Psychology

What can be Learned from Psychopaths about Trading?

Psychopaths are people who don’t care about social rules and the media has made well known for committing awful crimes. Whilst this is true, it is also the case that many successful businessmen, lawyers, politicians and also traders share the same characteristics.

Of course successful people don’t usually commit crimes but they use the same skills when they deal with some problems in a work environment. For example, they focus on their goal, don’t care what other people think about them and do everything they can to achieve their goal.

Oxford University psychologist, Kevin Dutton explored the similarities between psychopaths and successful people and discovered that many, if not all, successful traders share psychopathic characteristics! In this context a successful trader looks the same after making 1 million dollars and after losing 1 million dollars. If you look at them you don’t know if he or she has just lost money or won. The reason why this helps is because if you don’t care so much if you are losing or winning then you can just be focused on your plan and follow it. Consideration is not given to whether friends will think that you are a loser or wondering if you have deserved taking a loss or not as it simply doesn’t matter and allows a complete focus on goals and do what can be done to achieve them.

For everyday traders it becomes increasingly difficult to follow your trading plan if after first big loss you become depressed and as a result change your strategy. There can also be a tendency to be too excited after making a big profit with the consequence that in future trades you will risk too much.

So just like a psychopath, you should be calm and follow your plan regardless of any of your short term results.

You “Can” Control Your Emotions and Win
Of course achieving this state of mind is not easy and if you approach trading with the same attitude as most people then you will likely take care if you lose your money or win. However, being normal is not a way to be a winning trader and you may have doubts that you can achieve the needed state of mind. I also doubted my ability but I persevered and know from my own experience that it is possible to become successful.

Ten years ago I learned how to be a winning poker player and as I have a masters degree in mathematics and econometrics, I found it relatively easy. Initially, I won some money but after few months I had a losing streak and although I played poker well I still lost a lot of the time.  This is all perfectly natural so when you play poker or trade then you must sometimes expect consecutive losses and at the time it was just too much for me. I became depressed even though my losses were much smaller than my previous profits. I found it so difficult emotionally that I had to take a long break and began to think that maybe there was something wrong with me. Maybe I am not born to play poker or trade and I should find some other way of making money. In addition to this I also thought that I was unable to change my emotions.

I believed that I was not born to make money in that way because, with the exception of psychopaths, people who follow their natural emotions can’t make money on financial markets. Although I thought this it was not actually true as there are methods which allow you to control your emotions but it is not easy to find them. I decided that I had to create, or maybe just reinvent, some new ones by myself.

How to Achieve a Successful State of Mind
When you want to change your emotional behaviour you must first accept your current situation. If you are depressed or mad after taking a loss well OK it decreases your results. That said, it is not a reason to blame or punish yourself so just try to accept that fact without judging it.

Traders often think that they should be perfect and trade without any emotion but only robots are able to do this as they have no emotion and always do what you pre order or program them to do. It may seem a strange concept but as you are not a robot you will never be able to trade perfectly and from time to time you will make a mistake and especially when you are learning something new.

So start by accepting your current emotional behaviour. What’s next? Can you change it?  Yes! For example, you may feel mad after taking a loss but it doesn’t have to  happen automatically. After taking a loss you probably say something in your mind which makes you feel mad, for example “Oh no!”, swear or just scream. It creates an emotion of feeling mad which you later increase when you remind yourself that accident of taking a loss or comment on it.

But you can change it by first observing what you say in your mind after taking a loss and maybe it will be something that I suggested but it can be also something else. Next plan saying something positive and true, which will allow you to perceive your loss in a better way.

Here are a few examples but you can create your own solutions which better you’re your trading style and current situation:

1. “I made another step to make more money in future” 

2. “I made another step to be a winning trader”

3. “I will make much more money in future”

4. “I should be happy that I am closer to making more money in future”

5. “I should enjoy my losses because I have to take them to make money”

All the above are positive and if you have a good strategy then you will find that they are also true. In the last step observe yourself and consciously say that sentence whenever you take a loss. Of course when you begin you may sometimes forget about it but it is still not a reason to be sad or punish yourself. You will achieve a faster successful state of mind if you monitor your progress and by this I mean how often you say your positive sentence after taking a loss, how do you feel after that and how it increases your results.

