The Kirk Report

Justification Mode

Earlier this month I shared a quote in the email newsletter that seems to have struck a strong cord with a few of you...

"The ego is not your friend as a trader. The ego wants to be right, it wants to predict, and it wants to know secrets. The ego makes it much more difficult to trade well by avoiding the cognitive biases that hinder profits." - Curtis M. Faith

That quote came to mind this morning when having a conversation with a fellow trader who I think is in what I call "justification mode."

Justification mode is when traders (or investors) find themselves having to justify poor performance on something that seems logical and which helps comfort and protect their ego without having to own up and face a big mistake.

In this trader's case, like a lot of people it seems he went and stayed short when the market rolled over last month. Although he won't admit it to you now, I know from our prior emails he was sucked in by the infamous "death cross" and, in spite of a strong reversal, has now refused to reverse his short (and losing) positions. In fact, his ego is so involved with this short-trade that he's recently doubled down when the market refused to roll over even using lots of leverage to prove his point. Now he's in a painful position of being trapped between owning up to the mistake and taking the painful loss or doing what so many tend to do - find a way simply to justify his actions and let a growing loss have the potential to wipe him out entirely.

In our conversation this morning, this trader kept talking about "the market is in a trading range" and "ready to roll over." That's fine and well as long as the price action confirms that view, but it hasn't yet. As I asked him this morning, "Can you afford simply to stay wrong just to protect your ego?" He didn't know how to respond. In fact, it became clear that he didn't even realize that his ego was becoming such a strong influence over his entire market analysis. I suspect, as he does as well now after talking to me, that if this trader's positions were different, for example aggressively long the market instead of short, this same trader would not be seeing a "trading range" or a market "ripe for reversal." Instead, he would see nothing but more upside potential. This is why human traders, with human egos, are often at a significant disadvantage.

Trust me, at one point or the other, we've all done this. I know I have been in justification mode many times even when I didn't even realize it until much later on. However, over time, I've learned to spot to tell tale signs that I've fallen trap to this and then have learned to take immediate corrective steps to right the ship. Moreover, as many of you also know, at all times I also trade in a way that makes sure that when I do make mistakes (which are often) that they NEVER have the potential to wipe me out. When your ego gets so involved in your trading, the potential for catastrophic losses are tremendous which is why we've all have to learn and know when we've fallen into justification mode.

As most experienced traders will tell you, the most difficult thing about trading well is that you've got to learn for yourself how to stop protecting your ego and readily own up to mistakes quickly before they do significant and lasting real damage. No matter how hard you try, you will never be able to entirely separate your ego away from your trading. Those who tell you that you can, are, in my view, just wrong and have little understanding about how to trade well. As long as you are human, you are going to trade with both emotion and ego, but the better traders among us simply learn how to work with both in ways that limit their negative influence.

To help you do that, be sure to always ask yourself the following question especially when you find yourself trapped by poor positioning: "If I held the exact opposite bias, how would that impact my overall analysis of the market right now?" In other words, if you are currently short the market, how would your analysis change if you were long? That will help you think in a way that will help you at least spot the clues when you're in justification mode so you can take the necessary corrective action even when it hurts your ego to do so.

Everything Evens Out

Good breaks. Bad breaks. We all have them, don't we?

Thinking back to the past six months, this has been an unusual year for me both in the markets and on the golf course. So far in 2010, for whatever reason, I've had a unusually high number of really good and bad breaks. More so than I can ever recall over a six-month time span.

On the golf course I've recently had some of the best and luckiest golf shots of my entire life. From three very close hole-in-ones, to holed bunker shots (one even from 180 yards), to three eagles on par fours, to several crazy pitch ins, a few 30 foot double-breaking putts and crazy drives where I've hit rocks out of bounds in the rough and have the ball bounce back to the middle of the fairway, it has not been boring on the golf course this year!

Likewise, I've had some really bad breaks as well. From plugged lies in the bunker, golf ball stuck in a tree, golf balls laying under tree roots in the fairway, several times I've hit the pin to only have the ball bounce off the green, and so on. Several times this year it has felt that the Golfing Gods were dead set against me. If you've played any golf, I'm sure you know that feeling!

The very same has been true for me with my trading this year. For example, over a dozen times since the start of the year I've made a trade just before a big positive and unexpected catalyst that has been quite profitable. I have also sold several large positions (i.e. taken profits) just before a major price reversal. However, just as often, I've had positions blown out of the water from completely left field. In fact, I don't recall a six-month period filled with so many great trades and really ugly ones. None of which I really could have avoided very much by simply following my own strategy.

