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The Sugar trade I mentioned a few weeks ago that almost tripled one of my accounts had a lot of things going on inside it. But making the money was a symptom of several factors, some of which might surprise you.

Of course, it goes without saying that I was powerless over the move in Sugar itself, so the best thing I could have done is what I did do: add some risk to my account and enter a protective stop to knock me out if I was wrong. I should also add that I had no clue the trade would develop even remotely the way it did when it started out. Technology-wise, I used EOD data from my broker using daily and weekly charts (and I still don’t have real-time data – 10 years and going strong).

Yes, it is frustrating to put a trade on and get knocked out, but I’ve come to LOVE frustration. See, in the barometer of my emotional constitution, the feeling of frustration comes well before the feeling of despondency or paralysis (or the palsy phase from taking Lemon Quaaludes, but I digress). If your INTENTION is to trade like a professional, then get used to losing money: losses are part of the business.

By entering my protective stops, although I don’t want them to get hit, I am making an investment in my emotional well-being. I look at it as the “lesser of two evils.” Of the two, I’ll take frustration over despondency every day — that’s an easy trade. I’ll come back to the market tomorrow with a clean head: no regrets of the past and no fear of the future. There will always be another trade, maybe even a second attempt at the one I just got knocked out of.

Besides adding to my winners at prices that were upwards of 50% greater than my initial entries, I used something else that I believe was the key to the trade. I let go of trying to impose my will on the trade. I surrendered to letting the market do all the work. You should learn to do that too – that’s what they’re there for.

The key to making huge gains has virtually NOTHING to do with your entries. It has EVERYTHING to do with your keeping your ego out of the trade in order to avoid messing up a good opportunity.

I sat on my hands for 4 months – I held a long futures trade in SBH for 4 months and did not have to roll contracts either. Please think about this while you’re looking at whatever intraday “cloud-pattern” charts you’re looking at. My guess is that if this describes you, you’re only looking at 3-6 names so you have to see if you can somehow find a trade when there otherwise isn’t one.

If your trading desk makes you go home flat – YOU’RE AT THE WRONG PLACE. Don’t let your B/D or desk manager’s poor risk management decisions affect your otherwise excellent trading. Their balance sheet is none of your business and not your problem. If you can’t take winning trades home, it’s time for a new trading firm. All you’re doing is being taught bad habits.

You and I are lucky enough to get into a winner in the first place — which in the short run is RANDOM, not skill. It’s bad business and deplorable investment finance to sell a winning position before it ripens.

In order to make money, you need to have risk in your portfolio. And for the biggest moves, you need to take the risk home each night, and also over the weekend(s). This is indisputable. Michael Marcus didn’t make 3-4 digit percentage points per year looking at intraday charts or making a cool $2.50 day trading, double-clicking his mouse, or blasting his “hot keys.” Whatthef*ckever…

Put a protective stop in at a level that you can handle emotionally and financially, and let the market tell you when the move is over. Otherwise, you’re in your ego. You cannot pick tops, so why would you cut the branch of a tree off when you’re sitting on it?

I like to think of a position in my portfolio as a subsidiary of “Me, Incorporated.” Each one of them needs to make me money: the losers are closed down and sold, and naturally, I invest more capital into the subsidiaries that make money. How else would I scale my business?

If you feel empowered by taking gains manually, the feeling of doing so is probably greater or more important to you right now than the feeling you get of making large gains.

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Emotional Systems Rule

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You are a smart lady or gentleman and you’ve decided that you want to be a professional trader.  You think that if everything pans out that you would like to manage other peoples money for a living, perhaps as an Asset Manager or Commodity Trading Advisor.  Or you fancy getting onto an institutional desk and trading their massive proprietary capital.

You’ve always had a high IQ and been strong academically throughout life even doing all the extracurricular activities to make your CV stand out.  You went to a good University and came out with a decent degree.  You got offered jobs that you wanted and now you have realized that you are drawn to the markets.

