FROM AN EXPERIENCE
Is there any perfect trader in the world?
Trading is not about perfection. It is about probability and progress. All charts, analysis (fundamental and technical) and trading plans are built on probabilities.
Why then, do so many traders strive for perfection? Why do so many traders miss trades, waiting for exactly the right entry and then beat up on themselves when it doesn’t come and the position runs away while they sit there scratching their heads and condemning themselves?
Why are so many traders trying to turn a game of probability into one of 100% certainty?
The answer lies in one of the cardinal sins of trading which is PERFECTIONISM.
Perfectionism can be a great help to people in many professions, but can be fatal to a trader. Perfectionists, always trying to find the Holy Grail of trading go from one service to another, from one system to another, looking for a way that they can be right all the time. YES! Now, I found it. It’s this trading room, or this service, or this indicator!
Wait… something is wrong here. Not all of these trades are working and I have draw downs! How can it be that this particular method failed and I actually had to take a loss? Must be something wrong. I will try harder and look for an even better system, a more expensive service, a new and improved guru, some absolutely no-fail software so that I can have ONLY WINNING TRADES.
This is perfectionism in action. Not only does this type of irrational behavior and belief undermine and demoralize a trader, but it takes away all the enjoyment and fun of being in the markets. It leads to depression with depletion of psychic and physical energy, and leaves the perfectionist to confront his basic and overriding fear— fear of failure. In the extreme, it leads to physical and mental illness, including addiction to prescription drugs, alcohol, or illegal substances as well as other addictions. The pain of failure or the haunting fear of failure is simply overwhelming, and one turns to whatever works to medicate the pain.
I want to share something of my personal history with you, as I believe that many of you can identify with and learn from some part of this story (and if you do, please let me hear from you?)
My parents were seriously ill from the time that I was born. I truly believed that if I was absolutely perfect, scored the highest in school, did the best at music and dancing and elocution and debating that I could make them better. So I did that. I had no life outside of study and learning. I was the perfect little daughter and even became the perfect little doctor for my sick parents, even though I was only 13. Shortly after this, while I was still in my teens, both of my parents died. I was not good enough or perfect enough to make them better. So- I tried even harder and studied more and more, to the complete exclusion of any personal or social life whatsoever. This time, I was going to be perfect for my dead parents to show them how wonderful I really was and how much they should be proud of me. This reached absolute culmination when, after receiving two doctorate degrees, I still had to continue with more and more exams and more and more training. Can you imagine anything so ridiculous? Even after my parents died, I was still trying to get their approval by showing them how brilliant and talented I was.
Many years later, I suddenly became critically ill, stopped breathing and lapsed into a lengthy coma. This was the culmination of years and years of unrealistic internal demands that I set on myself and which manifested as addiction to perfection. It was only when I awakened from coma that I started on a new road and a new path. I was not superwoman…never was and never could be. Yes, I would continue to work hard and to achieve, but I could never in a bazillion years be perfect. I am not and you are not. So, when I tell you to “Get over yourself” I mean that I had to get over myself. I had to address the demons of perfectionism and move past them. I accepted that I am a flawed human being and acknowledged that I had certain real and wonderful strengths. I chose to concentrate on the strengths and stop beating myself up for the weaknesses.
“Life can be lived forwards, but can only be understood backwards” ~Soren Kierkegaard
What does this have to do with trading?
This is what happens with perfectionists. Perfectionists are made, not born. We are taught from an early age by demanding (and often well-meaning) parents that we have to be the best in order to win their approval and the approval of others. Unfortunately, this is totally upside down. Perfectionists share a belief that perfection is required in order to be accepted by others. The reality is that acceptance cannot be gained through performance or any other external factors. Self-acceptance is the root of happiness and the true beginning of personal evolution.If you have a perfectionist mentality when trading, you are setting yourself up for failure, because it is a “given” that you will experience losses along the way. You must begin to think of trading as a game of probability. Your losses ( that you hope will return to break-even) will kill you. If you cannot take a loss when it is small
( because of the need to be perfect), then you will watch that small loss grow into a larger loss and so on into a vicious cycle of more and more pain for the perfectionist. Trading on hope does not work. The markets can remain irrational for a lot longer than you can remain solvent.
The object should be excellence in trading, not perfection. Moreover, it is essential to strive for excellence over a sustained period, as opposed to judging that each trade must be excellent. This is a marathon…not a sprint.
The greatest traders know how to take cut losses and let winning positions run. Perfectionists often do exactly the opposite. They get in at the wrong time, stay in too long and then get out the wrong time. Perfectionists are always striving and never arriving. The market will find the flaw in a perfect trader and exploit it day after day. The market is your greatest teacher and your most demanding critic, so take this wonderful opportunity every day to learn about yourself and make yourself strong.
