Adam's RX

Nothing in the stock market is textbook.  In order to be successful as a stock trader, we have to, at some level, obtain a feel for the market.  If things were simply textbook, anyone would be able to do this.  However, in order to make a career out of trading, we need to develop a feel for the market. 

Trading stocks is similar to a sport.  Take basketball for instance.  I don’t care what book we’ve read, or even if Michael Jordan came down and verbally told us how to play the game, we’d need to stand at the free throw line and start shooting to get a feel for our shot. Once we get a feel for our own game, we can excel.

Learning to trade stocks is the same thing.  By watching and putting the time in the market, we will obtain a feel.  All too often I see traders trying to find a textbook method on how to trade – when A happens I do B, when stock crosses this I immediately do that. 

The market can be very irrational at times and if you trade strictly “by the book” without using your distinct feel for what is happening, it can be detrimental to your P&L.  True there are some textbook situations, just like a sport.  Overall, however, in order to trade successfully, we need to hone those instincts (that feel) that will help us make split decisions when needed.  The worst thing to do is to resist those instincts and go into a trading day saying to yourself, “I’m looking for this specific thing to happen and whenever this happens I do that.”  That is a very mechanical, robotic way to trade.  We need to let the market tell us what to do.
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I am frequently asked the question, “Adam, of all the great days you’ve had in trading, what is your best trade or what’s the most amount of money you made in one trade?” The answer to that question makes me think of this one particular trade I had. The best trade I had was a trade where I lost money. That’s the irony of it all. Why was that my best trade... because I learned from it!
So many times I see people doing the wrong thing and make money. Now, what is considered the wrong thing? The wrong thing is going against the rules that guide our trading. For example, if you are a trend trader, and you go against the trend, like going short near the high of a stock in a strong market, and all of a sudden the market turns around in your favor and you end up making money. The end result is you learned that doing the wrong thing made you money. So you continue to do the wrong thing. What ends up happening more often than not is you continue to go against the trend (if you are trend traders, definitely the wrong thing to do) and you eventually end up getting destroyed. This leads to an enormous amount of frustration and a breakdown of your principles and discipline. It’s a big pitfall I see traders get into all the time. You are not learning from your mistakes because sometimes they end up becoming profitable.
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So many times I see traders get involved in trades using many reasons such as technical analysis, their own ego to predict where the stock is going, their need to make up for the loss from yesterday, their need to make money to pay rent, defensive trading because they made significant amount last trading day, etc. We have so many things going on in our heads that we sometimes forget the most basic and simplest thing – THE NEED TO USE COMMON SENSE. If you ask a trader, he will give you a straight answer using common sense, yet many times his actions lack that most important and basic concept.
For example, I know that the market tends to not move much the day before and hours leading up to the Fed Meeting. And for the most part, traders will agree with that. The market generally tends to tread water until the Fed announces. However, I see traders getting involved in multiple positions, getting absolutely demolished, trading it as if it’s a regular trading day when in fact they know the market is not going to move much and put themselves in very bad situations. Another example of not using common sense is traders putting up on their computer screen stocks that are more volatile than they are comfortable trading. Is this a bad thing? It might not be if we trade it with caution. But we tend to put 2,3, 4 or whatever is too much for us on our screen and the amount of these “crazy” stocks become way too much to handle. We ultimately get killed on it and realize that it is not worth it. At the end of the day we ask ourselves, “Why did I do that? I know these are crazy stocks. I know they require a lot of attention each one individually and I flooded my screen with them.” We know to use common sense, yet actions say otherwise. Another example: say we are up all night because we had an argument with our spouse, or went out late on the town with our buddies and ended up not getting enough sleep. As a result, we come in next day and our focus isn’t there. Yet we trade as if it’s a regular good old trading day and end up getting killed. We know we need to be focused 100% and if the focus isn’t there we need to realize to take it slow. This is common sense.
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So many times we get involved in a situation where we are in a trade for the right reasons and everything is going in our favor. And then all of a sudden, the stock starts doing something different. If you are long, the stock starts coming down or it starts pausing. Before we know it while we are holding our position, we give back a big portion of our unrealized gain. And in some cases, we even lose money on the trade.
It’s a big pitfall us traders get ourselves into. We don’t lock in profits and take stock off the table. The reason we don’t is because our emotions get on this little high and we feel that the stock is going to go further in our direction. Perhaps it might, but when we start listening to our emotions we fail to listen to the stock.
As traders, we need to succumb to the fact that we are really never going to buy the bottom, and we are never going to sell the high. But should this happen, we need to shrug this off as luck. The bulk of the money we are going to make in a trade comes from the meat of the move. It is not buying the absolute bottom and selling the absolute top. The money comes from the middle of the trade, and this is the perspective we must have.
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“Consistency has to be Priority 1”
Those all to important words spoken by Vince Lombardi.

More often than not I would see this all too common scenario: Traders get on a roll where they would have many days in a row of great trading. It might be $5 a day or $10,000+ a day, depending on there trading level. Then, all of a sudden, a tremendously bad day, where it brings us all the way back to when the roll started, and sometimes below that. It’s as if we take 5 steps forward, 7 steps back. We get on a good streak and then boom it’s all gone…And it always seems to happen when we start thinking thoughts like, “it’s clicking”, “it’s finally happening”, “I finally got the hang of this”, “it’s my time”,” I know what I’m doing.” All of a sudden…boom! We have that bad day in the market, and it humbles us all the way back to zero, or further. Sounds familiar?
Well, think about this… making money is a habit!! It’s just something you do! Traders need to get in that habit of making money on a consistent basis. And in order to do this, we need to be 100% focused and on top of what we are doing at all times. What that means is we cannot get in the mindset of “I know what I’m doing and I can control the market.” We always need to let the market tell us what to do. The reason we have those huge down days where we take several steps back is because we get over confident. And all of those thoughts are not conducive to our consistently making money. Again, we need to get in the habit of making money, where it’s just what we do. When Michael Jordan stands on the free-throw line, he makes shots. His percentage was amazing. He was in the habit of always making free throws. It’s what he does. Of course every now and then you are going to miss. We are going to have a bad day every now and then. It’s part of the game. Ted Williams strikes out. When Michael Jordan is at the free-throw line, he shoots and makes. When we trade, we make money. This is what we do and we need to develop that habit. And things that are detrimental to that are those over confident thoughts that prevent us from making progress. If Michael Jordan went up to the free-throw line and said to himself, “this is a piece of cake, it’s easy, and I can make a free-throw whenever I want,” and is cocky, I would question whether or not his percentage would have been that great. If Ted Williams stepped up to the plate and thought to himself, “I can hit any pitch by any pitcher whenever I want, I’m better then you” where he’s beyond the point of being confident and is cocky, I would question whether or not he would have had a .400 batting average season. For us traders, we need to come in everyday with an open mind without the cocky attitude. It breaks up the consistency that we need to achieve in this business.
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