Trader's Thread 01 (May 08 - Dec 08)

[kennynah]

i like to touch on 2 aspects of trading...

a) Analyses
b) Trading

while the 2 seem to be inextricable knots, they really are NOT and should NOT be, if we are to be objective...let me clarify my thoughts and seek your inputs...

a) Analyses >> the process of sieving out data and translating that into actionable information. For example, a share price has broken upside across the MA200, on high volume. From TA point of view, this is a possible bullish signal. We process this data into a possible Long action.
BUT, it stops here... by this analyses, it is NOT sufficient enough, to actually act on this information.
WHY? bcos, analyses, whether it is FA or TA, does not take into account, our money and risk management. It does not account for our overall sector/portfolio exposures. It does not account for a ton of other considerations affecting our decision to trade. which brings me to the next item...

b) Trading >> this is whether the trader mindset takes over. The trader trades for profits, above all else. The trader is the "client" who decides whether or not to act on the advice of the "analyst", which has to be the precursor.

Hence, for most of us who do not engage any professional analysts to assist to identify possible trades, we are both the "analyst" and the "trader/investor"....

these 2 are differents hats worn on the same head... bu we must not confuse the 2 different and potent roles.

for some weekend thoughts..

[winston]

Beware The Calm by Jason Goepfert

Volatility is scary.

In our personal or business lives, the uncertainty that accompanies wild swings is harrowing, and it makes us take a step back so we can assess the situation from a safer place.

In investing, that usually means selling some stock and moving funds to a money market account, Treasury securities or other safe haven. But history suggests that this is the precise time we should be doing the opposite.

There are any number of ways to measure volatility and profit from its signals. I follow many of them, mostly related to sentiment, but today I want to touch on one that's readily available to anyone: volume.

I normally consider volume to be a secondary indicator--at best--when considering it on a market-wide level. It's simply not as big a deal as it's made out to be, especially in terms of the dubious concept of "accumulation" and "distribution" days, when stocks rise on higher volume or go down on higher volume, respectively.

I do pay attention when aggregate volume makes an extreme move, especially to the upside. High volume means there is a lot of disagreement among traders about what value is. Uncertainty is rampant, and we often see large gyrations in prices because of it. As things settle down, prices tend to rise. That tendency has not changed much over the years, and it allows us the opportunity to profit from volatility.

Low-volume conditions are the opposite. A lack of turnover suggests that a relative amount of complacency has spread, and that's usually accompanied by smaller intraday price ranges; there simply isn't as much disagreement over current prices as when volatility was higher. Unfortunately, the times we become the most relaxed are usually the times when we should start worrying.

Let me show you what I mean. When looking at a chart of total monthly volume, it's easy to be misled because volume exhibits a definite seasonal pattern. Turnover tends to be higher-than-average during the early months of the year and again in the fall. But it is often extremely low during August and December. That makes it more difficult to figure out what is "low" volume and what is "high" volume from month to month.

So when considering what "average" is, it's best to de-trend or seasonally adjust volume. Toward that end, I created a seasonally adjusted monthly volume figure for New York Stock Exchange data, using a procedure similar to what the government does to adjust most of its data. I then checked to see how much each month's ending volume deviated from its seasonally-adjusted norm.

We can see that big spikes higher in the ratio have been bullish--no surprise there. The deviation reached +2% in August 1998, July 2002 and August 2007, all times of upheaval in the market and subsequently rising prices, at least in the shorter-term.

But look at the past six months. Last month, along with October 2007, showed deviations of greater than -2%, the only two months in the past decade to do so. In fact, they're the only two months I could find going back to 1980. January 1988 came close but didn't reach this kind of extreme (stocks chopped around, edging slightly higher, for seven months after Jan 1988).

In a more general sense, let's take a look to see if low volume is good for the market. The charts below highlight the activity in the S&P 500 over the past 30 years. The average returns and percentage of time that the S&P is positive is separated by whether the market was in a bull or bear market, and whether total NYSE volume was high or low.

