Quest for the Psychology behind Trading Effectively...

this is good stuff Archie ... keep it up as i need all the help i can get on this subject

Cheers,
Ally

Very good information.

For me: if there is any holy grail in trading, it's the psychological side of it, with everything, thats connected to it (money and risk management, etc.)

I'm still a newbie, but my trading improved a lot once I started to set up rules for money and trade management and following them.

Chicky in another thread proposed to read "Trading in the zone" by Mark Douglas. It sums up a lot of points on how to be a consistantly profitable trader. Good stuff and recommended!

I'm very familiar with Mark Douglas' work, but imo he only goes so far, I've also noticed that he has produced a number of different products, which all cover basically the same material. Can I suggest you look up some of Denise Shull's work, she goes a great deal more into the practical psychological side of managing emotions, than Mark Douglas' mechanical approach...

I believe she has a new book out, but you can find some really excellent, free webinars here: http://www.traderkingdom.com/experts/90-denise-shull

I have a question (that I've posted many times before) addressed to anybody who thinks that the strategy/method part of the equation is easy, and the MM and psychological parts difficult.

A simple entry strategy, along with "let profits ride/cut losses quickly" exits, and suitable position sizing, is a very easy EA to code. Of course all EAs will follow all rules and strict MM requirements with perfect patience and discipline, eliminating psychology from the equation altogether.

Here's my question: If psychology is the major barrier to success, why aren't more EAs profitable?

In my opinion to trade you must know review all your behavior and then generalize it in a kind of a macro model. Once you know how people think and trade then you got some edge. Then the rest becomes only technicalities. Back-testing is one of the MOST important technical issues. Stop loss should be a 10-15% your account max drawdown, if you can hold with a 10-15 risk then abort and use another system...... Take profit and Entry will be given by consumer behavior

both The Fool and Stevefx have raised excellent points about the higher volatility found in FX compared to say traditional Equity markets...

Of course this doesn't fully address your question, but it may well be a contributing factor...

I have paid a few people to code systems which are profitable when i trade them by hand. When i tell the guy who is coding it what needs to happen for entry,exit...etc they always seem to add other things they "think" should also be in the EA that you do not ask for or want but then do not add all the entry conditions,exit conditions....etc that you have told them needs to happen.

So to me the reason most EAs are not profitable is because the guy coding the EA does not understand basic trading concepts and did it fast to collect the money then charge even more to "add code" to the EA because he did not code it right the first time.

And i say this because i have paid 5+ people to code systems and they never seem to get the EA right then always tell me it will cost more because "I did not tell them" that the EA should check for open orders,take into account current open orders or some other BS reason. But when i go to a free EA building website and make an EA with just the entry and i manage the trade myself with the same rules the free EAs are VERY PROFITABLE.

@Dredding82, @FibbinArchie,

Thanks guys for your replies.

FibbinArchie, I don't want to take your psychology thread too far off-topic by discussing EAs, except that I suspect automation is a good solution to many psychological problems. Let's examine briefly what an EA offers: adherence to strict MM rules; consistent and accurate execution; endless patience; unwavering discipline; no fear, greed or hesitation; immunity from hunches, guesswork or outside ‘noise’; around-the-clock trading that’s unaffected by tiredness, illness, stress, negative attitudes; no data entry errors; much more recreational time for the trader, away from his computer.

Hence all we need to do is find an entry/exit strategy that's both profitable and programmable, and we can book ourselves a place in the winner's circle. After all, if given a profitable EA, and the reasons I mentioned, why would anybody want to trade manually?

To be programmable, a system has to be 100% mechanical; the rules may be complex, but they must be unambiguous and complete. Opinion seems divided over whether mechanical systems can be profitable. At the one extreme, we have quants and others who believe in trading to a regimented plan; discipline necessitates a clearly defined set of rules to begin with. On the other, we have discretionary traders who say "it's not the system, it's the trader"; this view is apparently further supported by those who believe that markets are dynamic and evolving, and strategies must be intelligent and flexible enough to periodically adapt. Then there are those who will argue that discretionary trading - assuming that it's not total guesswork - is nothing more than an extremely complex rule set, which could potentially be nailed down if we looked at a large enough sample of chart-based examples.

(NOTE: I'm assuming TA-based systems - it would be extremely difficult to code an EA that reads a news calendar, and then interprets the outcome of news events; and totally impossible to have it 'listen to', let alone evaluate, a Bernanke speech, LOL).

Let's suppose that it is possible to be lifetime-profitable with an inflexible set of rules. Next question: is it feasibly possible to code these rules? This might not be as easy as it seems. Indicator based signals are widely used in EAs because they're so simple to code. Line studies are not quite so simple: for example, how does one define S/R mathematically, let alone interpret the 'quality' of the S/R (how many times it's been respected, broken, etc)? The same could probably be said for certain chart patterns. And having the EA read a news calendar, to adjust the strategy to avoid trading during high impact news, is not a trivial task. Hence, if (and I stress IF) profitable trading necessitates interpretation of 'visual' patterns, then it could well be that many EAs are simply not 'intelligent' enough.

