Goals

Goals

 

A dose of reality is also needed for expectations when you are just beginning your journey. One of the most damaging things that can happen to a new trader is beginners luck. The taste of success can be bitter sweet. It happens to everyone and it has happened to me. You place a few trades in a roaring bull market and you make a nice chunk of money. All of a sudden you are a natural, saying things like; this is easy, I got this, piece of cake, I am the master of the universe! Well maybe not the last one but you get where I am coming from. After that nice little winning streak you start bumping up your bets since you are so confident that you are in control of your destiny and your destiny is to RULE THE STOCK MARKET!

In reality you have no game plan; you have no technical or fundamental understanding of why you are making the moves you are making. Or even worse you have just enough knowledge to make yourself dangerous. All you know for certain is that you are about to make a lot of money.

This is typically when it happens. All of a sudden your luck changes and you start losing money. You are so confident in yourself that you start adding to your position. You’re reading twitter feeds and message boards where people are saying this stock is going to the moon. Who cares if it’s already up 150 percent in 4 days, this is just the beginning. You will read anything that helps you reaffirm your own beliefs. You add more to your position and then the stock plunges. You feel like you have been kicked in the gut. Then you start asking yourself if you should get out or buy more. You are getting to the point where you are too scared to buy more and too proud to take your losses. The stock continues to plunge and seems to be picking up steam. You are paralyzed; you want to do something but what? You start telling yourself it can’t go any lower and yet it does. You are sick to your stomach and you are sitting on a big loss. You rationalize keeping your position since you have already lost so much. You might as well hold it until it comes back. Does this sound familiar to you? If you haven’t experienced this, hopefully, this book will help you avoid that painful lesson.

Unfortunately there is no magic formula, black box trading system or silver bullet that I or anyone else will give you that will guarantee your success. There are thousands of systems and tools out there and none of them is bullet proof.

3 Goals for Success

#1 Discipline

It’s my belief that the first goal and probably the most critical is your ability to be disciplined.

You have to have enough self-discipline;  to never stop learning, to develop a game plan for each trade, to know your ideal entry, exit and reason for entry, to review the market conditions, to know your risk reward, to stick to your game plan and execute, to being flexible and change strategies when the market dynamics change, to take profits when they are there and cut losses while they are small, to continue in the face of defeat, to know when to walk away, to learn technical analysis, to scan for setups, to review your performance, to be independent, to seek the support and critique from peers and mentors.

You may have noticed that there are some conflicting ideas in that list. That is intentional, the markets are dynamic and they are constantly changing. What worked last year, last week or yesterday are not guaranteed to work tomorrow. You need to be flexible, having just one style of trade if fine as long as you know that there will be times where you need to walk away and wait for market conditions to become more favorable to your style.    

You may have the best system, with the best education and the best intentions but it will be discipline that will be the secret to your success. Without it you will be fighting a losing battle.  The goal should be to treat this like a true professional would treat any business. Keep a trading log that shows the date time and price of each entry and exit.  The type of trade, where your stops were set, where your targets were set for you to book profit, the reason you took the trade, commissions and what your actual results were from the trade. It would also be advised to give an indication of what the overall market was doing at the time of your trade. Review these trading logs each day or at the very least each weekend. The goal is to learn where you are strong and where you are weak in each market cycle. The most critical goal of discipline is to protect your capital and limit your losses. This requires you to have trading plans and a sound money management system. Losses in any business are bound to happen and like any business you need to recognize the source and correct it. There will be more on Money management later.

2) Emotional Intelligence

A true professional trader has their emotions in check. There have been a lot of headlines lately on HFT (High Frequency Trading) computer programs that use algorithms to measure crowd sentiment in individual stocks and markets. They move in and out of positions in fractions of a second aiming to capture a fraction of a cent in profit. There is not one ounce of emotion in the trade it’s all computer driven. As a day trader this is one example of who you’re competing against.

A professional trader recognizes that it’s easy to become emotionally attached for the new day trader. Trading can give the same high as gambling when you are right on a trade and it can bring on depression and fear when  a trade goes against you. Your goal is to manage your emotion; there should be no feelings of elation or depression during your trading. It’s a business, you are going to have ups and downs when emotions get involved humans have a tendency to make irrational decisions. This is the main reason it is so important to have a defined risk reward plan in place. If the trade hits your target you book profits and move onto your next plan. If you get stopped out you take your loss and move on to your next plan. The market doesn’t know you; it doesn’t care about your feelings, it doesn’t care if you make or lose money, it’s not personal!

