Trader's Psychology

50 Common Interview Questions And Answers

2007-09-04T08:52:00.000-07:00

Review these typical interview questions and think about how you would answer them. Read the questions listed; you will also find some strategy suggestions with it.

1. Tell me about yourself:
The most often asked question in interviews. You need to have a short statement prepared in your mind. Be careful that it does not sound rehearsed. Limit it to work-related items unless instructed otherwise. Talk about things you have done and jobs you have held that relate to the position you are interviewing for. Start with the item farthest back and work up to the present.

2. Why did you leave your last job?
Stay positive regardless of the circumstances. Never refer to a major problem with
management and never speak ill of supervisors, co-workers or the organization. If you do, you will be the one looking bad. Keep smiling and talk about leaving for a positive reason such as an opportunity, a chance to do something special or other forward-looking reasons.

3. What experience do you have in this field?
Speak about specifics that relate to the position you are applying for. If you do not have specific experience, get as close as you can.

4. Do you consider yourself successful?
You should always answer yes and briefly explain why. A good explanation is that you have set goals, and you have met some and are on track to achieve the others.

5. What do co-workers say about you?
Be prepared with a quote or two from co-workers. Either a specific statement or a
paraphrase will work. Jill Clark, a co-worker at Smith Company, always said I was the
hardest workers she had ever known. It is as powerful as Jill having said it at the interview herself.

6. What do you know about this organization?
This question is one reason to do some research on the organization before the interview. Find out where they have been and where they are going. What are the current issues and who are the major players?

7. What have you done to improve your knowledge in the last year?
Try to include improvement activities that relate to the job. A wide variety of activities can be mentioned as positive self-improvement. Have some good ones handy to mention.

8. Are you applying for other jobs?
Be honest but do not spend a lot of time in this area. Keep the focus on this job and what you can do for this organization. Anything else is a distraction.

9. Why do you want to work for this organization?
This may take some thought and certainly, should be based on the research you have done on the organization. Sincerity is extremely important here and will easily be sensed. Relate it to your long-term career goals.

10. Do you know anyone who works for us?
Be aware of the policy on relatives working for the organization. This can affect your answer even though they asked about friends not relatives. Be careful to mention a friend only if they are well thought of.

11. What kind of salary do you need?
A loaded question. A nasty little game that you will probably lose if you answer first. So, do not answer it. Instead, say something like, That's a tough question. Can you tell me the range for this position? In most cases, the interviewer, taken off guard, will tell you. If not, say that it can depend on the details of the job. Then give a wide range.

12. Are you a team player?
You are, of course, a team player. Be sure to have examples ready. Specifics that show you often perform for the good of the team rather than for yourself are good evidence of your team attitude. Do not brag, just say it in a matter-of-fact tone. This is a key point.

13. How long would you expect to work for us if hired?
Specifics here are not good. Something like this should work: I'd like it to be a long time. Or- as long as we both feel I'm doing a good job.

14. Have you ever had to fire anyone? How did you feel about that?
This is serious. Do not make light of it or in any way seem like you like to fire people. At the same time, you will do it when it is the right thing to do. When it comes to the organization versus the individual who has created a harmful situation, you will protect the organization.
Remember firing is not the same as layoff or reduction in force.

15. What is your philosophy towards work?
The interviewer is not looking for a long or flowery dissertation here. Do you have strong feelings that the job gets done? Yes. That's the type of answer that works best here. Short and positive, showing a benefit to the organization.

16. If you had enough money to retire right now, would you?
Answer yes if you would. But since you need to work, this is the type of work you prefer. Do not say yes if you do not mean it.

17. Have you ever been asked to leave a position?
If you have not, say no. If you have, be honest, brief and avoid saying negative things about the people or organization involved.

18. Explain how you would be an asset to this organization
You should be anxious for this question. It gives you a chance to highlight your best points as they relate to the position being discussed. Give a little advance thought to this relationship.

19. Why should we hire you?
Point out how your assets meet what the organization needs. Do not mention any other
candidates to make a comparison.

20. Tell me about a suggestion you have made
Have a good one ready. Be sure and use a suggestion that was accepted and was then
considered successful. One related to the type of work applied for is a real plus.

21. What irritates you about co-workers?
This is a trap question. Think real hard but fail to come up with anything that irritates you.
A short statement that you seem to get along with folks is great.

22. What is your greatest strength?
Numerous answers are good, just stay positive. A few good examples:
Your ability to prioritize, Your problem-solving skills, Your ability to work under pressure, Your ability to focus on projects, Your professional expertise, Your leadership skills, Yourpositive attitude.

23. Tell me about your dream job.
Stay away from a specific job. You cannot win. If you say the job you are contending for is it, you strain credibility. If you say another job is it, you plant the suspicion that you will be dissatisfied with this position if hired. The best is to stay genetic and say something like: A job where I love the work, like the people, can contribute and can't wait to get to work.

24. Why do you think you would do well at this job?
Give several reasons and include skills, experience and interest.

25. What are you looking for in a job?
See answer # 23

26. What kind of person would you refuse to work with?
Do not be trivial. It would take disloyalty to the organization, violence or lawbreaking to get you to object. Minor objections will label you as a whiner.

27. What is more important to you: the money or the work?
Money is always important, but the work is the most important. There is no better answer.

28. What would your previous supervisor say your strongest point is?
There are numerous good possibilities:
Loyalty, Energy, Positive attitude, Leadership, Team player, Expertise, Initiative, Patience, Hard work, Creativity, Problem solver

29. Tell me about a problem you had with a supervisor
Biggest trap of all. This is a test to see if you will speak ill of your boss. If you fall for it and tell about a problem with a former boss, you may well below the interview right there. Stay positive and develop a poor memory about any trouble with a supervisor.

30. What has disappointed you about a job?
Don't get trivial or negative. Safe areas are few but can include:
Not enough of a challenge. You were laid off in a reduction Company did not win a contract, which would have given you more responsibility.

31. Tell me about your ability to work under pressure.
You may say that you thrive under certain types of pressure. Give an example that relates to the type of position applied for.

32. Do your skills match this job or another job more closely?
Probably this one. Do not give fuel to the suspicion that you may want another job more than this one.

33. What motivates you to do your best on the job?
This is a personal trait that only you can say, but good examples are:
Challenge, Achievement, Recognition

34. Are you willing to work overtime? Nights? Weekends?
This is up to you. Be totally honest.

35. How would you know you were successful on this job?
Several ways are good measures:
You set high standards for yourself and meet them. Your outcomes are a success.Your boss tell you that you are successful

36. Would you be willing to relocate if required?
You should be clear on this with your family prior to the interview if you think there is a chance it may come up. Do not say yes just to get the job if the real answer is no. This can create a lot of problems later on in your career. Be honest at this point and save yourself future grief.

37. Are you willing to put the interests of the organization ahead of your own?
This is a straight loyalty and dedication question. Do not worry about the deep ethical and philosophical implications. Just say yes.

38. Describe your management style.
Try to avoid labels. Some of the more common labels, like progressive, salesman or
consensus, can have several meanings or descriptions depending on which management
expert you listen to. The situational style is safe, because it says you will manage according to the situation, instead of one size fits all.

39. What have you learned from mistakes on the job?
Here you have to come up with something or you strain credibility. Make it small, well intentioned mistake with a positive lesson learned. An example would be working too far ahead of colleagues on a project and thus throwing coordination off.

40. Do you have any blind spots?
Trick question. If you know about blind spots, they are no longer blind spots. Do not reveal any personal areas of concern here. Let them do their own discovery on your bad points. Do not hand it to them.

41. If you were hiring a person for this job, what would you look for?
Be careful to mention traits that are needed and that you have.

42. Do you think you are overqualified for this position?
Regardless of your qualifications, state that you are very well qualified for the position.

43. How do you propose to compensate for your lack of experience?
First, if you have experience that the interviewer does not know about, bring that up: Then, point out (if true) that you are a hard working quick learner.

44. What qualities do you look for in a boss?
Be generic and positive. Safe qualities are knowledgeable, a sense of humor, fair, loyal to subordinates and holder of high standards. All bosses think they have these traits.

45. Tell me about a time when you helped resolve a dispute between others.
Pick a specific incident. Concentrate on your problem solving technique and not the dispute you settled.

46. What position do you prefer on a team working on a project?
Be honest. If you are comfortable in different roles, point that out.

47. Describe your work ethic.
Emphasize benefits to the organization. Things like, determination to get the job done and work hard but enjoy your work are good.

48. What has been your biggest professional disappointment?
Be sure that you refer to something that was beyond your control. Show acceptance and no negative feelings.

49. Tell me about the most fun you have had on the job.
Talk about having fun by accomplishing something for the organization.

50. Do you have any questions for me?
Always have some questions prepared. Questions prepared where you will be an asset to
the organization are good. How soon will I be able to be productive? and What type of
projects will I be able to assist on? are examples.