Through both the good and bad on the golf course and in the market, the key for me was to simply to remind myself each time that both really good breaks and really bad breaks even themselves out over time. Things sometimes go very wrong, while sometimes everything goes very right and without any excuse or justification. But, over time, I firmly believe skill ultimately proves out and will make the key difference between long-term success and failure.

I remembered this lesson last week after watching Goydos shoot a 59. Here is a guy that has been playing poorly and who has had his fair share of bad breaks, but for at least a day, he could do no wrong (even though he didn't win last week's tournament). I've seen the same thing happen when watching not only myself, but also others on and off the golf course. For example, I've seen traders go through periods where everything they touch is gold and then switch to having a colder hand than a snowman sitting in Minnesota in January. It is just the way things go and we all have to realize the ebb and flow to both life and the markets.

No matter how much we would like to, we can't control what happens to us entirely BUT we can control how we react to good and bad breaks we experience.

Traders by nature tend to be control freaks and when things go wrong, most of us will naturally look for specific reasons to explain or blame on the poor result. It is just our nature to do that. But, sometimes bad trades happen when every decision you make leading up to the trade was the correct one. I've seen more traders than I care to think about change their whole entire strategy and mindset after just one big beat down and in doing so their trading often spirals out of control. Please resist the urge to do that when, not if, that happens. Many times you've just got to accept the fact that bad things happen even when you're doing all of the right things. Sticking with your same trading and investing strategy is often the right way to go even though it doesn't seem like it at the time.

Likewise, the same is true in when everything swings in your favor. Whether or not you are willing to admit it, I'm willing to bet that some of the best trades you've ever made were the direct result of being lucky rather than smart. Although not many traders will not readily own up to that fact because our large egos are so intertwined with our trading results, I can say with confidence that if you're blaming all of your bad breaks on other things while claiming full credit for all of the good breaks you've had, then you are not honestly evaluating your performance. In my experience, if you really took a good look at your track record to this extent, you'll find as I have that the good and bad breaks usually balance each other out. For the past several years, in my trading journal I've actually been trying to keep track of the lucky breaks I've had versus the unlucky ones, and while they tend to run in cycles, in general I've found that over time they cancel each other out. I never thought that was true until I actually started keeping track.

Those who win and achieve long-term success I think are those who eventually learn to take the bad breaks in stride and maintain their confidence while not letting their lucky breaks go to their head and overfeed their egos. They learn that sometimes you can do all of the right things, and still lose money in the market and vice versa.

The next time you get a bad break, or even a very lucky one, remember this lesson as it will help smooth out the edges, give you much needed perspective, and keep your emotional state where it should be.

Independent Trading: Pros & Cons

Sunday was "Independence Day" in the United States where we celebrate the birth of our country and declaring independence from Britain. It also got me to thinking, as I usually do on market holidays, how fortunate I am to be doing what I do for a living in this country. While America faces many, many challenges and uncertainties, I'm proud and happy I live here and thankful for the opportunities this country has provided me and my family!

In fact, there's probably no better time than the present to talk briefly about the pros and cons of being an "independent trader."

As someone who has worked independently for most of my professional career, you can say I place a tremendous value on "doing my own thing." As I've often said, at least for me it has been a combination of personal choice (what I want in both life and career) and also necessity (as I don't play well with others). Indeed, there are some tremendous positives for trading independently. After all, I wouldn't be doing this if there were not some significant advantages from doing so!

Here are a few things that first come to mind:

• As an independent trader, I set my goals and I'm in charge of my own destiny. I don't rely on any other person for how much money I make or how I make it. Other people's opinions of me are irrelevant to my own destiny. At the end of the day, bottom line trading results (not office politics) are all that matters.

• Most people in "normal jobs" don't have the opportunity to set out on their own and do something they really want and love to do and also make plenty of money doing it.

• I spend most of my time every day doing things I really like to do (trading, reading, researching, running screens & mentoring others). These are things I would do even if I were not paid to do them because it is what I like to do the most! Every day I plan my work on things I want to work on, not what others want me to work on. That level of professional autonomy is rare.

• The sense of accomplishment when you achieve success in the markets independently is unparalleled. There's nothing like finding and taking a good trade that produces lots of upside gain. This is especially true when that trade is unpopular and unforeseen by the herd.

