One of the many harsh realities of trading is that it takes a lot of intentional effort.

That means you intentionally prepare (both mentally and with an actual game plan), you intentionally execute (have the discipline to stick with your method), and you intentionally improve (by reviewing results, keeping an open mind, working with other traders to expand your abilities, etc.).

The fact of the matter is that if your competition is outgunning you, the way to start having more success is by outworking them.

When I was in 8th grade, I decided to take up golf. Being in a town with a huge presence of great players (including 8 PGA Tour pro’s), I had an uphill battle given that so many of my peers had already been pursuing the game for a few years. They were better than me, and I knew I had to outwork them in order to catch up to them or surpass them.

The same mindset applies to your trading. If your competition is getting the best of you, then you’ve gotta step up your game and work harder. Don’t be afraid of it, nothing worth doing is ever easy.

Trade Like a Bandit!

Jeff

I first learned about The Zurich Axioms by Max Gunther in the daily Worden Report when Don mentioned it among his favorite trading books a few years ago. Soon after, I picked up a copy and found it was indeed packed with some great insights – enough to be a must-have trading book.

There are 12 major axioms highlighted in the book, with a chapter devoted to each, as well as 16 minor axioms. It’s a relatively short book at only about 123 pages, but the “Rules of Risk and Reward Used by Generations of Swiss Bankers” offers no shortage of wisdom and insights for any trader or speculator.

Without disclosing all of the Axioms, I’ll summarize two of my favorites.

Always Play for Meaningful Stakes.

This minor axiom highlights the importance of trading with enough size for it to matter. This goes beyond the learning stages in which a developing trader needs to hone his skills and not fixate on the money. Rather, playing for meaningful stakes is about getting over the fear of getting hurt in such a way that when a play works, it’s well worth the risk taken.

A story is told in the book about the oil tycoon J. Paul Getty, who grew up rich, but once he became an adult he was sent out on his own. Wanting to enter the oil business, he shunned various opportunities to invest $50 in the early 1900’s in favor of betting nearly his entire savings of $500 on an oil lease he felt was more promising. After paydirt was hit, he sold his holdings for $12,000 just a short time later.

Getty mentioned that if he had not struck oil, the $500 would have hurt, but that he could have found a way to save that amount back up again. He was quoted as saying “it seemed to me I had a lot more to win than to lose.” That’s playing for meaningful stakes.

As a trader, it’s not about walking a tightrope where bankruptcy is the result if you slip. It means you don’t nickel-and-dime your way throughout the entire year if you want to get somewhere interesting.

Optimism means expecting the best, but confidence means knowing how you will handle the worst. Never make a move if you are merely optimistic.

What an excellent reminder for traders! Gunther makes the point that without some level of optimism, one cannot trade to begin with. However, there is general optimism and there is specific optimism. According to Gunther, it’s the venture-specific optimism which can become dangerous if you allow it.

The latter mention of what true confidence is just cannot be ignored here. Do you know how you will handle the worst? If you do, then you’ve got arguably the most difficult element of a trading plan already in place – the adverse exit. The ability to fail gracefully in trading – over and over – is what will ultimately define how long you can stay in the game. Your success may eventually be tremendous, but if you’re unable to handle losing the right way, you’ll be taken out long before the big wins can ever come along.

My advice? Pick up a copy of The Zurich Axioms and get a pen ready to mark up the margins and underline key points. It’s a quick read and one you’ll return to often.

Trade Like a Bandit!

Jeff

Dmitriy recently asked:

“Do you think that fixed stop-loss is better than a stop-loss which is based on market setup (stop below the low of the pullback or below support level)? If for instance, you trade ES or some stock every day, is it best to use a fixed stop-loss, say 3 points in any trade, or one which is based on the unique price pattern and hence requires a different size stop-loss every time (one trade may require 4 points, another 5 points)?”

This is a great question and one I’m glad he asked. Traders of many markets and of differing timeframes wonder about this and come up with mixed signals.

On the one hand, maybe they’ve read O’Neil say in How to Make Money in Stocks to limit one’s loss to 7-8%, which is a fixed amount that doesn’t vary from one trade to another. On the other hand, they realize that no two stocks are exactly alike (or futures or options or whatever instrument is in question). That kind of thinking would necessitate different sized stops depending upon what’s being traded.

