Zhu's Forex Thoughts

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The delusional trader

Mike Bellafiore talks about the delusional trader in his book One Good Trade. The trader who thinks that he can go from consistently blowing accounts or consistently losing money to making huge profits on a consistent basis without going through all the intermediate stages in between. He lays out a process for trader development. I can't remember the exact one but it looks something like this:

Lose a lot of money.
Lose less money.
Breakeven
Make a little bit consistently.
Make decent money consistently.
Getting larger at your best set-ups
Your best trader self.

It's a process. Each stage may take months or more. (generally more for FX traders for reasons I'll address soon) The delusional trader thinks that he can go from blowing accounts to trading setups with large size he is not psychologically comfortable with. I was once a delusional trader, until I realised there was no way around it.

The delusional trader, pt. 2

I would like to expand on Mike's definition. I think traders are also delusional in a different way. I am not sure how many of you are familiar with the pick-up-artist/game sub-culture, but I'm sure all of us have dated in some way or another. Imagine if someone told you that you can learn his "opening line" or some sort of technique and then you'll never have to be rejected by any one else again. Or if one thinks that, I just have to master this one pick-up line so well then I'd be successful at pick-up in general. It sounds incredulous, but that's the exact mindset that many traders have. They think that if they get good enough at trading, they would never have another losing trade. They think that trading is just about learning this set-up or simple system then they can just keep using it over and over and experience success.

IT IS DELUSIONAL. No matter how good you are, you will still have losing trades. Failure to accept losing trades will just lead to the ultimate loss = margin call. And trading is not about learning that one "system" or set-up and then suddenly be able to make lots of money. It's about becoming the person who can trade. You become a trader just like you become an attractive person. It's not gimmicky. It takes changing mindsets and deep-seated behavioural patterns. These changes don't occur overnight.

Are you delusional? I know I was for a long time. Don't make the same mistake and start examining your beliefs about trading.

Like Einstein said, everything should be made as simple as possible, but not simpler.

Profitable Forex Traders

Assuming people are actually honest about their track record, it would seem to me that the majority of traders who are making money on a somewhat consistent basis in FX are employing a variation of the following:

- Fund a relatively large account
- Trade small lots
- Trade many currency pairs
- Try to trade like a market maker
- No predefined loss limits/ employs loose mental stops or recovery strategies
- Try to close every "trade" in break-even or profit
- Sometimes hedges in the same currency pair
- Try to earn swap
- Recovery strategies often involve some form of martingale or averaging down
- Thinks that conventional trading wisdom/thoughts are completely wrong and are meant to misdirect traders

I have tried it, but I think it's not for me... Personally I wouldn't trade like the above because

1. Anything that does not employ clearly defined loss limit is NOT scalable. Both for psychological reasons and for basic math.

2. The edge is often unclear. If it is so good, why not clearly lay out exit rules instead of trying to average down and make every losing trade a break-even? I suspect most of profit comes from the recovery/martingale strategy that will eventually fail and destroy the trader over a long enough timeframe. This is just a hypothesis, as with most things I say.

3. Cognitive load. Imagine having tons of open positions and having to manage them throughout the day. What would that do to your life?

But it appears to me that many are successful with it and at least mildly profitable. I'm just uncomfortable with the hidden risks that are often not clearly taken into consideration by traders who employ these methods.

Profitable Forex Traders Pt. 2

In Seth Godin's book, The Dip, he lays out three different types of endeavours. The Dip, the cul-de-sac, and the cliff.



I think the trading method laid out above is a cliff. It makes good profit for a long time, until it doesn't.

Learning how to trade is like riding the dip. The dip is extremely deep and tough but if you are committed to it you need to stay with it. The dip is as such because of the low barriers to entry in the retail industry. Anything that's easy to get into is also hard to succeed at. The successful have put in so many hours of hard work to distinguish themselves and they just keep getting better. A new entrant has to overcome that initial barrier and that takes a long time.

The Little Things Add Up



This is especially true in FX. If there's one thing I've heard successful traders (and people) repeat over and over, it is this.

Being successful is not about doing one big thing right, it is about doing the thousand little small things well on a consistent basis.

