my journal

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Old Sep 5, 2009, 2:27pm   #1
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Joined Mar 2003
my journal

This section of the forum is a gold mine. You will learn so much when people are given a chance to talk freely, opening up, and are confident it's their own thread so they won't be interrupted too often, or bothered. I found this great thread of this great person:

Yes, sure he describes how he lost 9000 pounds in a few weeks, but he's honest, sincere, open, and hard working in the sense that he's willing to share details, passion and efforts he's making. I find him great particularly because he describes perfectly the feeling that many of us have in our first years of trading. It seems easy, and we lose all our money very quickly.

So here is where I start my own journal, which I won't write every day, but only whenever I'll have some ideas and I can't find any better places to write them down (like on a specific thread where the ideas may fit better).

Up until recently discretionary trading seemed easy to me just like it does to the author of the above mentioned journal. This is how I lost about 50 thousand euros during 12 years, one thousand at a time, more or less. I've kep on doing discretionary trading for the whole of these past 12 years, despite losing every month. This tells you that I am much sicker than the average trading addict.

Anyway, in these 12 years, one way or another, I did manage to do something good in the meanwhile, while losing a few hundred euros a month with my discretionary trading (on average 350). What I did is I developed a few automated trading systems, that make money, and have been making money for a couple of years now. Problem is at the same time I kept on doing discretionary trading (on and off until a few days ago), because I kept trying to find a profitable method. It was like a personal challenge - something I must find out how to do after all these years. But nobody forces me to find out with real money, when I can use all the paper trading account. By the way this is the mistake I made for 12 years, and it's the same mistake that the author of the above mentioned journal has been making as well.

So, just to clarify on the important info on whether right now I am a profitable trader or not, I will say that I have been profitable for 2 years, but have lost almost all profits made via automated trading with my discretionary trading addiction.

That "addiction" or just "activity", has been decreasing lately. The more I find out with forward testing how good my systems are, the less I feel the need to "help" (and hurt) my profit with discretionary trading.

This illusion of always being on the verge of profitability with my discretionary trading has been kept alive for so long for the specific way I lose with my discretionary trading. I am profitable on 4 trades out of 5, and I lose everything I've made and more on my fifth trade. Needless to say, I hardly use any stoplosses, and certainly I can't say that I have a method, because if one is not profitable he also cannot say he has one method, because he keeps on changing his methods in order to find one that is profitable. And maybe that's the major mistake that one is prone to make with discretionary trading, because the fact that you're not profitable today, does not mean that method isn't profitable, and yet you won't find out if it was a good one if tomorrow you change method because today that method made you lose money.

This catch-22 (you won't be profitable until you'll have a method, but you won't subscribe to a method until you'll see profit all the time) happens because in our minds we can't keep track of exactly which methods we are using, and we can't keep track of how much money (in the days, months, years) that specific method has yielded us. So it's very hard to find a trader who'll stick to a method, realizing that it is profitable despite occasional losses. Unless someone else tells him, which would make things easier.

All this doesn't happen with automated trading: tradestation, excel, or another program, are there to help you keep track of exactly what method makes what profit. And you certainly will not use a method that is not profitable. This is why a discretionary trader could never become profitable (which is my case, so far), and an automated trader could be profitable from the beginning (which is also my case). If you add to this that with discretionary trading you can start without knowing anything about the markets or having to do any homework, whereas with automated trading before you can start you have to work your ass off for two years with programming and testing, then you know why I keep on repeating that automated trading is far superior to discretionary trading, and how it's much more easier to be profitable with it. And for today I am done with my "general purpose" preaching. Later I will write my actual diary with what's been happening lately in my trading.

Some thoughts about the non-importance of psychology

What's the point of stressing so much the importance of psychology that I keep on seeing in the trading world? If you have a profitable method, you don't need psychology. And if you don't have a profitable method, psychology won't help you. The only psychology you need is to make sure you don't keep on trading with real money, when you don't have a profitable method. In other words, do not commit suicide as a trader. In other words, if you someone in your family, who, on a daily basis, is throwing money out the window, you send them to the psychiatrist. But psychology is useless otherwise.

To all these psychology preachers I say: give me a profitable method, don't help me understand myself, and you'll fix my psychological problems immediately. But you know what: maybe they know nothing about a profitable method, or are not willing to share it. Ok, fine - but then don't pretend you're trying to help me out.


What's been happening lately in my trading

Well, what's been happening...
Basically all these systems I am using, as many as 24, make money every single week, maybe with one slightly red week every two months. But then also guess what. Say for example that my systems made x dollars in the past month. With my discretionary trading I've lost x dollars (that same amount). Sounds crazy? It's the truth. If you add that I keep on taking money out for my living expenses, you see why my trading account is actually shrinking, to the point that I cannot trade all the systems anymore, but am limited to the best ones (hopefully I identified them correctly).

