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Quest for the Psychology behind Trading Effectively...

  • Post #1
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  • First Post: Edited Sep 2, 2011 4:32am Jun 16, 2011 3:58pm | Edited Sep 2, 2011 4:32am
Learn as much as you want about the markets, economic fundamentals, technical analysis, etc. Become a finely tuned machine for picking the exact turning point of a trend 9 times out of 10, but if you hold losers too long and cut winners too quickly then none of it matters...

The main focus of this discussion will be the psychology behind trading effectively, ie. cutting losers and riding winners, not the other way around. We hear it a million times (usually alongside "the trend is your friend"), fine ok, we know what we have to do, but how do we do it exactly? I challenge you to find an easy answer to this question, anywhere...

99% of traders have to overcome this mental blockage at some point or another, (that is if they're going to survive in this business for the long term), so don't be shy, if you can just share your past experiences or if you've been successful in your quest, what tips, tricks or resources can you share?

Lots more to follow...
Areas that I want to explore in this thread:

Trade management psychology

Revenge trading, going full tilt

Trade emotion management

When to hold and when to fold

Money management, pre-defining risk, limit and stop loss orders (hard stops, trailing and time stops)

This list is so far just off the top of my head and is by no means exhaustive, I welcome anyone and everyone to brainstorm for relevant sub topics...

Lots more to come tomorrow...
There is a theoretical saying: trend is your friend. But in reality there is another saying: if you go with trend then trend will end and if you go against trend then the trend will continue.
Quoting FibbinArchie
Learn as much as you want about the markets, economic fundamentals, technical analysis, etc. Become a finely tuned machine for picking the exact turning point of a trend 9 times out of 10, but if you hold losers too long and cut winners too quickly then none of it matters...

The main focus of this discussion will be the psychology behind trading effectively, ie. cutting losers and riding winners, not the other way around. We hear it a million times (usually alongside "the trend is your friend"), fine ok, we know what we have to do, but how...
Lovely post.

Must have totally missed this thread from a few weeks ago. No surprise that it didn't pick up any momentum either (it's not discussing entry signals ).

Regarding what Fibbin is saying, I agree with him 100%. It's mostly the individual that needs to be "optimized" and not the strategy.

There's a an enormously high probability that a trader, with over 2 (or so) years of experience, is losing money due to his psychology (and not his method).

I don't believe there is any shortcut to circumvent dealing with the "self" issue, either. I think it takes most a very LONG time to get a grip on the ego. This is a very difficult process which forces the participant to look at some seriously intimate aspects of themselves.

I know, it sounds fluffy but that's been my experience, and also what I have deduced from a lot of the people posting at FF. We've got some great system ideas, knowledgeable traders, and information all over this forum... yet, it's always the same thing - a lot of head scratching frustration.

What's that you say? "FF mostly contains misinformation and false prophets" - and that's why you blew out your last 3 accounts. I don't think so. Accounts always get blown out for the same reasons:

1. Over leveraging (you can bundle this with over trading)
2. Poor money management - which is a not so distant cousin of over leveraging.
3. Maybe we can sprinkle some R:R ratio on here as well

Point is, most traders know all this stuff early on, and yet it still doesn't make much difference.

Looks like I've typed a bunch of shit and still haven't added any value to the thread. Here goes -

1. Tiny positions (realistic expectations of gains)
2. Remove yourself from the charts when trades are open (set text alerts to let you know when you hit or miss)

I think those 2 pointers should help eliminate some of the psychological backlash... or not. They've helped me over the years.

Seriously though... the system/strategy fails much less frequently than the trader (due to psychology, or beliefs, ego, etc.)
Quoting mr.marketz
Lovely post.

Must have totally missed this thread from a few weeks ago. No surprise that it didn't pick up any momentum either (it's not discussing entry signals ).

Regarding what Fibbin is saying, I agree with him 100%. It's mostly the individual that needs to be "optimized" and not the strategy.

There's a an enormously high probability that a trader, with over 2 (or so) years of experience, is losing money due to his psychology (and not his method).