The Psychological Side of the Trade

2007-01-26T06:49:00.000-08:00

We live in a speculative financial world. In an ideal, basic economic society, you could imagine how goods and services would be exchanged in a matter-of-fact and straightforward way: A farmer tells a hunter, "It took me two days to produce 30 gallons of milk, and it took you two days to deliver a butchered deer, so let's make an even trade." In modern times, though, the value of goods and services are based to a significant extent on opinions, rather than on an objective, tangible value. We frequently buy houses that are overvalued based on the assumption that they will increase in value. We pay more for special edition cars not because they are faster than a standard model, but for their rarity, and the feeling of uniqueness they offer. And when it comes to trading the markets, we invest in stocks that are much higher than what a fundamentalist would pay based on dividends. It is the speculative nature of trading that makes it inherently psychological. We try our best to id entify trends and price ranges, but in the end, they are merely educated guesses. There are numerous unknown factors that influence stock prices and we can do nothing more than accept this uncertainty, and try our best to make a profit.

In principle, trading is straightforward. You pick a stock that will go up, buy low and sell high. Or go short by buying to cover and selling when the price goes down. If stocks went up and down as reliably as ocean tides, you could profit easily. Unfortunately, the ups and the downs of the markets are not always predictable. Indeed, if the market were that reliable, traders could not make money. If everyone knew the high and low points, traders could not profit by selling stocks to unsuspecting buyers at high prices, and buying them back when the price falls hard and the masses sell out of fear.

The challenge in trading is handling the psychological uncertainty. In the end, you must take a risk and decide where the price of a stock will go next. For example, consider a stock that has a clearly defined price range. Suppose that the stock traded between $50 and $52 for the past five years, and suppose there was clearly defined support areas at $50 and the price could not break through the resistance level of $52. But what happens when the price reaches $54 and has high volume? Where do you think it will go next? Will it move higher than $54? Will $52 be the new support area, or will the stock go down to the support area of $50? This is where you must make an educated guess. You must carefully review all available information and decide where new support and resistance levels will fall.

We frequently must make decisions where we are required to guess what will happen next, but the markets are often fickle. We must beat out other market participants and sell them stocks that are at a high point, and buy stocks from them that are at a low point. It's a matter of psychology. What do they think and what do you think? The one who is right is the one who wins.

What's the True Value?

2007-01-26T06:48:00.002-08:00

The release of PlayStation 3 consoles is like the tulip mania of 1636. There weren't enough game consoles to satisfy consumers; people believed they were valuable and the price skyrocketed. Some waited in line for a week just to get a console. But not all those people camping in front of electronics stores wanted to play video games. Many wanted to resell the products on eBay. Between the launch of PlayStation 3 and last Friday, over 14,000 PlayStation 3 consoles were sold on eBay for an average price of $1200. That's about twice as much as the list price. Is it worth it? It's all a matter of opinion. It's merely a function of supply and demand. Sound familiar?

In an interview with Innerworth, market observer Sam learned years ago from trading on the floor of the exchange that the financial markets are nothing more than the same kind of marketplace we see on eBay or any other auction. "When I saw how people made money on the trading floor, I realized it was nothing more than a marketplace. A buyer tries to take advantage of a seller and a seller tries to take advantage of a buyer," Sam observes.

What is the "true" price? It's all a matter of opinion. Buyers try to buy low and sellers hope to sell for a profit. But in the end, it's difficult to accurately gauge the "true value" of a stock, and thus, some traders win and some traders lose. As Sam observed on the floor, "You often see people buy something that is much too expensive, and see people selling at a price that, according to the chart, is much too cheap." It makes you wonder if there is a reasonable way to estimate what the optimal price of a stock is, but Sam argues, "The truly objective information on a price chart are areas of support and resistance. Support is where we find willing buyers. Resistance is where we find areas of willing sellers. Any time you see these facts, focus on them. And then focus on the trend." Trading profitably is often a matter of making an educated guess as to how much the masses will pay. Just like PlayStation 3, it doesn't matter what the list price is; all that matters is wh at people will pay at any given time. And that's how the markets work. If you can get in and get out at the right time, you will make a profit. If you buy too high, or sell too low, you will miss out.

Knowing when to buy makes all the difference. Sam warns, "I always remind myself how to make money trading: If I buy something, the only way I can make money is if others buy from me at a higher price. If I'm planning to sell something, the only way I can make money on a short position is if there are people who need what I'm trying to sell." But many times, novice traders forget these basic principles. They buy and sell at the wrong time. In the end, you can never know for sure when new highs will break through resistance levels or when a stock will drop to new lows. That is what makes trading a challenge: You never know what to expect next. The best you can do is realize "value" is a subjective concept, and that winning traders accept the uncertainty and figure out ways to profit from it.

Risk Management: Protecting Your Account Balance and Your Emotions

2007-01-26T06:48:00.001-08:00

The markets go up and down, and so will your account balance if you are not careful. Winning traders manage risk. There are many ways to manage risk. Some traders patiently wait for high probability setups, while other traders limit the amount of money they risk on any given trade. What strategies do you use to manage risk? How do you compare to other traders?

We asked a group of Innerworth subscribers to take the following true-false quiz. If the item is true for you, give yourself a score of 1 for the item. If you think it is false, give yourself a score of 0. Answer true or false for each of the following items, and see what score you get:

1) I stick to my stop loss rules regardless of how I feel when the price approaches my stop-loss point. 2) I never risk more than a small portion of my trading capital on any given trade. 3) Before I make a trade, I always determine my risk limit and my profit strategy, taking into account my capital. 4) I keep records of my past trades and carefully analyze them from time to time. 5) I always develop stop-loss rules before executing a trade.

What score did you get? If you received a score of 0, 1 or 2, you scored in the lower quartile, which means that less than 25% of the Innerworth subscribers who took this quiz obtained a score as low as yours. In an analysis of our database, we found that individuals who scored in this range were stressed out while trading, experienced unpleasant emotions, lacked disciplined, and had low self-esteem. In contrast, if your score was 5, you scored in the upper quartile, which means that 75% of the Innerworth subscribers who took this test obtained a lower score than yours. We found that individuals who scored in this range tended to approach trading in a carefree manner, showed self-control, and preferred a logical well-planned approach to trading.

How well do you manage risk? Managing risk not only protects your account balance, but it also helps you control your emotions. In our study of Innerworth subscribers, we found that traders who managed risk were less stressed out and tended to experience positive emotions. These findings suggest that you will feel calmer if you minimize risk. If you are not doing so now, it's easy to start taking some basic precautions. For example, develop a well-formulated trading plan before you execute a trade. Determine how much risk you are taking up front and decide if you want to actually take that risk. When used properly, by accounting for price fluctuation, protective stops are another effective way to minimize risk. Risking only a small portion of your account on a single trade is also useful. If you truly feel that risk is at a minimum and bearable, you will feel safe and relaxed. And when you feel relaxed, you will be able to trade more freely, creatively, and profitably.

Confident, Persistent, and Profitable

2007-01-09T05:10:00.000-08:00

Are traders naturally born? Can anyone learn to trade? What is the ideal psychological profile of the winning trader? At Innerworth, we have tried to find answers to these questions, but definitive answers are often elusive. We keep trying, though. We've surveyed traders and interviewed them. And we have tried to analyze interviews from Jack Schwager's classic "Market Wizards." Our conclusion: There doesn't seem to be one way to trade or one ideal trader personality. Consider Michael Marcus who was interviewed in "Market Wizards." Rather than taking a calm, unemotional approach to trading, he often seemed to fall prey to his emotions. He made large impulsive trades and lost. He sometimes let his emotions get to him to the point that he tried to use medications to gain control. His early experiences didn't permanently trip him up. He learned from his mistakes. His persistence won out, and he eventually learned to make a fortune.

Jack Schwager described Mr. Marcus as "aloof, almost withdrawn." This may be a useful personality characteristic for trading the markets. Aloof and withdrawn people tend to be focused. They may have difficulty dealing with people, but they are also likely to approach the markets with a single-minded passion to succeed. Mr. Marcus is also highly intelligent. He earned membership to Phi Beta Kappa at the prestigious Johns Hopkins University and won a scholarship to attend Clark University for graduate school. This early academic success clearly gave Mr. Marcus rock solid confidence that carried over into the trading realm. When asked, "Did the thought ever enter your mind that trading was not for you?" Mr. Marcus replied, "No. I had always done well in school, so I figured it was just a question of getting the knack of it." In our Innerworth studies of traders, we have found that regardless of whether it is succeeding in sports, academics, or business, the people who develop un wavering self-confidence as a result of these early experiences are the people who persist, hone their skills, and master the markets. Mr. Marcus strongly believed in his ability to achieve financial success. But his success didn't come easy. He admitted, "I lost. It was the same old cycle of borrowing money and losing it." Despite making loss after loss, Mr. Marcus persisted until he was able to achieve profitability. At times, he lost over five times his yearly salary, but he kept trading until he gained a wealth of experience to trade the markets profitably.

The markets are difficult to master. Many try but few make it. Mr. Marcus' "Market Wizard" interview reveals what it takes to succeed. A winning trader has confidence in his or her ability to succeed. Winning is never guaranteed and may take the stamina of a marathon runner. It is necessary to face setback after setback. You may get beaten down at times and feel like giving up. Your emotions may go up and down with your account balance. But in the end, you must believe in your abilities, and that if you put in enough hard work, you will achieve the success you have been seeking.

