Feb 07

The Beauty of Back Testing


I’ve embraced my inner nerd this weekend, and spent a great deal of time with my face in front of the computer, writing out reams of data by hand.  You see, I had an idea to make my life a little easier and hopefully more profitable.

I’ve been mucking around with FX this year in an effort to diversify away from equities, and while I had a brilliantly profitable month in May, it turned to absolute junk EUR/USD - Euro to US Dollar forex in June.  The main issue with my method was that it relied too heavily on my own input to generate signals through the use of trend lines.

The thing with using a trend line as part of your trigger is that you can pretty much draw a trend line to create any outcome you desire.  Don’t want to enter?  Funny how that trend line you just drew neatly misses the mark.

Even if you don’t mean to, your subconscious can have its evil way and screw things up.

So I need an entry that is totally price derived, and not manipulatable(?) by me. On Thursday I noticed a set of circumstances that seemed to be an interesting trigger into a trade, so set about testing it to see how it panned out in a stop-and-reverse kind of scenario.


It was crap.  It lost money and had way too much noise.  But after a couple of filters were added it’s come off quite nicely. Thankfully – after manually testing every entry and exit on the $AUDUSD since 1998 I was starting to feel like my eyeballs would fall out.

The thing I like about doing a manual back-test is that you get to feel the pain.  Perhaps that’s a little sadistic, but I think it’s important to sit through the ups Chart Euro to US Dollar and downs your system would have generated.

You live through each entry and exit as it would have happened and when you hit a huge patch of losses you start you feel uncomfortable that it’s not going very well.  You start to doubt if the system will even be profitable after this stupid clump of losers.

With computerised back-testing programs, you don’t get that.  You get to see very painlessly whether your idea works, but you don’t have to sit through each and every loss with anything invested.  Even having your afternoon invested in the outcome is enough to make you want it to be successful, and when you’re recording it and it feels like it might not be, it’s really disappointing and feels like a huge waste of time.

But its not.  There’s absolute gold to be found in back testing, even if the system is junk.

The first thing is that at least you get to find out it’s crap before it loses you all your money.

And in the happy event it rakes in the dough hand over fist, you get to have a sneak peak into the personality of your system.

For example, within the 14 years of data I tested, there was a huge run of 14 losses.  And a break-even was in there too, so 15 trades without a win.  On a daily system this could translate into a totally win-free year – yuck!!

When I was testing, I could feel myself getting frustrated.  I worried about what kind of effect the draw-down would have on the systems profitability, and if I would even be able to sit tight and trade through that kind of situation.

You hear all the time that you never know what’s just around the corner, and this testing experience really brought that home to me.  You need to be prepared to trade through 15 trades from hell – well, purgatory perhaps, since we’re capping our losses – to get through to the other side.

Because just like you don’t know when a nasty patch is before you, you also don’t know what comes right after those losses.

The thing is, that run was an outlier.  Prior to that freak run, the largest hit of losses was just five – nearly anyone can handle that and if I’d quit after loss 10 and ditched the system I’d have missed out on what was to follow – namely, two monstrous money-making wins.

I still have a lot of work ahead of me with this method – I need to test it on some other pairs, check the correlations and I also want to see if the method translates nicely onto shorter timeframes.

But it’s work I’m happy to do, because every minute I spend now figuring this out will translate into a method I know inside out, and have enough confidence in to pull the trigger time and time again.


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Feb 03

If The Shoe Fits….

The Evolution of A Trader, Expressed in Shoes.

(Yes, it’s possible I have far too much time on my hands.)

The Newbie Trader.

Little do they know they are but a table leg away from a great deal of pain.

The “I’ve Just Had My Ass Handed To Me” Trader

Did someone say “risk management”?  No bleeding toes here, but plenty of blisters until you wear these bad boys in.   “These boots are made for working, and that’s just what you’ll do…not gonna let the market do no walking over yooooou…”

The “First Profits” Trader

You’re on the sealed road now – there’s still work to be done, but the wounds have healed and your pace is picking up.  Your account is starting to look a bit more toned, too – but you’re not exactly the height of fashion, are you?!  Especially with jeans; really, that look is all bad.

The “Wind-Fall” Trader

Those skills are looking pretty damn good these days – you’ve stayed the course long enough to trade some great markets and can confidently pirouette through your routine with your eyes closed.  Watch it though, those shoes are a sprained ankle just waiting to happen.

