Trading for a Living

Another great book being read, “Trading for a Living” by Alexander Elder. This book was again cover market psychology, computerized technical analysis which explained well the function of those popular indicators plus risk management. I quite enjoying reading the market psychology part, because it did mention how our emotion influences by the price movement. However, when comes to computerized technical analysis part, I skip a lot because I know what indicator I want to use in my trading and I always believe simple is the best.

Why do most traders lose and wash out of the markets? Emotional and little trading knowledge are two reasons, but there is another. Markets are set up so that most traders must lose money and trading industry kills traders with slippage and commission. Slippage is the difference of the price that you willing to pay and the price you actually pay. When you eager to enter or exit the market by giving market order and it often tends to become the worst price when the order had been done. On the other hand, commission is the service charges given to the broker whenever a trader wants to enter or exit a trade. When you record down the commission for every transaction being made, you will found that your commission will be an upward sloping graph and never slope downward because your broker will never give back the commission even though lot of trading transaction was being made. Trading is a minus-sum game, in order to survive in long run, traders must cautious on the damage cause by slippage and commission. There is 1 of my friend who work as a future broker and he got 1 client which trade heavily with him. He told me this client was trading half year and losing around 150k and surprisingly this client was contribute 100k commission to my friend!!! In this case, if you don’t want to see your accumulated commission become so much as this client, always seek for broker that able to provide the cheapest commission as possible.

Trading is so exciting that it often make people feels high. Nobody can get high and make money at the same time. Greed and fear are enough to destroy a trader, so we have to use our intellect rather than gut to beat the market. Besides that, there are 2 very interesting question that being mention regarding probability. First, a group of people had given 2 choices to choose: a 75% chance to win $1000 with a 25% to get nothing or another choice; 100% get $700. In fact, most of the people will choose the second option including me even though the first choice leads to $750 gain over time. This test explained that most of the traders are make emotional decision and willing to take smaller gain just like what scalpers that aim for little profit from a trade as long the profit was guarantee. Another test is given: people have to choose between a sure loss $700 or a 75% chance of losing $1000 and a 25% of losing nothing. What an impressive probability test, I admit I choose the second option as majority people does rather than first one and tends to suffer extra $50 in the long run. Again, it shows I still an amateur trader who trying to avoid risk and end up maximizes losses. As a result, we have to aim for the trade that give higher probability to maximize wins and minimize losses, and don’t ever hang on hope and irrationally avoid accepting small losses.

Trading in the Zone

Actually I’m a person quite lazy to read. I will fall asleep if I reading something nonstop and I really mean it. However, it is time for me to change my attitude already, I have start reading and this is the only way I can gained more exposure of trading knowledge, or else I will be keep limit myself in a same box forever. After I suffer in the heaviest sideways ever, I stop trading until now. I know losing in futures market is unavoidable and it is part of the risk that must be taken but the frequency of losing make me unable to take it anymore. I very understand that as long there is an emotion disturbance, it means that there is something wrong with myself, and I have to stop trading. As a result, I download a lot of trading book and I hope after go through all the trading books, it can provide me some guidance to improve me trading skills.

So I start reading a book call “Trading in the Zone” by Mark Douglas. Actually this is neither a technical analysis nor a system development book but it is a book about market psychology that investors that encounter. This book I would say it is quite hard to understand or maybe my trading experience was not so deep enough, so some part that the author mentioned was quite confusing. However, there is some part that I really agree with it and it did help me to understand myself what kind of emotion problem I did encounter when I start involve in trading. At first, author was mentioned the only key the success in trading, is not about consistency in winning or consistency in following your signal, it is about the consistency in following your own rules. In order for you to achieve the consistency, you have to rigid to your rules and flexible on the expectation. Rules are about entry point, cut lost and profit taking while expectation is the outcome of the trade. Most of the trader was doing opposite ways, and they will tends to overtrade during a sequence of winning trade while they also become unconfident whenever there is a series of losing trade.

If futures market is all about a probability game, so the only thing have to keep focus is eliminate the emotional risk of trading by establishing a mindset such as: 1) Anything can happen, 2) You don’t have to know what is going to happen next in order to make money, 3) There is a random distribution between wins and losses for any given variables that define an edge, and 4) Every moment in the market is unique. If you able to establish such a mindset, then you will be more stress free in execute any trade and I am sure all the top traders are having the same mindset as what author mentioned. It was very great I able to finish this book in 1 week and I did benefit something from this book. Emotion always constitute a large portion in making decision for any trade, so when one day I can trade without any emotion, then I will view that the path of becoming a successful trader and become nearer and nearer.