If you’ve read my book, Safe Strategies for Financial Freedom, you should understand that we are still at the early stages of what could be a Super Bear Market.  That bear market started in 2000 and will probably end sometime between 2015 and 2020.  And while it’s difficult to predict what the market will do in a year, we can predict that if you have a long stock position that you just hold, you’ll lose much of those assets by the time this bear is finished with you.

How do we know this occurs?  Basically in the last 200 years, the market has gone through such cycles, repeatedly.  Why should it be different now?  Furthermore, the cycles tend to have a huge psychological component.  At the end of the last secular bull market in 1999, everyone was playing the stock market.  Everyone was a a stock market genius—the waiter at your restaurant, the bartender at the same restaurant, and even the taxicab driver who picked you up.

However, you might be thinking that we already had three rough years in the stock market from 2000-2002, so perhaps the market is now on its way to recovery.  No, that’s not the case at all.  This bear market will be over when everyone is totally afraid of the stock market.  Here’s what you’ll probably see:

1. many mutual funds will close down because they’ve lost heavily;
2. pension funds will no longer be allowed to invest in the stock market because they consider the risk too great;
3. very few of my clients will be equity investors (i.e., they’ll all be into options or futures or Forex.); and
4. most importantly, stocks will be at all time bargain levels.  

Blue chip stocks will be paying dividends of 5-6% and have single digit price earnings ratios.  When you see that you’ll know that the bear market is over.

There is so much involved in developing peak performance, that I recommend that all traders have a business plan. We recommend that the business plan cover all of the following areas.

• Your vision.
• Your purpose.
• Your objectives.
• A thorough self-assessment of your strengths and weakness, based upon real trading logs that you collect (if you haven’t done so already).
• A thorough assessment of the big picture of the fundamentals.
• A complete understanding of your beliefs about the market.
• Procedures for getting empowering beliefs and mental states behind you.
• A documentation of your research procedure for developing new systems and determining how to analyze their effectiveness.
• Your procedures for developing and maintaining discipline.
• Your budget and cashflow systems.
• Other necessary systems such as marketing, back office record keeping, etc.
• Your worst-case contingency plan.
• System 1 – which is compatible with the big picture.
• System 2 – which is also compatible with the big picture.
• System 3 – which might come into play should the big picture change.

How do you know if you are trading well? One way obviously is to monitor the balance of your trading account, but how else can you keep track of your performance? How do you know that you can't do better and make better decisions? It is imperative that you monitor your performance and keep track of how your trading is going.

When was the last time you reviewed an old trade? What were your last three poor trading decisions and what impact did they have? If you can answer these questions, you may already have a process of reviewing past performance even if it is subconsciously. A methodical process by where you thoroughly review your past trades and even positions you considered but did not enter will allow you to learn from your mistakes, but equally, reinforce the good decisions you did make and the positive consequences those decisions had.

It is well accepted that this is a characteristic of the best traders in the world. They have a passion for their trading and will often and periodically review all of the trades that they have conducted including all the profitable and losing trades, and learn from them. At the end of the trading day or week, that does not mean for them that they stop thinking about their trading. They will always be interested in learning new ideas and looking to build upon their trading and information systems they already have in place.

Probability is very relevant to trading, and one of the main things I look for when entering trades for example, is to have a high probability of having a profitable trade. In other words, because all of my conditions have been met, I enter the trade with confidence knowing there is a fair chance of the trade resulting in a profit. As we know, there are never any certainties.

Probability has its place in money management too, specifically position sizing.

Let's set the scene. Perhaps we have a trading method that results in half of our trades being profits and the other half being losses or close to breakeven. We start with $10000 and after a few losses, our trading capital has lessened to $9400. (3 x $200 losses in successive trades).

Now, we begin to think that we are behind and need to make up the deficit so we can move forward and begin to make money. As each losing trade passes however, the money we need to make to get back to breakeven (back to the initial $10000) increases and we have less and less capital to do it with, which places pressure on us to perform.

The trap we can fall into is to increase our trade size on the back of successive losses. In the back of our mind are desperation, and the thought that we need to have a massive winner trade soon to get back on track.

Here is where probability enters the scene. As each losing trade passes, we can easily think that the chance of the next trade being a profit increases significantly. It is too easy to think this and with this in the back of our mind, we can be tempted to increase our trade size to get back to break even quickly because the chance of the next trade being another loss is not great.