Dredding, apparently you've managed to code profitable EAs yourself. That being so, consider me an admirer.

As a programmer, I tend to see things the other way around. One big reason I gave up coding EAs for people, was because the vast majority of folk don't tell me all of the rules up front, and a $500 job ends up taking several weeks as they continuously refine their strategy ("there's just one more thing...."). Given that I've done some trading myself, I'd be more likely to ask beforehand whether the EA should consider open orders etc, but it's surprising how many 'obvious' details nonetheless initially get overlooked. Also, it's interesting that your entries are automated, but you prefer to manage exits; whereas I like to weigh up several factors (including some basic fundamentals) before I decide to enter, but I'm happy to let a simple EA manage my exits, saving me both computer time and risk of emotional decision-making. It's interesting how some strategies are more entry-dependent, and others more exit-dependent.

Anyway, all of these topics are probably best discussed in another thread, so I'll end here. Besides, I have to go off to my 9-to-5 now. My apologies for hijacking a psychology thread; however, I have found that automated exits have greatly helped me eliminate any psychological problems.

David

My entire goal of trading is to remove psychology [emotions] from the game.

Before I enter any trade, and yes, even down to the lower time frames, I have looking at the chart the following information that I want to gather.

1) What price will my order be entered?
2) What is my target price?
3) What is my 'I am wrong' price?

With those 3 things decided, the trade becomes mechanical. I do not use stops, however, I have a level that once my current time frame closes above/below, it tells me it's time to start winding the trade down.

1) What price will my order be entered? This is where discipline comes in. I look for support or resistance areas, and I will not take the trade unless price gives me EXACTLY what I want. No and's, if's or but's about it. If price doesn't come up/down to my entry level, then I will wait for the next level to build and run off of that. When you do this, you are in control of your trades, not the market. No random entries, no throwing in orders just for the sake of being in the market.

2) What is my target price? I trade supply and demand levels. If I take a long off of a demand, my next target is the next supply level up. Simple to figure out. At this point, I can decide whether the trade is worth it or not. I am calculating my potential profit and I always want to see at least a r/r of 1:1. Generally, this is very easily achievable because of the way I trade Support and demand levels. I also do not lock my stop to BE+1 until a minor cluster has formed to protect it. The idea is not to be quick on the trigger so to speak. But, as always, go with what type of trade you are currently in. If price is in a freefall, notice it and play accordingly. If this is the case, any bounce plays will get a BE sooner then later.

3) What is my 'I am wrong' price? Well, because I do trade supply and demand levels, a close of the bar of the current time frame I am looking at below/above my ENTRY level says I was wrong. This means that the supply / demand at the current level is not as strong as it was on the last iteration, and gave way. The cool part about this is, is that since it was a recent broken level, there is around a 80% chance of a retest, and the ability for me to get out at BE or at a smaller loss. The important part is that I am now looking to exit my trade. A good amount of the times, the trade will jump back into profit for a small bit... and this is where it is important to close out the order, and not get into another 'I could be right here', just to watch it plumit again because price told you you were wrong a few minutes earlier.

I have a certain set of rules to follow depending on what is going on. Interpretation of market conditions is also something we must be very aware of, although that is a hole other topic.

Trading should be nothing more then a series of if/then/if/then/else conditions. Figure out your condition, follow the correct path, and act accordingly. We do not need to make it that difficult.

@ FibbinArchie: for me "Trading in the Zone" is just one part of the framework I'm trying to errect. You are right about the mechanical approach, but in my understanding this is a first step. Being mechanically competent leads to lesser distractions, and so lets you work better, your mind being less clouded, whatever.

But I also think it's impossible to keep your feelings out of trading, and I'm not sure if that is even a good idea. We all are emotional beings, and, more importantly, the other traders are too. So the key might be to be able to manage you feelings, in a way to use the weapon your brain and emotions provide (sounds awful, I'm not a native speaker, so please forgive me here...)

I think you already pointed me to Denise Shull, I have seen the introduction to Psychological Capital, and it helped me a great deal. Thanks for pointing out the other stuff, I'll watch that as well.

@ hanover:

excellent question, and excellent replies to that. Being a newbie I didn't look into EAs too much, with the exception of trade managing. Until now I didn't find an EA suitable to my "scaling-out" technique.

