Kiwi's thoughts on trading psychology

[nine]

Some say that there is no need for psychological intervention in trading. These lucky few will say that if you've got a decent edge (trading tactic with a positive expectancy after slippage and commission) then the only psych issue is confidence. And you build that by good testing ... after which you're home.

I found that to be true when end of day trading. I had plenty of time to consider my decisions; there was no excitement; and I could be very systematic.

I didn't find that to be true when I moved to day trading on 5, 3 and sub-one minute charts. The time compression created a different situation for me. And on this timeframe I would suggest that getting your thinking / feeling / acting right is both harder and more important than finding a very high quality edge.

So I thought I'd start a thread with some of my thoughts in this area in it. And those of others if they wish to contribute. I will shamelessly steal the ideas of those more knowledgeable than I but I will give links to their web sites when I do so. If possible can we avoid the this does / this doesn't work type contention (lets not get into argument about hypnosis, nlp or whatever, lets assume that the reader can beware and do due diligence so we can leave the rubbish in this thread as well as the gems).

I will state my view now (and then ignore posts to the contrary) that nlp is underproven but includes some ideas that do work, and that hypnosis, eft and subliminal suggestion may help but may not. I, personally, will try to stick with promoting mainstream psych ideas based on "tested science".

 

[nine]

I will start with a little song posted by an American daytrader on youtube. I think its rather good.

http://www.youtube.com/watch?v=xiNQSbcOYNQ

 

[Mr Soros]

.

I didn't find that to be true when I moved to day trading on 5, 3 and sub-one minute charts. The time compression created a different situation for me. And on this timeframe I would suggest that getting your thinking / feeling / acting right is both harder and more important than finding a very high quality edge.

Hello Kiwi,

What instruments are you trading?

In many instruments the timeframes that you listed are just too tight to trade unless you have a specific scalping strategy. Once the spreads and thinking time is taken into account the market eats away at your profit levels, this adds to your stress and will increase your emotional output and lower your finacial output.

Do you use limit orders when using these timeframes? I found using limit orders you could scrape a few points otherwise slippage (both human and market) made it difficult.

I now use larger timeframes. eg 4hr, 1hr ,15m with 3 and 5 for entry in daytrading. I find them a lot less stressful and far more proftable.


Good Luck

 

[JillyB]

Trading makes you look at yourself and your personality in a way that nothing else does. You have to analyse yourself and your reactions to find the particular style and type of trading that suits you. You will probably go through many ways of thinking, but it is really only time that will help you to unravel the real trader within you.

Are you confident, quick thinking, trade on instinct? Or are you precise, thorough and detailed? Each of these would make you suited to a different style of trading and it's finding that out which takes the time.

Do you get a kick from the instant moves when trading news? Is it easier to be in the trade for a few seconds or even a minute, than to have a trade that lasts for a couple of hours or even days?

How does it make you feel when you have to watch a trade meandering around before finally hitting the target? Does it set your nerves on edge? Or would you rather just set the trade and leave it for a couple of days or weeks and it never worries you?

Do you grab at profits - any profit - before it disappears, just to have a profitable trade?

The psychology of trading has been the most difficult thing for me to learn. I have found the systems that work, but I didn't have the mindset to trade them. What I had to find was a system that suited my way of thinking. Something that I wasn't going to get chest tightening pains with, every time I pressed the sell/buy button. Something that I would walk away from, instead of being glued to the computer screen.

Before I found it, I enjoyed trading, but found it hard work - mentally. Now I feel much more calm and considered about it. I don't worry as much as I did - and the losses don't seem to hurt as much as they did either.

 

[zupcon]

I will start with a little song posted by an American daytrader on youtube. I think its rather good.

http://www.youtube.com/watch?v=xiNQSbcOYNQ

Even with the best possible edge there’s a random distribution of gains and losses, and learning to accept and live with that, not just on an intellectual level is really all its about. The second line of the following song says it all for me

"win some lose some. its still the same to me"

regards
zu

 

[nine]

LOL zupcon, I think the first song is more closely related to trading but agree with your sentiment.

Mr Soros, I trade the ultimate fast futures contract, the Hang Seng (HSI). I trade it on short timeframes and really enjoy it but I do dislike boredom. I use stop limits and limts. Often my stop limits have a negative entry point. HSI has taught me a great deal about my psychology.

Jilly, I like your philosophy and agree with most of your points. I think that systems that don't immediately mesh with your mindset can provide even greater learning than those that do. The challenge of identifying and working through your issues with them can be very enlightening.

