This is a story about how a good friend of mine who lost over $700,000 in nine hours.
Some time ago, a fellow trader called me, let's call him Tom and he traded occasionally and was the president of a small company during the day. We arranged to meet and it seemed like a friendly conversation and there was no indication of what I was about to hear...
“You know, I actually have one more thing on my mind” - Tom said haltingly. “Last week I lost over half a million on the market.” I'll admit I was surprised as I knew he made money in the market, but I didn't think he traded that much. Losing such an amount for an occasional trader is no small thing. So, before talking with him, I recollected over 20 ways of dealing with losses which were...
Articles
“I know how to trade. I have a plan and if I followed it, I would be doing well indeed. I know what to do; its just that I can’t do what I’m supposed to do when the money is real. I do exactly what I know better than to do. I tilt, something takes over my mind, and I throw away my plan. Something takes over me, and then I see clearly (in hindsight), that I became crazed and started gambling. When the smoke clears, I am bewildered and I don’t understand what happens to me.”
Mindfulness – Opening Your Shut Eyes to What is Really Going on in Your Head
Albert Einstein once quipped that insanity was when you keep doing the same thing over and over again while expecting a different result. Actually, I don’t believe that Einstein was wrong...
There is significant evidence that meditation can help us deal with stressful situations, including the recent pandemic and the challenges of doctoral education, as well as mental health concerns such as depression and anxiety. The Mindful.org site, in their review of the science behind meditation, notes such benefits as improved attention, increased emotional resilience, greater compassion, and “less rumination about ourselves and our place in the world”.
The work of Gaelle Desbordes and colleagues finds that mindfulness meditation facilitates emotional well-being, not just by increasing relaxation and reducing stress, but by building interoception: our awareness of our bodies. This awareness, which is accompanied by measurable shifts...
The gap between your desire to trade successfully and actually trading successfully is directly related to your willingness to embrace change - particularly, your understanding of winning and losing. Without knowing it, traders stand in their own way in the journey called trading. Though they try hard and then even harder and harder to win, they stubbornly refuse to see the real problem in their trading. And they wonder - why can’t they simply plan their trade, then trade their plan?
Instead, they sabotage themselves just at the moment when things are getting hopeful. But here’s the real problem – the mind that they have brought to trading is not going to produce the kind of success they are seeking from trading. It usually takes 3 – 5...
Emotions...they are part of the essentials of what make you human; as essential as the importance of opposable thumbs; for without emotions, as with your thumbs, you would not have the same quality and flexibility of responses. Now, what is interesting is that some traders labor under the false belief that they must stamp out, eradicate or otherwise do away with their emotions in the trade. Well, you actually cannot divorce yourself from your emotions; that is, not completely. It is true that through specific training you could become dispassionate to a degree.
Systematic Desensitization
One type of training that helps you to distance yourself from emotions is called "systematic desensitization." Systematic desensitization was...
"Know Thyself”
- Socrates
It doesn’t make any sense. You know better. Yet that trade goes against you (and maybe you’ve lost a couple already) and a twinge of discomfort surfaces. It’s like your “spidey-senses” begin to tingle. Then urgency sneaks up behind you and throws your discipline out the door. Then you believe it will turn around if you just give it some room. (This is called emotional reasoning.)
Somehow, this line of reasoning makes sense right now in the heat of the moment – you “believe” it is going to turn around (whatever that means). You “feel” certain of it (this is emotional chemistry – not the truth). You keep throwing scared money at it as the loss grows from acceptable to painful. Now it’s a bigger loss but you...
When I sat down to write this, I thought it would be challenging but useful, to distil over 20 years of trading experience and 25 years of specializing in brief therapy into ten lessons that I have learned whilst working with traders (including myself!). In that time, I’ve written two books on trading and worked with dozens of professional traders at a proprietary trading firm. What has this taught me? Let’s break it down:
Trading affects psychology as much as psychology affects trading
This was really the motivating factor behind my writing the new book. Many traders experience stress and frustration because they are trading poorly and lack a true edge in the marketplace. Working on your emotions will be of limited help if you are...
By learning about the beliefs that guide our trading, carefully defining a set of effective trading rules, and closely adhering to them, we can avoid costly pitfalls and achieve more consistent results.
