Hilmy83 Trading Psychology Journal

I love trading!. I love making money and reading about other traders!. But what I love MOST about trading is that it provides me with a great understanding of human personality and behaviors. I learn a lot about myself and from other traders as well

So this is a journal to share my thoughts about trading psychology.

I will begin with a nice article

Why Do Traders Fail?
Chris Tate 21 May 2001
It has been estimated that 8 out of 10 individuals who attempt to trade make no money. A recent survey of daytraders in the US found that 75% had lost everything within two years. This is an astonishing rate of failure in any endevour, what is even more amazing is that this rate of failure has stayed remarkably constant for approximately 150 years. This is as long as records of speculation on futures exchanges have been kept. I would theorize that as long as there has been speculation that the rate of failure has been about the same.

The remarkable thing about this rate of failure among traders is that it has stayed constant. Yet consider the advances that have been made in that time. Traders have access to sophisticated computer systems with complex technical analysis packages, data can be relayed around the world in seconds, every home computer now receives information that was once the preserve of sophisticated dealing rooms. Despite these advances the majority of individuals who actively seek to trade markets fail and fail dismally. Therefore the problem must be so intrinsic to the people involved in trading as to be immune from advances in technology.

To answer the question as to why the majority of traders fail would seem to open up a Pandora's Box of reasons yet the reasons for failure are often quite simple.
When people begin to trade they follow one of two courses. The first group merely guess about the direction of whatever they are trading or they take tips from a variety of sources. As you can imagine this group do not last very long. The second group is a little more sophisticated, they embark on the quest for the Holy Grail, that one tool or indicator that will allow them never ending success in the market. Unfortunately this magic indicator does not exist and the majority of traders engage in a fruitless search for it. Such traders constantly buy new packages, spend hours scouring the internet for the latest indicator, even believing that if they change the colour of their computer screens that this will enhance their chance of success.

In reality the search for the Holy Grail or system design as it is more formally known should occupy only approximately 10% of a traders time. But for most traders they focus all their energy on system design and in particular they focus upon entry signals. Entry signals are but a small part of your trading system, in fact they are almost irrelevant. A true trading system is composed of a variety of features only one of which is entry signals. Many of you will object to my saying entry signals are irrelevant but consider the following. If you were to trade markets completely randomly that is your chance of success was only 50% and you had a 2 to 1 expectancy. That is for every dollar you lost you made two dollars you can still make a fortune trading. In fact it is reputed that the legendary group of traders known as The Turtles do almost this in fact it is reputed that their trading system is only right 30% of the time yet they are among the most successful traders in the world. If you do not believe me perform this simple exercise start will $10,000 make your first trade a 10% loss and your second trade a 20% gain repeat this exercise over and over and watch how quickly your account grows.

As you can see from this simple exercise it is not where you enter a position that determines your success. It is how much you make on average over your trading career not how many times you are right. Traders are judged on how much they make not how many times they are right, in fact being right is irrelevant to whether you make any money. Yet the majority of traders are obsessed with entry signals, each of them has a desperate need to be right. This is a sign of a trader's ego creeping into their trading and it is an early warning signal of impending doom.

System design is therefore far more than entry signals. Implicit within the mechanics of trading system design is the concept of the expectancy of your system. That is how much you make per trade versus how much you lose per trade. Any slippage you face when you place an order, this includes costs such as brokerage, stamp duty and any difference between your intended exit point and your actual exit. How often you actually get to trade, there is little point in having a system that has a huge expectancy if it only produces one trading signal per year. Finally what are your exit criteria, getting into a position is easy, it is when you get out that determines whether you make any money.

It should be obvious that system design is not a matter of looking for a magic system but rather of developing a comprehensive approach to engaging the market. Yet even with these additional features trading system design is still a minor portion of your trading armoury. The key features that determine your success are money management and psychology almost everything else is irrelevant.
I am firmly convinced that trading is a psychological and not a financial endevour. Traders focus upon system design for a variety of reasons. The first is that it is easy. All technical analysis software consists of almost nothing but entry signals and these are very easy to manipulate in the search for the ideal indicator. To illustrate how absurd this can be consider Fibonacci numbers, many traders default their indicators to reflect these numbers but in essence how is a 13 day moving average superior to a 14 day or a 12 day moving average. In doing this, traders are obsessed with what they perceive to be the secrets of the market, that somehow they must discover these secrets.