I am gonna hang in there and hope for the best. It would be a great step ahead if I finally understood once and for all that discretionary trading with real money and without a profitable method doesn't make sense (especially if a reliable paper trading account is available, which is the case). This insane "addiction" to trading has been decreasing at least.
I began in 1997.
From 1997 till 2007 all I did was discretionary trading (and losing), while developing at the same time my trading systems.
In 2008, I did both: losing with discretionary trading and making money with automated trading, without even making a point of NOT engaging in discretionary trading and thinking I was "helping" my systems.
In 2009, I've realized the problem and have been trying to solve it, but don't think I have yet.

Two major problems I face are these:
1) It's hard to accept that since I created profitable systems I am actually still unable to trade profitable without them.
2) It's hard to accept the feeling of quitting for me. There's the good feeling of quitting an addiction, but there's a bad feeling of quitting an endeavor, especially when I feel that I am this close and when I feel that I could use the extra money made with discretionary trading.

However, there's also no excuse for not paper trading until you're sure that you've found something that works. I have been too arrogant in thinking for all this time that I was ready to make money, and that's why I never learned maybe. Too impatient and cocky. I wonder if I can learn from my mistakes, or if maybe I just don't want to make money and wish to stay at breakeven forever. But this latter could just be an excuse for justifying my lack of profitability by saying "if I don't make money, it's only because I don't want to", just like children say "i didn't even try, or I would have won". One should be careful when speaking of "self-sabotage" because it's unlikely to be the case, and it's more likely to be a bull**** explanation.
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Old Sep 5, 2009, 5:11pm   #2
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Yamato started this thread More thoughts on the nature of discretionary trading

The problems of discretionary trading without a profitable method are countless and many of them are indeed related to psychology - but at the same time psychology is still not important because, once you have a clearly defined profitable method, psychology is useless, and if you don't have it, psychology is again useless... however now I see that it's more complicated than that, because most discretionary traders - even profitable ones - do not have such univocal rules or else we couldn't even call it "discretionary" trading.

So I have to reconsider almost everything about "discretionary trading" that I wrote in my earlier post. If it's called "discretionary" it means it is not a univocal set of rules, in a sense it is not even a method. Or rather, we could say there's a fixed set of rules, and a few discretionary choices left to the trader's intuition, that for one reason or for another, could not be translated into fixed rules, which would be the optimal thing to do (and with all fixed rules, it would be the same as automated trading, only manually executed).

But even those "fixed" rules, aren't they breakable? That is an important question. I heard some profitable traders even say that they will allow themselves to break some of the "fixed" rules and make exceptions. So in this sense they must be doing consistently something that is profitable since they make money, except we can't call it a "method" since they don't even know what exactly they are doing, if not a vague "I must respect most of my rules".

You see at the same time that the more things become vague and undefined the more a profitable trader is at risk, should his psychological makeup change (this time "psychology" indicates something beyond our control, that can't be figured out).

Despite all these things that I had to re-examine and that I explained mistakenly in my previous post, I have now finally established, that unlike automated trading, discretionary trading is not univocal and therefore does have a lot to do with psychology. However, it is not the same psychology we're talking about, because as we get more and more into details we see that many profitable traders allow themselves to break all rules in their method (if we can call it so), and only call it "lack of discipline" when breaking that rule caused them a loss, but do not call it anything if breaking that rule caused them to make money.

In many ways, I sense that "psychology" is just a broad and misleading term, misused by all discretionary traders (profitable and unprofitable) because they simply are not clear about what they do when they trade.

Indeed, if a discretionary trader (profitable or unprofitable) does not use a stoploss, he will call it "lack of discipline" when such choice leads to a loss, and he will call it "my winning intuition" when such choice leads to a gain. It's reasonable to not be logical and to not make sense sometimes even if you are successful as a discretionary trader. If you asked the best driver in the world how he does it, he may do a horrible job at explaining how you should drive, whereas a worse driver could be a better teacher.

Let's see if I can synthesize for future reference.

When trading you can engage in:

1) automated trading, where there are fixed and univocal rules that lead to profit, so you don't have choices and therefore the psychological impact tends to zero.

2) discretionary trading, where, by definition, there are general principles (meaning rules that can sometimes be broken and interpreted) that are subject to discretionary interpretation. However, despite appearances, the importance of psychology here is much less than what it is said to be, and the term "psychology" is usually misused to account for all mistakes leading to losses.