It starts with a good night's sleep, a healthy diet, and sufficient exercise. It starts with keeping your mind sharp and your spiritual and emotional sides well-nourished.

It starts with having a checklist of things you ought to do each day before coming into the markets and trading.

It starts with giving full focus to your trading and not indulging in distractions like music or surfing the web while waiting for your set-ups.

It starts with respecting your loss limits.

It starts with that hour or two you put in after the end of your trading session each day to review your trades meticulously and to document your best set-ups. It starts with the trading journal you write before, during and after your trading session each day to monitor your own psychology and trading.

It starts with the weekly and monthly evaluation of your trading. Not so much focused on the P&L but on your process and other metrics that tell you how you are doing.

The little things add up. The little things add up.

The Playbook

You should read The Playbook written by Mike Bellafiore if you haven't.

But here's the main reasons why you want to have one.

A Playbook is the collection of your best set-ups you see in the market each day. They don't even have to be set-ups you have actually traded, so long as you conceptualise a framework and process to trade them.

Building a Playbook allows you to

1. Get in more repetitions of trading set-ups. Our brain doesn't actually distinguish between actual trading and visualisation of trading. By documenting a playbook set-up each day, you are turning one trading session into two or more. It helps you get better faster.

2. Dissect the best set-ups in this market. You want to focus on the variables governing each set-up. These variables could include, fundamentals, broad technical conditions, micro-structure conditions, breaking news etc. You want to think about how these variables interplay with one another to create the setups.

3. You can handpick from the collection of set-ups to focus on the ones you do best. Successful people focus on their strengths and not their weaknesses. Think about this one for a bit. How much of your focus is spent on doing more of what you are good at and exploiting your strengths v.s. fixing your weaknesses or focusing on the setups that are failing? Drop the set-ups that are failing. Focus on the ones that are working in this market and do more of what you are already successful at.

4. There is already a lot of good in our trading. Mike talks about this one a lot. He thinks as traders we underestimate how much good there is in our trading. Try looking at your records and see what trades you do well at and eliminate everything else and just focus on those. Try to see the subtler and subtler realities of each trade. As you grow over time you can expand your collection of trades but start from that which you are naturally good at.

I'll go into greater detail of how to document a playbook trade in Forex in the near future once I get access to my charts and computer.

Gamifying Life

Gamification is a really hot thing right now. A simple google search brings up this definition

gamification
ˌɡeɪmɪfɪˈkeɪʃ(ə)n/
noun
noun: gamification

1. the application of typical elements of game playing (e.g. point scoring, competition with others, rules of play) to other areas of activity, typically as an online marketing technique to encourage engagement with a product or service.
   "gamification is exciting because it promises to make the hard stuff in life fun"

While at the meditation bootcamp/retreat recently, after days of meditating, they posed a challenge called Sitting of Great Determination to everyone. Basically we were tasked to meditate for an hour straight without changing our posture/moving our hands or legs a single bit. If you have ever tried meditation before, you'd know how hard that is. After about 25 minutes, especially because we have already been meditating for 12 hours a day nearly for days before that, you start feeling so much pain in your legs that they begin to feel like stone. We were tasked to perform the breathing/attention technique for the full hour. It was extremely torturous but the purpose was to teach us equanimity. That we can observe sensations and experience them but we can choose not to react to them as how our deeply rooted behavioural patterns would want us to. Sounds a lot like the struggle traders have to go through doesn't it?

So the point is, I managed to accomplish what was instructed despite it sounding and feeling impossible at times. In the small group of 8 that consulted the teacher after that, none of the others did. Most changed posture at least 3 times in the one hour. Well you could call it willpower but I think a large part of why I was able to do it is because I gamified the whole thing. Instead of thinking of it as "let's sit here for an hour and try not to move." I shifted my attention to the task at hand. We were made to do cycles of attention. I started competing with myself. The previous few times i cycled through the task 8 times. This time I wanted to do 9. I focused on each step of the task, and shifted my attention carefully. The pain was still there, but it became a lot more bearable. I was not trying to endure the 1 hour, I was trying to complete my process-oriented challenge that I set for myself. Whenever I felt the pain, I would refocus my attention on the goal and the process. So using this approach, I completed 9 cycles and by then 1 hour had passed.

