My Trading Philosophy

I base my trading philosophy on three M’s:

M: MIND
M: METHOD
M: MONEY

Out of the three M’s, I find that the Mind component to be the most crucial to trading success.

Mind: The key to winning is inside the Mind. As Master of your mind, you have to manage and understand your emotions very well. It is extremely important to understand not just the individual’s psychology, but also the crowd psychology of the markets. To become a successful trader, you must have sheer perseverance and discipline.

Method: There is no Holy Grail in the search for the perfect method to trade. Follow the wisdom of 'Plan your Trade and Trade your Plan'. A good trading plan should cover your entry, exit and position sizing requirements. My method consists of discretionary trading techniques that combine both fundamental and technical analysis, in addition to my own proprietary automated trading system. Coming up with a good trading plan requires lots of market experience, as you modify, conquer and solidify your trading techniques. Don't be duped by charming salesmen selling get-rich-quick-without-effort secret recipes.

Money: Overall profit/loss depends on money management. The first goal of money management is capital preservation. If you lose 10% of your capital, you have to make 11% just to break even. If you lose 40%, you need to make 67%, and if you lose 50%, guess what? You have to make 100% just to recover! So before you think about making big money, first you got to think about not risking your capital unnecessarily. Money management is too important to be overlooked.

Source : Grace Cheng

The Power of Visualization

"When an object or purpose is clearly held in thought, its precipitation, in tangible and visible form, is merely a question of time. The vision always precedes the realization." Lillian Whiting

Sounds like magic, doesn't it? Picture something in your mind, and magic presto! There it is! A lot of our thought processes do work like magic. We're somehow not aware that we are the ones creating the magic. We think it just happened.

As you think about your trading, do you picture success? Or do you picture disaster? Or something in between?

We all of us make pictures in our minds of things and events. We may do it so quickly we're not aware of it. Remember a picture is worth a thousand words. If we're making pictures of success, we move towards it.

To succeed at any activity, whether it be athletics or trading, you need to have a clear mental picture of what you want. Through visualization, you imagine yourself successfully having or doing what you want even though it hasn't happened yet. Often unwittingly we do just the opposite-imagine ourselves having or doing what we don't want. This too works like a magnet.

Whenever I work with a client who has trouble pulling the trigger, I ask two questions. What are you saying to yourself when you see the signal? What are you imagining (imaging/picturing)? If they're having trouble pulling the trigger, you can be sure they are imagining the trade taking out their protective stop and giving them a loss.

Whenever I work with a client who overtrades in terms of size or frequency, or a client who continually jumps into the market before his signal matures, I ask the same two questions. You can be sure they are imagining the trade going the way they think it will. They want to get there early or fully. They do not entertain the possibility of loss, and therefore fail to take precaution.

Once again, what we need to picture is ourselves doing the right thing, following our methods and maintaining clarity about price action. Since we do not know and cannot know what will happen, it's best to maintain an attitude of not knowing with an openness to probabilities.

Imagine yourself replicating your methods in the markets. Imagine yourself being consistent and successful. Make a picture of it. Enter the picture so you're looking out of your own eyes. Adjust the qualities of the picture so that it is most impactful. Try making it larger, brighter, more focused.

Take time each day to visualize yourself trading the way you want to trade. Relax. Imagine yourself doing it right now. Make it real in your mind. Make it rich with vivid detail. Enter the role of successful trader and become it in your thoughts.

Do it repeatedly. Visualize your goal at least once a day, every day. The power is in the repetition. Any thought placed in your mind and nourished repeatedly will manifest results in your life. The magic is yours.

The Power of Mental Rehearsal

"I just visualize who's on the mound and more or less have at bats over and over and over in my head and just sort of make it happen before it happens." Wade Boggs, New York Yankees

"The purpose of practicing your mental skills is to remove the obstacles you put in your way-obstacles that keep you from being confident. Taking responsibility for your thinking means choosing what to think and how to act rather than blindly reacting to events around you." Ken Ravizza and Tom Hanson in Heads-Up Baseball

If you can't trade consistently in real life, you can do it in your imagination. It's easy to do things right when no money is on the line. Without the surprises and the tension of real life trading, you can learn to follow your rules in your mind. In this way you create an experience that you can rely on in actual trading. Mental rehearsal becomes as valid a reference experience as actual trading.

Let me tell you about a documented experiment conducted by psychologist Alan Richardson. A group of student basketball players was divided into three groups and tested as to their ability to throw a basketball into a basket. One group was instructed to practice every day for a month. Another group was told to imagine throwing balls into the basket for thirty minutes every day for the same month. The third group was told to do nothing, not even think about it.

After a month the first group, the group that actually physically practiced had improved an average of 32%. The group that did the mental rehearsal had improved an average of 31%. The third group was unchanged in skill level.

