Review of a Chapter in Tools and Tactics for the Master Day Trader by Velez and Capra
by buffy in the chatroom on October 29, 2002

This is based on "Tools and Tactics for the Master Day Trader"
by Oliver Velez and Greg Capra

While this book is written from a stock traders perspective, much can be learned from it by the futures trader. It has been in my bookcase for years.

This book is also where the bandwagon story came from that has been shared in the past that is such a great story relating the psychology of the market and thought of often by me.

A few of the money-costing sins of trading that are discussed in Part 1 Chapter 5:

Failing to cut losses short.
This is one of the most frequently committed errors by aspiring traders.
Traders must be willing to take quick but controlled losses and accept the fact that losses are and always will be a permanent part of trading.
The trader who hasn't accepted this is always looking for the "holy grail" that will deliver unbelievable profits without even a trace of loss.
This is impossible because successful trading is determined by how well we manage our losses not by how well we avoid them.
Learn how to lose like a professional and keep losses small. The winners will take care of themselves.

Daniel X: yes most traders lose a little ..make a little and then that trade comes along which takes you up to the next level
Daniel X: the key is to stay in the game as long as you can till that trade comes along

Things you can do if you have a problem with the failure to cut losses:
Never place a trade without defining a stop loss. This means at what price does it have to trade to show you the trade is going against you.

Always adhere to your predetermined stop loss. This is hard to do for some cause it is admitting you were wrong. No pride felt no confidence boost. Look at the trade like you hired someone to make you money works for some traders. They don't do it you fire them before they cost you too much!

Another sin is dollar counting

The goal and focus of every short-term traders is profits. While this may be the driving force behind the desire to trade, once a trade is taken you must work to forget your profits. Constant monitoring of how much a trade is up or down dollar wise is a destructive activity.
It can increase fear, promotes moment to moment uncertainty and most importantly of all prevents one from focusing on the chart and what it is saying.

Save this for the end of the day or at least the end of the trade.

Daniel X: you'll end up being in a holder and trying to make up for a loss by cutting too early

How many times has the fear of giving back a tiny profit knocked you out of a trade just before it went on to bigger price gains?
How many times has the paralyzing effect of loss prevented you from exiting a trade when you should have?
It leads to knee-jerk reactions and quick responses that lack reasoning.

Instead ask yourself questions to focus on the chart. Did I enter right? Is my reason for taking this trade still valid? Is it time to move my stops? When should I take profits?

Daniel X: thats what stop loss is there for...if you're wrong it will take you out if you cannot decide for yourself
Dollar counting causes uncertainty, fear of loss and an emotional imbalance that can lead to destructive actions.

Needing to know more

How many times have you missed a winning trade because back-to-back losses made you hesitate, second-guess and/or pause out of sheer fear of losing again? The main culprit in these scenarios is the desire for certainty or the need to know more.

It is natural to want to be certain before we act, to be extra sure... But the fact of the matter is the brass ring goes to those who can act intelligently without the need to know more.

The trader who needs to know more before the trade is placed will usually be late and often on the wrong side of the trade. Traders who are not imprisoned by the need for more info are free to act.

When you truly understand the wisdom of uncertainty, you become a chart maker not just a chart reader. You can't afford the comfort of certainty or the need to know more, because by the time you know all the facts, the opportunity may be already gone.

The needing to know more promotes inaction when action should be taken, and encourages action precisely when inaction is the better choice.

It can also serve to perpetually keep a trader on the wrong side of the game. All a trader can do is trade, trusting a well-planned strategy.

If you find yourself hesitating because you'd like to know more, stop and ask yourself, "Is what I'm looking for necessary for the trade, or am I just looking for a higher comfort level?"

Winning the wrong way

Many beginning traders do not realize that it's possible to make money in the market the wrong way.

An example would be a trader who fails to adhere to a protective stop on a trade and in doing so actually winds up making money on the play.

The next time your stop is triggered by price, you will be thinking I won the last time I ignored my stop should I ignore it again?

You must be aware that making money incorrectly reinforces bad habits and irresponsible actions. Once a trader gets success that comes the wrong way, the bad habit tends to repeat until it costs them. Try to win the right way. Use Google's daily feedback method to make sure you are.

The book goes on to state the following:

What appears to be a warm gift is really a cold debt in disguise, one that is usually paid back with outrageous interest. Novice traders tend to look for gains any which way they can get them. Profits achieved by way of faulty acts are not profits at all. They are loans that might as well have been accepted from a loan shark.

Right actions and right methods won't always produce profits for a trader but you will be winning the right way.

It is recommended you do the following:

Review every trade and check for errors or rule violation in the entry, initial stop placement, the money management, the exit, etc. If you find any, consider it a loss just like Google's daily feedback would. Try not to associate the feelings of a winner to these trades when they really are not.

Hoping and holding
- the 2 H's will be the major culprits that most frequently lead to winning the wrong way and ultimately lead to a trader's demise.

elroch: Buffy - I think there are always problems when you're trying to consolidate your personal trading rules. When is a rule change a rule break? I think all rules should be made outside of trading times.
elroch: I'm sure many people tweak rules when trading.

Right Elroch - we should be robots during the day and do our thinking at night.

Daniel X: not rules but you do have to adjust to market conditions
Daniel X: exactly

Yes different rules for chop and trend. True.
I have only mentioned a few of the seven deadly sins in trading. If you are interested in the others, you might get the book from the library or add it to your bookcase.

Thanks all for coming.

Daniel X: thnx Buf
elroch: Thanks Buffy
milesov: thx buffy
nedam: thanks buffy
ed1300: thank u
fooliospeculator: thx
pete77_1: Very helpful