my journal

[Yamato]

I don't know if that winning period was a coincidence or something else, but I liked the book (to my mind one of the best books on trading).
When I complained about my recent losses month ago or so to one professional trader, he asked if I read the book. When I replied that I know about the book (and have read it), he suggested to read it again (obviously I haven't read it properly!?)
Although it is a demanding book, worth reading again.

Thanks for the information. It makes sense. So this professional trader thinks that book should solve the final problems on your path to profitability. I agree and I hope it will happen for me. I think the book really gives you an understanding on what you need to do. As I said, after reading a few pages of it, I felt it was the best trading book I ever read (or rather: I ever started to read, because I haven't finished any of them). The most comprehensive one.

I mean: finding a an edge is the easiest part. The hardest part is using the stoploss. This book is all about making you understand why you should use the stoploss. It may sound simplistic and demeaning for the book, but if it achieves to get you to understand risk, accepting risk (which means taking the loss, when it happens), it will have achieved its purpose. So it is basically all about using the stoploss. If he had titled it "why you should use the stoploss" he might have sold fewer copies, but the title would have been more appropriate.

I expect the book to get this through my head: that you have to understand and accept your risk each time you make a trade, or you will not be in control of all possible outcomes once that trade is on: with the potential risk of blowing out your account. Understanding this will also mean that you will always have a maximum predetermined loss, and you will accept it. The whole book could have consisted of one word: stoploss. But one thing is to give you the formula, and another is to make you understand it. The formula is "stoploss". Understanding it requires one book of explanations, and years of losses.

 

[bedsit]

I should think I need to change certain beliefs as far as trading is concerned. Definitely need some work on fear, euphoria – recklessness, discipline etc. This time I'll try to apply what I learnt from the book (for a change)
About his approach: Well I try not to be dismissive – heard about him coaching some institutional traders etc. His philosophical approach may be unusual, but if it works why not. Trying to be pragmatic.

 

[Yamato]

If he uses whipping in his coaching I am all for it.

I don't read that much but when I read something, if I manage to read it, it means I am getting the message. I hope that within a few months my unprofitability will only be a distant memory. After 12 straight years of losses it would be about time.

I think this book you suggested to me is perfectly addressing my problem. I feel that he wrote every sentence of it just for me.

 

[bedsit]

Hope it works for you well. I wouldn't wait few months, instead would apply it immediately (I mean as soon as this unusual holiday price behaviour finishes)

 

[Yamato]

It might take me a few weeks and months to digest the book and its message. That's why I said "months". I don't think that yesterday's was my last relapse ever: I hope it was, but I wouldn't bet on it.

I'll be very happy if, by the end of book, I'll be cured.

 

[Yamato]

craving to break rules

Chapter 2:

...Just at that moment, he hears a scream from across the room, "NO! DON'T TOUCH THAT!"

Startled, the child falls back on his butt, and begins to cry. Obviously, this is a very common occurrence and one that is completely unavoidable. Children have absolutely no concept of how they can injure themselves or how valuable something like a vase can be. In fact, learning what is safe and what isn't and the value of things are important lessons the child must learn. However, there are some extremely important psychological dynamics at work here that have a direct effect on our ability to create the kind of discipline and focus necessary to trade effectively later in life.

and:

The problem is that, most of the time, events are not allowed to take their natural course and the denied
impulses are never reconciled (at least, not while we're still children). There are many reasons why adults don't like it when their children (especially boys) cry, and do everything they can to discourage this behavior. There are just as many reasons why adults will not bother to explain to children why they are being forced to do something they don't want to do. Even if adults do try, there are no assurances that they will be effective enough to reconcile the imbalance. What happens if these impulses aren't reconciled?

They accumulate and usually end up manifesting themselves in any number of addictive and compulsive behavior patterns. They accumulate and usually end up manifesting themselves in any number of addictive and
compulsive behavior patterns. A very loose rule of thumb is: Whatever we believe we were deprived of as children can easily become addictions in adulthood. For example, many people are addicted to attention. I am referring to people who will do most anything to draw attention to themselves. The most common reason for this is that they believe they either didn't get enough attention when they were young or didn't get it when it was important to them. In any case, the deprivation becomes unresolved emotional energy that compels them to behave in ways that will satisfy the addiction. What's important for us to understand about these unreconciled, denied impulses (that exist in all of us) is how they affect our ability to stay focused and take a disciplined, consistent approach to our trading.

I can't believe this guy is explaining to me what happened with my father forbidding just about everything to me and enforcing just about any type of discipline and rules that could ever be conceived by a parent. He's better than any shrink I could have ever gone to.