• Through my research I've been able to learn about many things, many industries, many countries, and many people. At this point, I can have a conversation with just about anyone no matter what they do for a living or where they live because I know something we can probably talk about based on what I've learned and know about others.

• It is always interesting and I'm NEVER bored. It is so true there is no better drama on Earth than following and being a participant in the markets daily.

• There are no meetings. People, often in corporate America but in many walks of professional life, waste so much time on so many irrelevant things like business meetings. At least if I'm going to waste time, it will be something worth wasting it on!

• There is no commute or dress code. I fall out of bed at 5AM and go to work in shorts and a tee shirt. I don't have to dress up or even take a shower. In fact, I only own one dress suit and that's because I may have to go to an occasional funeral or wedding. Finally, I don't have to spend an hour or more in the car every day just going to and from work. That's a good way to live and work!

• I can live and trade from just about anywhere in the world. Although we have found a little slice of heaven living here in Southern Utah (Cedar City) where the people are nice, the weather is great, housing costs are low, plenty of excellent golf courses nearby, we have dozens of national parks for hiking within a day's drive, Vegas is not too far away, and so on - if and when we tire of it, we can move anywhere we want to and I can still earn a good living.

• Trading independently offers level of personal freedom that isn't present in most jobs. If I want a day off to play golf, help a friend, visit with family, I do it. I don't have to ask anyone for permission! However, offering a paid members-only website places some severe limitations on that freedom!

So, now I've talked about the positives, what are the downsides to trading independently?

While many people think I have a dream job and, in many ways I do, there's no career choice that doesn't also have its own set of unique negatives. Frankly, if most of you actually had to do what I do every day to reach your financial and career goals, I think quite a few of you would begin to question whether "trading for a living" is really the right way to go.

There are many misconceptions about trading out there primarily due to shady marketing practices by those who sell investment services and trading products. Many in this business unfortunately propagate to their own benefit the view that trading for a living is an easy way to get rich without any time or effort. The truth is that it can often be, and has been, a challenging career choice and one frankly that is less than ideal for many people I encounter.

As for the downsides, here are a few you should be familiar with if trading for a living is a career you seek:

• You've got to bring your A game to the table each and every day. There is no sitting in a cubicle playing solitaire, visiting with facebook friends, talking with others in the break room about fantasy football, etc. that is going to get the job done for you. Your efforts, whatever they may be, will be directly related to your bottom line returns!

• Past success means absolutely nothing. You are only as good as your next trade, your next week, your next quarter, etc. In addition, what you do next always has the potential to unravel whatever success you've acquired previously. Few careers offer you the potential for self-destruction so quickly the way trading for a living provides.

• The pressure to perform will create unbelievable amounts of negative stress and energy you'll have to deal with daily. Most people don't have to worry or fear that being wrong will cost them their paycheck. After all, just look at economists, bankers, and politicians!

• There will be little to no respect or understanding for what you do for a living. People will assume you're a "day trading gambler." Or, in my view, which is even worse, many idiots will express the view that they could also "trade for a living" if they decided to. This is true even in by those who've shown no consistent success in the markets on a "part-time basis."

• Working in isolation you'll often miss close human interaction and the lack of a competitive "team" like atmosphere. Also, building and holding outside friendships, especially for men later on in life, are often very difficult for those who don't meet a lot of people through their jobs.

• Sitting 12 hours a day every day at the computer will wreak havoc on your overall health and fitness. Many traders are overweight, have back issues, eyesight problems, etc.

• Like many highly skilled professions it requires constant education & learning. In many, but not all careers, once you've acquired a certain amount of skills and knowledge, little more is expected of you. In trading, you've got to always be in learning mode. In addition, what you think you know right now and what is working for you, will not someday in the future. That's the way of constant evolutionary state of the marketplace.

• You've got to be a jack of all trades. I've often said that if trading was the only thing I had to do, my life would be a whole lot easier. Instead, independent traders must spend time serving as their very own tax accountant and tech support guru. In my view, there's nothing worse than a hardware or software issue that takes you away from concentrating on the markets.

• There will be very long work days and work weeks. Those who say you can trade successfully in 10 minutes a week are liars and charlatans. Most independent traders put in between 50 to 60 hour work weeks and are considered "grinders" rather than trading "wizards." Remember, there are no holidays or weekends for professional independent traders - only more time to devote to charts, scans, research, and strategies!

• You've got to have money to make money. There are very high capital requirements involved in being an independent trader as it takes a lot of money set aside from your personal assets to produce a living wage for yourself and your family.