If you see in yourself this trait of perfectionism rearing its ugly head, it’s OK to get angry at it and even yell or curse at it. Do whatever it takes to acknowledge it and then find a way to fix it.
Here are a few suggestions:
- Try to appreciate and enjoy the process as well as the outcome.
- Set more achievable and realistic goals for your trading.
- Remember that your self-worth and your worth as a human being to those who love you does not fluctuate from day to day depending on if you win or lose that day.
- Focus less on achievement and more on enjoyment. Trading is serious, but it should be fun and not something which one approaches with fear and dread.
- Lighten up. Laugh more (especially at yourself).
- Learn from your mistakes, and forgive yourself and make peace with your past. Strive to be better…not perfect…just a amazing human work in progress.
“If we were always to wait for the most favorable combination of circumstances, no enterprise would ever be undertaken. There can be no end without a beginning–there was never an enterprise in which everything fitted in perfectly, for chance plays a leading part in the affairs of all men. Obedience to rule does not ensure success, but success, on the other hand, furnishes a canon – a rule of conduct” ~ Napoleon Bonaparte
TRADERS - DO NOT LEAVE
IF YOU FIND THIS IN ANY STALL
CHAPTER 1
The Power of the Gut
“The intuitive mind is a sacred gift and the rational mind is a faithful servant. We have created a society that honors the servant and has forgotten the gift.”
—Albert Einstein
George Soros, one of the greatest traders alive, trades from the gut. He has widely remarked on the correlation between his backaches and trading choices. In the autobiographical Soros on Soros, he wrote:
I rely a great deal on animal instincts. When I was actively running the fund, I suffered from backache. I used the onset of acute pain as a signal that there was something wrong in my portfolio. The backache didn’t tell me what was wrong—you know, lower back for short positions, left shoulder for currencies—but it did prompt me to look for something amiss when I might not have done so otherwise.
Some traders might scoff at the idea of making decisions based on “feelings” or intuition. They see the trader’s role as one who remains calm and collected, rationally choosing the right course while those around them are tossed about by their emotions. They believe that Soros is either lying or fooling himself. They don’t see how gut instinct can help. Yet many successful traders feel otherwise. Who is right? Is one approach better than the other?
If you are one of those traders who doesn’t believe that gut instinct or intuition has any place in trading, I invite you to keep an open mind. I, too, once felt as you did. After all, I was trained to take a very systematic and logical approach to trading as a Turtle. I believed that it was important to keep your emotions in check. I didn’t believe in trading from the gut.
Trading from your gut is a way of tapping into the extra power of the right hemisphere of the brain.What I didn’t realize at the time, however, is that there is a big difference between trading emotionally and trading from your gut. Trading emotionally means reacting to fear and hope, which can destroy your trading decisions. Trading from your gut is different. It is a way of tapping into the extra power of the right hemisphere of the brain, which can be a powerful, effective, and entirely rational addition to any trader’s repertoire.
Trading comes naturally to some people, as it does to Soros or my trading mentor, Richard Dennis, for example. They seem to have a knack for it that comes from a well-developed sense of intuition. This gut intuition can be developed through training and the right kind of experience. In this book, I teach you how to incorporate expert-level gut instinct in your trading.
Before I go further, it is important to further define exactly what I mean by intuition and gut instinct.
Intuition
In mid-November 2007, when the Dow Jones Industrial Index was above 13,000 and the S&P 500 Index was above 1,450, I attended the Trader’s Expo conference in Las Vegas, Nevada. The Trader’s Expo is the largest trading conference in the country; people come from all over the western United States to attend the conference. I had been invited to speak at the conference in conjunction with the publication of my first trading book, Way of the Turtle.
While I was at the conference, I was asked to do an interview with MoneyShow.com, which had set up a video recording studio in one of the conference rooms. The interviewer asked me what I thought of the markets over the previous several weeks. Normally, my standard response is that I don’t try to predict the markets. I had grown weary of giving advice and had found that specific advice is not generally useful to others when not considered in context.
This time was different. I decided to go out on a limb and advise that viewers be very cautious in their stock investments. I told them that I thought there was a higher than normal chance that the markets would go down a significant amount, that we were coming off a long period of steady gains, and that there was a good chance we had seen the end. The timing was prescient. It turned out to be the beginning of the downturn that would see the market lose more than 50% of its value over the next 16 months.
You may think my instinct had told me that the market would soon decline. This is only partially true. I thought the market was risky at that moment, for some very specific reasons that had nothing to do with my instinct as a trader. Where my intuition came in was in breaking my longstanding rule not to talk about what I thought might or might not happen. I just had a feeling that this time was different, that I should voice my concerns.