I experienced a similar improvement in my tennis game by doing mental rehearsal. It's not easy to get a lot of practice time in New York City, so I did it in my mind. Then, when I would go out to actually play, I was as ready and as rehearsed as any opponent who had been playing regularly. Sometimes I was even better rehearsed. After all, in my mind there were no bad bounces, no surprises. I could practice all my strokes with consistency. I developed no bad habits. And when I went to play, I was fully prepared and could handle anything that came up.

My clients do the same kind of mental rehearsal with their trading. They trade consistently, following their rules, accepting losses and profits, taking the long view, as they mentally rehearse.

Mental rehearsal is different from paper trading. Paper trading is done in response to real market action. It is a useful tool to understand a method and to verify that method's profitability, but it does not teach the trader the ability to actually trade. It does, in fact, do quite the opposite. The trader learns simply to observe comfortably and be immune from risk. Too much paper trading teaches a person not to pull the trigger. It becomes a spectator sport.

In contrast, mental rehearsal allows you to imagine putting the trades on and accepting whatever the market gives you. You imagine your ultimate, long term success even as you accept temporary losses and set backs. You hold the faith as you build your faith. You build your confidence as you build your skills. You build the experience of consistently doing the right things. Then, when you actually trade, you have the support and the background experience of having traded effectively.

My clients mentally rehearsal trading as they listen to deep focus tapes that I have made especially for them, guiding them through the process. Through mental rehearsal they overcome their weaknesses even as they build upon their strengths.

Try mental rehearsal of trading by imagining yourself going through the trading day applying your methodology to the market. Better yet, you can purchase my Power Trading for Power Profits audio course which includes a mental rehearsal tape. I strongly recommend it. You'll be amazed at how your trading improves.

The mind is a powerhouse of possibility. We can literally change our lives and our trading through thought. We can change the meanings we give to events and we can change our results. In short, we can alter our factual reality through using mental rehearsal. We can do this to create what we want-as opposed to what we fear or don't want, which is what most people do unwittingly. What if you could take control of your trading through effective mental rehearsal?

The Power of Focus

There are three major ways to shift your emotional state. (See Shift Emotion.) You can alter how you feel by changing your focus, changing your beliefs, or changing your physiology. This column is about focus.

What you focus on as you trade becomes not just your focal reality but your understanding of the actual reality; and therefore effects your interpretation of events and, of course, your emotional state. This in turn effects your behavior. Decisions have an emotional component.

What are you looking at? Are you looking at the possibility of loss? Are you looking at the probability of profit?

Those who look only at the possibility of loss will either hesitate too long in getting into a trade or completely miss the trade. If they do get into the trade, they will grab their profits too soon.

Those who look only at the probability of profit may not protect themselves against loss, and managing loss is what trading is all about.

Have you told yourself a story about this trade? Have you told yourself a story about trading in general? Your story will effect your focus. You will be looking for evidence of the truth of your story. You will tend to discount or overlook all contradictory evidence.

A particularly effective way to direct your focus is through the use of questions. I'll be writing about the significance of questions in future columns. When you ask a question, you set up a gestault that demands an answer and assumes the truth of the question.

Do you ask, "What if I lose? What if I'm wrong? What if this trade doesn't work out?" Now look at where your imagination has to go. It has to go to the consequences of losing. You're going to feel bad. You'll lose courage. You'll hesitate.

Do you ask, "What if this trade is a big winner? What if this trade actually goes to my target? What if the market does what I think it will do?" You'll be putting on the trade, and feeling confident.

But here is the caveat: just thinking about winning is not enough. You may overtrade. You may fail to put in protective stops. Instead you need to focus on probabilities. Ask yourself, "What are the probabilities? What do my methods tell me to do?" This will keep you from jumping the gun. This will keep you from stalling.

Trading is a matter of balance. We need to focus on profit and loss, and balance the prospects. We need to focus on the probabilities of our methods. We need to focus on the information the market is giving us. And the only thoroughly reliable information we get is the price action.

And yet, having said all this, it's really important to look optimistically to the future even as we accept the current reality of news and market action. What if you could learn to control your focus so that your emotional state supported your trading actions?

The Power of Affirmations

"The possibilities of thought training are infinite, its consequences eternal, and yet few take the pains to direct their thinking into channels that will do them good, but instead leave all to chance." Brice Marden

You wouldn't leave your trading to chance. Why leave your thinking about trading to chance? How you think about trading effects what you do with your trading, and what you do effects your results.

Any thought put in your mind and revisited regularly develops an energy and independent reality that will-has to-manifest in your life. Why leave it to chance? Some of us automatically think in ways that support our trading. Others of us do not. But we can all take conscious control of our thoughts and ultimately our destiny. How to think effectively about your trading is the subject of this column and of my book, Exceptional Trading: The Mind Game.