I will start with a little Mark Douglas later today. Mark dealt with fear in trading. I think fear is a major ... but that excitement and thrill can be a big problem too.

 

[nine]

I've discovered someone who's looking at the biological basis of trading psychology so I'm going to start with him rather than Mark Douglas.

Lots of ET'rs challenge the need for trading psychology. dBPhoenix, in his new guise here always seemed to me to be of the "you only need a system that you've really tested so that you have genuine confidence in it" school as well. He was however quite a Mark Douglas fan.

So, why do some think that psychology is important in trading? Simple. When you have a system that you have back tested, that you have forward tested, and it was profitable and then under live, cash, conditions it either loses money or makes an awful lot less than you can explain then you probably have a psych issue.

But why do we develop psychology issues?
Why can't we just take our system, and trade it the way it was meant to be?
Why is it hard (we all know that trading is simple after all)?

 

[Splitlink]

So, why do some think that psychology is important in trading? Simple. When you have a system that you have back tested, that you have forward tested, and it was profitable and then under live, cash, conditions it either loses money or makes an awful lot less than you can explain then you probably have a psych issue.

But why do we develop psychology issues?
Why can't we just take our system, and trade it the way it was meant to be?
Why is it hard (we all know that trading is simple after all)?

As you say, some believe that psychology is not needed in trading. However, we are all different and I am sure that a psychologist could make a good case for deciding that we, all, do need his services in some form or other. You say that you do not need it for end of day trades. I would say that I, personally, have more mental hesitations then because of the time available for decision making.

Why do we develope psychology issues? Failure, perhaps? Nothing like losing a few trades to start you wondering!

Split

 

[barjon]

I've discovered someone who's looking at the biological basis of trading psychology so I'm going to start with him rather than Mark Douglas.

Lots of ET'rs challenge the need for trading psychology. dBPhoenix, in his new guise here always seemed to me to be of the "you only need a system that you've really tested so that you have genuine confidence in it" school as well. He was however quite a Mark Douglas fan.

So, why do some think that psychology is important in trading? Simple. When you have a system that you have back tested, that you have forward tested, and it was profitable and then under live, cash, conditions it either loses money or makes an awful lot less than you can explain then you probably have a psych issue.

But why do we develop psychology issues?
Why can't we just take our system, and trade it the way it was meant to be?
Why is it hard (we all know that trading is simple after all)?

kiwi,

I don't think there's much doubt that peoples' individual mind-set plays a great part. Whether you can learn to change that mind-set is a different matter - personally, I doubt it. I suspect that most people revert to type when the pressure comes on.

Jilly's point about finding a system that you're comfortable with strikes a chord with me. I spent a lot of time trying to change myself but without success, then I just listed my mental weaknesses and developed a system and trading method that minimised their impact. There's a lot of me in Our Jack - http://www.trade2win.com/knowledge/articles/general_articles/our-jack/ :cheesy:

good trading

jon

 

[nine]

Agreed Jon, seeking a system that exposes as few of your issues as possible can help. But for the sake of the thread I'm going to assume that even then the fit might not be perfect. So why would that be?

For a start, most of us don't seem to strike it lucky and acquire a Mentor who teaches us, with great care, skill and diligence to trade our holy grail system (the one that works and we can work too) in one smooth experience. Most of us get there by making a number of abortive attempts as we move toward the perfect system. Why is that a problem?

Because we pick up bad habits. These can be behaviours, patterns of thinking, conscious and alterable or below the level of consciousness and extremely intractable.

This brings me to Dr Bruce Hong. Bruce is not selling anything and he's not strictly a psychologist. He's a physician, become trader, who has an interest in the biology that underlies trading issues. To quote from his blog:

"I am a Physician/Trader. I am appalled at the amount of misinformation and bogus ["Pop Psychology" out there. I hope to provide factual information with which traders can effectively change their behaviors."

"Allow me to introduce myself. I am a Physician in my 60's who is transitioning to retirement and a new career in trading. I started off in a Geriatrics Clinic and a Chronic Pain and Addiction Clinic. My co-therapists in these clinics were Neurologists and Clinical Psychologists. As a result, I absorbed a great deal of learning about psychology in general and Behaviorism, in particular. I also learned about habits, bad habits, and some techniques to help patients overcome their bad habits - if they were willing to put the time and effort to do so. There was then, as now, no "magic bullet", pill, elixer, or hypnotic therapy that could do the job for you. There is no cheap and easy solution to deep-seated, self-destructive habits. There is only the deep-seated desire and willingness to work to achieve your goals to help you help yourselves."

