Trading psychology

[CanOz]

Re: Trading psychology_State of Flow

Interesting comments by Mike Bellefiore on State of Flow...

 

[Wysiwyg]

I don't belong in this thread.

But I can't resist posting this little extract from the book that Howard Bandy mentioned quite a bit lately, not one of his.

"Thinking , fast and slow", by Daniel Kahneman

it's about psychology and not about trading as such
there are tons of examples where irrational decisions are made in games/gambling with a positive expectation

this is on page 388:

" ... I sympathize with your aversion to losing any gamble, but it is costing you a lot of money. Please consider this question:
Are you on your deathbed? Is this the last offer of a small favorable gamble that you will ever consider? Of course you are unlikely to be offered exactly this gamble again, but you will have many opportunities to consider attractive gambles with stakes that are very small relative to your wealth. You will do yourself a large financial favor if you are able to see each of these gambles as part of a bundle of small gambles ... "

I have the same problem as Modest. I know what I'm doing wrong but I'm doing it anyway.

Hello. Hopefully you will see this post. I want to pick your thoughts on what I have bold typed above. It is something that I have never been able to absolutely define. In my mind and actions, I do not get it wrong. I do not get it wrong (make a mistake is another common term) when I enter and exit the market. The reason is because I do not determine the direction of the move, the intensity of the move nor the timing of the move. The collective of market participants (mainly the big stacks) determine the move so how can I be wrong when I have zero control over a move? It is a concept which most people cannot grasp.

It is only after the entry/exit that people judge themselves right or wrong. The direction, intensity and timing of a move has absolutely nothing to do with the trader being right or wrong. It is simply one of the outcomes of that trade and thinking that one is beating the market (being right) is a small 'delusion of grandeur'.

I am very interested in anyones thoughts on this subject.

 

[rnr]

Hello. Hopefully you will see this post. I want to pick your thoughts on what I have bold typed above. It is something that I have never been able to absolutely define. In my mind and actions, I do not get it wrong. I do not get it wrong (make a mistake is another common term) when I enter and exit the market. The reason is because I do not determine the direction of the move, the intensity of the move nor the timing of the move. The collective of market participants (mainly the big stacks) determine the move so how can I be wrong when I have zero control over a move? It is a concept which most people cannot grasp.

It is only after the entry/exit that people judge themselves right or wrong. The direction, intensity and timing of a move has absolutely nothing to do with the trader being right or wrong. It is simply one of the outcomes of that trade and thinking that one is beating the market (being right) is a small 'delusion of grandeur'.

I am very interested in anyones thoughts on this subject.

I know what I'm doing wrong but I'm doing it anyway.

From my perspective this statement refers to those elements of the trade I can control.

Some examples would be:-

Placing stops too close to the daily price action.

Taking profits too early.

Second guessing the market and, as a result, exiting the trade before my stop loss was taken out.

 

[Habakkuk]

Hello. Hopefully you will see this post. I want to pick your thoughts on what I have bold typed above. It is something that I have never been able to absolutely define. In my mind and actions, I do not get it wrong. I do not get it wrong (make a mistake is another common term) when I enter and exit the market. The reason is because I do not determine the direction of the move, the intensity of the move nor the timing of the move. The collective of market participants (mainly the big stacks) determine the move so how can I be wrong when I have zero control over a move? It is a concept which most people cannot grasp.

It is only after the entry/exit that people judge themselves right or wrong. The direction, intensity and timing of a move has absolutely nothing to do with the trader being right or wrong. It is simply one of the outcomes of that trade and thinking that one is beating the market (being right) is a small 'delusion of grandeur'.

I am very interested in anyones thoughts on this subject.

Modest has described his psychological issues as he calls it, that apparently lead to a breakdown of common sense and self-sabotage.
That struck a chord with me and while I don't believe I'm sabotaging myself, I notice my loss of common sense.

That's what I meant when I said "I know what I'm doing wrong but I'm doing it anyway". I haven't followed Modest's thread as I'm not interested in futures, and whenever I look casually at the charts those guys put up - well, it doesn't make much sense to me.

So it's fair to say that I have only read a few posts by Modest and captain black and don't really know the bigger picture.
That book goes into great detail on the unconscious biases people have that result in irrational decisions. The fact is that I have studied this stuff for years and know "all" about it but I seem to "forget" it when it counts. Some classic examples will illustrate it.

We can't win every trade. We know we don't need to. But we (or at least I do) expend far too much emotional energy on each individual trade, when we should simply let (hopefully) positive expectancy and the law of averages take care of itself. My risk-aversion causes me to over-analyse each trading signal until I can find something wrong with it and therefore not take the trade. Also, halfway through a month I may stop trading altogether because I'm sitting on a nice profit and I don't want to risk having a losing month. How stupid is that?
And how about this: on the first day of the month I casually enter a trade or two completely carelessly, without even looking at a chart, what the ... ?

