All about investment

by Frank Topino

It's been said that trading is 90% emotional, and 10% technical. Never is this statement truer than when you are in the first stages of your trading career. Do you often find yourself (or used to) thinking, "Damn, why didn't I take that trade. Chart setup was perfect. What was I thinking! I was so afraid of pulling the trigger". Well, if that's the case, you have probably entered the "trading mental block" zone.

Let me tell you a bit about the early stages of my trading career. Back in '99, I was in my senior year of college, studying Finance and Investments in NY. Since I was planning to embark upon a trading career as soon as I finished college, I decided to give myself a head start. I decided to start doing a little bit of trading on the side, to get a feel for how trading worked, to test the waters!

So I armed myself with a Tradescape account, took some college money(note this as it will be crucial) and dumped it into the account, and off I was, trading in the early to mid morning, and going to classes afterwards. I remember I "liked" trading JDSU which, in those days, was trading well over $100. I emphasized I "liked" because the first 2 months I didn't really place that many trades. In fact, I was very busy watching my stocks fly away and, much to my chagrin, in the direction I originally predicted. I was afraid of pulling the trigger. And it was getting worser and worser. Almost every time I was about to place a trade, I had some kind of weird mental block and my index finger froze on the mouse. I had to do something about it.

First of all, I decided to go back to paper trading for a while. That would give me some time to clear my mind a bit and do some situation analysis. Sooner than later, I realized I had made several medium to large size mistakes in my early trading career, both emotional and technical.

Technical mistakes

• No newbie should trade a high priced - high flyer stock such as JDSU at that time. Those stocks shouldn't even be paper traded!

  I fixed this by choosing lower priced stocks trading around $50 at maximum. Later, I fell in love with NITE, which was trading right around $50 in those days.

• I was not keeping a trading journal of my actual wins and losses, and my trading setups in general.

  I started keeping a daily journal of all my trading activities. I took notes of all the trades and their outcomes. I filed every chart or trading setup and the reason why I liked/disliked it. I wrote down everything. This helped me a lot figure out whether I was right in my predictions or not. Thus, it helped build more confidence in myself.

Emotional mistakes

• Earlier in the article, I mentioned that my initial trading stake was taken from money originally apportioned for college expenses. This was a major flaw in my trading approach. Never ever play with scared money. Scared money is funds you cannot afford to loose. Be it college money, retirement money, or whatever monies which was not originally regarded as risk funds. That kind of money weighs heavily on the amount of pressure traders have to already go through. It's money you just can't loose. As a result, you tend to sit on the sidelines on most trades, you exit too early on good trades, or stay too long in loosing ones.

  I was able to solve this major flaw in my trading plan by postponing any live trading to a later time. That is, as soon as I would finish my college studies. In the meantime, I saved a few hundred dollars every month and divoured every trading related material I could put my hands on. And of course, I paper traded a lot! This way, I was able to stash away a little risk capital and have a fresh start again, free of any financial related worries.

Of course, other causes might be playing an important role in your trading state of mind. For example, having a mentor can sometimes help overcome any fear you may have at the beginning. However, most times trading fears stem from an increased pressure to either make money or not loose money. Solving this issue first is of paramount importance for new and seasoned traders alike.

About the Author

Frank Topino is a full-time trader specializing in US equities. He is also the founder of Trading-Lab a high quality trading content portal catering to the investing and trading world.

www.trading-lab.com

Article Source: http://www.trading-lab.com/forums/overcoming_trading_fears-t38.html

All traders have gone through a period they wished they never placed the trades. It could be impulsive and emotional factor that drove the trader to commit these trades. These are trades that he wished he can forget forever and hope to never repeat them again.

What is opportunity cost in trading?

Opportunity costs happen when we lose unnecessarily while we pass up the higher probability trades with higher reward-to-risk ratio. Everything in life has opportunity costs and in trading, it's no different. This happens more often to new traders who do not understand this concept, usually causing them to blow out their accounts that shorten their trading career or hobby (however the trader views it).

When traders first start out, they usually begin trading without realizing the consequences of how they select their trades. These unnecessary trades would eventually would affect the future opportunities to profit and better their batting average. These trades tend to be losing trades but without calculating the probability of the success of the trade. When they lose, the equity has less of a chance of getting a better trade in the future. This is opportunity cost. For example, the trade takes a bad trade, loses $300 on the trade. Little by little $300 becomes $500, and then more. Finally when the market condition has turned in favor of the trader's strategy, he no longer has the capital to take advantage of the opportunity.

The other opportunity cost that many don't realize is a psychological cost. When a trader takes a bad trade, loses money, regrets for making a bad decision, causing him to be confused and losing his confidence. This loss of self confidence will affect the next trade which could be a high-probability trade. Due to the trader in a state where he's scared of losing again, he may hesitate on the next trade that could be the next winner. He will realize it only after a long while the cause and effect and the vicious circle this opportunity cost creates.

How does solve this problem? The first thing is to re-evaluate the trading records and sort out the trades that were part of the trading plan and trades that were not (impulsive, on the fly trades). If they are more than a few at least 10% of the total trades made, then a solution must be found to eliminate these impulsive or unplanned trades. Better yet, add the total amounts from these impulsive trades to get a reality check on the costliness of these trades. 10% or more is excessive. Most successive traders would not even permit 1% of the trades based on unplanned setups. Understand that these impulsive trades tend to lead more unplanned trades, such as overtrading. This causes mental exhaustion and leads to losing streaks.

One way to eliminate these trades is to write down and memorize the setups that are part of the plan. Better yet, start with one setup/strategy only and trade it repeatedly until it becomes a routine setup the trader takes day in day out. This way, the trader knows exactly what to do when the setup comes up. Once it's proven that he can trade it with discipline and timeliness without giving in and take impulsive trade then he can add another setup. This is the start of the road to recovery from losing opportunity costs.

As for the losing trades that are part of the trading plan, almost nothing can be done to them. Accept them and move on. Losses and losing trades are part of trading. No successful trader ever trade without losses, far from the truth. Very few successful traders manage to have a percentage of wins to losses higher than 60-70%. Normally it's much less, around 50%. So they must accept the fact that at least 30% or more trades will be turn into losses.

If a trader cannot handle losses, he can either quit trading or alternative find a new or different strategy where he can find an extremely high percentage of wins to losses. But keep in mind that this is a Holy Grail, meaning it may not exist. If they do, the trader may have to wait a long time to find such a strategy.

Before taking a trade, make sure to ask if the next trade will hinder and pay for an opportunity in the future. That is, if the trade meets all the right condition and rules of the strategy and not another "intuitive gut feeling" trade that will add another check on the loss column. Giving up this type of trades will open up more opportunities for profitable trades in the future.

Larry Swing is the President of the popular day and swing trading site http://www.mrswing.com a place where you can find free daily articles and videos covering education, market analysis and picks from Larry and other well known traders in the industry.

Article Source: http://www.ArticleBiz.com