"What is the difference between a winning trader and a losing trader?"

As for my thoughts on any trail subscription on trading. I think your wasting your time and here is why.

You cannot learn how a trading methodology works in 7-30 days. This I feel is one of the biggest causes of traders chasing their tails. Most traders are always searching for the holly grail that does not exist. They never stick with any one thing long enough to see the benefits. All systems will have good times and bad. You step into a trail service that is not doing so well and you think it is a bad system?

Here is my biggest secret to playing this game. Ya ready? MONEY MANAGEMENT and POSITION SIZING…..

You're missing one key element and that's diversification. If you keep your position sizes reasonable and own nothing but tech stocks you will lose your ass on the first downdraft. Position size is important but it means little by itself. Get it?

Some info contained in this thread is about all I have to offer. In closing maybe one new trader might read something that makes sense and helps him or her put together a better system or at least open one’s eyes…

Market Update for February 7, 2007

1-2-3 Model In Yellow Light Mode

By
Van K. Tharp

Look for these monthly updates on the first issue of each month. This allows us to get the closing month data. In these updates, we’ll be covering each of the major models mentioned in the Safe Strategies book: 1) the 1-2-3 stock market model; 2) the five week status on each of the major stock U.S. stock market indices; 3) our four star inflation-deflation model; and we’ll be 4) tracking the dollar.

Part I: Market Commentary

The market seems to be replete with conflicting information. On the one hand, I have sources that tell me people have cash that they just don’t know what to do with. For example, someone bought a New York building that was full (with ten year leases) at a rate of return that was about 4% (less maintenance costs). Why would one spend billions on an illiquid asset like that when you could do better with treasury bills? But this seems to be the state of the market. The baby boomers are still pouring pension money into the market (and that should continue through April 15th), so the market has lots of cash. In addition, the Fed has stopped raising rates (and may even start reducing them in the near future) and many pundits are saying that the market is undervalued at current levels.

At the same time, I hear other market gurus saying that the market is overvalued and due for a major correction at any time now. Just wait and see. This one might fit with the secular bear market scenario (which I believe) that says valuations (not prices) will continue to go down for the next ten years or more.

This is all the more reason why the best traders just watch the market and act based upon what it is doing right now. And right now the market looks pretty good. Our model portfolio, which I report on in the middle of each month, is mostly long and efficiency levels, as discussed later in the update, are positive.

Part II: The 1-2-3 Stock Market Model IS IN YELLOW LIGHT MODE and that’s good for stocks

As I said last month, the Fed stopped tightening a little over six months ago, so we can now say the “the Fed is out of the way.” And that officially occurred on December 29th. Under red light mode, stocks typically go up, although not massively. The average yearly increase in the S&P 500 is about 10.9% during yellow light mode.

Let’s look at what the market has done over the last five weeks and compare that with where the averages were December 31st last year. This is given in Table 1.

Table 1: Weekly Changes in the Major Averages
Dow 30 S&P 500 NASDAQ 100
Date Close % Change Close %Change Close % Change
Close 04 10,783.01 1,211.92 1,621.12
Close 05 10,117.50 -6.17% 1,248.29 3.00% 1,645.20 1.49%
Close 06 12,463.15 15.58% 1,418.30 13.62% 1,756.90 6.79%
5-Jan-07 12,398.01 -0.52% 1,409.71 -0.61% 1,785.30 1.62%
12-Jan-07 12,556.08 1.27% 1,430.73 1.49% 1,844.81 3.33%
19-Jan-07 12,565.53 0.08% 1,430.50 -0.02% 1,796.81 -2.60%
26-Jan-07 12,487.02 -0.62% 1,422.18 -0.58% 1,772.97 -1.33%
2-Feb-07 12,653.49 1.33% 1,448.39 1.84% 1,798.13 1.42%

The market is continuing to rise and everything is up on the year. Last week included some excellent gains and my guess is that those gains will continue during February.

As of the close of the year, 71.4% of the market consisted of positive efficiency stocks. As of February 2nd, it was 77.3% positive efficiency, which is the strongest I’ve seen it since its prior peak in February 2005.

Part III: Our Four Star Inflation-Deflation Model

I strongly believe that we are in an inflationary bear market and that our inflation rate is simply masked by government statistics.

So far our models have been telling us, that inflation/deflation is pretty steady, with a slight inflationary bias, and that’s where secular bear markets tend to start.

So what’s our new indicator telling us about inflation? I’ve described the inflation model I’m using in these updates for over six months now, so instead of continuing to list the criteria here each month, click here to read more if it is new to you or you don’t understand it.

Okay, so now let’s look at the results for the last six months.

