read the rest of our interview with Michael Parness, author of the new book 'Rule the Freakin' Markets'.
Click here


Insights

Dealing With Losses
"Each buying and likewise each selling decision introduces the possibility of both success and failure. But of course buying decisions merely open the game, leaving the result an open-ended unknown. Selling decisions offer no such comfort, for they seal the verdict forever. Those readers trained in the mysterious ways of the mind know well the syndromes of fear of failure and fear of success. Selling at a gain leaves chances for both (failure if the stock goes higher), and selling at a loss seals a verdict of failure (and maybe twice, if the price then rebounds!)"
-The Psychology of Investing, edited by Lifson and Geist, p.45-46

Feature Article

Roomy Trading Plans
Successful traders tend to have a specific routine when it comes to their trading plan. Whether they're making a long-term trade or looking for intraday opportunities, their methodology in evaluating trades or investments doesn't leave much room for making last minute decisions - it's more of a process of following a series of rules.
Novice traders often have difficulty developing such systematic trading plans. They tend to come up with routines or plans that leave a lot of room for last minute decision-making, and which usually cause them to fall into common psychological traps and make incorrect decisions. This is because they don't understand how to set rules for what they view to be innumerable unknown factors that they think will only become apparent as they watch a specific price pattern.
They figure that they need to, and can "fill-in" their trading plan at the last-minute, such that each decision is made partly based on a "plan" and partly based on other decisions and assessments made right before entering the trade. Successful traders on the other hand, have learned that if they need to "fill-in" the details of their plan at the last minute, their plan is structured incorrectly.
Last-minute observations and considerations can easily cause the trader to fall into common psychological traps. Since the trader tries to quickly factor these into his incomplete trading plan, potential emotional influences (like fear, greed, hope, and panic) become a real part of his decision-making. In addition, the trader is more susceptible to media influences and will have difficulty properly assessing and sticking to risk ratios and stop-loss points. Therefore, what seems to the trader to be a planned, objective decision is really an emotional one.
And often times, the losses resulting from such decisions will cause the trader to lose any confidence he may have had, and to believe that he doesn't have what it takes to become a successful trader. This can lead to other longer-term psychological issues.
The key to prevent this from happening to you is to very critically evaluate what you believe to be a good trading plan. How much of the decision-making is done immediately before your trade? What kind of observations and assessments does your plan require you to make, and how susceptible are they to emotional and outside influences? Answering these types of questions will guide you to properly evaluate the effectiveness of your trading plan.
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