Weekend Food For Thought;

People always ask me how I did it; Referring to getting bankrupted, living broke for almost 7 years, working my butt off, changing careers at 42 years of age for something I had no idea about and no one to guide or mentor me, getting beaten by the market and still keep the determination to succeed as a Trader, then teach it and go on to help others to change their lives …

My answer; I had no choice, I had nothing left to lose, It was a “must” for me to succeed and frankly, if you were wearing my shoes then, you would have done the same thing.

The reason you ask me this question is because you still have a choice, you have a lot to lose, success is not a “must” because you have your comfort zone and frankly, you are not wearing those shoes which is why you will never understand why I did what I did when I did what I had to do.

So now that you know, what are you prepared to do?

Or will you wait till it is too late when “should have” becomes a “must“?

In a footnote, I added:

Come to think of it … the secret to success is Failure.

It is a very common story when you dig up all the success stories.

Here are some of the comments that followed:

Success is not something you dream about nor is it a goal to be achieved. I truly believe that success will come when it is earned, deserved and warranted.

Believe in what you do. Work earnestly. Be honest with yourself and with everyone. Do good deeds.

That’s is my secret to success after failure.

The young and impressionable shopper doesn’t give much, if any, consideration to market timing and will buy on impulse without thinking of the long-term consequences. In short, they buy for the “now”.

The old and wise shopper is particular about the timing of their purchases knowing that a well-timed purchase could save some money that can be used for other purchases in the future. They buy for the future.

The young and impressionable shopper doesn’t consider the price as long as they can have possession as quickly as they can get it.

The old and wise shopper is particular about the price even if it is affordable as long as they can have the best price no matter how long it takes to get that bargain.

The young and impressionable shopper is easily influenced by marketing, advertising and peer pressure and will buy on public sentiment. (Herd instinct)

The old and wise shopper is not easily moved by hype, will be extremely skeptical about marketing gimmicks and will be deterred by pressure. (Contrarian)

The young and impressionable shopper has a budget based on a monthly income and how much their credit card can stretch.

The old and wise shopper has a budget based on prudence, frugality and need.

The young and impressionable shopper will buy unnecessary things they can’t afford to impress people that don’t matter and only impress them for a very short time.

The old and wise shoppers buy things they need with what they can afford.

The novice trader is exactly like the young and impressionable shopper in every way. They will always get caught up in the hype, they will always buy the rumor and sell the news, they will always regret pulling the trigger too early and they almost always spend more than they can afford.

The book is due out by March 2012.

This is an extract from my next book on Trading Psychology which I shared with Batches 53 and 54 this morning in an email in reference to GRPN’s IPO launch and why seasoned traders tend to stay away from such events.

In life, we have two kinds of shoppers – the young and impressionable shopper with not a lot of money (in trading, they known as novices) and the old and wise shopper with obviously more wealth (in trading, they known as seasoned traders).

The young and impressionable buy on impulse the moment they see something new and attractive. This puts them in the hip and fashionable light. But the hipness doesn’t last and they will continue to spend lavishly to stay hip and fashionable by always shopping for things that don’t have an intrinsic value.

The old and wise shopper with obviously more wealth will shop for things that are necessary and will always look for the best bargains, lowest deals and cost efficiency. This ensures that what they buy will last and save them money in the long term. They shop for an intrinsic value.

The young and impressionable buy properties on impulse without much care for the total value (quantum value) and will be focused instead on the ability to make the monthly instalments. They often shop for properties that are too large for their needs and in locations that are most convenient and hip.

The old and wise property hunter will buy a property with the quantum in mind and will scope out the deal with the best resale value that their nest egg can afford. They will stick to properties that meet their needs and won’t mind locations that are slightly out of the way as long as there is a promise of future developments and expansions that will guarantee a rise in their property’s value.

The novice trader is exactly like the young and impressionable shopper in every way. They will always get caught up in the hype, they will always buy the rumor and sell the news, they will always regret pulling the trigger too early and they almost always spend more than they can afford.

This extract is from a chapter that compares Novice behavior against Seasoned behavior and vindicates my theory that the market makes us do things that are not normal in life. In the weeks to come, I will share a few more gems from this chapter that will lead up into the launch of this next book.

Happy Hunting!

I had a separate conversation around the same time to one of my WA graduates, Ais, who is in a relationship with another graduate from WA and WAT, R***. The two make a lovely pair. During the time I’ve known them, they have made AKLTG their second home and make-shift “pick-up” point where they meet after work. I caught Ais one night, waiting for R*** and decided to keep her company till he arrived. In our conversation, I casually asked what her relationship was to R*** … she declared they were “Best Friends”. So I prompted if they were going to get married and she shyly pushed away the question by answering that in order to consider marriage, a couple must first be best friends so that the relationship can stand the test of time.

Deja Vu.

There was no need to make any comment or give advice to this young couple. They are on the right path to a loving and happy life together. She did ask me for three specific tips to improve her life. My first tip on success was to never quit persevering. I even quoted her two of my favorite quotes on success;

You always pass failure on the way to success.” ` Mickey Rooney

and …

Many of life’s failures are people who did not realize how close they were to success when they gave up.” ~ Thomas Edison

My tip on financial success;

Be happy with what you have because small fortunes breed bigger ones, small thanks lead to greater gratitudes and every financial problem is only a temporary set back meant to garner more momentum for the next ride up to the top.

My tip on life;

Set your goals. Stay focused. Take a dare. Be greedy. Stay Hungry. After all, you only live once so what have you got to lose?

These are the same sound advice I took throughout my life, in good times and bad, for better or worse. They were codes of life that Lucy and I held dear and close to our beliefs … and we believed. We put our faith in our strength as a couple, as friends, as parents. We put faith in our ability to survive and surpass. We put faith in knowing that others have done it thus so can we. We put faith in God to watch over us and give us strength.

Today we put faith in the fact that we’ve done it so many times in the past that we can do it again in the future if the need arises.

So what is the one piece of advice I will give to a couple who want to know if their friendship can stand the test of time? One word – cohabit.