The “I’m Doing What I Came Here To Do” Trader

Yep – You’re running a pretty smooth operation right now.  You’ve got it going on,  and your trading is simple and professional.  Your account is healthy and you’ve hit your stride – in Manolo Blahnik pumps, which you can now actually afford.

The “I Could Buy New Zealand” Trader

You’ve been playing this game so long footwear is entirely at your discretion.  You are free to do what you want, when it pleases you – and if you want shoes with a goldfish in them, you’ll get them, dammit!


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Feb 02

If You Had To Choose A Trading Skill….

What would it be?

Great technical analysis skills?  The ability to take small losses?  Better insight into your trading psyche?

While all these skills would be great,  personally I believe there is one ‘skill’ that successful traders possess that underpins all the others.

Without this one attribute, longevity in the markets is pretty much a no-go.

I bet you’re thinking discipline, right?  Blah blah, heard it all before, discipline, stick to plan blah blah…. Wrong.

Well, right, but wrong.  Discipline is definitely required, there is no doubt about that, but what every trader really needs even before discipline, is optimism.

I’m not just talking about a glass half-full attitude, and looking on the bright side – real optimism is much more than that.

How Optimism Makes Us Great

Real optimism is the ability to attribute the good stuff to ‘that’s how life is’, and the bad stuff to “that how things are this moment, but not forever’.  It allows us to bounce back after a blow rather than be emotionally flattened by it.

We all have a disposition one way or another, and it affects our outcomes in pretty much everything.

My two eldest kids are a prime example.

Josie, my eldest, is a naturally gifted runner.  She’s just built for speed, and at 9 years old can kick my ass in a running race.  Which is kind of embarrassing.

Toby is different.  He has flat feet, a stockier build and just generally doesn’t have the natural gifts that Josie does. But Tobes thinks he’s awesome.

So who do you think is a more successful runner?   In fact, they are about the same.

Toby trains passionately.  He believes he is a great runner and when he wins, that’s taken as confirmation that he is, indeed awesome.

When he loses, he takes it as though it’s a temporary loss that will be amended shortly – and uses it to practice even harder.

Josie, on the other hand doesn’t train or practice at all, except maybe twice prior to a sports carnival. She often wins because of her natural ability, but won’t put in the time to train because she gets too puffed out and isn’t fit.  And in her mind that won’t change – ever.   It’s permanent, and that’s just the way she is.

If I had to place bets on who will be the better athlete in 5 years – or even 2 years time, my money would be firmly on Toby because his optimistic attitude will undoubtably end up trumping Josie’s innate skill.

Martin Seligman, the go-to guy regarding optimism, suggests that there are three ways that pessimists think differently than optimists, shown in the graphic below.

optimism vs pessimism


The thing with trading is that the negative feedback is constant.  It doesn’t let up, and it doesn’t go away because the losing trades will keep on coming as long as you’re trading.

No matter what natural trading talent you have, if you think the negative feedback you get from trading defines you – I’m losing, I will always lose, and that’s the way it is for me – you simply won’t have the sticking power – or the mental strength – to get through.

Added to this is the fact that trading is a feel-bad endeavor.   The feel-bad factor of a $1k loss is way worse than the feel-good factor of the equivalent $1k win, which leaves an interesting over-all “feel-good deficit” that most traders are not prepared for.   Unless you are naturally happy and an optimistic person it is a very heavy weight to carry.

A trader with a good streak of optimism will find it reasonably easy to disconnect from losses.  They find it easier than their pessimistic counterparts to accept that their losses aren’t a personal affront, and that their trading can be profitable overall in spite of them.

The Good News About Pessimism

Is that optimism can be learned.  And if anyone can learn it, a trader can!

Traders are used to a good deal of self-reflection and that’s exactly what’s required to change our thinking to a more optimistic outlook.

For those that do have a more pessimistic bent, Martin Seligmans book “Learned Optimism” is a brilliant read.  It’s not trader-specific but is fantastic to help recognise and change unproductive and even potentially harmful thinking.

Or, if you’d like to read more, this is a more in depth explanation.


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Feb 01

Ask, And It Shall Be Given

I had quite a revealing morning, this morning.  Of course, I didn’t realise it at the time, because I was 85% asleep.

