Psychology of Trading - Retail as Contrarian Indicator

Hi, folks!

See attachment. Why is that? Someone will know this yourself? How do you change your way of thinking?

As the New Market Wizard William Eckhardt said referring to his methodology as a floor trader: "Basically, I would buy when weak hands were selling and sell when they were buying".

The highlighted snippet assumes retail traders across all markets are the same.

They are not.

I agree that retail traders and floor traders in equity and similar exchange-traded instruments (for example) are direct participants in their respective markets.

But retail traders in forex are not.

In fact, retail forex traders are no different from punters in an off-track betting parlor i.e. the retail forex "market" is just a parallel exchange which necessarily mirrors the real institutional market.

Therefore I think that the "value" of retail trader positioning information in forex is over-rated.

Retail traders behaviours are actually consistent and predictable, as an aggregate group as they share the same mindset/mental map. The chart and the book are pretty accurate.

I think the same.
I wonder why the group thinks so? Why did the band decides to purchase at peak prices? Because he believes that the price will rise further ...?
How to change your way of thinking, is to become of this group? To see a picture of a fundamentally different and take other decisions.

Nope, they're not going to buy at the top. They will be selling into the top.
The buying you see was actually happening when the price is going down, thus they're buying into the subsequent down move after the top. I believe the indicator was lagging a little bit.

I'll tell you a secret:

The retails will keep net short positions in an up move, and net long position in an down move- that's why they'll always be the net loser.

so... please trade like a market maker....

If the above phenomenon is statistically observable for any meaningful length of time, I will not dispute it. In any case, I have no opinion on this, either way.

My main points of contention, however, are the following snippets from the book,

1. "Retail traders.... and their positioning is in fact a valued commodity that is actively traded upon by many funds and money managers."

Not true. Regardless of how "predictable" retail trader behaviors may be, their behaviors are not being tracked or traded against by accredited professional funds. As a basis for reference, PAMM operators (for example) are NOT accredited professional funds.


2. "... somehow amateur traders have the innate ability to pick tops and bottoms and consistently get chewed up by the market makers...."

Also not true. Tops in forex markets are created when institutional buyers become weaker and institutional sellers turn stronger; likewise, bottoms in forex markets are created when institutional sellers become weaker and institutional buyers turn stronger.

In other words, tops and bottoms in forex markets are not "picked" by retail traders. Retail forex traders are just riding waves that are not of their own making.

Interesting Link - Enjoy your weekend - http://traderfeed.blogspot.ca/2015/0...-trait-of.html

This is why the single most important trait of traders who achieve career success is adaptability. Adaptability does require discipline and self-control, but importantly it also requires self-awareness, market awareness, creativity, and flexibility. Companies continued to churn out personal computers when laptops gained traction. Companies continued to emphasize laptops when tablets became popular. There will be companies pushing tablets when wearable computing devices become the rage. All of those companies had fine processes and disciplined execution. They simply failed to adapt to changing markets.

Psychological Challenges of Speculative Trading

An Extract from the book of “Beat the Odds in Forex Trading” by Igor Toshchakov, published by Wiley

A successful trader’s career mainly depends on his or her psychological stability in stressful situations, which are common in the process of trading. Theoretical knowledge can be acquired by reading professional literature; practical skills and experience are acquired in the process of actual trading. The most difficult process is adjusting psychological stress, because in real life it is impossible to completely eliminate the stress factor influencing human activity. Underestimating the stress factor could play a mean trick on trader and even completely block their abilities to make reasonable decisions in real trading situations. The psychological stress of those trading in the FOREX (and any other) market is extremely high. Traders must work under permanent psychological pressure, making decisions in highly unpredictable and uncertain market situations.

Each trader goes through mistakes, failures, and losses in his or her own way, in accord with his or her personality and temper. Some might blame their failure on market’s “wrong behaviour”, which didn’t comply with the trader’s brilliant forecast and caused the failure of the magnificently planned speculative combination. Others blame themselves and their own inabilities to make right decisions in situations, which afterwards seem to be simple. It is an interesting fact that, in hindsight, traders usually find the decision that should have been made at the lost critical moment and can reasonably prove their point of view. Why can they find the right decision so easily and quickly in hindsight? Was the trader unable to do so at the right moment? I don’t think it can be simply explained by looking at yesterday’s situation from today’s point of view. I do not think it can be explained by the fact that classical technical analysis at allows for multiple explanations of almost any market situation. It is always possible to find an appropriate basic explanation for any market shift after the event takes place. In the heat of the moment, however, the trader was influence by stress, and that stress caused the error. This is proven by the fact that most novice traders show exceptionally good (and even phenomenal) results trading dummy accounts but can’t even come near those result when trading with real money.