Humans, you and I, have been programmed. This programming began in infancy and continues throughout life. However, the most powerful programming takes place in those early years between 0 and 5. This programming equates to beliefs, values, and stories you tell yourself about how life is and came to be.
These stories have been constructed much like a script to a play, and that play is your life and the scripts to that play are your stories. These stories or scripts can also be termed rules that form the foundation of your behavior.
In...
What I love most about trading is that it exercises the brain and the will. It involves ongoing analysis and problem solving, and it requires the steady development of performance-based skills. I'm sure serious players of chess and poker enjoy similar benefits. Talk to any successful athlete and you'll find someone who has cultivated themselves, not just their bodies.
There are times, however, when trading becomes a vehicle for destroying mind and soul. You won't hear brokerage firms, trading publications, or seminar producers talking much about this problem, because their common aim is to keep the public trading and buying trading-related products. But, as someone who has worked with many independent traders and traders at firms, I've...
Part 1 – The Survival Based Biases that Are Robbing Your Potential
After a considerable amount of time searching, traders come to the realization that the real trading edge is the mind you bring into the moment of performance under pressure. Until your mind is right, no amount of theoretical edge is going to deliver the potential for consistent profitability. Just look at the health of your trading account for confirmation. It will tell you the truth if you are willing to listen. And that preparedness does not come naturally. The brain that your mind emerges from is built for survival in the short term, wants control over outcome, and is thrown into a state of confusion (which leads to fear and aggression) when forced to experience...
Consider the following advice:
* Trade what you see;
* Trade the plan, and plan the trade;
* Don't let emotions interfere with trading;
* Don't overthink trades; go with your feel for the market.
All of these are reasonable in themselves, but they also contradict one another. Should you shut off your emotions or go with your feel for the market? Should you stick with your trading plans or get in/out of the market when you see an unexpected development?
If you read my previous posts, you can see that the reason for the contradictions is that the advice pertains to different time frames. The very short-term trader--the scalper or market maker--can't afford to overthink trades. He or she also can't afford the luxury...
I’m sure that most of you have at least a cursory understanding of mindfulness meditation if not an actual practice in the ancient art. That’s because mindfulness meditation is enjoying, along with other forms of meditation, somewhat of a resurgence. Many scholars, academics, trainers, teachers and traders just like you swear by mindfulness as one of the most powerful and dramatic exercises that one can practice.
Mindful meditation is associated with the ability to overcome difficulties associated with maintaining focus and as well increasing cognitive processing, pattern recognition and a list of other skillsets that are made better by giving the brain the down-time it needs to recalibrate, reset and reboot. So, mindfulness could be...
It was a tough trade to manage. It bounced around in its range, went against him, flitted with his stop a couple of times, then went sideways on him for a while. Unnerving. Though stressed Tom maintained his composure just enough to stay in the trade. Finally, it broke into the black. That is when the urgency to take his profits now struck. After all that uncertainty, he wanted to lock in a profitable trade. Tom took the money. He felt the relief as he sighed – whew! Then, after all that trouble, the trade gained some momentum and hit his target in a few minutes. Tom felt cheated now. He left a good bit of money on the table, again. Why didn’t he just follow his rules – it would have been a good money maker. But now, all he...
Many years ago, when my wife and I first made a home together with three children by a prior marriage, we encountered a problem. The kids complained that I was taking too much time in the shower in the morning, making them late for school. Upon a moment's reflection, I recognized that I indeed was the culprit. But why would I do this? Was it selfishness or insensitivity?
The answer came in a flash of memory. My own parents came from troubled childhood backgrounds and bent over backwards to create a close family environment. In fact, at times, it felt too close for me. On those occasions, I craved solitude. So one way I created alone time was to take nice long showers. As much as my parents wanted closeness, they were sane enough to...
You got it – with all that training and knowledge gained, you are poised to achieve your trading dreams. You know this stuff and you work hard. You are ready to win and grow wealth. Confidently you put money on the line. Then, WHAM, when the money is real, you hit the brick wall again, again, and again. Suddenly your trading mind is hacked and you spin out of emotional control, again. Trying harder next time simply does not help. Despite your best efforts, something is missing that blocks you from achieving the success you know is possible. But nobody is talking. And maybe, just maybe, you do not want to hear that the problem is you and your secret, primitive brain.