All In Perspective

2007-01-09T05:09:00.002-08:00

As a novice trader, Jack has just put on his tenth trade. He's still new to trading, but he is optimistic that he will be successful. He wants to succeed. He thinks, "I want to prove that I'm a good trader. I hope I do well on this trade. The outcome is critical to the rest of my trading career."

Jack's thoughts and feelings are understandable. Whenever we start a major endeavor - starting college, a new job, or whatever - we want to succeed. And it's nice to have early success. The first few moments of a major life turning point seem especially significant. When we aren't successful immediately, the initial letdown often haunts us for a long time, interrupting our train of thought, and shaking our self-confidence. Despite the reasonable hope of an early triumph, however, it's vital to keep the proper perspective when approaching trading: one must always think of the big picture, the long run.

Any single trade is of little importance. Experienced traders know this fact, and live by it as if it were doctrine. Even though they may focus all their energy on the current trade, they know it is of little real significance in the long run. It is wise to put each trade in proper perspective. It is essential that you consider, at least in the back of your mind, that a single trade is just one among a series of trades, and that the bottom line is the overall outcome across the series, not any single outcome.

There are psychological advantages to taking this perspective. When you downplay the outcome of any single trade, it is less critical to your ego. When viewed as just one in a long line of trades, it's easier to tell yourself, "It doesn't matter. There will be many more trades and opportunities to come." If there isn't much riding on the outcome of a trade, it will free up precious psychological energy. You won't waste your limited psychological resources needlessly worrying about the outcome. You will feel free and creative, ready for whatever happens next. All your attention will be focused on trading your plan, objectively analyzing how market moves fit into your plan, and taking decisive action for a clean exit.

Putting a trade in proper perspective is not only psychological, however; it also involves proper risk management. To survive the learning curve, or a severe drawdown, you must limit your risk on any single trade. By limiting your stake to a small percentage of your trading capital, the trade will have minimal financial significance. In reality, it will be of little consequence compared to your overall account balance. Merely believing that a trade is insignificant doesn't work very well unless in reality it is not significant. For example, it's hard to fool yourself into thinking that a trade is insignificant if you have a month's salary on the line on a single trade, and you can't afford to lose it. The stress will be unbearable. It's important for your psychological and financial security that you limit the risk on any single trade. Again, think in terms of the big picture. You don't need to make money on a single trade; the overall results across a series of trades are al l that really matter.

When starting a new endeavor, it's natural to want to do well on every single attempt. All of one's hopes and dreams may be placed on a few key trades, for example. But trading is much too difficult to think you can quickly make a few trades and be set for life, with all your aspirations met. The successful trader is in the game for the long haul. The trading lore is replete with stories of traders who made huge profits only to lose it all later. You may see some big trades in your career, which will provide numerous war stories that you can use to entertain your friends for hours, but when going into a trade, it's vital to keep the trade in proper perspective. It's still just one trade of the many you will make in your career.

The Day After Thanksgiving: A Day To Rest or a Day to Trade?

2007-01-09T05:09:00.001-08:00

It's the day after Thanksgiving. Are you going to trade today? Some traders believe that stock prices tend to rise the day after Thanksgiving. Perhaps you have anticipated that rise and are holding a few positions in the hopes that you can sell into the strength brought on by the holidays. Nevertheless, there's going to be less trading today just by the mere fact that the markets are closing early. Who knows what will happen? Historical studies may support the claim that prices go up after Thanksgiving, but history doesn't always repeat itself. You might consider taking another day off. Why not make it a four-day weekend? If you want to trade the markets profitably in the long run, it is vital to get your rest. Trading takes psychological stamina and if you trade chaotic, hectic markets too long without a break, you will soon find that you cannot concentrate fully.

Research studies have demonstrated that when people's psychological resources are taxed to the limit, they make impulsive mistakes. Maintaining discipline takes psychological energy, and when you use it up, you have to rest. Just like a muscle, when you are worn out, you need to take a break and regain your strength. It's vital to consider that the mind has limited energy, and that after putting in a hard and tedious effort, you must take a rest and rejuvenate, so you can face the market action with a renewed sense of vigor. Holidays are one of the best times to stand aside and regain your composure.

Trading often comes down to performing in a peak performance state at a few key moments. To take advantage of these key moments, you must be relaxed. If you have strained your mental "muscles," you'll have difficulty taking advantage of these opportunities. Your mind will be elsewhere or you'll be too tired to act decisively. When you're tired, it's hard to gauge market action accurately. You'll be prone to decision-making biases and you may act impulsively because you are too tired to patiently wait for the proper signals to enter or exit a trade. By staying relaxed yet full of energy, you'll be able to trade in a logical and disciplined manner.

You don't need to perform at a peak performance state every minute of your life. Many people can work for only a limited number of hours a day, and if we try to work in marathon stretches, it eventually catches up with us, and is shown by our weak performance. Just as a runner must rest when his or her muscles ache, it's vital to take breaks after a marathon work session.

Part of trading profitably is the acknowledgment of your limitations and putting together sensible ways to work around them. Don't think you are superhuman. Take a few days off to rest and regain your mental and physical strength. Get plenty of rest so that next week, you will be ready to handle whatever the market throws at you.

Seeking Out Protection From Loss

2007-01-09T05:08:00.000-08:00

You must risk money to make money. It is sad, but true. You cannot possibly make profits in the markets unless you put up the money. Many people hate taking risks, especially with their money.

Risk is a part of everyday life, though. We take risks all the time, even when we complete the most mundane tasks, such as driving our children to school or flying home to visit our family for Thanksgiving. We even take risks while staying home. We can slip in the bathtub, for example. We can't escape risk but we can take reasonable precautions to protect our interests. When you drive down the street, for example, it's prudent to wear seatbelts and carefully drive at a safe speed. When it comes to trading, it's also vital to have proper protection. Adverse forces may go against your trading plan, and unless you protect yourself, you run the risk of getting hurt, and with trading, that often means substantial hits to your account balance.

You must be able to handle risk in order to trade profitably. When we are afraid to take a risk, we shrink back, paralyzed and defeated. So what can we do? On any given trade, we can alleviate some of the fear by risking a small percentage of our trading account on a single trade, and taking it "one trade at a time" instead of focusing immediately on the onerous goal of achieving a specific return across the entire series of trades. If you can avoid ever thinking of the long-term goal of huge success, you could probably trade forever without hesitation.

There are other obvious ways to feel protected and safe. For example, you can use a protective stop to make sure that you restrict the amount you can lose on any given trade. By looking at the past performance of a stock, you can estimate an ideal stop loss point that protects you, but does not allow you to get "stopped out" too early. Perhaps the most important form of protection, though, comes in the form of a well-developed trading plan. If you know specifically when to enter and when to exit, you can execute the plan even while feeling afraid of losses. You can easily follow your plan, freeing up your mind to focus on your immediate experience rather than the long-term consequences of a trading loss. It's also important to anticipate adverse events as part of your trading plan. Make sure that earning reports or a rate hike announcement isn't going to ruin your trading plan. Careful and precise planning is the best way to protect your account balance.

Just like engaging in a dangerous sport, you feel better when you know that you have some form of protection. Athletes protect themselves with helmets, and airbags and seatbelts protect us as we drive in rush hour traffic. Successful trading also requires adequate protection. Protection not only ensures that you can survive to trade another day, but it also allows you to feel relaxed while you execute and monitor a trade. So protect yourself. If anything can go wrong, it usually does. You don't have to worry, however. If you take precautions, you'll survive the inherent setbacks in trading, and end up winning in the long run

Carefree or Stressed Out?

2007-01-09T05:07:00.000-08:00

Carefree or Stressed Out?

Winning traders approach the markets with an optimal mindset. They trade in the zone, but it's surprising how stress can impact your ability to enter this ideal state of mind. You can carefully delineate a complete trading plan, for example, where every aspect is spelled out clearly from when to enter and when to exit, and you may have a wealth of experience executing such plans, but when you are stressed out, even the most simple task can be difficult to carry out. You may miss an obvious signal, which would be apparent in a more rational state of mind. When you are nervous and slightly overwhelmed, your psychological perceptions and intuition are restricted and closed off. You miss little things and have a tendency to respond impulsively. We may forget to place an order according to plan or we may misread a signal and close out a position too early. These little errors can be frustrating. Are you easily stressed out by trading, or do you approach trading with a carefree, re laxed mindset? Here's a quiz to see how you compare to other traders.

We asked a group of Innerworth subscribers to take this true-false quiz. If the item is true for you, give yourself a score of 1 for the item. If you think it is false, give yourself a score of 0. Answer true or false for each of the following items, and see what score you get:

1) I often over-analyze an investment decision. 2) I often feel that there is too much information to take it all in. 3) I wish that I had more time to think through my decisions. 4) When I think about my life, I frequently think pessimistic thoughts. 5) I tend to hesitate at critical moments of investing.