His blog is at:
http://traderpsychology.blogspot.com/

and I'll be borrowing liberally from it to look at how we form these self-destructive habits over the next few posts.

 

[JillyB]

For me 'self-belief' has been my greatest obstacle, and I can really equate to that 'self-destructive' part of us that you mention. I wonder though if this is a 'British' thing more than a 'US' thing and has to do with our social beliefs.

I - and probably a lot of other people - were brought up to be modest, unassuming and not to blow our own trumpet. We find it hard to accept praise and very easy to accept negative comments. Hence the lack of self-belief we can exhibit when trading and possibly why we question our judgement so often.

From what I know of a few of my US friends, they are brought up differently and have a self-belief and self-confidence that I wish I had. They believe that they can do it, and that when they do it, they will do it well.

So perhaps our trading psychology - and our own general psychology - has to do with the society that we are brought up as well.

 

[Atilla]

For me 'self-belief' has been my greatest obstacle, and I can really equate to that 'self-destructive' part of us that you mention. I wonder though if this is a 'British' thing more than a 'US' thing and has to do with our social beliefs.

I - and probably a lot of other people - were brought up to be modest, unassuming and not to blow our own trumpet. We find it hard to accept praise and very easy to accept negative comments. Hence the lack of self-belief we can exhibit when trading and possibly why we question our judgement so often.

From what I know of a few of my US friends, they are brought up differently and have a self-belief and self-confidence that I wish I had. They believe that they can do it, and that when they do it, they will do it well.

So perhaps our trading psychology - and our own general psychology - has to do with the society that we are brought up as well.

There is another way of looking at this.

Sensitive people with lack of character get offended easily and respond in a wrong way.

Robust people with strong character and conviction with thick skins take criticism much better and respond equally right / wrong way.

 

[Crap Buddist]

As you say, some believe that psychology is not needed in trading. However, we are all different and I am sure that a psychologist could make a good case for deciding that we, all, do need his services in some form or other. You say that you do not need it for end of day trades. I would say that I, personally, have more mental hesitations then because of the time available for decision making.

Why do we develope psychology issues? Failure, perhaps? Nothing like losing a few trades to start you wondering!

Split

I think for some a lot has to do with, a deeper knowing of not being entirely happy that the system being used is likely not one that mirrors the intention of the market . ie although its a system that we can bang away with, and hey look its net profitable, some people , would like to seek a deeper understanding for the reason of price behaviour and create the system that delivers true to the market dynamics.

In short a system with logic that makes sense. And yes to pilot that if its manual human execution of signals, the trader may have suffered many a knock back (emotional trauma in a live environment) on route to obtaining the logical system which fits with the / a markets nature. If we understand the essence of the market and can build that into a system, the systems results will indicate higher probabilty trades of risk worth assuming.

Now we read from time to time that a system should be tailored to our own method personality in some way, why ? what sense of that if its no sense in the market ? just open questions.

So i think, in short, we have to sense that the system makes sense, and a lot of people know it really doesnt. Journey onwards, until it does?

 

[nine]

I'd like to put the "design a system that fits us" aside for now (its a thread by itself in size) ... so please no more discussion on this. I will take that as a possible and make the assumption that even with a "good fit" we might still have issues trading it as well as it performs with hindsight - and that these problems might lie in the psychological realm of this thread.

Re the self-destructive I don't mean anything complex by that. As examples of how benign this could be, here are a few examples of self destructive trading behaviours:
- getting bored and taking a trade that doesn't quite meet your entry rules
- hesitating and not taking a trade that does meet your entry rules
- moving your stop back, or stopping out and re-entering soon afterwards
- going countertrend at a perceived top or bottom when your basic rule is "always trade with the trend"

All these things meet my criteria for self-destructive. On to Dr Bruce in the next post.

 

[wasp]

Its that fear of the unknown isn't it.

Lets say we are in a losing position. You have, as always, choices. You've seen every variable occur; you take the small loss and it immediately reverses to an amazing run whilst you sit there dumbfounded and swearing at the screen or keep moving back the stop to see it only do the best move of the month whilst you rack up the biggest loss you can imagine. Or you exit and reverse as per your plan, only to see it do exactly what you'd originally positioned for.