If I look at the post of some traders I believe are profitable (cloggie, redsword, a lot of people in the useless thread) I think they look mainly for S/R, S/D, and PA. I guess thats extremly difficult to code. It'd probably be helpful to have an EA that is identifying entries and makes suggestions, but I believe that these guys would still prefer to pull the trigger manually. Exits is another thing, but there as well they rely on their patterns.

This is a great thread!

Reconciling the contradictions in trading is probably one of the areas that takes time and is psychologically difficult. I forget where on FF I read a post that really went into how everything in trading appears to be contradiction at first until you reach a point where your understanding of the markets makes it all clear and there are no longer any contradictions. I like the above comment because it illustrates how the cliches always get spun around. Maybe spun around isn't the right term, but how every cliche can be made into a contradictory cliche.

Another layer of trading that makes is psychologically difficult is that it is counter-intuitive on top of being contradictory. Wrap your brain around that one.

I don't believe it can be done, actually I know it cannot be done. The best you can hope for is to keep the emotions in check. You're a human being not a machine. Don't get me wrong, I 'get' what you are trying to say, I'm just saying I'd rephrase your goal into something that is realistically achievable.

Maybe... I have been doing a fine job of emotion suppression so far when trading the markets. I don't cheer when I make a big win, I don't cry when I take a big loss... it's just another trade in the hundreds of trades taken per month.

Of course, I have been training myself to disassociate the trades with money as well; something that gets harder and harder to do as the lot sizes get bigger. Make good trades, and the rest will follow so to speak.

http://groups.google.com/group/futur...ad27b1e1aa13b#

Emotions are a good thing, like somebody jumping of his roof in a Captain America outfit: it is just isn't working.

Same with forex, your emotions are telling that this stuff isn't working, like the emotions a person has after trying to run through a brick wall.

What you must determine is if your methods has a statistical edge to it.

Man, this has been done to death. Yes, a statistical edge is 100% needed, but it is useless without proper money management and proper psychology.

Just wanted to add my 2 Aussie cents

I think it's quite simple in theory and a skill that needs mastering all the same which isn't so simple. The main attack against any psychological issues is confidence which of course can only come in trading from experience.

Firstly the most obvious problem is the monetary aspect of what we do. The constant fear that the next 5 minutes in the trade can/will affect our bottom line whether it be missing out on the profit we have or taking a loss and making that loss "official".

The second aspect is our own ego, this is the winner/ loser, smart/ dumb, rich/ poor mentality that controls our sense of self worth

The difference between demo and live is the first point, the monetary aspect. Even on demo you'll be exposed to the ego side but the monetary side is the biggest driver as it combines with ego but at the same time had a physical presense in the actual money involved.

This is obviously why you hear people talking about being able to trade on demo but when they go live they just can't win. It's very simple, on demo you can ignore that powerful emotion and the logic part of your brain is free to think.

I think demo is easier for most people not only because its free of real money but the ego is free to work with logic wirhout the impediments of the monetary aspect I think this is actually a powerful combination to be honest. Ego isn't so bad when free of emotion and perhaps even inspires the logical part of your brain to work harder. I can't back that up with scientific proof but in a crazy way it makes sense. Think sportsmen.

Once live, if you allow your emotions to occupy your mind, then all logic (the part you rely on to make the correct trading decisions) is unable to function because your mind is too busy indulging in your emotions.

One thing is for sure you can never eliminate these feelings but you can definitely learn to control them. The biggest part in this is being able to acknowledge when any logic overriding feelings are happening and either close the trade (a good practice in learning to control them) or silence it so the better part of your brain can deal with business.

How do silence a screaming voice inside tour head? Ignore it, cause the more you listen the more it will scream at you. Don't focus on the P/L number, forget it and keep your focus on the market or walk away, give all your attention to the logical side of your brain and that screaming voice will go away.

Edit: just to add that when your logic is in control so too is you patience, dicipline, money management etc. At least you will be more able, prepared and willing to deal with these things in the correct manner.

Yo, CindyXXXX...

Hi all

Interesting thread. Bin trading Forex about 18 months. Long journey, investigated and experienced many of the points raised so far.

Before Forex I played a lot of poker online. Like over 1,000,000 hands. Mainly No Limit Holdem but some variants as well. Lucky for me I was educated by an experienced player who impressed upon me the need for sound money management and being aware of my emotions in the heat of battle (sound familiar ?). Notice I said being aware not controlling. As pointed out previously we are human beings not robots.

When I first started playing poker I was very money orientated and even bets made I perceived in $ terms. I used a simple 20 buyin money management principle so 5% risk on each table played. When I had 20 buyins for the next level I moved up. I reviewed my play after every session and if I lost 2 buyins I quit the session.

Anyone who has played poker will be well aware how it can pound on your emotions. Poor players make bad plays and take your money. If this happens often enough in a session you are prone to tilt. A state of mind where common sense and logic goes out the window and your emotions and ego take complete control (sound familiar to any traders out there ?). Many bankrolls get badly damaged when this happens. Hence my 2 buyin loss and leave rule. You gotta have some rules to help manage yourself.