"High" in this case means that 10-day average volume was more than 25% greater than 200-day average volume; "low" meant that 10-day average volume was more than 15% below 200-day average volume. A "bull market" was considered anytime the slope of the S&P 500 was positive; a "bear market" was when the slope was negative.

First, let's look at average returns:

We can see from the chart that the best possible scenario for future 10-day returns in the S&P was when we saw high volume during bear markets. That highlights panic conditions, and stocks usually bounced back. The S&P averaged +3% over the next couple of weeks, compared to a random two-week return of +0.1% during that time.

The worst scenario was low volume during bear markets. That's what we're seeing now.

Now let's look at how often the two-week returns in the index were positive during the various scenarios:

Again, the best situation was when we had high-volume periods during bear markets, with the S&P showing a positive two-week return 83% of the time. That is extremely high compared with the random 51% during other bear-market periods.

And again, the worst situation was low volume during bear markets. The 42% of the time that the S&P showed a positive return severely lagged all other scenarios, as well as random periods.

I really don't care whether the low volume we're seeing has been occurring on up days or down days--if the difference is extreme enough, then maybe there would be an edge there, but the concept of accumulation and distribution days is overblown among market watchers. I do care that volume in general has been exceptionally low, especially considering that we're still in a bear-market environment, as far as I'm concerned.

That struck me again earlier in May as I was looking at the S&P 500 and Nasdaq 100 tracking funds (SPY and QQQQ, respectively) which had both gone 24 straight days with volume that was below their 50-day averages. That is an exceptional stretch that has been matched only a couple of times in the indexes' history.

For SPY, we saw similar streaks in late June 2000 and 2005, both of which ended quickly after hitting 24 days. After the 2000 occurrence, the S&P spurted higher over the next couple of weeks, then gave it all back over the next couple. It was basically at the same price three months later.

For QQQQ, there was only one instance that lasted this long, on June 30, 2004. That was a bad time to be a buyer, as the index went into a 15% tailspin over the next month and a half. There were two other times that the index reached 22 straight days of below-average volume, which were July 5, 2000 and January 1, 2008. In 2000, the index shot higher for a week, then gave it all back and was essentially unchanged after a few months. In January 2008, well, we know what happened--we got the severe sell-off into March.

Based on what we've gone over above, it's pretty clear that periods of high volume (and high volatility) tend to produce much higher-than-average returns, and with a high degree of consistency. We should not shy away during these times, as gut-wrenching as they may seem. We should identify those periods, and then work like mad to find opportune times to increase our equity exposure.

It's during times of relative calm and low volume that we should be more worried. And according to the recent volume figures, we may be nearing one of those times now.

Jason Goepfert is p resident and CEO of Sundial Capital Research in Blaine, Minn., and editor of Sentimentrader.com. His work focuses on research and practical application of mass psychology to the financial markets.

[winston]

Systems To Lick The Market
Joshua Lipton 05.19.08, 6:00 PM ET

Violent turns in the market, particularly when they result in lower prices, can cause a lot of consternation among investors. Extreme volatility makes folks feel understandably jittery. But there are ways to play the volatility, systems that those of the trading mind can use to exploit big ups and downs in stocks.

For evidence that volatility has been higher in recent months, just check out the CBOE Volatility Index--a measure of the premiums that options traders are willing to pay on S&P 500 Index options. Since February 2007, the VIX, which had been in a downtrend since October 2002, shot up and more than tripled--although it has settled back down to the mid-teens recently.

Higher VIX readings generally correspond to a higher level of fear in the market, and rather than get spooked by that volatility, there are systems traders can use to navigate it. We checked in recently with some market pros that offered a few systems traders can try, ways to make friends with volatility.

The first is the Moving Average Convergence Divergence (MACD), which has characteristics of both a trend following system and an oscillator. At its simplest, the MACD basically tells you what direction market momentum is going.