Make no mistake, the stock market is a battle field, it’s a war that is taking place between buyers and sellers. For every buyer there is a seller and everyone wants to be right about their position. The professional trader is cool as a cucumber through wins and losses. It’s business and there are going to be gains and losses, what they are focused on is keeping losses very small and taking profits when they are there. They don’t even need to have more wins than losses to be profitable as long as they manage their trades with a disciplined unemotional approach. They know their maximum loss and their potential gain. The professional does not hold a stock a few minutes longer once their stop is hit. They do not hold and hope it’s going to come back. They sell and move on. Once their target for profit is hit they do not decide that they are going to let it run so they can capture more profit or double down on their position because they think the stock is going to the moon. They book profit and move on.

For the professional trader it’s all mapped out in the plan and they execute the plan without emotion. The plan may be that they intend on doubling up on a position if it hits a specific target or crosses resistance area with conviction. The plan may consist of scaling out half the position at one price target and quarter at another, leaving the balance for a lotto play. It may be to go short on a stock that they took long if it breaks a specific area of support with conviction. Nothing is left to chance, they know that they need to follow the rules of their plan. They do not start making decisions based upon their gut feeling or their perception of what a stock should be doing. They make logical, strategic decisions based on the price action of a stock.

I know this sounds easier said than done. I mean after all we are humans and not computers. We are going to have good days and bad days. We are going to have personal issues that we deal with in life outside of trading that can impact our emotional state. Maybe there are financial issues, health issues or family issues that are taking heavy toll on our emotions. The professional trader knows when to walk away if he is not in the right emotional state. One of the beauties of this particular career is you are not forced to trade if you don’t want to. If you are emotionally charged about something and not thinking clearly then simply DO NOT TRADE! The market will be there tomorrow and the day after that. Have a plan and get your emotions in check before you attempt to trade.

#3 Independence

 

With the rise of the internet and the availability of chat rooms and other forms of paid trader services there is a natural tendency for new traders to seek out “Trading Gurus” to follow for advice. You will see hundreds of services out there all trying to differentiate themselves by the amount of money they claim to be making each day. Some services have verified trades and others are asking you to take their word for it. Whether the actual performance is true or not doesn’t matter in my opinion. Ask yourself why they post these numbers?  Is it because it ignites an emotional response; people want to surround themselves with proven winners. The bigger the numbers the more attractive the service sounds. If you see that they are making 50 grand a week, then you can assume you will make 50 grand a week.

It is important to get a formal education in trading and equally important to find likeminded individuals for idea generation as well as mentors and peers for trade review. Taking what you learn and establishing your own identity while relying upon your own trading strategies should be a priority in your journey to becoming a successful trader.

There is a tendency for new traders to rely upon gurus because it makes them feel more comfortable believing they aren’t alone in their journey. They have the Guru to depend on for their success. Reality is gurus come and go and their success does not mean you will succeed. Most people like to be part of a group and we tend to rally around our leader. Following a leader can lead to impulsive behavior where you enter trades without a complete understanding as to why you’re taking the trade. Your entries and exits are usually late to the party and limit your ability to profit from them. Group members tend to believe in other members and especially leaders more than they believe in themselves. Ultimately, someone else is not going to make you rich, that you will have to do on your own. Being part of a chat room or trading mentoring service is valuable as long as your recognize that you must take what you have learned and use it to develop your own style and create your own trading plan. The weakest part of any trading system is you. Traders fail when they follow someone else into trades because it’s reactionary and not meticulously planned out. Building your own plan and executing the plan successfully will help you establish self-confidence and eventually your own independence. Just trying to follow someone will actually hinder your ability to grow and become successful.

Look at it like a crutch; the more you lean on the crutch the longer it takes for you to build the strength needed to stand on your own two feet. Having a guru allows you to transfer the weight of responsibility elsewhere and take the monkey off your back. If you have a bad trade it’s the guru’s fault because they picked the trade. Even though, they probably made money on the trade, it’s still their fault that you lost money.

The third critically important goal for every new trader should be to learn how to rely on and believe in yourself. Chat rooms and gurus are great but your own independence should be your ultimate goal. It’s important to recognize the psychology of the masses and it pays to let the trend be your friend. However it’s equally important to establish your own independence. Don’t just follow the herd!

Psychology over Mechanics

You may have noticed that these three goals had no monetary targets. I didn’t suggest that you should try to make 1000 dollars a week or 300 dollars a day. The monetary goals of each individual will be specific to their own wants and needs. Some may want to make just enough for a comfortable living and others may want to become the first billionaire day trader. The three goals I have just outlined are more psychological than they are mechanical and it’s my belief that if you can successfully achieve each of them your ability to succeed will greatly improve. We will go over the mechanics of trading and the tools at your disposal to help you achieve your desired results but the tools are only as strong and effective as the person using them. Your mind needs to be in the right place psychologically if you want to achieve superior results.