Equities Stock market and finance: Trader skills for would-be investors

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Text comes from: Trader-Kompetenzen: Verhalten erkennen, Fehler vermeiden, Trading verbessern (2016) from Stefan Sillmann & John O'Donnell, published by Münchener Verlagsgruppe (MVG), Reprints by friendly permission of the publisher.
Copyright:  Images by Stefan Sillmann & John O'Donnell.

Anyone who wants to be successful on the stock exchange should have trader skills. But how do you best acquire them?

Equities Stock market and finance: Trader skills for would-be investors

Here writes for you:


Stefan Sillmann & John O'Donnell are traders and investment bankers.


From the author:


This is how financial coaching works

For a few years now, we've been training and coaching people who want to make money on the stock market. These traders all have something in common. You want to make money quickly and easily. And it is precisely with this attitude that they come to us. You can imagine how big the disappointment is when you get this tooth pulled right at the beginning. In principle, it is also quick and easy, but only if you are very lucky and already have a lot of money. Those who bet on luck lose their money relatively quickly when trading and / or have decided to play the lottery. We have packed all of our experiences into these trainings and coachings.

We thought of a lot of things that at first glance seem "completely normal", such as checking my "back-up system" in preparation for a morning trading day. They say it goes without saying! It just isn't. And since we speak from our own experience, we have at least tried to think of everything. Even if you sometimes only notice the second glance Sense recognizes a certain point on our checklists ... All points, strategies and ideas ultimately only have the purpose of avoiding errors. Because if we have learned one thing as traders, coaches and trainers, it is this: A mistake means a loss. Very easily. Not only when trading, by the way. Just recently I was talking to a professional poker player, coach and trainer. We exchanged our experiences on the subject of risk management. What are the similarities between poker and trading?

Gamer or Trader?

Lo and behold, we are not that far apart. Both activities are externally referred to as "gambling". But in reality, and from a professional point of view, both activities have absolutely nothing to do with gambling. In both cases it means: I cannot influence the market (or the cards) and certainly not manage it, only myself. In both cases there is something that "excites" the participants. It's about winning! And as mentioned above, too many rely solely on luck to do this. Or better yet, they blame their failure on a lack of luck. In addition, both are supposedly easy to understand. Trading means "buying cheap - selling high". All right, understood. The implementation is unfortunately not that easy, otherwise anyone could do it. In fact, as a trader, you have a 50/50 chance of being right with your decision at any moment. In the markets you only have two movements, stronger or weaker. That's why the temptation is so great to always start right away. A professional poker player also relies on probabilities, but assesses his "market" through observation and analysis before acting.

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If the trader were to act in the same way, he would first have to analyze his personal behavior, then his market, and then list his options so that he can finally make a decision. We have learned that much of the losses traders make in the market are not due to a lack of luck, but rather to improper personal behavior. The essence of these thoughts and experiences is that in both poker and trading, only those who, on the one hand, minimize their own mistakes and, on the other hand, carry out more good and therefore profitable actions will actually win. How does it work and how do you get there? It's actually very simple: you analyze your own behavior in certain situations. How did I behave? What did i think What did i feel Where does this feeling come from? This analysis should lead to a self-diagnosis that gives you clarity about certain thought patterns and the emotional life that goes with them. And of course what the consequences are for your trading. Motto: danger recognized - danger averted! This is not witchcraft, nor have we created anything new. Every professional regularly reviews his own behavior with the aim of improving himself.

How to acquire trading skills

No matter where you look, business, sport, medicine, aviation, fire services, disaster control. Professionals all have one thing in common: They constantly check and optimize their own behavior and train their skills every day in order to get better. And that is exactly the case for trading. The traders who have been in the market for a long time keep looking to see how they can improve. Here is just a small example from forex trading. Electronic trading systems were introduced a good 25 years ago. Until then, you could rely on your hearing and feeling. Business was done over the phone and over loudspeakers with brokers from all over the world. We heard from the noise level when something was moving in the market. We felt the tension in the silence just before important labor market data was announced. And then the market exploded. Everyone was shouting, nobody really knew where the market was right now, and real market makers were setting prices at which they were buying and selling at the same time to provide the market with liquidity. Then the machines came and we heard less and less. We looked at the screen and watched the numbers move. One important factor, namely hearing and the emotions associated with it, was simply turned off.

What have we done? The chart technique, which until then had been treated rather negatively and was given a smile by many, came more into focus. We tried again and again to read the market based on certain parameters. AND we had to learn to ignore or control all the feelings that were previously an important factor and indicator. We took positions "from the gut" and learned to manage them with our heads. We want to clarify and explain this process. With this we want to create a work that should facilitate entry into professional action. And we also want to offer seasoned professionals the opportunity to question whether they can still improve their behavior. Because at the very highest level, the one who makes the fewest mistakes "wins" in the end ... One more thing: We will write here in the you-form that is common in retail and also use the male version. We are of course addressing both genders. We also use a relatively simple and understandable style of speech, as is usual with retailers. So please do not expect highly scientific formulations, but rather an open and clear form of communication. When it says "WE" I always mean us,

Checklist for wannabe traders: Understand your own behavior

Are you or would you like to be or become a trader? Then you should first learn to assess yourself correctly.