My husband, Jim, is a bit of a freak.   He sets his alarm at 5.30 am every week morning and religiously gets up to do some sort of exercise.    And as luck would have it, earlier in the year when I asked him to encourage me to get up too, he took me seriously.

Anyway, this morning in my sleep induced haze I noticed Jim had gotten up.  I didn’t want to, wasn’t ready.  And – (this is a bit weird) I started to listen to myself think.

This is the ensuing conversation –

Me –  “Uurgh.”

A bizarre, somewhat sprightly form of me –  “Come on Jess, get up or your thighs will turn into lard.”

Me – “Mmmph. (Rolls over)

Sprightly, who was precariously close to being slapped – “I know it’s disappointing, but there weren’t any wet beds or sick kids last night – you have to get up, there is no excuse at all.”

And Sprightly was right, there was no excuse and I did drag myself out of bed.  And went for a run, and did some yoga, and watched the sun rise with a cup of coffee and my gorgeous husband.

Asking Questions

It struck me how differently Jim and I treat the mornings.  I have to drag myself into them, kicking and screaming, whereas Jim just gets up and goes. He has unshakable discipline, and has had ever since I’ve known him.

After hearing myself negotiate my way out of bed this morning, I was intrigued to know what went on in his head – I figured if he can leap out of bed in the mornings with a spring in his step, I can too.

I admit I was expecting him to say something entirely unhelpful like “I just do it”, or similar, but what he actually told me was much more profound.

He told me he thinks of all the things he has to be grateful for. Things like a healthy body, a good job, a gorgeous, amazing, clever wife (okay – he didn’t really say that.  But he definitely thought it ).  The point here is that he used a strategy to get himself to a great place to start the day – a strategy that I can learn and replicate.

Unfortunately, I suspect that the only thing I’ll be able to think of being grateful for at that time of morning is my bed.

And Learning From Others

Jim’s response really made me realise how important it is to be inquisitive.  What do we not know, because we simply never bothered to ask?

What holes do we have in our trading that could easily be fixed if we asked the right questions?

Sometimes it’s scary to ask knowledgeable people questions, because we worry that they’ll think we’re stupid, or it’ll be embarrassing, or we’re to shy…the excuses just pile up and before you know it nothings changed.  Ever.

Here’s a trick – knowledgeable people didn’t always know what they know, and the way they found out was to ask questions.

We are so lucky with the communication we have and the incredible access we have to traders all over the world – we have experts at our fingertips, who are just lying around wondering why no-one is asking them anything.

Right now, I have a few questions I need answered in the hope I can return the favour down the track with a new project I’m working on.

The people with just the knowledge I need are part-time traders who would like to move to full-time trading in the future.

If that sounds suspiciously like you, please click here to send me your email address, and I’ll send you my burning questions asap.  It’ll be worth it, I promise :)

Thank you to everyone who offered to answer my questions, I have had a brilliant response and have enough to keep me going for quite some time.  Thank you!


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Jan 31

My Top 10 Favourite Self-Destructive Trading Thoughts

Finally – after weeks of hand cramps, crossed eyes and other nerd-induced unattractiveness, my testing is complete.

I’ve finally finished manually testing the FX 1H method I developed, and on Monday I started trading it live.  I really enjoyed testing it – the method made sense to me, gave me clear entries and exits with defined rules regarding each, and it felt good (enough) emotionally.

So I was understandably pretty keen to turn the money machine on and let it start churning out the cash.

Unfortunately, on the very first day of operation my lovely, shiny new method started making scary grinding noises and blowing out  a swirly mess of black smoke.  Crap.


My house on Monday. Sadly, my insurance doesn’t cover faulty money-machines.

It turned out there was something wedged in amongst the workings of the machine.   After much pulling and wrenching I managed to get the mangled object out, only to find it was, in fact me.

The Return Of The Evil Trader

I always seem to screw up the first day trading a new method.  It’s a weird thing.  It’s as though my whole internal being spontaneously rebels and shrieks and twist and turns and doesn’t want to go through with it.

It seems I have a freakishly noisy anti-trading persona residing in my head that makes itself heard at particularly inopportune moments.  Either that, or I might be possessed by Satan.

My Top Ten Destructive Trading Thoughts

Taken From Monday.

