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Emotional Systems Rule

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You are a smart lady or gentleman and you’ve decided that you want to be a professional trader.  You think that if everything pans out that you would like to manage other peoples money for a living, perhaps as an Asset Manager or Commodity Trading Advisor.  Or you fancy getting onto an institutional desk and trading their massive proprietary capital.

You’ve always had a high IQ and been strong academically throughout life even doing all the extracurricular activities to make your CV stand out.  You went to a good University and came out with a decent degree.  You got offered jobs that you wanted and now you have realized that you are drawn to the markets.

BUT SO FAR YOUR TRADING EXPERIENCE ISN’T REALLY WORKING OUT HOW YOU HOPED!!

A recent psychology study by the University of Western Ontario has shown that the notion of IQ is a ‘myth’.  “There is no such thing as a single measure of IQ or a measure of general intelligence”.

The study determined three factors that combined to create human intelligence or our ‘cognitive profile’ -> reasoning, short-term memory and verbal ability.

Now here’s the catch……

You definitely need those three to be a good trader (verbal intelligence being least important unless you are tying to raise money in which case it may be the most important) but what the study overlooks is the key area of intelligence that is needed:

EMOTIONAL INTELLIGENCE

Victor Sperandeo covers this:

“Assume that you’re a brilliant student who graduates from Harvard summa cum laude. You get a job with a top investment house, and within one year, they hand you a $5 million portfolio to manage. What would you believe about yourself? Most likely, you would assume that you’re very bright and do everything right. Now, assume you find yourself in a situation where the market is going against your position. What is your reaction likely to be? “I’m right.” Why? Because everything you’ve done in life is right. You’ll tend to place your IQ above the market action. ”

Perhaps that describes you a bit?  Well here is the hit to the sensitive bits again from Victor:

“I discovered that you can’t train people how to trade by just imparting knowledge. The key to trading success is emotional discipline. Making money has nothing to do with intelligence.”

Did you get that?  Making money has nothing to do with intelligence!!  This interesting study on IQ leaves out the key facet that you need to have to be a trader.

EMOTIONAL INTELLIGENCE

The good news?

You recognize this and decide to work on it.  You can develop your emotional intelligence.

A good place to start would be:

  • Reading this site
  • Reading the Inner Voice of Trading
  • Taking up meditation, yoga, tai chi etc
  • Joining a Trading Tribe
  • Finding a coach or mentor

 

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Learning to avoid a stock market crash comes from learning how to play superior defense. You always have to be able to define where the risk is and where your blind spots are.

If you have money committed in the market – as a trader or investor – you must be able to define your risk. If you don’t know these specific points, you’re likely to suffer both a financial and emotional shock to your system.

It’s hard enough to make money in the market. When it gives you a gift, like it’s done the past several years, you have to protect your equity like it’s a new born child. You don’t give it back or let it get taken away.

Let me know what you think in the comments or on Twitter, and please send this to anyone who you think has confused brains with a bull market. They will thank you for it.

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You need to have a plan in place BEFORE the correction occurs. Let the amateurs do all the rubber-necking while you confidently wait for the scenario to play out as you anticipated. Once the HFTs pile in, you’ll be in the right place at the right time.

Learn From the Mistakes I Made Early in My Career

However you decide to position yourself, have your exit strategy planned out as well. If you read my book, you know that I mishandled exiting the monster INTC Call position that I had. I still made great gains, but it could have been several MULTIPLES more.

Have a Contingency Trading Plan for Multiple Outcomes

When a correction hits, it catches most people by surprise. This is a negative Black Swan. You, however, can be prepared by writing out several potential scenarios when it hits by using history as a guide.

All you have to do then is execute. Mozart’s compositions are said to be flawlessly written with no mistakes. He simply transcribed the music that was already written in his head. You can do the same with your trading.

1. What will you do if the S&P 500 opens Limit Down?
2. What will you do if Limits are expanded and you see further substantial weakness?
3. How will you protect your capital in the other positions in your portfolio (from Floor Creep, for example)?
4. What is your low-risk method to trade a snap-back upswing?

If you watch the video, you need to come up with a macro plan first. Once you do, the technical part of entering the trade is easy.

Here is some recent feedback from the market from widely followed money managers that has come out since the video was recorded.

Marc Faber: We are in a massive speculative bubble

Howard Marks: Heed this Omen: The risks of 2007 are back

Jim Cramer: learn to develop a Macro view in his new book Get Rich Carefully

Please consider sending this to anyone who you think will benefit from it.

Students of my Trader Coaching and Mentoring program are busy watching the follow up video on how to put on the trades.

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Check out this great article from Open Markets / CME Group. It underscores the important role that speculators and traders play in the overall business of agriculture. Without being able to lay off the risk, farmers would have a tough time calculating profitability. That in turns effects how much they can borrow from the bank.

“He can look at the hedging strategy and see what the farmer’s profit potential is before the trade is executed. “I know if they’re spending $30,000 in margin money, they may be protecting a profit potential of $150,000,” he says. “It’s easier to explain (to the bank’s approving committee) that margin money, which had that label of being money you throw out the window, now its protecting a risk management plan.”

“It’s one more tool that I can use to verify that the money I’m being asked for is being used for a risk management plan, not a speculative plan.”

Right. Who’s taking the other side of the trade?

Read the full article at Open Markets.

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