Winning trader's mind

[4xpipcounter]

bbmac, I've been reading some of your posts, and you have some solid maringing principles in place. I like that style, and maybe it is because mine is similar.
I monitor and trade 28 pairs. I am looking for entries into ones that are most likely to succeed in my forecasted direction, and yield the most pips. My margin is 10% on all my trades. A 100-pip gain is a 10% gain on my account, etc.
I also like how you point out the mathematical principle behind winning and losing trades, which is spot on. If you lose 20%, then you have to gain 25% to get back to the point of origination.
Excellent stuff!

Fleshing out what I was saying in my post above: The table below shows the 1% chance of the size of consecutive losing run over any 500set-up sample:



So consider the possible depletion of your a/c at the given historical strike rate of your trading edge...Let's for the sake of argument say a trading edge has a 53% strike rate (ie winners as a % of total)...and that a consecutive losing run occurs of 7...at 2% risk per trade, you have to ask yourself whether a loss of 14% would be catastropic to you, Remember too that a consec losing run could be followed by a couple of winners and another consec losing run of 2-3-4-5 which are common given this strike rate of 53%...so that actually this loss could quickly in practice go to 20% or more at such a 2% risk/trade. Are you comfortable see-ing your a/c deplete by 20%...is it a 'catastrophic loss ? By catastrophic I mean the following;

Theortically it should be possible to make money in trading from an arbitrary entry so long as the correct risk:reward strategy is employed and adhered to. Even without an arbritary entry employing say a 3:1 risk:reward ratio on a 33% strike rate (winning trades as a % of total trades) would over any sample of entries, prove profitable. It is rightly said that it is not the entry, but the exit that makes the money.

But here's the thing...when in a trade it is common to experience discomfort and the body communicates that to our brains, resulting in the all too common response to ending that discomfort...by exiting the trade early. (Our bodys react to perceived dangers by preparing to 'Fight or Flee.' )

In trading a lower strike rate system/methodology there are naturally more losing trades and crucially more consecutive losing trades. Our brains remember past losses and irrationally place more emhasis on them than the winners, resulting in it fearing more losses to come. It's mechanism to protect us from this discomfort is to secrete adrenaline and noradrenaline (which comes from the adrenal glands above the kidneys.) The release of these hormones results in the body increasing the flow of fatty sugars through the liver which causes the feelings of discomfort resulting in a much decreased ability to make objective judegements. To put it another way;

'..Your Neo-Cortex (the thinking part of your brain) shuts down and the survival mechanism in the middle and lower more primitive parts of the brain take over. As a result you can react to things and stop thinking things through rationally. Basic emotions like fear and anger take over from more complicated sophisticated higher function emotions.'

So our ability to adhere to strict risk:reward ratios necessary to ensure overall net profitability with a lower strike rate system is severely impaired with the greater number of losses and consecutive losses with this type of trading system. The greater the consecutive run of losses the greater the impairment, and again, crucially, the less experience/understanding one has of this, the greater the discomfort one might experience resulting in non-adherence with the critical risk:reward ratio.

Further to this, such a consecutive run of losing trades can also interfere with the ability to actually place the next trade when the trading edge presents itself, fearfull of further losses, thus interfering with the natural flow of probability upon which all trading edges rely.

Physical discomfort and Fear are powerful debilitating factors on the ability to profit from a trading edge.

Remember too that, following the example above a 20% depletion of a/c requires a gain of 25% to recover the a/c to starting bal. Ie 25% of the 80% (100%-20%) remaining a/c bal.


My rather long winded point is that every known eventuality and contingency has to be caterered for in your trading plan including the likely depletion of a/c at the strike rate being experienced and risk used, and your ability to recover from it, lest it turn into the 'death spiral' common to many a/c's.

G/L

 

[oildaytrader]

BBmac

Strike rate is relevant to stop loss and profit target .Example if you have a stop of 100 and take profit target of 38 ,the strike rate may be around 75%.If you have target of 250 pips your strike rate will go down to around 50 % , strike rate is also based on factors of entire system.

What criteria is your strike based on?

 

[bbmac]

BBmac

Strike rate is relevant to stop loss and profit target .Example if you have a stop of 100 and take profit target of 38 ,the strike rate may be around 75%.If you have target of 250 pips your strike rate will go down to around 50 % , strike rate is also based on factors of entire system.

What criteria is your strike based on?

Your point is a valid one....My strike rate is calculated on how many of the set-ups that I trade (that make up my trading edge) go on to achieve my minimum target for the set-up....this figure as a % of the total trades taken gives the strike rate.