What score did you get? If you received a score of 0 or 1, you scored in the lower quartile, which means that less than 25% of the Innerworth subscribers who took this quiz obtained a score as low as yours. In an analysis of our database, we found that individuals who scored in this range were more relaxed when approaching trades, and reported making profits trading the markets. In contrast, if your score was 4 or 5, you scored in the upper quartile, which means that 75% of the Innerworth subscribers who took this test obtained a lower score than yours. We found that individuals who scored in this range tended to experience anxiety while trading, had difficulty handing risk, and tended to report mounting losses while trading the markets.

Why are some traders easily stressed while others are more carefree? Some people are too wrapped up in trading outcomes and how an outcome reflects on their value as a person. They may think consciously or unconsciously, "If I win, I'm great, omnipotent, and a champion. If I lose, I'm a sorry failure." When you take this approach to trading, though, it can create a roller coaster ride when it comes to your self-esteem. You'll be up one minute and down the next.

Seasoned traders report that they make the most profits when they aren't expecting them. They observe the markets openly and freely, and suddenly, they make a profitable trade. If you put pressure on yourself, however, you usually choke. Your mind isn't free, but cluttered with feelings of doubt and pressures to succeed. The frustration distracts you, and suddenly, you find it almost impossible to make enough winning trades to come out ahead. It's better to trade in a relaxed and carefree manner. It may be difficult to completely view a trade as a leisurely activity, but there is a lot that you can do to make it fun. You can limit risk so that you know that you can handle a worst-case scenario. When you know that you can't possibly lose too much, you will feel at ease. In addition, don't put your self-esteem on the line with your money. It's just a trade. Don't seek out glory. Just enjoy the intellectual challenge of trading. You win some; you lose some. Focus on playing the game and how fun it is. This approach to trading will allow you to think clearly and freely. You will make more profits if you trade with a carefree attitude.

I Want To Be Impulsive

2007-01-05T01:52:00.001-08:00

The markets keep reaching new highs. Oil prices are at their lowest levels in years. HP profits are up despite a government investigation. Many market indicators are positive. There's a sense of optimism in the air and you can't wait to cash in. It's at times like these, however, that some traders have trouble with discipline. After making a few winning trades, they want to celebrate. It's understandable but potentially dangerous.

Winning traders maintain discipline. Successful trading is a matter of odds. It's vital to get the law of averages to work in your favor. The more trades you make, the more likely you will win. But you can't make impulsive trades or abandon risk limits. After a few winning trades, though, acting impulsively is what most traders want to do. Behavioral economists call this phenomenon the windfall effect. It's much like playing with the house's money at a casino. You win big and you figure you can gamble with wild abandon.

When you trade the markets, however, sometimes you will win but oftentimes you will lose. Losses are commonplace when trading. So when you win, you must retain the profits you make for those times when, by shear chance, your method temporarily stops working. How can you maintain discipline? It isn't as easy as it may seem. Self-control takes psychological energy, and just like physical stamina, when your energy runs out, you get worn out to the point that you can't keep going. Similarly, you can only control your impulses for so long before you feel like acting out and doing something wild and impulsive. Some trading experts suggest recognizing this fact. For example, if you want to act out, stand aside and do something impulsive to get it out of your system. You might want to do something fun and exciting outside the trading arena, or even do some recreational gambling to celebrate, and pat yourself on the back. Once it's over, though, it's time to get back to work.

How else can you maintain discipline? First, admit your limitations. Self-control is like a muscle. You need to practice self-control. Don't try to be superhuman. You can't run a marathon tomorrow if the farthest you had to run in the past year was between your front door and your car. You need to work up to it. Don't expect to be able to maintain self-control without extensive practice. Give yourself time to build up your self-control skills. Second, make a strong commitment to build up your self-control skills. Take the matter seriously. Until you commit to change, you cannot improve your ability to maintain discipline. It's similar to losing weight or quitting smoking. A person must first acknowledge that he or she has difficulty with self-control before change can happen. Admitting that you need to improve your self-control skills goes a long way. Don't trade impulsively. The winning trader is the disciplined trader. The more you can stay calm, rational, and in control, t he more profits you'll take home.

A Solid Plan Equals A Winning Trade

2007-01-05T01:51:00.000-08:00

James B. Rogers, Jr. started the Quantum Fund with legendary trader George Soros. In his "Market Wizards" interview, Mr. Rogers offers some sage advice, "Just don't do anything until you know you've got it right." Many times, traders are in a rush to make profits. And in this rush to win, they often trade without a detailed trading plan. But in principle Mr. Rogers' advice is as true today as when he gave his interview almost 20 years ago.

Mr. Rogers' losses early in his career taught him to acquire an accurate view of a trading setup before executing a trade. He says, "I learned quickly not to do anything unless you know what you are doing. I learned that it is better to do nothing and wait until you get a concept so right, and a price so right, that even if you are wrong, it is not going to hurt you." The price of a stock can be a function of what Mr. Rogers called "hysteria." A stock can be hyped up, greatly exceeding a reasonable estimate of its value. A stock price based on "hysteria" is likely to go down as fast as it went up. It's useful to know if you are trading hysteria. If you are, you may be vulnerable to the whims of the masses.

In his interview, Mr. Rogers preferred to call himself an "investor" rather than a "trader." Jack Schwager's definition of an "investor" is someone who only goes long, whereas a "trader" is willing to go long or short. And since Mr. Rogers was willing to go long or short, he fits the definition of a "trader" according to Jack Schwager. Without getting into a polemic discussion of the differences between traders and investors, there is a common stereotype that traders tend to trade by the seat of their pants. Rather than carefully plan a trade after a thorough consideration of all available information, they look at only a few indicators and execute a trade. There are times when this works well, but there is wisdom in Mr. Rogers' advice to make sure that you fully understand market conditions before you execute a trade. If you know what you are doing and why you are doing it, you will be more likely to make winning trades. If you know that the price is going up because of hype , for example, you may decide to trade a little differently. Rather than buy stocks that are hyped up, you will be better off selling the stocks you held previously that are hyped up, and wait for the hype to end before you buy them back, when they return to a reasonable price.

Whatever you do, however, it's vital to have a solid trading plan. If you can identify the factors that drive the price of a stock, you will be able to make prudent trading decisions. You will have a better intuitive feel for a trade, and will feel confident in your actions. Don't trade leisurely. Trading is a business and when you develop a good business plan and follow it, you will be more likely to profit.

Background Stress: Don't Let It Impact Your Trading

2007-01-05T01:50:00.000-08:00

Have you ever suddenly just closed out a trade for no good reason? You didn't think about it. You just closed it on impulse. Perhaps you felt the stock wasn't moving fast enough, or maybe you were worried it would fall hard, and you just didn't want to see what happened next. As much as we try to monitor our trades in a cold, calm rational mindset, our emotions often seem to get the best of us. The explanation for an emotional outburst may not be apparent at first glance, but in retrospect, we may realize that a host of factors came together in a split second to make us act on impulse. It's vital to gain as much awareness as possible, however. It is useful to know what we are doing and why, and one of the reasons that impulsive decisions happen is that background stress is left unchecked.

Trading is inherently stressful. When your money is on the line, you feel stress whenever you start thinking about losing. The single losses don't matter much, but when losses mount it can be stressful. The losses lurk in the back of your mind. You may not be sure how you're going to make back the losses that have piled up. Other issues may gnaw at you. There could be a host of problems that lurk beneath the surface, from problems with family or friends to a general uncertainty about the future. Any one of these stresses may seem like nothing more than a common, everyday hassle, but when they add up, even a minor setback can set you off. When you least expect it, you lose your cool. And when you do, these background stressors are likely to influence your performance.

It is almost impossible to eliminate all background stress, but you can greatly reduce some of it. You can do a few things to ease some of the strain, like talking to friends and loved ones about your troubles. Whatever you do, it's useful to admit to someone, almost anyone, that you may be in a little trouble. It takes more energy to pretend that you don't have a problem than to merely admit that you may be stuck and that you should just admit it and devise a game plan to get out of it. By uncovering hidden stressors and talking about them, you will feel a sense of relief.

Stress can get the better of you if you let it. It builds up if it isn't released. Many traders find it useful to let it out physically. By going for a run or working out at the gym, you will let off steam. It may seem like a little thing, but it really helps. You will feel a little less stressed out and be able to cultivate a more detached, rational mindset.

The proper mindset can spell the difference between trading yourself into a slump and achieving great financial success. You must focus on the process of trading. Rather than worry about how well you are doing, enjoy every moment. The key is to take it one minute at a time. Don't mull over the past or worry about the future. Just focus on what you can do one step at a time in the current moment you are living. Once you appreciate each moment, and enjoy the intellectual challenge trading offers, you will calm down and trade more freely and creatively. Finally, always remember to run your own race. Don't try to live up to other's expectations, and don't set unrealistically high expectations. Accept what the markets give you. If you live by your own rules, and accept whatever profits you can take out of the markets, you'll feel better, trade better, and you'll take home more profits.

