The Shocking Way That Winning Trades Blow Up Trading Accounts

You may have just crushed it with your biggest winning trade of the year, but you still do not know how to trade.

That rush your feeling means it was a bad trade.  Good trades are not exciting. If this trade was your biggest win of the year, you probably committed a cardinal trading sin.

A few big wins doesn't make you a big elephant

Common big win trading mistakes (and their mental trigger) include:

1. Taking on too much risk (greed).
2. Gambling by holding through earnings (FOMO-fear).
3. Traded too big for your account size (greed).
4. Piggybacking somebody else's trade without understanding the trade (fear and greed). 

There are many more trading leaks but these are the ones I see my students make over and over again.

There's a pattern at work here that ultimately leads you to blow up your account. Trust me I know because I have done it twice (see my story and listen to there interviews here and here).

The patterns goes a little something like this.

Fledgling trader (actually I also see way too many seasoned pros do this too) gets an idea from a member of the twitterati. Her rules allow here to risk up to 1 percent of her account, but this trade looks too good and she envisions the big gain. She uses all of her 25K account for this one trade and ends up risking 10%.

Earnings are three days away and again she imagines blow out earnings. While her rules tell her to get out of the trade before earnings, she fears missing out and gambles the entire position.

The trade worked and her account is now at 33K. She does this 10 more times and after a wild ride she's doubled up to 50K.

You think you are the shit. Best damn trader this side of Wall Street.

Thoughts of quitting your job fill your head. The two week notice is ready and your playlist has "take this job and shove it" on loop.

As any degenerate gambler knows, eventually your luck will run out.

You WILL blow up your account.

You do not know how to trade.

Before that happens get your stuff together and learn.

I'm here to help.

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How to Embrace Your Fear in Trading: The Trading Intelligentsia Has it Wrong

Most trader's and coaches think of emotion as if it is trading kryptonite. The worst of these emotions is thought to be fear.

If you Google "fear" and "trading" you will see a host of "how to overcome fear in trading" articles. No disrespect to those authors, but they are worthless. Don't read them. Every one of these articles misses the point.

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Fear in trading is a good thing. It is an emotion that is telling you something. To a trader it is warning that "something is wrong here. Past experience and pattern recognition is a signal that I need to adapt my strategy." 

Why would you want to overcome this legitimate warning signal? Ignoring your emotion and sticking with the plan is a likely bad move. Rather than overcoming this vital emotion, embrace your fear and investigate why the sirens are going off in your head.

The 3 Step Process Embracing Fear

When fear grips me during a trade, I analyze the situation using a  3 step process:

1. I ask myself why I am scared. I review the setup, patterns, risk parameters, position sizing and market conditions. If something has fundamentally changed in any of these factors, I reassess the trade. 
2. If I can't find anything wrong with the trade, I think back to the last time few times I felt this way. Was there a common theme. Did something significant happen in those trades, or was my fear ultimately misguided?
3. If I still can't come up with anything, I look inward. This is where self actualization comes into play. I try to take a step back and "watch the watcher". Is this emotion based on flawed perceptions? Are there factors outside trading making me feel this way? Am I focusing too much on recent profits and losses rather than the trade? 

If my perceptions are flawed or the fear is based on my own mental anxiety rather than a change in trade conditions, I make no trade adjustment and come up with a plan to work on myself.

After this three stop process, a plan is in place to fix the trade or the trader. By doing so, I end up becoming a better trader. This is accomplished not by overcoming my fear, but by embracing it. 

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Chart of the Day: How to Trade VIX

At the first sign of a market sell off or correction, my eyes leave my well developed focus list and turn to the CBOE Volatility Index, otherwise known as VIX. During market selloffs, it is crucial that you learn how to trade VIX.

Why do I love trading the VIX during sharp selloffs and corrections?
 
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It's because the VIX smells fear and acts accordingly with wild spikes. Okay, so in truth an insane calculation that some Ph.D wrote is used, but I like to think of the VIX like a shark smelling it's prey, attacking with a mad rush, enjoying the spoils of it's victory, then settling down.

In other words, the VIX will spike up when the market sells off, hang out at the high for a short period, then ramp back down as the market settles down.

Study this chart of VXX (VIX ETF) to understand the last few times VIX has made huge moves. We are talking 30-100 percent moves in 1-2 weeks. Notice that they always correspond to SPY selloffs.

Here you can see that when volume spikes, so does VIX. We are currently in the midst of a big volume spike and VXX has ramped up from a low of $17 to $21.35. Studying recent volume spikes, it looks like we still have some room to run.

In the Trade Report, we are currently up 10 percent, as we entered VXX at $19.30 and are still holding. Once the spike is over, we will reverse and "short" VIX using invese ETF XIV.

Watch this short video on trading VIX during volatile markets and using pair trading with VIX as a strategy to profit without knowing which direction the market will move. If you like the video, please hit like on the youtube clip!

https://youtu.be/avpW0l1NhMU

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If you would like to learn more about how I trade, receive my nightly focus list with market analysis, setups and trade alerts, sign up for a 14 day free trial at BullsonWallStreet.com.

100 Trading Quotes To Put Into Action And Change Your Life: Michael Jordan on Limits and Trading Scared

I forbid any trader I am working with to set this type of trading goal: "I plan to make xxx dollars per month." This is a common goal that almost every trader has made at one time or another in their trading careers. So why should you avoid this goal like the plague?

