3/23/2010

Trading psychology issues to think about

Examine your beliefs
Traders trade their belief
Unless your belief change nothing happens.
Behaviour flows from beliefs.
So if you want to change how you trade  your beliefs must change.
Beliefs are often enduring and difficult to change.
When you change your beliefs your mental models change. 
This is the task for new trader: How to develop right mental model for trading. 
If you believe there is an edge in trading earnings or momentum or value, or growth or mean reversion
you will put effort in to making that style and it work for you.
You will put software/databases for efficiently trading a method. 
Absent that you will flirt from one method to another.
Will chase whatever is flavor of the day.
After one year you would still struggle. 
By not following a method and taking trades based on whatever someone says,
sometime you will be lucky but you will not be consistent.
If you want to be consistent you need a trade setup which you trade day in and out.
Think setups. 
Beliefs change is the foundation of everything. 
Self efficacy beliefs are important
Learning is complete and behavioural change happens only when "self efficacy beliefs" change.
Your success in trading will be a function of your self efficacy beliefs. 
the performance difference between two individuals 
ultimately boils down to their self efficacy beliefs. 
Every year thousands will try trading, the few who survive and prosper do so 
because in the process of learning they enhance their self efficacy belief.
Self efficacy belief is your own  judgments of your capabilities to organize and execute a plan of action.
Self efficacy beliefs change through 4 processes out of which most important is mastery experience.
 (I have written about self efficacy a lot in the past)
The process of achieving mastery experience involves purposeful  engagement  in tasks and activities.
A interpretation of  the results of those tasks and  actions. After that  the interpretations is used
to develop beliefs about your own  capability to engage in subsequent tasks or activities of similar kinds
and act in concert with the beliefs created. This is the goal of any trader who want to learn to trade.
Mastery experience is not available as a pill like the blue pill which you get, 
and once you take it presto  magical things happen and 
you furiously start washing your vintage car.
Your key challenge as a independent trader is to develop a plan for gaining mastery experience yourself.
How can you do it.
If you can answer that 75% of your trading problem will be solved.
What is your  trading plan for today morning10 minutes spent on developing a plan will significantly improve your trading.
What is your plan if your view is
 bullish on overall market
If you are bullish you should have breakout anticipation list ready.
What is your plan if your view is
bearish on the overall market
If you are bearish have probable shorts list ready.
What "method" is driving your
 bullishness or bearishness
Is it logical or based on questionable premise
or second hand information.
The most critical thing for you is to have your own judgement about market.
It does not matter what Faber says or Gartman says or Prechter says 
or some Harry, James, or Barry says. 
Unless you understand how to shut out the noise from all other sources and form 
your own opinion based on your own logical method 
you will have little progress in your trading. 
Become "methodology" and "process" focused and not "opinion" focused. 
Whenever you read any opinion look at what process or
method lead that person to arrive at that opinion.
If you know that you can replicate that opinion. 
If you see anything on this site it is process focused. 
Similarly you need to develop your own processes and fine tune it. 
That process orientation will give you long term success in trading. 
What is your pre market trading plan for trading
What data sources you must monitor
 in the morning for that
If you identify a good trade in pre market
how will you enter it
Have you thought of where you would put stop,
how much you will risk on them
What will you do if after entry it does not act
 as expected
Where and how will you exit the trade

If you set up everything you will have a  trade  factory.
Trading opportunities will show up and then your task is to execute those trades.
There is an edge in execution.
Think like a athlete. They mentally rehearse their moves.
Pre think everything.
If you do this 30 days in a row it becomes automatic.
That is the implicit learning principle.
Many people in the beginning come with the attitude that they will start trading,
then in few weeks  buy a island in some sunny place.
Then will  issue buy and sell order  while army of  bikini clad girls hover over them.
Before you start dreaming about trading while some bikini clad girl gets you a drink and
another waxes your ear hairs, you first need
to put in efforts to master trading and get organised.
What is your plan for managing :"each" of
 your position
What is driving that decision
You don'y have to write it down, but the process of thinking about it is critical.
You need to develop this discipline. 




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