G/L

 

[oildaytrader]

As regards entries I wait for my set ups and scale in with a stop loss.

http://www.investopedia.com/terms/s/scale-in.asp

Here is scaling in method, it works very well .I have to be wrong on set up 10 to 15 times daily to lose money.

http://www.trade2win.com/boards/gen...sequence-intra-day-trading-3.html#post1232378

 

[Prawnsandwich]

Your point is a valid one....My strike rate is calculated on how many of the set-ups that I trade (that make up my trading edge) go on to achieve my minimum target for the set-up....this figure as a % of the total trades taken gives the strike rate.

G/L

You s have a very precise and consistent analysis of your trading method....mine seems to vary month to month depending on market conditions, how much I stick to the method etc...mistakes made...above average expected gainers etc etc.....

 

[Dentalfloss]

bbmac....
a geat posting by on the biochemistry of a losing trade.never thought about it that way.thnks

 

[Dentalfloss]

i am thinking we have lost the track a bit on this thread
the point being that we want to analyse a winning traders mindset
two things come to light..imho
1.the ability of the trader to identify areas where trades can be put on...this can be looked in 2 ways
a good method of identifying areas of supp/res.if you look at bbmac"s methodology.he is spending time identifying these areas ,and then spending time to classify these.ie major/intermediate,minor.from his method,the rest falls easily into place.so no special indecators,software or setups looked at yet.
if you cant do this,then really you have no hope
one other thing...it does recquire practice to identify these areas quickly and correctly.these are areas of previous supp/res..ie known areas...
the next thin from the method....he identifies POTENTIAL supp/res areas.ie where trend MIGHT change.so fibs ,gann .ma.round numbers
so,the mindset of a good trader...he/she will look at a chart and indentify these areas quickly in his/her mind.within a few seconds ,there is a good idea of where it can be traded from
then he/she can look further and put on indecators etc etc

 

[Dentalfloss]

bbmac...where you a brain surgeon before you became a full time trader...??

 

[JahDave]

bbmac...where you a brain surgeon before you became a full time trader...??

It's not brain surgery and to imply so would toss out all the successful traders like myself. I have two working class parents and I have worked at a fulltime job and learning to trade successfully at night. I will say that it took me 3 years of hard work to be consistently profitable, but now I am and it was well worth the effort.

 

[bbmac]

bbmac...where you a brain surgeon before you became a full time trader...??

lol.

 

[4xpipcounter]

I think bbmac is the embodiment of a true, successful trader. He treats it like a business. He has done his homework. He has covered every facet carefully to ensure he will be the success he knows he is capable of.
I think anyone who has become a success in this business has paid the price with many long hours of making nothing, trial and error, lots of demo trading, and then a few months to years later, a trader is born.

 

[Prawnsandwich]

i am thinking we have lost the track a bit on this thread
the point being that we want to analyse a winning traders mindset
two things come to light..imho
1.the ability of the trader to identify areas where trades can be put on...this can be looked in 2 ways
a good method of identifying areas of supp/res.if you look at bbmac"s methodology.he is spending time identifying these areas ,and then spending time to classify these.ie major/intermediate,minor.from his method,the rest falls easily into place.so no special indecators,software or setups looked at yet.
if you cant do this,then really you have no hope
one other thing...it does recquire practice to identify these areas quickly and correctly.these are areas of previous supp/res..ie known areas...
the next thin from the method....he identifies POTENTIAL supp/res areas.ie where trend MIGHT change.so fibs ,gann .ma.round numbers
so,the mindset of a good trader...he/she will look at a chart and indentify these areas quickly in his/her mind.within a few seconds ,there is a good idea of where it can be traded from
then he/she can look further and put on indecators etc etc

I think bbmacs posts and others have been very relevant to the topic in question - a winning traders mindset....he's covered in significant detail the effects of strike rate / losses / risk on the psychology of a trader, a hugely important aspect and one which isn't covered too often in these forums..

..the point being that a winning trader will have taken account of these various factors and how they impact on his own psychology and mind set....

 

[wallstreetwarrior87]

Thanks for the response....I risk a fixed % of capital per trade but size the actual position taken based on distance of stop from entry based on a sensible technical position for the stop...

I am looking at ways of maximising potential gains by adjusting risk size based on quality of the set-up, and also evaluating what is the optimum risk amount for my method / trading conditions etc

I think bbmac has touched on a very important point that is not discussed very much on forums regarding risk; "Risking the same amount on each trade". It is something I can never get my head round as it doesnt seem very logical. Why risk the same on every trade when every trade is different?