A relationship, like any business, has a time test. In business, the first year is finding the footing and controlling budgets and hoping you don’t lose too much money and wipe out your first year in business. In the second year, you find out if your business partners truly have what it takes to run the business and grow it. The third year is make-or-break time. Any business that survives the third year usually goes on to bigger success and longevity.

In a relationship, the first year of cohabiting will breed either familiarity or contempt. Small things like squeezing the toothpaste tube, tardiness and spending habits come to the fore. Tolerance and patience will be tested. Adaptability and flexibility will be stretched.

The second year will test the financial strength of the couple. Ambition, pride, greed, hunger (or the lack thereof) will come to the fore and the couple struggle to financially understand each other better.

The third year usually is a test of fidelity. While many fail, few persevere to overcome, forgive and move on. In other cases, the couple tire of each other’s company and as they say, the spark fades. For some, chicken rice everyday is boring. But for whatever reason the relationship gets tested, it happens for a reason and it is best to find out sooner rather than later.  Those who survive, forgive and move on, usually go on to have a really meaningful relationship and later, a marriage.

Being unfaithful is not something to be taken lightly but for those who have lived through this, they will tell you that it is better to know your and/or your partner’s weakness and work to make it better than to give up and repeat the process with another new partner and constantly live in doubt about the fidelity of your new partner.

Nobody is going to be perfect. And if we accept that, then the next step is to be a friend and love your partner for everything he/she is, flaws and all. The three year cohabitation test is a small investment of time for the long term future of the life-long partnership.

In trading, we take controlled risks. Sometimes we get beaten, sometimes it works out. But we take the trade knowing the risks it carries and in the long run, the good trade will reveal its intrinsic value while we cut losses on the bad ones.

In life, we do the same thing. It can be a painful life lesson but it is necessary in our on-going quest to find that perfect partner that may never exist. So we cut our losses if it doesn’t work out and we hedge ourselves on the one that just might hide an intrinsic value.

I made a few “trades” in my early years. Some of them were good ones with no intrinsic value while others had to be cut for both our sakes. A few were meant to be nothing more than good friends while a few others just weren’t meant to be. Then there were those few … erm … how shall I say, … “scalps” …  *Ahem*

But I did find one that met most of my fundamental and technical criteria. Heck, she even fit into my budget! I guess I must have made it into her watchlist too because I became her prime investment. She became a friend, a buddy, a lover, a soul mate and finally, my wife and mother to my two kids. The ride up the chart was filled with corrections, pull backs, spikes, dips, rallies and even at one stage, it almost became a junk stock. But she still saw value. In fact, I had become a truly undervalued stock that no one wanted. But she stuck with her investment and in spite of a few more dips, today she is reaping the dividends of her investment.

Me? I still enjoy my “scalps” on the same stock for the last 22 years.

Happy Birthday, Lucy, my love … its been a good time, its been a rough time, its been a time of our lives and I look forward to more with you.

Why do you still stay in a 3-Room Flat and drive a Suzuki when you can afford much better?

This is a common question I get all the time.  I myself must have asked that question of others in my earlier years. The answers to that one simple question are varied as they are vast but I’ll sum it up in a handful of not-too-long paragraphs.

I Don’t Need More.
Really I don’t. And even if I did, the last two years have not been the best time to get a bigger house or car especially when prices have been going up and up. Like the trader I am, I don’t buy things at or near the highs or as they continue rising. Having recovered from nothing, I am used to having bare minimal and keeping costs low. Even now as I can afford more luxury, I don’t find it in me to spend lavishly as I have never been that way all my life.

I am not fully invested. I have taken the advice of my wise old friend, G.M. Teoh and kept cash ready. As a personal rule in this current economy, I am not investing more than 50% of my cash and keeping hoards of it ready to pick up more investments when opportunity come knocking. Whatever I am invested in can easily be liquidated for cash if the need arises. And the need will not arise as long as I keep 50% of it as ready cash.

Money has never been a main priority in my life. To me, money is there to be made and I have been blessed with the gift of making it as and when I need it. I have always prioritized more important passions above money as long as there was enough of it to provide for a comfortable life. So what do I do with all that money I’ve made? Read on …

I’m Absolutely Debt Free.
For the first time in my adult life, I have enjoyed a debt-free life since my bankruptcy discharge in April 2007. Everything I have, I own outright. I own my 3 room flat. What little I owe the HDB for the few remaining payments can be easily covered with a small percentage of my CPF money. The bills on my flat are conservative because it is a small flat. The flat we live in is Home and it doesn’t matter what it looks like or how big it is as long as it’s comfortable, conducive and filled with love.

I own my Suzuki. There are a few remaining payments I can’t settle in bulk because the damn finance company needs to collect the interest to stay in business. (Doing my part to keep the economy afloat.) My petrol bill per month does not exceed $200 (Shell V-Power, no less) as we hardly use the car anyway. Its two and a half years old and I have only clocked up 30,300km including a trip to Bukit Bintang. S0 why buy an expensive flashy car I don’t need?

I don’t have credit cards – what I need, I buy with cash or my debit card. I don’t trade on Contra. I don’t owe anyone anything at all. I am debt free and loving it.  Being debt free to me is much better than being financially free. Of course now that I am both, I can’t say it’s all that bad.

I’m Happy.
My only luxury in life today is a life-long dream that I have hung on to and only recently made a reality. In my younger, struggling days in the media industry, I had always wondered what it would be like to walk into any restaurant I desired, picked up the menu and ordered whatever I wanted without having to look at the price. I remember how terribly embarrassing it was to entertain clients and worry about paying the bill and hoping we’d have a “wallet duel” that the client would win. Those days are gone now. Today, I sit across from people who hope I win the wallet duel … and I understand how it feels to be in their shoes.

I know a lot of people who have flashy cars, nice houses or apartments but are stressed out with monthly payments and debts. They would rather keep these unafforable luxuries in the name of face and pride rather than to live prudently and be happily cash-rich. Isn’t it funny how the ones that can’t afford it, must have it and those who can, don’t bother. I had always wished for it and in some time in my past, lived the life of one who couldn’t afford it but did … albeit with some prudence. Reality has a strange way of teaching us these lessons – it’s called Maturity – and it is always a tough lesson to learn.