Being permanently under stress, a trader can often make insufficiently considered, impulsive, and therefore, wrong decisions that result in losses or premature liquidation of profitable position, that is, in lost profit. Sometimes, after a few successive failures with various trades, traders become fearful of the market. They are in as state of psychological stupor, and even a simple market situation may cause panic. They cannot overcome their emotions or soberly evaluate the current situation, and they are unable to make any decision – reasonable or otherwise. In many cases when the market situation shifts against the trader’s position, they can only passively watch the growth of their losses, because they are unable to make any decision at all. Often, after the market stabilizes and traders have the opportunity to calmly analyse daily diagrams of currency fluctuations, they come to the conclusion that the main cause of failure was not the lack of knowledge or training but their own emotions. However, the situation cannot be reversed. Time has passed, money has been lost, even everything should be begun again.

Another problem that causes severe and even catastrophic consequences is the trader’s wilful thinking. In this case, treaders are sure that their forecast of market trends is solely correct. They feel the market cannot and should not give any surprises. They do not consider other options that could be helpful or they think of other options in a vague and uncertain form. Sometimes, traders consider a market shift against their positions. They acquire new contracts at a lower price in the hope that the market situation will come back, and all the positions will become highly profitable. Afterwards, as the situation worsens, they will be able to come out of the market without serious losses. Being sire they are right, traders lose the ability to critically evaluate the condition of the market and accordingly their own position in the market. In this case, they consider only those basic and technical features that justify their wishful thinking, and they discard the contradicting features. This wishful thinking costs them dearly and can lead to psychological frustration. The market’s “wrong behaviour” not only deprives traders of a certain amount of money and often ruins their trading account, but also undermines their self-esteem and their hopes of being a winner in the trading battle.

After such a loss, traders blame themselves, repeatedly going through the details of the unsuccessful trade. They blame the market for the “wrong behaviour” or themselves for errors in what then seems an absolutely clear situation. Sometimes, the trader-market relationship takes the form of a vendetta. Traders consider the market as their personal enemy, treat it in an unfriendly way (even with hate) and dream of immediate revenge. Doing so, they miss the fact ht at they are essentially blaming nature for changing sunny weather to rain. It is very important to be prepared beforehand for this change. Traders should always have close at hand one or few options in case of sudden change of the situation/weather, so that their foresight assures their good time or good profit.

The third main psychological problem is trader uncertainty, especially when traders are inexperienced in abilities and skills – specifically about each market position they hold. Immediately after each position is opened and a money contract is bought, treaders start questioning their choices. This is revealed most vividly in the case of a moderately active market at the moment of fluctuations close to the opening price of the position. Any moment (even insignificant) against their position causes traders to have an irresistible desire to sell the recently acquired contract to limit losses, until it is too late and the market does not shift too far away from their position opening price. On the other hand, an insignificant market shift in the desirable direction causes the same desire to eliminate the position, until it provides for any (even tiny) profit and before this profit does not turn into losses.

Sacred and trouble traders rush and race about. They open and liquidate their positions too often, and experience many small losses and gains. Within a short period of time, they turn intermittently into bulls or bears. As a result, they suffer losses on a dealer’s spread and/or commissions when there were no significant market changes, and all the market fluctuations were no more than just regular market “noise”. Such losses are typical for beginners and individual traders with small investment capital or little experience and insufficiently psychological preparation.

Not uncommon are cases of traders’ impulsive decisions on trading, without any plans or serious preliminary market analysis. The position is opened under an impulsive, invalid emotional reaction. Often, it can be explained by traders’ fear of losing a brilliant opportunity to earn money they think is being offered by the market at that moment. I have witnessed these attempts to jump onto the last carriage of a departing train, and such attempts have ruined a lot of traders. Many traders cannot calmly watch any kind of market movements. Some of my students have confirmed this reality. If they have no positions at the moment of more or less significant market movement, they consider it as a lost opportunity to gain profit. This can inflict a serious shock to them.

When they have no position, they seem unable to realize that each market movement can be considered both ways, and the opposite situation can quite possibly develop. Statistics show that, at each market movement, the chances to lose are much higher than to profit. How does it happen that reasonable people (who in everyday life, without any emotion, can watch a bank casher counting other people’s money) consider the fact of market movement as a threat to their own pockets? Why is other people’s money in the hands of a bank cashier not considered as a lost profit, whereas capital shift on the market and the corresponding quote fluctuations are causes of negative emotions? I think the answer is in the illusory simplicity of business itself, which is considered by many people as a good and simple opportunity to earn a lot of easy money. Similar notions are widely spread among novice currency traders. The soon traders abandon such ideas, the sooner they become professionally efficient traders.

The most difficult problem for every trader (regardless of their experiences) is to learn as quickly as possible how to recover quickly from losses, which are inevitable in this business. At the same time, they must learn to handle shocks and psychological damage inflicted by the losses, because there situations could negatively influence their future work.

The losses themselves and the fear of losing, both of which permanently torture traders, negatively influence their ability to make reasonable decisions in a complicated situation. These factors also undermine traders’ ability to follow their own rules about trade strategies and systems.

Very interesting...
When I became interested in trading, I could not think what it is in reality)