Captain black points out to Modest that his wins are 4-6 pips and his losers are more like 8 pips. Something like that. That links in with Prospect Theory (Kahneman and Tversky), the bit about different attitudes to risk for gains and losses. Words to the effect that losses are felt twice as much as the pleasure from gains. And yet we know that we should cut losses and let winners run.

Hey, it's a 500-page book. Don't expect me to summarise it.

Wysi, I understand exactly what you're saying about 'not being wrong'. The outcome being judged instead of the action/choice/decision before the event. A fundamental principle of game theory is that the right moves/decisions aren't determined by what eventually happens. A good strategy is one that would have the highest chance at success if repeated enough times to develop a reasonable sample size. You know that.
Van Tharp would ask, "Is it a useful belief?".

Do you know of Michael Covel and his "Trend Following" book? It's been a few years since I've read it but I remember the bit about trend followers NOT predicting but only reacting to the market moves. You could therefore say they also are never wrong. I'm not sure if he actually says that but it's implied. I think it's semantics.
"Is it a useful belief?"
Yes, it is for Michael - he has sold a lot of books and turtle trader courses.

Getting back to the the other book for a moment, and I hope Howard Bandy doesn't read my comment. I find it very interesting and worthwhile reading. I'm glad that he mentioned it, otherwise I would probably never have found it. I'm going to read it more than once.
However, the average ASF member will find it heavy going, it's almost 500 pages and not about trading.

 

[Gringotts Bank]

Self-sabotage is when a part of you doesn't actually want the winning trade. Done it many times.
It's a hard thing to 'unpack' because self-sabotage usually relates to subconscious beliefs about worthiness.

Living a highly virtuous lifestyle can go some way towards helping this. The expert commentary on virtue -in my opinion- is from buddhist literature (aka sila, http://www.accesstoinsight.org/ptf/dhamma/sila/)

With a high level of virtue, the mind tends to become clear. Meditation becomes easier and self-sabotage less likely because karma is reduced. If you think of karma as "guilt relating to past actions" you can see how the mind gets disturbed by this, and the drive for self-punishment arises in some people. The pitfall is to use virtue to prop up self esteem eg. "I helped an old lady cross the road, therefore I am a good person!". That's the mind co-opting the situation for self-aggrandizement. If on the other hand you help the old lady with a pure intent, a connection is formed and the reward is immediate. The first is self-focussed helping, the second is other focussed (selfless).

 

[Wysiwyg]

Modest has described his psychological issues as he calls it, that apparently lead to a breakdown of common sense and self-sabotage. That's what I meant when I said "I know what I'm doing wrong but I'm doing it anyway".

Well I did notice Modest does lament his decisions with could have and should have which is the connection I thought you drew. The truth is it is only after a trade decision is made that we pass judgement on ourselves which I believe leads to biases in the future and more to the point, not trading in the moment.

That book goes into great detail on the unconscious biases people have that result in irrational decisions.

Yes yes, that is it. Observers may see them when the individual may not.

We can't win every trade. We know we don't need to. But we (or at least I do) expend far too much emotional energy on each individual trade, when we should simply let (hopefully) positive expectancy and the law of averages take care of itself.

Positive expectancy is another trading cliche I have never come to terms with -slash- understood. Positive expectancy based on (usually) statistics and faithful probability! The trader believes because of historical and most recent results that similar or same results will happen in their future trades. The test results are the holy bible. I think it true to say that human behaviour repeats with pricing but the intensity and duration is near random.

My risk-aversion causes me to over-analyse each trading signal until I can find something wrong with it and therefore not take the trade. Also, halfway through a month I may stop trading altogether because I'm sitting on a nice profit and I don't want to risk having a losing month. How stupid is that?

Tech/A posted something along the lines of - being successful staying out of the market at the right times. Timing is a biggy?

Captain black points out to Modest that his wins are 4-6 pips and his losers are more like 8 pips. Something like that.

His scatter chart results show he had more losses than wins for that period but the aggregate winners were greater than the aggregate losses. Obviously if repeated will lead to success but the shear loss percentage takes a belief that is devout. I am surprised Blacky has not stumbled upon a more consistent sequence of trade signals or maybe trading the trend is the only profitable game to play. In flow.

Do you know of Michael Covel and his "Trend Following" book? It's been a few years since I've read it but I remember the bit about trend followers NOT predicting but only reacting to the market moves. You could therefore say they also are never wrong.

Yes that is what I mean. No could have or should have post trade disempowering lament. I have been trading stocks, indices, FX and testing strategies for what seems like a length of time to be reasonably conclusive in my assessments.