Date
CRB
XLB
Gold
XLF

December 30 2005 347.89
30.28
513.00
31.67

June 30 2006 385.63
32.10
613.50
32.34

July 3 2006 391.49
30.90
632.50
33.08

August 31 2006 390.95
32.19
623.50
33.52

September 30 2006 379.10
31.82
599.25
34.62

October 31 2006 383.92
33.33
603.75
35.43

November 30 2006 408.79
35.00
646.70
35.68

December 29 2006 394.89
34.84
635.70
36.74

January 31 2007 393.89
36.25
650.50
37.08


We’ll now look at the two-month and six-month changes during the last six months to see what our readings have been.

Date CRB2 CRB6 XLB2 XLB6 Gold2 Gold6 XLF2 XLF6 Total Score
October Lower Higher Higher Higher Higher Higher Higher Higher


+1/2

+1

+1

-1
+1.5


The results of this model are much more sensitive (I believe) than the model I presented in Safe Strategies for Financial Freedom. The model once again shows that inflation is winning slightly.

However, let’s compare real inflation as measured by the CRB versus the government’s measure of inflation as measured by the CPI. These are shown for 2005 through 2006 in the next chart. Notice that the CPI has hardly moved, while the CRB has gone up about 33% over the two years. Click here to view chart.

Part IV: Tracking the Dollar

The U.S. dollar is still looking weak. It was relatively flat for about six months and then it started a major fall against the Euro, which is still going on. This is another reason why the Federal Reserve needs to keep rates high. When interest rates are high, people are attracted to the dollar. But when rates are falling, they will dump it quickly. The IMF has already said that the dollar, at current rates, is 35% overvalued. Can you imagine the impact of the dollar falling another 35%? Incidentally, I get my data from a government website. And to my surprise, the numbers had totally changed from the last time I looked at it. All I can do is assume that the government decided to change their measure in some way. I’ve changed the chart below to reflect the government’s updated figures. Perhaps the government was worried about critical support levels and did some statistical changes in the index.

The Dollar Index

Month
Dollar Index

Jan 05 81.06
Jan 06 84.29
Feb 06 85.05
Mar 06 85.01
Apr 06 83.88
May 06 80.63
June 06 81.51
July 06 81.94
Aug 06 81.18
Sep 06 81.59
Oct 06 82.36
Nov 06 81.49
Dec 06 80.89
Jan 07 82.37

Earlier, I pointed out that the falling dollar had attracted the Economist magazine to feature it on the cover. Covers tend to make good contrary indicators and the market is now higher than it was when that cover came out in November.

Right now there is no currency around to replace the dollar. It’s not going to be the Euro and I don’t think any major Asian currency is close to becoming the world’s reserve. However, my guess is that the Yen is a good candidate for becoming strong in the near future.

[lemonjello]

Thanks ski. I'll check it out.

Lemon,
Try this one, www.morpheustradinggroup.com. Take the free 1 month trial on the Wagner Daily, Deron's daily ETF report, and The Stalk Sheet, his daily stock setups. You can get them both for 1 month free. The combo offer is $125 for both after the 1 month trial or $49.95 for the ETF report and $125 for the stalk sheet separately.
At least check out the website to see what the guy is all about. He details everything he does and is as legitimate as the day is long. I've been there for almost 2 years running and have made 10 times the subscription costs. Plus you'll get educated on a number of facets regarding position sizing, money management, and technical analysis for your bucks at the same time.

[skiracer]

Lemon,
Try this one, www.morpheustradinggroup.com. Take the free 1 month trial on the Wagner Daily, Deron's daily ETF report, and The Stalk Sheet, his daily stock setups. You can get them both for 1 month free. The combo offer is $125 for both after the 1 month trial or $49.95 for the ETF report and $125 for the stalk sheet separately.
At least check out the website to see what the guy is all about. He details everything he does and is as legitimate as the day is long. I've been there for almost 2 years running and have made 10 times the subscription costs. Plus you'll get educated on a number of facets regarding position sizing, money management, and technical analysis for your bucks at the same time.

[lemonjello]

Hey, it was free. Basically I used to use a trial to check their trading record which is usually not openly published. Then I'd check a few of their trades to see if they are reporting them correctly and if they're making any money. Mostly idle curiosity since I've never found one of the people that use a lot of marketing to be any good. A lot of them don't even report their trades correctly and if they were trading a real portfolio they would have tanked it. This is a very bad sign. Another one I'd avoid is Dr. J Najarian (sp?) or anyone associated with Tobin Smith. I posted the comments as a heads up to anyone reading this thread - maybe save somebody some money- not criticizing your reading selections.

I even took a free trial to Larry McMillan's service - didn't see him making any money and he wrote one of the top books on options. Not saying he's in the same hypster category as the others tho.

I've since gotten to the point where I don't even bother with trials since 99% of the time it's worthless anyway.

Agree with you on money management and position sizing.

IN all honesty I’ve never herd of Price Headley. I simply came across this article, liked what I read and thought it was good enough to post. In fact someone may possibly learn something from it…

As for my thoughts on any trail subscription on trading. I think your wasting your time and here is why.