I don't believe there is any shortcut to circumvent dealing with the "self"...
bumpety bump...

thanks for your input so far guys...
pyschology is a real failing point for me, and the reason why i havent got as far as id like in forex is due to any one of the following:

1) not admitting your wrong, ie, ego, so u end up holding losers till u get a margin call
2) being way too fearful of the profit gained and exiting too early
3) over trading, jumping in without a plan
4) revenge trading, jumping in without a plan, especially after a loss..

The main issues i have is the inability to admit im wrong, and the inability to take a mild loss, waiting till it turns into a major loss...starting from a small pot and trying to turn it into a sustainable way of life seems wonderful on paper and you can plan the timeline, but knowing that being sensible will take 6 months to a year to change your life, or be totally rash and letting the casino gambling attitude means you're back at square one very quickly...

so i definitely need pyschology tips
Quoting monkey@forex
pyschology is a real failing point for me, and the reason why i havent got as far as id like in forex is due to any one of the following:

1) not admitting your wrong, ie, ego, so u end up holding losers till u get a margin call
2) being way too fearful of the profit gained and exiting too early
3) over trading, jumping in without a plan
4) revenge trading, jumping in without a plan, especially after a loss..

The main issues i have is the inability to admit im wrong, and the inability to take a mild loss, waiting till it turns into a major loss...starting...
good man this is all stuff that most if not all traders have experienced and can relate to..

i think tho' that many are embarrassed to admit to it, tho' i'll freely admit to be guilty (at one time or another and some of them still) of all of the points you've raised..

of course admitting it (at least to yourself) is the first step in overcoming it.

hopefully we can get a few more on board and then try to sort out a road map for working through all of this...
well, as long as you care about the money, the market's gonna take it, that's what it's for anyway, to take from the greedy, the fearful, the stupid, like moths to flames they keep coming, supply & demand my ass
Invincibility lies in the defence, the possibility of victory in the attack
Quoting silverheat
well, as long as you care about the money, the market's gonna take it, that's what it's for anyway, to take from the greedy, the fearful, the stupid, like moths to flames they keep coming, supply & demand my ass
hmm, interesting, very interesting and you may well have nailed the root of it... one solution would be to keep your risk per trade so small as a percentage of overall account size that actually it doesn't matter if the trade is a winner or a loser...

i think that the difficulty may arise in the patience and discipline required to maintain such a small risk per trade...
I'd say that it depends upon the specific nature of one's problems. For example: fear of missing opportunities, fear of losing profit gained thus far in a trade, fear of being wrong vs fear of losing money, fear of pulling the trigger, etc. Most psychological problems can be identified with simple, honest self-analysis. For example, trading demo can help pinpoint whether a trader's fear lies in the area of failure vs actually losing money.

I consider the following to be absolute essentials (at least for me, personally):

1. Have a clearly defined strategy/plan. Otherwise your entries (and exits) are nothing more than guesswork.

2. If the strategy isn't proven, your confidence will be too easily eroded. Having absolute belief in your strategy can come only from time and experience: watching profits outweigh losses over time. If you have any doubts, either go back to demo until your confidence is completely restored, or you'll find yourself donating money to the market needlessly ("scared money never wins"). I'd wager that many people who say that psychology is their biggest problem don't actually have a proven methodological edge.

3. Know your pain threshold, position size-wise, and to stay well within it. For example, I can trade at $1 per pip as if it were demo, but at $20 per pip (2 full lots) I find that the stress quickly challenges my emotions.

4. Know your risk (worst case outcome) before you pull the trigger. If that risk is unacceptable, either reduce your position size, or don't take the trade.

5. Virtually all of my own problems are exit related. Hence I have simple EAs that exit my trades for me, saving me both time and worry, and ensuring that my exits are performed objectively and emotionlessly. Even without an EA it's possible to set a SL/TP/trailing SL and walk away; there's no advantage in exiting manually, unless you can forecast imminent price behavior with greater accuracy as a trade unfolds.