Being wealthy is not the key to being happy. I have always chosen to be happy, no matter what my circumstance. Maybe that’s what got me out of bankruptcy and all the other sticky situations in my life. Choosing to be happy makes financial goals more achievable. If you can’t be happy with what you have, nothing and everything will never be enough and you will never be satisfied, let alone, happy. Being thankful and grateful for the little things you now have will lead to bigger and better gratifications in time. It all starts with choosing to be happy. Problems are always temporary … happiness is permanent if you wish it to be.

I’m happy to have a wife who knows what having nothing means having come from nothing and then losing everything on more than one occasion. She is a prudent yet financially savvy chic from whom I have learned a lot about financial management. She doesn’t make big demands, doesn’t ask for much and is a very simple person at heart. If anything, I am the one who wants to spoil her.

If I do owe someone and have a life-long debt to, it would be my wife.

And she deserves all I have.

… I feel that although taking paper trade seriously in cutting losses and being discipline in your trading plan, it lacks the stress and pressure when I used to do actual trade in Forex. It will be a challenge to bring the paper trade to the actual warfront of doing the live trading in scalping. The psychology must be strong and the discipline must be in place and definitely the money that you do not need and affordable to lose to prevent clouding your mind with unnecessary burden.

To a certain extent, This student is correct. But as with most people with the same thinking, they are missing out the main point.

A kid is taken from life and sent to military school. There, he learns to take orders and in some cases give orders, he is trained to be disciplined, orderly and organized, he is drilled and drilled, and then drilled some more, he goes through the same training of reaction and response over and over and over again, he practices reflex action and counter-active action repeatedly, … it would seem like a total waste of the tax payers’ monies to make these kids do the same thing everyday, over and over again. It becomes mundane, repetitive and absolutely boring and senseless.

Then war comes to this soldier’s front door. He and the other troopers hit the beach. The bullets start flying, the bombs start blowing up, the metal meets the meat.

Without thinking, the soldier knows what to do. His training and discipline takes over. He doesn’t think about what he has to do … he knows what to do. He doesn’t think about how he feels … he reacts and responds. He doesn’t run from the fight … his drilling and reflexes put him right into the fight.

The training takes over. This is where all those hours of drilling and training pay off. The soldier’s life depends on it. All victory in war depends on this.

Paper trading, when practiced in all seriousness, is meant to do just that.

It is a precious experience from which the skill is derived. This is the skill that will keep you alive when the metal meets the meat – real money trading.

When that happens, the training takes over, you work without considering your emotions and you do what needs to be done.

You work with your head and not your heart.

If you are not achieving this with your paper trades, then you are not being serious about your training. If you are not serious about your training, you are likely to get killed in battle.

Happy Hunting … or are you going to allow yourself to be the hunted?

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Through the years, trading has always been a pipe dream for most who wanted to get filthy rich. With the advancements in technology over the last decade, this pipe dream has been brought closer to home than ever before. Today, it is a very accessible dream to anyone and everyone. All you need is a computer and an internet connection.

And of course, you need the right kind of market.

This is where the hype starts. We have been over-exposed to all sorts of advertising and promotional rah-rah that makes us believe that it is actually possible to make that fortune a reality. We see ads with winners making really fantastic profits from a single trade and we hear of friends who make a living from trading and living the good life. We see the rich and famous on TV that have made fortunes in the market. We read about people making fortunes from the comfort of their homes.

We believe we can be one of them. Worse, we believe it is really that easy.

What we don’t see in most cases is the real ugly truth. We don’t get to see losers, we never see the many hundreds or thousands that get wiped out and we definitely never hear what happens to the few winners when the market turns.

We never get to see how difficult it is for those successful few to make that living. We don’t see how much studying, hard work and endless hours of practice it takes to achieve that “easy” life. We definitely don’t hear about how much losses were accrued before the wealth accumulation started.

When the market is rallying at full steam, you always get to see new gurus hyping up their courses, authors of all sorts publishing their version of making a fortune from the market and everyone rushing to brokerages to get an account open. Workshops of all kinds will be touting their software that makes profits without the trader having to put in much effort. Some gurus will adapt their classes to ride the trend of the market – if Options is the way to go, you’ll get Options teachers by the dozens … if Forex is the flavor of the trend, then that’s what you’ll get lots of.

The market in itself is a hype. When everything is running up the charts, it is so easy to make money from the market. Everyone seems to be getting in on the action when a bull run is in full steam. The hype worsens as these bull-run winners put more money into the market to help the rally climb even higher. Pretty much like what is happening in our property market today. The aunties and uncles at the coffee shop also seem to have the best tips and everyone in the neighborhood is an expert at stock picking.

Scandals also abound when the market is in full hype. Hedge funds and pillion-trading are two of the many ways these scandals begin. In some recent cases, the owner of the fund or hedge starts spending the money even before the fund is profitable. This adds to the hype. We see fund managers driving fancy sports cars and living it up in penthouse condos and sprawling landed properties. Everyone wants that life and the market can give it to you.

So the average Joe, or in our case, Ah Seng, joins the hype bandwagon and puts his hard earned money into a few bets in the market. It makes money for sure. The bull run continues. So Ah Seng buys more and grows his wealth. He tells his friend, Ah Huat about it and he joins the bandwagon. Soon, the market is flooded with Ah Sengs and Ah Huats who know little about the danger they just got themselves into.

The fact is, the market had already been running up like mad which is where all the hype came from. By the time the new gurus, workshops and books emerge, the rally is almost always halfway there. This is when the aunties and uncles get wind of the easy money and this brings on the Sengs and Huats. Next thing you know, the market is over-cooked. Yet it continues to rally, albeit on suspiciously lower volumes.

The lower volumes are an indication that the smart money is already sidelined and waiting for the inevitable. The smart money knows when to get out and stay out. They know because the ignorant money has started to flood the market.

When the market is greedy, you should be fearful.” ~ Warren Buffet

Then the inevitable happens – the market stutters and falters … the easy money slows down … volatility begins to rule the market … the ignorant money slowly realize that they have left their arses hanging in the wind without protection. But they’ll continue to live in denial because of the hype.