• Your "salary" will vary considerably based on things outside of your control like overall market conditions and how your strategy is in sync with the market. It is true, you'll make 90% of your income in 10% of your time. However, overhead costs will remain constant and there's nothing worse than having to grind out trades in an unreceptive market to "make the mortgage."

• Even when you make a lot of money and have experienced tremendous success, you've got to still live like a pauper. There are no golden parachutes, annual bonuses, etc. that are going to save you when you screw up in the future. And, trust me, you will screw up. You will make bad decisions. You will be on the wrong side of a trending market. It happens to everyone and it is never fun or profitable! Which is why when the sun is shining, we've got to always prepare for those future rainy days.

• Personal, family relationships can be difficult. Like most people, when things aren't going well, many will look for others to blame and take it out on their spouses and family members. Divorce rates are high among independent traders. The only way around that is to find endeavors that release this negative energy (like golf, hiking & daily exercise). In addition, I seldom see successful independent traders who don't also have a very strong family support structure in place. If your life is a mess, your trading will often be as well.

• Distractions at home will be both numerous and frequent. As independent traders who work from home, everyone else will think you can spare time for doing other things during the normal work day (i.e. like going to the grocery store, getting the house worked on, taking the cars in for repair, mowing the grass, taking kids to the doctor, doing laundry, etc.) In addition, there are things you'll want to do as well (like playing golf) when you should be looking through charts that are going to distract you constantly from achieving the results you desire.

• As an independent trader working a "zero sum game," nothing you do every day as a trader other than making money will be a benefit to others or society in general. While you will have plenty of opportunities to donate to charity in order to give back something, independent traders must work really hard at finding good and effective ways to make a "real difference" for other people. My late father once said to me that "when you die, the good Lord will ask you who on Earth you really helped freely and without personal gain. You better have a lot of names to give to him or you're going to be in big trouble son!" It is true - we all get caught up in our crazy game of beating the markets that we forget how others have to really struggle to "work for a living." Also, even the best of us fail to do enough to make a true, positive AND lasting difference in other people's lives beyond just donating some of our profits to charity.

While I know I've missed a few of the negatives and positives, I think this at least offers some perspective on what it means to trade independently as I have all of these years.

All in all, I have no regrets and I'm happy today as I've been in the past to do what I do for a living. Whatever you do, I hope you feel the exact same way and, if you don't - you have both the courage and conviction to make a real change for the better. Life is far too short for anything less than that!

The great thing about this country is that whatever you want to do, you're still free to do it. It is my most sincere wish that you enjoy and take full advantage of that freedom!

Stubborn Determination & Confidence

Q: Between your friends in the business which I know are many and through your mentoring have you discovered one personality trait common among the most successful?

A: I think Dr. Brett's post on personality and trading success confirm what I've found as well - i.e. that "trading is probably far more related to talents, skills, and effort than personality features." I agree with this as I've worked with and know all sorts of different types of people who trade successfully.

There is no "one suit" that fits all.

However, I will say this. One thing that I tend to see most often is what I call stubborn determination. What I mean by that is that after a series of significant setbacks, mistakes, frustration and disappointment, the most successful traders always find a way to dust themselves off quickly and return even more motivated and focused about their trading than before. I see that not only in myself but in many of those who trade well. Trading is one of the most challenging endeavors out there and the market will test everything you've got and then some.

As Dr. Brett also mentioned in that very same post there are "certain traits tend to help people make best use of their talents and skills." This is why it is so important for traders to use strategies that also are a good fit for their personality.

There are so many profitable ways to trade, but in all likelihood only a few that match and harness your own unique skills and who you really are. That's why it is so difficult for most who desire success to play copycat with other traders although everyone at some point gives it their best shot. However, unless you are one of the first to discover your very own "trading twin" as I often like to say, you are going to experience tremendous difficulty and frustration implementing another trader's strategy as your own.

One of the first things I like to do when working with a new student in my mentorship group is to spend the first month we are working together on a completely new and different strategy they've have never used in the past. In fact, I'm very careful not to try to train people into adopting my own strategy, but instead start the process of discovering the right strategy that meets their own skill set and personality. To do this, I begin the process by having my student taking an in-depth personality test that helps both of us understand who they are and offer some ideas which strategies could potentially offer the "best chance" of a match.