 

[Wysiwyg]

Self-sabotage is when a part of you doesn't actually want the winning trade. Done it many times.
It's a hard thing to 'unpack' because self-sabotage usually relates to subconscious beliefs about worthiness.

It may not need 'unpacking' but simply flipping that thought. Again it is only after the event that the judgement is formed. Next time you 'know' the winning trade, let me know.

 

[cynic]

It may not need 'unpacking' but simply flipping that thought. Again it is only after the event that the judgement is formed. Next time you 'know' the winning trade, let me know.

Ahh! But did you not know?
Knowing it's a winner!
That is the key to making it so!

 

[Wysiwyg]

Ahh! But did you not know?
Knowing it's a winner!
That is the key to making it so!

Wellll, yes if there is consensus.

 

[cynic]

Wellll, yes if there is consensus.

A consensus of one?!

 

[Wysiwyg]

A consensus of one?!

Okay, one billionaire then concensus.

 

[cynic]

Okay, one billionaire then concensus.

I was alluding to a philosophical concept that suggests our reality is formed in accordance with our beliefs! Have you noticed how your beliefs have influenced your interpretation of my last two posts?

 

[Quant]

I have not read entire thread but have read a few posts here and there . And i have to tell you there is only one cure to trading induced emotional breakdowns . EDGE , thats it , now you dont need a therapist to find that . You more than likely need a mathematician . Now an edge is a positive expectancy ( that terrible thing many think is not real ) I can tell you the quickest way to a positive mindset is POSITIVE EXPECTANCY . Now obviously accurately defining it is difficult for many and basically impossible for a discretionary trader . It requires statistics of a repeatable sequence that produces a trade , this is where everyone fails . All i got to say is throw those goddam pyschology books in the bin and goddam learn to become systematic trader , I am a machine and i dont get emotional , its the answer i tell you ... The can is open haha


Many traders think its their psychology letting them down when in fact they are no freaking good at trading . Fix the root of the problem

Find a method that works and is defined by a rock solid set of rules ... RINSE & REPEAT ... its that easy


Last edit ... If you can measure it you can more than likely improve it . start bloody measuring

I LIED , if you have not got POSITIVE EXPECTANCY you could do all the work on psychology in the world and never fix your problems ..... that is a FACT , you cant turn **** into marble

 

[Triathlete]

I have not read entire thread but have read a few posts here and there . And i have to tell you there is only one cure to trading induced emotional breakdowns . EDGE , thats it , now you dont need a therapist to find that . You more than likely need a mathematician . Now an edge is a positive expectancy ( that terrible thing many think is not real ) I can tell you the quickest way to a positive mindset is POSITIVE EXPECTANCY . Now obviously accurately defining it is difficult for many and basically impossible for a discretionary trader . It requires statistics of a repeatable sequence that produces a trade , this is where everyone fails . All i got to say is throw those goddam pyschology books in the bin and goddam learn to become systematic trader , I am a machine and i dont get emotional , its the answer i tell you ... The can is open haha


Many traders think its their psychology letting them down when in fact they are no freaking good at trading . Fix the root of the problem

Find a method that works and is defined by a rock solid set of rules ... RINSE & REPEAT ... its that easy


Last edit ... If you can measure it you can more than likely improve it . start bloody measuring

I LIED , if you have not got POSITIVE EXPECTANCY you could do all the work on psychology in the world and never fix your problems ..... that is a FACT , you cant turn **** into marble

+ 1 ..........although myself I am more of a discretionary position trader with a positive expectancy rather than a system trader.....

 

[cynic]

I have not read entire thread but have read a few posts here and there . And i have to tell you there is only one cure to trading induced emotional breakdowns . EDGE , thats it , now you dont need a therapist to find that . You more than likely need a mathematician . Now an edge is a positive expectancy ( that terrible thing many think is not real ) I can tell you the quickest way to a positive mindset is POSITIVE EXPECTANCY . Now obviously accurately defining it is difficult for many and basically impossible for a discretionary trader . It requires statistics of a repeatable sequence that produces a trade , this is where everyone fails . All i got to say is throw those goddam pyschology books in the bin and goddam learn to become systematic trader , I am a machine and i dont get emotional , its the answer i tell you ... The can is open haha


Many traders think its their psychology letting them down when in fact they are no freaking good at trading . Fix the root of the problem

Find a method that works and is defined by a rock solid set of rules ... RINSE & REPEAT ... its that easy


Last edit ... If you can measure it you can more than likely improve it . start bloody measuring

I LIED , if you have not got POSITIVE EXPECTANCY you could do all the work on psychology in the world and never fix your problems ..... that is a FACT , you cant turn **** into marble

I remember a time when I entrusted a friend with a very simple, high probability, rule based betting formula.

The first day that we both independently operated the system, on the same race meeting, was an enlightening experience.