6. It's important to understand statistical validity, and the role of randomness over a series of independent (trade) outcomes. If you experience X consecutive losses, for example, is this within the bounds of acceptable statistical fluctuation, or is it time to go back to the drawing board and re-assess (and if necessary, overhaul) your strategy? Hence you need to decide beforehand what is acceptable, and what level of equity drawdown you're willing to allow, before starting over.
Just like the experience of a lot of others, my trading went from night to day when I jumped from the 3-minute chart to the Daily, and has improved even more now that I'm taking signals from the Weekly chart. This resolved, for me, every single one of the psychological issues you listed, plus some others, notably that the stress from daytrading was negatively changing my personality and now I'm back to (relative) normal.

If I have a losing trade it's easier to shrug off, both because I'm distanced from it so I'm not emotionally wrapped-up, and because my leverage is low - my profits come more from pip gain than from position size.
Quoting FibbinArchie
Learn as much as you want about the markets, economic fundamentals, technical analysis, etc. Become a finely tuned machine for picking the exact turning point of a trend 9 times out of 10, but if you hold losers too long and cut winners too quickly then none of it matters...

The main focus of this discussion will be the psychology behind trading effectively, ie. cutting losers and riding winners, not the other way around. We hear it a million times (usually alongside "the trend is your friend"), fine ok, we know what we have to do, but how...
mark
hanover wrote:

"I'd wager that many people who say that psychology is their biggest problem don't actually have a proven methodological edge."

I agree with that, only want to mention, in my opinion psychlogy should be seen as part of the strategy not something seperate.

if someone has a proven strategy this person should know that this strategy gives only an edge of 50%, because knowbody can predict the market with a strategy, a strategy is only a reacting methodology to the randomness and tricks of the market.
(The emprovement of the 50% edge is done just by stop loss orders.)

e.g.
if you think, the situation is crystal-clear and it's time to leverage up, when your first position is just at BE, you suppress parts of your own strategy, thats why the risk to lose is much higher when leveraging up in this situation

this means: if you have the feeling to leverage up, you can use this as a hint - whithin your strategy - that your first position might be in danger already and the last thing to do is to take more initial risk.
/ ... clarifying decisions ... /
A lot of good points made in previous posts. You only get to know who you are when you become a trader.It can expose some nasties as well as some hidden gems.

The upshot is that you trade to your strengths and work hard at those weaknesses or simply avoid them.

I am 10 years into trading now so I have been around the block so to speak. Took me a while to find what suited my personality..........concentrated on just two or three markets (big moving markets) and used limit orders to take profits to curb any greed or wishful thinking on my part.

Stuck to one approach and mastered it (in my case pure price action and those psychological price points in the markets). So confidence increased and competence was achieved. Settled on taking two trades per day and not worrying about what I had missed. I have strict rules for entry/exit/stop loss and these never change.

Once the excitement/fear/greed dies down trading becomes a boring routine. Also important to trade to your own level of competence as your trading journey develops..........you can waste a lot of time and energy trying to trade like someone else. Success is in finding our own trading niche within a workable strategy and then you can capitalize and plan to make xxx pips per day or xxx pips per month or whatever your own plan says.

It is human nature to make something simple more complicated borne out by the many strange and wierd threads on FF. Keep it all simple and stay with the simple approach as you move forward.

I have said elsewhere on FF.........if you cannot describe your approach in a couple of sentences it is too complicated.

I have also seen it said by someone on FF that he trades for 100 pips per trade but his market tends to only move 85 pips so he ends up losing out or gets a BE outcome. The solution for him is to trade for 75 to 80 pips per trade on his chosen market or find a market that moves in excess of 100 pips. The solution is simple but he perseveres to get his 100 pips in a market that is unlikely to accommodate his plan or desire so he will fail.

Trading is close to 100% mindset and the edge is with the trader.
No room for ego or emotion. He/she who adapts succeeds.
He/she who searches for some secret code searches forever.
If you cannot follow a plan/set of workable rules then trading is not for you and you are wasting your time and money.


makingpips
  • Post #15
  • Quote
  • Edited 10:49am Aug 28, 2011 7:46am | Edited 10:49am
saw this and it sums up what i'm driving at...

Inserted Video

Quoting FibbinArchie
saw this and it sums up what i'm driving at...
Purposeful thread... adding my 2c to the jar...

Losers focus on how much they can win, winners focus on how much they can lose. This is the simple truth that best describes my trading journey up to this moment...