Most charting tools allow you to plot the MACD, which shows the difference between two moving averages of prices, typically a 26-day exponential moving average (EMA) and 12-day EMA. When the MACD gets below zero and turns upward, that can be viewed as a buy signal. If it gets above zero and turns downward, that then can be viewed as a sell signal.

Of course, there can be many switches in direction. The best MACD signals are confirmed by other chart patterns, says those who employ the system.

The system was first developed by Gerald Appel back in the 1970s. Appel was a psychotherapist by training who became interested in the stock market and wanted to develop an indicator that would allow him to trade mutual funds.

His son, Dr. Marvin Appel, now CEO of Appel Asset Management and editor of the investment newsletter Systems and Forecasts still uses the system his dad created. Dr. Appel, an anesthesiologist by training, likes to use the 12 and 26 MACD.

"The market can exhibit too much random noise for the MACD to be useful in a very short-term period, like intraday ticks," he says. "Conversely, using MACD in a monthly chart can sometimes be too slow in recognizing new trends. So 12 and 26 is a good compromise."

Appel says he doesn't do much short-term trading but, when he does, he uses the MACD to confirm attractive buying areas. He also uses a weekly MACD for trading investment grade bond ETFs. "There are significant intermediate trends that last weeks or months," Appel says. "MACD filters out the noise but gets the investor on the right side of major interest rate trends when there have been any.

Here is one pick Appel suggests: Bank of America (nyse: BAC - news - people ).

"I like Bank of America because it is one of the most solid of the financial institutions, having weathered the credit crisis relatively well so far," Appel says. "It pays a generous 6.7% dividend yield, which means that investors are getting paid very well while they wait for the financial sector to take off, which could be in another year from now. Its stock looks safe from the perspective of technical analysis."

Appel says the stock has shown strong support above $35 per share.This is confirmed by a bullish double rising bottom in the MACD. The recommended strategy, Appel says, is to buy BAC at $37.50 to $38.00 per share, and write $37.50 calls. "I think the June $37.50 or August $37.50 calls offer the best balance between the potential risk and reward of a covered call position." Another system you can think about using: timing the cycles of high and low dividend yields.

That's what Kelley Wright, editor of the newsletter Investment Quality Trends, practices. "Most simply, when a stock offers high yield, investment capital is attracted to it," Wright says. "When yield falls, capital flows out of the stock. Rather than emphasize price cycles of a stock or a company's products or strategy, the dividend yield theory stresses dividend yield patterns."

Here is what Wright does: First, he narrows down the universe of 13,000 stocks to a few hundred "Select Blue Chips" using a simple screen.

In order to make his list of potential picks, the company must meet at least five of the following six criteria:

--Dividend increases five times in the last 12 years

--S&P Quality ranking in the "A" category

--At least 5,000,000 shares outstanding

--At least 80 institutional investors

--At least 25 years of uninterrupted dividends

--Earnings improved in at least seven of the last 12 years

That screen leaves Wright with about 300 companies. From there, it's all about the dividend. A stock is in a buying area when the dividend yield is at the high end of its historical range. A high dividend yield is usually associated with a low price. A selling area is when dividend yield is historically low and the price is unattractively high.

What does this theory tell us about the current market? Overall, stocks in the Dow are decent buys right now with a dividend yield of 2.44%. According to Wright's theory, the Dow wouldn't be overvalued until its yield fell to 1.5%, which would correspond to a Dow level of 20,898.

Wright offers two picks for your consideration. First he likes Polaris Industries (nyse: PII - news - people ).

"Polaris sells fun," Wright says, "like snowmobiles and jet skis. The stock has declined a tad below its undervalued area. I suspect this is largely due to fears of recession and that the consumer would defer purchases of this kind of equipment. The key to our system is to buy a company like Polaris when its price is depressed and its yield is high. In this case, the current yield is higher than normal at undervalue."

Wright adds that if the Street starts to think a recession will be shallow or that we'll avoid one altogether, he see Polaris taking off.

