Teachings from Larry Williams, a once well known Trader

To begin, for many traders greed is a stronger emotional force than fear. I believe we are a greedy lot (that's why we
enter an arena others pass on). Thus, one needs to know what emotion is gaining the upper hand in his or her daily life,
be it in the markets or business.

Greed, as I have come to understand it causes us to do that which we should not! It is greed that is the active force,
kicking us in, causing us to jump the gun, to hold on too long, to buy too much. Hence if you feel greed seeping inside
you, I suggest you look it directly in the face to see if it is leading you into more trouble than reward.
Fear is different. Our fears cause us to not do what we should do. President Roosevelt had the all time worst comment
saying, "…all we have to fear is fear itself." But then, what would you expect from a socialist who, along with Colonel
House, did more to damage this country on a long-term basis than anyone before or since? I digress…
Fear is prohibitive - it puts on the brakes. It is preventive and it is very primal as it is more closely connected to
survival. Indeed, we need a healthy dose of fear to keep on living. But life, or event fear, is not the same as market fear.
For some unexplainable reason, we pass on the best or largest winning trades out of pure adrenaline spouting fear. We
don't place stops for fear we will be stopped out. My advice is when your fear emotions tell you to not do something, in
this business, as Nike says, "Just Do IT!”. Scary thought – but that is why top traders are successful they do just do it.
There are two important parts to fear; the first is why it happens, the second is what it makes you do. Fear is the
product of unknowing. A seal team buddy of mine said it best, "Whenever we went on a shoot and loot mission my
heart was pumping but it was not from fear. We were so well trained and armed that every unknown was known. We
knew what to do and how to react to any contingency". Traders are not so well prepared. They have not thought out
the future, they trade with no stops (protection) and trade with no idea of where or how to take profits. Hence all of
the future is unknown. It's a black hole and they are afraid of the night.
To shut down on your fears prepare for the future, and have all bases covered and you will be able to act, not react
to market events.

The next point is that fear causes us to lie. Traders lie about their trades, wins or losses, especially to their spouses,
so they are in a state of constant denial and fabrication, a dream world. It's no wonder they don't deal well with
reality

rigtly said

In 1987, Williams won the World Cup Championship of Futures Trading, sponsored by Robbins Trading Company, trading $10,000 in real money to $1,147,000 in 12 months(http://en.wikipedia.org/wiki/Larry_Williams_(trader))

However, in his clients' account he actually lost money during that period. He was legally booked for misguiding investors. Shall later post his trades during that championship.

BTW this is a reminder that Saint's say on psychology is much easier to follow ;)

Regards.

Hmm.. looks like nobody is intrested in Mind-reading anymore

Here I am giving some of the excerpts from a Trader who also featrued in the Book- The New Market Wizards. An avid fan of Jesse Livermore, only difference is that this guy is a winner all the way, his Largest Monthly Drawdown for the Fund he manages is Miniscule 3% and is known to give 50% PA returns since last 15 yrs. Go on and read, you might find something worth

1. I am a long-term trader on my winning positions and a short-term trader on my adverse ones.

2.The traders who make money on a consistent basis are the long-term position traders.

3. One of the traits of successful operators is to close out losing positions and stay with, and even add to, the winning ones.

4. In two related markets, you should buy the strongest acting one and sell the weakest acting one.

5. The most important tactic for consistent and successful speculation is to control losses.

6. A long-term holder speculating with the trend should not try to capture small counter-trend profits by trying to get in and out.

7.I might lose my position, and with it the certainty of making a big killing with the big move. It is the big swing that makes the big money for you.

8.If you exit a trending position, regardless of the reason, and on the close of the next two days the trend is still in the original direction, you should get back on board.

9.The most damaging loss, and the one to be avoided at all costs, is the loss of confidence and belief in your ability to trade with consistent success – you must avoid that loss at all costs.

Thanks for this good post.

Read a good article today…..reproducing it below :

When we trade the markets, we have many hurdles to overcome if we are ultimately to be successful. Underlying all trades, for example, is the necessity to have knowledge. We need to know what we are doing and we need to know the specific risk(s) we are assuming. We need to understand the strategy we are employing and we should have an exit strategy. We are well served when we have a plan for our trade and utilize a money management system. All those factors can help us achieve an edge in our trading that can lead us where we want to go.