The reason for this approach is two-fold: 1) students bring a lot of baggage with them with the strategies they are currently using that to make progress we need a whole new approach and opens up an entirely new and fresh path which is important, and 2) students often learn how to do something new and successful in the markets which in turn provides them the much needed confidence. Without confidence, success is difficult to maintain no matter what strategy you use. Confidence only comes when traders use a strategy that they completely understand AND which fits their personality and skill set the most. So, if you're looking for one commonality that I see among the most successful, that is it.

Everything You Know Is Wrong

I had a beloved professor in law school who would say that it is important to have a good forgettory. In other words, he thought it was an distinct advantage to have forgotten what you have already learned so that you'd be forced when the time came to relearn and think about problems from a completely fresh perspective.

His point was that experienced lawyers, especially the more lazy ones, are often at distinct disadvantage to the inexperienced because they make constant assumptions on what the law was which would get them into serious trouble in the court room. Although all of his students wondered if it was really true, the professor said that he lost many cases after an inexperienced lawyer was better prepared.

As things change, experience can sometimes work to your disadvantage especially if you're not keeping and adjusting to the environment around you. I've talked previously about the importance of gaining experience, but there is a point where experience can also work against you.

Take for example a trader in my mentoring program at the moment. He has over 25 years of experience trading full-time, but struggling tremendously with the market primarily because he hasn't adjusted his strategies and mental perspective enough to account for program-related trading. Although I won't go into specifics of why and how this is in order to keep his trust and confidentiality, I will say this - the primary issue he has is that he constantly makes bold assumptions based on lessons learned long ago as they relate to the market and refuses to adjust or consider other things.

Contrast this situation with another student in my mentorship group who is relatively new (just over 3 years of part-time experience & now moving full-time) that looks at the market in a way that is constantly fresh and always evolving. (He has even taught me a few things!) You know what? The newbie trader is killing it (currently up triple digits on the year) even though old graybeards like me say that should never happen!

The reason I think for that is that the newbie is not fighting this market with past scars and hard-learned lessons. Instead he is simply trading upon the price action alone and managing his risk in a way that he knows what he always must do even amid uncertainty. In other words, what he doesn't know, isn't hurting him unlike those of us who are more experienced. It is so weird how that happens, but I've seen this before and among the more experienced traders who I've been privileged work with.

So, the point here is that if you're having trouble as a more experienced and skilled trader AND you have suspicion it may be directly related to old perspectives and information, don't be afraid to step back, break the mold you've created for yourself, and try new things. The best way to do that in my view is to constantly work on new trading strategies that force you outside of your comfort zone and which require you to constantly examine what you do in a different ways. This will also enable you, as my beloved law professor said, to have a good forgettory. And, that can serve you well as markets change and evolve.

Trading Percentages & Management

Q: Do you ever buy stocks other than ones passing your current screens? If so, what would be the circumstances that would lead you to make that decision?

A: Yes, I do trade stocks and other instruments that our outside of the stock screen machine. However, as you'll see by my percentage breakdown based on trades I completed in 2009, trading stocks which appear within the stock screen machine have remained a primary concentration:

• 32% of trades made were stocks in stock screen machine

• 30% of trades made were in ETFs

• 14% of trades made were in other special screens (like book value screen & others I'll feature in the new screen of the week series)

• 13% of trades made were position day trades using both ETFs & stocks

• 11%: Emini & Forex trades

As for the second part of your question, what circumstances would lead me to trade outside of the system, it depends primarily on two main things: 1) whether I'm finding attractive setups within my screens as I'm biased toward concentrating my positions there than away from it, and 2) whether I desire more diversification & exposure than I can readily obtain through stock-only positions. However, the same technical approach I use to find and exploit attractive risk/reward setups in my stock screen machine for the most part are the same I use elsewhere.

The most significant change here much like many of you is that trading ETFs continues to grow in terms of my overall focus. In fact, over this year or next it wouldn't surprise me to find that trading ETFs are over half of the trades I make as well as far more emini trades which I've grown more fond of lately (more on that at a later time). ETFs are much easier for me than hand-holding a number of equity positions and that's especially true through earnings season! This is also why I've been working on a new ETF tool to share at the site for those of you who only limit your focus to ETFs.

Finally, as I've often talked about before, it is my opinion that what you trade is not as important as how you you manage the trades you make. Many people can build high-quality watchlists but if you don't know how to spot optimal entry points, how to scale into and out of positions, have a complete understanding of how to limit loser trades through position sizing and stop losses, etc. your success will be modest at best. Remember, it isn't what you trade that will make successful, but rather how you manage the trades you make no matter what they may be. A good trader can and should be able to take the worst watchlist ever created and still find a way to make money from it!