Facts and Figures: A Gold Mine For Some

2007-01-02T07:27:00.000-08:00

Some people like facts and figures; others prefer trusting their intuition and looking for artistic expression in the trading realm. The trading profession is big enough for all kinds of traders, though. There isn't one right way to trade, but the trick is to figure out what you are like and to match your trading style to your personality. Take the data-driven trader, for example. At an extreme, the data driven trader looks for consistency and attempts to find "rules" and conventional wisdom to guide trading decisions. For some data-driven traders, a major preoccupation is to study historical data and backtest ideas until a good fit is discovered. Other data-driven traders enjoy spending their nights scouring reports for a valuable tidbit of information that will give them an edge. If you are the kind of trader that enjoys getting caught up in the
details, using this affinity to your advantage is the best way to profit from the markets.

Consider Aaron. He trades his own hedge fund, and takes a methodical approach to trading. He loves facts and figures, and he is good at using them to make profits. He has had a lifelong interest in mathematics and science that has influenced his trading style. "I backtest everything," he says. "Much of my day is spent backtesting strategies and indicators, and most of them don't pan out. But once in a while I hit a gold nugget, and that's a good day. I think that's the most important thing: backtesting and understanding statistics so I can decide whether historical performance is a fluke or if there's some actual, profitable signal there." How does he feel when his backtesting works? "It's always a surprising and joyous moment when I find an indicator that works and lives up to statistical backtesting."

Are there any drawbacks to his approach? Aaron says, "I think I'm very linear. I can't do multi-tasking very well. I have to do one thing after another. I think that's my weakness. My strength is being very methodical and quantitative." "Sometimes it's difficult to pull the trigger," he admits. "Maybe it's getting close to my stop loss level and I think to myself, it's got to turn around. So I cancel my stop loss order to stay in the trade. Well, it might turn around and go back up, but it might just keep going down, and I'm going to wish I had gotten out and followed the strategy."

Aaron is a successful trader, but not all data-driven traders use their love of facts and figures to their advantage. Dr. Richard Geist, in his book "Investor Therapy," profiled the typical data-driven trader. Although a detail oriented trader may identify information in reports or in data records that more impressionistic traders may miss, he or she often can't separate the forest from the trees. It's hard to see the big picture when you are focused on details. It's important not to get too caught up in a small fact and forget about broader issues. For example, a company may be gearing up to manufacture a cutting edge product, but if few consumers have the money to buy it, or if there is little interest in using the product, sales will be in a slump. Discovering a "hidden" piece of information in an annual report may be a grand discovery, but depending on broader market factors, it may have relatively little impact on the market action.

Some traders are data-driven and use this style of trading to their advantage, like Aaron. Other traders, however, get too caught up in details, and need to modify their approach. There isn't one right way to trade, but it's essential that you match your trading style to your personal strengths. If you are a data driven trader, you may prefer studying facts and figures and trading for the long term. Whatever you decide to do, though, don't be afraid to be yourself. If you like facts and figures, use it to your advantage. You'll profit from it in the long run.

Take It Easy: Relax and Be Yourself

2007-01-02T07:22:00.000-08:00

When learning any new skill, you need to find the right balance between pushing yourself to the limits and setting realistic expectations and goals. But whatever approach you take, you must work with what you've got. You must identify your natural inclinations and work around them. This is especially a challenge for trading. There are two basic types of novice traders: the fearful and the overconfident. Neither type achieves long-term consistent success easily. The fearful are reluctant to put on trades. They are easily frightened. Upon encountering the slightest signal of the trade going against them, they bail out. They don't make money in the long run. The overconfident, in stark contrast, don't show enough caution. They aren't afraid to put large sums of their trading capital on the line, even when their methods are questionable. They have a gung ho attitude. They may stumble upon early success, but usually fail in the end. Fortunately, these are two extremes, with most t raders finding themselves somewhere in the middle. At whatever extreme you find yourself, you'll make the most progress if you work around, rather than try to change,
your basic personality style.

It's useful to be a little fearful, but not too fearful. At least the fearful are sufficiently risk averse that they show enough skepticism to protect their interests. Some people are overly fearful, however. Their central nervous system is easily "activated" and when facing risk, it's unbearable. Traders with this kind of personality style are afraid to put on big trades, and while they are in a trade, they feel uneasy as they wait for the trade to reach the profit objective. Because they panic a little too easily, they sometimes have trouble sticking with their trading plan. They hesitate upon entering a trade, and may exit at the wrong time. Although it's hard for the extremely risk averse to trade in a calm, objective, and effortless style, it doesn't mean that they need to give up trading. One just needs to come up with ways to work around one's limitations. Even some professional traders are reluctant to enter a trade. To work around this personal limitation, some call the trade into a broker with specific instructions, such as where to buy, when to exit, and where to place a protective stop. Similarly, other traders use the automatic settings on their trading software to enter and exit trades at optimal times. Clearly, there are disadvantages to these strategies. It's difficult to use these strategies when trading in an intraday timeframe, for example. It may be necessary to trade weekly swings or make long-term investments. It would also be useful to make every effort to address outside influences that produce anxiety and fear, such as managing risk by trading small positions and using protective stops. (And through practice and the use of professionally administered relaxation training, one can control one's natural tendency to experience anxiety and fear.) But the main point is that one can trade profitably even though one's natural inclinations don't exactly match the ideal trader personality of the cold, rational, objective trader wh o isn't afraid of risk.

The overconfident, novice trader doesn't show enough risk aversion. Overconfident traders think they have more skills than they actually do, and tend to put on trades without adequate preparation. There are many kinds of overconfident traders. For some overconfident traders, their trading behavior was improperly reinforced. For example, they may have learned to trade in a bull market where prices seemed to go essentially straight up. Or their first few trades may have made big profits, purely by chance, and they gained a sense of reassurance and a false sense of confidence because of this run of early luck. Others, ironically, only appear overconfident, but actually, they lack confidence, and just put on trade after trade to hide their feelings of inadequacy. Whatever the reasons, it's vital for survival to admit that as a novice trader, one does not yet have the requisite trading skills to trade with a solid sense of self-confidence. One should be a little skeptical and take proper precautions to manage risk, again, by trading small positions, using protective stops and outlining a very detailed trading plan. It's also essential to set realistic goals. Rather than focusing on unrealistically huge profit goals, which don't match the trading skills of a novice, set moderate goals, which can be achieved. At the same time, it's useful to set ambitious "learning goals." That is, don't focus on the profits, but devote much of your time to learning how to trade. Novice traders make the mistake of overtrading. They think they "should" spend all their time putting on trades, even when the market conditions don't warrant it. Instead, they would do better to spend that time taking classes, reading about new methods, and paper trading. Don't underestimate the importance of building up well-honed trading skills. When you have the skills to trade consistently and profitably, you will truly have rock solid self-confidence. And if you are the kind of person wh o isn't afraid to take a big risk, you'll be especially ready to use your trading skills efficiently. But until then, don't over-leverage your knowledge. Don't be arrogant and overconfident. Be humble, modest, and build up your trading skills.

Whether you lean toward the fearful trader or the overconfident trader, it's useful to identify where you stand on this continuum and take active steps to work around your personality. Relax, take it easy, and give yourself the time you need to master the markets. You'll feel better and trade at your best.

Be Specific: Precisely What Are You Doing Wrong?

2007-01-02T07:21:00.002-08:00

In the trading world, the "Market Wizards" are often elevated to the status of idols. Why not? They have accomplished relatively rare feats. Consider Tom Baldwin, for example, he took what Jack Schwager called a "skimpy capital base" and turned it into a fortune. His "fearless" approach to the markets allowed him to trade aggressively. These tales of success can be inspiring, but they can also create unrealistic expectations. You may start to believe that you need to be a natural born trader to profit in the markets. But successful trading is often a matter of persistence, and it is hard to persist if you believe that trading requires special talents. It is more useful to work under the assumption that profitable trading can be learned. That's not to say that anyone can learn to trade, but if you are relatively intelligent, confident in your ability to succeed, and persist long enough, you can learn how to master the markets. It's all a matter
of taking trading seriously, set ting specific goals, and picking yourself up gracefully after a defeat.

Psychologists have found that many people get fed up and decide to quit when they make broad generalizations about their abilities after a setback. Rather than focus on specific deficits, they view their flaws as very general, enduring, and only about them. They think they aren't intelligent enough or they believe they don't have the right personality to trade. Although this may be somewhat true, it is not useful to think this way. It's much more adaptive to be specific about what you are doing wrong.

Consider the plight of Jack. He is upset because he lost money on a trade. At about 11:00 this morning he noticed that a stock rapidly went up $1 since the open. He bought 1,000 shares, but the price went down just as fast as it went up. He decided to cut his losses. What should Jack do at this point? First, let's consider what he shouldn't do: He should not attribute his loss to an enduring inability to trade. He should not think pessimistic thoughts like, "I'll never learn to trade profitability. I just don't have enough talent." What he should do is identify where he has specific problems with his approach to trading. For example, he did not have a detailed trading plan. In addition, he did not study the stock closely enough before trading it. By identifying specific problems, rather than making global statements about his abilities, he can make a specific plan for improving his method. He can learn to trade better. He can develop more detailed trading plans. He can study a company's stock chart more closely to get a good idea of the range that the price of the stock moves in a given timeframe. When his problems are stated specifically, they can be changed more easily.

Many people jump to the conclusion that their performance is closely linked to innate abilities. But oftentimes, the more you practice trading, the better you will become at it. Don't be afraid to identify specifically what you are doing wrong. The faster you do so, the faster you will improve, and the faster you will take home the profits you desire.