  1. That resistance is way too close, I really shouldn’t have taken that signal. 
  2. I should definitely trade that breakout. My method doesn’t trade breakouts,but that’s a really good-looking trade.
  3. I’m long, this is a downtrend.  What the heck was I thinking?
  4. This going to be a loser, for sure.
  5. Price has ripped so far away from me – please don’t turn into a signal.
  6. This is clearly in a congestion range.  I’m going to ignore that signal and wait for a breakout.
  7. Buying spikes – this short is doomed.  See ya, money.
  8. Yippeee! It’s not turning into a signal!
  9. Ooh, nice profit – I should take that while it’s still there.
  10. Take the profit. TAKE THE PROFIT.  TAKE THE DAMN PROFIT!!!!!

As you can see, I was in fine form.

Thankfully, despite my mind being absolute crap and tormenting me every step of the way, I stuck to my plan like glue and actually ended up trading well.

But it fascinated me to watch and listen to myself trade.  It became very clear that there is some part of me that is quite intent on sabotaging my efforts – a part that would have been far more successful a couple of years back.

We all have an Evil Trader inside us that wants us to fail.  He sits there and watches, just waiting for the right moment to strike.

The problem most traders have is that they don’t realise he’s there.  They are so used to hearing his voice that they can’t distinguish their own thoughts from their Evil Traders and as a result their trading reflects their great big internal mash-up.

Ways to Recognise and Defeat Your Evil Trader

  • Have a plan.  If you don’t have a plan, your Evil Trader has zero boundaries and will take over entirely.  When you have a plan, you’ll start to notice him telling you not to follow it.  You’ll hear him whisper seductive anti-plan ideas that sound and look perfectly reasonable – except they aren’t in the plan.
  • Have an Evil Trader Journal.   The thing with ET is that often his ideas sound great and are really hard to ignore.  So as not to discard potentially good ideas, keep a log and after each trade is closed make a note of whether the idea would have been positive or detrimental to the outcome of your trade.  After a period of listing these ideas you’ll be able to notice that a) ET is wrong and he needs to shut it, or b) his idea deserves some further testing as it’s possible it has merit.
  • Try to make your method as water-tight as possible.  A signal needs to be a signal without a shadow of a doubt.  An exit needs to be a definite exit, no two ways about it.  The more black and white the better, as your Evil Trader loves to second guess your judgement.  Planting seeds of doubt is just the way he rolls.
  • Make a check-list for those times when you’re just not sure.   There will always be times when things just don’t seem so clear-cut.  This is your evil trader’s very favourite moment to strike.  You need to be armed with your weapons of ET destruction – aka, your check-list – to guide you through.  Having a checklist on hand allows you to objectively determine whether what you think you’re seeing is in fact what the market is presenting.


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Jan 30

13 Things They Didn’t Tell Me About Being A Trader

1. They never told me trading was hard. Or anything that resembled work at all, really.

2. I never got told that 90% of traders fail – in fact I got told anyone could trade, and that it was especially lucrative if you did it while lounging by the pool.

3. They failed to mention that I would have to dig into my past, unravel my mind and battle a few demons in order to have any chance of succeeding.

4. Or that trading would generously provide me with the most hideously earth-shattering moment of my life.

5. They must’ve forgotten to tell me that it’s not possible for trading to provide the startlingly ecstatic opposite of Number 4; that those amazing moments come from things that aren’t, in fact, things.

6. I must’ve glossed over the bit where it said that I would have to morph, at times, into the epitome of nerdiness – the likes of which have previously only been observed in accountants and mathematician.

7. Also hidden in the fine print was the fact that I would become proficient in coding Excel. Makes me gag in horror at the reality of it, to be honest.

8. I missed the bit where it said that finding real people (who you can actually sit next to) to talk to about trading is extraordinarily difficult. Especially for a woman.

9. They didn’t tell me that it’s easier to tell people you’re an alien than it is to tell them you’re a trader. At least being an alien is a conversation starter.

Or, on the flip side – that every clueless yokel within a 3 mile radius will feel compelled to tell me their hot tips at Saturday afternoon barbeques.

10. They neglected to mention that no matter how brilliant your teacher or mentor is, you really do have to get up off your butt and do the work. That your mentors can hand you the uniform and bat so you look the part, but it’s up to you to hit the ball.