The second reason why traders concentrate upon entry signals I alluded to before, it is the need to be right. In simple terms each of us has an ego, therefore we have an emotional stake in all the decisions we make. It is difficult for us to be faced with a situation where we are wrong just as many times as we are right and this is what happens when we accept that the most common entry signals such as moving averages are right approximately less than 50% of the time. Therefore we attempt to redress this balance by looking for a system that is right all the time. Thus traders attempt to protect the fragility of their ego from the realities of trading.

The third reason traders spend so many fruitless hours on entry signals is that trying to get a perfect entry gives the illusion of control. Traders believe that somehow their entry signals give them control over the market. This has often been referred to as the lotto bias and the example often cited is that people pick numbers in a lottery based upon a variety of superstitions rather than having them picked at random by a computer when the lottery ticket is purchased. Once again such people have a need to feel that they are in control even when it is clear they are not, the chances of winning a lottery remain the same irrespective of the method used to pick the numbers. The same is true in trading your chance of success or failure is unaltered by the fact as to whether you pick the numbers for your moving averages based upon Fibonacci numbers or whether you pick them randomly.

I don't want to give the appearance that developing a trading system is irrelevant, traders do need a form of entry signal. We need to have some idea of what the prevailing trend is and what conditions to expect in the market upon entry. But to concentrate on entry signals alone is to ignore the complexity of systems and the vital importance of money management and trader psychology. Once traders begin to understand the importance of these two key elements they are on the path to being long term successful traders. Ignore these features and concentrate only on the search for the Holy Grail and you are certain to join the 8 out of 10 traders who make no money.

Ego Trading
http://www.themoneyblogs.com/investi...o-trading.html
Posted on 02/07/2007

If there's one word that costs traders the most money, I would have to say it is "ego". See, what we believe about ourselves - whether it's true or now - prevents us from seeing and acting on what the market is really telling us. Read on below for details on how to not let ego take over in your trading or click the Ego Trading header link above to learn even more.

1. Master The Internal Ego

The idea is a simple one - you must precisely recognize what is keeping you from taking your trading success to the next level. The vast majority of the time, it's your ego getting in the way. This isn't the arrogant or over-confident type of ego. Instead, it's more along the lines of a defensive, protective ego. The problem is, that kind of self-shielding ego is what prevents real learning. Let's take a closer look.

We're all human, and being human, we don't want to admit that we are wrong about a trade. The ego wants to uphold an ideal version of self that allows for only successes and not failures.Some traders lose millions of dollars trying to protect the ego's version of reality. Your goal should be to trade without ego, without personal judgment of your self worth. Trading is a business, and the businessmen who do the best are the ones who treat as such. It's not a reflection of them personally. In fact it's usually just a reflection of a mostly-mechanized trading system. In order to make money trading, your goal is to keep losses small while letting winners run. Your ego is not equipped to do that naturally, but a trading system is.

But aren't you up against traders with a ton of experience and great trading systems? Absolutely. But remember, everyone follows the same learning curve, and nothing is free. You'll have to spend time and effort to get good at this. How do you do that? Learn!

The reality is that you chose to enter each and every trade. Examine why the losing trades failed, and why the winners were successful. This can be painful, at least initially, since the ego is built to deflect blame yet accept praise (this is why we said the ego can create problems). That's a trap. If you find yourself saying "that was a good trade entry but..." then stop yourself immediately. Either everything before 'but' or after 'but' is inaccurate. If you rationalize or justify poor trades, then you'll never learn from them. This is an important reality - the ego can prevent real learning. If you can learn to accept some failure without being emotionally devastated, then you'll be a good trader. In fact it's been said that the world's top traders aren't necessarily geniuses - they're survivors. They lasted longer because they could handle their ego, and in so doing learned a great deal just by being able to stay in the game longer.

2. Defend The External Ego

So what can you do today to start managing your ego? There's not enough space here to even really begin. However, there is one characteristic that seems to separate the great traders from the average ones. The great ones realize what kind of problems that a lack of confidence can present, so they don't even risk a shattered ego. How? They keep their trading activities to themselves. While the amateur trader will often tell friends, neighbors, and total strangers about trades he may have entered, it's all too often a setup for disaster.

Call it Murphy's Law if you want, but one of the 'sure-fire' trades you just entered and told your neighbor about will turn against you soon. And like clockwork, the neighbor will ask how it panned out. You have one of two options at that point: tell the truth, or lie. You could lie to the neighbor and say the trade went fine. However, even though the neighbor may not know any better, the damage to our own ego is still a reality. Instead of acknowledging a losing position, we're forced to conceal the trade, which hurts your internal self-image.