You cannot learn how a trading methodology works in 7-30 days. This I feel is one of the biggest causes of traders chasing their tails. Most traders are always searching for the holly grail that does not exist. They never stick with any one thing long enough to see the benefits. All systems will have good times and bad. You step into a trail service that is not doing so well and you think it is a bad system?

Here is my biggest secret to playing this game. Ya ready? MONEY MANAGEMENT and POSITION SIZING…..

Ailun Zhan


Being an individual investor, I neither have a huge army of analysts doing work for me, nor do I have the smartest talent money can buy doing complicated strategies for me(strategies that work, Long term capital management doesn’t count). In this sense, it appears that we individual investors are at a disadvantage.

Not quite. In an ocean of investments that is growing in size every day, there are many opportunities for us individual investors. We are small, thus we are agile and mobile. To the contrary, institutions are way too big to fully take advantage of the many opportunities the market presents. People like Warren Buffett are faced with a problem—namely too much money and too few big enough ideas to be worth trading on.

Without the huge amount of resources the mammoths in the financial industry control, individual investors must develop their own approach to the market that is neither time and people intensive and is not doable by institutions(though it may be best to follow the institutional money in the long run.)

What kind of approach is that? The top down approach.

By utilizing a top down approach, I am to achieve the following:

1)Saving time, by doing research on different markets, and investing only when the broad market is bullish.

2)Find opportunities quickly. For example, a recent short in my newsletter and Investopedia simulator MTH was found in 15 minutes or so. I felt the Nasdaq was bearish then, and I looked through the best performing industries in the past few years. Metals was one, housing construction was another. I saw it had broken below the neckline on an H&S on a weekly chart. Then I looked through all of the charts in the sector, found MTH to be ready to go into freefall. 9% profit realized in like 2 weeks.

The advantages of my approach are

1)Less time spent

2)By analysing market direction first, I can avoid bear markets/corrections and enter near the beginning of bull markets.

3)I can jump in and out rapidly, acting on short term opportunities, increasing profits and lowering risk.

Here how I go about using my top down approach to the markets.

1)I look at the charts of the Dow Jones Industrial Average, S&P 500 Index and Nasdaq Composite Index. I look for chart patterns, get a feel for the movement in the market indicies. I use some other commonly used technical indicators to analyse the data(though they are relatively unimportant in the decision process). I also use market breadth indicators, i.e. New high/New low ratio etc etc. Also, pay attention to where we are in the current market cycle. I believe that we will be in a consolidation area for nearly another decade.

2)Do my own macroeconomic analysis. Right now, I’m focusing on the prediction of where future interest rates will go. This will need analysis and prediction of inflation. Thus I would look at commodity prices and other inflation indicators. We have also seen high money supply growth rates before the release of the numbers was terminated. This would be good for interest-rate sensitive stocks. Led me to BOT, entered at 92 and 105 and sold in the 110s.

3)I also utilize intermarket analysis. I.e. using bonds as a leading indicator for equities. John Murphy’s “Intermarket Technical Analysis” is a good book on the subject.

4)Look at the charts of the different sectors. Pay close attention to the financial sectors and utilities, which usually lead the broad market, as they are interest rates sensitive.

5)After I have a list of different sectors, I try to figure out a reason for their bullishness. Interest-rate sensitive securities and commodity-related securities are the easiest to figure out. Low interest rates and high commodity prices respectively, are good fundamental reasons to enter these industries.

6)Then I usually use two methods to look for stocks in the industries I’m bullish in. First way is to look at the charts of all of the stocks in the industry.Time consuming, but it’s worth it. Find a list of bullish stocks and then look at their fundamentals. The second method is to screen for stocks with good fundamentals, then look at the charts. More efficient, but sometimes small fish slip through the net.

7)Place a trade, size according to risk model and then you’re set .

Money Management and Reward to Risk

Unless you're a pure gambler, "betting it all on black" or putting all your trading money into one position definitely isn't the way to go. Money management can be critical to long term success in stock and option trading and investing. "Diversify." "Don't put all your eggs in one basket." Who hasn't heard those words of wisdom? Yet, time and time again, people forget that wisdom. They put all their savings into one stock -- often the company where they work. Apparently they believe the company can't fail so they don't perceive the risk until it is too late. Talk to people who owned Worldcom, Enron, United Airlines, Qwest, GM over the last 5 or 6 years, and see how they feel that strategy worked. Clearly, many stayed until the all too bitter end in some of those stocks and suffered the life changing results. For companies like GM where the stock topped out around 94 in the year 2000 and as of mid March 2006 trades around $21 or $22, the old "it'll come back" refrain will require over a 400% move. Suppose you owned 5000 shares of GM since the year 2000; your asset value has gone from about $470,000 to $107,500. Suppose today was the day you planned to retire and those shares of GM and Social Security were it! First, you can see how important it would have been to have used an exit (see our Trend Trading materials on our website), but also quite importantly you can see how leaving all the eggs in that one basket worked out. I don't mean to pick on GM. Stock in many companies have suffered a similar fate. I just want to illustrate the dangers of failing to manage money.

