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Strategies & Market Trends : Strictly Buy and Sell Set Ups -- Ignore unavailable to you. Want to Upgrade?

To: chowder who wrote (4858)	7/29/2005 9:52:15 AM
From: chowder	Respond to of 13449

How things look on the outside of us depends on how things are on the inside of us. - - Parks Cousins - Feature Article The Windfall Bias Ever find $50 in your coat pocket or receive an unexpected gift from a relative? Perhaps you inadvertently overpaid your credit card, and now have an extra $100 that you didn't think you had? When most people receive a windfall, they feel they can spend it freely, as if it isn't "real" money. The same thing happens when recreational gamblers unexpectedly win a jackpot. They didn't expect to win, so they decide that they might as well cavalierly spend it. They might make a few risky bets. After all, it's not their money; it belongs to the "house." Behavioral economists have shown that the same phenomenon occurs when traders and investors unexpectedly receive a windfall. They are willing to take unnecessary risks with it because "it's just the house's money." But if you want to trade like a professional, it's vital that you treat all money, windfall or not, equally. Money is money, and to trade profitably, it is vital to control risk at all times. Why are we willing to take risks with a windfall? It's an example of what behavioral economists call "mental accounting." People informally put money into specific mental categories. Some mental categories are treated like long-term investments, while other mental categories are treated like disposable income. Windfalls are usually put into the disposable income category and treated like "mad money," which can be spent freely and carelessly. When you receive a windfall while trading, it's natural to put the unexpected profit in the "disposable income" category. But if you want to maximize your profits, it is essential that you view the money the same way as you would any other profit. Profits are hard to come by. It doesn't matter if it is unexpected. It is a profit that you should do everything you can to protect. You shouldn't take unnecessary risks with it. Consider an example of how novice traders "play with the house's money" in order to build risk tolerance. It's difficult to take risks, and many novice traders find it anxiety provoking. One way to reduce some of the fear in the midst of a trade is to scale out of a position when it moves favorably into a predetermined target price. For example, if the market has moved favorably to a point that is midway between your entry price and price objective, you can liquidate half of your position and feel emotionally detached. You can hold the rest of the position and feel less fear because you've made enough of a profit on the trade. It's a great strategy for taking some of the pressure off, but there are two problems with this approach. First, you may have the tendency to feel that you can treat the remainder of the position as if you're playing with the house's money. You might erroneously think, "I've made enough profit, who cares what happens next?" But you still have money on the line. Don't fall for the windfall bias. Profit is profit. Money is money. Just because a profit was unexpected or easier than usual to make doesn't mean that it is money that you can risk indiscriminately. You're never "playing with the house's money." No matter how the money gets there, once it is in your account, it is trading capital that you must trade wisely in order to stay profitable in the long run. Innerworth.com

To: chowder who wrote (4858)	8/2/2005 1:31:04 PM
From: chowder	Read Replies (2) \| Respond to of 13449

Life has no limitations, except the ones you make. - - Les Brown - Feature Article Setbacks are Blessings in Disguise Have you ever asked seasoned traders how they deal with a trading strategy that has failed? All may be going well. They are in the zone and everything just clicks. Suddenly, though, the strategy fails. A couple days go by and every trade is a loser. How a trader deals with this change in fortune separates a winning trader from those who fruitlessly feed their account every month. The winning trader thinks positively, and turns a setback into a blessing. Who wouldn't want to have a Midas touch as a trader? It's a nice fantasy, but if you ask a seasoned trader how many times he or she has failed, you'd find that behind their success are mountains of failure. The winning trader persistently overcame setback after setback to hone his or her skills. Setbacks are commonplace when trading. A seasoned trader doesn't become paralyzed by them, but tries to get past them. Decisive action is taken. When a strategy no longer works, winning traders think positively and actively try to discover what's going wrong. They rise to the challenge and try to figure out what they can do next. Here are some steps you might take to turn a setback into a blessing. First, abandon the tendency to feel like a victim or feel that you must be on the attack. After a setback, thoughts of revenge may consume your mind and you may be driven by a strong urge to dominate and regain control. You might think, "This wasn't supposed to happen. I don't want it to happen. I want to undo it." These thoughts foster denial and inaction. When you get caught up in revenge, stop your thought processes. Tell yourself to slow down, and try to calm down. Don't try to change your ongoing experience. For now, just accept it and let it be. Don't try to undo it or deny what's happened. Tell yourself, "It's all right. Things don't have to be the way I want them to be. Setbacks happen." Make a factual statement about what has happened and accept it. For example, you might say, "My strategy no longer works. It's a fact. Just accept it for now." If you feel disappointed, acknowledge your feelings. Accept your feelings, and they will pass through your mind and allow you to calm down. Next, you want to become centered. Remember who you are, and remind yourself that you can regain control. You might say, "I've got to concentrate. If I calm down, I can find a solution. I have the skills to get past this setback. Maybe I can't control the markets, but I can control my reactions to this setback. I can take it in stride and move forward." After you accept the emotions associated with the setback, calm down, and regain your composure, you can begin finding solutions to your setback. For example, you can study the markets to discern precisely how market conditions have changed, or you may search for other industry sectors or new markets where your current trading approach may work. Or you may just want to start over and find a new method that does work under current market conditions. Whatever you try to do, however, you have to recover from the setback and think positively. Each setback is a learning experience. The number of setbacks you face in your career isn't as important as how you recover from them. If you view setbacks from a victim mentality, you'll get stuck. Your mind will be fixed on failure. But if you calm down, own your experience, and take an active, problem solving approach, you'll turn a setback into a blessing. Innerworth.com