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Traders Toolbox: Lesson 2 Discipline

Discipline Of all the "tools" available to the trader, none is more important than his or her own mind! Lack of mental discipline has to be the primary cause of losses in the marketplace. Why else would traders with years of experience and reliable systems fail to be consistent winners? Show a 6-year-old child a chart and he will tell you if a market is going up or down by simple observation. Yet, 80% or 90% of all traders end up as losers. The market doesn't beat you; you beat yourself!You are your own worst enemy!

Challenges of a trader's mental discipline exist in many areas of the marketplace and appear in many different forms. Virtually every trader who has spent any amount of time in the commodity business has experienced one or more of the following upsets to his mentality: My broker says ... ; the report said. .. ; the weather will be ... ; but this time is different; ABC is buying; XYZ is selling; it's too high to buy; it's too low to sell; if I get out today the market will turn tomorrow; I saw it coming but my broker (wife, husband, brother, friend, etc.) talked me out of it; and my favorite "They say..."

The trader lacking confidence in his own abilities will seek advice from anyone who will agree with his position. In doing so, he often finds the group of experts called "they" quoted. Invariably, he will stay with a bad position or prematurely abandon or exit a good position because "they" said so and so. Interestingly, in all my years in the business, I have never been able to locate a government agency or an advisory service under the title of "THEY." Do not take the advice of anyone unless you are sure they know more than you do.

Contrary opinion or bullish consensus is a measure of mental attitude. When 80% to 90% of traders are bullish, a market may be termed overbought. How does a market become overbought? High bullish consensus readings develop when traders are "sold" on the idea a mar- is going higher. The idea is promoted by market action and by media attention. A prime example was the media blitz during late 1987 which said foreign currencies would never experience another down day. Finally, everyone was convinced the sky was the limit and, as usual, when everyone knew what the market was going to do, they were wrong. When a person is bombarded by a multitude of news re- ports,it is extremely difficult to examine a market from an unemotional and objective point of view.

However, to be successful, you have to develop such a mental discipline. mental discipline is necessary in any competition you enter. The competition the trader faces is the battle he has with himself. He must be able to avoid the emotional forces constantly tugging at his mind. He must defend against im- pulsive greed when a market is "leaving" without him and against fear when a market is moving against his position. He has to maintain the confidence that his analysis is correct and enter orders based on this confidence even when it is "obvious" the analysis can't be correct. When he suffers a loss, the trader must fight the "I have to get it back" syndrome. When he succumbs to this malady, he begins to trade equity instead of the marketplace and he is doomed to throw good money after bad.

My observation has been the most dangerous period a trader can face is when he first becomes a winner. I have had the good fortune to catch some significant moves in the past and have received a number of calls from people who were overjoyed with their positions; in some instances, the callers were nearly euphoric (probably long hogs or bellies).

All too often I have watched new winners gain the feeling of overconfidence and indestructibility. Greed sets in and one- or two-contract traders become five- and ten-contract traders. They hit on another trade or two and the ego goes limit up; now they can do no wrong. Suddenly, they are one of the "big swingers"; then disaster strikes. The hot streak turns cold and the equity leaves faster than it came. Their emotions leave an island top and they plunge into mental despair. They become another statistic marked to the loser category.

Where do the new winners go wrong? In general, they have not learned the lessons of past losses and do not have the discipline to continue the trading strategy which finally brought them into the winner category. What is different about the consistent winners? First of all, most of the consistent winners were losers at one time. They learned from their losses. They went on to study which tools work and then implemented those tools.

But most importantly, they have undergone a self examination to determine their mental flaws and how to correct them. Like a championship boxer, they realize they can win the first 14 rounds of a fight, but if they let their guard down and relax, they can still lose by a knockout in the final round. It takes work to become a winner and even more work to stay a winner.