The market slides south. But not in a hyped-up crash, mind you. The market is a sneaky place that gives you more rope than you need to hang yourself repeatedly. It takes a slow and steady slide with the occasional bull-trap to keep the ignorant money believing that the correction is a “normal” thing in this business. After a brief reprieve to bring hope to those living in denial and possibly bring in more ignorant money, the market continues its sneaky slide south. This goes on for a while and before the ignorant money realizes it, more than half the investment is down the toilet.

By this time, some of the gurus quietly “disappear” from the press, some workshops cease to exist, software traders start complaining that the system is not working as promised, fund managers appear in the news for the wrong reasons and my class starts filling out with dozens of traders looking for a fix and a more realistic way to survive the market.

The market gets down to an impossible low. Gone is the hype and all that came with it. In its wake, it leaves a massive trail of destroyed lives and emptied bank accounts. The market is now “a dangerous place” when it was once a dream maker. The market is a “casino” when it was once an ATM. When the hype is all gone along with the money, people get serious and stay away from the market.

This is when the smart money returns.

And this starts a new hype cycle that brings in the new ignorant money.

The question you should be asking is not; “when will the ignorant money start to suffer?”
If you thought of asking that question, YOU are the ignorant money.

The only question you should be asking is; “How do I become the Smart Money?“

It starts right at the start where most newcomers think that the market can be a get-rich-quick plan. This is akin to thinking that the market is like a casino. Consider this fact – the house ALWAYS wins. So if you treat the market like a casino, it will make you feel like most gamblers do. Gamblers always win a few but lose a lot.

Some trade like the market is a system to be beaten. Such traders ought to give themselves more credit. You’re insulting yourself if you have this attitude. To think that the market is a system is to include yourself in that system. Therefore, the system you are looking to beat includes you. Give yourself some respect and while you’re doing that, give the market the same respect – we’re not robots in the market and we’re definitely not part of a system. We’re humans that are driven by emotions. The market is an emotional place, not mathematical. You cannot have a system to beat an emotion because there is no math that can factor emotional irrationality.

Then we have those that don’t realize how unscrupulous the market is. Their ignorance is evident when they correctly assume the market is not that clear cut but will still buy into the hype. What is obvious is that the market is made up of all kinds of people especially those who will do anything to get an edge, even through illegal and criminal means. It is also full of experts who have spent years in Harvard and Princeton and then more years with established institutions such as Goldman Sachs, Morgan Stanley and the like. They have hugely experienced mentors to guide them to become the next generation of world class traders. These people have so much leverage and influence on market sentiment and to make their advantage more unfair, they collude with their competitive counterparts in order to corner the larger market for their own gains. With such power, how is a three-day workshop graduate expected to beat the odds? Yet more and more look past the obvious and end up throwing their hard earned money to the power-brokers.

These are also those who buy into the idea that the market can be analyzed fundamentally with valuations. Such valuations do help to reduce risk. But that is an investment-styled strategy and not suited for trading. Trading is way faster and seldom allows the security time to flex its fundamental muscles before the next gyration takes out the profits. Read the previous lesson to know the difference between the investor and the trader and you’ll have a clearer understanding of this.

Others rely purely on technical analysis. I can’t deny that I base a lot of my analysis on technicals. But that is not the end all. All it takes is one bit of macroeconomic news and all that technical analysis is out the window faster than you can say “Cut loss!”   TA is great as long as there is no news to upset the prevailing sentiment and as long as volumes don’t dip. But the market is never so generous. So in the end, TA is only a “best guess” … and contrary to common belief, TA is not the best guess of when to buy or sell – rather it is most reliable when used to guess the best potential against the least risk or the most risk against unfavorable potential.

Then there are those who believe that a good tip from a trader is the key to easy money without putting in any effort. For this, I have only one analogy; Would you take a heap of hard-earned money out of your wallet and give it to someone you hardly know and expect to get it all back after a few weeks? And if that person was trustworthy, would you still do it? And do you really believe that it will come back with more than you gave him? If in life we don’t make such practices, then the same principles should be applied in the financial world and most of all, in the market. The desire to get-rich-quick-and-easy makes simple people do really silly things with their money. And it is always only after getting burned that you hear those famous last words, “ … if only I knew …“.  Yes, you’ve heard the horror stories time and again and so has everyone else. Yet people continue to write new chapters into this horror story ever so frequently … all in the name of greed, gluttony and sloth.

The financial markets are like an office block in a busy business district. The people who go to work there are serious professionals who take what they do very seriously. They are highly experienced, very influential and extremely powerful. It is also like a hospital where the surgeons, doctors and nurses are highly qualified and trained professionals. People put their life in their hands everyday.

Then one day, some over-zealous graduate with three days of workshop knowledge comes into this office block and expects to beat everyone out of their jobs. Or this hyped-up graduate with only three days of experience comes into the hospital and expects everyone to trust him with their lives.

Okay, maybe that is a bit of a stretch but the implications are no different. Every professional takes years to study his craft and then spends more years honing the skills with hours and hours of practice and hard work. They also have a mentor to constantly guide them till the day they are ready to go solo. There is no easy path to success and there will be failures along the way. The financial market is to be respected and feared. There is no other attitude except humility that will help a trader survive it.

It is said that more than 80% of the market is made up of those who lose and less than 20% are winners. The truth is that those statistics apply to any profession – how many top rated lawyers, engineers, surgeons, etc are there compared to the many also-rans?

The big money is always at the top where there are few who have it while the small money is at the bottom where most have to fight for it. And there are only two ways to be at the top – either you are already there or work hard to get there.

In Lesson 1, we look at where the problems all begin – The Education.

Most people know that trading is a stressful and dangerous job. Most also know that it isn’t easy and takes a lot of work and learning. Of course, there are the few who believe that the market can be beaten with a system or with some high-tech software. Then there are those who cling on to the ignorant belief that the market is a place that can get them rich quick.

Let’s not waste time discussing the dreamers and ignoramuses. Rather, lets look at the fellow who knows what it takes and is ready to work for it. Let’s look at the fellow who sincerely wants to learn all there is to know about this business but is unable or unwilling to get a formal education for it. It has been argued that one is able to learn about trading by reading books and obtaining information through the internet.

So if it is that simple, why do so many still fail? The answer is just as simple; Learning the wrong thing without realizing it.