11. I wasn’t told that there is no magic bullet; in fact I was told the opposite – that there is a magic bullet and it costs $2999. They didn’t tell me that my best weapon is the plan I’ve developed for myself and the strength I have to implement it time and time again. That’s as magic as it gets.

12. I sure missed the memo about the labelling and name calling – I’m sure there was nothing in there about getting slapped with everything from a gambler and a materialistic money-freak to horribly selfish, greedy, and a rich cow simply because I trade.

13. But they especially didn’t tell me that I’d happily put up with all of the above because contemplating life without trading is akin to having my head shaved and my legs lopped off.

Hideous, and entirely unthinkable.

*Hat tip to Louise Bedford, you can read her take here 😉

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Jan 29

Two Mistakes I Made Last Year, (And How I Saved My Ass)

Today I am lucky enough to welcome my very first ever guest blogger. I know, it’s very exciting :) Troy blogs over at The Financial Economist, where he shares his thoughts on the financial markets. Please check it out when you have a moment.


As I’m writing this, I’m currently lounging in my hotel, waiting for the night to come so that I can converge with a bunch of my fellow traders for dinner. We do this about once a year, and one of the main highlights is to talk about our war stories from the past year. I figured that this would make an excellent post topic, and in case Jess decides to publish this before tonight (it’s currently May 20th), at least I’ll have something to read off of in case I forget a point or two (although my trading errors are pretty hard to forget 😛 ) So without further delay, here are 2 pretty big trading mistakes I made in the last year, and how I saved my ass to fight in the next Bears vs. Bulls war.

Silver Bullets

Silver is a commodity that has a high degree of correlation with the US stock market and an inverse correlation with the USD. Thus when the stock market goes up and the USD goes down, silver should go up.

By late October 2012, I knew that risk-on assets (stocks, commodities) should begin the final stage of the bull market (little did I know that the bull market would last until now). Fundamentally, many things supported this. China’s economy had bottomed and the U.S. housing market had stabilized. Europe’s problems were temporarily put on hold, and the seasonal Santa Claus Rally was approaching. From a technical perspective the market didn’t look like it was forming a market top (rather, it looked more like a consolidation pattern). Look at this chart: (Sorry for the crappy screenshots off of CNBC & Google Finance – the laptop I’m using right now doesn’t have Metastock).


I sifted through history and figured out why the three peaks (red rectangle above) weren’t a market top, but rather a consolidation period. Market tops are characterized by extreme volatility: during this period, volatility did not even exceed 6%. Thus, the low volatility supported my theory that the bull market was not over.

By October I was getting bullish on silver (I prefer trading silver over stocks because silver has a lot more volatility, yielding greater returns). The stock market turned upwards on November 15 2012, while silver had done so by November 2 2012. This alone demonstrated that silver had more strength than stocks did. In addition, silver’s staircase-like upwards movements demonstrated extreme strength. (A stair-case moves up, consolidates sideways, moves up, consolidates sideways, repeat. This is extremely bullish because it leaves no room for those who want to buy in on the dips – they must chase the market, thereby pushing it higher).

But by December 10, something really weird started to happen. Stocks would go up and the USD would go down, but silver would go down! Based upon the previous correlation, silver should have gone up! For example, on December 17 the S&P500 went up 1%, and silver, being the more “risk-on” asset, went up a measly 0.03%!

Here’s what happened: S&P500 vs. Silver ($SLV).


silver 3

How I Saved My Ass

What should you do when this type of correlation all of a sudden changes for no apparent fundamental reason? Leave the market alone – there’s probably a big weakness that you don’t know. So that’s exactly what I did.

Dump the market. Fast. I dumped silver when it started acting strange a few days before December 10 (during that time, it would have been a really easy way for silver to break past $33 and create a technical breakout, which would have caused the price to rise further – instead, silver languished, a sign of weakness). During this time, I saw no fundamental reason why silver should act so weak. I was right to dump my silver at the time because a few days after that, silver fell a lot despite the strong stock market and weak USD.

Turns out, silver fell nonstop, all the way until today (I actually bought a ton of $SLV today – bullish call!)


The Lesson

As George Soros says “trade first, investigate later”. Many times, you won’t know what the fundamental reason is – you’ll only see how it is reflected in the price action.