"Saturday Seminars" - Developing the Psychological Edge to Maximize your Trading

Do you react like a "deer in the headlights" when a trade moves against you? Developing techniques and skills to turn around your trading can mean the difference between success and failure. In her first presentation at TAG, Robin Dayne will teach you how to pull yourself out of a "tail spin," conquer over trading and overcome the fear of getting into a trade. No matter what type of trading you do, all obstacles and errors in trading can 99% of the time be traced back to one's emotions. Robin will show you how to develop a plan to emotionally start your day and to create the confidence to get in and out of a trade. Whether you are a novice or professional, her method will help you develop a psychological edge!

Dayne Will explore:

  • Managing Emotional Trading Swings
  • Creating Trading Certainty
  • Breaking A Losing "Tailspin"

Known as "The Trader's Coach," Robin Dayne has been sought after and appeared on ABC News 20/20, CNBC - Power Lunch, Business Week, and other trading venues. After years of studying psychology and coaching thousands of clients to realize their maximum potential, Robin found her "niche" coaching all types of stock traders. A trader herself, she learned from some of the best and studied in one of the most active Day Trading offices on Wall Street. Combining her personal experiences with her psychology expertise she has developed trading strategies and techniques to turn any trader around. These invaluable skills are taught today in her 1-1 coaching, "The Intricacies of Day Trading" seminars, and chat rooms, focusing on ones trading psychology and the "foundation" skills of trading needed to succeed.


For more audio and video seminars please visit INO TV

Be prepared with these three markets

Friday, June 20, 2008

FR: Adam Hewison, President

RE: 3 Markets that will change everything

Dear blog reader,

Every once in a while there comes a time in the market when you get to see some amazing trading opportunities.

I believe this could be one of those times.

In this special private video I analyze in detail the upcoming major moves in three major markets. This just maybe the most important video I have ever made on these three markets and I want you to see it.

Watch this video.

Every success in the markets and in life,

Adam Hewison

Back Testing for Better Trading Results

In today's guest blog post I asked Ingela Troha to talk about something that has plagued me, and millions of traders each and every's back testing! Please read the full article, and put the info to good use!


Back Testing can be a dirty word for traders who are too impatient to test their trading plan. Just the thought of it feels like an inconvenience, and a delay of getting into the live markets. Also many are confused about what the process involves, or completely unaware of how valuable it is to the bottom line of their results.

The benefits of back testing are extensive; years of experience can be gained over a shorter time frame (sometimes within hours) which further develops the traders intuition as the get to know their trading plan intimately; there is also the advantage of using your trading system through various market conditions and not just the current market type; plus testing new indicators and tweaking old ones; or creating a trading plan tailored to your own personal style.

The back testing process involves taking what criteria you have within your trading plan and applying it over at least 4 years of data – pick a period including all movements; bull, bear and sideways conditions. Your trading criteria must be well defined and not open to subjectivity – if it is get rid of it and find a new indictor. Trading rules should be very clear, for example: “Enter 1 daily close above the XX Day Simple Moving Average, with a Stop Loss 25 points away…” and so on. Trading criteria must be so precise that if you were to give the information to 10 different people they would come back with the same results. If there is too much room for interpretation within your rules, you will find it hard to repeat your successes
and avoid losing trades.

Once you have applied your trading criteria over a historical period, carefully noting each trade, you will be able to reflect on each position you took and identify a number of things; you may be able to minimize the risk of each trade by moving your stop loss closer or minimize the probability of being unnecessarily stopped out by having it even further away. For example, if over the 4 year period you made a total of 100 trades where 60 were winning and 40 were losing, you could analyze all the losing trades and see if any of those could have been eliminated or minimized. You could bring in an extra rule or indicator that would have avoided the placement of those losing trades, (however, remember that a new indicator could also have subsequently not allowed you to enter some of the most profitable trades so these need to be tested for viability).

The scenarios that you can back test are endless, and the process may at the time feel quite daunting or monotonous but it is actually deepening your feel for the market by training your eye to look for market movements and patterns that repeat…setting you up as an agile trader to effectively stalk the live markets.

Back testing of course cannot replicate the emotions you will feel that fuel the live markets, but it will add to your profit margin in more ways than one. Happy back testing…

Ingela Troha


Ingela Troha is a professional trader with over 14 years experience
within the financial services industry –