The same process can be applied to trading. The whole thing about writing down precise probabilities is just another game I set up for myself so I can shift my attention away from "trying to make money" to focusing on the process. There must be some kind of immediate feedback for this to be successful. Just like in the meditation case I could tell how close I was to my target of 9 cycles and whether I would make it, I can also tell whether my ability to read the market bias at each moment is getting better or not by clearly documenting my predictions and evaluating them over time.

There are many other ways this can be done. Documenting a playbook trade or even writing in your journal can be a game. You can set up clear goalposts and try to challenge yourself to do a bit more each time. Having clear process oriented goals in trading that are easily measurable at the end of each session can also help. You want to focus on something other than the P&L. That will give you equanimity and it is the first step to not reacting based on unconscious pattern loops set up in our brains from evolution and social conditioning.

In summary, you want to set up games where the objectives are process-oriented and accomplishing these objectives will lead to rewards as a by-product.

The Checklist Paradox

We are taught to create checklists in trading to identify our best trade set-ups. But that alone is insufficient because we are missing a key step.

Imagine a doctor who has a checklist to account for process such as washing their hands, examining the patient, and considering all the symptoms, but there is no attempt at evaluating whether the treatment works. That is the kind of thing most traders are doing.

Well one may argue that one measures P&L. Measuring P&L is the first step to evaluating, but it is insufficient. If you make money it could be due to a myriad of different factors, and most of it could have nothing to do with the approach you use to identify your set-ups. If one truly wants to monitor how one's edges are behaving, then it is essential to measure more than just the P&L.

Thanks for the kind words.

Look forward to more of your input in the future.

Dear Shellsnail!

You have great knowledge of Market behavior.
I am going to learn something here. I
Subscribe you.

Can you throw more light on two layers of technical analysis in the market,
From your post 13.

Thanks in advance.

Take care,

Very much helpful and obviously superb....

Studying Failure

When was the last time you read a book or article talking about failure and lessons drawn from them? I bet you can hardly recall. As a society we spend most of our energy looking at success and how successful people behave but not enough time studying failure. I think there is a lot that can be learned from studying failure.

We earn our failures as much as we earn our successes.

Here's a personal story.

One afternoon, after some time of mulling over the idea of using FX for investment purposes, I thought it would be a great idea to try it out. Never mind that it wasn't my field of expertise and I had no deep knowledge of how markets behaved at the technical level on the higher time frames in FX. In my usual state of decisiveness, I quickly wired $1000 to my broker and opened up an account. Initially I wanted to try $4000, but I caught myself thinking that it was unnecessary and way too greedy for something like an experiment. Good one there. $1000 is just enough to initiate a couple of 0.01-0.04 lot positions without being over leveraged -- exactly what I need for an investment account.

But here comes the tricky part: I was overseas and without my laptop. I had no ready access to charts. But hey, I had my mobile phone with me. Surely I could pull it off using MT4 Mobile, or so I thought. I went to look at the charts, make notes, and came up with some trade theses. They turned out to be not so much investments but rather swing trades that I expect to close each week. Hmm. Not exactly what I wanted. But by this point I was already knee deep so I went ahead and initiated a few positions anyway.

Then NY Open came and I was checking my positions. I was looking at the EUR/USD. And I thought maybe I should try trading it. There seems to be an opportunity to make some money and also validate my own ego. Never mind that I was practically trading blind without any of my usual visual aids/indicators. Never mind that my reaction time was basically slow as a snail since I was trading on mobile.

So I analysed that price seems to be on an uptrend on the 1 hour, the key timeframe to use for most directional decisions intraday. But ahead lie a key 4H level, a major resistance that price has tested in the London open and failed at. It was about 15 pips away from current price. On the 15 minute, the trend was unclear and without my indicators I couldn't determine what was going on exactly. So I formed my trade thesis: Price will trade down to support that was a few pips away, bounce and attack the 4H key level about 90% of the time within the next few hours. At the 4H key level there's an opportunity to go short initially expecting it to hold. But if the level break, I should increase my long to at least 2nd tier if not 3rd tier depending on the strength of the up move. Great.