Wright also likes the look of Procter & Gamble (nyse: PG - news - people ). He points out that the company has paid a dividend uninterrupted since 1891. Look at their dividend since 1999 when it was $0.57 and today at $1.60, he says. "That 300% increase in dividend income is why we buy stocks like Procter & Gamble."

A final system to consider: Bollinger Bands. This is the creation of John Bollinger, president of Bollinger Capital Management in Manhattan Beach, Calif.

Volatility used to be thought of as static, Bollinger says. "IBM's volatility, for example, was thought to be a fixed property of the stock. It wasn't thought that it changed over time. Betas, the basic measure of a stock's volatility, were calculated once a year. People weren't lazy. They just didn't think you needed to do calculations anymore frequently or results would be variable."

But volatility was actually much more dynamic, market pros discovered. The purpose of Bollinger Bands is to provide a relative definition of high and low. By definition prices are high at the upper band and low at the lower band.

"Traders can create systematic trading systems and test them and get a handle on what the results will be like," Bollinger says. "You are no longer making emotional decisions. You are waiting for systematic set-ups before making entry or exit decisions."

This tool isn't really for the casual stock watcher, but perhaps appropriate for a more experienced trader.

[winston]

i like to touch on 2 aspects of trading...
a) Analyses
b) Trading
while the 2 seem to be inextricable knots, they really are NOT and should NOT be, if we are to be objective...

1) Analysis - The Thinking
2) Trading - The Action

Do "the thinking" before the market opens.
After the market opens, it is time "to do the action" ie. execute the plan.

Those who think after the market opens and then try to execute the plan, normally get whipsawed eg. chasing after a stock just when it is about to run out of steam, catching a falling knife etc.

[blid2def]

Got this from another site; this is from another of O'Neil's books - How To Make Money Selling Stocks Short.

6 Rules for Short Selling, William O’Neil

1. The general market should be in a bear trend, and preferably in a position that is relatively early in the bear trend. Shorting stocks in a bull market does not offer a high probability of success, and shorting stocks very late in a bear period can be dangerous if the market suddenly turns to the upside and begins a new bull phase.

2. Stocks that the would-be short seller has identified as candidates for short sales should be relatively liquid. They should have sufficient daily trading volume so as not to be subject to rapid upward price movement if the stock experiences a sudden rush of buyers that can result in a significant short squeeze. A general rule of one million shares or more traded per day on average is a reasonable liquidity requirement.

3. Look to short former leaders from the prior bull cycle. Stocks that offer the best short sale opportunities in a bear market tend to be the very same stocks that led the prior bull phase and had huge price run-ups during the bull market.

4. Watch for head & shoulders top formations (explained and shown in the book) and late-stage, wide, loose, improper bases that then fail. These are your optimal short sale chart patterns.

5. Look to short former leaders five to seven months or more after the stock’s absolute price peak. Often, the optimal shorting point will occur after the 50-day moving average has crossed below the 200-day moving average, a so-called “black cross,” and this may take several months to develop. Once a former leading stock has topped, monitor it closely and be prepared to take action when it signals an optimal shorting point.

6. Set 20-30% profit objectives, and take profits often!

[kennynah]

W : good advice on doing the planning before hand...

gd : <<6. Set 20-30% profit objectives, and take profits often!>>....thanks for sharing this....good stuff...
oneil style, everything is signal-based. covering shorts, i guess, should be signal-based too... rather than closing off based on profit target
the reason is, that we can only get whatever the enemy gives...we cant possibly coerce it to give more than it is willing...some days that could mean 500%, some days...0.5%

[blid2def]

W : good advice on doing the planning before hand...

gd : <<6. Set 20-30% profit objectives, and take profits often!>>....thanks for sharing this....good stuff...
oneil style, everything is signal-based. covering shorts, i guess, should be signal-based too... rather than closing off based on profit target
the reason is, that we can only get whatever the enemy gives...we cant possibly coerce it to give more than it is willing...some days that could mean 500%, some days...0.5%

Yup - I tend to agree; that 20% - 30% good to say, but I think it's based on the assumption you shorted the correct ones which went on diarrhoea. If not, I'd prefer to just go with "take profits early, take profits often" if things are volatile. Earn less money won't die. Lose money will.

