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Archive for January 2005

- - -- by Ed Reif»
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RULE #1: Learn to use inaction as a weapon. Most of the time, the market is indeed random. One can only win consistently by avoiding activity most of the time and trading only the few times during the day when a high probability trade occurs. It is our job as traders to wait more than we trade. (William)
One of the best rules anybody can learn about investing is to do nothing, absolutely nothing, unless there is something to do. Most people always have to be playing; they always have to be doing something. They can't just sit there and wait for something new to develop. I wait until there is money lying in the corner, and all I have to do is go over there and pick it up. I do nothing in the meantime. Even people who lose money in the market say, 'I just lost my money, now I have to do something to make it back.' No, you don't. You should sit there until you find something. (Jim Rogers)

RULE #2: Don't get irritated or angered by long session of folding. We are all playing probability over a long run. Understand it. Accept it. Mentally prepare for it. Keeping our heads makes all the difference. (William)

RULE #3: If you've been folding a lot, for a long time in the game, and you're starting to think that maybe it's time you got in and played a few hands again -- that's not a good enough reason. Keep folding.The level beyond this is having no desire to act inappropriately- to be so immersed in the moment and the process that time does not exist and thus impatience does not exist.Great traders have rituals they enjoy for their own sake, a method and a habit that acts as its own reason for being. When you have this mindset, impatience goes away; whatever is in front of you becomes too engaging to worry about what you aren't doing or could be doing.The amount of time a trader should be willing to wait for a good trade is infinite, because with the correct mindset the trader isn't actually “waiting” in the traditional sense; being and experiencing yes, waiting no. (darkhorse)
RULE #4: Don't feel like a martyr when folding.Don't start feeling self-righteous about all this folding you are doing... as if now it owes you (because you've been so good, so disciplined, so patient...). This is a trap... As you keep folding, you must feel neutral about it. (William)
RULE#5: Sometimes others get to play and you don't... But the most important thing is this: you must be comfortable with this - welcome it. Make peace with this idea. Cross your arms and sit back.It is silly to try to catch every swing or worry about missing a move. There are thousands of markets out there and we are missing a play ALL THE TIME. The objective is to execute the business plan with precision over a long run. Precision = Speed. Marginal, wild, random trading will only bring chaos into the statistical equation.There are also internal reasons not to play. The poker adage H.A.L.T (Hungry, Angry, Lonely, Tired) basically says that if you can't play with a smile, don't play at all. And scared money rarely wins. (William)
RULE#6: To win at poker you must embrace the idea of breaking even... A distaste for breaking even can lead us into the valley of pressing and overplaying and other wrongful activity.We have to have a positive mindset for the long run. A one-sided expectation for a short performance interval is just going to chew us up. Breaking even or a loss is just one of the natural outcomes in a statistical run. This is the way our trading plan is supposed to work given the nature of the game... The plan is not broken. The reason we have a plan in place is to help us focus on executing sound decisions under fire. Do not make it difficult by trying to outsmart your own plan. Pressing at the last hour to meet some number in our head is just out of place.When you have a glass of muddy water, you can't make it clear by stirring it. You can't make the mind clear by forcing it one way or the other. Don't force your expectations on your trading; let the Law of Large Numbers do its work in peace. (William)