Reading Less, Practicing More & Getting Experience

Q:  I am a relatively new trader with an voracious appetite for learning and getting better. I also work full-time so trading is very much a part-time endeavor.

For the past six months I have been spending approximately two hours per day (roughly 12 hours per week as I take off Sundays) toward my trading. In your opinion, how should I properly allocate my time between reading & learning (recommended books, links & reports you share, etc.) versus actual practicing (time spent on simulated trading) to gain the skills I require as quickly as possible? At the moment I'm dividing my time between both (1 hour practice & 1 hour learning) and while I'm making good progress as my results in my simulated trading are steady showing improvement, I would like to know your thoughts and whether you have any recommended "rules of thumb" to share.

A:  I have a number of thoughts to share about this topic and I'm really glad you asked. It is a topic I spend a tremendous time and energy covering within the mentorship group as I know this is of key importance.

First, I must start by congratulating you on a number of things including the fact that you devote as much time and effort as you do, that you understand the difference between learning and practicing to acquire trading skills, and that you're using simulated practice trading at this stage of your learning curve. I can't say enough about how very good this approach will be for you during your early-formative years. So, great job!

Second, it is my opinion that practicing is an crucial part of the learning. You can spend hours reading books and blogs but if you're not doing the things that require you to trade well and often through concentrated skill and practice, then you will not be spending your time effectively.

I find that most who read the website tend to spend far too much time reading more than they do practicing and real skill-development. In fact, I would say that you are unusual in this regard as you've decided upon adopting a split approach between both practice and study. Most of those who have joined the mentorship group tend to devote far too much time in reading and only a minor amount of time in concentrated and consistent practice.

However, since you are seeing steady and consistent improvement now, I would not recommend altering your approach one little bit. What you are doing seems to be working and that means you need to continue until that begins to change. Sooner or later there will be a time where your progress starts to slow down and you'll see a period when you think you are moving backwards again. It will be at that same point that you may consider bumping up the time you devote to practice more than study after identifying any issues that may be hurting your performance.

Ideally, through practice simulated trading you'll begin to figure out which areas you'll need to concentrate you study upon. This will help you concentrate your study time and allow for you to practice more and more. This will obviously require you to keep close and accurate trading records and stats not to mention in-depth study of prior practice trades to identify any issues that may be present in your strategy. Once you identify issues you think are present that's more than half the battle.

Bottom line - practice and study should not be mutually exclusive of one another but used very much the same way you are doing right now. For most, that means spending far more time in practice than study and reading than the other way around. Most of the problems relating to time management I see among members is that they spend far too much time reading and not enough time practicing.

Finally, I have two stories to share that can illustrate why I think practice is so important in the skill development process and why most would be benefited by reading less and practicing more and, importantly, while at some point you must move beyond simulated practicing.

First, I have a friend who also mentors other traders (mostly professionals who work at proprietary trading firms) and in a conversation this past year he shared a interesting story about an experiment he did at prop firm he worked. At the that firm, there were two identical twins of had similar skills, aptitude, experience and knowledge and who joined the firm but were not reaching their goals and had similar trading performance. When undertaking an in-depth assessment of how they allocated their time, my friend discovered that they were not using the time effectively and were spending far too much time reading the analysis and opinions of others including focusing too much on "trading the news."

As an experiment, he decided to isolate one of the twins and instructed him only to trade based on technical scans and screens while he left the other twin trader to continue to trade the same way as he had previously. The difference in terms of performance was incredible in the weeks and months that followed. While the trader on the news/opinion ban performed very poorly at first primarily due to the transition and loss of confidence (yes, traders often use news and opinions of others to seek comfort in their own positions and go crazy when they can't get their daily media fix), by the sixth week in the experiment that same twin was outperforming by a consistently significant margin. So much so that both twins now trade far differently and have seen far more consistent success.

While we live in a day and age where so much information is easily accessible and freely obtained, there is some evidence starting to show up that suggests that traders are no better off for being so vastly informed. In fact, being so informed can and often can work against you which is why concentrated and consistent practice more than reading/study is something I have grown to really believe in. While both are important and compliment each other during the early cycle of the learning curve, you will have to focus more time and energy on structured practice once the foundation of knowledge about trading and how the markets work are obtained. As you move beyond reading so much and practicing, there will be a time and place where study and practice must be set aside for actual, real-life trading. Along these same lines, I also have a story to share.