There is a gap between your dreams and the reality of trading...
Mindfulness, over the past few years, has become synonymous with meditation. Now, that doesn’t mean that all who read this missive will know that to be true. In fact, there are still great numbers of people, traders included, who have no clue that this is so. Additionally, when the word trading is coupled with meditation, there are large swaths of traders whose eyes roll and glaze over at the notion. There are a number of reasons for this phenomenon; for example, meditation is still not fully understood and is often mischaracterized as strictly a religious exercise and/or it is thought to be so esoteric as to not be useful for something as practical as trading.
To combat this notion, I’ll list some of the benefits of a mindfulness...
Getting Blindsided by Implicit Emotional Brain Beliefs
Trading success seems so simple in principle, then the reality of trading blindsides traders. Without having a clue about what they are getting themselves into, traders walk into an emotional minefield for which they are completely unprepared and end up paying the price of emotionally undisciplined trading. The thinking, logical left brain simply gets blown out of the water consistently by primitive emotional responses to the stress of trading. Yet few acknowledge the power that emotion and trading psychology have on achieving their potential in trading. It is almost like there is a conspiracy in the deep state of trading to keep this knowledge out of sight and out of mind.
With...
Like all things in life, the trade begins in the mind of the trader. Nothing exists outside of nature that didn’t begin as a thought. In other words, every-thing began as a thought first…every building, invention, device or concept started in someone’s mind. Additionally, virtually everything that you have become also began as a thought due to the choices that you have made and your experiences in life. So, let’s face it, thoughts are some of the most powerful things in the Universe.
Yes, thoughts are things; and as such thoughts are also manifestations of energy. Isn’t it interesting that energy, which is at the core of all universal expressions, is also a huge part of trade fundamentals. Since thoughts are things and energy, it...
I hate to lose. It’s just such a bad feeling when I lose. Everything else in my life I can pretty much force my way and prevail – but trading has my number. And I know that losing is part of trading, but that doesn’t make it any easier to take a loss. It’s one thing to tell yourself that platitude, but it’s quite another to actually take a series of losses and see your P/L shrinking. It’s getting harder to keep my winning attitude when I lose, so I have to push myself even more. I can see what I’m doing is not working, but I keep on doing it hoping that through sheer determination things will turn around.
Your Winning Mindset Is Killing Your Trading
To be successful, traders must travel down a collision course between two equal...
Financial markets attract all sorts of participants, from part-time hobbyists looking for extra cash to multinational institutions moving billions of dollars across thousands of instruments. The trading game stretches across both ends of the spectrum, with part-timers and at-home gamers competing for profits with traditional funds and lightning-fast computer algorithms.
Data suggest the majority of traders playing at the shallow end of the market pool will eventually fail at the endeavor and pick up stakes, letting someone else manage their money, or simply giving up and looking for another way to build wealth. Ironically, many of these folks never had a chance to succeed because they came into the game with a casino mentality that...
‘You can’t change what you can’t face, and you can’t face what you don’t know.’ This obscure but very important quote was coined by my friend, Jackie in a conversation we had some years ago. We were discussing the challenges that all humans face with initiating and managing change. Within this conversation we both agreed enthusiastically that, embodied in this simple yet deeply profound statement is a principled truth about how acutely and pervasively awareness plays into your ability to detect and repair issues.
The speed and effectiveness with which you become aware that you have initiated an error in the sequence of behaviors needed to secure an effective outcome to an endeavor…like trading… will determine whether you get stuck...
Psychology The Invisible Wall that Separates You from Your Potential: Establishing a Disciplined Impartial Trading Psychology
“I see the potential, but I keep hitting an invisible wall. My trading mind is in good shape one minute and then, out of nowhere, a switch goes off. I don’t see it coming. That’s where I keep falling apart – I even see it happening right in front of my eyes. It’s like I’m a spectator and I am paralyzed from doing anything. My impartial trading mind flies out the window, along with my trading rules. When the dust settles and I can see clearly again, I see that I lost control again. I keep trying to stay impartial, but I keep losing that battle. It’s frustrating because I’m trying hard, and I’m so close. That invisible wall is what keeps me stuck where I am as a trader. If I could get past it, it would make all the difference in...