This is in keeping with what Bo Yoder calls the "win-lose" cycle. I paraphrase his take in one of the stages in the "Stages of a Trader" pdf posted to my Blog:After a while (sometimes a good long while), you notice a particular phenomenon which pops up regularly and seems to "work" pretty well. You focus on this pattern. You begin to find more and more instances of it and all of them work! It’s all true! It Works! Your confidence in the pattern grows and you decide to take it the very next time it appears. You take it, and almost immediately your stop is hit, and you're underwater for the total amount of your stoploss.So you back off and study this pattern further. You go back to the books, back to your notes. And the very next time it appears, it works. And again. And yet again. So you decide to try again. And you take the full hit on your stoploss.Practically everyone goes through this, but few understand that this is all part of the win-lose cycle. They do not yet understand that loss is an inevitable part of any system/strategy/method/whathaveyou, that is, there is no such thing as a 100% win approach. When they gauge the success of a particular pattern or setup, they get caught up in the win cycle. They don't wait for the "lose" cycle to see how long it lasts or what the win/lose pattern is. Instead, they keep touching the pot and getting burned, never understanding that it's not the pot (pattern/setup) that's the problem, but a failure on their part to understand that it's the heat from the stove (the market) that they're paying no attention to whatsoever. So instead of trying to understand the nature of thermal transfer (the market), they avoid the pot (the pattern), moving on to another pattern/setup without bothering to find out whether or not the stove is on.
RULE#7: Regard patience as a central pillar of your game and strategy... Don't assign it a secondary or lesser role.Although the cheetah is the fastest animal in the world and can catch any animal on the plains, it will wait until it is absolutely sure it can catch its prey. It may hide in the bush for a week waiting for just the right moment. It will wait for a baby antelope, and not just any baby antelope, but preferably one that is also sick or lame. Only then, when there is no chance it can lose its prey, does it attack. That, to me, is the epitome of professional trading. (Mark Weinstein)
RULE#8: You cannot apply the principles of Zen until you know the game perfectly -- inside and out.Having the proper attitude of Zen calm and confidence does no good if you do not know the game. Zen will not make up for, or offset, incorrect . . . play. As a result, there is a certain amount of ordinary, old-fashioned work involved in mastering the game -- a certain amount of sweating the white beads before the days of tranquility come along.The most important thing to know, above all things, is exactly how to play the game. No outlook, attitude, or philosophy is as important as this.Good [trading] is not a "mood", it is a series of individual decisions. It does not occur by "Buddhistically" meditating ourselves into some dreamlike mental state, but rather by knowing the game well and being in synch with it -- by inserting ourselves correctly into the flow of what is going on in front of us.No Zen attitude will make up for this lack. You may be quite Zen-like and have all the attributes of Zen calm, but if you play incorrectly, the result is that you will get destroyed. Practice, and long hours at the table, are indispensable.When I first began to cut up bullocks, I saw before me whole bullocks. After three years' practice, I saw no more whole animals. And now I work with my mind and not with my eye. My mind works along without the control of the senses. Falling back upon eternal principles, I glide through such great joints or cavities as there may be, according to the natural constitution of the animal. I do not even touch the convolutions of muscle and tendon, still less attempt to cut through large bones.A good cook changes his chopper once a year, -- because he cuts. An ordinary cook, one a month, -- because he hacks. But I have had this chopper nineteen years, and although I have cut up many thousand bullocks, its edge is as if fresh from the whetstone. For at the joints there are always interstices, and the edge of a chopper being without thickness, it remains only to insert that which is without thickness into such an interstice. Indeed there is plenty of room for the blade to move about. It is thus that I have kept my chopper for nineteen years as though fresh from the whetstone.Nevertheless, when I come upon a knotty part which is difficult to tackle, I am all caution. Fixing my eye on it, I stay my hand, and gently apply my blade, until with a hwah the part yields like earth crumbling to the ground. Then I take out my chopper and stand up, and look around, and pause with an air of triumph. Then wiping my chopper, I put it carefully away. (Chuang Tzu)

RULE#9: Arrive with a system... It is not enough to rely on luck or hope to carry us past the weak parts of our game. These parts must be attended to. The system must be whole and complete... The weak parts must be corrected, or disaster will appear.

