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Hi,
As traders we talk about ourselves as trading:
- grains,
- currencies,
- stocks
and shares,
- equity
indices,
- ...
We also say we trade:
- futures,
- options,
- forwards,
- ...
We often describe ourselves as being:
- buyers
and holders,
- long
term traders,
- medium
term traders,
- day
traders,
- ...
We can consider ourselves;
- trend-followers,
- spreaders,
- volatility
breakout players,
- bulls
or bears,
- scalpers,
- faders,
- cycle
traders,
- Gann
traders,
- ...
All these can be true descriptions.
Of course some traders are composites, trading many instruments,
instrument types, trading durations and styles.
But every trader, whether aware of it are not, trades their confidence
level.
Based on assisting many types of traders each at different levels of
success, trading success can be seen as mostly a mirror of confidence
levels.
So how is a high confidence level achieved and how can confidence be
measured?
And how can trader confidence be built and developed and honed over
time?
------------
It will help in the later discussion of confidence building if we look
first at some common problems of trader confidence:
- shallow
confidence (compared to deep-rooted confidence),
- over-confidence.
Shallow confidence is short-lived, easily shattered and thus of limited
value to a trader.
An analogy might be of a teenager trader who is brimming with shallow
confidence. He/she has not experienced a major and rapid
market move and is innocent or naive about margin changes and computer
problems and difficulties getting through to his/her broker and increased
bid-offer spreads, let alone the clearing house instructing her/his
broker to close out her/his positions.
Over-confidence can undermine the other components of confidence over
time. So over-confidence is not just a 'disaster
waiting to happen', it can also undermine real confidence in its
wake.
An analogy for over-trading based on over-confidence again might be the
teenage driver who thinks he/she can go round corners at 120 miles an
hour on public roads and survive. The ensuing crash (this
time or next) might dent the confidence in driving for years to
come.
The common features in these analogies is:
- lack
of experience,
- lack
of learning from experience.
Shallow confidence can lead to:
- 'pulling
the trigger' problems,
- over-riding
trading signals,
- going
for tips,
- increased
stress,
- trend-followers
'cutting profits short',
- ego
damage,
- self-sabotage,
- ...
Over-confidence can lead to:
- over-trading,
- increased
stress,
- ignoring
warning signs,
- feelings
of invulnerability,
- ego
damage,
- self-sabotage,
- ...
So to build deep-rooted, reality based confidence is a matter
of:
- gaining
sufficient experience,
- learning
to learn from experience,
- using
learnings skills and experience in focused areas.
Gaining Sufficient Experience
This is probably the key reason why most traders fail - they trade
with the big-boys without the gaining sufficient experience.
I will use equity index markets as an example. Similar
concepts apply to other instruments.
A typical unit size traded on equity index markets is $500 a
point. Even so-called 'mini' contracts are $50 a
point.
This is just too big for most new players to gain the experience and
preserve their capital while gaining that experience.
The result is a drop-out rate of 95% who have learnt something but are
not quite sure what they have learnt. Some come back
for more when they have saved more capital, still not realising the
problem of trade size. They have not heard of risk of
ruin calculations, and anyway, they did not come to trading to do that
kind of work.
Experience takes time. So to get the experience of
trading without being shunted out of the game prematurely, traders need
to learn on an inexpensive field of play.
Technology has come to the rescue. Internet
dealers exist where you can place a 1 cent a point play on the S & P
500. That is 5,000 times smaller than the 'mini'
contract and 50,000 times smaller than the full-sized contract.
If a 1 cent trade up trade on the S&P 500 is placed and the index
falls to zero before the trader can exit, he/she has just lost the price
of a cheap restaurant meal. Not his/her
ego. Not his/her entire trading capital.
Experience is now available more cheaply by over a 1,000 fold - yet many
traders do not take the opportunity - some prefer the ego value of
playing in the big-boys game, others are just ignorant of
alternatives.
They are perhaps in denial of the need for time to gain experience, or
are ignorant of the opportunities afforded by the internet, and many will
pay the price of loss of participation in the trading game or
worse.
The internet can also save traders costs as real-time prices (updates
every 20 seconds or better) are provided free of charge. Also
the equivalent of a $20 (or more) brokerage round turn can be less than
five cents.
So lack of experience is no longer a function of availability of capital
or opportunity - more a reluctance to see yourself as 'in training' and
act accordingly.
Learning from Experience
At school we are rarely taught how to learn.
It is just, mostly falsely, assumed we have learnt how to learn at
home.
To learn from experience we have to digest that experience.
Most of us are too shallow to fully digest the implications of our
experiences and to modify our beliefs and behaviours to effectively learn
from any experience.
Common aspects of shallow learning include:
- wallowing
in emotions (just fun you know and showing off),
- not
realising the importance of timing,
- not
knowing about the power of our beliefs,
- unwilling
to change our beliefs,
- not
knowing how to change beliefs,
- unwilling
to modify our behaviour,
- unaware
of how to consolidate behavioural change,
- ...
You have perhaps learned how to learn when:
- you
understand some of your inner tendencies that stop you learning,
- you
love learning,
- you
have an inkling of how much you still have to learn,
- even
traders who are not in learning mode and talk of nothing but their
last
entry and forecast have something to teach you,
- ...
Focusing on Key Areas
To make best use of our experiences, we need to use the time wisely,
spending as much time and using as much experience as possible on
fruitful learning processes.
Practical areas for focusing on learning skills that directly impact
confidence levels include:
- understanding
market behaviours,
- designing
trading systems/methodologies that are coherent with
identified
market behaviours,
- understanding
effective trader behaviours,
- modifying
your trader behaviour to be congruent with identified effective
trader
behaviours.
There are several techniques that have a direct impact on confidence
including:
- risk
of ruin considerations,
- position
sizing ideas,
- service
concepts,
- ...
Summary
Oh, that I was wise enough to know this about 20 years
ago. I would have developed as a trader much more rapidly and
enjoyed life more.
In practice, I was not ready for this information - I was too shallow in
too many aspects for much of it to stick.
Are you ready?
Do you know any later or better stages - if so why not share your
experience and wisdom instead of lurking?
Unconditional regards, Ric.
www.traderscalm.com
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