An affirmation is a statement made in the present about the future as if it had already occurred in the past. More simply put, an affirmation is a simple statement about what you want to occur stated as if it is already true. It's a statement made in the present tense. You affirm your hopes and dreams. You affirm the opposite of your fears.

You want to keep the affirmation based in the present, because if you put it in the future, it remains in the future. "Next month I'll turn my trading around" stays out there in the future. Now is when you need to turn the trading around.

Affirmations can be repeated to yourself silently or aloud. You can record them and play them, or write them and read them. You can say them to yourself as you go to sleep and when you wake up in the morning. You can say them while you drive or while you wait in a bank line or as you watch the market or manage a trade. You can affirm your trading while you run or work out.

You don't have to believe the truth of the affirmation in order for it to take effect. Sufficient repetition breeds acceptance. Unless, of course, you mismatch yourself strongly every time you say it.

If you strongly don't believe the affirmation, you could phrase it as a process statement. Change "I am a consistent trader" to "I am becoming a consistent trader". "I am consistently profitable" becomes "I am becoming more consistently profitable". The process is more believable than the current reality.

You can bypass the mismatch by turning the affirmation into a question. "In what ways am I becoming a consistent trader?" The question presumes the truth of the affirmation, and lets it slip in.

We think in language. The words we say fill our minds and crowd out other thoughts. You may say to me, "It's just words." But I will answer you, "Words have power."

A word encompasses an idea. Ideas are stronger than will power. By reiterating ideas, they become a part of us and impact our beliefs and actions.

You want to keep your affirmations positive. Say "Now I make money trading" and experience what it feels like. Compare that with saying "Don't lose money". Immediately you begin to imagine losing money, and you begin to feel bad. Thought mixed with emotion attracts its essence.

You want to keep your affirmations short. Don't get lost in convoluted sentences and paragraphs. A simple sentence ten words or less will do it. "I follow my trading rules." "When I get a valid signal, I take it easily." "I let my profits run." "I cut my losses." "I act on time right on time." "I focus clearly on market action." "I want what the market wants." "I can handle anything that happens."

You can also use simple words: "Courageous." "Consistent." "Winner." "Confident." "Trusting." "Clear minded." "Detached." "Patient." "Effective." Who are you talking about? You, of course, the affirmer, are the person you're talking about. The "I am" is understood.

When you affirm, you are filling your mind with certain thoughts. With repetition these ideas seep down into your subconscious mind. By affirming good trading principles, you get your subconscious mind alligned with your desire to trade your verified methodology. Your will power is under the direction of your conscious mind, but for it to take effect smoothly and efficiently, it must be in harmony with the ideas already rooted in the subconscious. Affirmations are one way to create that harmony.

What if you could unify and clarify your ideas about yourself as an effective and profitable trader? What if you could affirm your way to trading success?

The Power of Beliefs

"Desire engenders belief: if we are not usually aware of this, it is because most belief-creating desires last as long as we do." Marcel Proust

And the same thing can be said about fear. Fear engenders belief: if we are not usually aware of this, it is because most belief-creating fears last as long as we do.

Emotions create beliefs. Experiences and teachings also create beliefs especially when they are mixed with emotions. Beliefs, in turn, create emotions. Remember past columns where I said the three ways to change emotions are to change focus, beliefs, or physiology.

Belief producing emotion and emotion producing belief is a cycle that turns round and round. Rarely is that cycle built on pure reality. If that cycle is not serving your trading, you need to change something.

Beliefs act as filters for our perceptions. We filter out evidence of what we don't believe, and we clarify and enlarge the evidence of what we do believe. As traders we are dependent on our perceptions. Traders often are so convinced the market is going up or down that they exclude the overwhelming evidence to the contrary until it's too late. In such cases, you need to step back and ask yourself, "What is the market showing me now?" "Has anything changed?" "Do I believe anything that's distorting the picture?"

To what degree do our beliefs about the market, ourselves, and the world in general support us? In order to do anything at all well, we need at a minimum to believe three ideas: It can be done. I can do it. I deserve to do it. Translated into trading terms, it would read: Money can be made trading the markets. I can make money trading the markets. I deserve to make money trading the markets.

Step into those three beliefs for a minute and assume that they are actually true for you. Go ahead. Pretend for a minute if you need to. Notice how your emotions shift for you as you think about yourself trading with those three beliefs. Experience what it feels like to trade with a conviction that it can be done successfully, that you can do it, and that you deserve to do it. Feel how beliefs effect emotion.

There are many different beliefs that effect trading, and we'll be talking about them in future columns. Also we'll be talking about ways to change beliefs that could be limiting you. In the meantime, be aware that it could be a belief that's effecting your emotions and getting in your way as you trade. Or it could be a belief that is supporting you in your effective trading. In either case you can disaffirm or affirm that belief. Beliefs are powerful motivators. What if you could truly believe those ideas that fully support you in successful trading?