RULE#10: Begin by playing tight, but don't forget to stay tight... The important thing is not who possesses the control and discipline at the start of the game, but who possesses it at the middle, the end, and all points throughout.It is easy to have faith in yourself and have discipline when you're a winner, when you're number one. What you've got to have is faith and discipline when you're not yet a winner. (Vincent Lombardi)Stick to a plan despite what happened before and what will happen after. It is less about fighting and more about surrendering. (William)

RULE #11: Don't fall into the "Now Trap."... Players want to win now, today. Results must happen now, in this hand, the one right in front of us... We assign a little more importance to where we are. We make it bigger, more important... But we do this timewise , too - we assign things more importance because they are happening in the present moment... Yet giving greater importance to the present in the game of poker allows us to imagine marginal hands into good hands and good hands into great hands.The market doesn't know you and couldn't care less. Couldn't care less about your entry price, either. Nor about your agenda. It's gonna do what it's gonna do, and that most likely will not include plunging as soon as you've entered your short, or rocketing the moment you've gone long. If whatever the market is doing is inconsistent with your agenda, then get out. But don't expect anything magical simply because you've pressed a key. (Db)

RULE#12: Detach yourself emotionally from the game.Please don't think... that I am showing off when I say that I know the secret of how not to lose but win. I really do know the secret; it is terribly silly and simple and consists of keeping one's head the whole time, whatever the state of the game, and not getting excited. That is all, and it makes losing simply impossible... But that is not the point: the point is whether, having grasped the secret, a man knows how to make use of it and is fit to do so. A man can be as wise as Solomon and have an iron character and still be carried away. (Fyodor Dostoyevsky)

RULE#13: Don't be impatient about patience... Your brain is telling you to play patiently while your emotions are saying, "What's taking so long?" These two must be in alignment.The gatekeeper of our subconscious keeps us from constant behavioral modifications, which means that if you are not a patient type, there is probably more work than just telling yourself to be patient. I think one might have a chance in two ways:1) If you are an enlightened kind of guy, you can tap into your own innate essence for power. The power comes from your strong awareness. All your subtle self-talk and make-believes and all the games your ego plays will evaporate in the expanse of your wisdom. Just like an old man watching children play. 2) Change your internal self-talk. Bypass the gatekeeper and do some behavioral modification. There are two ways to bypass the gatekeeper: (1) use sheer will and persistence and (2) keep changing your self-talk on the conscious level. Eventually you will have nagged your gatekeeper to death. (William)
RULE #14: The long run is longer than you think... Playing only the best hands can be frustrating... Anger and irritability can arise. The emotions can be severely tested. This is where Zen comes in.The only way to turn the corner is to get rid of marginal trades. It is ALREADY a very fine balance. If one injects a few marginal trades into the picture, he quickly screws up the Profit/Loss equation. Making the matter worse, doing so will create chaos in both one’s equity curve and one’s head. Just get rid of marginal trades, don't stare at the monitor the whole day, and learn to maximize profits WHEN appropriate.If we fail to take the responsibility for getting rid of marginal trades, we lose the privilege to trade. Provided one does have a good method, it’s meaningless to try to fix things any other way. Trade LESS, make more. (William)

RULE#15: When you take your emotions out of the game, other players' emotions become visible. When we are focused exclusively on our own emotions (as we often are), the emotions of others tend to be obscured. When we make ourselves neutral, however, we find that the canvas suddenly becomes blank and the emotions of others begin to appear.You can't be "good" by pushing away "bad". If anger arises, instead of getting involved with the content of the thought, rest in the awareness of it. The angry thought dissolves, and a clone arises. Rest in the awareness again. Don't fight the thought or get involved. Give it enough space and it will dissolve. (William)

