The Winning Psychology Of Defensive Traders

This post contains my personal notes from the book: Winning Psychology Of Defensive Traders by Conrad Alvin Lim.

1. The life of a trader is similar to the life of a turtle. Just like the turtle’s life is in danger from the moment the mother lays the egg, so is a trader’s financial life. He has to learn the right things, successfully paper trade, then actually trade in the market and see most lose, gradually gain experience over many years, know when to trade and when to stay put and be watchful throughout his life as failure can come any time.

2.  Ten truths about online trading are:

  • You will lose money.
  • Online trading is tough.
  • There are more losers than winners.
  • It takes money to make money.
  • It takes a long time to become a good trader.
  • You must learn everything.
  • It takes endless hours of training and practice.
  • You need a lot of patience.
  • This is a very emotional business.
  • How you trade is how you really are.

3. Traders provide the price. You need to know why you want to trade. Your attitude is very important:

  • Do not think what others may think of you.
  • Do not be proud.
  • Do not have ego while trading.
  • Be humble, prudent and frugal.
  • Be flexible and adaptable at all times.
  • You have to think critically.
  • You have to remember that the news that comes out is not the news that will help you.
  • You should not follow the herd.
  • You should be greedy when others are fearful and fearful when others are greedy.
  • Do not over rely on technical analysis

4. Every trading and investing style comes with its own set of rules and requirements. Every financial instrument comes with its own set of risks and irrationalities. Every technique for researching and planning has its own set of tools and disciplines. Every security has its own characteristics, seasons and cycles. Every human is built with his own unique risk profile and idiosyncrasies. Every market will be influenced by its own culture, habits and practices.

5. Buy on support and sell on resistance. Waves help you know whether the trend will last or whether it is at its end. Channels help you gauge the volatility and range of the stock’s gyrations. Timeframes tell you how long the gyrations may last. Patterns lower your risk by streamlining your entry. Candlestick analysis drills down the timing even more acutely. Breakouts are good indicators for entries and exits and must always be supported by volumes. Therefore divergence is not a key risk factor. Indicators and oscillators tell when the trade is getting risky and whether it is time to exit.

So, the important technical risk indicators are:

  • Support and resistance
  • Identify waves
  • Use channels
  • Know the time frames
  • Wait for patterns
  • Confirm breakouts
  • Candlestick reliability
  • Consistent/increasing volumes
  • Watch for price/volume divergence
  • Watch the indicators/oscillators

6. In trading, you have to be disciplined and follow the rules. Ten rules worth following are:

  • Trade only when there is something to trade.
  • Never trade without reason, strategy and targets(RST).
  • Never trade something you did not research yourself.
  • Never buy the high.
  • Never sell/short the low.
  • Buy on supports.
  • Sell/short on resistance.
  • Never trade in No Man’s Land( between support and resistance).
  • Always wait for your set up.
  • Never break these rules.

7. Use both time targets and price targets.

8. Ten levels of economic risk are:

  • Monetary/rate cycle: In consumer based economy, market rallies as rates increase. In import based economy, market rallies as rates decrease.
  • Currency trends: Movement of US dollar produces counter trend in commodities market. Equity movements are more related to monetary rates.
  • Commodity sentiment: Commodity prices signal inflation which is worse for equity prices.
  • Market season/cycles: November-January rallies. February stalls. March and April complete the six best months in the year. May and June tend to sell off. July is volatile. August, September and October are usually bearish.
  • Inventory/production data: If production is high and inventory levels are low, the market rallies. Monitor the services/manufacturing PMI( Purchasing Manager’s Index). If PMI is more than 50, then it is a good sign.
  • Inflation and economic data: Low stable inflation is good. High inflation or deflation is not good. Low unemployment is good.
  • Bond rates and yield curve: Decreasing rates are good for equity while increasing rates are bad. Flattening or inverted yield curves are bad.
  • Consumer sentiment: Consumers need to spend adequately for the economy to grow. Underspending or overspending is bad.
  • Housing data: Increased housing construction is good.
  • GDP: GDP growth is good.

9. The Fed Fund rate movement does not correlate with market movement. The bond rates are more correlated. Gold prices are also not correlated to market movement.

10. Three defensive approaches in trading are:

  • Risk management
  • Financial management
  • Psychological management

Risk management means:

  • Never buy the high.
  • Never sell the low.
  • Lose as little as you can and make as much as is allowed.

Financial management means:

  • Never add more risk to higher risk. This means that you should buy less as the price increases and more as the price decreases. This can be used for averaging up, averaging down, profit taking, risk reduction, position sizing, etc. This is called the pyramid system.
  • Trade in multiple lots so that you can add or remove positions easily.
  • Have a stop for the last part of your holdings.

Psychological management means:

  • Only trade because you have a trade. Never trade because you have to trade.
  • Who you really are is how you will be trading. Your trading results reflect who you really are.
  • What you believe in often proves to be contrary to the true way, distorted as it is by tendencies to favour your own thoughts and views.
  • You must practice day by day and hour by hour.

11. Eight values for success in trading and life are:

  • Respect
  • Harmony
  • Balance
  • Experience
  • Protection
  • Happiness
  • Wisdom
  • Passion

15. Be humble. Be passionate. Have belief. These three are very important for success in any pursuit.


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