Money Management

Why Do We Look For The Perfect Trade?

Here was a question I was posed from an Inner Circle member, [1/15/2011 3:03:58 PM]xxx : My quick question is: How can I overcome from the perfecting phase to the performing phase? (I hope you know what i mean/think of) Thanks in advance, Tom. Cheers xxx from Denmark.

I figure if this person is struggling with this then others must be also. This and similar questions like this were answered in my money management ebook, but I am happy to answer the best I can for all to read and comment on. Please add to the thread, not that I am Interested in what your opinion is, but it does help the page rank LOL Just kidding!

Okay, so if I am reading this trader right and I think I am his question(problem) is that he is looking for the Perfect Trade the one that has zero chance for losses! He cant get himself to pull the trigger, or if he does pull the trigger self doubt overcomes him and he gets out before the s/l. The next trade he takes he may let run beyond the S/L, because the first was a winner after it challenged  the s/l but was never executed. (However he got out before he should have.)
Lets pull apart the issue of:

Perfectionism: Definition in the English language.
per·fec·tion·ism
/pərˈfɛkʃəˌnɪzəm/ Show Spelled[per-fek-shuh-niz-uhm] Show IPA
–noun
1.
any of various doctrines holding that religious, moral, social, or political perfection is attainable.
2.
a personal standard, attitude, or philosophy that demands perfection and rejects anything less.
Then The Medical Definition:
Medical Dictionary

per·fec·tion·ism definition
Pronunciation: /pər-ˈfek-shə-ˌniz-əm/
Function: n
: a disposition to regard anything short of perfection as unacceptable
especially : the setting of unrealistically demanding goals accompanied by a disposition to regard failure to achieve them as unacceptable and a sign of personal worthlessness

This is the most useful definition for us as traders.

Perfectionism in trading is a form of procrastination. Procrastination in trading occurs because of the fear of being wrong, it is Ego based. This persons values being right(showing that they are smart) more then they value making money in the Forex Market. This will cause most to trade haphazardly. Taking one trade that sets up and disregarding another, then moving s/l (either up or down.) It just creates confusion, which produces non adaptive behavior. That will put you in the negative loss loop. Confusion===>Errors===>Losses!! Rinse and Repeat Confusion===>Errors===> Losses. Errors are not following your trading rules! Errors have nothing to do with losing Money we all do that, Trading without losses is like living only breathing in and never breathing out! Your main job as a trader is to Control The Losses. How Through Money Management.

Aldo always told me (and I think he pinched the line from someone)
*Professional Traders look for over all performance, Novice traders are always in search of Perfection*

When you are looking for perfection, you want to be right, you are not dealing with the market. You are trying to force the market to do what you want it do do. Huge mistake. There is a simple solution, make it okay not to be perfect. We are all far from it, some people more then others

Here are somethings that I learned all boiled down:

*You can never succeed at trading if all possible objections must be overcome first!*

AND

“*In trading with a plan, its better to be boldly decisive and risk being wrong than to agonize at length and be right too late…**

Lets look at the steps necessary to overcome this evil Ego Based issue.

1. Realize trading is a game of probabilities, it is not a pure science. It is a bit like medicine part science part instinct.  Just like medicine if you follow the frame work you will succeed over all.
2. Trust your Money Management Plan, know that it will save you from ruin.
3. Make it okay to lose, its part of the game!
4. Have a high probability trading system in place(I taught him many these so that was all worked out, but obviously he doesn’t trust them, which is okay. He needs to come up with a mixture of mine and his own.)
5. Test the systems using Entry And Exit formulas(again in my super ebook on Money Management. Hey a bit of self promotion doesn’t hurt.)
6. Realize no trader or trade will ever be perfect

Pull The Trigger And Follow Your Rules.

So these are the steps needed to move away from the stuck state of Perfectionism. JUST DO IT!

Enjoy The Party …. Dance Near The Door!

PS Since he strives for perfection he will probably say this was not the answer he was looking for, and I misunderstood!