Most of the books available, either at bookshops or at the library are about INVESTING and very few are actually about TRADING. So what happens is that most people don’t realize the real difference between investing and trading and will assume the two to be the same with slight variances. That could not be farther from the truth.

Investing is much easier to learn – like learning to drive a Honda Jazz. It doesn’t take much to learn it and it is easily understood and put into practice without much difficulty. The trick thereafter is not to crash.

Trading, on the other hand, is a very different skill and mind set. It is akin to driving a Formula 1 car. Unlike the Honda where the manual version has the clutch on the left foot, the F1 car’s clutch is a very different mechanism and is controlled by the right hand. Unlike the Honda which packs less than 80bhp, the F1 car stacks up an earth-shattering 900+bhp which, in untrained and inexperienced hands, could end up killing the driver.

There is so much more to trading than investing. The skills involved are very different, the psychology is worlds apart, the knowledge needed requires way more weeks and even months to acquire and the amount of research needed to be a good investor is nothing compared to the daily research and monitoring the trader is required to do to survive the market day in and day out. Where investing requires little or no practice, trading demands hours and hours of practice time to hone the skill. The financial management skills are also extremely different in that the investor protects his capital by how much he invests while the trader requires a different skill set to manage his finances – its called “cutting loss” – something easier said than done.

So without realizing it, most beginners will pick up an investment book or visit sites hosted by investors or have contributing members who are investors and assume that all that knowledge gained will stand him in good stead as a trader.

And when things don’t work out, it gets confusing. The common query that follows is always, “Why is it others can make it but I can’t?“

You can’t blame the poor fellow because there isn’t much literature on this subject and even some so-called gurus don’t know the difference. But all you have to do to know that this is true is to just look at Wall Street – how come the investors don’t have to be on the floor of the exchange everyday while the ones on the floor everyday are known as traders?

Knowledge … a little of it can kill you quickly while the wrong kind will slowly bleed you to death.

When you pulled out those cards to pay for something, it told people that you had arrived. It was a badge of wealth. You would get looks of envy, jealousy and respect. In those days, membership had its privileges and they were proud to sign for it.

In those days, the only person frowning at your card was the sales person who had to execute the transaction with a franking machine and a whole lot more extra work because they preferred the easier transaction; cash.

The gold card – everybody wanted it, few could have it.

Fast forward >>> 2010.

Today, those who don’t have credit cards carry cash. This is a time when having such liberties is a big deal. This is because you REALLY have it and can pay for anything and still have a handsome balance in your bank. The qualifying factor for Cash is to physically have it and have it in abundance.

When you pull out cash to pay for something today, it tells people that you have arrived. It is a sign of REAL wealth. You will get looks of surprise, envy, jealousy and respect. Today, membership is a liability and it gets embarrassing and stressful to have to sign for anything.

Today, the only person frowning at your cash is the sales person who has to count the change with a brain which is a serious challenge because they prefer the easier transaction; credit cards.

Cold hard cash – everybody wants it, few really have enough of it.

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20 years ago, loans were a heaven-sent for people who needed it for basic things like homes, business and education. Rates were affordable as loans were designed to help the ordinary middle class family to achieve progress in their lives.

Banks did not like dealing in loans as they were a liability and took a lot of work to qualify a borrower. They took risks to lend out this money but default rates were low relative to today’s rate of defaults. Not that many people became bankrupts as a result of bad debts as few could qualify for those loans and you could only get one loan at a time from any one bank.

Back then, it was shameful to let anyone know you had to take a loan.

Fast forward >>> 2010.

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In 1988, people saved like mad to buy a VCR, a Sony Walkman and the Motorola Tai-Kor-Tai.

Month on month, little by little, the savings grew and soon, that person was wearing a badge of wealth by flaunting those precious, hard-earned discretionary products.

Fast forward >>> 2010.

Today, people rush out to buy state-of-the-art Blue-Ray players and laptops, iPods and smart phones which costs more than half of their monthly income, if not all of it.

Month by month, bit by bit, the credit card debt grows and soon, that person is wearing a frown of stress from increasing interest payments by flaunting those extravagant and sometimes, unnecessary spoils.

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Back in the 80s, buying a car was really difficult. Car loans were hard to get. You needed 30% of the entire sale as a down payment and loans were to be repaid as quickly as possible. Finance companies would happily repossess your car if you failed to meet your payments.

Roads then were kept free of traffic jams with the use of deterrent systems such as car pooling, CBD charges and high road tax charges. Cars were also made less affordable with the introduction of COEs by car size. Only those who really needed a car and could afford maintaining one would buy one. And they could sell it quite easily for a good second-hand price to a ready market.

Fast forward >>> 2010.

Today, buying a car is really easy. Car loans are easy to get. You don’t need the 30% down payment anymore and loans can be stretched out over 10 years. Finance companies hate to repossess your car because they can’t sell it high enough to recoup their losses, if they are able to sell it at all.

Roads today are heavy with traffic as cars become more affordable and the ERP is a big money machine while barely keeping traffic volume in check. Anyone can own a car or two cars without being able to afford maintaining it.  And these owners who can’t afford to top up their loans, won’t be able to sell off the liability when they can’t afford it. And the market is not interested in second-hand cars when new ones are so affordable.

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In the 70s and 80s, housing loans were for people who genuinely needed a place to stay and own. They could afford the down payment and had to qualify for the loan with a respectable annual income. Their income dictated the size of the home loan and thus, the size of the home they lived in. Government loan rates were made affordable so that everyone could own a home.

Fast forward >>> 2010.

Today, housing loans are for people who want to own more than they can afford. They only need to afford the down payment because they don’t need to pay up the rest of the loan by the time they flip the property for a quick gain. Their income is not an issue relative to the size and number of loans and thus, the size and number of the properties they flip. The government now qualifies buyers and shoves the over-qualified buyers to private banks to get their loans. (See second story.)

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In the 80s and 90s, trading and investing was only for the wealthy who could afford it and were part of an exclusive community. Anyone else wanting a piece of that action paid a hefty price for the privilege.

You needed to have cash to invest. There was no other way. No money, no talk – this was something straight out of the stock market then.