My personal preference is to go with the latter line of thinking. I base my stops on current conditions and the pattern being traded. Some markets are faster than others, so they warrant a smaller position but wider stop. Others are slower and more steady, so they can be traded with larger size but a tighter stop. Personalities of stocks can greatly vary, so it’s difficult to apply a one-size-fits-all stop to every trade you make.

The bottom line is this: those who commit to learning the technicals by studying price action, learning patterns, and personalities of stocks can utilize custom-fit stops and gain a ton of flexibility. By contrast, those who lack that commitment are stuck with using a set percentage which will be more than enough in some cases and not enough in others – very hit and miss.

Grow, learn, and improve – it’s the best investment you could possibly make in your trading.

Trade Like a Bandit!

 

Jeff

Dean Karnazes runs like a man possessed. He’s an ultramarathoner, which means he goes beyond marathon distances – sometimes a lot farther. He once ran 50 marathons in 50 states in 50 consecutive days. Apparently, the dude loves pain.

In his book Confessions of an All-Night Runner, he makes the following statement:

“Struggling and suffering are the essence of a life worth living. If you’re not pushing yourself beyond the comfort zone, if you’re not demanding more from yourself – expanding and learning as you go – you’re choosing a numb existence. You’re denying yourself an extraordinary trip.”

So, this being a trading blog, it begs the question: how well do you embrace the struggle of trading? At times it’s really smooth, and trading can provide extraordinary profits in incredibly brief amounts of time, but not always. Sometimes trading’s a real grind. You question everything you’re doing, your results offer you no condolences, and you’re just flat-out suffering.

If you’ve been through that before and you’re still a trader, congratulations! You have been able to overcome the pain and doubt and press on and work your way out of it. Others of you, however, might be facing that right now for the first time and you’re wondering if you have what it takes.

Here’s the thing…if you fall into the latter camp, this is where the rubber meets the road. You’re facing a choice of whether to persevere or to walk away. While moving forward might or might not deliver the success you so badly want, I can guarantee you that permanently walking away will never allow you to reach your trading goals.

Struggle, Suffering, and Success

Struggling and suffering in trading are common side effects of the job, they come with the territory. As you well know, if it were easy then everyone would be doing it. Trading can be hard, it can be demanding, and boy can it be frustrating.

That same struggle can also propel you to new heights of success, but you have to respond the right way – and it’s not gonna be comfortable.

3 Ways to Grow from Trading Adversity:

1. Appreciate the ache. It doesn’t mean you enjoy the frustration. Appreciating it means you acknowledge it’s here, you recognize the fact that a change is needed, and you understand that if you don’t shift in some way it’ll be the end of your trading – at least for a while.

2. Expect to grow. Why shouldn’t you? What you’re doing isn’t working, as otherwise you wouldn’t be facing adversity to begin with. Watch for new kinds of moves, implement some different techniques, and anticipate some different results. If you survive, you’re going to be a better trader because of this time and how you respond to it.

3. Require more from yourself. Maybe you got stagnant, and that’s what brought you to this point of frustration. You’ve had some approaches which have worked, and you rested on them – perhaps a little too much. As traders, we have to continually blend a loyalty to what’s working now with a willingness to employ some new methods. So push yourself more going forward, keep moving, never sit idle when it comes to growing as a trader.

And finally, for some of you this is a wake-up call. You’re starting to become set in your ways, but you now recognize you’re in for a rude surprise if you continue to operate in that manner. No more! Seek out ways to improve, to grow, to add to your skill set. Because according to Dean, getting stuck in your comfort zone means you’re denying yourself something extraordinary – maybe even that elusive next level.

Trade Like a Bandit!

Jeff

Hey Bandits!

Just wanted to point you to a post I published early today over at MarketWatch called “Practice Like a Doctor to Trade Well.”

I have gotten a kick out of some of the early comments from folks who didn’t read the title and missed the whole point of the post, which is to practice continually and keep learning.  I think you’ll enjoy it, here’s the link.