What do I mean by "money management"? How is it done? When someone trades stock (or options) he should set aside a specific amount to trade. The money set aside should be risk money; money that isn't needed to pay the bills, the mortgage, the car payment, groceries, etc. Since all trading involves risk, the amount set aside should definitely be considered to be at risk. Once the amount is identified, the trader has the option of making equal dollar amount trades or trading a fixed percentage of the risk money on each trade. Someone with a relatively small stake may initially make equal dollar amount trades. So, for example, if the trader has $10,000 in risk money, he may make each trade $500 (or $750 or maybe even $1,000) thus if everything is lost in one trade, there is still $9,500 (or $9,250 or $9,000) left to trade. He is still in the game. Even better, in my view, is making equal percentage trades. I prefer something in the 3% to 5% of risk money in any given trade. Let's say our hypothetical trader starts with $100,000 and trades 3% per trade. The first trade is for about $3,000. Let's say that all is lost on that trade, now the trader has $97,000 and the next trade would be only $2,910. Again, the $2,910 is lost, now there is $94,090 in risk money and the next trade would be about $2,800. Finally, that trade makes a nice gain of $2000. Now, there is $96,090 and the next trade would be for $2,900. Again, there is a gain, and this time a big one for $6,000. Now the risk money is $102,090 and the following trade would be for about $3,060. You get the point. As the fund diminishes, the trades are getting smaller and as it gains, the trades get larger. Several wins in a row will result in more money traded so dollar gains should be greater. If there are several losses in a row, less and less money is traded so potential losses are smaller and smaller. The chances of staying in the game are greater with this method of money management, and you can't make money trading unless you are able to trade. Of course, there is the old bridge players story of the Duke of Yarborough who purportedly went years without having a single point in a hand of bridge. If you are the stock trader's equivalent of the Duke of Yarborough, I guess nothing will help, but proper money management could give you a better chance.


While many people who trade are aware of money management principles, they fail to use them. Though money management makes sense, greed sometimes takes over. I once had a trading student who was doing very well. He'd call me and say "I made "x" today." The next day he'd tell me he made twice as much as the day before and the following day he did well again. The calls went on for some time, each one more excited, and then they stopped. I was concerned so I called him and asked how he was doing. He was crestfallen. He had five winning trades in a row on a particular stock and then guess what he did. He put all his money on the next trade. As fate would have it, the stock gapped down hugely the following morning and my friend not only lost all the profits he had claimed, he was out of the trading business. The market is a stern teacher and "Murphy" is always near at hand. Knowing that every trade involves risk, do everything you can in your trades to try to put the odds in your favor. Proper money management is one of those things that could help.


Another thing I believe a trader should analyze is the reward to risk ratio of a trade. I am a firm believer that I should know my initial exit before I ever enter a trade. I should also have a "first target" for the move I am trying to play. That does not mean that I will exit just because my position hits the first target. I'll see what the stock is doing if it gets there. If I'm bullish, I won't sell automatically if it hits that first target -- it may keep going, you know. If I sold just because it hit the target I may cut my profits by getting right out. I'll have my stop close, but unless the stock turns back at that point, I'll stay in the position.


My "first target" is important in determining the reward to risk ratio I am looking at when I buy the stock. Suppose the stock is trading at $50 and my initial exit is $1 below that at $49. My risk, for the purposes of this calculation only (the real risk is $50) is $1.00. Further suppose that my initial target is $53. My reward to risk ratio in this scenario is $3 to $1 ($3 potential profit to $1 potential loss) or 3:1.


Let's say, for purposes of this Article, that my reward to risk criteria for entry into a position is 2:1 and that I do 10 trades. Here is the hypothetical Trade Table:




Trade 1 +2
Trade 2 +2
Trade 3 +2
Trade 4 +2
Trade 5 -1
Trade 6 -1
Trade 7 -1
Trade 8 -1
Trade 9 -1
Trade 10 -1
____________
Total +2

In that example, I could have lost 6 out of 10 trades and still come out ahead if I lost my anticipated risk in 6 and gained my initial target in the other 4 trades. So I can theoretically lose 60% of the time and still make money if I am trading positions with a 2:1 reward to risk. In actuality, I try to find trades that have a 2.5:1 reward to risk ratio.

Money management and reward to risk awareness can make all of us better traders and help try to enhance our trading.