There has only been one constant throughout time and the only way that people lived their lives without debt and interests. It is also the only way the future debt-free people will live.

CASH IS KING! CASH IS CLASS!

• If you don’t have it, start earning it before thinking about luxuries and fun.
• If you don’t have it, start making it before spending what you don’t have.
• If you don’t have it, save up what you can instead of borrowing.
• If you don’t have it, don’t sign cheques that your body can’t cash.
• If you don’t have it, don’t hope to get it quickly – it will go just as quickly.
• If you don’t have it, you don’t have problems yet. Wait till you have it then you can complain.
• If you don’t have it, be humble and live within your means. You’ll be happier.

The only reason you won’t agree to the above statements is because you already have financial problems and stress as a result of one or more of the Then-And-Now stories mentioned above.

There is a solution but it won’t be an easy task; stop spending, cut down and swallow your pride. The only reason you can’t do these things is probably because of your pride.

But there are a few of you unfortunate ones who have legitimate financial burdens as a result of health, parental maintenance or inherited debt. To you I say;

Chin up. There is a lot to be thankful for because financial problems are only temporary. There will be troubles in life that money can’t save you from. And when you are in that position, you can only be brave and put your chin up anyway.

So, chin up, smile and turn that adversity into an advantage.

No mumbo-jumo this week so let’s just cut to the chase and let’s have ourselves some fun!! Remember, it’s all about having fun and being able to laugh at ourselves.

Let’s start with your BMTI by using the Jung Typology Test™.  This test will help you find:

• Your type formula according to Carl Jung and Isabel Myers-Briggs typology along with the strengths of the preferences
• The description of your personality type
• The list of occupations and educational institutions where you can get relevant degree or training, most suitable for your personality type

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Now let’s move on to your Big Five Personality Test.   This test measures what many psychologists consider to be the five fundamental dimensions of personality.

You can even make a comparison Personality test by comparing yourself with say, your mom, brother, sister, etc by taking the Twins Interactive Personality Test.

Or maybe you’d like something more lighthearted and amazingly spot on – The Personality DNA Test

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Now for everybody’s most quizzed test – The IQ Test.

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If the test above was not your cup of tea, then the Am I Dumb? Common Sense Test should suit you better!

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How about a Fear/Phobia Test? Or are too scared to take this one?

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Love anyone? Check out Gary Chapman’s test for the 5 Languages of Love with his;

Personal Profiling and 30 Second Quizzes

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Test the strength of your Marriage with the Marriage Assessment: How Strong Is Your Marriage?

Or take the Marriage Compatibility Test And Evaluation

And if you’re not married and wondering if it will work out, do the Marriage Readiness Test to see if you and your partner are up for it yet.

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Are you an Alpha Male/Female? I think this one speaks for itself.

This is my favorite – What kind of Trader are you? Find out your Trading Personality with this wonderfully (and eerily) accurate test.

Well I hope you had fun!  Feel free to feedback your results by sharing your comments here.

What I would do is ask my crowd to raise their hands if they were trading equities, currencies, options, futures and any other derivative(s). Each time, the number of people trading currencies outweighed the nearest rival, which in most cases was equities and/or options. Futures had the smallest return and other derivatives accounted for slightly more numbers than futures.

Second part of my poll was to get a return on the number of people trading a specific instrument profitably. What I would do is ask those with raised hands for, in this case, currencies, to keep their hands up if they were making money from it. I would repeat the process for equities, options and so on. And each time, after getting the most hands raised for currencies, I also got the least hands raised for profitability. Equities had the most profitable traders for those trading more than two years while futures had the most hands up for profitable traders altogether. Other derivatives came in lowest and options were second last.

It didn’t surprise me that currencies had the most traders because most of the ads in the papers these days are for Forex Trading workshops. This was the case about four to seven years ago when options was the craze – ads for Options Trading flooded the papers then – and from my personal experience, I have little doubt that the winning population then was also a low return.

This is not about courses or workshops. This is about how influential herd instinct becomes that it throws all common sense out the window. At each of these polls, after revealing that currencies had the most traders with the lowest percentage of winners, why then, did so many of these losing traders still persist with trading an instrument that wasn’t making them money?

Just as it was four to seven years ago, it was perceived that options was easy and dozens flocked to trade it only to find out that options is the most difficult instrument to learn and apply successfully. Yet they persisted, believing that they would achieve success in spite of the obvious difficulties.

Today, everyone seems to think that forex is easy and are flocking to it in droves. The low percentage of winners bears testimony to a repeating pattern …

… it is so easy for a skillful and experienced predator to make his kill when the herd is larger, more ignorant and heavily populated with weak prey.

The reason, in my opinion, why futures traders were fewer and bore a higher percentage of winners than any other instrument is because these traders have found a niche in an instrument that takes a lot of practice and experience. Futures traders know the dangers of this instrument and trade it well because of this fear of the dangers that lurk at every dip and rally. If is not the easiest instrument to learn, practice and trade well. Therefore those that do are a bunch of highly dedicated and serious traders who have run the gauntlet and survived it to make it their mainstay. Plus, it is one of the most expensive trades in the market and not everyone can afford to trade it.

The same can be said for equity traders. These traders make up the second highest population of profitable traders. But the reasons for this high success rate are very different. Most of these profitable traders are those who have persisted in it for more than 1.5 years. Even through a bearish year like last year, these traders have run down and up with the market, survived and prospered from it. Some applied a ‘buy-and-hold” attitude that in the long run, always is a profitable strategy. But we’re talking about the few who have the holding power, the extra ton of cash to stomach the test of time that is equity trading.

Not many have such deep pockets, dedication, discipline and patience. So these lesser endowed masses flock to the next best instrument that will allow them to trade for “big bucks” with little outlay and on huge margin – Forex. Years ago, the same dream was sold about options – low risk, high leverage and affordable trades.

It is this sort of attractiveness that drives the flocks to such instruments. These flocks are often not serious traders (in most cases, they’re gamblers looking for the quick buck with little outlay) looking for the ‘Holy Grail’ that will get them rich quick. And it is these traders that get preyed on by experienced predators as their ignorance, greed and lack of discipline overpopulate the instrument. Forex, like options before it, becomes the killing fields for many a newbie.