One of the most critical elements, however, is one that traders often ignore and that is our own psychological trading profile. I am convinced that certain of our individual psychological traits are the greatest impediments to success that we face. Long ago, a trader came to me seeking help. He had lost a great deal of money when the tech bubble burst and the market turned over in the early part of this decade. He had a fair amount of money and no job and wanted to get back to trading for his living. When I met with him, I learned that he had no specific business or trading plan so I began to go through the elements of a basic trading plan .

When we came to the section where he would set his trading hours, he absolutely refused to set hours. I prodded him by suggesting that if he were to open any other business he would likely have hours, but he persistently refused, creating one excuse after another as to why he could not set the hours he would devote. I reminded him that his plan is always a work in progress so once set he could always make a change. Even that didn't help convince him to include hours in his plan. His resistance was adamant and seemed irrational to me. Suddenly it occurred to me that refusal to complete the plan may be a way for him to avoid trading altogether so I changed gears.

I asked this fellow whether buying stock was a strategy he believed he understood well and he agreed it was. At the time of our meeting, the market was bullish so I suggested we find a stock that looked ripe for an entry and that had a nearby exit in the event it turned down. In a short time we found a candidate that we both agreed looked bullish and that might afford a good entry. I asked the student how much money he had in his account and learned it was in the mid six figures. The stock we found was trading for around $30 a share. I suggested he buy one (1) share. Immediately he refused, he literally began to shake and offered many reasons why he needed to do further research before committing. I pointed out that even if we were wrong on direction and the company immediately announced a bankruptcy after he bought the share he would lose only $30 and the commission. Tears filled his eyes as he claimed a need to do more research, gain more knowledge about the fundamentals, and await confirmation.

He never made the trade. Undoubtedly this situation illustrates an extreme case, but it does illustrate a psychological barrier that absolutely prevented this fellow from becoming a successful trader. He is a poster-child example of how perfectionism (in his case resulting from fear) can stifle good trading. Perfectionism in trading can lead to paralysis of analysis. The perfectionist seeks every bit of information he can possibly find and then seeks confirmation of the information. Meanwhile, he is likely to miss the trade. He is so interested in being right that he fails to pull the trigger until after the target is gone.

One of the problems with the perfectionist approach is that it fails to recognize that even once as much information is gathered as is humanly possible there is still no guarantee that it will remain the same the moment after the trade is entered. Perfectionism does not guarantee the trade even though the perfectionist may, indeed, be seeking the perfect trade. A perfectionist generally does what he does to insure complete safety, but in reality there is no such thing.

Many years have passed and the fellow about whom I wrote in the anecdote above continues to try to create a perfect algorithm to find the perfect trade. Unless we can perfectly predict the future there can be no such algorithm. Unexpected attacks occur; cataclysmic natural events occur; fundamentals can turn on a dime — any of those kinds of things can and do alter predicted outcomes.

Those who are perfectionists can help themselves in their trading, I believe, if they are aware of the trait and temper it with the knowledge that no matter how hard they try, complete safety cannot be achieved. Learn to make reasonable efforts, understand that all cannot be known and even if all current facts are known it does not guarantee the next moment. Try not to let the trade get away, but realize that it will have risk. Work to manage the risk.

Best Wishes,

Smart_trade

Don't know why but this section looks to be the most ignored one though this one needs attention the most.

Saint's Blog always help us balance the Mental side of our Trading along with the Method, though cannot totally match it but I will try to bring the best I have read so far Together.

Here is some dose of Medicine for your Minds, the most important aspect of Trading

You’ve Got a Great Trading System… So Why Are You Losing?

You’ve done your homework.
Countless hours of seeking out the right guru (or piecing together your own system). Weeks of monitoring your guru’s daily trade picks (or paper-trading and back-testing your homemade system). You’ve done it by the book.

No seat of the pants trading for you!
OK, now you’re confident. It’s time to put your money where your homework is.
You’ve had your coffee and your first trade signal ibefore you.

Confidence high. Trade made. First loss. Not a problem.
You understood before you started that successful traders both win and lose and “losing is part of the overall winning”. You’ve also heard more then once that “successful traders don’t win on every trade.”

