T2W Trading Community

The Paradox of Trading
Profitable trading is an endeavor that goes against human nature, mainly because of these annoying flaws called emotions. Fear and greed compose the actions of the market. When a position is profitable, greed kicks in until the position turns bloody and then fear kicks in. Blow off tops are peaks with the most volume because that’s when the crowd’s greed gets the best of them as they chase an entry to get ‘in’ on the action, only to have it peak and tank. The same holds with ‘capitulation’ when the pain is too great and the crowd finally exits a losing position, right before it bounces.

The notion of working ‘harder’ for a greater reward may apply in the job force, but in the world of trading, working harder as in making more trades means losing more money. There is a capacity to the number of trades one can effectively make before the slippage from stop losses and commissions far out weigh the profits. In fact, there are times to pay very close attention to the markets (like the first hour of trading) and time where it’s absolutely detrimental to pay too close attention (like the deadzone midday period).

As for control, people think the more stringent, tight focused and attentive you are during the day, the more profitable you will be. This expectation of control paints an almost militaristic picture of keeping a tight clenched fist on the market all day long. It implies that you are carefully watching every tick and gyration of the market with complete uninterrupted attention. It means you carefully analyze and berate yourself on every trade because you could have made more or you should have stopped out earlier. It means you have high expectations every day with a positive mental attitude and absolutely require no less than excellence. It means you have to be ‘hard’ on yourself because you can always strive for better. You are the bastion of ironclad fortitude and dedication. Blinking is not an option, sir!

All the above criteria is perfect recipe for success in the corporate and fast food world, but when it comes to trading the markets, it’s a death sentence. This type of rigidity will eventually force a person to breakdown from the stress. Basically, the trader has already placed such impossible goals that he not only shoots himself in the foot, but eventually will voluntarily turn the gun on himself to relieve the pressure.

In fact, deep inside, the trader subconsciously invites the possibility of a blow out just to finally relieve the pressure of having to make money every day. It’s like trying to get yourself killed just so you can finally get a good night’s sleep. To a rational person observing from the outside, it’s insanity. But to the trader locked in his own prison within the eye of the storm, this rationalization is the only way out. This self-induced pressure is completely foolish, detrimental and hazardous. In all reality, it’s a form of self abuse. The line that separates one from being a delusional humanoid and a masochist freak is about as wide as a Mack truck. Get real. Everyone has their own threshold levels for stress. The key here is to place yourself only in situations where that threshold never has to be tested.

Instead of expecting to make big profits going into the trading day, try expecting less to end up with more. If you make $500 in either case, which mindset leaves you with confidence?

The first mindset leaves you wanting more. You should have made more. Try harder tomorrow, junior. This builds pressure to do better which is carried into the next day.

The second mindset leaves you with a confident and controlled peaceful state of mind, humble yet confident. You done good, even better than expected. Don’t expect as much tomorrow, just filter tight and let the trades play out. No expectations equates to no pressure going into the next market day.

The Cognitive Dissonance Theory by Dr. Leon Festinger shows very clearly why people blowout their accounts when they start off this rigid. When contradicting piece of knowledge known as cognitions collide, they create stress. Human nature is to relieve that stress either through changing his beliefs or behavior.

That’s because they want to take the pressure off. Traders inherently desire to fail to relieve the pressure.

Human nature is to reduce stress by changing one’s belief or one’s actions.

Since 1998, UndergroundTrader.com has had thousands of traders worldwide come through the doors. Many of these traders learned the methods, applied their own style to them and left as profitable self-sustaining traders. Unfortunately, many other traders were internally programmed to blow out their accounts no matter what they were taught or told, and proceeded to do just that. It’s a tragic but real aspect of this game. Everyone can’t win.

However, a lot has changed since the ‘old’ days. Trading has taken on a complete paradigm shift. The industry has gone through it’s boom and bust filtering cycle. As with every trend, there’s the parabolic pop (1998-2000), the bust (2001-2004) and then a slow reemergence (2004-present). The good news is there are plenty more resources and materials available that work to shorten the time and costs of the learning curve. From training materials to trade simulators and back testing software, it’s gotten more sophisticated and more accessible. Nasdaq level 2 has been bypassed for converging time frame charts. Volume trading has been bypassed for sniper trading. Scalpers have evolved into range players. Basket trading has been bypassed for pattern trading. Full time trading is now effective part time trading. Less is more. The markets require more attention to pacing over methods. This is all part of the evolution of the trading markets. Failure to adapt results in extinction.

The people entering this game tend to be more educated and aware of the risks involved. Now if they only get rid of the pattern day trading rule and move to .05 spread increments, we’d be in heaven.

The bad news is that as long as it’s humanoids making trades, there will still be blowouts. Then again, this is the market, a supposed zero sum game. We can’t save’em all, only the ones who can adapt. For most, it’s really a blessing in disguise as they move forward with their lives to pursue other endeavors. For some, it’s a calling.

Some of the most successful traders I know blew out their earlier accounts first. It’s almost a rite of passage amongst the old school traders. The pain and agony they suffered is a constant reminder of what they did wrong. It forced them to reevaluate and re assemble their methods. It allowed them to identify when a bad situation is forming and they are wise enough now to avoid it. I remember reading an interview with a successful fund manager who claimed his success was based on making ‘every’ mistake possible enough times to know not to make them again. Traders don’t have to go this route any more.

As I said, the resources available on the internet alone should be enough to thoroughly reduce a trader’s learning curve, but, some things just can’t be taught. They have to be felt. Pain is a thorough and thought inducing teacher, as long as you learn from it.

Today’s trader not only has to possess the ability to objectively assess the market, but also assess his own actions and mental state. He needs to be acutely aware of when he is pushing the risk envelope a little too hard as quality of set ups decline. Most importantly, he has to have the ability to ease up on the pedal or downright hit the breaks before disaster hits.

In the second article, I will go over the steps to climb back out of the abyss and prevent yourself from falling back in again. Please don’t overtrade tight markets and stay out of deadzone. Good trading!

Part 2 of this article will be published next week.