But they persist. They pump more money into it insisting that it can be done. They give it one more go. They tell themselves that they’ve learnt their lessons and are now smarter and better prepared for a new run at the gauntlet. All I see is more ignorance coming back with more money for the taking.

The very fine line that makes the difference between a trader and a gambler is that the gambler never knows when to quit.

Equity trading may be unglamorous, slow and reaps only small profits for the small time trader. But it is responsible for many a profitable trader when compared to forex. Futures is a highly specialized skill and only the most passionate traders can make this instrument profitable.

Forex is no different. It is a highly specialized skill that will turn any serious trader into a profitable one but only if that trader has the proper guidance, psychology and discipline. I know many profitable forex traders but they are the few skillful and experienced predators who will hate me for posting this article.

Sadly, good guidance is hard to come by these days and it is difficult to know who really provides good, quality education until you have taken the course. Another way to do this is to read up on the best books and internet sites. Problem is, good books and sites are hard to come by and it is difficult to know which books and sites provide good, quality education until you have taken the trade to the market … by which time, it’s too late to regret.

Here’s a little sound advice; if it is not making money for you, move on … stay away from the crowds and don’t do what everybody else is doing. The larger the herd, the more predators there will be.

The most profitable instrument for you is the one you can trade well everyday, using the same underlying and applying a simple set of techniques that doesn’t require paralysis of analysis. It is the same ticker symbol you look at everyday and know better than your closest partner. It is the one constant in your life regardless of the market direction. It is this underlying ticker that will make you rich, whether in a short time or a longer time, depending on your leverage, gearing and discipline.

This is the secret to a trader’s success. This is what gives a good trader his/her edge. This is exactly what makes the trader become the predator.

And the predator’s fodder?

Just look over your shoulders if you are running with a herd.

When things in your life seem almost too much to handle, when 24 hours in a day are not enough, remember the The Mayonnaise Jar and 2 Cups of Coffee.

A professor stood before his philosophy class and had some items in front of him. When the class began, he wordlessly picked up a very large and empty mayonnaise jar and proceeded to fill it with golf balls. He then asked the students if the jar was full. They agreed that it was.

The professor then picked up a box of pebbles and poured them into the jar. He shook the jar lightly. The pebbles rolled into the open areas between the golf balls. He then asked the students again if the jar was full. They agreed that it was.

The professor next picked up a box of sand and poured it into the jar. Of course, the sand filled up everything else. He asked once more if the jar was full. The students responded with a unanimous “yes.”

The professor then produced two cups of coffee from under the table and poured the entire contents into the jar effectively filling the empty space between the sand. The students laughed.

“Now,” said the professor as the laughter subsided, “I want you to recognize that this jar represents your life. The golf balls are the important things – God, your family, your children, your health, your friends and your favorite passions – and if everything else was lost and only they remained, your life would still be full.  The pebbles are the other things that matter like your job, your house and your car. The sand is everything else – the small stuff.”

“If you put the sand into the jar first,” he continued, “there is no room for the pebbles or the golf balls. The same goes for life. If you spend all your time and energy on the small stuff you will never have room for the things that are important to you.

“Pay attention to the things that are critical to your happiness. Play with your children. Take time to get medical checkups. Take your spouse out to dinner. Play another 18. There will always be time to clean the house and fix the disposal. Take care of the golf balls first – the things that really matter. Set your priorities. The rest is just sand.”

One of the students raised her hand and inquired what the coffee represented. The professor smiled. ”I’m glad you asked. It just goes to show you that no matter how full your life may seem, there’s always room for a couple of cups of coffee with a friend.”

And another great reflection on everything being money and money not being everything, there is this wonderful video that was posted in Facebook by one of my students from Malaysia …

And since we’re in a motivational mood before next week’s roller-coaster market gets most of us down … check out this extremely touching commercial from Pantene …

And just one more to help you realize why everyone needs a coach even when you think you don’t.

The message I take from the Pantene commercial and the clip about the coach is that when everything else becomes noisy, you only need to focus on the outcome. Even the deaf girl found her handicap “noisy” as the distractions around her proved too unmotivational. All she had to do was close her eyes and completely block out all that noise for a flawless performance … just like the kid who achieved an amazing feat only because all the “noise” was blocked out by the blindfold and the only focus he had was the voice of his coach.

I hope this was a welcome difference to the usual doom and gloom. I hope you all had a great weekend and pray you’ll have a good one ahead.

Cheers!

The same thing happened last month. You decided to cut your losses fast. And as soon as you did, the trade turned around and went on to be a big winner had you not cut and run.

• “Why didn’t you wait?”
• “Why were you so hasty?”

Then last week, the same thing happened again and being smarter, you decided to hold out. The trade continued losing. The longer you held it, the more you lost. But you knew then that as soon as you cut your loss, it would have turned around. So you held on and the losses kept mounting.

• “Why didn’t I cut sooner?”
• “Why did I hold on for so long?”

By the time you made that cut, the loss was insurmountable.  And the trade turned around right after the cut.

Let’s resign ourselves to one fact;

Whatever the decision, it will always be the wrong one.

So a simple lesson in this is that if we are going to make a decision, it WILL always be the wrong one. Cutting losses fast will return the trade. Cutting too late will continue the trend. What ever you decide, the market is going to take the mickey out of you.

So to overcome this dilemma, ask yourself a simple question:

“Is it better to make the wrong decision sooner or later?”

The answer is obvious, isn’t it? I don’t know why anyone, in their right mind, would want to prolong an agony. If any decision you make is going to be the wrong one, then get it over and done with it quickly. Here’s another line of logic …

You know that the moment you cut, the trade will return. So why don’t you cut it quickly and be ready for another entry as soon as the trade returns? (okay, that is speculative … but it works for the psychology!) At least it is obviously better than running the losses deeper.

Likewise, you know that you are always going to take profit too early. So what can you do? Answer: Make the wrong decision early because making it too late will surely eat away your profits or could even end up with profits becoming losses.

But in profit taking, you do have the advantage of taking some profit and leaving some to be greedy. It is always a good way to manage your profits. Take it when you have it but do it in stages.