If you asked me, I could probably come up with some reasons I felt obliged to share my thoughts on the direction of the market, but these reasons would be somewhat contrived. The truth is, I didn’t really know why I spoke up; I had an intuition, a gut feeling, but one without a logical basis that I could readily articulate. In fact, the rational side of my brain was arguing for me to keep quiet because I knew that predicting market movement was a fool’s game. In retrospect, I hope that sounding this early warning benefited the traders who saw the video.
Using Gut Instinct: Left Brain Versus Right Brain
Relatively recent advances in psychology and neuroscience show that human intuition can indeed serve as the basis for powerful rapid decision making. Our brains can make decisions using thousands of individual inputs almost instantaneously. This type of rapid parallel processing occurs in our right-brain hemisphere. Because of the speed of the right brain, it can be a powerful tool in the hands of an experienced trader. Unfortunately, too much reliance on an untrained gut can prove disastrous for the inexperienced trader. This makes proper training very important.
Analysis, linear thinking, ordering, and the need to find structure dominate left-brain thinking. We try to make sense of the world with our left brains and bring order to it. We categorize, theorize, rank, and file with our left brains. When you think out loud, you are using your left brain. Put another way, when you think consciously, you are using your left brain.
The right brain, in contrast, is concerned with the whole picture and the spatial relationships between each of its parts. The right brain is quick and intuits instead of reasons. If you’ve ever felt uncomfortable or unsafe but couldn’t pin down the reason, this was your right brain’s sense of intuition generating that feeling. The right brain excels at reading patterns and interpreting their meaning in the context of a larger picture, and it moves much more quickly than its counterpart.
Although the right brain can quickly come to a conclusion or recognize danger, it cannot generally explain the reasons why it has arrived at that conclusion.
This speed comes at a price. Although the right brain can quickly come to a conclusion or recognize danger, it cannot generally explain the reasons why it has arrived at that conclusion. This often puts it at odds with the left brain because that analytical part of the brain wants explanations for its decisions.
This speed comes at a price. Although the right brain can quickly come to a conclusion or recognize danger, it cannot generally explain the reasons why it has arrived at that conclusion. This often puts it at odds with the left brain because that analytical part of the brain wants explanations for its decisions.
To better understand how the right brain works, it’s worth looking at the processes embedded in neural networks.
The Artificial Brain: Neural Networks
In the 1970s and 1980s, researchers in computer science attempted to re-create the brain’s function using simulated neurons connected through computer software. They created the first artificial neural networks. As research in neural networks continued, this technology proved to be excellent at recognizing patterns. However, the downside of neural networks was the same as that of the right brain and the speed at which it arrives at conclusions. Neural networks can rapidly reach conclusions, but it is impossible to examine a neural network to understand the assumptions it is drawing from.
The right brain works a lot like a neural network. It draws upon experience to reach suppositions, but we generally don’t know the reasons for those conclusions, except as a feeling. So if the left brain wants to explain and the right brain cannot offer explanations, which side wins in a battle of decision making?
The answer depends on personality.
Thinking Versus Feeling: Can’t We All Just Get Along?
Psychiatrist and pioneering psychologist Carl Jung developed a theory that measured one’s personality in three different areas. In each area, individuals had a personality that fell somewhere on a continuum between one extreme and the other. One of these is a continuum between thinking and feeling; scores on a test of this personality aspect measures the extent to which the right brain or the left brain dominates decisions.
Isabel Briggs-Myers and her mother, Katharine Cook Briggs, subsequently developed Jung’s work. Their work has been popularized as Myers-Briggs personality types. The Thinking and Feeling axis (generally abbreviated as T or F) of the Myers-Briggs test is often equated with rational decision making and emotional decision making. Sometimes those who make decisions using their left brains (the T’s) look at those who make decisions with their right brains (the F’s) and think that the F’s are being unreasonable when they cannot explain exactly why they make particular decisions.
Most schools are geared toward developing and training the left brain. Math, science, reading, writing, and rote memorization are all left-brain activities. This emphasis leaves some would-be traders with a relatively overdeveloped left brain and underdeveloped right brain.
A balance between left-brain analysis and right-brain intuition is critical for optimum trading.
A balance between left-brain analysis and right-brain intuition is critical for optimum trading, so training must overcome any disparity a trader has in his cerebral development. Every trader has a dominant hemisphere, but recognizing the non dominant hemisphere is also important, especially if this is the right brain.
The Two Trading Camps
Consider another way in which the fight between the left and right hemispheres affects trading, in the ideological battle between discretionary (gut) and system (left-brain) approaches. The trading world is divided into two fairly distinct camps. The largest camp consists of traders who consider trading an art, those who are called discretionary traders. A smaller group consists of traders who use a specific set of rules to make their trading decisions. These traders are known as system traders.