  • You are a beginner, professionally or institutionally active, private, gamer
  • You are active in all asset classes: currencies, interest rates, commodities, securities, bonds, stocks, derivatives, options, certificates, etc.
  • You are a short- and medium-term investor who would like to get an overview of your personal investment behavior
  • You are an investor who occasionally wants to take advantage of market characteristics with short-term positions
  • You are an investor who wants to follow another »guru« (social trading) and first checks what exactly this guru is doing and how he is doing it
  • You are an investor who wants to compare the "gurus" with one another.
  • You are an investor who wants to or has to monitor the activities and behavior of your "investments" and, if necessary, intervene.
  • You are a controller who wants a general understanding of markets and wants to learn more about traders' behavior and their trading decisions
  • You are a trader who oversees the individual risk and money management of traders.
  • You are someone interested in psychology in financial markets (behavioral finance)
  • You are someone who wants to understand the consequences of this for personal trading behavior
  • You are someone looking for solutions to optimize this trading behavior

We want to give impulses and stimulate thought about how you can optimize your individual trading style and what you should pay attention to. Every trading strategy, however good it may be, at some point - for whatever reason - can no longer be used or implemented. Markets change, conditions change, you change. Here, we want you as a trader to maintain your mental flexibility and ideally not lapse into the mode »I've always done it this way«.

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How to continuously improve your strategy

It's not about throwing your strategies overboard after every failed trade. We want you to thoroughly review your trades and / or your strategy based on predefined criteria and only then optimize them if necessary. Henry Ford once said: "Whoever does what he is already able to do, always remains what he already is!" A little transformed and interpreted in our business, this means: "Whoever does the same shouldn't be surprised if he always gets the same results. "

The financial markets ensure every day that this wisdom has a special meaning. Even if traders, investors and investors always want to "understand" the markets at least once, there is always a plausible explanation for a certain movement only in retrospect, during the analysis. One of my first bosses once brought the astute pun: "You are always smarter afterwards!" At the end of the day, however, despite all the best wishes, it remains: "You are only as good as your last trade." This is especially true in the financial markets Wisdom, because there is probably no other market in which changes can make or lose so much money so quickly.

The trading colors game

Let's start with a little exercise - it is also the cover picture, by the way. It should playfully help you learn more about you. Or ask those around you who have already played a "game" with you. Playing very often reveals the true character of a personality. Especially when you're losing. That is why we want to start with this little "self-experiment" right from the start. Back then, as young traders, we were carefully introduced to the subject of trading with this game. Our bosses wanted to know what goals we are pursuing and how we are implementing strategy and tactics in a playful atmosphere. The conclusions that were then drawn behind closed doors gave indications of possible areas of application on a trading floor. However, we didn't know that at first. We should just "play".

And this is how the game works

Imagine you have a capital of 10.000 euros, that is your "play money". You decide how much you bet per round. Whether 100 or 10.000 does not matter at first. Please don't think too much here, be spontaneous because it's just a game.

Our playground is the market, and this is represented here by colored playing figures or cards. At that time we didn't use the classic little characters of Mensch-ärgere-dich-nicht. Each figure represents a negative or positive multiplier that corresponds to a specific market change. We play with five colors and there are thirteen pieces in total. The division of the colors and the number of figures per color are listed in the table below. In the third column you can also see the respective positive or negative change in the capital employed (KE) for each color.

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Capital input: EUR 1.000 Alternative 1: A figure in the color »beige« is drawn, which corresponds to a change of +2 times the capital input (KE). Your new total capital is 12.000 euros. Alternative 2: A figure of the color »green« is drawn, which corresponds to a change of –2 times the capital employed (KE). Your new total capital amounts to 8.000 euros.

The sample table is almost self-explanatory, but we want to make sure that the "principles" of our game are really clear. In the first round you bet an amount of 2.000 euros. Green is drawn, which corresponds to a change of -2 times the capital employed (KE), i.e. a loss of 4.000 euros. Your new capital amount (total) is only 6.000 euros. Now be a little more careful and bet only 1.000 euros in the next round. Black is drawn. +1 times the stake of 1.000 euros corresponds to a change of 0. Your capital is retained. In the next round you bet 1.000 euros again, beige is drawn. +2 times the capital employed corresponds to a profit of 2.000 euros. Your new total capital is now 8.000 euros. Having become brave, you bet 2.000 euros again for the next "trade". The color yellow corresponds to a loss of -5 times your capital investment (KE), i.e. 10.000 euros. Since you only had 8.000 euros in capital, your broker (bank) now demands an additional payment of 2.000 euros. Ergo, you are ready for today's trading day (FFT = finished for today).