Back in 2008 my golf instructor (one of the top 100 instructors as rated by Golf Magazine) told me that I spent far too much time practicing on the golf range and not enough time actually playing golf. I remember him saying to me like it was yesterday that "If you played as much as you spent time practicing your score would improve." Back then on an average week I was split between the two just like you are now (4 hours on the golf range & 4 hours on the golf course.) So after he said that, I stopped going to the range as often and instead played much more. What happened was that I learned how to score and my confidence improved dramatically. By putting myself in pressure situations on the golf course more than I had in the past, I simply learned to focus and play much better especially in tournaments when I desired to perform at my very best.

True real life experience is a teacher unlike any other.

I share this personal story to make the point that there will be a time and place where study and practice must be set aside for actual, real-life experience. In fact, some of you are already at this key stage where you should not be spending more than 30 minutes every day reading & studying versus learning through real-life trades not just simulated trading. In this game, nothing can serve as a long-term substitute for the number of trades you can work to build experience. In essence, no book, blog, or any other resource (no matter how helpful they may be) can serve as a long-term substitute for the level of experience you truly need that can only be acquired by real-life trading where heavy emotions and real money are on the line.

By having a solid understanding of what skills you lack and then refocus your time and energy on those through concentrated practice followed by real-life trading will go a long way to develop the experience you need to achieve great things in the market.

Make It Fun

In law school when I started trading actively on a full-time basis, I had little money and lots of interest in the market. In order to continue to improve myself and learn to be better, I had to find creative and fun ways to test myself. I simply could not afford to lose any money because I had so little of it to begin with!

Fortunately I become close friends with several other newbie traders early on who were in the exact same position as I was - i.e. lots of interest and desire to learn to trade but very little capital to learn with. That forced all of us to be extremely creative during the beginning years. Looking back at now, that was also one of the best things that could have ever happened!

Almost every week we would figure out some sort of side game to play concerning stocks and the market. Whether it be how many days until a certain stock managed to break out from a trading range to when the market itself crossed a specific moving average. Each week would be something different and would present a fun test. The loser from the prior week would select the side game to be played the following week so it made for a fair competition. And, in case you were wondering, we never once put money on the line in these games.

Only our pride was on the line.

Given how competitive in nature we all were (and still are today), the weekly contests have been a fun opportunity even when I was the big loser which happened more often than I would like to admit. As payback, I've had to do some really crazy things over the years after losing. My two personal favorites required me to eat a pickled pig ear (which I gagged) and playing in a golf tournament I had paid big money to play in while dressed only in pink clothing (pants, hat, shirt, socks, bag, etc.) with people I didn't know. You can imagine the embarrassment! Others in the group have been forced to skydive, run in marathons, jump in a lake on a cold winter day, serve as an unpaid volunteer for the political campaign the loser hated the most, shave off all of their hair, etc. In picking the punishment, we'd usually focus on whatever the person would fear the most and it was sure has been fun watching last week's loser squirm when they lost!

To this very day, I continue to play those same games with the group of guys I started doing this with over 12 years ago. Although, I must confess that as each of us has grown older and the payouts have become far less painful or interesting (because we're getting older and we now live in different areas of the country making it difficult). But, it is something we continue to do even though capital is no longer an issue for us now. Most of the guys in the group now manage money professionally or trade full-time independently and have become quite successful (two are already retired). In a recent gathering, most of us attribute it to the fact that we "made it fun" early on and enjoyed what we do much more than making money.

So with that in mind, I really encourage you to find and explore new and creative ways to make trading and investing fun especially with others who share similar interests. While this is a zero sum game in many ways and making money is a serious business, if you can learn to enjoy the game more than the bottom line, I think you will give yourself a greater chance of long-term success. Surround yourself with people who enjoy and revel in the challenge and you'll raise your own game to new heights.

Sacrifice For Success

We certainly have been enjoying the Olympics and watching the competition. Although my wife and I are not huge sports fans (you can occasionally find me watching the golf channel but that's it), the Olympics is special because you can become inspired by the personal stories of amazing amounts of sacrifice and dedication so many athletes gave in order perform at their very best.

This year we especially enjoyed the story of speed skater Apolo Ohno who talked about the struggles he had with his father as a child. Ohno shared a personal story that when he was a young man his father took him to an isolated cabin and left him there for a week by himself to "think about and figure out what he wanted from his life." Apolo now believes that his father's actions laid the foundation for his incredible success.

Knowing what you want out of life is certainly the first step. But the second step, making the sacrifice to make it happen, is even more important. Many people express the desire, but when it comes to actually making sacrifice that truly hurts, it is entirely different matter. Which is why these athletes are so inspiring!