Also Please comment if you have any tips of how you over came inner obstacles with trading,or you if you have  inner issues don’t be shy.We all enter the world naked!

UPDATE  MY STUDENT SKYPED ME AND SAID I WAS WRONG, HE DID GET SOMETHING OUT OF THE ARTICLE! I stand Corrected! I am glad he did!

HAPPY NEW YEAR ALL!!!

Get Prepared For some wild Forex trading that is going to border on Insanity. Lots of Ways to Profit, Lots of ways to lose! Get your copy of my Money Management It will be the best gift you can Give Yourself For The New Year. And Always “Enjoy The Party…But Dance Near The Door!”
Ciao
Tom
tomstrignanomoneymanagement

Why Can I Make Money In Demo; Yet Lose My kaboose In Real Time?

Your Driving down the highway in the dead of winter.
You had heard the traffic reports of patches of black ice in certain locations on the highway. You had decided that you were going to press on with the trip and drive on using extreme caution. With this thought in the back of your mind you feel a certain tension through out the muscles in your arms, neck and lower back. You know just how dangerous this could be. As you look in the rear view mirror you make sure your children are thoroughly locked in there car seats. You look over to your right to notice your wife checking her Blackberry, and as you turn your head back towards the road you feel something is very wrong! Yes, something is definably wrong with the motion of the car. It starts to weave back and forth, slightly at first.
You have a white-knuckle grip on the steering wheel, which starts to jerk back and forth, more and more severely. “It’s malfunctioning!” You scream out-loud. Just at that moment you slide into the side of an 18 wheeler, you bounce off the gas tank of that 18-wheeler that was keeping pace with you on the right. You hit the brakes and instinctively know its not the correct thing to do, but its to late! You start spin into a 360’s and hit into several other cars. Its all happening in slow motion, and you are relived to see that the 18 wheeler is receding from your view, but just then you are hit again by another oncoming car, and you car rolls over! Spinning in circles, you can’t believe this is actually happening.
When the car stops moving, you ask your wife are you okay? As you look in the rearview mirror, you see your children, hanging upside down in their car seats, looking very surprised. You wife is hysterical and hyperventilating, You are bleeding and don’t know the extent of your injury. You attempt to open the door and cannot due to the damage from the collisions. At this point illogical thoughts come into your mind, of the car exploding into flames, and you whole family perishing on the scene. You panic further, and can’t even remember were the seat beat release button is.

Why can’t you calmly consider all the information available?
You could for example open all the windows, the electronics still work. You could then calmly unbuckle your self and release you family by pulling them out the windows! You could dismiss the illogical thoughts of fire, and assess the situation as is, after all your all awake and talking. Do you consider any of these logical alternatives? No, because under the stress of the situation, these alternatives do not exist for you!

So What Does This Car Accident Have To Do With My Trading Performance?

The parallels of uncertain events whether they be in the physical world, or in the mental trading arena have the same affect on human performance. Just as in the car crash above the over powering stimuli of the unknown forces the
Sympathetic Nervous system to takes over. This is the fight or flight response, and is the not the best for solving even the simplest problems. So this is one of the main reasons why people ca make money in a Demo account yet can not repeat the performance in a live account!
When Money Is At Stake, People Tend To Worry, And Worry Has A greater Impact On Human Performance Then Emotionality!

What’s the difference between these to states?
Emotionality Is exactly what we went through in the car crash, It is the Biological release of the flight or Fight response, when we are under physical attack.

The State of Worry is the precursor to emotionality, it is the concern for one performance and its consequences. It puts the trader in a negative self evaluation that often is self fulfilling in a failure. The trader is always ready to kick in the flight or fight response and as stated above is not the correct state of mind for problem solving.

Trading Contrary To Popular Belief Is A Complex Task!
Another reason people can make money in a demo account and not in a live account is because the major incentive is not present in a demo account.
The major incentive is money once again. Now we stated above that money can produce worry, which hampers human performance. However the second part of the equation is that when money is at stake GREED PRODUCES LOSSES!
Incentives hamper human performance, traders focus their attention on the outcome rather then a solution to a problem or task. This make them extremely inflexible and leads to losses.