What did my dad deny to me that is causing me to trade unprofitably? I can't jump to conclusions. But basically he gave me too many rules, and so I have an unsatisfied need for freedom: but if I trade with the necessary rules, freedom is reduced to zero. So I basically have to look for freedom in other areas. However what goes on is that - throughout my life - I've been feeling this crave to break rules, and this also happens in my trading.

But let's keep on reading.

I was waiting for him to tell me how to curb my compulsive behaviours. Not yet, but he says something else very interesting:

The market is like a stream that is in constant motion. It doesn't start, stop, or wait. Even when the markets are closed, prices are still in motion. There is no rule that the opening price on any day must be the same as the closing price the day before. Nothing we do in society properly prepares us to function effectively in such a "boundary-less" environment. Even gambling games have built-in structures that make them much different from trading, and a lot less dangerous. For example, if we decide to play blackjack, the first thing we have to do is decide how much we are going to wager or risk. This is a choice we are forced to make by the rules of the game. If we don't make the choice, we don't get to play.

In trading, no one (except yourself) is going to force you to decide in advance what your risk is. In fact, what we have is a limitless environment, where virtually anything can happen at any moment and only the consistent winners define their risk in advance of putting on a trade. For everyone else, defining the risk in advance would force you to confront the reality that each trade has a probable outcome, meaning that it could be a loser. Consistent losers do almost anything to avoid accepting the reality that, no matter how good a trade looks, it could lose. Without the presence of an external structure forcing the typical trader to think otherwise, he is susceptible to any number of justifications, rationalizations, and the kind of distorted logic that will allow him to get into a trade believing that it can't lose, which makes determining the risk in advance irrelevant.

Let me quote it once more because this is the point of the whole book, it totally applies to me, and if I can get to understand this, I am done!!!

In trading, no one (except yourself) is going to force you to decide in advance what your risk is. In fact, what we have is a limitless environment, where virtually anything can happen at any moment and only the consistent winners define their risk in advance of putting on a trade. For everyone else, defining the risk in advance would force you to confront the reality that each trade has a probable outcome, meaning that it could be a loser. Consistent losers do almost anything to avoid accepting the reality that, no matter how good a trade looks, it could lose. Without the presence of an external structure forcing the typical trader to think otherwise, he is susceptible to any number of justifications, rationalizations, and the kind of distorted logic that will allow him to get into a trade believing that it can't lose, which makes determining the risk in advance irrelevant.

It is totally true: before I make a trade I hate to hypothesize that it could be a loser.

He talks about creating rules, and respecting rules just about after this. I don't know if I'll post the whole book though, because it's getting tiring. Basically everything he says is just perfect for me.

 

[Yamato]

One more good quote from chapter 2 before giving up because there's too much good stuff to quote:

Trading has no formal ending. The market will not take you out of a trade. Unless you have the appropriate mental structure to end a trade in a manner that is always in your best interest, you can become a passive loser. This means that, once you're in a losing trade, you don't have to do anything to keep on losing. You don't even have to watch. You can just ignore the situation, and the market will take everything you own—and more.

One of the many contradictions of trading is that it offers a gift and a curse at the same time. The gift is that, perhaps for the first time in our lives, we're in complete control of everything we do. The curse is that there are no external rules or boundaries to guide or structure our behavior. The unlimited characteristics of the trading environment require that we act with some degree of restraint and selfcontrol, at least if we want to create some measure of consistent success. The structure we need to guide our behavior has to originate in your mind, as a conscious act of free will. This is where the many problems begin.

The next paragraph is titled "PROBLEM: The willingness to Create Rules" and is like the bible of trading to me, and I feel it will certainly give me the awareness to solve my problems.

However, I will stop quoting, because as usual it's slowing down my reading too much.

 

[Yamato]

Very interesting reviews on the book on amazon:
http://www.amazon.com/Trading-Zone-Confidence-Discipline-Attitude/dp/0735201447

The first two comments are really good and summarize what I think already. I agree with both:

By Peter B. Nelson (Minneapolis, MN USA) - See all my reviews

If you are like most people, after your first few losing trades you set about to learn better market analysis. After your next string of losers you learned about risk management. But there's still one more challenge to conquer; yourself.
That is the major premise of this book. If it sounds like wishy-washy psycho-babble to you, I'll only say that I would have agreed -- four months ago, before I quit my 20-year technology career, obtained a Series/7 license and joined a professional day-trading firm. I now believe most people would lose money if you gave them 50/50 odds on whether or not it was going to rain tomorrow.
In other words, successfully forecasting the market is not enough. Why not? Well, this book explains why not. It has to do with one's sense of self-worth, one's moral judgment of money, one's work-ethic, one's tendency to focus on good news while ignoring bad, and other things.
"Zone" was recommended to a friend of mine by a professional floor trader who told him, "I wish I had read it before starting two years ago. Don't place another trade until you do." Well said. Does this apply to investors as well as traders? Oh, absolutely! If you have ever said to yourself, "I'm not selling that stock while it's down, I'll wait until I have a profit in it," then for the love of money, read this book.
Finally, read "Zone" before Douglas' earlier work. If you still want more then read "Disciplined Trader" for a general review plus a deeper exploration into the author's philosophical and meta-physical theories.