You sit and toss up the options and if you have had a bad run so far your going to be even more reluctant to take the loss or reverse etc....

Either way, you think your gonna lose out so what to do, is the great self destructive/ego/arrogance gesture, of sticking 2 fingers up at the screen and losing more or reversing or.....

I did it yesterday, I was comfortably up in cable on a new account, trying out my intuition as a 'plan' and the news came out and it was back to break even. I was determined not to lose and i cancelled off my stop, and watched it climb and climb - all the time I sat there cursing, nearly punching the screen but saying '**** it' to myself, I'm not taking the loss now, and hey presto, I am still sitting -120 down trying to decide what to do....

Discipline and taking the small loss, not knowing if your gonna kick yourself in half hour when you find out the opposite of your decision happens, leads to some dumb ass decisions.

Classic self destructive behaviour

 

[Crap Buddist]

I'd like to put the "design a system that fits us" aside for now (its a thread by itself in size) ... so please no more discussion on this. I will take that as a possible and make the assumption that even with a "good fit" we might still have issues trading it as well as it performs with hindsight - and that these problems might lie in the psychological realm of this thread.

yeah agree, 100% and thats the point, the system shouldnt fit us, so yes no more discussion on that. Less psyche issues to deal with if the system hand and gloves the markets nature maybe? And the point again is I reckon there will be less issues trading a system of that nature, because of its peromance.

Or its simply being a better or best tool for a trader to work with for the job, hence less frustration, less unsurity, less losses. etc. having said that all of those are worth a person going through and dealing with too. ? get it knocked out of you, the market will offer that by the bucket load, especially if the system is , for example, a coin flip, with an 3 x atr stop. That system i think is profitable, and i think a person who can trade that, wow.

hats off to them i think.

 

[JillyB]

Or the fear of being wrong.

Being determined to understand trading we spend hours reading books, pouring over charts and searching the internet. We reach a point when we can draw trend-lines, see head and shoulders patterns and various others, know what a doji is - plus lots more. We have a determination that we won't be beaten by this and we are determined to be good at trading and make money out of it. (To make up for all we've lost in our 'training' period).

Not taking a trade - because if it goes wrong, it means that I'm really no good at this and that everything I thought I understood about trading is a load of b*@@*cks!

Not exiting a trade - because the 'pattern', 'candlestick' just formed says otherwise and we think that 'by now we should be able to read a chart'. If not why are we doing this?

Fear of being wrong - because it challenges why we are doing any of this in the first place.

 

[Crap Buddist]

Or the fear of being wrong.

Being determined to understand trading we spend hours reading books, pouring over charts and searching the internet. We reach a point when we can draw trend-lines, see head and shoulders patterns and various others, know what a doji is - plus lots more. We have a determination that we won't be beaten by this and we are determined to be good at trading and make money out of it. (To make up for all we've lost in our 'training' period).

Not taking a trade - because if it goes wrong, it means that I'm really no good at this and that everything I thought I understood about trading is a load of b*@@*cks!

Not exiting a trade - because the 'pattern', 'candlestick' just formed says otherwise and we think that 'by now we should be able to read a chart'. If not why are we doing this?

Fear of being wrong - because it challenges why we are doing any of this in the first place.

yeah fear of being wrong can play a part, look at how we are brought up conditioned by parent figures and peers coupled with a desire to please others so we are accepted.

Get it right, have a reward, wrong? the guilty must be punished. Now no surprise then at the task of "wanting to be right the market" are we avoiding being wrong because of our ingrained birth to here time conditioning?

Certainly a trader should be able to "see" all that . Or work through and as a by product of staying the course learning, may develop awareness of his own personal "self and his or her conditioned typical self nature" And drop it, for trading purposes.

Come the weekend we can always revert back do, "honey im never wrong , up yours sweetie, I put the bin out for the last 3 weeks." In the market though. thats always right, maybe not argue with that beast.

So not only we need to consider the markets nature, but our own nature too. And the former exploits the latter.

 

[Crap Buddist]

Its that fear of the unknown isn't it.

Lets say we are in a losing position. You have, as always, choices. You've seen every variable occur; you take the small loss and it immediately reverses to an amazing run whilst you sit there dumbfounded and swearing at the screen or keep moving back the stop to see it only do the best move of the month whilst you rack up the biggest loss you can imagine. Or you exit and reverse as per your plan, only to see it do exactly what you'd originally positioned for.

You sit and toss up the options and if you have had a bad run so far your going to be even more reluctant to take the loss or reverse etc....

