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6,359 posts
msg #51858
Ignore TheRumpledOne
5/28/2007 8:18:18 PM

Saturday, May 26, 2007
So How do Traders Break Their (Bad) Habits?

In my previous posts, I observed the process of recovery from addiction and that this process does not entail "unlearning" anything. Instead, it requires the addict to learn new behaviors and consistently utilize these behaviors. In so doing, he reinforces the new, adaptive behavior and by not utilizing the old, maladaptive behavior, allows it to atrophy. So there it is. Easy, right?

Well, perhaps not so easy. The process is long and hard. First, the addict must admit that he needs help. That he is powerless to change by himself. Usually, it means that the addict has hit a nadir or hit bottom. Only at such a time, when he is unable to lie to himself anymore, will he be motivated to seek change and be willing to put in the hard work that is required.

Here's a fun story. In the 60's, there weren't many options available to psychiatrists. There was Psychoanalysis, which typically took seven or more years of once or twice weekly therapy session. And even then, the patient wasn't cured, only better able to control the symptoms. The drugs available to treat psychiatric illnesses were terrible - full of side effects. And, when that all failed, there was electroshock therapy and frontal lobotomies! Remember Ken Kesey's "One Flew Over the Cuckoo's Nest"? This, incidentally, was when L. Ron Hubbard formed his hatred of psychiatry.

So anyway a grad student wondered if there were any people who had "cured themselves." He put an ad in the San Francisco Enquirer asking if there were any phobia patients who had cured themselves. He chose phobias because it was easy to determine the state of their condition. Phobia patients are "all-or-nothing." They don't suddenly, on the 20th floor, recall that they have a phobia about elevators. They won't even approach them. Just the sight of one will make them sweat! So this grad student put his ad in the paper and was surprised to find that there were hundreds who answered his ad!

And all of them told essentially the same story. After years of therapy and drug treatment and even electroshock therapy, all of which went nowhere, they all had an epiphany. They essentially had an out-of-body experience, looked hard at themselves, and said, 'Hey! What I'm doing is Stupid!" And the moment that they decided to stop acting stupidly was the moment that they gained control over their phobias. The moment that happened, they regained control of their lives. They still had some work to do, but they no longer required drugs, electroshock therapy or psychoanalysis. They had, indeed, cured themselves.

Now notice that they didn't say, "I'm stupid." When you say that, you admit that you are powerless and unable to do anything to help yourself. But saying, "What I'm doing is stupid" gave them a behavior to target and permission to do something about it. Does this start to sound like our addict who hits bottom and admits that he needs help? Or going to AA and standing up and saying, "Hi. My name is Joe and I'm an alcoholic?" In each case, it requires the individual to step outside of himself, shine the light of cold, brutal truth on himself AND LOOK AT HIMSELF. And if he doesn't like what he sees, he can then say, "What I'm doing is stupid."

This, in the field of addictionology, appears to be an essential first step. In the Church, one must first acknowledge the fact of sin before one can seek absolution. Then, one is given a penance to perform. In our case, it's a series of steps, of tasks, of rehabilitative efforts to gain full recovery.

So everyone. Stand up and state, loudly and firmly, "What I'm doing is STUPID!" Or "Hi. My name is ... and I'm acting stupidly." AND TAKE A GOOD HARD LOOK AT YOURSELF. It's not enough to just go through the motions. You have to really look at yourself, really commit to the statement, and really commit to the long, hard, effortful process upon which you must now embark. To do anything else is to delude yourself into thinking that you can get a "quick fix" and then go on with your life, untroubled. There is no free and easy cure. That is what Trader's Coaches promise you with their five or six 30-minute "coaching sessions" - over the phone! And for thousands of dollars! (Sound like psychotherapy?) They may even throw in some "motivational" tapes or relaxing music to help you along (sound like the old, ineffective drugs?) Let's hope the next step is not electroshock or lobotomy!