[winston]

Random Thoughts for Traders on a Holiday Weekend -- by Bill Kraft

As an advocate of discipline in trading, I am a firm believer in having a precise exit strategy in place before I ever enter a trade. I try to do that in my own trading and believe it is important to actually exit according to that plan rather than relying on that little voice in my head that tells me: "Don't worry, hang in there, it'll come back.

" One of my random thoughts this weekend is whether everyone has that little voice. In talking with traders and students over the years, I suspect almost everyone has heard that voice and maybe even heard the same advice.

It can be awfully easy to listen to that voice and stay in a play just a little longer than originally planned. Maybe the voice is right. Maybe it will come back. I'm sure many would argue that you should stay in because the market goes up and the market goes down and, after all, it is best to buy and hold.

On the other hand, could it be that it won't come back? If it is coming back, when? Since I have absolutely no ability to predict the future with certainty (and neither does anyone else as far as I know), what effect does my believing that "it'll come back" have on the price movement of the stock? Obviously saying "it'll come back" does not make it so.

Trading, quite simply, is done in the present. That, I guess, is one of the main reasons why I set up my exit strategy before I enter a play and exit when it is hit -- almost always, at least.

Another of my random thoughts this weekend is why don't people make the effort to take over the management of their own money? Why, for example, was there such a furor over the idea that as at least a partial replacement for social security, people be in charge of investing their own retirement money? Really, now, how has the government done investing the social security trust monies? If we are going to have retirements, who is going to provide the money? Social Security?

Corporate pensions -- how many people coming to retirement thought they would have a pension and now don't? My thought, and you certainly may disagree, is that everyone should be in charge of their own investments. That means that they may need to invest some time first in educating themselves and it could take time away from watching the "Bachelorette" or some other reality TV show. Is it worth the effort? It was for me. I had no savings, no pension, no appreciable 401k, but took the time to learn about risk and money management and strategies and it has done me very well.

If I didn't do it, who was going to do it for me? So I did it. The apprehension about learning trading and investing is, quite frankly, much worse than the learning itself. We have been led to believe investing, trading, stock and 'oh my gosh,' options are too complex and well beyond our abilities.

Frankly, I believe that is nonsense or an excuse not to learn.... Almost any of us can learn ways to trade or invest successfully providing we are willing to commit to learning. Why do so many of us simply refuse to do it and expect it to come from somewhere else?

The next random thought for the weekend is why do so many people always go after the home run in trading? I've seen so many over the years who are in a highly profitable position only to see the profits fade and ultimately turn into a loss all the while waiting for the big hit. Though 'ten baggers' do occasionally occur, why not generate profits in smaller increments as well.

I've heard it said that no one can get rich selling covered calls, for example. I disagree. As a purely hypothetical example, suppose we could make 2% a month selling covered calls, the compounding effect can lead to some pretty hefty sums over time. Let's say you could net 1.5% per month selling those unexciting covered calls. That would be an 18% gain in a year.

Using the rule of 72 and compounding at 18%, it would take about 4 years to double your money. $10,000 could grow to $160,000 in 12 years or $100,000 to $1.6 million in 16 years. As one instructor told me, one of the great ways to make money in the markets is the same way you eat an elephant -- one bite at a time.

