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

To: chowder who wrote (9169)	4/16/2006 8:33:49 PM
From: chowder	Respond to of 13449

Don't Run from the Lions ............................ If ever happen to run into a mountain lion while hiking, you should know that the best thing to do is not to run. What you should do, is stand up as tall as you can and open up your coat or jacket to make yourself look larger. This technique actually works well against polar bears also. This is an example of the worst case scenario when you are hiking or ice skating in the North Pole. What about the worst case scenario when trading? Have you ever considered it? Do you remember the story of Long Term Capital Management? Well this Shakespearean tragedy, occurred 4 years after it was founded by several geniuses including John Meriwether, Myron Scholes, and Robert Merton. Does the name Scholes sound familiar to you? His name is the one in the Black Scholes option pricing model. These gentleman started a hedge fund and were doing quite well until 1998 when they lost over 4 billion dollars and nearly caused a stock market crash. They were making money from the concept of reversion to mean which means that when volatility increased above historical norms, they profited from the volatility decreases back to the historical average. There were several problems with their methods though. For one thing, they did not consider carefully enough what the worst case scenarios were. The other problem was that although LTCM invested in many different assets, virtually all of them were betting on reversions to the mean (they were all betting on the same phenomenon). Finally, the top traders at LTCM were so blindly confident that they made disproportionately large bets that led to their demise. If Nobel-prize-winning geniuses can be blind to risks and worse case scenarios, is it possible that you could be the same? So, what are the main mistakes that traders make when they develop trading systems? One problem is that traders don’t worry enough. Their main concern is making profitable systems. Most traders have to sell their systems to someone, including themselves. So, they have a knack of being overly enthusiastic and eventually, overconfident. This can lead to seeking the most profitable system with little consideration about risks. Another mistake that is commonly made is that traders look at the disasters that other traders make and think to themselves, "it could never happen to me, because I know better." Let's be realistic here. Human behavioral patterns are very repetitive. There have been booms, busts, miracles, and breakthroughs of the same kind since the beginning of time, and there always will be because people are people. Keep in mind, that you can make mistakes. Write down your possible mistakes, and avoid them. So what should we do to manage risk? First of all, we must develop systems in this unique way: make a list of at least 5 different things that could go wrong in implementation of your trading or market conditions. For example, in doing so, LTCM may have realized that a potential problem that could go wrong is the possibility of a unique period when prices move much more than expected and did not revert back to the mean for a much longer time than expected. Could the fund survive? Or, perhaps LTCM should have asked, "what would happen if we took positions that were too large and we lost on them?" Or, "What if we start out with tremendous success and then blindly expect the strategy to work exactly the same indefinitely?" Although these questions seem pessimistic, the responsible, effective trader should ask these questions with regularity. Let's sum it up then: When developing systems ask what the worst case scenario and try to estimate the probability of it actually happening. When developing systems, write down 5 things that could go wrong. *Run through several bad scenarios and try to estimate the probability of each one happening. These steps will help you survive which is the first goal when trading. Be disciplined- and trade well! BigTrends.com (This message is linked to previous articles.)

To: chowder who wrote (9169)	4/17/2006 11:18:37 PM
From: the navigator	Respond to of 13449

They say a picture is worth a thousand words, and this is one of the best examples of that truism that I have ever seen. Thank you so much for sharing! It certainly helped me to understand your message...and it is a powerful lesson.

To: chowder who wrote (9169)	4/18/2006 4:51:14 PM
From: chowder	Read Replies (1) \| Respond to of 13449

The Power of Focus .................................... After a few heavy-duty TrendWatches the last few days (covering global economic trends), we want to take a break and look at some trading psychology tips. Today our ideas are coming from one of my favorite books that's not really trading-oriented. We're going to be looking at a few highlights from a book called 'The Power Of Focus', by Jack Canfield, Mark Hansen, and Les Hewitt. While there's no way to do the book justice in our limited space here, hopefully you'll take away some of the more important pieces of the book. And best of all, you'll be able to apply them immediately. Your habits will determine your future. Period. This is not news to any of us, but what I found interesting was something of an aside in the book. The book contends that the results of bad habits don't show up until well after the habit has been learned. That's unfortunate too, as we all know that it's incredibly difficult to unlearn something. The implication is that that you'll be engaging in a destructive behavior, but you may not know it until it's far too late to actually do anything about it. In fact, up to 90% of your everyday behavior is based on habits. Have you made it a habit to spend an hour a day preparing and doing trade research? Have you committed to waking up an hour earlier to plan your trading or work day? Or do you hit the snooze button a few times, and miss out on reviewing the news and charts of your positions? Habits are the key to success. - Your goals must have a number. And this doesn't just mean the total returns on your trades, as an overall goal is still too ambiguous to actually use in making daily plans. You need to know how many trades per day, week, or month it will take to achieve your goal. Of course, you'll also need to know what type of return you need to average on each trade to reach that goal. As the book states so accurately, 'a goal without a number is just a slogan'. - Take decisive action. They say 80% of success is showing up, and that's probably a pretty good rule of thumb. So how does one 'show up' to be a trader? By taking trading action! And if you're not taking the action you know you should be taking, you absolutely must understand and admit that you're procrastinating. Stings, doesn't it? But recognizing the truth is the first step to attacking any problem. The book explains six reasons for procrastination; think about which ones apply to you. 1) You're bored 2) You're overwhelmed 3) Your confidence has slipped 4) You have low self-esteem 5) You don't enjoy what you do 6) You're easily distracted So, the reasons for your procrastinations may be diverse. However, the resolution of all of them is the same. The first thing you need to is ask yourself a LOT of questions.....mostly "why" questions, but also a lot of "how" questions. Why are you bored? Why has your confidence slipped? Why don't you enjoy trading? Then move on to the other set of questions. How can you feel less overwhelmed? How can you prevent distraction? How can you feel good about trading again? And finally, the last portion of the book details how you can cement that change, once you're happy with your new you....... - Become an active decision-maker. There is a difference between being willing to make decisions, and being proactive about making decisions - being proactive puts you in control. To do this, there are four steps to follow: 1) Think - About what action will best accomplish your goals, and why 2) Ask - The questions that must be answered to make an intelligent decision 3) Decide - Establish if-then scenarios for each option, and choose the best 'then' 4) Act - Then repeat the whole process, again and again 'The Power Of Focus' is a great book for every aspect of your life, whether you're a full-time trader or not. I encourage you to think about how you can improve yourself and your habits by focusing. BigTrends.com (This message is linked to previous articles.)