Moving on, still confident. Next trade made. Another loss, but…
This one hurt your pride a little because you got stopped out early in the trade, and then the market rebounded and would have hit your profit target if you weren’t stopped out.
You double check.
Yep, you placed the stop where your trading system told you to place it.

You kind of had a feeling that the early weakness in the market was just profit-taking from the previous day’s trading, but you’re trading a system and you must stick to it. Wounded, but resilient.

After a good night’s sleep and a few mouse clicks, your new daily trades are in front of you.
Hey, this one looks good! It’s a little bit more risk than yesterday’s trades had, but look at that profit potential!
With a smiling face, the trade is executed. With a nice start to the trade, you’re feeling good and you’ve moved your stop to breakeven, just like your system said.

Surprise piece of news! Market reverses – blows through your stop – an “unexpected” loss.
Is something wrong with the system?
Has the overall market “personality” changed, affecting your system to the core, rendering all your back-testing irrelevant?
Your confidence turns to doubt.

You decide to “watch” the next trade… I mean, isn’t it wise to make sure the system gets back on track before you “throw good money after bad?”
Isn’t that what a conservative trader does?
Trade watched. It wins!
In your head, you beat yourself up a little because you know that when you started your “live” trading, you made an agreement with yourself to take the first 10 trades “no matter what”… and here you wimped-out and missed a big winner that would have gotten you even.

What’s happening?!!
What’s happening is that you are out of control. Your emotions are ruling your trading.
The above scenario plays out in every trader from time to time… newbie and veteran alike.

The winning trader senses what is happening and nips it in the bud. The winning trader spend time EVERY DAY, working on “the discipline of trading”.
He/she reads a chapter in his/her favorite psychological trading book, scans the “ten commandments of trading” that hangs on the wall over his/her desk, listens to his/her mental training software for traders…
Something… Every Day… before trading begins.

There are many more losing traders than winning traders… and it’s seldom about the trading system.
In my career, I’ve come across at least 50 systems that I consider A+, yet I know for a fact that MOST traders that have traded these systems have lost.

They were not in control of their emotions.
Are you?

Thanks a lot for Great post prabhjeet …. keep them coming

Great stuff,Prabhjeet………and yes,a bit sad that the most important sections are a tad bit ignored.Hope you and the other Mods can keep a fire under this section……….All the strategies and the methodologies cannot stand up to the havoc that one's mind-especially the subconscious mind- can play.

Looking forward to more,Prabhjeet.

Great Going!
Saint

An eyeopener and great post Prabhjeet.. It is because of the fact that most traders ignore these aspects of trading that leads to disaster and then the game of shifting the blame to method or strategy starts. It is the reason that many traders with sophisticated systems keep on wondering about why they keep on getting losses and in turn are always looking for the holy grail when some with very simple techniques are always laughing their way to banks.

Kapil

Thanks for the nice and informative articles!!!

Fear is something that can freeze your rational thinking and create a havoc in your trading no matter how great system you trade.

I have faced this dilemma of whether to book profits or stay in out of fear and this was a chronic issue and the solution was to cover up the multiple possibilities in the plan and act on them whenever they occurred again. I still fail to do this all the time but have improved over time. There is no option to hard work here and you need to be open and agile all the time.

I have been watching you guys work on different aspects of trading and I am really thankful to be in the good company.

Thanks,
Revati

Great Post Doctorsahab,

I normally reserve such posts to be read carefully over the weekend. Psychological aspect of trading is the most important part and most difficult to master/overcome. Technical part is the easier part and can be mastered if someone is persistent enough but psychological part requires much deeper level of mental involvement, stamina, commitment and perseverance.

I have still not been able to fully put aside the greed and fear aspect of trading.

Do you think younger people are better equipped to adapt to the requirement of this psychological aspect of trading as they have lesser of the old baggage and more flexibility in their thinking than the older people????!!!!

Look forward to more posts here by everyone.

Bee

Random thoughts on Fear and Greed

Fear and Greed are two dominant emotions all traders encounter in trading. Lets see how we can deal with them.

Fear is an emotion which does not allow us to pull the trigger and take the trade…fear is more strong in undercapitalised traders.Fear comes from our past experience….we all as traders have suffered a few major losses in past so our past experience with the loss in the market gives us fear which can be termed as fear of known….there is also fear of unknown..something suddenly may go wrong,we loose the connectivity,we cannot square up our loosing position etc this is fear of unknown…fear also comes from the fact that we see a few traders blowout,lead a life of misery,inflict harm on their family and our sub-concious mind tells us that it can happen to us as well……..