On the other hand, you could tell the truth and own up to a bad trade, but that would negatively impact your confidence in a slightly different way. You see, our perception of how others see us has a far greater impact (for better and worse) than our perception of ourselves. It may not be fair or logical, but it's a fact nonetheless. And when we fail publicly (even at our own hands), we start to internalize and misinterpret external data, whether or not it's accurate. In other words, our damaged ego affects our judgment.

For instance, the neighbor may ask "How much did you lose?", while the trader may hear "Why didn't you use tighter stops?"

The neighbor may ask "Why did you buy it in the first place?", while the trader may hear "Can't you do adequate research?"

The neighbor may say "Better luck next time.", while the trader may hear "You have no business being in the market."

You get the idea - enough of those innocent questions, and the trader is no longer trading. Or worse, the trader has changed his or her trading strategy in an effort to salvage some confidence. And all because he opened the door to his ego!

The only real defense against such an attack is to simply not share the details of your trading with others. There's nothing wrong with telling others you trade, but in no way will detailing your trading activity enhance your return. In fact, it may potentially do the opposite. If you profess a trade position to someone else, you have made a subconscious commitment to it - maybe one you shouldn't have. If you know someone may ask you about that position later, you're more apt to hold it, even if it's a loser you'd normally get rid of.

Good day and good trading!

By not sharing your trades with friends and colleagues, you allow yourself to make mistakes free of criticism. You allow yourself to fail. You allow yourself to focus on finding better trades rather than proving someone else wrong. When you don't have to worry about protecting your psyche, you can shift the focus from defense to offense - a necessary trait for all traders.

Hey,
I think this is a great idea. Ive just had a brief ( ) stint with real money recently, and Im just beginning to comprehend what psychology has to do with real trading. Sure, Ive read Trading In The Zone, Come Into My Trading Room, etc, etc, and other articles dealing with psychological aspects. But in reality, it's totally different. Even though I find myself analysing and estimating things very well (I dont use a system so far, just discretionary trading), my execution has been ridiculous. I mean even if I have a clearly laid out action plan, when something starts to go wrong, I begin making mistakes after mistakes. Sometimes I may spend hours going over charts, looking for the perfect set up that has the highest probability of success, and yet very often I can't follow through with my plans. Have you experienced this? I guess people that apply purely mechanical systems are not so much affected by this if they simply follow their signals. However, with me, there's no signals, nothing tells me what to do. It's all up to me, and even if I know beforehand very well how to execute the trade, when it comes down to actually doing it, I often screw up. I hope to get some feedback from some of the members on this, as I find it the most important issue that's keeping me from "taking it to the next level".
Matt

Sounds like you need to develop your system. Have reason why you are buying or selling why you get out or hold.

When I say system I'm not using signals or EA's but my own set of guide lines I have outlined for each trade I take.

Use a journal offline/online be very specific so you can use this to look back to see what you did right/wrong.

Take it one day at a time a system isn't developed overnight.

when i used online journal, i did find myself more 'affected' by winners and losses. Even though I try to convince myself that this is only for analysis purposes, I can't help the feeling of being 'watched' because people do look at your journals and do comment on them. They'll say 'good job' and you feel good. And when you lose, they'll comfort you, but essentially you feel bad for some reason. I don't know, I guess it's just me. Now, I feel more confident and I can say that my trading has improved. I now look for money management techniques and learning more about trading psychology

I have to say discretionary trading is very difficult for beginners, at least it was for me. I think new traders should implement mechanical trading to develop discipline and money management techniques. Once you have that down you can implement some discretion into your trading. Discretion is more versatile, thus enable you to adjust to market conditions

my sytems is a combination of mechanical (entry) and discretion (stop/exit)

I find many are affected by stage fright. Nothing wrong with good old pen and paper

Remember trading isn't any different than pro sport you have to develop the skills to play/trade this only comes with time and dedication. Then once your ready to play you have to put your self on the feild w/ the best of the best.

"practice makes perfect"

Website with some questionaires into your trading personality

http://www.marketpsych.com/

Hey hilmy,

I very much like your idea of starting a psychology journal. So far you have presented some great stuff, and I enjoyed the trading personality test link you've posted above. Although the results were somewhat disagreeable, I believe any chance you have to examine yourself is worthwhile.

Thanks, and I will certainly be following your posts.

