Do you have the mindset of a Pro or Amateur Trader?

As we progress along our journey toward being successful traders, we often find the biggest issue we have to deal with is ourselves. 

This is not a profound statement - anyone who studies trading is forever being reminded that trading is '20% about the system and 80% about the mind' And yet how many aspiring traders really understand this statement? I'd suggest that not only do very few aspiring traders fully understand this, but that a good portion of traders who believe they've developed the mindset, only believe this because they are going through a purple patch in their trading and making money.

What happens to these traders when their purple patch ends and they experience a run of losers? Is their mindset sufficiently 'mature and developed as a trader' that they accept this inevitable string of losers and simply buckle down and keep trading their plan?

I know I have a long way to go before I could look you in the eye and with 100% confidence tell you I had developed 'the traders mindset'. There are a lot of things that I do right as a trader and I know I am developing the mindset, but there are still things I do wrong, that remind me I have a long way to go.

Developing the right mental approach to the market takes an incredible amount of experience and understanding - there is no real substitute for this. You need to experience the euphoria of a great trade, and the downright misery of a bad one. You need to learn to put these emotions aside and move on. And that is incredibly hard.

How many of us have seen a stock rocket 10,20 or even 30% in our direction right after we closed our position for (what we thought) was a very nice 5%? How did that make us feel? For me, when this happens I still work out how much I left on the table and think 'if only'! What I should be doing is firstly patting myself on the back and reminding myself that I took a profit, and then working on improving my exit strategy.

And what about the times when our stops are taken out only for the stock to rocket once again in our direction? How does this make us feel? For some of use, we blame the professionals, they obviously went fishing for our stops! But who put the trade on? Us or the professionals? If you accept responsibility for your trading then you are well on the way to developing the right mindset.

Most traders will have heard of Mark Douglas - the man is rightly credited with writing one of the best books on Trading Psychology available - Trading in the Zone. I constantly remind myself what Mark's key messages are;

• Anything can happen.
  
• You don’t need to know what is going to happen next in order to make money.
  
• There is a random distribution between wins and losses for any given set of variables that define an edge.
  
• An edge is nothing more than an indication of a higher probability of one thing happening over another.
  
• Every moment in the market is unique. 
  

Thinking about what these messages really mean gives me an inner calm when trading, and that is absolutely vital towards success.

For me, a big part of developing a traders mindset is in having a trading plan. And not just something you have thrown together because 'every trader needs a plan', but something you have developed over time that deals with all the aspects required to make you successful. A good trading plan covers off not just strategies you will use, but also financial requirements, rewards systems, hardware and software requirements and your trading disciplines (to name but a few). 

Trading is a really tough way to make a living, but would you really expect a profession that offers unlimited upside to be easy to master.

AtticManTrader's journey continues......

My trading business

So a bit more about my trading business. I've been interested in the financial markets for many years. A couple of years ago I got interested in the US markets. A friend pointed me in the direction of a couple of US websites that really sparked my interest. I spent many hours researching trading, from market selection and strategy development to money and risk management. 

I began trading my own account in September of 2007. I followed my rules as closely as possible and was meticulous in the recording of my trading (being a software developer by day, I was able to develop some pretty cool databases that enabled me to record my trading in great detail). 

In January of 2008 I created equation Interactive Trading to record my trading experiences. I wanted to create a website that was totally transparent and was an honest and real account of my journey as a trader. I decided to 'open' the doors to my trading room. I published details of my trading strategy, how I developed strategies, my trading plan and my daily and weekly analysis. 

As we all know by now, the credit crunch really kicked around March/April of 2008. The strategy central to my trading plan hadn't been designed to manage these volatility levels and I decided to cease trading and wait for volatility to return to pre 2008 levels;

In 2008 the S&P 500 Index moved up or down by more than 5% in a day on 44 occasions – 22 of them in October. The index had only demonstrated this degree of volatility on 34 occasions in the previous 57 years.

The credit crunch was not great timing for my fledgling website. Suddenly I had very little to post! In fact, you'll see that my last posts were made around May of 2008. I was frustrated because I was keen to keep developing the business, but at the same time, my trading plan prevented me from trading my core strategy. I could have developed some "credit crunch friendly" strategies, but trading no longer felt like trading. It felt like gambling.

During the downtime, I've had a chance to reflect on exactly what I want equationIT to become and I'm currently in the middle of a re-design. The website will re-launch and will become much more personal. I have other money making interests (and some none money making interests!) that I will share on this website. Some current ideas I'm mulling over;

• Include details of my eBay activity - with enough focus this can be a valid revenue stream
• How to merge together all my 'online' interests (Facebook, Linkedin, Amazon reseller,  ei42 reseller etc) to act together as a central marketing device
• Change all the text from 'us' to 'me'
• Make the website about 'my journey' from a suit to a successful 'trader' 

The World in 2009

The financial crisis of 2008 has changed the way the world will do business for many many years. I've been following the events unfold very closely (October 7-9th were perhaps the most worrying days of my professiona life to date - although at the time there was little else to do but laugh!). However what happens after financial crises? When do things begin to 'return to normal?' - Indeed, 'do things return to normal?'