A Big Win: A Time to Splurge or a Time to Be Careful?

2007-01-02T07:21:00.001-08:00

Recent election results had a positive impact on the markets? Did you profit? Did you have a windfall? Behavioral economists find over and over again that when people receive an unexpected windfall, they act as if it is free money. There is a strong tendency to put on trades unnecessarily, haphazardly, and without a specific plan. Overtrading doesn't usually pay off, however, as shown by Drs. Barber and Odean, in what
has now become a classic study in behavioral finance.

Barber and Odean studied trading patterns at a large brokerage. They identified overtraders based on the number of trades they made and examined the amount of profits each group realized over the course of a year. They wanted to see whether overtraders could beat investors who used a simple buy-and-hold strategy, which is a relatively conservative trading strategy. Average annual turnover was 250% for overtraders and 2.4% for buy-and-hold investors. It is quite interesting, however, that although both groups achieved an 18.7% gross return on their investments, the net return differed greatly. Due to commissions, the overtrading group had a net return of 11.4% while the buy-and-hold group had a return of 18.5%. Overtraders were more likely to make trades after a big windfall.

Even seasoned traders may struggle with overtrading. Consider what a seasoned professional told us in an interview with Innerworth staff. "I have always struggled with, and still struggle with, becoming overconfident. When I'm doing well, I tend to become complacent in the management of the money or protective stops. Or I tend to start trading bigger size just because I have the extra money. I also tend not to be as diligent when it comes to doing my homework. I become more whimsical."

"In contrast, when I'm really working on the trades, I ask questions like, Where did it open? Where did it close? If it opens higher, where's the floor going to open it higher? Where do I expect the commercials to come in? What's the volume? What's the scale? What does it look like on the weekly? What's it look like on the daily? I get into the details. My problem is when I'm happy and making a lot of money, all of a sudden I don't worry about the details."

What is the solution? What does he do when he finds he is becoming overconfident?

"The first thing I do is start looking to see if I'm making mistakes. The other thing I do is to use a trading diary, and write down why I made the trade. The problem with human beings is that we tend to deceive ourselves time and time again. A little deception is acceptable. But then we will forgive ourselves for our own self-deception. If I just keep it in my head, I can lie to myself. But if I write it down, I can't lie to myself."

It may also be useful to stand aside after a big win. "When I have a big windfall of profits, I stop trading for a few days. I take that windfall home with me. I try to figure out ways to keep it. I come up with new strategies."

One of the best antidotes to overtrading is developing very detailed trading plans. It is to your advantage to develop a specific trading plan and stick with it. Before you put on a trade, make sure your trading plan is clear. Identify the signals or indicators you will use to monitor the trade. Anticipate which indicators will signal when a trade is going against you. Justify your trading plan, and make sure that you have sound reasons for putting on a trade. Make sure you are taking advantage of a good setup, rather than impulsively acting on the urge to put on a trade. Through careful self-monitoring of your trading plan, you can reduce overtrading and the potential damage it can do to your trading account.

Conventional Wisdom

2007-01-02T07:20:00.000-08:00

It would be wonderful if there were a foolproof and valid instruction manual for how to trade the markets profitably, a cookbook of sorts where you merely follow the steps and you are successful. For decades, traders have tried to find recipes for financial success. For some, the Holy Grail comes from the latest trading guru. For others, it may be a new software program. As appealing as a trading cookbook may sound, however, countless professional traders have told us at Innerworth that there are no quick and dirty methods for successful trading. A method may work under some market conditions and not others. And when it comes to conventional wisdom, sometimes it is true and sometimes it is not. A popular saying that captures the fallible nature of conventional wisdom is, "history only repeats itself in the markets when it does." That is, you can study old charts and discover a historical set of events that unfolded in the past that suggests a high chance of a profitable tradi ng setup in the future should the same events arise, but history doesn't always repeat itself, so you cannot count on the same chain of events happening precisely the same
way. In the end, you have to go your own way and accept what you get.

What are your favorite tidbits of conventional wisdom? Some people say avoid the market open, but other traders thrive on the chaos and uncertainty that occurs during the open. Other people warn to avoid trading right before an earnings report, but other traders make profits anticipating what the news might be. Still other traders like the idea of multiple regression formulae that will predict a trend. Sure, if you have a large enough dataset and want to make very long-term forecasts, it may work, but probably only for large institutions. In the end, conventional wisdom is right some of the time, but at the same time, it is wrong some of the time.

I'm not saying to throw out all conventional wisdom. Even though it may not be in your best interest at times, it makes sense to take conventional wisdom into account. For example, it makes good sense to control risks, and it is always vital to make sure that you can survive a trade should it be a loser. Similarly, it's always valuable to have a trading plan and to follow it. If you have a map to guide you, then you will be more likely to follow it.

Why do we have a strong need to seek out conventional wisdom and follow it? Throughout our lives we have been taught that those people who play by the rules tend to succeed. If you "do the right thing," whatever that is, you will be successful. There is a sense of security in believing that if you complete steps A, B, and C, then D will happen. It is all so straightforward, but life doesn't always work that way. And in a profession like trading, where relatively few make a fortune, it is rarely true. The steps to follow are not clear, and since market conditions are in constant flux, the "rules" seem to change constantly. But don't despair. If you have confidence in your ability to win, work hard, gain a wealth of experience and persist, you'll master the markets and make the profits you are looking for.

Bouncing Back

2006-12-13T00:34:00.002-08:00

Ever had a bad day when nothing seemed to go right? First, you got up late. Second, your computer wouldn't boot up, and third, when it did, you couldn't seem to get in and out at the right time when executing even the most basic trade. What really upset you was when your DSL line went down for 10 minutes during a critical moment in your trading plan. Traders face setback after setback, but they never feel beaten down. They recover from a setback quickly and are ready to tackle their next challenge with aplomb. Not all traders can take setbacks in stride, however. For some people, any loss regardless of how small can be upsetting. How well do you take setbacks? Here's a brief quiz to show you where you
stand?

We asked a group of Innerworth subscribers to answer the following questions on a 4-point scale. To what extent do you agree with each of the following items? If you strongly disagree with an item, give yourself a score of 1 for the item. If you disagree, give yourself a score of 2. If you agree, give yourself a score of 3 for the item, and if you strongly agree, give yourself a score of 4. Answer each of the following items, and see what score you get:

1) I tend to get angry more than most people. 2) I believe that there are people with huge resources and influence who can control market prices and I think that is unfair. 3) At times, I feel angry even though I'm not sure why. 4) When I'm feeling down, I sometimes put on a trade to feel excited and thrilled. 5) Almost every day, something makes me at least a little angry. 6) I secretly wish I could punish people who do not live up to my expectations. 7) I can make myself angry about the past just by thinking about it. 8) When I'm frustrated or upset, I have difficulty sticking with my investment strategy. 9) I blame myself when trades do not go my way.

What score did you get? If you received a score between 9 and 16, you scored in the lower quartile, which means that less than 25% of the Innerworth subscribers who took this quiz obtained a score as low as yours. In an analysis of our database, we found that individuals who scored in this range were optimistic, flexible, ambitious, and creative problem-solvers. In contrast, if your score was between 22 and 28, you scored in the upper quartile, which means that 75% of the Innerworth subscribers who took this test obtained a lower score than yours. We found that individuals who scored in this range tended to experience higher levels of stress, were easily frustrated, and often allowed this frustration to interfere with their trading.

If you scored high, don't despair. Resilient trading is often a matter of attitude. A resilient trader is realistic. He or she accepts reality and appreciates what the markets have to offer. On some days the markets offer many opportunities. On other days, however, there are just a few. But whatever opportunities are available, resilient traders accept the current state of affairs. They don't pressure themselves into trying to take out more money than the markets are willing to give.

Resilient traders are eternal optimists. They may expect setbacks, but they don't equate a setback with personal failure. They are confident that if they put in enough time and effort, they can overcome any obstacle. That said, they accept their limitations. They don't believe that they must be "perfect." Trading is challenging enough. You don't have to make it even harder. Manage your risk, anticipate losses, and don't beat yourself up unnecessarily for not meeting unrealistic expectations. Enjoy the process of trading, and don't merely focus on the prize. With the right attitude, you can be a resilient trader and achieve enduring success.

Respecting Risk

2006-12-13T00:34:00.001-08:00

Is trading easy or hard? To the outside observer, trading seems easy enough. You merely pick a stock, bet it will go up or down, execute a trade and see what happens. What's the big deal? If it were that easy, however, everyone would be doing it and making millions. Unfortunately, it is not that easy, especially in a sideways market or one that fluctuates wildly. In a strong bull market like we saw during the dot-com boom, amateur traders merely opened an online account and watched their account balances balloon. It all changed in 2000, though. We've seen a taste of "the good old days" in the past month, but even when the masses are interested and prices go up, trading is not easy. You have to work at it, and hard, to make
profits across a series of trades.