[kennynah]

<<As an advocate of discipline in trading, I am a firm believer in having a precise exit strategy in place before I ever enter a trade. I try to do that in my own trading and believe it is important to actually exit according to that plan rather than relying on that little voice in my head that tells me: "Don't worry, hang in there, it'll come back.>>

Over my trading history, I have experimented with % based target as exit plan...and more recently, i have changed that practice to "signal based" exit... my objective is to let my enemy tell me what to do...and not what i want my enemy to give me(something I cannot control)... i have seen as high as 650% (becos i trade derivatives) paper profit levels based on the latter technique...
all i'm saying is that we must not be limited by our own self-imposed %target profits when the mkt wants to give u more...take as much as it offers until u see the sign of stopping..

however, the mkt cannot take more than what we are willing to give...becos we are the ones to do the stop outs...so, the enemy cannot kill us if we disallow it...

recall Sun Tze's Art of War :
You must fight well.
You can prevent the enemy's victory.
You cannot win unless the enemy enables your victory.

The Art of War 4:1.6-8

Again Sun Tze reemphasises the key note that our enemy (market) gives us profits. we cannot command the chosen stock to sway to our likings.

Here's an important concept "fight". In Sun Tze's opnion, "fight" is about preventing the opponent's(market's) victory. We are often guilty of spending to much time focusing on price moving in our desired direction than against us.

We must learn to fight not against the market, but fight against ourselves, to do what we inherently do not want to do, to take a loss when the opponent does not allow us to win.


<<I've heard it said that no one can get rich selling covered calls, for example. I disagree. As a purely hypothetical example, suppose we could make 2% a month selling covered calls, the compounding effect can lead to some pretty hefty sums over time. Let's say you could net 1.5% per month selling those unexciting covered calls. That would be an 18% gain in a year.>>

I agree with the author in this regard.... income from covered calls can be substantial when compounded over time. BUT it has to be reinvested...else what compounding is there?

[winston]

Seven Habits of Highly Successful Traders
Words by Phillips Wiegand Jr.

Most people spend a lot of time focusing on mistakes they’ve made in the past, hoping to avoid the same undesirable results in the future. Although this can be helpful, perhaps it would be even more useful to take the focus off of yourself and examine
what other highly successful traders are doing right—not what you’re doing wrong.

Focusing on the positives and the actions necessary for success will automatically program your mind to achieve your goals and objectives, while allowing for mistakes to be made without wiping you out. So what exactly are the best traders doing differently?

Here are seven of the most important habits that you’ll need to develop a successful trading mindset.

1. They have the right attitude

As with most aspects of our lives, having the right attitude is imperative to successful trading. Most of us possess potential that far exceeds what we ordinarily imagine; yet, too often we place limitations on ourselves without even realizing it, simply through a process of denial or blame. When the hard times hit or trading does not seem as glamorous as it seemed, some begin to make excuses and steer away from their original goal to succeed. To blame a failed strategy or a losing streak on someone or something else is to seed failure.

Every trader is going to have setbacks and difficult times, but it is the way we choose to handle those times that will separate us from the majority. Will you use rough periods to learn valuable lessons, or will you live in denial and make excuses for your losses? Will you let self-doubt creep into your mind, or will you continue moving forward? It’s been said that successful trading is 10% strategy, 90% psychology. Successful traders keep a proper mindset and have a positive attitude, even when the going gets tough.

2. They do their own homework

The Street has always been littered with people who wanted to make a fortune trading stocks, but were washed out because they were not willing to put forth the necessary effort. It is not enough to simply subscribe to a couple of newsletters or trading services and feel that your work is done. Although those can be helpful tools, successful traders never blindly follow someone else’s trades without doing a fair amount of due diligence themselves.

As the saying goes, “Trust your gut.” When was the last time you made money on an analyst upgrade? How about a hot tip? Most of the time, your best trades are probably those that you come up with on your own, not from the advice of an
outside source.

3. They keep it simple

The advent of the computer and trading software in the last decade has been both a blessing and a curse. On the upside, it’s leveled the playing field by affording the average Joe to make a living trading the stock market with analysis techniques
previously available only to institutional traders. Ironically, this is also its downside. It’s essential to not get caught up in too many of these tools, or you may become prone to “Paralysis by Analysis”—when traders use too many indicators and find themselves at an impasse, unable to enter good trades or get out of bad ones.