I've been subscribing to an excellent weekly financial commentary service which alerted me to some research that has been done specifically on this subject. Professors Carmen Reinhart and Kenneth Rogoff recently published a paper 'The Aftermath of Financial Crises'. Here's an excerpt

"... Broadly speaking, financial crises are protracted affairs. More often than not, the aftermath of severe financial crises share three characteristics. First, asset market collapses are deep and prolonged. Real housing price declines average 35 percent stretched out over six years, while equity price collapses average 55 percent over a downturn of about three and a half years. Second, the aftermath of banking crises is associated with profound declines in output and employment. The unemployment rate rises an average of 7 percentage points over the down phase of the cycle, which lasts on average over four years. Output falls (from peak to trough) an average of over 9 percent, although the duration of the downturn, averaging roughly two years, is considerably shorter than for unemployment. Third, the real value of government debt tends to explode, rising an average of 86 percent in the major post-World War II episodes."

Some interesting (if not worrying) stats;

Average % decrease in housing prices (post a financial crisis) - 35.5%

Average length of downturn - 5 years

Current % decrease in UK house prices - 15-20%

Current Length of Downturn - 1.5 years (?)

Average % decrease in equity market prices - 55.9%

Average length of downturn - 3.4 years

Current % decrease in UK equity market prices - 40-45%

Current Length of Downturn - 1.5 years (?)

So what can we see from this? Well there's good and there's bad news. We can see there is portentially still some way to go, both in terms of duration and % decreases, but on the positive side 'past performance is no indication of the future' - Now although that may sound a little corny, let me try and explain my views on this. Firstly, this is not a localised banking crisis, this is global. Almost without exception every major first world economy is currently dealing with this problem. This has to be a good thing as all those clever dudes together will surely come up with a solution. Secondly, its been evident to date that governments (and central banks) are prepared to do everything they can in order to stave off a serious depression. Interest rates are tumbling, pressure is being put on lenders to pass these rates on and Governments are stepping in and saving banks. Thirdly, and specifically looking at the motor industry, now is the time for governments to insist on investment in what will become the cars of the future. "You want a bail-out?, No problem, but we will only bail you out if you invest £££ in what we tell you (eg hydrogen cars and clean fuel stuff)" - With innovation comes opportunity and with opportunity comes more jobs..

I spent last night writing my trading account review of 2008 and it was by no means as bad as (probably) 80-90% of hedge funds. I was down just over 6% for the year (this after a stella start to the year of +13% for Jan and Feb!). I am actually very pleased with how it went. It was my first full year trading and I learnt an incredible amount about not only the markets, but also myself and my trading abilities and strategies. My core strategy stopped functioning due to volatility increases - some reports suggesting volatility was up over 400%! I did however 'roughly' follow my trading rules and I ceased trading after a string of losses. I'm waiting for volatility to return to late 2007 levels before I begin trading this strategy again. Whilst I was 'on the bench' however, I developed a really cool day trading strategy that looks like it could form the basis of a very solid and profitable day trading strategy - I'm not one to be secretive about strategies - this new one is based simply on price and volume - looking at large volume bars (on 5 minute charts) and seeing what price is doing. It's really looking at what is called 'professional money' - (what are the big boys doing) It's a hybrid Volume Spread Analysis system and I'm very excited by it, not least because it's been working for me, but because it's as pure a system as there is. No clever technical indicators, just price and volume. I'll post more on this at a later date.

I'm off to pick the ex up from Sainsburys (not only do I live in the attic, I also offer a very competitive taxi service....Still she is a great cook!)

Later all :)

The attic mans first post

I've been thinking of starting a blog for a while but to be honest, I've not known where to start.

 
I want to find a way of channeling my ramblings into something that may even be described as coherent and could prove interesting reading for some people.

Let me start by telling you about me.

I'm mid 30's, I live in London with my two children and my estranged partner. We all have our own bedrooms. I live in the attic!

I work in the city for a once large and proud global Investment Bank, I trade my own stock and futures account which is my passion. 

My living situation could be described in a number of ways - crazy, strange, weird, unconventional, completely dysfunctional! I still live in the same house as the women who is the mother of my kids, and yet we have not been together for nearly 3 years. How strange it sounds, just to write that! So why are we still living in the same house? Well, I guess there are two main reasons, the first and most important is that I want to be around my kids. I love them more than anything in the world, and simply waking up knowing they wake up under the same roof as me, is a lovely feeling. The other reason, is the bloody credit crunch! I bought this house right at the top of the market (excellent timing!) and now I can't afford to sell it!

This year has been a crazy year for the company I work for. I've seen colleagues and friends being made redundant, some have been happy with the chance redundancy brings, and some have been devastated. I look at these people with mixed emotion. They have finally escaped the rat race and have the chance to start again. But in the current economic climate, is it better to have a job, however boring it may be, as opposed to be free to follow ones dreams?

So what sort of stuff will I be posting here? Well this blog is going to be an honest account of my life. Of my professional experiences during the most significant economic downturn since the 1930's, of my experiences as I navigate toward middle age as a single man with children. I'll write here about my continued efforts to follow my dream as a successful self-directed trader.  I want to talk about all aspects of my life, I want to know if I am so different from other people - do I see the world differently or are there others out there whose lives are not following the course they had planned?

Should I still have dreams or should I accept my lot. Maybe this blog will help me to understand more about myself.