Earlier this morning the good Doctor provided a link to an article that offered the following quote:

"First, you decide what you want specifically; and second, you decide if you're willing to pay the price to make it happen, and then pay that price." - Nelson Bunker Hunt, Texas Oil Billionaire

What a terrific quote and, if you had the opportunity to get to know every successful athlete in the winter games, you would find out that each one went through this process. And, most importantly, they made lots of sacrifices and took many risks to make it happen.

The same is true with every single successful trader. While so many in this business want others to think it is easy for them, that they've somehow become smarter than the market, and/or that everything they touch easily turns to gold, the truth is that those who are successful work really hard and constantly make enormous sacrifices to improve themselves so they can perform at their best. They know from experience and the battle scars they've earned over time, how truly difficult it is to do consistently well in the market. And more importantly, they understand what it takes for them to do their best AND they make every sacrifice they need to in order to make it happen.

In the many years I've been blogging online about the market, I've learned that while many have the desire to be successful in the markets, when it comes right down to it they don't fully understand and appreciate that they must also make tremendous amounts of sacrifice to achieve the goals they've set. Much like Apolo Ohno's father, there are many times I would very much like to put readers of this website in a cabin for a week and tell them to figure out what they really want (and if that includes trading successfully) before they come out. Then, when they say they know and are ready to leave, I would ask them a simple question - "Ok, now I know what you want, tell me what you are going to sacrifice to make it happen?" If they didn't have a good answer for me, I'd send them straight back into the cabin until they had an answer.

In spite of everything you may wish to believe, those who achieve great things in the market or in life, sacrifice greatly. So, I ask you, what are you willing to sacrifice today, tomorrow, and every week that follows to achieve your goals whatever they may be? Without sacrifice, you'll never fully reach your full and great potential.

All of you who read this have dreams and the potential and talent to make those dreams a reality. I sincerely believe that. I wouldn't be doing what I do and working hard to share what I share if I didn't truly believe that with all of my heart. But, it will require sacrifice. It will not be fun. And, it will hurt. But, that is the price you must pay for success. The same as I have and the same as any other successful trader has each and every day.

Consider The Consequences

I love the scene in the television show The Office when a woman standing in a long line asks Dwight Schrute to hold her place behind him because she has to go and use the restroom. "No!" he replied. "Did you grow up in a household without consequences?" After looking back at him with a mixture of both disbelief and disgust, Dwight then explained to her that he had taken enough time to go to the restroom BEFORE getting in to the long line and she should have done the same.

Those of us who follow the rules whether it be in life or trading, can sympathize with Dwight, especially when dealing with other people who don't follow the same rules you think are important and who impact you in some negative way.

I was thinking about that this morning after a few things happened this week that illustrate again that not only do most people break the rules (even the ones they set for themselves in trading) but that most don't spend a single moment thinking about and considering the potential consequences that could follow BEFORE those rules are broken. And, I think that's an important point.

The truth is that as traders and investors, we all set rules for ourselves to follow whether we are conscious of it or not. Most of us in fact do a pretty good job of following those rules and, of course there are rare times the rules must be broken. No rule will work perfectly in every type of environment which is why some of the best traders out there are those who learn to be flexible when the environment demands it. A combination of skill and experience will help you know when those rules are not working to your advantage.

But, in those traders who are flexible and successful, you'll often see something very different which is that they also make absolutely sure that when they do violate their own rules, that they've taken enough time and have properly considered all of the most probable consequences both good and bad that could follow before violating that rule. They don't simply say, I'm not going to follow my trading rule today and at the same time not fully understand the potential consequences that could follow from doing so. As many of you have already discovered, that's a terrific way to get into a lot of trouble.

I've learned over time that when I am contemplating breaking one of my own rules (like chasing a stock that doesn't fit my low/risk high/reward strategy for example) I also require myself as a matter of habit to stop, think, and quickly outline the probabilities of what could follow if I break or abandon my rule. In doing so, more often than not, by considering those consequences, I'm reminded why I set the rule in the first place and just simply follow the rule. In fact, it is often much easier that way. But, there are rare occasions, where after I go through and outline the consequences that when I consider everything, I think the rule should still be broken in that particular situation.

Learning when that is the case is an important element of being a successful trader. In fact, it is often in the rule breaking and subsequent tracking of the consequences that follow from it that you learn more about who you really are and how to become more successful in the market.