So price started trading down to the support and I put on a tier one position upon seeing my favoured entry setup. A stop of 15 pips was placed below. Now price started to demonstrate behaviour characteristic of the level breaking. Upon a 15 minute candle close below the key support level and coupled with the observed behaviour, I judged that the trade was no longer worth holding and abandoned it for a tiny loss. In the same moment, without waiting for a better trade entry, I went with a short of tier 2 size. The trade bias was sound, but the entry was pathetic. If the level has indeed broken and given the microstructure behaviour and the fact that price rejected the 4H level in London, this was setting up to be a good downmove on the EUR/USD to the next lower 4H level. Tier 2 was worthwhile. But what I should have done was to wait for a clear entry. It eventually presented itself at a higher price, but I was already in at a worse one. During the whole thing price seemed to hold the level again and I exited, switched to long, exited, and entered back around the same level, incurring transaction costs. More bad trading.

But eventually price broke down and I was in profit for about 10 pips. That's when suddenly price started moving up with great force and broke previous resistances. This was clear behaviour that strong demand was found and that the level hasn't actually broken and given the 1H uptrend, there was no clear edge anymore. When price later traded back down to test the demand area for a usual double bottom, I had a tremendous opportunity to see the reality of the moment and do the right thing and switch from short to a long. But I didn't. So I took the stop-loss on this one. Guess what, price eventually hit the 4H level as I expected with great probability from the start!

So I traded without a clearly written plan and handicapped myself with no clear visuals. Now I lost money. Great... I was calm but deep down it triggered some behavioural patterns built up from years of bad trading. I went ahead and deposited 2000$ into my proper trading account and tried to trade the 4H rejection pattern. It didn't work initially, and then it did. Price kept trading down and at one point I was in decent profit for the night. I closed half of the trade and also kept reminding myself that I needed to get long at some point since the level has broken and price has traded above it. But somehow, I got sucked into all the market action and emotions and when the signal appeared I couldn't take it! I rationalised that price should still go further down and I can make a bit more and get even better entry. Even though at this point the bias was clearly long already. Uptrend on all time frames and a break of the 4H level. I got sucked into the crowd!

Eventually I exited the trade at break-even and I wish I could say I stopped trading then. The truth is I went on tilt and lost copious amounts of money.

So what are the lessons to draw from the experience above?

1. Instead of opening up a new investment account, I could have reminded myself of my core business -- intraday trading. I ought to focus on that and get better at that one thing first before taking on other hats. Correcting myself and spending the afternoon reading or on some other activity would have proved to be way more fruitful.

2. Instead of trading without a written plan and trading on mobile, I should have reminded myself that those were mistakes I made before and every time they would no doubt lead me to lose money. I should thus have not traded and spent the time sleeping or reading and the day would have been well spent.

3. Instead of trading with the mindset to make money by depositing $2000, I could have reminded myself of Mike Bellafiore's words, "Winning traders trade to improve. Losing traders trade to make money." and quickly realise that I was falling into the latter category.

4. Instead of trading on tilt, I could have used my awareness of the moment to look within and realise that I was riled up and use that as a signal to take a 10 minute break from the market before making any other decision. If I had done that, I would have avoided further depositing money into my trading account and racking up the losses.

The technique I am using above is called additive counterfactual thinking. It is in contrast to subtractive counterfactual thinking that most use when they fail. Here's an extract from Top Dog that details these two types of thinking:

"Additive counterfactuals are what we might have done but it didnt occur in reality. Subtractive counterfactuals are things that actually occurred in the past, that wed subtract thinking of how things would be different if it hadnt really happened. An additive counterfactual is, if only I had driven towards the hoop, while a subtractive counterfactual is like, if only I hadnt missed the shot. A subtractive counterfactual usually expresses regret over a mistake or a failed strategy. An additive counterfactual sees new strategies and options it adds to the choices available if the situation happens again.

Researchers including Kray, Keith Markman, and Adam Galinsky have tested the efficacy of counterfactuals in various scenarios, such as sales pitches, negotiations, flight training, and athletic tasks. People who look back on their performance with subtractive counterfactuals perform worse the next time. Those who employ additive counterfactuals perform better over time. This is true both in experimental studies (where subjects are told to reflect in one style or the other) and in naturalistic studies (looking at what people really do.)