For example if a trade has a 55% chance of playing out, why would you risk the same as a trade that had an 85% chance of playing out? This is not the best way to turn your account over.

The key here is to know your success rate, this will come with time and experience. The aim is surely too maximise the best opportunities.

A good example would be; if a market stall holder that sold fruit ,found out that his other 2 competitors were not trading the next day, but he still decided to buy the same stock as any other day. Would it not be logical to increase his stock knowing that his competitors were having the day off, and that there was a greater chance of having an increase in customers, thus maximising his profits.

The problem (in the beginning) is how a trader calculates his/her strike rate. Not every trade is the same.

This is just another component that goes into making up a traders mindset. It becomes a lot clearer with time and experience.

 

[Prawnsandwich]

It is something I can never get my head round as it doesnt seem very logical. Why risk the same on every trade when every trade is different?

For example if a trade has a 55% chance of playing out, why would you risk the same as a trade that had an 85% chance of playing out? This is not the best way to turn your account over.

Well every trade may not be that different, particularly if you are using the basically same method. Depends on if you are using multiple strategies / methods, then you may have clearer % strike rates....

..if you are using the same basic method then it can be a theoretical exercise to be attaching precise % strike rates, according to the perceived quality of the set-up...

...the markets are not that logical - sometimes what appears to be a not great quality set up can give you your biggest R gainer of the month, and vice versa...

 

[oildaytrader]

lol.

How many trades do you do per week and on average per day? Over trading can leave the mind with too much information to process, leading to overload of work and inefficiency.How many instruments do you trade and monitor simultaneously?

 

[bbmac]

How many trades do you do per week and on average per day? Over trading can leave the mind with too much information to process, leading to overload of work and inefficiency.How many instruments do you trade and monitor simultaneously?

I trade multiple set-ups on 1 instrument (gbpusd) as opposed to fewer set-ups on multiple instruments (I believe you are best doing one or the othere as it proves difficult to do both.)

The repeating set-ups I look for are a confluence of a proprietary pattern of oscillator divergence (both regular and hidden) with bol band deviation @ pre-identified potential support/resistance factors areas, with a price action trigger. I also look for an additional factor to support these repeating set-ups-that of 3 types of repeating fractal geometric price action patterns that must be present on at least the next higher t/f higher than that used as a the trigger t/f. So in total I effectively have 6 types of repeating counter trend and 4 types of repeating with trend Re-entry (to next higher t/f [+] after a pullback) set-ups. All this sounds very involved but once you have trained your eye to see them (they are very visual) it is quite easy...the task then is to determine whether they are Max Conf, A or B rated as discussed further below, and then to have the patience and discipline to stick to the trading plan even though those that are not, and should therefore be passed up, may result in them working out positively.

Of the set-ups I see I would say that I reject (ie do not trade) 50% of them as they do match the Maximum Confidence, A or B+ ratings conditions I look for and discussed earlier in this thread, (such ratings for the largest part revolving around the potential strength of support/resistance factors present at the set-up...partly the number of potential supp/res factors but also an observation as to the likely higher probability behaviour of price when it reaches one of those factors- a previous 1hr [+] near-term obvious swing hi or lo...ie a near-term obvious previous imbalance of supply/demand or demand/supply. I can pre-determine the rating of any such 'set-up as I have pre-determined this strength of such potential supp/res factors in advance.

This results in 3-4 trades per 5hr trading session being taken, ie an average of 15-20 per 4 session week, given this trading session duration.

G/L

 

[oildaytrader]

I trade multiple set-ups on 1 instrument (gbpusd) as opposed to fewer set-ups on multiple instruments (I believe you are best doing one or the othere as it proves difficult to do both.)

The repeating set-ups I look for are a confluence of a proprietary pattern of oscillator divergence (both regular and hidden) with bol band deviation @ pre-identified potential support/resistance factors areas, with a price action trigger. I also look for an additional factor to support these repeating set-ups-that of 3 types of repeating fractal geometric price action patterns that must be present on at least the next higher t/f higher than that used as a the trigger t/f. So in total I effectively have 6 types of repeating counter trend and 4 types of repeating with trend Re-entry (to next higher t/f [+] after a pullback) set-ups. All this sounds very involved but once you have trained your eye to see them (they are very visual) it is quite easy...the task then is to determine whether they are Max Conf, A or B rated as discussed further below, and then to have the patience and discipline to stick to the trading plan even though those that are not, and should therefore be passed up, may result in them working out positively.