Good Trading!
Bill Kraft

A while back I got a trial subscription to some of Price Headley's newsletters. His trades were just awful and he misrepresented his track record. Same with Bernie Schaeffer and Tobin Smith. Just awful. They must have trained at the the same boiler room. PT Barnham would be proud.

IN all honesty I’ve never herd of Price Headley. I simply came across this article, liked what I read and thought it was good enough to post. In fact someone may possibly learn something from it…

As for my thoughts on any trail subscription on trading. I think your wasting your time and here is why.

You cannot learn how a trading methodology works in 7-30 days. This I feel is one of the biggest causes of traders chasing their tails. Most traders are always searching for the holly grail that does not exist. They never stick with any one thing long enough to see the benefits. All systems will have good times and bad. You step into a trail service that is not doing so well and you think it is a bad system?

Here is my biggest secret to playing this game. Ya ready? MONEY MANAGEMENT and POSITION SIZING…..

[lemonjello]

Sounds typical BJ. In the old days they would have tarred and feathered those snake oil salesmen or worse. Now they get to be regulars on Fox TV.

lemon,
Funny you should mention Schaeffer. Did you notice who got last place with a pick that was -63.01% this year in the celebrity division of the Pick of the Year Contest ? I don't think I could pick that bad if I tried. It was right down the toilet for MWY from January--December. I've noticed after a particularly bad year these guys often change the name of their newsletter and mention some great pick from their past. Out of the hundreds of symbols they list at least one or two will do great each year.


---------------billyjoe

[billyjoe]

A while back I got a trial subscription to some of Price Headley's newsletters. His trades were just awful and he misrepresented his track record. Same with Bernie Schaeffer and Tobin Smith. Just awful. They must have trained at the the same boiler room. PT Barnham would be proud.

lemon,
Funny you should mention Schaeffer. Did you notice who got last place with a pick that was -63.01% this year in the celebrity division of the Pick of the Year Contest ? I don't think I could pick that bad if I tried. It was right down the toilet for MWY from January--December. I've noticed after a particularly bad year these guys often change the name of their newsletter and mention some great pick from their past. Out of the hundreds of symbols they list at least one or two will do great each year.


---------------billyjoe

[lemonjello]

A while back I got a trial subscription to some of Price Headley's newsletters. His trades were just awful and he misrepresented his track record. Same with Bernie Schaeffer and Tobin Smith. Just awful. They must have trained at the the same boiler room. PT Barnham would be proud.

Master the Four Fears of Trading
November 2002
Originally Published
in Stock Futures and Options Magazine
by: Price Headley

[lemonjello]

4. You enjoy financial talk shows for their entertainment value while knowing that 95% of what’s said is nonsense.

99% are nonsense.


21. Whether your choice of wristwatch is a top-of-the-line Rolex, a fashionable Cartier, a respectable Bulova, or an economy Timex, you recognize that all are battery-operated, with a similar quartz movement, and none fail to keep excellent time.

I bought a quartz Rolex in Hong Kong one time. It lasted a couple of months.

Master the Four Fears of Trading
November 2002
Originally Published
in Stock Futures and Options Magazine
by: Price Headley

Merriam-Webster's dictionary defines fear as "an unpleasant, often strong emotion caused by anticipation or awareness of danger, going on to explain that fear...implies anxiety and usually the loss of courage." This definition of fear is useful in helping define the issues that traders face when coping with fear. The reality is that all traders feel fear at some level, but the key is how we prepare to address our concerns related to taking on risk as a trader. In this article I will review four major fears experienced by traders, and I'll take it a step further by noting how the outcomes of these fears create undesirable trading behaviors. Basically, my aim is to have you walk away with an understanding of these dangers so you can and implement strategies that will address your fears and let you get on with your trading plan.

Mark Douglas, an expert in trading psychology, noted in his book, Trading in the Zone, that most investors believe they know what is going to happen next. This causes traders to put too much weight on the outcome of the current trade, while not assessing their performance as "a probability game" that they are playing over time. This manifests itself in investors getting too high and too low and causes them to react emotionally, with excessive fear or greed after a series of losses or wins.
As the importance of an individual trade increases in the trader's mind, the fear level tends to increase as well. A trader becomes more hesitant and cautious, seeking to avoid a mistake. The risk of choking under pressure increases as the trader feels the pressure build.

All traders have fear, but winning traders manage their fear while losers are controlled by it. When faced with a potentially dangerous situation, the instinctive tendency is to revert to the "fight or flight" response. We can either prepare to do battle against the perceived threat, or we can flee from this danger. When an investor interprets a state of arousal negatively as fear or stress, performance is likely to be impaired. A trader will tend to ?freeze.? In contrast, when a trader feels the surge of adrenaline but interprets this as excitement or a state of greater alertness before placing a trade, then performance will tend to improve. Many great live performers talk of feeling butterflies just before they go on stage, and how they interpret this as a wake-up call to go out and perform at their highest level. That's clearly a more empowering response than someone who might interpret these butterflies as a reason to run back to his dressing room to get sick! Winners take positive action in spite of their fears.