By thinking through different versions of if only this had happened instead, you can avoid some of the blind spots due to overconfidence. You can predict problems that may arise, and then rerun the situation in your head until youve figured out a solution.

In effect, additive counterfactuals trigger a problem-solving mindset. Additive counterfactuals activate regions of the brain that would otherwise be deactivated during positive thinking, or even experential learning. When engaged in counterfactual thinking, the lateral frontal polar cortex, dorsomedial frontal cortex, and posteromedial cortex seem to operate as a network. Through this interaction, the brain identifies the best road not taken and retains this information until the next time you have to make a similar decision.

The benefit of activating this network exists even if you cant spot the solution right away. Counterfactual thinking seems to prime the brain to think more creatively; it readies the creative neural networks. Research has shown that people do better on creative-thinking tasks after having ben asked to mentalise a series of counterfactual thoughts. When faced with a unique problem, a scenario that wasnt previously anticipated or considered, theyre better at finding solutions."

Now for the astounding reveal: the sequence of events happened yesterday!

This is why I say that much of my success has been due to luck (accompanied with some skills of market analysis). I still have many bad habits and behavioural tendencies lurking within that I have to consciously be aware and adjust for.

This experience has also prompted me to reflect deeper about the reality of my trading situation and readjust my plan heading into 2016. "Am I trading to make money or am I trading to improve?" I think my original plan was built to trade to make money. Clearly I am not ready for that yet. I have to accept the reality at the moment, that I am still a break-even/mildly profitable trader and that I have much to learn. Does this quote make sense though? Can we really trade not to make money? What does that even mean?

I will expand on those in the post below, followed by laying out a plan that I think will be helpful for most of you reading this.

Intent + Freedom from Outcome

Tyler talks about this a lot when he discusses success with women. Trading is much of the same.

Of course we are all trading to make money. Anyone who tries to reason otherwise is merely kidding himself. Making money in the long run is the strong intent that guides all our behaviour as it should be.

But then how would we interpret a quote from Mike Bellafiore such as "Winning traders trade to improve while losing traders trade to make money."?

The key then is to realise that, making money is a function and by-product of doing the thousand little correct things. Notice how in the above post I detailed the little things that contributed to my overall failure experience. Alone they don't sound like much but each failed action is dimming my edge in the market. When I shift my focus from learning to making money, immediately I am prompted to make poor trading decisions.

Why?

Because we can't control how much money we make on a given day. That's it! The uncertainty is beyond us. It is uncontrollable. We can trade perfectly well and still lose money on any given day. When we try to make money instead of focusing on trading well, we will become our own worst enemies. It is simple but easy to forget in the heat of it all.

The solution is to build "games" for ourselves and systems that automatically increase our money-making potential as we get better. One such possibility is to start from incredibly small amounts. After 2 weeks of consistent profitability by trading properly, bump the size up by 20%. Keep doing this and in a year your size should be pretty huge. So how I have modified my plan is to start from $50 in January and trade lot sizes of 0.01 (tier 1) to 0.10 (tier 5). Yes. That's me accepting the reality that I cannot yet make money consistently. If I am prone to losing money or destructive streaks, then I SHOULD NOT be trading with large sums until I can prove to myself that I can make money. Sure I have a track record but it's not nearly enough when I know of the deeper issues plaguing my trading. Are you being honest with your own reality or are you a delusional trader? See the previous post on delusional trader to find out.

Don't be worried that you can't make money. Play the game correctly and focus on getting better everyday. Focus on performing all the right learning actions that will get you better and eventually when the results show start trading larger.

The Path

Based on: http://www.eminiplayer.com/2009/06/l...ul-trader.html

Read the post first.

An extract:
"As for the learning process of how you go about doing this, it's all about being constantly engaged with the markets, trying to figure things out and learn from experience. For me, for instance, what I did was each and every day take notes in a journal all about market action and what I think it means, and how I should trade, and what is working and what's not. I didn't write a journal describing the trades I took, or what my emotions were during the day. It was all about market action. And it was all my perception and interpretation. Day after day, week after week, making mistakes, wrong calls, being clueless as to what was going on, not knowing how I should trade, not knowing if my views made sense or not, and yet I continued taking notes and learning. Then I would view charts and combinations of historical intraday charts, and I'd note certain behavior. For example, I'd study trend day after trend day and try to notice what they had in common and how I could have picked up on it in real time. Then I'd study range days. Then I'd study a price chart of the ES versus the Advance decline line and see what the relationship was across many different days. Then I'd do the same with the ES and TICK chart. And on and on. Over time, this gave me a feel for the markets, and a certain understanding of how certain days differ and many subtle signs and tells for each type of environment and context.