Successful trading is part financial resources, part trading strategy, and part psychology. Suppose that you had a simple trading strategy. You might decide to find stocks that temporarily went down on general weak economic news, but by all indications, the stocks should increase when clearer heads prevail. You look at all the information, and decide to develop a trading method based on "seller's remorse." That is, you anticipate that there will be those investors who sold in a panic on weak economic news and will buy the stocks back when they realize that the stocks were still good buys. But there's more to it than good trading strategy. You must also decide how much capital you will devote to the strategy. On any one trade, you might risk 2-3%, but not all of your picks will go up in the way you had planned. Trading is also part mathematics. Some of your trades will come through, but others will not. You have to decide how many trades you will make and how much you will ris k. And it's not just the number of trades that matter. You also must look at the range at which the price is likely to move. So, for the sake of argument, suppose you decide to risk 2%, on average, on each trade, and suppose you decide to make 10 trades using your seller's remorse strategy. That is a 20% risk. Psychologically, you have to be able to handle the risk. If you lose 20% of your capital, it will be difficult to make it back. Depending on your risk tolerance, it may be hard psychologically to risk 20%.

If you have relatively low financial resources, taking a 20% risk may be hard to handle. You may feel it would be a disaster if your approach did not realize a substantial profit. Psychologically, taking the risk can be anxiety provoking to say the least. A jumble of thoughts may race through your mind as you execute the trades, and monitor them. As you anxiously await the outcome, you may barely be able to think clearly as your emotions overpower you.

What do you do if you can't tolerate risk? An obvious solution is to simply take less of a risk. You may not want to make all 10 trades, for example. Instead, look for two or three of the 10 that are the most likely to produce a profit. You do not stand to make as much, but you are not likely to lose as much either. And if you have trouble tolerating risk, the piece of mind you get instead will probably be worth more than the profits you could have made, considering the financial and psychological risks it would require. What are the long-term consequences? On the one hand, it may seem that you will never make huge profits in the markets if you are not willing to take risks. After all, seasoned, professional traders put on big trades and it doesn't bother them. But you must decide if taking such big risks would be in your best interests. And until you are confident that you can make profits in market to market, you might want to hone your trading skills before taking big risk s. Seasoned traders have established trading skills and rock-solid confidence. If they lose a large stake, it would certainly be a setback, but they know that they have the ability to make the money back, eventually. On the other hand, if you are not yet confident as a trader, you know deep down that it's quite possible that you can't make back the capital that you lose. No matter how hard you try to ignore this possibility, you know in the back of your mind that it's a real threat, and it will haunt you.

Don't downplay the importance of risk management. There are financial and psychological benefits for limiting risks. A hard reality of trading is that there are few foolproof trading strategies. Even the most reliable strategy is bound to fail eventually. Market conditions frequently change, and when they do, your strategies must be changed also. The trouble is that you don't know when a strategy will fail or when it will not beforehand. Your best defense against the sporadic changes in market conditions is to limit your risk. If you limit your risk, you'll be able to survive the learning curve, and eventually, become one of the select few who profits big from trading the markets.

Going Your Own Way

2006-12-13T00:33:00.002-08:00

Don't follow the crowd! You've been warned over and over, but few are that independent minded. Breaking away is harder than it looks. We are all familiar with the rebel, the person who breaks all the rules and is skeptical of the status quo. At the other extreme, the ultra-conformist seems to follow the rules too blindly. Neither extreme is optimal for trading. It's necessary to find the right balance between these two extremes. It takes a great deal of trading experience, self-searching, and a firm, concerted effort to act independently, but it is essential to develop this skill, especially in markets that seem to change from month
to month.

All humans have a natural tendency to follow the crowd. There is safety and comfort in numbers. As the human race developed, it learned that its survival depended on banding together and working as a group. All humans inherited this legacy, and it is shown in the security we feel when we follow the crowd. It's adaptive most of the time. Although there may be vast individual differences on the extent to which people follow the crowd, with some conforming too much and others conforming too little, most successful members of society have seen the virtues in following the crowd. Blind obedience to authority may not be beneficial but compromise is. To be successful, it was vital to protect your self interests yet also stay within the bounds of acceptable behavior. It was also important to develop a clear and solid sense of personal values and to develop a clearly defined personal identity. Such a clearly defined view of oneself allows one to be self-sufficient. You can follow the crowd when appropriate, but effortlessly go your own way when it's necessary to protect yourself.

Although you've been frequently warned about the pitfalls of following the crowd as a trader, it's important to acknowledge that it is adaptive at times. For long term investing, it is wise to put your money in stocks that don't have a great deal of volatility and by all indications, have solid fundamentals that will push the stock up consistently for several years. If a large enough "crowd" believes strongly that the company will produce profits for months or years, it would be to your advantage to follow them, if you want a safe investment.

So following the crowd isn't bad all the time, especially for those who don't like risk. On the other hand, if you are a shorter-term trader trying to profit in markets that seem to change from week to week, as we are seeing these days, you must anticipate and profit from volatility and shorter-term trends. And this requires an astute intuition about where the markets will go next. You must anticipate how the movement of the masses can benefit you as a trader. The key to success is to decide when to follow the crowd and when to go against it. The crowd is usually right, until a turning point occurs. When virtually everyone has taken the position that the market is headed in a particular direction, there are few traders left to push the trend further. At that point, a countertrend initiates and moves the market in the opposite direction. The challenge is predicting when that turning point will occur, anticipating it, and developing a trading plan to capitalize on it. Now, this all sounds easy in theory, but in practice, it is difficult to implement a trading strategy to capitalize on this cycle, especially when they happen in the shorter-term, such as days or weeks. How can one predict the turning point? Some say it is almost impossible. All you can do is develop a sound method that works most of the time but also admit that it may fail. Whether you use technical indicators or you are lucky enough to use the media news to your advantage, you must temporarily believe in your method, put money on the line, and work under the assumption that overall, luck will be in your favor should you make enough trades. (And by all means, control your risk; otherwise you will be the victim of relatively risky trades, rather than the victor.)

It seems like the markets these days are changing from week to week, with weak economic news lowering prices one day and unexpected profits in key sectors raising prices the next. Only the most independent minded and perceptive traders will make a killing. But one thing is certain, in the end, going your own way is the only sure path to profits.

The Need to Control

2006-12-13T00:33:00.001-08:00

The need for control is the biggest psychological impediment to profitable trading. Traders strive to control the markets, but in the end, they find that they must accept their fate and settle for controlling their emotions. When your money is on the line, it's difficult to remain calm, rational, and in complete control. You want to win, and there is a strong need to want the market action to fall in line, but trading outcomes are rarely sure things. It's natural to want to have complete control over your destiny, but it can't happen. Instead, as a trader, you must put up with where the markets want you to go, and you must try to control your impulses and emotions rather than "acting out" impulsively against the markets out of anger and
frustration.

Many traders have a strong independent streak. They are used to having things go their way. This strong sense of independence allows them to work in an unconventional profession, like trading the markets, but it also usually means that they have trouble maintaining discipline. They may often want to control rather than be controlled. They may become frustrated by the numerous ways events can go against them, such as interest rate hikes, weak economic news, or media hype. There are a host of factors that traders cannot control. You cannot merely dominate the markets and make the markets go where you want them to do. Instead, you have to learn to go where the markets go, and rather than act out of frustration, you must maintain discipline.

How can you maintain discipline and self-control? First, you must accept events as they come. The markets are chaotic and unpredictable, and thus, it does not make sense to believe you can control events. If you try to control events, you will become angry and frustrated. And when you are angry, you are bound to act on impulse and make decisions that you'll regret later. Second, develop detailed trading plans that are easy to follow. If you trade with a detailed trading plan, for example, you will impose structure onto an unstructured reality, and this structure will give you a sense of realistic control. You can reduce some of the feelings of uncertainty, and feel in control, by clearly defining a target profit objective, and entrance and exit strategies. The more structure you impose and follow, the more powerful you'll feel. You will know what to do and when to do it, and you will gain some of the control you desire.

Seeking out complete control when your money on the line is understandable, but there's only so much you can do. The winning trader tries to gain as much control as possible by managing risk and trading a detailed trading plan, but at the same time, he or she knows that nothing in the markets is certain and that all you can do is change the things you can and accept the things you cannot.

The Chain Reaction

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It all starts innocently enough. You open an online trading account. You make a few winning trades, and you find it fun and exhilarating. You're hooked! You make another trade and then another, and the winning streak holds up. You get the hang of it and decide to increase your position size. It works for a few more months, but then you hit upon a slump. The method that worked so well for the past few months has now stopped working. It's a critical point in a potential chain reaction of events that spells doom. Many traders let the chain reaction happen. Their method stops working, but rather than make a careful study of what is going right and what is going wrong, they just keep going. They make losing trade after losing trade, risking money they can't afford to lose, until finally, they end up blown out. They wrongly believe that an optimistic attitude alone will allow them to return to profitability. In the end, however, all they have to show for their efforts is red ink. W hen you are at a critical point in your trading career, it's vital to know when to
go on and when to "fold 'em." Well, temporarily at least.