1. Fear of Loss
Analysis Paralysis and Its Cousins

The fear of losing when making a trade often has several consequences. Fear of loss tends to make a trader hesitant to execute his trading plan. This can often lead to an inability to pull the trigger on new entries as well as on new exits. As a trader, you know that you need to be decisive in taking action when your approach dictates a new entry or exit, so when fear of loss holds you back from taking action, you also lose confidence in your ability to execute your trading plan. This causes a lack of trust in your method or,more importantly, in your own ability to execute future trades.

Thus, you can see how fear can set in place a vicious cycle of recurring doubt and, in turn, reinforce a traders' lack of confidence in executing new positions. For example, if you doubt you will actually be able to exit your position when your method tells you to get the heck out, then as a self-preservation mechanism you will also choose not to get into new trades. Thus begins the analysis paralysis, where you are merely looking at new trades but not getting the proper reinforcement to pull the trigger. In fact, the reinforcement is negative and actually pulls you away from making a move.

Looking deeper at why a trader cannot pull the trigger, I believe the root stems from a lack of confidence about the trading plan, which then causes the trader to believe that by not trading, he is moving away from potential pain as opposed to moving toward future gain. No one likes losses, but the reality is, of course, that even the best professionals will lose. The key is that they will lose much less, which allows them to remain in the game both financially and psychologically. The longer you can remain in the trading game with a sound method, the more likely you will start to experience a better run of trades that will take you out of any temporary trading slumps.

When you're having trouble pulling the trigger, realize that you are worrying too much about results and are not focused on your execution process. Make sure your have a written plan and then practice executing your plan.

Start with paper trades if you prefer, or consider trading smaller positions to get the fear of losing out of your system and get yourself focused on execution. When in the heat of battle and realizing you need to get in or out of a trade, consider using market orders, especially on the exit. That way you can't beat yourself up for not pulling the trigger on your trade.

Many traders may get too cute with a trade and try to work out of a position at a limit price better than the current market price, hoping they can squeeze more out of a trade. But as famed trader Jesse Livermore advised in the classic book Reminiscences of a Stock Operator by Edwin Lefevre, ?give up trying to catch the last eighth.? Keep it simple with a market order to exit allows you to bring closure when you need it, which reinforces the confidence-building feelings that come from following your trading plan. In the past when my indicators noted it was time to exit, I have experienced firsthand the pain of not getting filled at my limit, watching the option drop and then placing a new limit back where I should have exited at the market in the first place! Then I have realized I was not going to get filled there either, so I again kept lowering my limit until, in frustration, I placed a market order to exit much lower than I could have closed the position initially. Not only can you feel the pain of loss financially but, more important, you can chip away at your internal state of confidence and create frustration by not getting filled.

You should be more concerned about avoiding big losses and less concerned about taking small losses. If you can?t bear to take a small loss, you will never give yourself an opportunity to be around when a big winning idea comes along, as every trade you enter has the risk of first turning against you for a loss. You must execute by knowing what your risk is in each trade, and define parameters to make sure you can ride favorable trends correctly as well so that your winners will be larger than you losers. And never get stuck in the mindset of hoping a loser will come back to "breakeven," as that is one of the trader's most deadly mental fantasies. Billions of dollars have been lost by technology investors hoping their stocks would bounce back in recent years to allow them to escape the downtrend. That only led to even greater losses in most cases. That's how a short-term trader can become a long-term investor unintentionally, and that is a position in which you never want to put yourself.

Ask how well you trust yourself to execute your trading plan. You want to judge your effectiveness based on how well you get in and out of the market when your method gives entry and exit signals. You?ll need to be decisive, not hesitant, know in your heart that your method is well tested and that your risk is low compared to your likely reward. In other words, you must be fully prepared before you go into the heat of battle during a trading day. You need to know where you will enter and where you will exit if you are a discretionary trader. Or you need to know what system you are following and be prepared to enter and exit as the system dictates. This keeps you disciplined and focused on following a process that can generate favorable results over time.

2. Fear of Missing Out
Being a Part of the Crowd Isn?t
Everything It's Cracked Up to Be

Every trend always has its doubters, but I often notice that many skeptics of a trend will slowly become converts due to the fear of missing out on profits or the pain of losses in betting against that trend. The fear of missing out can also be characterized as greed of a sorts, for an investor is not acting based on some desire to own the security - other than the fact that it is going up without him on board. This fear is often fueled during runaway booms like the technology bubble of the late-1990s, as investors heard their friends talking about newfound riches. The fear of missing out came into play for those who wanted to experience the same type of euphoria.