Either way, you think your gonna lose out so what to do, is the great self destructive/ego/arrogance gesture, of sticking 2 fingers up at the screen and losing more or reversing or.....

I did it yesterday, I was comfortably up in cable on a new account, trying out my intuition as a 'plan' and the news came out and it was back to break even. I was determined not to lose and i cancelled off my stop, and watched it climb and climb - all the time I sat there cursing, nearly punching the screen but saying '**** it' to myself, I'm not taking the loss now, and hey presto, I am still sitting -120 down trying to decide what to do....

Discipline and taking the small loss, not knowing if your gonna kick yourself in half hour when you find out the opposite of your decision happens, leads to some dumb ass decisions.

Classic self destructive behaviour

Its that fear of the unknown isn't it.

Lets say we are in a losing position. You have, as always, choices. You've seen every variable occur; you take the small loss and it immediately reverses to an amazing run whilst you sit there dumbfounded and swearing at the screen or keep moving back the stop to see it only do the best move of the month whilst you rack up the biggest loss you can imagine. Or you exit and reverse as per your plan, only to see it do exactly what you'd originally positioned for.

You sit and toss up the options and if you have had a bad run so far your going to be even more reluctant to take the loss or reverse etc....

Either way, you think your gonna lose out so what to do, is the great self destructive/ego/arrogance gesture, of sticking 2 fingers up at the screen and losing more or reversing or.....

I did it yesterday, I was comfortably up in cable on a new account, trying out my intuition as a 'plan' and the news came out and it was back to break even. I was determined not to lose and i cancelled off my stop, and watched it climb and climb - all the time I sat there cursing, nearly punching the screen but saying '**** it' to myself, I'm not taking the loss now, and hey presto, I am still sitting -120 down trying to decide what to do....

Discipline and taking the small loss, not knowing if your gonna kick yourself in half hour when you find out the opposite of your decision happens, leads to some dumb ass decisions.

Classic self destructive behaviour

hmm yes, trial and erroring a new plan live, then take it easy on yourself. You have to know to expect even more "poorer performance" because its a work in progress, maybe.

If you try intuition live, your trialling it, then dont kick yourself in the head too hard. Again I would expect a person to experience "turbulence" when attempting this.

i think if you are daytrading, you, we have to be prepared to change, when the market does. Its a tough job of a person getting to "forgetting ourselves exist" when internalising the market behaviour, the quicker, I think we can shed our own views or opinions on that, the better.

Took a short?, the markets looks like its holding up past my entry on the news, thats bullish, 2 things to do. 1) lose the short 2) get long. cable yesterday yeah? Not your decision wasp , the markets. if the market reversed again, then so what , what you/ we gonna do ?

Thats why i think daytraders, have a tougher time, ie the time to change , I have 1/2 minutes to typically to change my position. Now if we sit there internalising, thinking ohh but im short, umm, wait for it to come back maybe, tic toc, then bang, the markets sprung. That moment we tie ourselves up, thats us, not shedding ourselves, not forgetting ourselves. Really we have no decisions to make as the market decides, people however will bring their own agenda's into it though but its pointless, because the market aint listening.

Also limited knowledge, this may be a cause too affecting or decision to choose non actioning or indecision and wait and hope. we want to give it time to work, but we need to learn to get to a point to recognise that with all the time in the world, this trade aint gonna work. So dump it.

Old cable today, likely to change trend 1-3 times today, in a daytraders timeframe, are we gonna follow it ?

It can be tough, to learn to let go of ourselves.

Just some ideas.

hmmm dunno how i managed the double quote wasp. must be double important maybe...

 

[barjon]

.....................Its that fear of the unknown isn't it.............

Sort of, i 'spose.

For me, I have two character traits that caused difficulty in the early days:

Firstly, I am pessimistic by nature so always fear the worst for any trade. Because of this I had a reluctance to trade and it caused entry problems where I went "off plan" by being selective about the trades I took. You've guessed it - the trades I chose went belly up and the ones I bypassed did the business

Secondly, I hate losing money. This made it difficult to take a loss and I'd hang on to losing positions in the hope that they'd come right. Similarly, when I started using stops it caused difficulty because I would set them too close. This same emotion came into play for exits where I was facing "losing" money as the price retreated from a high.

Both these traits were self-destructive so far as trading was concerned, but they are part of me and they are deep seated and impossible (for me anyway) to change. I found a way to work round them, though, so I'm still intact

good trading

jon