Of the set-ups I see I would say that I reject (ie do not trade) 50% of them as they do match the Maximum Confidence, A or B+ ratings conditions I look for and discussed earlier in this thread, (such ratings for the largest part revolving around the potential strength of support/resistance factors present at the set-up...partly the number of potential supp/res factors but also an observation as to the likely higher probability behaviour of price when it reaches one of those factors- a previous 1hr [+] near-term obvious swing hi or lo...ie a near-term obvious previous imbalance of supply/demand or demand/supply. I can pre-determine the rating of any such 'set-up as I have pre-determined this strength of such potential supp/res factors in advance.

This results in 3-4 trades per 5hr trading session being taken, ie an average of 15-20 per 4 session week, given this trading session duration.

G/L

How much emphasis do you place on e/gbp or e/usd when taking positions on cable?

What is the minimum stop you use on cable?I have tried 12 pips , but cable jumps all over and knocks out small stops .What is ideal stop for cable for intra day?

 

[bbmac]

How much emphasis do you place on e/gbp or e/usd when taking positions on cable?

What is the minimum stop you use on cable?I have tried 12 pips , but cable jumps all over and knocks out small stops .What is ideal stop for cable for intra day?

I place no emphasis on the cross pairings save for a cursory glance at eurusd from time to time...such glances not forming part of my trading decisions. Re Stops- the market does not care what size stop we prefer, so place a stop that if hit will be because the set-up or potential supp/res failed to hold not beacuse the set-up worked bu you had a badly placed stop. Ie stop size (within a max) is determined by the market, ie where is the value zone...where is top least likely to be hit...the answer is under those potential support or above potential resistance factors...this said if the potential supp/res zone is wide and I have a very clear set-up with very convincing entry trigger candle (my market entries are at close of such,) I will place my stop just outside of that to try and minimise stop and therefore R:R ratios.

The answer then is that the ideal stop is somewhere it is least likely to be hit!

G/L

 

[bbmac]

I will give an example below as to the technical confluence that I look for to trigger a market entry , such confluence, referencing the thread's original subject... being part of a winning trader's mind

Today, Gbpusd: Price is dropping steeply in the late asian/early London session, following on from yesterday's drop..Price then reaches a previous 1hr/4hr swing lo zone (ie a near term obvious area where there existed a large imbalance of demand/supply causing prices to rise from this area) The fact that the obvious fractal swing lo existed as such on 4hr too made it a potentially stronger support zone. In that zone, mni were talking of bids to 5400 and Weekly S1 pivot was close by....so a confluence of potential support factors is present
.
at 0808am Uk time, a repeating 1min regular bullish divergence set-up developed with a decent candle close trigger for entry, but price had dropped below the reported bids @ 5400 and there are stronger bids reported @ 5375/70,, so I ignore this set-up aware that there are potentially similar repeating regular bullish divergence set-ups to the 1hr t/f's should decent candle close entry triggers develop. Next t/f up is 5min and a great such set-up developed with a bullish hammer trigger candle close which I trade as the close of the trigger candle is back inside the reported bids to 5400, so the working assumption is that likely stops below were not triggered.

This 5min set-up has the further confluence of one of the 3 x repeating fractal geometric set-ups that I look all of which suggests that price has a higher probability of rising from here than falling (however temporary in an overall price action 30min/1hr downtrend) Speaking of the repeating regular bullish divergence set-ups up to the 1hr t/f.... I noted that on the 15min price had breeched the 261.8% support channel (red wide dotted) and as this channel is rarely breeched -containing 98% of price action on this t/f, it added to the reasons for the long from here with the working assumption that it is a pullback against the 30min/1hr downtrend hence a sensible/achievable target.


So, all in all a market entry based on a technical confluence of potential support factors timed by a repeating market entry trigger....within the context of the prevailing overall price action conditions on the highest t/f that forms part of my 3 t/f analysis (30min downtrend.) B+ rated on my Max Confidence -to- A -to- B+ rated scale of rating trading set-ups.

Add methodology to the general phenomenon of technical confluebce and you have the makings of a 'winning trading edge' The task however is always to profit from that trading edge by mastering the requisite psychological factors discussed earlier in this thread, and on countless others.

G/L

 

[zoesdad]

Hi
Obviously you have Trading in the Zone by Douglas. I also enjoyed The Trading Athlete by Murphy and Hirschhorn, this goes over the similarities between top traders and top athletes and the mental game. Then there is Way of the Turtle by Curtis which is just a damn good read.

Zoe's Dad