When you think about it, this is a very dangerous situation, as at this stage investors tend essentially to say, "Get me in at any price - I must participate in this hot trend!? The effect of the fear of missing out is a blindness to any potential downside risk, as it seems clear to the investor that there can only be gains ahead from such a "promising" and "obviously beneficial" trend. But there's nothing obvious about it.

We remember the stories of the Internet and how it would revolutionize the way business was done. While the Internet has indeed had a significant impact on our lives, the hype and frenzy for these stocks ramped up supply of every possible technology stock that could be brought public and created a situation where the incredibly high expectations could not possibly be met in reality. It is expectation gaps like this that often create serious risks for those who have piled into a trend late, once it has been widely broadcast in the media to all investors.

3. Fear of Letting a Profit Turn into a Loss

I get many more questions from subscribers asking if it is time to take a profit than I do subscribers asking when they should take their loss. This represents the fact that most traders do the opposite of the "let profits run, cut losses short" motto: they instead like to take quick profits while letting losers get out of control. Why would a trader do this? Too many traders tend to equate their net worth with their self-worth. They want to lock in a quick profit to guarantee that they feel like a winner.

How should you take profits? Should you utilize a fixed target profit objective, or should you only trail your stop on a winning trade until the trend breaks?

Those who can accept more risk should consider trailing a stop on their trending position, while more conservative traders may be more comfortable taking profits at their target objective. There is another alternative as well, which is to merge the two concepts by taking some profits off the table while seeking to ride the trend with a trailing stop on the remaining portion of the position.

When I trade options, I usually recommend taking half of the position off at a double or more, and then following the half position still open with a trailing stop. This allows you to have the opportunity to ride my best trading ideas further, as these are the trades where I am mostly likely to continue being right. Yet, I am also able to get the initial capital at risk back in my pocket, which frees me from worrying about letting a profit turn into a loss; I am guaranteed a breakeven even if the other half position were to go to nothing overnight. My general rule for the remaining half position is to exit if it reaches my trailing stop of half its maximum profit on an end-of-day closing basis, or scale out of the remaining half position every time it doubles again.

I?m also a big fan of moving your stop up to breakeven relatively quickly once the position starts to move in your favor, by about five percent on a stock or by roughly 25 percent on the option. It is also critical to recognize the impact of time spent waiting for a position to move. If you are not losing but not yet winning after several trading days, there are likely better opportunities elsewhere. This is known as a "time stop," and it will get your capital out of non-performers and free it up for fresher trading ideas.

4. Fear of Not Being Right - All Too Common

Too many traders care too much about being proven right in their analysis on each trade, as opposed to looking at trading as a probability game in which they will be both right and wrong on individual trades. In other words, their overall method will create positive results.

The desire to focus on being right instead of making money is a function of the individual's ego, and to be successful you must trade without ego at all costs. Ego leads to equating the trader?s net worth with his self-worth, which results in the desire to take winners too quickly and sit on losers in often-misguided hopes of exiting at a breakeven.

Trading results are often a mirror for where you are in your life. If you feel any sort of conflict internally with making money or feel the need to be perfect in everything you do, you will experience cognitive dissonance as you trade. This means that your brain will be insisting that you cannot exit a trade at a loss because it ruins your self-image of perfection. Or if you grew up and feel guilty about having money, your mind and ego will find a way to give up gains and take losses in the markets. The ego?s need to protect its version of the self must be let go in order to rid ourselves of the potential for self-sabotage.

If you have a perfectionist mentality when trading, you are really setting yourself up for failure, because it is a given that you will experience losses along the way in trading. Again, you have to think of trading as a probability game. You can't be a perfectionist and expect to be a great trader. If you cannot take a loss when it is small because of the need to be perfect, then the loss will often times grow to a much larger loss, causing further pain for the perfectionist. The objective should be excellence in trading, not perfection.

In addition, you should strive for excellence over a sustained period, as opposed to judging that each trade must be excellent. The great traders make mistakes too, but they are able to keep the impact of those mistakes small, while really riding their best ideas fully.

For the trader who is dealing with excessive ego challenges (yet, who wants to admit it?), this is one of the strongest arguments for mechanical systems, as you grade yourself not on whether your trade analysis was right or wrong. Instead you judge yourself based on how effectively you executed your system?s entry and exit signals. This is much easier for those traders who want to leave their egos at the door when they start to trade. Additionally, because we are raised in a highly competitive culture, the perception of a contest or competition will also bring out your ego's desire to win and beat others.

You will be better off seeing trading as a series of opportunities that will become apparent to you, and your task is to create a plan that finds opportunities with potential rewards that are several times greater than the risks you incur.