Traders, mistakenly, use "psychology" to explain unprofitable decisions they made due to wrong but rational and even reasonable appraisals. If you lost money because you didn't apply the stoploss, most likely it's because you weren't sure, from your past experience, that stoploss in that case was a good idea, and not because you were undisciplined. Most likely, given what you knew about the market, that was a reasonable choice to make and not an "undisciplined" one. If it works, you forget about it, and think everything is fine with your psychology. Yet, if it doesn't work, you call it "lack of discipline". As a consequence, at the end of the day, you think all your wins are due to your profitable "rules" (which you actually bend every which way), and you blame all your losses on not following those same "rules" due to "psychological" problems. Instead of saying, logically, "I still have not completely figured out how the markets move and therefore some of my choices are profitable and some are not", you think "I got everything figured out, but what screws me is discipline". It's an illusion. Of course every time you lose it's because you didn't respect some of your twenty or more rules. But also, every time you win it's because you didn't respect some of those same rules for the very fact that, to be precise, they are principles and not rules (if they were rules your system would be automated, and psychology would be zero). So the bottom line is you lose because of a bad call on the market, and not because of discipline and psychology. I don't know what else psychology could account for, but I agree with what I said in my previous post once again, even though on different grounds, that psychology in both types of trading does not matter. If you lose it's just a question of making the wrong discretionary choices (since we have established that a "method" does not exist, so there's really no univocal rules to be followed or broken).
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Old Sep 5, 2009, 5:33pm   #3
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Yamato started this thread I think I made a logical mess because I was trying to be too precise and scientific and to explain everything, so I will say it all again in simple words, my "essay" on psychology and trading. Ignore everything you've read until here.

If you do automated trading, all choices are already made, so psychology is zero. If you do discretionary trading, all choices are potentially "discretionary" and the less your method is "univocal" the more psychology will play a role. The heavier is the weight of your choices and their quantity the more you run the risk of being worn out, and even going crazy.

However, just because discretionary trading is discretionary and therefore all "psychological", since all inputs come, continuously, from your mind (whereas automated trading cannot be defined "psychological" especially considering that you can even let your systems run unattended), we should not mistakenly assume that all our mistakes are due to psychological issues, such as self-discipline. Most of our losses are in fact due to bad calls on the market, bad calls on our entries and exits, and therefore they are due to limits in our skills and knowledge of the markets, or also our knowledge and memory of our trades - they're not at all issues of self-discipline. Yet they are wrongly attributed by many discretionary traders to psychology. An ignored stoploss, when it leads to gains, is considered a well-chosen exception to our rules. When it leads to losses, it is not a bad appraisal, but it becomes an issue of self-discipline, personality, sometimes even called "self-sabotage". Wrong, wrong, wrong. Can't blame everything on psychology.

To be even clearer the following are not "psychological" causes of losses:
  • not using a stoploss (you don't use it when you are uncertain whether it's good, because too many times it made you get out of a good trade)
  • taking profits too early (you're doing it, because too many times a profitable trade turned into a loss)
  • letting a position run unattended and letting it turn into a loss (you do it, because often by staring too much at a position, you mess with it, and ruin a profitable trade)
  • "revenge trading": yes, this, too, is not necessarily a psychological mistake (you do it because often when you're mad because of a recent loss you are actually so focused on getting your money back, that you do get it back)

Yet, all of the above, are often called illogical irrational choices, due to a lack of self-discipline or even due to issues of self-sabotage. Well, I say "bull****". We, as discretionary traders, do those things because we actually think they will work. Only, mistakenly, when they don't work, we say "oh, I'm so undisciplined". Well, once again "bull****". It was just a bad choice, which other times worked. And, if we are overall unprofitable, it's not due to psychology but to the fact that we are not skilled enough.

Last edited by Yamato; Sep 5, 2009 at 5:51pm.
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Old Sep 5, 2009, 8:41pm   #4
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Something i use to find is that when i made $50 bucks, sub-consciously i would be like 'Great! I can do a bit of gambling and maybe make a fortune and boast about it' Then i'd immediately proceed to lose the $50.

Just thought that related to your losing money in discretionary trading.
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Old Sep 5, 2009, 11:15pm   #5
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Yamato started this thread Yes, thank you. That is a good example of what happens with unprofitable discretionary trading, in my opinion when you still do not know what works (what is overall profitable).

What we don't know however is if, back then, had you thought something other than "great..." and so on (gambling mentality), your next trade would have been more likely to be profitable. My guess is that even if you tried your best, you still would have lost and not be profitable (overall and in the long run, because the next trade could be just luck or bad luck). In this sense I said that psychology is not the cause of our unprofitability but only a faulty explanation we use for our unprofitability, whereas the correct explanation is that we don't know what works. Most likely, back then, if you had known a profitable method, you would have used it.