Anyone who thinks now that you couldn't lose more than your total capital is only partially true. Today, many brokers offer their customers to act on the markets with a so-called leverage, which means x times their share capital. We call this "leverage" in our technical jargon. Quite often you will find this when trading forex. It allows you to trade larger and more "attractive" amounts. Mostly a fallacy and really only for real professionals with at least ten years of trading experience.

Start the game

Let's start with the Trading Colors Game. Now you should take a position. Bet an amount (between 1 and 10.000) based on your "market expectation". Which color do you think will be drawn first? After you have wagered your amount, a color is drawn blindly and purely at random (at the end of each chapter and between the checklists). In our game we assume that there are no good predictions about the market development, but only probabilities of which color could be drawn. From our point of view, this comes closest to the real market! Now keep your trading diary independently and responsibly during the "game". Professionals also refer to this as a dealer relay. Aim, you should be able to keep an eye on your position at all times. Multiply your stake with the amount of the color drawn and now enter the "data" in your trading diary. As soon as the line is completed, bet the next amount.

After all trades are done, how are you going to end the day? Were your "paper trades" successful? Or were you "finished for today" after the sixth move? What can you learn from this? Certainly you cannot rule the market. Nobody can turn a few pages to see what the market will be like in two days or two hours or sometimes two minutes. You can only control yourself! Your actions and your thinking. Based on your behavior in this game, one can draw pretty good conclusions about how you would behave in an emergency and with real money. It provides information about your personality. It shows how you deal with the subject of »risk« and »money«. How you act when you're on the winning side and how you react when things don't go well.

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What does the game say about you?

If you are now thinking: "Well, it was just a game, in reality everything looks very different ...", our experience from many coaching and training sessions shows that this is not the case. In most cases there is more truth behind the playful behavior than the player would like to admit to himself. However, the greater the awareness of how strongly your personality traits influence your decision-making.

There are different personalities and their individual characteristics that influence trading behavior. It is our goal that you know from the start what your personal pitfalls can be. If you already know them, you will at least be able to rule out trading losses for these reasons. As I said, you cannot influence the market, only yourself. We know how annoying it is when you know exactly what mistake you made after a loss. It is even worse not to have learned anything from this mistake and to make it a second time. With the help of your journal, you will (hopefully) make each mistake only once!

Lose more money than you have?

The question arises as to whether you can lose more with just one trade than you have in your trading account ... I have a very good example here from January 2015: The customer of a foreign exchange broker has 30.000 euros trading -Capital deposited into a trading account. According to the agreement with the broker, he may enter into currency positions with a leverage of 100. He could actually take a position worth 3.000.000 euros. Let's assume that he did not bet everything, but bought with a trading capital of 10.000 euros and a leverage of 100 euros against Swiss francs (CHF) at a rate of 1,2100. This means that he has bought a nominal amount of EUR 1.000.000 (100 * 10.000) through the lever and sold CHF 1.210.000. His goal: a short-term rise in the EUR / CHF rate and thus a nice price gain.

In order to minimize a possible loss, the customer has given his broker an order to close the position at a price of 1,1990 (stop / loss) if the EUR / CHF price trades at 1,1990 or lower. This minimizes his risk of loss to CHF 11.000 (1.000.000 * a loss of CHF 0,0110 pips), which roughly corresponds to a loss of around EUR 9.200. The customer takes his profit at a price of 1,2350, which corresponds to a profit of 25.000 CHF. In January 2015, however, something extraordinary happened on the market, and the exchange rate of the euro against the Swiss franc collapsed inexorably. In this case, the SNB decided not to support the EUR / CHF exchange rate at 1,2000 in the future. But since it had already done this for many years and therefore (almost) everyone expected that this will also be the case in the future, it literally caught the market on the wrong foot. Every market participant who had a long position in EUR / CHF tried to close out this position. Suddenly there were only sellers and nobody who would have been willing to act as buyers. Since no one knew how low the EUR / CHF exchange rate could end up falling, it first plummeted.

The broker mentioned above was of course unable to close out his client's position at the desired rate (1,1990). The next really tradable price was only near the daily low, at 0,8750. Here the broker found a buyer and finally closed the position. The 1.000.000 euros invested were now only worth CHF 875.000, which corresponds to a loss of CHF 335.000. At the current new price level, these CHF 335.000 correspond to a value of just over 382.000 euros (loss). The broker informed his client of this trading loss and asked for the account to be balanced. However, since the customer had "only" deposited 30.000 euros into his trading account, the broker now asked for an "additional payment" of a little over 300.000 euros to balance the account ... Annoying or hara-kiri? Now just imagine if this customer had traded with the whole 30.000 euros and a leverage of 100. There were rumors of such trades in the market and some brokers who got into serious trouble because their customers could not afford these horrific additional payments.

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