Art Linkletter once said, "Things turn out best for people who make the best of the way things turn out." Humans are eternal optimists, and when you trade the markets, it's hard not to want to make a fortune. It's hard to know when to be optimistic, and make the best of things, and when to be a pessimist and stand aside. One moment it all looks bleak. The next moment, the market opportunities seem endless. A pessimist is less likely to lose money, but runs the risk of watching profits go by while standing aside. A winning trader, in contrast, is always searching for, and trading, the next big opportunity. That said, winning traders are optimistic but skeptical. Sure, they may take losses in stride, but at the same time, they are constantly aware that if they are not careful, they may set off a chain reaction of events that leads to their downfall.

When your plan seems to stop working, it is sometimes necessary to evaluate its reliability. You must ask, was there something to learn here? Sometimes there is and sometimes there isn't. A good trading plan can often fail for no good reason. What winning traders don't do, though, is mull over a setback too long. They make the best of it and move on. That can mean executing the same trading plan under more favorable market conditions or it could mean searching for a new trading opportunity. Whatever they do next, though, they do not act blindly. They know what they are doing and are fully aware of the consequences of continuing to use their methods.

Self-monitoring is the key to success. A trade dairy may be particularly helpful. For example, you might record key features in your trading diary, such as the market conditions for your trades, the specific strategy, your mood, the rationale for the trade, and its outcome. It is vital to record detailed information before and after the trade so you can study it carefully later. Looking at your performance can be difficult. It is useful to set up a time and place to study your performance objectively. A careful examination of the circumstances when you perform at your worst, and your best, can be enlightening. You may find that the time of day matters. Some traders make their worst trades at the open, others find they make the most mistakes toward the close. Yet others find the break before lunch to be the most optimal time of day. The key is to discover what works and what does not in order to constantly improve your approach to trading. All traders have their talents, and w inning traders capitalize on those talents rather than waste time trying to do something they are not good at. So rather than go along on your merry way until a crisis happens, be on the lookout for a chain reaction that can spell your downfall. And if you see it coming, don't be afraid to stand aside, regroup, and tackle the markets in earnest with a winning, new approach.

Frustrated, Angry, and Irrational

2006-12-05T04:51:00.000-08:00

If you are like most traders, you have an unbridled need to win, and win big. With the interest in the markets in the past few weeks, you may have high expectations for your trading. You may believe that with all the interest in the markets these days, taking profits out of the markets should be easy. But even during times of optimal market conditions, obstacles get in your way: Current events impact prices, or reports of interest rates hikes or consumer confidence may temporarily make the markets go against you. Unless you are ready to tackle these setbacks, they can throw you off balance, and produce feelings of
frustration and anger. And when you are angry, you can make impulsive mistakes or even act irrationally.

People experience anger when they feel that they have been unfairly wronged. Traders become angry at the markets because they believe that the markets and the people involved in the markets should act in ways consistent with their trading plan. It's emotional and illogical but true. When the profits don't materialize, they implicitly or explicitly believe that the markets have wronged them, and they naturally seek revenge.

Anger can be a dangerous emotion. When people are angry, they are ready to put up a fight. They focus all of their energies on fighting and seeking revenge. It's hard to think clearly when you are angry. Sound decision-making requires the avoidance of such emotions.

There's no reason to be angry at the markets. It's important to recognize the reasons for our anger. By doing so, we will feel less anger in the long run. How can you stay calm? First, don't take setbacks personally. Setbacks happen. Taking them personally only makes you feel bad. Anger is an interpersonal emotion. We are usually angry with someone because we believe that he or she has purposely tried to harm us. The markets may consist of people making trades, but it doesn't make sense to treat the markets as an interpersonal setting. The people participating in the markets may engage in actions that thwart your goals, but their actions are not directed toward you personally. It is best to look at the markets as an abstract impersonal entity, rather than a collection of people. The more abstract and impersonal you look at things, the easier it will be to look at matters coolly and objectively.

Second, expect setbacks. Setbacks are commonplace when trading the markets. We tend to feel angry when our expectations are not met. When you are expecting to win, and profits are not realized, you have a natural tendency to feel upset, frustrated and angry. However, it isn't useful to have high expectations in the markets. Don't depend on the markets to fulfill your goals or meet your expectations. Assume that anything can happen. Indeed, in dealing with the markets, it's almost a given that you will lose money, so it is not useful to expect to make money on every trade. Just accept what you can get. You will feel better if you do. Eliminate any preconceptions you have regarding the outcome of a trade. For example, it is essential that you learn to anticipate and accept losses. If you cannot accept a loss, you will feel anger and want to get even. But if you expect to lose and accept as a natural consequence of doing business, you will tend to stay calm. Don't let anger imp act your ability to trade the markets in a cool, rational and objective state of mind. If you can anticipate setbacks and accept that nothing is completely certain when trading the markets, you will be able to cultivate the mental edge of a winning trader.

Still Can't Seem To Win

2006-12-05T04:50:00.000-08:00

There has been great interest in the markets lately, so there's no reason that you shouldn't take home huge profits, right? Although many traders profit, there are some who still can't seem to make a profit, even during relatively good times like these. Let's consider some of the psychological impediments that may limit
success.

The most obvious reason for an inability to win is a lack of experience with the markets. Trading is a skill that cannot be mastered overnight. Sure, you can make a few winning trades, but taking out profits day in and day out takes experience and practice. Many novice traders suffer from the double-edged sword of incompetence. That is, they are incompetent but don't know it. The reason can be simple: They don't put in enough time and effort. Many traders think they have more skills than they actually do, and similarly, they falsely believe that they put in as much time and effort as everyone else, yet if they were to look at what a skilled winning trader actually does, they would find that winning traders put in at least twice as much effort as one would think. In addition, winning traders use their time wisely, and because they have more experience, they can read reports faster, know precisely where to look for information when evaluating their trading plan, and have a more astute perception of the market action. So if you are a novice trader and still can't seem to win, calm down, work extra hard and give it time. The more experience you have, the more likely you will be able to take profits out of the markets.

A second reason that traders fail is that they set themselves up to fail. Some traders actually fear success. This is not true of all traders, though. In one of our Innerworth surveys of traders, we found that relatively few traders had a fear of success. For example, only 12% thought that if they made huge profits that others would try to take advantage of them, and similarly, only 10% indicated that they thought that if they were successful traders, their lives would change in adverse ways. That said, those who feared success tended to feel stressed by trading and generally felt disappointed and upset. Some people secretly believe that money is the root of all evil or that they are not deserving of making huge profits. If you secretly fear success, you will find that even during optimal market conditions, you will not feel good about winning and may unconsciously sabotage your efforts.

Traders are also their own worst enemy when they trade when worn out and tired. Trading uses up limited psychological energy, even when you are winning. The emotional ups and downs can take a toll on your body and mind. It's vital to get plenty of rest while you are trading. Don't force yourself to trade like a robot or superhuman. You are not. You need rest, relaxation, and rejuvenation. When you are tired and hungry, you are bound to act on impulse while trading. It's an unnecessary way to make errors, however. All you need to do is get proper rest, so you might as well rest up when you need to. Many traders sabotage their own efforts either consciously or unconsciously. But most of the time, you can gain awareness, overcome psychological obstacles and trade with a mental edge. It just takes commitment, planning, and effort.

Winning Traders Are Flexible and Realistic

2006-12-05T04:49:00.000-08:00

Eternal optimists often make the best traders. The winning trader engages in a constant search for innovative ways to take profits out of the markets. It takes a positive attitude to persist in the face of almost endless setbacks. If you are an optimist, you will pick yourself up gracefully after a loss. When you can't seem to find a high probability setup, you'll keep searching until you find one. An upbeat, optimistic attitude is an essential ingredient for success. But traders are infamous for their unrealistic optimism. They tend to look at the world through rose-colored glasses at times. It's easy to understand why. Most traders are attracted to the markets for the money they can make. They can't wait to get rich. Unfortunately, you have to risk money to make money, and when your hard-earned cash is on the line, it's hard to stay objective. You want to see endless possibilities. But if trading were that easy, everyone would make millions. Oftentimes, optimism is merely a defense against the anxiety-provoking realization that you are more likely to lose than to win. There is a fine line between realistic, cautious optimism and defensive,
inflexible optimism. The winning trader, though, knows the difference. Do you?

An experiment by psychologists Radcliffe and Klein highlights the downside of defensive, inflexible optimism. Study participants were identified as realistic optimists or unrealistic optimists. They were asked to estimate the odds of experiencing an adverse outcome, in which a reasonable estimate of the actual probability was known. Unrealistic optimists underestimated the odds of the adverse event compared to realistic optimists. They also allowed their unrealistic optimism to bias their judgment. When presented with information regarding how they could reduce the probability of the adverse event, they did not review it closely, compared to realistic optimists. They did not show proper concern and did not take necessary steps to protect themselves from the adverse event.

During the excitement of the past month, it's easy to feel optimistic about the markets, but if you have watched closely, you have also seen that it is quite possible for an adverse event to sporadically turn things around, even if it is just for a short time. The winning trader is flexible and cautiously optimistic. As hard as it may be to consider all possible adverse events that may thwart your trade, it's vital to consider all possibilities. Don't let your enthusiasm cloud your judgment. The more flexible you are, the more likely you will see an adverse coming and take precautions.