When the formula worked that day, I was naturally pleased for myself and my friend, but, later that day a puzzling thing happened!

My friend complained to me about losing money!

When I asked what she had done, she admitted to having initially profitted, but, being discontent with the size of the win, had decided to violate a critical rule by placing an additional bet!

Clearly something other than the systematic edge was at play here!

 

[minwa]

I remember a time when I entrusted a friend with a very simple, high probability, rule based betting formula.

The first day that we both independently operated the system, on the same race meeting, was an enlightening experience.

When the formula worked that day, I was naturally pleased for myself and my friend, but, later that day a puzzling thing happened!

My friend complained to me about losing money!

When I asked what she had done, she admitted to having initially profitted, but, being discontent with the size of the win, had decided to violate a critical rule by placing an additional bet!

Clearly something other than the systematic edge was at play here!

Much like the turtle traders experiment. Same rules, same system, same edge. Some blew their accounts and booted from program while others collectively go on to make $175m over 5 years.

 

[Wysiwyg]

The only "edge" in trading is the trade management.

 

[Habakkuk]

Wysi, some further thoughts on your original comments about not 'getting it wrong'.

You're looking at it like Mark Douglas.
- You think in probabilities
- You have an edge
- You act on it (flawlessly)
- You completely accept the risk (carefree state, maybe?)
- You let the market unfold, etc.

In that case you are correct - you did everything right, according to plan. Any individual losing trade is the result of market action and was out of your control. There is nothing to correct.

Now consider the opposite scenario. I'm a full discretionary intra-day momentum trader (I wish!).
- I have an edge too
- My entry timing is decided by myself, it's my responsiblity
- What happens next is decided by market forces

If the position moves against me immediately after entry, I have been wrong; I have made a mistake; The loss is my fault.
I was supposed to trade momentum but I entered at the wrong time, just as it mean-reverted. There is no excuse. I'm guilty.

That's the way I see it, and I prefer that idea. It might explain why I can't trade profitable mechanical systems.


In my previous post there is some clumsy wording that caused confusion.

Captain black points out to Modest that his wins are 4-6 pips and his losers are more like 8 pips. Something like that.

I meant this comment by captain black to Modest:

Taking a profit at 6 ticks but letting losses run out to -6 and -8 makes it really tough to get expectancy working in your favour.

You have a real edge when it comes to picking S&R levels, just need to keep working on reviewing where to let the winners run.

And finally, I don't believe in this concept of self-sabotage. Nobody does that. Why would you lose deliberately to punish yourself? I can't see the point.
But it sells books.

 

[Habakkuk]

All i got to say is throw those goddam pyschology books in the bin and goddam learn to become systematic trader , I am a machine and i dont get emotional , its the answer i tell you ...

Quant, I agree with your main point, but it's precisely because people are not machines that they get emotional and (maybe) need the goddamn psychology books. Although they haven't helped me much so far.

It may have been Van Tharp who said 15 years ago that successful trading is 10% methodology, 20% money management and 70% psychology.
Apart from the complete nonsense of assigning percentages to completely different, hard to quantify items (that's why I think it was Van Tharp), I think it's about right. The method or system is not that difficult to come up with for a retail trader. Money management is to make the highest possible return with acceptable risk. That's only slightly more challenging. But executing it consistently and accurately, that's where psychology comes in.

That's what's holding me back and it's 100% for me.

 

[Roller_1]

The only "edge" in trading is the trade management.

You can have an entry edge ie greater than 50% win rate or you need to manage your positions to create an edge ie. cutting losses, letting profits run. Two different things.

I have not read entire thread but have read a few posts here and there . And i have to tell you there is only one cure to trading induced emotional breakdowns . EDGE , thats it , now you dont need a therapist to find that . You more than likely need a mathematician . Now an edge is a positive expectancy ( that terrible thing many think is not real ) I can tell you the quickest way to a positive mindset is POSITIVE EXPECTANCY . Now obviously accurately defining it is difficult for many and basically impossible for a discretionary trader . It requires statistics of a repeatable sequence that produces a trade , this is where everyone fails . All i got to say is throw those goddam pyschology books in the bin and goddam learn to become systematic trader , I am a machine and i dont get emotional , its the answer i tell you ... The can is open haha


Many traders think its their psychology letting them down when in fact they are no freaking good at trading . Fix the root of the problem

Find a method that works and is defined by a rock solid set of rules ... RINSE & REPEAT ... its that easy


Last edit ... If you can measure it you can more than likely improve it . start bloody measuring

I LIED , if you have not got POSITIVE EXPECTANCY you could do all the work on psychology in the world and never fix your problems ..... that is a FACT , you cant turn **** into marble

Good post, don't agree with needing to be a mathematician but you need to understand what you're looking for/at.