RULE#16: Be wary of pushing forward aggressively when encountering resistance.This goes along with the concept of non-coercive trading. You don't fight the situation. The cheetah waits only for the weak prey even though it is capable of catching any animal.Besides external conditions, it is also important to be aware of the internal conditions such as H.A.L.T. (Hungry, Angry, Lonely, Tired).So why does one press it? Because one wants perfection, and perfection loses. One has to let go of his agenda and listen to the market. You should know by now that I believe a "natural" trader is the best trader and in order to be a "natural" trader, one CANNOT be the "perfect" trader.For all beginner traders like me, if one truly truly thinks it through and gets this point, it will stop the bleeding. The number of trades (including marginal trades) will go straight down significantly and the whole profit/loss equation will turn around. Only then will one have a fighting chance. (William)
RULE#17: Develop a true indifference to the game. George Leonard writes in Mastery that mastery's true face is often "relaxed and serene, sometimes faintly smiling." You sometimes see this with good poker players - a kind of smiling, ironic indifference to the vicissitudes of fate and the outcome of hands.1. Under emotional distress, people shift toward favoring high-risk, high payoff options, even if these are objectively poor choices. This appears based on a failure to think things through.2. When self-esteem is threatened, people become upset and lose their capacity to regulate themselves. In particular, people who hold a high opinion of themselves often get quite upset in response to a blow to pride, and the rush to prove something great about themselves overrides their normal rational way of dealing with life.3. Self-regulation is required for many forms of self-interest behavior. When self-regulation fails, people may become self-defeating in various ways, such as taking immediate pleasures instead of delayed rewards. Self-regulation appears to depend on limited resources that operate like strength or energy, and so people can only regulate themselves to a limited extent.4. Making choices and decisions depletes this same resource. Once the resource is depleted, such as after making a series of important decisions, the self becomes tired and depleted, and its subsequent decisions may well be costly or foolish. (Baumeister)

RULE#18: Learn from your mistakes... When we factor past lessons in for future play, losses are not losses, but rather stepping-stones toward future correct play. Failure, by its nature, moves us in another direction, away from failure. We need to treat these lessons neutrally. Simply learn from them. Don't take them too much to heart or put too much emotion into them.# Make journals a part of the daily routine. Even if you don’t trade on a particular day, it is valuable to review the day’s setups and behavior at key price levels. Reviewing patterns on different time frames can also help traders internalize the context of the markets they are trading, as well as the interrelationships among those markets. The French scientist Louis Pasteur observed that, in matters of observation, “chance only favors prepared minds”. Replaying market days, reviewing your own performance, and identifying missed opportunities prepares you for future performance, as your increasing familiarity with trading patterns sensitizes you to them in real time (while static charts are better than nothing, they do not capture the unfolding of patterns, the very thing that traders need to be able to recognize and act upon; replay provides the opportunity to see patterns over and over again, accelerating the recognition process).# Incorporate specifics in your journals. If I had to identify the single most common shortcoming among trading journals, it would be their absence of detail. Entries such as, “I lost my discipline; I have to be more patient,” might be nice as post-it reminders, but are inadequate as journal entries. Journals need to clearly state what happened, your assessment of why it happened, and the specific steps you intend to take to deal with the situation in the future. A good rule is that anyone reading your journal should be able to identify and follow the exact same steps that you intend to take in the future. Your journal should be a planning document, not a statement of intentions. (Brett Steenbarger)

RULE #19: Make sure you know when you're on a cold streak... You’re not aware of your condition. You’re not stepping back from it and seeing it -- and, more important, not acting on this information. As a result, as cold as you are, you often find yourself right back in there on the next hand, fighting, struggling, betting...You need to be two people-- one is the guy who is doing it, and the second is the guy who steps back and watches the other guy from a slight distance and evaluates whether the first guy is too tired, too upset, too unfocused, too much on tilt, etc, to be sitting at the poker table, trading, or whatever. Most important, this second guy must have the AUTHORITY to pull the first guy out of the chair if he doesn't like what he sees. (William)The first step in the process of creating consistency is to start noticing what you’re thinking, saying, and doing. Why? Because everything we think, say, or do as a trader contributes to and therefore reinforces some belief in our mental system. Because the process of becoming consistent is psychological in nature, it shouldn’t come as a surprise that you’ll have to start paying attention to your various psychological processes.The idea is eventually to learn to become an objective observer of your own thoughts, words, and deeds. Your first line of defense against committing a trading error is to catch yourself thinking about it. Of course, the last line of defense is to catch yourself in the act. If you don’t commit yourself to becoming an observer to these processes, your realizations will always come after the experience, usually when you are in a state of deep regret and frustration. (Mark Douglas)

This is why I like Wyckoff's approach: gathering data, weighing the evidence, making the best decision one can based on that evidence, understanding that things don't always work out the way they're "supposed" to, regardless of how diligent one is.

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