Discussion in 'Psychology' started by turkeyneck, Jan 28, 2011.
I remember reading that in Market Wizards. How can you stop doing that? It's easier said than done.
Two things think have to happen. 1 you have to have an account large enough to take a few hits. Once you can have the mentality if i lose a a few grand today, well i can come back tomorrow attitude. 2 try thinking of it as a game. Think of the money as points. 100 dollars equals 1 point of however you see fit given your account size. Thats how i view my account which while not large; Allows for losing days to not ruin my entire day. Hope that helps.
This is an interesting question. It's hard not to think "I just lost $5000, I coulda bot alotta cheeze with that." I find that I'm not as bothered by losses in my IRA because I'm not going to touch it for a few decades. But it's hard to think of your balance as a scorecard and not as real money.
It's gets harder when your account gets bigger, for obvious reasons. The losses are bigger.
I had to supply the money and the question was: Where could I get it? I didn't want
to take it out of the balance I kept at my brokers' because if I did I wouldn't have much of a margin left for my own trading; and I needed trading facilities more than ever if I was to win
back my millions quickly. There was only one alternative that I could see, and that was to take it out of the stock market!
Just think of it! If you know much about the average customer of the average commission house you will agree with me that the hope of making the stock market pay your bill is one of
the most prolific sources of loss in Wall Street. You will chip out all you have if you adhere to your determination. Why, in Harding's office one winter a little bunch of high
flyers spent thirty or forty thousand dollars for an overcoat - and not one of them lived to wear it. It so happened that a prominent floor trader who since has become world-famous as one
of the dollar-a-year men-came down to the Exchange wearing a fur overcoat lined with sea otter. In those days, before furs went up sky high, that coat was valued at only ten thousand dollars.
Well, one of the chaps in Harding's office, Bob Keown, decided to get a coat lined with Russian sable. He priced one uptown. The cost was about the same, ten thousand dollars.
"That's the devil of a lot of money," objected one of the fellows."
"Oh, fair! Fair!" admitted Bob Keown amiably. "About a week's wages -- unless you guys promise to present it to me as a slight but sincere token of the esteem in which you hold the
nicest man in the office. Do I hear the presentation speech? No? Very well. I shall let the stock market buy it for me!"
"Why do you want a sable coat?" asked Ed Harding.
"It would look particularly well on a man of my inches," replied Bob, drawing himself up.
"And how did you say you were going to pay for it?" asked Jim Murphy, who was the star tip-chaser of the office.
"By a judicious investment of a temporary character, James.
That's how," answered Bob, who knew that Murphy merely wanted a tip.
Sure enough, Jimmy asked, "What stock are you going to buy?"
"Wrong as usual, friend. This is no time to buy anything. I propose to sell five thousand Steel. It ought to go down ten points at the least. I'll just take two and a half points net. That is conservative, isn't it?"
"What do you hear about it?" asked Murphy eagerly. He was a tall thin man with black hair and a hungry look, due to his never going out to lunch for fear of missing something on the
"I hear that coat's the most becoming I ever planned to get." He turned to Harding and said, "Ed, sell five thousand U.S. Steel common at the market. Today, darling!"
He was a plunger, Bob was, and liked to indulge in humorous talk. It was his way of letting the world know that he had an iron nerve. He sold five thousand Steel, and the stock promptly
went up. Not being half as big an ass as he seemed when he talked, Bob stopped his loss at one and a half points and confided to the office that the New York climate was too benign
for fur coats. They were unhealthy and ostentatious. The rest of the fellows jeered. But it was not long before one of them bought some Union Pacific to pay for the coat. He lost eighteen
hundred dollars and said sables were all right for the outside of a woman's wrap, but not for the inside of a garment intended to be worn by a modest and intelligent man.
After that, one after another of the fellows tried to coax the market to pay for that coat. One day I said I would buy it to keep the office from going broke. But they all said that it
wasn't a sporting thing to do; that i f I wanted the coat for myself I ought to let the market give it to me. But Ed Harding strongly approved of my intention and that same afternoon I went to the furrier's to buy it. I found out that a man from Chicago had bought it the week before.