Trade Like A Bandit!

Jeff

A friend of mine recently mentioned that the area to the right of price is the only place on a chart where you make money. He’s absolutely right. But I’d add that by also looking to the left, you can save money as well.

Take for instance CXO. Right now the stock is sitting in a short-term bearish formation. The stock recently declined for a couple of weeks, then has attempted to bounce – without success. That has created a small rising channel, or bear flag, which is quite likely to be resolved to the downside when taken at face value.

Why I Use TeleChart

 

So am I going aggressively short here? No, and here’s why:

Short-term, this looks like it wants lower. But by looking to the left, I see more than just the selloff and feeble bounce attempt. I see that just about $3 lower is a major level which has served as both support and resistance in recent months. That could again provide buyers with a spot to take a stand, and it poses a threat to this setup as a bearish play – a roadblock for the trade.

Here’s a closer look at the chart:

Why I Use TeleChart

 

Always take the short-term pattern you’re seeing in context. With that in mind, this bear flag isn’t a high-probability trade given support isn’t far below. Furthermore, the overall trend in recent months hasn’t changed, as this is really just a range-bound stock heading back toward key support. It might not hold, but trading is about probabilities, and they aren’t real favorable in this case for a move of more than about 3%.

In other words, always look to the left.

Trade Like a Bandit!

Jeff

I’m a trader, so what I care about is catching short-term moves in price. I’m not an investor who’s looking for long-haul appreciation or locating the next ORCL. For that reason, the health of a business doesn’t matter to me. It’s unlikely to change during the course of a trade that lasts anywhere from a few hours up to a couple of weeks (barring scheduled earnings reports or conference calls).

Some traders fixate on fundamentals. They might use the fundies as a starting point for trade ideas, which is alright, but is not necessary for short-term positions. They might use the fundamentals as a logic crutch to defend their losing trade, telling themselves “it’ll come back” because of the business. We know how that usually ends for them when opinions are allowed to interfere.

If you haven’t already done so, make this all-important distinction: there are good companies and there are good stocks, and they do not necessarily overlap. Sorry if that bursts your bubble, but many great businesses have a stock that’s going nowhere. Some stocks are making excellent, clean moves even though their business may not endure the test of time. The correlation between good company and trade-worthy stock is not at all guaranteed.

Here’s the point in case you’ve missed it so far… If you are a trader, focus on the price action and place importance on it alone. Trading is about compounding money by turning capital over frequently. It’s not committing to a long-term relationship with a stock…that’s investing and it’s an entirely different topic (not found here).

So if you are a trader, and if your timeframe is less than a few weeks, consider the likelihood that the health (or lack thereof) of the company behind the ticker symbol you’re trading just isn’t going to change that quickly. Business growth or attrition takes time. With that in mind, all you’re left with is the price action – right where we began.

Simple and straightforward.

Trade Like a Bandit!

Jeff

I heard from a trader over the weekend who has gone through a number of changes in recent months, both personally and in their trading. The result was a big lack of consistency in their trading.

This particular trader has endured a stretch of personal changes, including relationship stress, family changes, financial pressures tied to it, and a move. That’s a lot to take!

In terms of their trading, they went from being a retail trader to a prop trader and found some distinct, challenging differences which impacted their results (and trading process) adversely. It wasn’t that prop vs. retail was the issue, but rather this particular trader’s surprise and perhaps their lack of understanding of what those differences would be from the front end.

For example, this particular trader did not realize they would not be allowed to hold overnights at their firm. They got caught up in the ECN rebate game and started focusing on minimizing transaction costs rather than getting into and out of trades in a timely fashion. And there were several other issues they hadn’t fixated on previously (like platform fees). These changes added considerable pressure to the trader.

It left them asking me, how do you gain consistency in trading? They asked me specifically “what got you over the hump to consistent profits in your trading?”

Here was my response…

Sounds like you have been through a ton, and I’m sure you’re drained emotionally as a result. Once the dust settles for you though, your self-honesty will serve you quite well as you get back on a track that’s right for you.