What I noticed after a period of a few months was that I started to get less focused on the $ outcome and more focused on making the correct play given the information at hand. Instead of money I started to see it as chips and how to use these as weapons to achieve the desired result.

After a while I found I had experienced all of the bad beats that could happen and the negative emotional impact of these started to reduce until eventually I reached a point where I started to just see these as statistical anomalies.

Now you may be wondering why I have rambled on about my poker career for so long. Simply there are so many similarities between success at Forex and success at Poker.

Education and money management are fundamental to both.

Experience is a huge advantage not just because you get to see most things the market can throw at you.

I would suggest it is also because you get to experience all the various responses your ego and emotional self can throw at you. Eventually you get used to these responses and whilst you still experience these to some extent the impact is reduced to the point where they no longer derail the logical/methodical side of you which is required to be successfull.

Bit like the 1st time you do some hard manual labour. You get blisters and the pain impacts your ability to carry on. After a period of time your skin toughens up and it has no further impact. In our case it's ur psyche that toughens up.

Are there things we can do to speed up this toughening up process ? I can't speak for others but in my case the following things have helped.

1) Max risk per trade 1% of capital. As per an early post the smaller you can make your risk the less financial and emotional impact it will have when things don't go according to plan.

An additional benefit is that it will increase your longevity as a trader. This will give you time to gain valuable experience of market behaviour and the responses of your emotions and ego during the trading process.

2) Whilst I obviously record my overall P&L I prefer to documents trades in terms of pips credited or loaned back to the market. Just tweaking the definition helps to put a positive spin on things. You want as much positive reinforcement as you can get. You could also call them Credits or Debits. To me the debits are just part of the cost of doing business, bit like paying your gas or electric bill. No trader has a 100% success rate.

Logging it as won or lost comes from a much more egocentric point of view especially as we are conditioned that a loss is bad and enough losses will cause pain. This can seriously affect your equilibrium. Ideally we want the ego to sit on the sidelines whilst we are trading.

3) Regular review of all my trades including not just the technical execution but any emotional responses experienced during them. You will get them but it's important to analyse where they come from and most importantly did they cause you to deviate from your plan ?

4) Also a regular evaluation of pips risked and returned. What's ur ratio?How many trades did u gain pips and how many resulted in a loan back to the market ? Whats the percentage ? Are the maths still stacking up in the right direction ? Break it down into 100 Trade chunks. If it's temporarily going wrong analyse why before you continue trading. Change in market conditions could mean you need to revise your methodology eg increase in volatility means getting stopped out more often.
Have a session stop eg 3 loan backs (Debits) end session and analyse the trades.

I hope some of this rambling proves useful, if it helps prevent just one revenge trade it will have served its purpose.


V

Hi, thanks this was a decent post and perhaps it deserves some kind of response or comment.

I think poker is a pretty good analogy in a lot of ways. There are similar kinds of emotional impacts which occur within the same basic win/loss structure of each pursuit. Tilt is another good word. Like, trading on full tilt.

I actually used to run a poker website-just an informative type deal, where among other things I offered a free poker course which I wrote myself. In this course I had a page called top 10 beginner mistakes to avoid.

The number 1 and deadliest mistake was, new players play too many hands.

So here's another good analogy to forex trading. And its not just new traders-many seasoned traders have the same problem. Some traders feel like they have to try and capture every twist and turn. If they've made 80 pips one day, and keep trading til they're overtired, and wind up at -20, then they sit back and wonder why they suck so bad at trading. Or how the market is impossible to read, or how its simply totally random and unpredictable. Then somebody posts a "why bother trading-its impossible thread"....

That's why threads like this one are so important IMO, if only at a minimum to remind people that there is a definitive connection between their own attitudes towards what they are doing and the outcome. In order to make gains you have to treat yourself and your trading with respect and give yourself some kind of structure. The power to stay out of trading, sit back and wait until your conditions are met is a serious advantage.

In a similar thread somebody suggested the idea of "just try to make 10 pips a day". When you know you can make 40 to 100 or 120 this is a really good exercise. Only make 10 to 15 and call it a day. Its not so easy. But if you can do that for a couple of weeks then you know you have some discipline and impulse control going for you.

I think most of it comes down to some basic attitudes. But if you got problems then you got problems, and the problem of long run success and profitability can get to seem somehow complicated, difficult and mysterious.

Great thread guys, really appreciate it.

I have read Mark Douglas's book a few times and agree with Fib about Mark only going so far. I still think there is merit to his work though and it has helped me approach the charts with the right mindset.

Stumbled upon this interview which I found to be worthwhile -