That was only one case. There isn't a man in Wall Street who has not lost money trying to make the market pay for an automobile or a bracelet or a motor boat or a painting. I could
build a huge hospital with the birthday presents that the tight-fisted stock market has refused to pay for. In fact, of all hoodoos in Wall Street I think the resolve to induce the
stock market to act as a fairy godmother is the busiest and most persistent.
Like all well-authenticated hoodoos this has its reason for being. What does a man do when he sets out to make the stock market pay for a sudden need? Why, he merely hopes. He gambles.
He therefore runs much greater risks than he would if he were speculating intelligently, in accordance with opinions or beliefs logically arrived at after a dispassionate study of
underlying conditions. To begin with, he is after an immediate profit. He cannot afford to wait. The market must be nice to him at once if at all. He flatters himself that he is not asking
more than to place an even-money bet. Because he is prepared to run quick -- say, stop his loss at two points when all he hopes to make is two points -- he hugs the fallacy that he is merely taking a fifty-fifty chance. Why, I've known men to lose thousands of dollars on such trades, particularly on purchases made at the height of a bull market just before a moderate
reaction. It certainly is no way to trade.
It helps to focus on trading your method that you already have strong confidence in. The money/profit should follow if your method AND discipline to execute the method are good.
1) Arithmetically, the losses can be "bigger".
2) Geometrically, the losses should be "smaller" as you tend to reduce your leverage and turnover.
1) ?.....the "Jesse Livermore" book?
2) There must be an updated version of that story having to do with guys from Brooklyn who are trading penny stocks in order to raise money to buy a condominium in Manhattan.
i disagree. when i first opened an account i put in the minimum and thought $100 dollars was a lot, but $100 is just noise. with a larger account you can actually put on trades and see them through; the only time you think in money terms is when you're really right or really wrong
If you trade for a living, then trading is your business and you should be thinking in money terms, but you need to place trading into a business framework.
You are your own boss, so you need a business plan to answer to, since you donât have a supervisor to answer to.
Your business plan should include:
A description of your statistical edge based on in depth market research and testing, and a description of all valid trade setups that you will trade so you can take advantage of the statistical edge.
How much weekly/monthly profit you need to generate to pay expenses and have something left over for savings/emergencies.
Based on your statistical edge, the average position size needed to generate this profit, while limiting risk of ruin.
Rules for trade management to take full advantage of your edge and rules for risk management that, combined with your average win rate, provide a positive money management edge (for example: trend-following strategies - 50% win rate, 2:1 reward:risk ratio; reversion to mean strategies - 90% win rate, 1:4 reward:risk ratio).
Once youâve done your research, and put together your business plan, you should feel confident that you will be profitable as long as you follow your plan. Thinking about profit/loss trade by trade will be detrimental and probably drive you to drink. Youâll start picking and choosing trades instead of trading all valid setups per your plan, youâll take profits too soon and mess up your R:R ratio; you may start to stray from your plan altogether.
A good business that provides products or services to customers will be most profitable when it provides what customers want at a reasonable price and treats all potential customers with respect. If the business treats certain prospects with indifference because the customer "appears" unqualified, it could lose large profitable sales.
Similarly, a good trading entrepreneur will provide his/her trading account with every valid opportunity to turn a profit. A setup may appear unqualified (âthis thingâs been running up all day, it canât possibly go higher so Iâm not going to trade this pending breakoutâ), yet turn out to be the most profitable opportunity of the day (in fact, this happened to me just today).
Losing trades are simply a cost of doing business and are meaningless within the bigger picture of your trading plan having demonstrated a statistical edge of profitability over time.
If youâve done your research, developed a business plan, and tested the business plan, then youâll think of losing trades much like a business thinks of paying its vendors for inventory; no one likes to pay bills, but you work to get the best price while maintaining quality, meaning you limit losses (costs) and during times when your customers (the market) are bidding/offering for what you have with irrational exuberance, you take as much additional profit as possible.
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