Trader Mentality & Psychology

Psychology is a massive part of trading IMO.
As an intraday trader with great education. Even as clear as targets and timings were, it still took a great deal of experience/effort to overcome not reacting to market makers and/or weak levels that were in the way. There are many ways to trade I guess, however, the rules of timing, liquidity are things all of us must follow. Anyway as a swing trader (albeit micro swings) getting break even, reacting to SRs/MMs are strategy killers. Trusting in process and seeing targets achieved over and over again (after reactions) was the only way for me to become comfortable trading serious money.
You can have the greatest strategy in the world but experience is what will make you great. Unless of course you were born for this. Which not many are. I certainly wasnt, I can tell you. Good news is you dont have to be a wizard, just experienced.

In order to successfully avoid the many pitfalls presented by active trading, ample time and effort must be given to the honest assessment of one’s emotional, and psychological state of being.

I agree. To trade well you need to be calm just as much you need knowledge and experience.

Just finished up Non-farms and a good week so thought I'd continue on with my Psychology & Mentality posts. If you haven't read my first post on Psychology and the Blackjack analogy, I would recommend that as this continues on similar concepts.

Trader Core Beliefs & Managing your emotions

After understanding that trading is a probability based activity, the logical next step is to truly believe in 'uncertainty'. Bear with me on this one as I know it sounds all theoretical.

So what is believing in 'uncertainty', it is that deep within yourself you accept that the market, can and will do, whatever it wants and that no matter how strong the signals, indicators, price action are suggesting it should do one thing, it could always, albeit with a small probability, do the opposite. If you think about it, the market is just a collection of a lot of people expressing their opinions. That means:

 

1. It does not know who you are or care what your position is
2. Anything can happen and you have absolutely no control over it
3. No matter how much conviction you have on your view, it takes potentially just one person with massive size to prove you wrong

How does this translate into trading? Most importantly you need to accept that if you make money, you are lucky. Sounds crazy but let's break it down. Your job as a trader is to put on good trades with edge (refer Psychology post). Your job is to put yourself into a favourable position, i.e. let's say 70% trade. Now if the 70% actually happens, great, happy days, but that occurrence has nothing to do with you. Simply, one or a group of people agreed with your view and moved the market in your favour. This reinforces the notion that outcome is irrelevant and once you've put yourself into a favourable position, your job is done.

If you truly believe in 'uncertainty' then it is now easy to avoid all of the bad trading emotions, as opposed to having to manage them.

Fear

1. Fear stems from being wrong and the fear of losing more money
2. If you accept the concept of uncertainty then you would accept that unfavourable outcomes are an inherent part of a probablity based activity and not take them personally nor let it affect your confidence.
3. As per BlackJack analogy, you've simply busted as a dealer, next hand, keep dealing as per usual.

Greed / Overconfidence

1. This can happen if you go through a period where even regardless of the quality of the trade, all your trades tend to have favourable outcomes but issues will occur if you stay too long in a state of euphoria, your trade discipline and risk management starts lacking
2. To avoid this, understand favourable outcomes is you being lucky, of course if they were good trades with edge then you've done a good job but this is a very different mindset to 'everything I touch turns to gold'.
3. I will refer to this later but you need to pride/reward yourself for doing good trades, not favourable outcomes

Ego / Stubbornness

1. This is likely the single biggest killer of trading careers
2. This occurs when you have too much conviction in your market reading and directional view
3. The solution is to truly believe in uncertainty, no matter how strong the signal is, how much research you've done, how convinced you are of that you are 'right', there is always a chance it can do the opposite. You accept that unfortunately maybe the 5% event has just happened.

Good Practices

To reinforce good mentality and psychology you have to reward/pride yourself in a way that is consistent with the principle - otherwise it would encourage wrong behaviour.

Most importantly you need to either reward or pride yourself on good trades not good outcomes. Remember that money/trading account is perishable but mastery is not. If your pride is based on your account balance, a large hit could cripple your trading abilities which would severely affect your ability to 'climb out of the hole'. But you are still the same trader.

This can be found in your language to yourself or other traders as well. I leave you with examples of different type of mental language (examples I've taken from some of the firm's junior trader's review)

Trader A: I'm up $3k today, awesome day! I knew we were going bid today, I'm right.
Trader B: I’ve made 4 good trades today, all of them had good edge and exits. 3 worked out, 1 was unfortunate as the market turned as I got in, there wasn’t much I could improve about that trade. I missed 2 other good trades though, I chickened out as I didn’t want to be wrong, I need to work on this mental block tomorrow.

Who do you think is a more profitable trader at the firm?

Patience is also imperative.

The philosophy of trade and the habit of observing not only money management, but also the rules of personal psychology (being calm, being confident, being able to take losses and not losing control from victories, etc.) is hard work. Only a fairly experienced trader can trade without emotion.
It is human nature to look guilty. For the trader who lost, the market or the broker acts guilty. It is very important to understand that the only thing that led you to failure is the wrong calculation. Probably just a mathematical mistake.

Cool thread @minter, im subscribed

Thanks for your thread Minter. Insightful.

It's been a very busy month and a good one at that. In terms of 'classroom' material I've already posted all that I teach from a psychology / mentality point of view, as mentioned earlier, I trade a very different market (AUS/US bond futures for those curious) and so my trading strategies and tactics are not very applicable at all to the FX market. If anyone has any psychology / mentality questions I'd be happy to help.

Not sure why I started another thread when I could've just put this link in here (don't know how to delete a thread neither).

The link below is an interview which reinforces the psychology and mentality concepts I've mentioned as well as various breakthroughs, lessons and other topics related to a trading career. There are some discussion regarding specific bond trading strategies which you can skip if irrelevant to you as well as the last 20 mins which talks about Minter Capital as a firm.

So true, your analogy is totally correct and I’ve noticed this with some of my friend, who get excited by the idea of trading, they think that they can make good money in a few days and then they are disappointed and give up. It takes a lot of efforts to work on good and quality trading rather than enjoy fast wins.

Trading the forex or other markets doesn’t have anything with pain, psychology or improvement: the only law is: if you know, you win, if not you lose!

You who have already lost everything and are looking for a way to get your money back, stay away from all the EA’s, indicators, softwares as Metatrader, Jigsaw, Sierra, Bookmap and all other. Understanding the options on the futures is the only thing that will help you efficiently. You ‘ll never find anything to help you on forex website.

Finally, think about that: universal access to financial markets is a huge opportunity to get rip off millions of naive people! YOU JUST GIVE LIQUIDITY TO THE MARKET MAKERS VIA YOUR BOKER !