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The training of sports athletes is an excellent example to follow in learning to successfully trade. What would you expect of an athlete
that did not practice?
Some people have said that paper trading is worthless because nothing is at risk. If you were a college basketball coach and one of your
players said that to you would you agree? In practice you sharpen your key skills through repetition until you internalize them in a way
that is unforgettable. In that way, when the real game is on, and the tension is high, you can fall back on your training and do what you
unforgettably know how to do.
Without practice you will not do things correctly, lose money, doubt your abilities, and be unable to remember what it was that you did
correctly or how you did it. It is a terrible time of self-doubt and you will need to start all over again on
the process of learning to trade.
Perfect practice makes perfect play. Bad practice leads to bad play. Don't stop paper trading until your practice sessions tell you that
you are ready. Would you look forward to a basketball game if all your players missed their shots in practice?
The best way to begin trading is with paper money. It is easy to keep your emotions out of it and to concentrate on practicing your
methodology. Then begin trading small positions where the losers, when they occur, are just a minor nuisance. Scale up your size until
you are trading the right size for your account.
The market will tease your emotions to do the wrong thing: sell at the bottom and buy at the top. You need to re-train your emotions to
respond correctly to the market. This will take some time. In the meantime you need to resist the fear and greed that will lose you money.
Emotion is not all bad. Fear is bad. Greed is bad. pride is bad. Anger can be good if it prompts you to take your painful lesson, learn
from it, and aggressively put it to work. If your painful lesson makes you fearful of more pain, then that is very bad.
The trader that has too much pride will stick to a trade long after he should have exited it because he refuses to admit defeat. Sometimes
it is a conviction that is the result of extensive research that keeps him in the trade. For traders, discipline always trumps conviction.
No matter how right you think you are, and you may ultimately be proven right, you must always follow your risk management rules when
support or resistance is broken. Being wrong won’t kill you but staying wrong will. Don’t stay long stocks that go down every day because
you hope you’ll be able to sell a bounce.
Hope has no place in trading.
Confirmation bias is a serious problem for people and can be a disaster for trading. Confirmation bias is when you tend to favor information
that agrees with you and discount information that disagrees with you. It makes you slow to accept change when change is in the early stages.
In one experiment the subjects were sellers of some items. One set of sellers owned the items and another set were selling it for someone else. Both
sets of sellers set the sale price for the items. The sellers who owned the items felt the items had higher value and demanded a higher price than
those who did not own them. The items were exactly the same but the personal ownership increased the perception of value. As a trader, we will tend
to stand by our own views more stubbornly than the views we have heard expressed by others. If we are bullish then we will stick stubbornly to
that view longer than if we heard bullish views expressed by another trader. This bias has no basis in reality, just ownership.
It is not wrong to have a view, just don't hold onto it for the wrong reasons when change is at hand.
You should not be a cheerleader for a market or a stock. It is just a trade, not a marriage. In trading, you need to love nothing and hate nothing.
If you want to do a little love/hate thing to make trading more fulfilling, then take Jeff Macke's approach:
"Corporate good isn’t a function of your product. Phillip Morris -- Okay,
"Altria" (MO) -- is a force of corporate good despite poisoning the youth of the
world. I trade stocks. All it takes for a CEO to get on my good list is not destroying my capital by maximizing the impact of mishaps. It's that easy. The
tobacco industry denied the addictive nature of their product even as they endeavored to make cigarettes even more addictive. They sold their souls to
protect their shareholders. They may go to hell but they pay a good dividend and Altria is up 30% over the last five years compared to a 10% drop for
the S&P 500. Nice.
Which brings us back to McDonald's, a company in the business of making the world too fat to fly Southwest (LUV). It does this by making food that tastes
both good and the same all over the world. Of every bite of a Quarter Pounder with Cheese you put in your body 5% is digested, 10% is jammed directly into
your arteries, and the balance is spread over your arse and gut, depending on your personal physique. Doesn’t matter. I haven’t had one in at least five
years but my mouth is literally watering at the idea of eating one. I remember the flavor of a Quarter Pounder the way Keith Richards recalls heroin; quite
fondly, if a bit vaguely.
I don’t let my kids eat at Micky D’s but I’ve owned the stock for a couple years. Today’s news tells you why. Part of the kiddie allure of McDonald's are
the promotional toys and doodads they sell and give away with purchases of a kid's meal. In that tradition the company was recently selling glasses featuring
Dreamworks’ (DWA) Shrek. Two problems. One, the most recent Shrek is lousy even by kid movie standards. Two, and here’s where I get to the point, the company
that actually produced the glasses for McDonald's put cadmium in the paint. Cadmium (Cd on your periodic table) happens to be both toxic and a carcinogen. Ooops.
There wasn’t enough cadmium on the Shrek glasses to actually poison anyone and, as the good, albeit greasy, people at Altria will tell you, it’s pretty hard
to prove exactly how a person gets cancer. McDonald's could have spent weeks denying the glasses were poisonous. It could have blamed whatever sweat shop it
hired to put Shrek's adorable face on the glasses. In other words, McDonald's could have made toxic sludge out of the lemons fate handed it. What McDonald's
did instead was classic smart management. McDonald's stood up, apologized for the mess, and recalled the glasses last week. But a simple recall of glasses wasn’t
the smart part. A recall covered McDonald’s ass in court but still risked damaging the brand. Like the good managers they are, McDonald’s real goal wasn’t getting
the company off the legal hook but rather to actually get the glasses back so they could dispose of them properly (most likely by smashing them over the head of
the execs at the glass manufacturer).
Having the Shrek glasses in the marketplace damages the McDonald’s brand. Being both good and smart, McDonald's wanted to recover the glasses. As a result,
McDonald's did both the right and the smart thing; it paid now rather than later by buying the glasses back at a premium. You bring your $2.49 Shrek glass back
to Micky D’s and they give you $3. Simple. Clean. Genius.
McDonald's, a merchant of obesity and death which seeks to lure
children into its restaurants with cheap toys and cartoon
characters, is officially my choice for the the corporate
world’s Greatest Force of Good (“G-Fog”)."
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