For example, if you have 10 lots long and they’re making some money, take half off the table when you reach your time/profit target. Let the remaining five lots run. The worst that can happen now is you can still get out at break-even if the trade turns against you.

If the 5 remaining lots continue the profitable trend, when the trade hits a resistance, or if it stalls, take three more lots of the table and see what happens to the last two. At this point in time, you’ll have no fear and nothing but greed to manage. Should the remaining two lots reverse, your worst case scenario is that you can still get out at breakeven on those two lots and still get to keep the profits of the first eight lots.

In a best case scenario, you are now in a position to put on a trailing stop and let the profits of the last two run to the sky.

So avoid procrastinating on your trading decision. Make it quick, make it sensible and make it happen … make it sooner and never later.

Moral of the story is that in Trading, it is NOT “better late than never” because in Trading, late is as good as never.

We all know that the market has been going through a rough time and it has been difficult to anticipate any sort of medium term direction. The gyrations and volatility has made this market a Day Trader’s and Scalper’s dream. But therein lies the problem …

As the market wound down to the end of the year, volumes waned because of confidence problems plus the holiday season vacation which leaves the market with even weaker volumes than usual. Thus, what little sentiment that prevailed in the market, tended to give the market a false sense of any real direction.  Knowing that we’re still in a Bear market, traders will tend to trade South. Also, the savvy traders will probably deny any presence of a Santa Clause rally in a Recession year and thus, also trade South. And as we can see, the market rallied for two weeks despite the odds.

Day Traders and Scalpers care little for direction. They will take their trade on the age old system of buying Supports and selling  Resistance. The Day Trader will look at the general direction in the first 15, 30 and 60 minutes of trading (Scalpers will probably even make some money in that time too) and then decide if their trade should go up or down depending on prevailing indicators and market internals.

Nothing wrong with this approach … until you start wondering why you are not making more and why you aren’t losing less. As the low volumes gyrate the market unexpectedly on the slightest bit of insignificant news, the Scalper will run and the Day Trader will begin profit taking in stages just in case their winner turns into a loser. Then as the market recovers its “senses”, the trade goes on to continue its previous trend and the trader rues his decision of not staying in the trade, never mind that it was a profitable trade.

Sometimes, the trade reverses and never recovers its previous trend. The trader gets caught in the wrong direction because he thought that the gyration was irrational and inspired by knee jerks. It’s only when the losses start to hurt that the trader resigns himself to a bad trade and cuts losses much too late.

In either situation, it became clear to me that one common factor prevailed in these “plagued” traders … the lack of an OPINION. This opinion I am talking about is a pre-market analysis that forms a conclusion on which direction the market will take and what kind of gyrations to expect within the trading day. Such opinions are formed by using a myriad of information such as Market Monitoring, Trend Watching, Technical Analysis, Market Psychology, Sector Influences and the all-too-famous Newbie Factor (aka Market Noise).

All too often, people will email me with queries on the way my traders and I take on Scalps and Day Trades. They want to know what charts we use, what indicators we apply and what we look for. I usually never answer such queries because any answer I give them will only serve to kill them rather than help.

So much has to be studied and so much more has to be applied. It takes me more than 60 hours to impart such knowledge to my students and it takes my students many months of practice in order to execute a competent trade. So how am I to answer such queries in a single email?

Then comes the Mother of all lessons – Trading Psychology.

Honestly, how am I to teach anyone about trading psychology when in the first place, I don’t know what you have already learned and if what you’ve learned isn’t rubbish. (Trust me, there is a lot of rubbish being taught out there … do you know when you’ve learned rubbish? – Simple answer; it’s rubbish when it doesn’t work consistently or when you have the urge to email me with such queries.)

So, back to our troubled traders …

Their dependency on their technicals, market internals and indicators tends to give them some assurances and in some cases, a false sense of security … until something irrational happens and they start questioning their technique to no avail. When the problem persists, they will start questioning if there is something wrong with the market or with themselves … doubt and fear sets in. The problem compounds itself or in a best case, the profits are stagnant or diminishing … the greed starts to feed the fear. Maybe a change in technique or a tweek to the technical settings might help … but the problem persists. So an alternative plan kicks in and they change securities or change instruments … the problem worsens – at best, the problem doesn’t get better.

As the problem worsens, the frustration heightens and more money making opportunities are missed. Anger at seeing others profit while you lose or stagnate will blind your common sense and surely as the sun will rise, you have lost to Fear and Greed … you have become a victim of your own poor psychological management.

The one way to curb the greed/fear is to have an opinion of the market condition. Say you thought today would rally because its a holiday eve, you take a bullish trade and everything looks good for a rally after your entry … let it run because the worst that can happen is that it reverses big time and you get out in lesser profits. Is that a bad thing?

Say it didn’t rally for some silly reason, you’d be waiting to go bull at the first sign of reversal. It reverses and you take the trade only to find out it doesn’t have legs. You either cut a small loss or get out with small profits. Also not a bad thing.

This works both ways – bullish or bearish – the idea is to have an opinion and know what you intend to do before you do it. If it works out, great … if it doesn’t, get out. It’s that simple.

The Scalper’s bad habit of not caring whether we’re going up or down today … to see what happens in the market today and take that direction … such an attitude will result in the trader never being sure if he’s good to go and he will test the fear/greed factor every single time.

Start doing a simple Daily Pre-Market Analysis. Remember that it matters not if it’s right or wrong. I used to think like Jesse Livermoore …

This great quote from the all time greatest trader, got me thinking about how to handle my losses and then how to handle being wrong:

“A loss never bothers me after I take it.
I forget it overnight. But being wrong – not taking the loss -
that is what does damage to the pocketbook and to the soul.”
- Jesse L. Livermore

To minimize the “damage to the pocketbook and to the soul“, I use another great trader’s mantra:

“Its not about being right or wrong, rather,
its about how much money you make when you’re right
and how much you don’t lose when you’re wrong.”
- George Soros

Take on an opinion. See it change your results for the better and improve your consistency in losses.

Cheers and Happy Hunting!

Footnote: This is one of the many psychological issues mentioned in my book, “Secret Psychology of Millionaire Traders. But in order to maximise this knowledge, you must first have the right education about the financial markets and to achieve that, see the post above …