As for set-ups, I didn't use any predefined ones. I just formed trading ideas and then tried to get in at good trade locations. Even this, which is the art of execution, is quite complicated and not straight forward. I started realizing that in some environments it's best to wait for pullbacks, in others I need to get in at market or I'll be left in the dust. In some markets I can buy low and sell high, in other markets the opposite is in order. And so on.

I became consistently profitable in a timeframe of a few months by doing this. But of course before that I had read 30 or 40 books and so I had all the technical background. I had also worked a lot on my psychology and personal issues. But all of this was in conjunction with a method of learning and trading the markets that was mostly in opposition to what the general wisdom says about simple set-ups and exact rules."

***

Trading is not about trawling the forums or reading tons of books. Sure those are important. Theory is important in any endeavour but ultimately for something like trading, it is the experience that matters. Experience trumps all. It doesn't matter what anybody says. When you hear something, go test it, don't just believe it. Trading is primarily based on testing. It is not based on arm-chair reasoning.

Look at the method he described above. He basically went out there with a focus on learning. The way he became profitable is so similar to how I did it that I find it hard to believe. I resonate so much with the "art of execution" which is what i mean by technical analysis at the microstructure level. It's about learning how price behaves in different environments and how they behave around turning points. You are on the way to making money when you realise trading is not about learning a simple set-up.

***
Intraday trading path

1. Go watch the charts. Just observe.
2. Make predictions/trading plans and see how they turn out.
3. Look at how market behaves on your favourite time frames and make notes.
4. Test, test, test.
5. Start trading with a very small account.
6. Document 1 Playbook trade everyday. Conclude everyday with trade reviews of every single trade you took and also review of what went best, what went worst, how to continue best, how to stop worst.
7. Play the game of making one good trade and try to make as many one good trades as you can in a single session.
8. Keep trading the same account until you can make money for two consecutive trading weeks then increase your size. If you start losing money for two weeks in a row, then bump your size down.
9. Keep doing this for the rest of your life.

Curious as to whether you use guaranteed or non guaranteed stops?

Re bolded - a good question for most would be if this style of trading is so hard why not consider a different style. I think a key to trading is finding a style consistent with your goals and personality.

A combination. But I am trying to move to always using a guaranteed stop and still maintaining the flexibility to exit earlier. Generally, the better the quality of the set-up, the more space I am willing to give it, so guaranteed stops can be helpful for those trades.

Gamifying Life Pt. 2

Pick any one particular aspect/domain of your life and ask yourself the following questions:

1. What does success in this domain look like and feel like? What are the processes that I can put in place to get me to/maintain that level of success? (If you do not know what processes are important, seek mentors and model after success.)
2. "What's the one thing I can do, such that by doing it, everything else will be easier or unnecessary?" Pick one thing to focus on first.
3. What parts of this process are within my control? Which part of it isn't?
4. For the part of the process that is within your control, set yourself a goal using one of the following templates:
- Quantity of something per unit time/duration
- When I notice myself... , I will do...
5. Be honest with yourself, what is your current status when it comes to this goal?
6. Can you do a little bit better tomorrow? How do you intend to reward yourself when you meet your goal?
7. What would be a satisfactory level of performance that you can move onto a more difficult goal or the next goal?
8. Now that you have accomplished your process-oriented goal, do you feel closer to your vision of success?

OK I am going to be very honest without malice and that in your current state you make a better writer or `inquisitor` as opposed to an accomplished forex trader and one more thing you are not trading from Singapore so be honest about what you preached.

GS.

I'm trading from Singapore so I am not sure where the confusion is.

Thanks for your opinion. I never said I was an accomplished forex trader. It would be nice if you could substantiate your "opinions" with evidence/reasoning. As of now they don't add much value to the thread and are mildly accusatory in nature.