Best way to deal with fear is to greet the fear face to face….understand that our major losses in past did not happen suddenly,market gave us plenty of chances to cut our loosing position….but we held to our position ….so if we keep a stoploss at a particular point then our losses cannot be large and open ended and will have a little impact on our trading capital…leave aside having any impact on our family…so if we risk 1 to 1.5 percent of our trading capital on reducing balance method on any particluar trade,there is very little chance of our blowout happening….

We also have to understand that market is not a living animal and it has no enmity against us, it in fact does not even know that we exist …so if we are not on wrong side of it,it will not harm us in any way…the fear also vanishes if we have backtested our method well…our mind knows that there will be a few losses in this method but when you trade this method for sufficiently long time you will come out with positive performance…

So proper capitalisation, stoplosses and backtesting of your trading method are three "sutras" which will drive away a demon called Fear….

Greed is equally strong emotion which comes into play after we pull the trigger and take the trade and trade moves in our favour…..we all want to hit a big thing in all walks of life….so we also want big money to come from the current trade…..there are times in the market when market gives us more than what we expect but those are rare occasions….we cannot hit a sixer on every ball,,,singles are equally important for making a big score…the greed comes from the fact that we prematurely book our profits on some trades and later on the trade develops as a big winner….but we have extracted very little out of it…it is a left out feeling which prompts us to hold the trade longer…and market reverses and we find it difficult to accept less profit than what was there some time back…so the holding against the trend continues and the trade finally goes into a loss…sometimes a big loss…here we loose on two counts and they are 1) we lost on profits from this trade and 2) we lost on profits from the next trade which we should have taken in the reverse direction…so double effect….

Greed can be tamed by understanding that trading is a business like any other business and bumper profits if they come are welcome but if they dont,we have to earn normal profits and keep the business going…if we have a trailing profit taking or periodic profit taking built in our method,we are sure that the method will latch on to large profit trades…but will also keep small profits flowing in regularly like a normal business activity….and we will not miss the reverse trade opportunity which again will add to our profits…and who knows,the reverse trade couls be a home run trade which we would never miss……

We cannot totally eliminate Fear and Greed…best of the traders faces these emotions in every trade…we can only tame them……..

Best wishes for taming Fear and Greed…..

Smart_trade

Awsome articles Prabh and ST…thanks a lot for these.

I had read a book by sometime back by Van Tharp…and he suggests that Psychology is always more important than your trading system and money management put together.

Great that now we are discussing psychological aspects of trading as well. I request that apart from the articles we put here, it would be nice if we could share some must-read or should read books/articles also…so that one can go through it and derive the benifit.

The one which I strongly recommend everyone is a book called Trading in the Zone by Mark Douglas. Available online on 4shared dot com.

Thanks a lot once again Prabh and ST.

Puneet

Another great article ST. Actually most of the traders do go through these phases and the sooner this is tackled, the better it is.

Kapil

Great one ST, the best thing that you said is that a Trader can never trade without Fear and Greed, the only thing that can be done is to tame it.
Only original market experience can say these words.

Good one

Thanks for the kind words…Puneet,Kapil and Prabhjeet…we all go through these emotions every day…

ST

It is so easy to read all the psychology and think that one has understood and assimilated. Yet, when you are in the field, the vision becomes so myophic and distorted that any objective discerning is impossible. Today is my 2nd day and lots of self learning.

1. Paper trading is so easy…in fact it is a complete waste of time once you have understood the method. The feelings/emotions do not exist in PT. After days of 'successful PT', today when I was stopped at a measly 17 points loss, fear took over and the next long trade was skipped just because I wanted to be doubly sure!!! Put long and cancelled just before it got executed. Put short at the rectangle top and cancelled it…and yes, regret followed in both cases. Saint Sirs golden words echo 'Don't be a master of the method, be a master of trading'.