When a market starts acting strange, dump it. There’s probably something going on that you don’t know right now (e.g. manipulative speculation). Only by adhering to this principle was I able to save myself from greater potential losses.
The 1995 Rally

I have been bearish on U.S. stocks since the beginning of this year – I think that this rally is way overbought. And a lot of other highly successful traders like James Goode, Angela Zhou, and SentimenTrader (you can find them on Twitter) agree with me. We’re pretty much all in the same boat. Since the beginning of the year, we’ve been putting on short after short after short, only to be stopped out again and again and again.

Why is this stock market rally so ridiculous and nonsensical? Because in ALL OF HISTORY, there’s never been a year until this year without at least a 5% correction, save 1995. How can we compare today’s economy to that of 1995′s? We can’t! 1995 was a huge bull market, bolstered by a super awesome economy and a tech boom. Today – we have none of that going on, unless you count the Closing Sale posters outside as signs of the economy’s health. That’s why we (those other traders and I) are all so anxious to short the U.S. stock market. If the markets don’t have at least a 5% correction this year, then I guess the market has just thrown history to the winds. If you can’t rely on history, what can you rely on? Nothing.

But I am certain that the market will experience some kind of correction, probably a bigger one to the tune of 20%. Meanwhile, I’ve stopped putting on my shorts. Doing so adheres to one of my key principles – when things don’t make sense, get out. Avoid hysteria. With that being said, I’m waiting to spot the top of this rally. I’m saving my money to fight another day.


Thanks so much for contributing, Troy! Once again, please make sure you check out his site at The Financial Economist.

Jan 28

Why The Grass Isn’t Greener

Some people are a little bit mental.

I mean, I’m sure they’re lovely and everything, but just raving mad. In a nice way.

I met a trader on Twitter yesterday who was trading FX and the US markets, which of course is very un-crazy and really rather normal. What I found slightly nutso was that he was getting up to trade currencies at 2.30 am, then the US markets at 9.30 am and was considering moving to Australia because as you might imagine, his sleep patterns suck.


While I certainly can’t fault his decision to move to Australia – it’s a rather nice place to live, after all – moving to Australia to make your trading life easier is crazy. Moving house down the road is a big enough deal, moving continents is huge.

But it’s not an uncommon thing. I know Aussie traders who’ve done the opposite and moved to the US to take advantage of the massive markets they have there, only to return a short time later.

They do come home a little wiser, however – they come home realising that it’s not the market that makes the trader profitable, it’s the other way around.

The trader makes the market profitable.

The grass is always greener in a different market, and some time zones do have advantages over others. But with the good comes the bad – the Aussie equity market is very different from the US one, for example, and might not be conducive at all to the intraday strategies a US trader is used to, even though it is possibly more conducive to trading $EURUSD on the London open.

You wins some, you lose some. It’s a matter of trading the markets that work for you, not against you.

As traders we have the flexibility to trade when we want – there are markets trading around the world all day pretty much 6 days a week. There is zero reason to be up in the middle of the night trading unless you’re a vampire and that is your preferred time to be awake.

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Jan 27

The Two Trading Rules That Everyone Is Breaking

I read a great post by Stephen Burns (@SJosephBurns) That outlined the 7 Habits of Highly Effective Traders. It was a good list, and well worth reading.

I’ve been quiet with my blogging recently, but I have been stalking you all nonetheless, and in my recent stalker-observations I’ve noticed two of these habits are being blatantly ignored by a large amount of traders – both newbies and professionals alike.

In his post, Stephen lists the following two habits, or rules (italics mine)

Being reactive to actual price action instead of predictive of what price action will be is a winning principle I have seen in many rich traders. Letting price action give you signals is trading reality, trading your beliefs about what price ‘should be’ is wishful thinking.
Great traders are bullish in bull markets and bearish in bear markets, until the end when the trend bends.

These two rules or habits simply aren’t being utilised, either because people don’t know them, or think they’re better than them.

Let me tell you this – no-one is better than the rules. And the traders that have been ignoring them are feeling this right now where it hurts.

I know of professionals who are quitting over what the market has been doing recently. I know of professionals who are at breaking point – literally a nervous wreck because they cannot fathom that the market will go higher….and yet it does.

If you don’t follow these two of Stephens rules, you will never flow with the market. You will constantly be in conflict; constantly fighting and stubbornly protecting your ‘rightness’, and you will never be in tune with what the market is saying.