Michael White can be contacted at Decisive Investing

Michael White has been considered an expert in trading psychology and decision making processes since 2007. He has a Masters degree in econometrics (application of statistics in economy) and Masters degree in mathematics and uses his knowledge in the financial markets.

Whilst working on his PHD thesis, he included using Kelly criterion as part of money management in Forex and other financial markets and published an article in scientific magazine about this subject. He also runs a blog and YouTube channel on trading psychology and has published many posts and videos. 

Michael White has been considered an expert in trading psychology and decision making processes since 2007. He has a Masters degree in econometrics (a...

MajorMagnuM

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interesting. I agree with Lance Beggs when he talks about preaccepting the loss before you enter the trade. It minimizes alll the stuff that you then have to manage as per the article after the fact
 

dbphoenix

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interesting. I agree with Lance Beggs when he talks about preaccepting the loss before you enter the trade. It minimizes alll the stuff that you then have to manage as per the article after the fact
To some extent, pre-accepting the loss is necessary but only insofar as one has correctly determined the conditions for the loss. IOW, just jumping in for insufficient reasons even though one is willing to accept a loss of N is no better than just throwing the money away.

Mr. White appears not to understand the win-lose cycle. He therefore didn't understand the nature of his losing streak. As he didn't understand it, his go-to solution was to "control his emotions" and engage in changing his self-talk, neither of which is going to work well. A more appropriate course would be to address the source of the problem, which, in this case, had to do with naivete regarding the nature of trading, which naivete transforms trading into gambling.

Db

PS: It helps to know the difference between a psychopath and a sociopath. :)
 
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counter_violent

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To some extent, pre-accepting the loss is necessary but only insofar as one has correctly determined the conditions for the loss. IOW, just jumping in for insufficient reasons even though one is willing to accept a loss of N is no better than just throwing the money away.

Mr. White appears not to understand the win-lose cycle. He therefore didn't understand the nature of his losing streak. As he didn't understand it, his go-to solution was to "control his emotions" and engage in changing his self-talk, neither of which is going to work well. A more appropriate course would be to address the source of the problem, which, in this case, had to do with naivete regarding the nature of trading, which naivete transforms trading into gambling.

Db

PS: It helps to know the difference between a psychopath and a sociopath. :)
Take your pick ! :)

 

trendie

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I am not sure this article really tells us anything about psychopaths and trading at all.
The first few paragraphs made were generic assertions, but then went onto other ideas about mindsets.

I suspect a psychopath DOES care about winning or losing a million dollars, its just that they are willing to bend the rules more flagrantly to make the million, and have less of a conscience about breaking those rules to get there.

Anyway, I think the idea about losses is about de-personalising them.
This can be achieved not necessarily by controlling your emotions, but by taking the immediacy away from wins and losses.
Decide to trade X instances of a set-up, and only analyse the aggregate outcomes after finishing a set. That way you assess the total balance of outcomes, rather than the immediate emotion of any single trade. You should look at the outcomes from a cooler, detached position.

On page 2, the writer lists 5 ways of interpreting the outcomes, such as “I made another step to make more money in future".
My concern here is that 3 of the 5 all refer to looking at the monetary perspective, rather commenting on whether the trader followed the process, the mechanics of the trade.
If you just focus on the whether you made money or not, you run the risk of neglecting whether you followed the principle of the strategy.
That is, did the losses result from failing to follow the rules (good rules / bad execution), or whether the strategy needs refining (good execution / bad rules).
Worse case would be bad rules / bad execution.

I don't think we can learn anything from psychopaths about trading.
But we can perhaps replicate the inability to feel emotion, in some diluted sense, by de-personalising individual outcomes, by looking at the broader picture.
 
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dbphoenix

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But we can perhaps replicate the inability to feel emotion, in some diluted sense, by de-personalising individual outcomes, by looking at the broader picture.
I agree, if by "broader picture" you mean a series of trades implemented according to a robust trading plan so that one knows what to expect out of, for example, 20 trades. If one knows what to expect, there's nothing to get emotional about. Unless one isn't following his plan, in which case he's right back where he started.