Best of luck,

Kevin

Thanks for answering. I realize that discretion is really difficult, but in my opinion, it's more important to know why the price moves where and how it does, than just blindly following some signals. Especially at the beginning. While mechanical trading can help you with discipline and money management implementation, it will not really teach you anything about how the market moves and behaves. (By mechanical in this case I mean not having ANY discretion in selecting your entry and exits) In fact, I think if I just use a system, I would not have such "mental" problems, but then that would not solve those problems either right? So were I then to go back to using price action/ candlesticks, etc, my problem would still persist. Having said that, I think I've spent at least 5 months back and forward testing various systems, and only then I came to the conclusion that I'd rather learn various technical analysis tools and strategies, and only after that I would create my own system that suits me.

Ok, I definitely agree with this, rather than having a purely mechanical system, I need to establish clear guidlines for each trade, and follow them meticulously. Oh and my journal is coming, it'll definitely be here, on FF. Thanks for the input

Great articles Himly! Especially the 2nd one! Man I always felt, like you, that sharing detailed results actually hurts my execution and now this article shed a complete light on why this happens.
Thanks!

I think there are two emotions that encounter the market and those are fear and greed.

And I am learning everyday to deal with them

One aspect of my system is to determine stops/exits because it is done with descretion. I look at hourly and determine the s/r levels and place my stops accordingly.

I don't have too much problem putting a s/l when I first initiate a trade. The problem comes when trades move my way. And I'm faced with having to move my s/l to protect profits and reduce risk.

The fear comes from balancing the act of staying away from the daily fluctuations while being in a trend and possibly stopped out with little profits. Greed plays a factor because I dont' want to give back all those gains. In addition, I also add positions to winning trades. Adding positions means that you run into the risk of reducing your original profit.

But I'm beginning to learn that the number one goal in trading or any business is to reduce losses/risk, THEN maximize gains. I read in statistics that many new businesses fail in the first year. I don't know what factors lead to the failure, but I assume, a lot of new business owners think a lot about how much money they can make, rather than thinkin about reducing their expenses and come out breakeven.

I feel that when you focus your time and energy focusing on the risk side of trading, you are also maximizing your gains at the same time. Sort of like killing two birds with one stone.

I guess if I take that creed of minimize losses first then maximize gains, I learn to be able to excecute my trades easily. I also feel I have to learn that trades that DOESN'T result in a loss (breakeven, small gain) is a good trade in itself...

I've thought a lot about why we use indicators in our trading. Basically the market presents a lot of information, and various books I have read claims that the human brain cannot process too many information.

So indicators are used to simplify those information. For example, ma's simplify the trend, MACD simplifies the momentum, etc. But in essence, when you are simplifying information, you are essentially throwing certain information out.

Sometimes we may use indicators as a crutch, when we can't decide what to do.

What about trendlines? Is trendline just a pattern that the human mind forms like a person who sees a certain shape when looking at clouds? Do trendlines actually have any meaning or is it just a result of a person fitting the market into what he perceive to be?

All indicators are derivatives of one thing really, and that is price. Some measure only the close, others high, low, open etc.

Dr Elder in his book 'come into my trading room' actually propose traders to 'fit' indicators in their chosen markets. That means to fit the indicator by playing with its parameters. Isn't that just the worst thing you can do?

I for one, a great proponent of s/r. Everything revolves around s/r (polarity concept). When I look at how price behave at s/r, everthing else just seem to be coincindental (i.e peaks and bottoms of trendlines).

anyways..good trading

I believe it is about balance, just like in everything else. If one is confused, has too many choices, when trading a naked chart then he throws out a bunch of indicators (the process of selecting and interpreting the indicators is not important here). Usually at this point the trader will fall on the other side, there are so many indicators and rules that again they are confused by confirmations and confirmations to confirmations etc. And finally the other party of which a trader has a few rules, a few indicators (maybe) thus a simpler and more coehrent decision process.

About trendlines, you pointed out a very interesting remark. Is the trendline just a pattern of the human mind? I would say yes, because it is a line! A lesser known trading author in one of his books asked: Have you ever wondered why human beings see shapes? (He of course means the basic shapes like line, square, circle etc.) In fact a S/R line is just a specialized trendline (horizontal trendline) and more powerful since there are limited choices on how to draw a horizontal line versus how to draw a variable angle line. This is a very vast and interesting (to some) topic, I'll stop now before opening a can of worms.

yes the human mind is very complex, and the market is made up of the collective human minds.

I think if you can figure out what the majority sees, then act sooner or contrary to them, that would be your edge?