When we don't know what works, we are rationally encouraged to try new things in all possible ways and even at the risk of making all sorts of mistakes and then later we will mistakenly call psychology the cause of these losses - mistakenly so, because all this happened in the first place because we did not know what behaviour was the (overall) profitable one. So the cause of unprofitability was not our trying new things (or not applying stoplosses for example, which makes sense if stoplosses do not seem to work), but the cause was indeed our lack of trading skills. Who would be so crazy not to use a stoploss that is proven to work? Very few. The reason so many do not use stoplosses (and later, when they incur into losses, blame them on psychology and self-sabotage) is that they don't know exactly if and which level of stoplosses yield a profitable outcome in the long run. And they do not know, because they are not skilled enough as traders and do not know what works - not because they know and yet want to keep on losing, which is the explanation most people are giving themselves on psychology forums.

I say this with much confidence, because I've seen it happen to myself many times. Blaming myself for self-sabotage, whereas if I didn't use stoplosses is because I wasn't really sure they worked - in fact I had no idea what method was profitable and of course, given that situation, I kept on trying different things. It's hard (not impossible) to keep in your mind enough things to find out what works, in a discretionary way. It's very easy instead to do it with automated trading, by back-testing and forward-testing your systems. At least that is the only was I could find.

I know there will be many objections, but unfortunately I have to generalize in order to make some general statements. If I went after all details and exceptions, I could never make any general statements, which are very useful. That's why I am using this journal section, so I can speak freely and at length without encountering too many objections and criticism. This way I can go further with my train of thought, and the few good-intentioned ones, willing to read my entire posts can still follow and participate.

Last edited by Yamato; Sep 5, 2009 at 11:32pm.
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Old Sep 7, 2009, 11:42pm   #6
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Yamato started this thread Ok, great place to be. I can write as much as I want and not be off-topic.
Today I tried testing a so-called "volatility breakout" system on tradestation. The data I had wasn't very much, because I felt that I needed a one-minute timeframe, so the file got really heavy with just one year. Anyway, I found something worked, but not well enough. And I know that if things don't work well enough, there's no point in trying to force them to work by over-optimizing my parameters. So far I would say that, at least with my limited tools and speed of execution, breakout systems are not where the money can be made. I mean, I found better solutions elsewhere already, so I don't think it's a good place to look. The idea sounded great, but it doesn't work that well. Yes, it does clearly make a profit, but overall it's not worth the big effort that a frequent time-frame requires and so on.
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Old Sep 8, 2009, 7:22pm   #7
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Yamato started this thread Hey, check this out.

I just relapsed into my trading addiction and lost me another 100 dollars (which is a miracle because I was down 800). I can't believe I've been losing money for 12 full years and still haven't healed from this addiction. I make money with my systems, but I gotta lose it with discretionary trading.

Pretty much, I can trust myself and I'm in control in every area of my life (I am a "control freak") except in this one - trading. Here I just keep on hurtin myself, irrationally.

Or maybe it's not like this. Maybe no one is really in control of all areas in his life, and no one is really acting in his best interest in ALL areas of his life. But in trading, the thing is immediately apparent because you lose money.

For example, I don't get enough sleep at night. And each morning I say "tonight I'll go to bed earlier" (how many of us do it? many...). Then when it's time to go to bed, I just postpone and go to bed late again. This means I am not in control, and I am not doing my best self-interest for one reason or the other (not enough time to get into that) just like for trading. Except in this case no the damage done to myself is not as apparent as it would be for trading.

I guess trading is similar to boxing or something like that. If you are doing anything wrong it's gonna hurt you and you'll realize it immediately. In other fields, we can deceive ourselves and think we're doing everything perfectly and we're in full control, but the truth is that we are not. Eating, sleeping, drinking, smoking... countless examples in everyone's lives of not being in total control. But if you have a trading addiction, then it will show. It will appear to you, immediately. Smoking and similar are just the same, but socially they're ok, because the damage is more limited. A guy with a trading addiction endangers himself and his family, potentially causing disaster overnight (unlike smoking).

Trading in this sense is teaching me a lot about myself. It speeds up the process by punching me each time I am doing something wrong. Trading teaches you psychology, but psychology doesn't teach you trading for **** (to get back to my earlier posts).

Can I heal this? No. I haven't learned to go to bed early in my entire life: how am I gonna heal this trading addiction? I guess I'll just have to live with it, being aware that I have it. Or maybe I'll heal it by realizing that I have it. Again, guess not. I still go to bed late and I am tired in the morning, even though I realize I have this problem, and even though I am taking these precious melatonin pills. **** me.

Last edited by Yamato; Sep 8, 2009 at 10:51pm.
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Old Sep 8, 2009, 7:43pm   #8
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As a matter of interest, what timeframes do you trade when you use your discretionary method(s), and is it different from that used in your mechanical method(s)?

Also, if you don't mind my asking, what sort of a diet are you on? (I wondered this after you mentioned melatonin and sleep).
Still learning my trade.

Just because it worked, it doesn't mean that it works.
Think of losing trades as your training fees.
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