These two rules can be neatly summed up in one sentence.

Shut Up and Listen.

Stop talking. Stop thinking. Just listen to what the market is telling you.

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Jan 27

The Impact Of Fear

Fear is probably one of the most crippling emotions a trader can have.

It has the ability to over-ride our in-built fight or flight reflex, and paralyse us like a deer in the headlights. This frozen, paralysed state is probably the most harmful state a trader can find themselves in, because rather than panicking out of a trade that is going against them, they just sit there. Frozen. All the while, the market is merrily taking their account and giving it to someone else.

The problem is that once that kind of paralytic fear has its hooks in a trader it tends to make itself right at home, and rather than limiting its fun to when a trade is going against us, it infiltrates all our trading actions.

All of a sudden, we can’t place a trade. We can see it there, clear as day – but our fingers won’t move. The paralysis has spread and our fear won’t allow us to trade.

After my post on optimism a few weeks ago, I got quite a few emails from traders who were facing this very problem. They were finding it incredibly hard to be optimistic about their trading, because all they had received from the market was negative feedback – and in some cases quite excruciating negative feedback.

They had learned all they needed to know about risk management, but still couldn’t bring themselves to post a trade despite the fact they had the all the knowledge they required to trade safely. Somehow, that trigger wouldn’t pull.

After getting smashed by the market, that pain hangs around. It doesn’t just disappear. Losing a large wad of cash hurts us in ways that extend way beyond our bank account; it also causes a direct hit on our confidence and causes us to question our ability to make money in the markets. But more than that, it makes us terrified that it could happen all over again.

Fear swings our perspective away from tradings money-making potential, and focusses it firmly on the money-losing potential.

This actually isn’t such a bad thing, but like all areas of life a balance is needed. The pendulum has swung from one extreme to the other, when where it really needs to be is in the middle.

Unfortunately getting that pendulum to sit squarely in the middle is tricky.

Often after a hefty loss, a trader will go on an education spree to fix the problem, and while further education is often beneficial, it’s also superficial. Mostly, it will tell you how to cap your losses which is great, but it will do nothing to actually get rid of the insidious fear that now resides just beneath your skin.

No amount of theory will enable you to trade fear-free – that is up to you, and you alone. But happily, there are some practical steps you can take to work your way through the emotional mess and get back to placing trades from a productive and healthy frame of mind without being crippled by fear.

1. Be Honest

If you’re too busy trying to protect your ego, you’ll never get rid of the fear. It will cause you to quit, because you’d rather blame something external than admit you made a mistake. The thing is, if something external caused your fear, there is every chance it will do so again – which means your fear is justified, and here to stay.

2. Journal your thoughts.

Here she goes again, banging on about journalling… :) You betcha! Writing stuff down is honestly one of the best ways I know to clarify what’s actually going on underneath the swirling whirlpool of feelings that can cloud our thinking.

Just write. Even if you don’t know specifically what the problem is, just write that you don’t know, but keep writing!! Keeping a steady flow of words coming onto the page means that once your protective, superficial thoughts are down – the “I don’t know’s”, the “it’s not a big deal’s” and all the other ego-protecting crap – once that’s out of the way the true, more authentic ideas have a chance to make their way out.

Once you confront what’s actually bothering you, you are in a position to recognise and deal with each problem/emotion as they arise in your trading.

3. Develop a process that allows you to see ALL the possibilities of a trade.

I have a mini-mantra that I tell myself when I place a trade. “You never know what’s just around the corner – anything can happen.”

This statement allows me to recognise that my trade might be a loser, but it could also be the trade of a lifetime. So many times when I was testing my method I came across a trade that I was hesitant to enter, only to have it rip through resistance and go on to be an outrageous winner. It confirmed to me that my opinion means nothing, and anything can happen. Not only can anything happen, we need to be prepared for anything to happen.

That means we need to be equally as prepared for a winner as a loser, both in our trading system and also in our head.

If you are equally prepared for your trade to be a winner as you are for it to be a loser, you’re one step closer to having a more healthy balance to your trading.

If you’re having trouble pulling the trigger because you’re terrified of losing any more money, implementing these things can help. But it’s not instant – it’s an ongoing process to achieving a healthier, more balanced way of thinking.

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