The Personality of the Trader: How It Affects Performance

traderfeed.blogspot.com



A recent pilot study addresses the interesting topic of how a trader's personality affects his or her trading performance. The researchers focused on six personality traits and their impact upon trading:

* Locus of control - The degree to which a trader believes that the ability to be successful is within his or her control;

* Maximizing tendency - The degree to which individuals seek optimum outcomes from their decisions, not just outcomes that meet or exceed expectations;

* Regret susceptibility - The tendency to look back on outcomes of decisions and focus on negative aspects, creating regret;

* Self-monitoring - People's tendency to track and control their own thoughts, feelings, and behaviors;

* Sensation seeking - The degree to which people seek varied and stimulating experience;

* Type A behavior - The degree to which individuals are driven to achieve.

The researchers set up a simulated trading exercise with real money payouts. Because data from only 32 subjects were collected, results must be considered preliminary.

Examining the personality profiles of the participants, the researchers found that the first two traits--locus of control and maximizing tendency--were not related to trading performance. Among the remaining traits, three clusters or personality types emerged:

1) Relaxed, risk-averse traders who avoid regret, dislike sensation-seeking, and show type-B (non achievement oriented) behavior;

2) Traders who were controlled risk takers: high in both self-monitoring and sensation seeking;

3) Achievement-driven traders who showed high Type-A personality traits.

Of the three groups, number three performed the worst. These highly competitive traders were also the most impatient in their decision making, reducing their effectiveness. The first two groups performed similarly--no significant difference. What this suggests is that a relaxed attitude toward performance may be more helpful than a driven one: the highly achievement-driven trader may create his or her own internal noise, interfering with sound decision-making.

Although this is a small study and needs to be followed up with more extensive work, the findings are consistent with other research related to personality and trading performance. In my own study with Andrew Lo and Dmitry Repin of M.I.T., we found that highly emotional reactions to trading outcomes--positive *and* negative--are associated with worse trading performance. The highly driven trader may generate more positive and negative emotional experiences in his or her approach to trading, interfering with clear, calm decisions under conditions of risk and uncertainty. This would fit with research mentioned in my Psychology of Trading book (p. 276), which links stimulation-seeking to high states of emotional arousal. (One of the rationales for the Philip Glass techniques mentioned in that book is the creation of internal states in which stimulation--and hence arousal--are reduced).

The conundrum is that successful traders do tend to be an aggressive, achievement-oriented lot. Up to a certain point, that Type-A tendency works for them, especially if they are able to combine self-monitoring and self-control (the personality trait of conscientiousness) with the desire to take risks. At very high levels of aggressiveness and need-for-achievement, however, the frustrations inherent in working in a setting of high uncertainty may prove overwhelming. I would expect that highly achievement-oriented traders who also have a strong tendency toward negative emotional experience (guilt, anger, depression, anxiety) might experience the worst trading outcomes of all.

The interesting finding of the pilot research summarized above is that group one--the relaxed, risk-averse traders--performed as well as the conscientious risk takers. It may well be the case that clarity of mind--not personality per se--is the most important psychological determinant of good decision making and trading profitability.

One observation I noticed about FF is that most people tend to limit their gains. They would plan to trade to get certain amount of 'pips' per week, month or year.

But isn't the goal of trading is capital preservation? I never see journals that say, 'trading plan maximum loss x pips per week month or year'. They would stop trading once they lose certain amount of pips, instead you see people stop trading once they gain certaiin amount of pips! isn't that nonsense?!

This is somewhat in contradiction to 'limit your losses, and let your profits run'. Instead we tend to limit our winners and leave our losses alone. I guess limiting winners gives somewhat of a security? I guess it makes sense. People work their butt of in the corporate world, to receive those paycheck regularly. So when they come to trading, they translate hardwork into regular rewards (paycheck).

But the market isn't like the 9-5 routine.

people wanna be rich trading, able to trade your own hours, not answer to be anybody, basically be independent..

but they subconcsiously believe in 'paycheck to paycheck' mentality when they limit themselves to certain amount of 'pips' per week, month or year.

The point is, be open minded. Limiting your gains is not like limiting your losses. The latter is very important, while the former is just nonsense

I think this is an interesting thread. For me, 100% mechanical trading through EAs would be my only approach.

I tried live trading and found myself become too emotionally involved with the price action. I felt like every second my money was changing in real-time was gutwrenching. Sure, the winning trades felt good, but the unpredictability of short term price movement was too stressful.

So I started reading the James 16 thread, and incorporated the pinnochio bar and double bar resistance into an EA. I came up with some other methods that looked profitable. The only way I can feel good about a method is if it has been backtested for at least 5 or 6 years.

Ultimately, my style of trading revolves around a calculated risk. If a method backtests well, that is about all you can ask for. I'd much rather my computer execute my methods for me than me having to be emotionally attached to each trade.