2. Distorted myophic vision - Just because I had gone short early in the morning, I was seeing bearish movement everywhere..I was looking at bearish flag when; looking at it retrospectively, it was a price channel; I did not enter long trade on pivot break cause I was waiting for it to go bearish, did not see WW forming on both 5min and 60min and yet now I see it clear. All the pivots and SARs that I'd learned and executed so confidently on PT disappeared in thin air. Objectivity disappears…I see exactly what I want to see irrespective of whether it is real or not.

3. Loss teaches - First day was in positive points…did not learn anything except that patterns and all my learnings actually do happen in real on a real trading day…2nd day was negative…lots of self learning and emotions. I guess the earlier I get hang of these factors, the better for my longetivity.

Some of the psychology mumbo jumbo makes some sense now..I know lots and lots of stuff to experience…just 2 days yet..more than the knowlege it is the emotions that make or break a trader.

Very good life long lessons for a measly 17 points!

Live trading is different from Paper trading……….Good read from Market Wizard….. Following is the quote from one of Market Wizard book:

"I guess that implies you are not an advocate of paper trading for beginners.

Absolutely. I think paper trading is the worst thing you can do. If you are a beginner, trade with an amount of money that is small enough so that you can afford to lose it, but large enough so that you will feel the pain if you do. Otherwise, you're fooling yourself. I have news for you: If you go from paper trading to real trading, you're going to make totally different decisions because you're not used to being subjected to the emotional pressure. Nothing is the same. It's like shadowboxing and then getting in the ring with a professional boxer. What do you think is going to happen? You're going to crawl up into a turtle position and get the crap beat out of you because you're not used to really getting hit. The most important thing to becoming a good trader is to trade."

Regards,

Monk…

Very good life long lessons for a measly 17 points!

—Bonny

Bonny let me assure you that you haven't even seen the Tip of Iceberg when it comes to Trading Psycholgy. For anyone starting with Trading a Loss of 17 pts. is much better than a gain of 100 pts. as it does not cause a overconfident swollen Head which can lead to a disaster in the early stages.

When you win big at the start or even after some time it makes us think that we are smart, which is actually not the case, its the market that has been good and we were lucky enough to be there. So a loss of 17 times is 100 times better than Gain of even 170 pts. as it will make us study the markets.

And one more thing why all the experienced Traders are always so intrested in Psychological lessons. Its what we call as Conditioning of Sub- concious mind that we are intrested in mind. Our Sub-concious mind is the most efficient Data storage place, whenever we keep on reading these lessons again and again they start to get stored in our Subconcious mind and then it becomes a bit of sub concious decision to Let the profits run and Cut the losses.

So if I can advise anyone 1 thing about Trading I will ask him to be strong Mentally, these are the only muscles we use while Trading and frankly we are very lucky to have experienced Saint here who shares the mind of a Trader in his blogs

Very well said Doctorsahab!!!

I treat losses as investments as they force us to think hard. Winning lulls the mind into complacency. Even experienced traders are brought to ground hard by occasional losses when they become over smart. Market is unforgiving and merciless.

I think it takes time to mature into a good trader. Until and unless all scenarios are experienced in real time trading one does not appreciate their importance.

If you read previous posts of Saint after every 3 to 6 months you will see things which previously you read but full implication did not sink in.

In time and with practice we can be good traders provided one's account survives that long:):)

Trade well

Bee

Rightly Pointed Bee ji, haha I know it sounds like I am referring to an Old Lady. Rome was not built in a day, so it will take lots of time to develop into mature Traders

Looking at my trading today, can some seniors give insight into careless trades?

Today I had a good early morning trade and I achieved in excess of my target for the day. I took the next trade where none existed. Infact if I look at it now, it was like almost throwing the excess points that I'd got from my earlier trade. After getting stopped out, the result was below my target.
The next trade was sensible…all fundementals followed. Excess again, and the same careless type of trade after that.

Its like I do not want anything more than my target for the day.The rest is all thrown away.

Is my target setting a problem? How do the seniors deal with this more than target achieved emotions?

Bonny,

Are you trading any method or trading on your hunch ?If you are trading on some method then you should not take careless trades….trades should be initiated because the market calls for a particular trade and they should not be the function of how much more money you have over and above your day's target….

Nothing wrong with setting targets,though I am not a great believer of any targets for the day…we take as much as market gives us and having achieved the target is no reason to stop trading….and having not achieved it yet is no reason for initiating a trade….

Best wishes ….

Smart_trade