Db
 
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trendie

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I agree, if by "broader picture" you mean a series of trades implemented according to a robust trading plan so that one knows what to expect out of, for example, 20 trades. If one knows what to expect, there's nothing to get emotional about. Unless one isn't following his plan, in which case he's right back where he started.

Db
Yes, exactly.
Your pithy 3-liner sums up my rather meandering essay. :)
 
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MajorMagnuM

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just jumping in for insufficient reasons even though one is willing to accept a loss of N is no better than just throwing the money away

yes of course agree completely. He means, calculate your risk and reward, understand accept and live with amount to be risked
 
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MajorMagnuM

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one of my favorite movies scenes opf all time . great song too....

i think he mentions the importance of trend pre strrike too!
 

dbphoenix

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He means, calculate your risk and reward, understand accept and live with amount to be risked
That may be what he means, but, if so, he's incorrect. Yes, the risk must be calculated, but calculating the ubiquitous "risk:reward" ratio is pointless (no pun intended) unless one also calculates the probability that the risk level will be reached before the reward ever appears. The "r:r" is most often determined by fear and results in whatever profits do appear being cut short because the "reward" level has been reached and "whew!"

A similar problem is "daily targets", though that's a separate issue.

Db
 

timsk

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Over the years, some of the Articles published on T2W have come in for a bit of stick. And justifiably so some would say. Indeed, there's little doubt that some of them are - how shall I put this - not great. However, there is value in the weaker contributions. On the basis that there's no white without black, we need the weaker ones to highlight the really good ones for what they are. More importantly, the weaker ones can act as a catalyst for discussion and, as in this case, it's the subsequent discussion thread where the real meat is to be found. Members highlight the flaws (as they perceive them) and huge amounts of value is added to what might otherwise be - at best - a so so article. And that's the power of forums and a community like this one. Excellent contributions all round folks - take a bow!
(y)
Tim.
 

MajorMagnuM

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That may be what he means, but, if so, he's incorrect. Yes, the risk must be calculated, but calculating the ubiquitous "risk:reward" ratio is pointless (no pun intended) unless one also calculates the probability that the risk level will be reached before the reward ever appears. The "r:r" is most often determined by fear and results in whatever profits do appear being cut short because the "reward" level has been reached and "whew!"

A similar problem is "daily targets", though that's a separate issue.

Db
surely one calculates this by historical results?, achieved initially when testing trading plan before live application? ie you know this before you take the trade
 

MajorMagnuM

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9,284 887
Over the years, some of the Articles published on T2W have come in for a bit of stick. And justifiably so some would say. Indeed, there's little doubt that some of them are - how shall I put this - not great. However, there is value in the weaker contributions. On the basis that there's no white without black, we need the weaker ones to highlight the really good ones for what they are. More importantly, the weaker ones can act as a catalyst for discussion and, as in this case, it's the subsequent discussion thread where the real meat is to be found. Members highlight the flaws (as they perceive them) and huge amounts of value is added to what might otherwise be - at best - a so so article. And that's the power of forums and a community like this one. Excellent contributions all round folks - take a bow!
(y)
Tim.
always good to test/think/question!
 

dbphoenix

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surely one calculates this by historical results?, achieved initially when testing trading plan before live application? ie you know this before you take the trade
One would hope so, but, if this were the case, traders would be a lot more successful than they are.

In any case, unless and until one learns to trade emotionlessly, calculating the r:r is generally done with fear in the background, and with fear in the picture, one can be reasonably sure that the trader will exit within a nanosecond of reaching his target, assuming that he reaches it before being tossed out of the trade. And if he doesn't know the win-cycle for whatever he's trading and how he's trading it, the possibility of his allowing his profits -- if any -- to run is that much less.

Db
 

MajorMagnuM

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That may be what he means, but, if so, he's incorrect. Yes, the risk must be calculated, but calculating the ubiquitous "risk:reward" ratio is pointless (no pun intended) unless one also calculates the probability that the risk level will be reached before the reward ever appears. The "r:r" is most often determined by fear and results in whatever profits do appear being cut short because the "reward" level has been reached and "whew!"

A similar problem is "daily targets", though that's a separate issue.

Db
yes im quite happy to take partial profits. if i think a significant but non structure threatening pullback may occur. i then may take the opposite trade against my partials.