BUT SO FAR YOUR TRADING EXPERIENCE ISN’T REALLY WORKING OUT HOW YOU HOPED!!

A recent psychology study by the University of Western Ontario has shown that the notion of IQ is a ‘myth’.  “There is no such thing as a single measure of IQ or a measure of general intelligence”.

The study determined three factors that combined to create human intelligence or our ‘cognitive profile’ -> reasoning, short-term memory and verbal ability.

Now here’s the catch……

You definitely need those three to be a good trader (verbal intelligence being least important unless you are tying to raise money in which case it may be the most important) but what the study overlooks is the key area of intelligence that is needed:

EMOTIONAL INTELLIGENCE

Victor Sperandeo covers this:

“Assume that you’re a brilliant student who graduates from Harvard summa cum laude. You get a job with a top investment house, and within one year, they hand you a $5 million portfolio to manage. What would you believe about yourself? Most likely, you would assume that you’re very bright and do everything right. Now, assume you find yourself in a situation where the market is going against your position. What is your reaction likely to be? “I’m right.” Why? Because everything you’ve done in life is right. You’ll tend to place your IQ above the market action. ”

Perhaps that describes you a bit?  Well here is the hit to the sensitive bits again from Victor:

“I discovered that you can’t train people how to trade by just imparting knowledge. The key to trading success is emotional discipline. Making money has nothing to do with intelligence.”

Did you get that?  Making money has nothing to do with intelligence!!  This interesting study on IQ leaves out the key facet that you need to have to be a trader.

EMOTIONAL INTELLIGENCE

The good news?

You recognize this and decide to work on it.  You can develop your emotional intelligence.

A good place to start would be:

  • Reading this site
  • Reading the Inner Voice of Trading
  • Taking up meditation, yoga, tai chi etc
  • Joining a Trading Tribe
  • Finding a coach or mentor

 

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Learning to avoid a stock market crash comes from learning how to play superior defense. You always have to be able to define where the risk is and where your blind spots are.

If you have money committed in the market – as a trader or investor – you must be able to define your risk. If you don’t know these specific points, you’re likely to suffer both a financial and emotional shock to your system.

It’s hard enough to make money in the market. When it gives you a gift, like it’s done the past several years, you have to protect your equity like it’s a new born child. You don’t give it back or let it get taken away.

Let me know what you think in the comments or on Twitter, and please send this to anyone who you think has confused brains with a bull market. They will thank you for it.

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You need to have a plan in place BEFORE the correction occurs. Let the amateurs do all the rubber-necking while you confidently wait for the scenario to play out as you anticipated. Once the HFTs pile in, you’ll be in the right place at the right time.

Learn From the Mistakes I Made Early in My Career

However you decide to position yourself, have your exit strategy planned out as well. If you read my book, you know that I mishandled exiting the monster INTC Call position that I had. I still made great gains, but it could have been several MULTIPLES more.

Have a Contingency Trading Plan for Multiple Outcomes

When a correction hits, it catches most people by surprise. This is a negative Black Swan. You, however, can be prepared by writing out several potential scenarios when it hits by using history as a guide.

All you have to do then is execute. Mozart’s compositions are said to be flawlessly written with no mistakes. He simply transcribed the music that was already written in his head. You can do the same with your trading.

1. What will you do if the S&P 500 opens Limit Down?
2. What will you do if Limits are expanded and you see further substantial weakness?
3. How will you protect your capital in the other positions in your portfolio (from Floor Creep, for example)?
4. What is your low-risk method to trade a snap-back upswing?

If you watch the video, you need to come up with a macro plan first. Once you do, the technical part of entering the trade is easy.

Here is some recent feedback from the market from widely followed money managers that has come out since the video was recorded.

Marc Faber: We are in a massive speculative bubble

Howard Marks: Heed this Omen: The risks of 2007 are back

Jim Cramer: learn to develop a Macro view in his new book Get Rich Carefully

Please consider sending this to anyone who you think will benefit from it.

Students of my Trader Coaching and Mentoring program are busy watching the follow up video on how to put on the trades.

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