Often when traders first meet each other, they ask if the other trader is a discretionary or system trader. For most successful traders, the answer is rarely black and white, because trading styles generally fall on a continuum between the purely intuitive discretionary trader and the purely rule-oriented system trader. Individuals who think of themselves as discretionary traders range from shoot-from-the-hip traders who buy and sell when it feels right, to more methodical traders who use combinations of chart patterns and mathematical indicators to trade only when a set of conditions have been met. Investors who think of themselves as system traders range from traders who use such a specific set of rules that they can be programmed into a computer, to those who use a loose set of rules in combination with their own ability to recognize certain patterns and market conditions.
The best discretionary traders tend to be right-brain dominant, using their intuition to decide when to make trades. This tendency is especially prominent among discretionary day traders who look to profit from small intraday price movements. For these traders, the speed of their decision making is often a critical factor if they are to be successful. They might describe their approach as having a “knack” for the market or a “feel” for the direction of the market.
Left-brain traders know exactly why they put on certain trades. They generally have a very specific set of criteria that must be met before they initiate a trade. In contrast, purist right-brained traders, who use their intuition almost exclusively, often don’t understand exactly why they make certain trades; they just know when a trade feels right. This willingness to relinquish decision making to intuition or gut characterizes the hard-core right-brain trader.
System traders are most often left-brain dominant. They use a rational, systematic process to decide when to make trades. They often analyze their approach using computers to perform “what-if” analyses using historical data to determine the hypothetical results their trading methods might have earned in the past, a process known as backtesting. Left-brain traders don’t trade on their gut or intuition; they trade using rules and strategies. These traders often think in terms of signals and triggers, as specific events that determine when to initiate a particular trade. Systems traders will have identified these specific criteria earlier, when they performed their back testing and historical analysis.
Whole-Brain Trading
After reading my first trading book, Way of the Turtle, which lays out a very rational approach to trading, some readers might think that I believe left-brain trading is better or more valid than intuitive right-brain trading. I don’t. Even though I got my trading education as a Turtle in a tradition that stressed a systematic approach to trading, I see plenty of value in the right brain’s ability to quickly process lots of information to arrive at an intuitive conclusion. In short, both approaches have merit.
Whole-brain trading involves both hemispheres and is a balancing act between the brain’s two primary types of cognitive function: logical reasoning, and intuitive feelings and impressions. The blend of right brain and left brain depends on the type of trading you are involved in. For extremely short-term trades, relying on the right brain is often the only practical approach. Traders simply do not have enough time to perform complicated analysis. Traders who are scalpers must trade mostly using their right brains. For longer-term trading, traders have plenty of time for analysis. Getting historical data for performing this analysis also is relatively easy. Therefore, longer-term trading is very suitable for the left-brain trader. Swing trading, in which trades are kept for a few days or a few weeks, is best addressed with whole-brain trading. Generally sufficient time exists for performing an analysis, but the data and tools available to the typical trader do not generally permit a completely systematic approach such as one might use for long-term trading. For this reason, whole-brain trading is virtually required for effective swing trading.
In this book, I show discretionary traders how to strengthen their intuition and gut instinct and how to incorporate analytical tools that systems traders traditionally use. I also show systems traders how to use many of the tools and techniques that discretionary traders use, to develop more robust trading methods. My approach to trading, and the philosophy that I share with you in this book, is what I refer to as whole-brain or whole-mind trading.
Mastering the Art of the Trade
To become a master trader, to be able to intuitively make good decisions, you must first gain enough of the right kinds of experience. This is why doctors and nurses go through extensive training and supervision when they are new to the profession. It is why firefighters train in fire simulations, and why airline pilots train in flight simulators. Through this constant exposure and consistent practice, experts build up a library of experiences that they can draw upon when making decisions.
To become a master trader, to be able to intuitively make good decisions, you must first gain enough
of the right kinds of experience.
The same holds true for the trader—the most effective training is trading itself. In this way, the experiences you encounter while trading train your intuition so that, in time, you can become an expert. Learning as a trader can be difficult, however, because of the price of mistakes. In trading, mistakes cost money. Fortunately, traders can develop their intuition to a high level of expertise without having to put their money at risk. I discuss several strategies for doing this in upcoming chapters.
Before I lay out these strategies, it is important to understand the pitfalls and dangers of relying on gut feeling and intuition if you have not yet received proper training. In the hands of a novice, gut instinct can be dangerous to your account balance. In the next chapter, “The Purpose of Gut Intuition,” I cover this important topic.
DAY TRADING STRATEGY
OF NIFTY FUTURES – AUG 27
Day support @ 5465
Resistance @ 5489
BETTER DO NOT TRADE IN NIFTY FUTURES TILL THESE LEVELS ARE BROKEN
Use the levels for your trading, but pls do not trade blindly.
BANK NIFTY
Good resistance between 11014-33 in EOD card
Day Support @ 10966-56
Do not get trapped in long before 11035
Above 11035-hike upto 11070-80 is possible
Sell btwn 10956-40
T1- 10914-01
T2- 10889-72
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