It’s possible to get so caught up in developing a system, tweaking a strategy just a bit more or cramming that last datapoint into a search, that it becomes nearly impossible to capture the information needed for a clear and concise trading idea. Too much information can blur the mind and guide you down the wrong path. The bottom line is that the system or indicators are not what will make you a successful trader; it is what you actually do with the information or ideas that they generate. Keeping it simple is the best way to remain lucid and avoid a convoluted thought process.

4. They have a plan

If you find yourself losing more trades than you’re winning, step back and look at your plan to see where you might have gone wrong. Oh, you don’t have one? Try again. If you want to succeed long-term, this is critical. Without a plan, you might do silly things like double down on losers or even implement the ever-popular strategy of praying that your stocks will come back. A carefully developed plan keeps things objective and prevents emotional trading decisions that will invariably lead to poor money management, excessive losses, and certain failure. Something as simple as deciding definitively when to get in, when to get out (i.e. stop-losses), and how much risk to allocate for each trade are all that’s really needed to create a basic trading plan.

5. They practice risk management and self-discipline

Habit 5 is the implementation of Habit 4. In other words, plan your trade and trade your plan. That’s a mantra of nearly every highly successful trader in existence. The objective in this business is to remain in the game. The more often you walk to the plate, the greater the chance you have of smacking the ball out of the park.

Each time you place a trade, you’re taking on a chunk of risk, and there is potential for loss. Therefore, it is imperative that measures are in place to prevent a disaster if a position does not cooperate as you anticipated. Even if you know all about the protective measures available, they will not be effective unless you have the discipline to implement them as part of your plan. This may sound simple, but trading can be stressful, and stress can lead to bad decisions. Never let pride or conviction get in the way of the discipline that is necessary for risk management to work properly.

6. They practice sound money management

One of the cardinal rules of successful trading is to use proper money management. A trader’s most precious tool is his capital, and that capital must be guarded and put to use in the most efficient way possible. The primary idea behind money management is to preserve capital while implementing strategies that incrementally provide a positive rate of return. The first question that should always be asked is not, “How much can I make on this trade?” but rather, “How much money can I lose?”

You must never be in a position where one trade could wipe out all of the other profits that you have accrued. In addition, you need to perform a risk/reward analysis to determine if the trade is the most efficient use of your capital. The idea is to maximize reward and minimize risk so that you can obtain the largest bang for the buck.while keeping the potential
downside as small as possible.

7. They adapt to change

It may sound like a cliché, but in fact the only thing in trading that stays the same is change. The financial markets are dynamic beasts that have a funny way of humbling you just when you think you have it all figured out. It’s really not possible to have a solid grasp of everything that the market discounts while it moves, and what makes it all so interesting and complex is the multitude of variables that affect the prices of securities.

Generally, we need the benefit of hindsight in order to understand the true reasons why the market behaves the way it does. Since the variables are constantly changing, you can rarely find an exact match when comparing one period of time to another. Instead, successful traders simply adapt their trading strategies to the ever-evolving market.

What’s working now may not work tomorrow; and it’s always important to be flexible enough to adjust to such changes. If, for example, all of a sudden your “perfect system” begins to experience drawdowns, you should be ready, willing, and able to switch gears and institute a new plan (see Habit 4), instead of being paralyzed by losses when it’s already too late.

Conclusion

Remember that trading is just one aspect of our lives, and keeping everything in perspective is part of living a balanced, healthy, and happy life. Whether you are performing well or running through a dry spell, emotions run high at the trading desk. It
is important to mitigate these highs and lows as best you can and attempt to operate with a calm, cool, and collected mindset.

In addition to these seven habits, you should always maintain a reasonable perspective of the market. It owes you nothing and
doesn’t care whether you win or lose. Through your complete acceptance of this and by implementing some basic habits into your own regimen, you too can be a highly successful trader.