In terms of what I did to achieve consistency, I had been making money part-time before going full-time. When I made the switch from part-time to full-time, there was a period of about 2 months in between where I was assisting another experienced full-time trader by placing orders for him and helping manage his account. This was due to a very different style of trading (managing many positions simultaneously), and it was new software, so I needed to get accustomed to it. Once I was comfortable with it, I went live, and from my first day I was profitable.

A year or two later, I went through a tough stretch and got really frustrated. The way I responded actually led to my longest streak of consecutive profitable months, and it was all due to one single commitment: limit losses. By taking little paper cuts, I got out of bad trades with minor damage but kept finding winners along the way too (it’s a numbers game), and that just created a ton of consistency for me.

I think if you can simplify the effects of what’s taking place personally with you, then your trading will be calmer as well. Life goes on, and periodically it gets hectic in a way that’s not under our control, but if you detect that then just get more passive with your trading. When personal things are clear and you’re more focused on the market, you can get more aggressive with your trading. Becoming consistently profitable goes hand-in-hand with taking a long-haul approach for consistency over time.

Trade Like a Bandit!

Jeff

re-cov-er-y (noun) – the regaining of something lost or taken away; restoration to a former or better condition; the extraction of useful substances from waste.

Traders have to go through recovery on almost an ongoing basis. Sometimes it’s from a paper-cut-sized hit to the account, while other times it involves coming back from an amputation of sorts – whether it be a major drawdown to actual or emotional capital.

Either way, without the ability to recover, you’re done. (Obvious alert: that’s no place to be).

There are steps to recovery which should be taken, and I want to discuss some of them. By no means is this an exhaustive list, so please add your own in the comments, but here are a few which I think are necessary on the (sometimes long) road back.

Admit it. Face up to what it is. Call it a slump, call it shattered confidence, call it a big scary market monster. Whatever “it” is, you have to get it on the table so you can deal with it.

Seek help. Maybe you shouldn’t go it alone. Without some accountability, it’s easy to relapse. Find a mentor or some coaching to get you back on track, and add some skills to your repertoire. The fact of the matter is that left to your own abilities as they currently stand, you may very well be facing a similar situation again.

Take inventory. Take an inventory of what’s left of your capital, both in terms of cash and confidence. It may be that you simply don’t have enough left to consider a comeback right away, so perhaps you incubate for awhile and prepare in other ways for your eventual return. Or perhaps you assess your situation and realize you have more than enough to start the process.

Get uncomfortably familiar with the cause. What was it that put you in need of recovery to begin with? Overconfidence? Lack of respect for the market? A series of small mistakes which compounded your problems? Understanding the root cause of your wounds, even if painful, will help you prevent it from happening again in the future. After all, you’ve already paid the tuition, you might as well get the lesson.

Get back in the saddle. The last step in the sequence is to return to trading and begin rebuilding. Start thinking about what that’s going to look like for you and how you’ll avoid the same pitfalls which got you this time around. Visualize yourself back in the routine again, making plays, staying disciplined, and having success.

** What are some steps you think are necessary to begin the healing process following a big trading loss?

Trade Like a Bandit!

Jeff

I was asked this week about the best trading books from a Bandit who expects to have some downtime this winter due to his seasonal business. Here’s the list I sent him.

Market Wizards, New Market Wizards, Stock Market Wizards, all by Jack Schwager. These are interview-style books loaded with insights from traders of all styles and in all markets. Must-have books.

Reminiscences of a Stock Operator by Edwin Lefevre. This classic is a memoir-type book modeled after Jesse Livermore, one of the most famous traders ever. Underline the lessons that stand out to you, but it’s full of wisdom even though it’s approaching 90 years old.

The Zurich Axioms by Max Gunther. A list of rules from Swiss bankers which is apply for any trader. A little harder book to find, but a great one worth reading multiple times.

How I Made $2 Million in the Stock Market by Nicolas Darvas. A true-life account (published in 1960) of a guy who made every mistake imaginable before finding his winning system. It’s got a lot of great lessons and it’s one I’ve read numerous times for that reason.

All these are great aids for traders, they are not how-to books but rather the kinds of books with lessons that last. I’d recommend them all!

Trade Like a Bandit!

Jeff