Be sure you are writing down your reasons for entering each trade, as the ego will play tricks and come up with new reasons to hang on to losing positions once the original reasons have evaporated. One of our survival mechanisms is remembering the good and omitting the bad in our minds, but this is dangerous in trading. You must acknowledge the risk and use a stop on every trade to admit when the analysis is no longer timely. This helps prevent undesirable situations where you get stuck in a position because you did not adhere to your original stop. This is a bad use of capital being tied up in an under-performing position, when there are likely to be many better opportunities elsewhere. Trading without stops is an ego-driven approach that hopes to avoid accountability for a losing trading idea. This is an unacceptable behavior to the successful trader, who knows he must limit risk with stops to stay in the game for the next trading opportunity.

In summary, your trading plan must account for the emotions you will be prone to experience, particularly those related to managing fear. As a trade, you must move from a fearful mindset to mental state of confidence. You have to believe in your ability as well as the effectiveness of your plan to take profits that are larger than the manageable losses. This builds the confidence of knowing that you are on the right track. It also makes it easier to continue to execute new trades after a string of losing positions. Psychologically, that's the critical point where many individuals will pull the plug, because they are too reactive to emotions as opposed to the longer-term mechanics of their plan. If you?re not sure if you can make this leap, know that you can if you start small.

Too many investors have an "all-or-none" mentality. They're either going to get rich quick or blow out trying. You want to take the opposite mentality - one that signals that you are in this for the longer haul. This gives you "permission" to slowly get comfortable and to keep refining your plan as you go. As you focus on execution while managing fear, you realize that giving up is the only way you can truly lose. You will win as you conquer the four major fears, to gain confidence in your trading method and, ultimately, you will gain even more confidence in yourself.

25 Signs That Show You Know How to Handle Money - Article by Al Jacobs

The ability to master your money is not something that just happens. It takes time, training, and temperament. Whatever praise or criticism you may direct at the American public school system, one thing must be acknowledged: The handling of personal financial affairs is not a subject to which much attention is devoted. Whatever the average citizen knows about saving and investing did not come from the classroom. This is understandable, of course, if only because the typical classroom teacher is equally mystified by the world of money. Nonetheless, there are those among us who have figured out how it all works, and what it takes to prosper.
Are you one of those persons that has managed somehow to get the hang of it? If you recognize yourself in most of the twenty-five following scenarios, then you can confidently answer "yes" to that question.

1. Your credit card bill is paid in full each month with never a penny in interest incurred.

2. You understand that the variable annuity in which your neighbor just invested will prove to be a sad mistake.

3. Despite orchestrated furor by the media, you recognize that the $30 it costs to fill your vehicle’s gas tank is cheaper in today’s dollar that the $15 it cost 20 years ago.

4. You enjoy financial talk shows for their entertainment value while knowing that 95% of what’s said is nonsense.

5. The only type of life insurance that you’d ever consider purchasing is a term policy.

6. You’re not tempted to invest in something because of a hot tip you get from a friend or relative.

7. You have serious doubts that the 3-unit course in basic English composition offered at Eleganté University for $900 is any better than a similar course conducted at Midtown Community College for $60.

8. You are sufficiently sophisticated in real estate to know that the worst house in the best neighborhood beats the best house in the worst neighborhood.

9. You owe nothing on the vehicle you drive.

10. You have a pretty good idea by mid-November how much your income tax obligation for the current year will be.

11. When hearing that the S&P 500 Index just hit an all-time high, you are not inclined to call your broker with a buy order.

12. It’s beyond your comprehension why anyone not certifiably insane would purchase a timeshare property.

13. Your checking account balance never drops below the minimum limit that triggers a monthly service charge.

14. You’re aware that an option to pay your auto insurance premium in two installments, with a "modest convenience fee" instead of a single payment, probably works out as a loan at about a 25% interest rate.

15. Although you thoroughly enjoy the home in which you live, it’s considerably less expensive than you can afford.

16. You know practically nothing about the option market—and intend to keep it that way.

17. You feel instinctively that every dollar you contribute in FICA taxes to the Social Security system is a dollar lost to you forever.

18. Whenever you’re negotiating a purchase and qualify to receive a discount, you do not hesitate to ask for it.

19. You entertain no illusions that a financial advisor will provide sound counsel merely because of the Certified Financial Planner (CFP) designation held.

20. You make the maximum possible contribution to your retirement funds.

21. Whether your choice of wristwatch is a top-of-the-line Rolex, a fashionable Cartier, a respectable Bulova, or an economy Timex, you recognize that all are battery-operated, with a similar quartz movement, and none fail to keep excellent time.

22. You find it baffling why anyone would buy a lottery ticket.

23. You cannot remember when you last borrowed money for an unexpected emergency.

24. The newspaper advertisement offering a half-pound silver commemorative medallion from The Perfidious Mint, at the "special advance price of only 139 dollars," forces you to suppress a laugh.

25. You have no confidence in the concept of "Investor Confidence."

If the sentiments expressed in most of those situations do not reflect your thinking, you’re not in control of your financial destiny. In that case, you can use a little guidance.