Psychology is the often overlooked intangible aspect of trading, because it is unquantifiable and generally misunderstood by most traders and investors. Unlike the precise mathematical formulas used in technical analysis, we cannot easily reduce human behavior to a mathematical equation that can be plotted on a graph as a trendline or as a series of variables that we can examine in detail, throughout history.
That said, much of the current research in social sciences is attempting to bring psychology more in line with mathematics for the precision that it gives to experimental methods. Mathematical methods are applied to behavioral science for the purpose of observing and comparing human behavior, according to a set of strict numerical...
Risking capital under pressure can be like a time bomb ticking away in your head. One moment everything is under control and then (in the blink of an eye) the thought or threat of losing capital pulses through you – creating an emotional avalanche that covers up rational thinking. It may be at an entry point, where you have to come to grips with the possibility that you could lose money – and a shudder runs through you. It could be when your position goes against you and you feel the money slipping through your fingers – and an urgency consumes you to get it back before it’s too late. Or it could be after your position has turned profitable and waves of anxiety pulse through you – and you regretfully get out way too early with a...
I have often discussed how awareness or the lack thereof is profoundly important to trading. About 95% of everything that goes on in your brain and mind is out of your awareness. Just consider that your unconscious brain is responsible for all the communication between cells, organs, muscles and bones as well as motor functions, respiration, heartbeat, immune functions, overall regulation and so on and so on. In fact, only about 3% falls under the purview of your conscious mind. So, the vast majority of your system and what it is doing is out of your awareness…and that’s a good thing.
Can you imagine having to think about breathing, beating your heart or defending yourself against micro-organisms? It would be a disaster to say the...
When technical tools are used judiciously, their value cannot be overstated. And every time you apply a tool of technical analysis, you are calculating a consensus of bullishness or bearishness among all market participants.
For example, the moving average convergence-divergence (MACD) is simply a tool that measures shifts in consensus from bullishness to bearishness, and vice versa. Extending the basic MACD to a deeper level, we find the MACD-histogram, which is actually a tool for determining the difference between long-term and short-term consensus of value. The measure tracks the difference between the fast MACD line (short-term consensus) and the slow signal line (longer-term consensus).
The principles of market psychology...
Finding the Blind Spot Sabotaging Your Potential
You know it’s possible. You feel it inside you. Every day you see the potential in the markets just waiting to be tapped. And you know you can do it. But even with your best effort, you consistently face the realization that achieving your trading potential is far more elusive than you initially figured. It’s up and then down. You think you finally have your act together – then you give it all back and more. Consequently, time and capital drag on without achieving the kind of success you know is possible. What are you missing that could be the defining difference in your trading or active investing?
No one warned you about the mindset problem you were going to run into when...
Have you ever felt down and out; like life itself was falling from you and it seemed like a major effort just to take care of the everyday mundane things? Of course you have it’s called being human.
No one that I have ever encountered in person or in the media has been perfect. No one has been able to lay claim to have each and every day be a shining example of everything working out just as they wanted. We all have set-backs, challenges and improvables; it is a part of life and living. OK, be that as it may, no one wants to feel dejected, depressed and overwhelmed. Today, I’d like to share a concept with you that can literally change that dark cloud over your head to reflect the bold brilliance of the sun as it illuminates your...
I was only 18 years old when I first heard of "derivatives trading" when my late father tried to explain the concept to me after having had a discussion with one of his friends. Quite honestly, I had absolutely no idea what it entailed but a part of me just knew that I wanted to do it for a living though there was no clear cut way or indication of how I would go about it.
It wasn't until roughly 10 years later that I managed to get my first break into the industry when I started working at a broking firm run by traders. They taught me many useful things and gave me a lot of insights into how things work and what to look out for etc. After almost 4 years of doing this professionally, I have come to realize how. in spite of what I've...
“Man is not a rational animal; he is a rationalizing animal.”
Robert A. Heinlein
Jeff had been here before. After working real hard, he had finally gotten funded, traded well for a while, and then it all fell apart – again. And he lost the funding he had worked so hard to get. He had cycled through this pattern a couple of times over the last several years so he was no stranger to it. Each time, he thought he had it beaten. Jeff would double down on his effort, work real hard at getting his head back together, and trade confidently.
Then “it”, ever so subtly, would creep back into his trading and, before he knew it, he started making mistakes he...