My trading still has a lot of room for improvements, but for the time being I'm fortunate enough to be in profit using both 100% mechanic and discretionary trading... the constant I find in both styles is a set of rock solid capital preservation fail-safes (eg, if daily loss equals X%account then I'm closing the books for the day; irrespective of hit ratio%, a trade is only a trade as long as R:R = 1:1+; when I'm 'feeling uncomfortable' with taking a trade for some reason my position is having no position at all, etc).
"To hold, you must first open your hand. Let go." - Lao Tzu
  • Post #17
  • Quote
  • Edited 1:02pm Aug 28, 2011 12:49pm | Edited 1:02pm
Quoting vox dei
winners focus on how much they can lose.
this is very much a recurrent theme in the testimony of many consistently profitable traders and I think should be a key cornerstone of any good trading plan or strategy.

as the old chestnut goes; small winners and small losers, large winners but no large losers equates to success. therefore it is critical in my opinion to develop a psychological framework for trading that totally obliterates the holding losers syndrome.. however once again and especially for the newbie, this is easier said than done...
Quoting FibbinArchie
...as the old chestnut goes; small winners and small losers, ...
...I can't quite place the quote but it goes something like: "Trading is a losing game, it all depends on how well you lose."

I would say that is the most important thing a newbie must learn: how to lose. If you can't cut your losers off, close out your trades when you hit that pre-determined "line in the sand" drawdown of equity - then you will ultimately fail. In volatile markets with heavy leverage failure will come quickly and repetitively.

Is it necessary for a trader to live through "trial by fire" - necessaary to understand what it is to lose painfully, blow out accounts - before he can get a clue and control his losses? Maybe, I don't know - some people never learn, make the same mistakes over and over again until they have lost everything, until they die.

I do know that it is possible to learn to lose. Pretty simple, really: use a stop loss on every trade and never move it or add to a losing position. If you are in a losing trade, cut it off or watch it hit your sl. If you are doing this and still losing money, then your trading strategies and money management approach need refinement. Of course, the latter can be good and you may still have losing streaks, which is why capital preservation is so important.

So get over yourself and learn to lose like a man.
"If The Fool persists in his Folly he will become wise." - William Blake
Quoting The Fool
...I can't quite place the quote but it goes something like: "Trading is a losing game, it all depends on how well you lose."

I would say that is the most important thing a newbie must learn: how to lose. If you can't cut your losers off, close out your trades when you hit that pre-determined "line in the sand" drawdown of equity - then you will ultimately fail. In volatile markets with heavy leverage failure will come quickly and repetitively.

Is it necessary for a trader to live through "trial by fire" - necessaary to understand what...
Hi Fool, long time, hope you are keeping well.

Great post and I totally agree high leverage coupled with high volatility as is found in the popular spot fx pairs is a dangerous cocktail.

Every time that I have ever experienced a major dd in equity it has always been due to moving stops and averaging losing positions, so yes when the pa is telling you that you're wrong, then you just have to take your medicine.
"Let your winners run and cut your losers short" might be a bit of a cliche in this particular game of spot FX. Letting your winners run can turn winners into losers and cutting your losers short can also turn winners into losers.

I agree with the idea to the extent that I think, as a previous poster mentioned, that there is often this heavy element of fear attached to letting a profitable trade run, and dumping a position based on that particular motivation can cost you profits. But a much more precise way to put that would be, "don't allow your trading decisions to be governed by fear."

So having the right motivations, if you're opening a new trade, or closing a winning or losing trade is the key. Those "right" motivations should be based on rational analysis which ideally takes place, Entry, TP, SL, before the trade is ever placed.

In my own experience I find that fear creeps in when I'm not sufficiently prepared for a trade-when I haven't thought the matter through as thoroughly as I should have. That's when I start feeling like somebody else must know something I don't, and I'm sort of at the mercy of the market. So in this type of case, even if I've stumbled into a big winner, I'm not likely to hold on to it long enough to take advantage.

Every battle is won or lost before it is ever fought, and all of that.

I try to get myself into the habit of "analyze, set (entry, TP, SL), and forget", and then once that's done become unattached to the result. If the trade size is small compared to the equity then that becomes a whole lot easier.

2 more cents for the penny jar.
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