First, if you have a set dollar amount to make per day, week or month, you will more than likely execute trades you should not take because you are trying to hit your dollar amount. Rarely does pushing trades like this actually get you to your goal. Most of the time you will end up on the losing end of these trades.

Second, and more importantly, setting a dollar goal places a limit on your potential gains. What usually happens when we hit a goal?

We relax. Feeling a sense of accomplishment, the natural tenancy is to pat yourself on the back, work less and take a little mini-vacation.  How many times have you hear a day trader say he hit his daily goal and is taking the rest of the day off? I've seen it too many times.

This trader, once hitting his daily goal (also applies to weekly or monthly goals) effectively places a limit on what he can make.

So why do we set these types of goals? Michael Jordan equated limits with fear:

Limits, like fear, are often an illusion. 

Over the years dozens of traders have told me they set goals/limits because they do not want to lose their hard earned gains. They fear they will give it back. This is a psychological flaw, and the sad thing is they are actually proud of themselves for creating this type of rule.

They are TRADING SCARED, and as Jordan would say, this fear is an illusion.

What if Michael Jordan had set limits on himself?  The Chicago Bulls would not have won 6 championships, he would not be the greatest of all-time and would not be the first billionaire NBA player to own a franchise.

Rather than set a dollar related trading goal, set process related goals.  For instance, every quarter I grade all of my trades A to F.  Win or lose, my goal is always to have straight A's.  Even if a trade was a loss, I can earn an A if the setup was good and I followed my risk and trade management rules.

If you follow a process oriented approach, apply your methodology and never place limits on yourself, in time you will achieve more than you ever dreamed. The 100 Quotes To Put Into Action and Change Your Life Series:

Quote 1: Nehru on Caution as Risk

Quote 2: Bruce Lee on Creating Opportunity

Quote 3: Machiavelli On Risk Management

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How to overcome the fear of entering market pullbacks

Salvador Dali

Have no fear of perfection, you will never reach it - Salvador Dali 

As swing traders we all know that a market pullback is our friend. If we go back and look at any market index chart, we will see that the best time to enter the market was on a pullback after and extended run. Take a look at this short one minute video that illustrates the power of doing nothing more than entering pullbacks in the S&P 500. In the past year, entering on a deep pullback was profitable 7 out of 8 times. That win rate is hard to beat.

Watch this 2 minute video showing the power of entering on market pullbacks.

   http://youtu.be/gMWEIDamlKA

So intellectually we know the right thing to do. Entering on pullbacks is a slam dunk trade. So why don't we do it more often?

It all goes back to the mental game. Fear is quite possibly the most powerful emotion. Fear stifles us and leads to indecisiveness and bad decisions. To be a successful winning trader, you must overcome fear. How do we overcome this fear?

Here are 4 methods for overcoming the fear of buying dips:

1. Trade small. Make sure you are risking an amount that won't cause you pain if you take a small loss. This way, even if you take a loss on the trade, it's no big deal.

2. Trust your methodology. You have done the research. You know that historically the way to make money in the market is buying dips.

3. Shut off social media and CNBC. Becoming a stock news junkie is a guaranteed method for increasing your fear levels.

4. Go to war with yourself.

Conquer your fear, buy on dips and become a profitable trader. It's that simple.

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Conquering Fear, a Requirement for Profitable Trading - Part 1

The most destructive element in the human mind is fear. - Dorothy Thompson

Neither a man nor a crowd nor a nation can be trusted to act humanely or think sanely under the influence of a great fear . . . To conquer fear is the beginning of wisdom. - Bertrand Russell

Collective fear stimulates herd instinct, and tends to produce ferocity toward those who are not regarded as members of the herd. - Bertrand Russell

We need not look further than the tragic events of 9-11 to fully understand the meaning of Russell and Dorothy's words. Two weeks after 9-11 my father and I, two of them most westernized Asian-Indian Americans you will ever meet, boarded a flight from Minneapolis to San Francisco. It was the most unpleasant plane rides I have ever taken. The man in our row looked like he was going to have a heart attack when we sat next to him.

While the probability that we were terrorists was on par with being struck by lightening, I still understood the anxiety created by our presence. Even if the probability of an event happening is low, our brains have been wired to fear low probability outcomes if the danger is great enough. After all, one bad judgment and you're minced meat. The harm in fearing the insignificant was small compared to what could happen once disaster struck. Evolutionary Darwinism at it's best.

However, this brilliant evolutionary mechanism has it's downside. Besides the fact that it made my dad and me feel like crap, it can cause the crowd to make unwise decisions. Most of those who supported the Iraq War in its infancy have come to grips with the fact that fear lead them towards an irrational conclusion. The panic that followed from a low probability, yet high impact event made the masses subject to manipulation and self serving propaganda. The course of world history changed because the masses were tricked into supporting irrational decisions influenced by fear.

If fear can cause a nation to act insanely, there's no doubt it can reek havoc on collective markets and individual investors. My biggest leap as a trader was not developing my trading systems. For me, that has come quite easy. No, my epiphany came when I learned how to control fear. I've had the same systems for quite some time, but it was not until I gained control of the fear factor that I became a profitable trader.

Notice that I don't say "eliminate fear". That cannot be done. Thousands of years of evolution can't be eliminated, but we can control the fear impulse by recognizing and not giving in to it. To become profitable, logic must triumph over fear.

One final thought before I sign off. Many traders spend way too much time on the psychological aspects of trading. Remember, the first requirement to trading profits is developing effective trading systems and understanding markets. It is only then that the mental aspect comes into play.

Over the coming weeks, I plan to talk more about fear and trading.