Traders In A Live Account Get Frustrated!
When Traders begin to trade a live account they can become frustrated, frustration will cause a trader to become angry and do silly things. They will revert to doing the simplest tasks which maybe be to do nothing. This in turn causes them to cut profits to quickly and let Losses run!

So How Do We Reverse This Pattern?
Well just by it being pointed out to you, it should be of a big help. However you must realize that this can not be cured over night, you need to have a system in place.

Money Management is one of the primary systems to get you out of the primitive state of trading. Money Management is a plan to minimize losses and maximizing gains. Just by following this one plan will require discipline and force you in higher thinking. This will get you out of the primitive state and into a state where you control your emotions and stay out of the Emotionality or State of Worry!

If You Are Interested in Breaking these Primitive Trading Cycles Please See Money Management by Tom Strignano.

Forex And Commodity Trading ~Money Management

Your account was up over 200%, you were feeling great about your
positions. However over the last three days you can t believe how the market
turned on you. You are shell-shocked over what happened you have not
only lost all your profits but your account is down 70% !!! You are shaken
but you think you can quickly make it back. After all you were just up
huge!! You keep focusing on that 200% gain you had before those bastards
ran you down!! You still have $10,000 left in you account. What advice
should you give yourself?
Your advice to yourself should be to get out of the market Immediately!
You don’t have the proper mind set and have lost to much at this point to
to trade speculatively. This is one aspect of the psychology of Money Management.
You need to know when to stop and realize how much your account
has to recover from various draw-downs. I want you to study the ratios
below and print it out. So you can see at what point you need to stop
and regroup. I my opinion you must stop at a maximum of a 23% draw-down.
Draw-downs Gain to Recovery
5 Percent; 5.3% Gain

10 Percent Draw-down; 11.1% Gain

15 Percent Draw-down; 17.6% Gain

20 Percent Draw-down; 25% gain
25 percent Draw-down; 33% gain
30 Percent Draw-down;42.9% Gain

40 Percent Draw-down; 66.7% Gain

50 Percent Draw-down; 100% Gain

60 Percent Draw-down;150% Gain

75 Percent Draw-down;300% Gain

90 Percent Draw-down; 900% Gain

Recovery after Draw downs
Notice how much your account has to recover from various sized draw downs
in order to get back to even. For example, losses as large as 20%
don’t require that much of a corresponding gain to get back to even. But a
40% draw down requires a 66.7% gain to break-even and a 50% draw down
requires a 100% gain.
Losses beyond 50% require huge, improbable gains
in order to get back to even. As a result, when you risk too much and lose,
your chances of a full recovery are very slim. Keep in Mind we are not in
the stay or get back to even trading game. By, keeping our losses under
control and small we don t have to play the “I need to get back to even”
game.
What is Money Management?
I my opinion, money management is the most significant part of any
trading system. Many professionals, and most amateurs, do not understand
how important it is.
Since money management is the difference between poor performance and
great performance – the difference between going broke and being a successful
professional – it’s important that It has a specific definition. For me
the definition I was taught it is:

Money management is the part of your system that tell
you “How Much” you can afford to put on at a given
price in the market. It is linked to “How Much” risk is
involved in the Trade. You an only trade an amount that
if you are wrong it will not damage the account beyond
repair. You also have to trade an amount that is meaningful
if you are correct and your profit targets are reached.
Its a balance between a small draw down and a sizable
gain.
There are many ways to implement money management listed below are the main criteria that I feel are necessary to be successful.

Position Sizing What percentage should I risk?

Do I understand the Risk of Ruin matrix

What are my Trade objectives?

Who am I as a trader?

What is Average True Range Trading for longer term trades.

Entry Efficiency

Exit Efficiency Index

Exit Efficiency Gauge Formula

Do I have a Creative Money management system?

Core Equity
Vs.
Base equity

Psychology of it all; Does It fit with my personality.

A bit of selfish promotion If you are interested in this all important topic please see
Money Management.