The point is, that you must be willing to put in the work to make a change. I've spent the time in all my previous posts to lay the groundwork so that you will see and know what the steps are, how long it will take (many, many repetitions) and how much effort it will take to force yourself to avoid the old behavior and repetitively reinforce the new.

Sunday, May 27, 2007
So how do Traders Break Their (Bad) Habits? Part 2

In my last post, I started looking at what a trader can do to overcome their bad habits. Now here are some concrete steps that Joe Trader can do to help himself. This is not definitive. It's just a few things that I've found to be helpful.

Here's the first step: Read, read, read. I suggest that you start with the resources that I mentioned in my last post - especially Dr Steenbarger.

And here's the second step: Form a trading plan. A trading plan should identify what you plan to trade, under what circumstances, and what risk you will be willing to assume. Remember, amateurs look first or only at the anticipated reward. The pros look first at the possible risks, and how they can be minimized. Identify your entry and exit strategies. Ask lots of questions of successful traders to see if your plans are reasonable. Woodie's site is a wonderful resource with lots of people willing to step in and help. Step away from trading until your stress levels subside and READ, READ, READ.

The third step is to not sim or paper trade. I've seen a lot of people recommend that. But remember, repetition will LTP your neurons, whether you like it or not. And if you repeat and LTP bad trading practices, then all that sim trading will be for naught. Instead, I suggest that you listen to Woodie's FREE web cast and just passively absorb as much as you can until a good trading philosophy, and good trading practices become internalized. Just as an addict is removed to a safe, non-threatening and non-challenging environment in order create favorable circumstances for behavior change, so should you take the opportunity to do the same.

The fourth step is not to read about trading methodology, but read everything you can about risk/reward, risk management and money management. I'll start you off with an example: if you lose 50% of your money, you will have to make 100% in your next trade to get it all back. Go to Woodie's site and you can download a wonderful lecture by GB007 on money management. Towards the end, there's a chart showing the average win vs the average loss. STUDY IT!

The fifth step is to pretty much ignore back testing. The market is constantly changing. Instead, practice learning how to read the markets. Here's a fun exercise. Look up the upcoming conference call schedule. You can find them easily in Barron's, Yahoo Finance or by doing a Google search. Try to pick a small to mid cap stock (they can move more than a GE or MSFT). Also look for a stock that has good institutional ownership, around 40-60%. That will ensure that the big boys will get in and really move the stock if they like/dislike what they hear. Then, assign yourself 100 shares of that stock. You can listen in, if you want. I don't. Instead, I watch the price/volume action and try to determine what the Big Boys are going to do. Initially, there will be some see-sawing. This is noise, generated as small traders hear things and overreact. Ignore that and try to determine what the big boys are doing. It will be one of three things: They will buy, they will sell, or they will decide that they have enough of a position and do nothing. The average conference call lasts about an hour and you can generally find one that is held just before opening or at midday. This is an excellent exercise to help you learn to read a market and to make quick, decisive decisions. It also helps to develop patience and helps you learn how to filter out the noise.

The sixth step is to do an inventory of yourself. Again, do it in the hard, cold light of reality. Identify your strengths and weaknesses. Assign priorities to each and focus on one strength to augment and one weakness to overcome. Then formulate a game plan. Much as a football coach formulates a game plan, institute it and modify it, as needed. Determine what milestones you will use to measure your success in accomplishing your goals. If satisfied, pick the next strength to augment or the next weakness to target. By the way, you may be surprised at which you find to be the harder task.

Posted by Dr Bruce Hong at 6:58 AM 0 comments


No paper trading and no backtesting... IMAGINE THAT!!

2,824 posts
msg #51863
Ignore nikoschopen
5/29/2007 1:21:28 AM

Thanks for sharing. What this guy wrote is just another rehash from trading 101, but it's a refresher nonetheless. I would just like to add a no-brainer of my own: you could have made the money you had lost...only if you went the other way. I don't mean to sound trivial, but I always find this notion startling to say the least.

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