And:

By Mr. John M. Macgregor "John Macgregor" (Chiang Mai, Thailand) - See all my reviews

Because the core of the book - the emphasis on 'thinking probabilistically', and on banishing both fear and euphoria: on the system rather than on individual trades - is excellent and worth the cover price alone.

However there is a wearying amount of padding - most of it in the 'obviousness' category. The author spends pages at a time, for example, telling us that:

1. We have beliefs

2. Those beliefs cause us to act certain ways

3. We can change those beliefs

4. Therefore causing us to act in different ways.

(etc etc etc)

We knew all this.

Chief problem is that Douglas isn't a writer: doesn't know how to pare and refine material; reduce to essence; delete the unnecessary. Likes the sound of his own voice.

This also shows in the frequent spelling and grammatical mistakes, and the poor punctuation - which tends to throw one's attention all over the page, trying to discern a meaning. I'd have hoped the publisher - Prentice Hall - could have afforded an editor.

Douglas also affects, at times, knowledge of things he knows nothing about. E.g. equating negative ions with negative emotions - i.e. an electrical charge with a metaphor (!) Even a bit of school science would have prevented this one.

Hard to know whether to recommend this book or not, as reading it will waste much of your time: as you proceed from gem to gem (and there are many) via a wilderness of excess, often meaningless, verbiage.

Advice to wealthy readers: Pay someone to rip out the time-wasting pages, and chapters, and salvage for you the worthwhile bits - most of them in the first half.

Advice to Prentice Hall: Employ editors; you'll find it cost-effective in the long run. For example, people will recommend more of your books to other people.

Advice to Mark Douglas: cut this book in half, or less.


John Macgregor

 

[wprins]

Hey Travis,

Came accross this thread tonight, re FX500club, in case you're interested: http://www.trade2win.com/boards/mec...0club-subscription-transfer-4.html#post586396

 

[Yamato]

Hey Travis,

Came accross this thread tonight, re FX500club, in case you're interested: http://www.trade2win.com/boards/mec...0club-subscription-transfer-4.html#post586396

Thanks, I'll check it out.

 

[Yamato]

I agree so much with this that I'll now do a search and found a similar thing I wrote months ago, before ever reading anything by douglas.

In other words, the very reason we are attracted to trading in the first place—the unlimited freedom of
creative expression—is the same reason we feel a natural resistance to creating the kinds of rules and
boundaries that can appropriately guide our behavior. It's as if we have found a Utopia in which there is
complete freedom, and then someone taps us on the shoulder and says, "Hey, you have to create rules,
and not only that, you also have to have the discipline to abide by them."

Not yet the part about the paradox that I remembered writing about, but so far I've found this related thing I've written a month ago:
http://www.trade2win.com/boards/trading-journals/72598-my-journal-111.html#post996438

AM I WILLING TO RENOUNCE TO SOME OF MY FREEDOM?
That's been in a constant down trend, and this journal is pretty much witnessing that, and hoping to fix this problem. Do I want to win, enough to sacrifice my freedom, my habit of rebelling to every single rule I'm confronted with? Do I renounce the freedom of trading however and whenever I want without following any rules?

I am surprised how much I see eye to eye with mark douglas. Hopefully he's profitable and I'll be able to become profitable as well. I am pretty sure he had my same problems in early unprofitable years.

I searched for a few minutes and didn't find it. What's important is that Douglas and I are very very similar in everything except that he's profitable and I am not, so hopefully I am going to be like him with this respect as well.

 

[Yamato]

More from chapter 2, too important not to quote even if I'm tired of quoting:

In other words, the very reason we are attracted to trading in the first place—the unlimited freedom of
creative expression—is the same reason we feel a natural resistance to creating the kinds of rules and
boundaries that can appropriately guide our behavior. It's as if we have found a Utopia in which there is
complete freedom, and then someone taps us on the shoulder and says, "Hey, you have to create rules,
and not only that, you also have to have the discipline to abide by them."

The need for rules may make perfect sense, but it can be difficult to generate the motivation to create
these rules when we've been trying to break free of them most of our lives. It usually takes a great deal
of pain and suffering to break down the source of our resistance to establishing and abiding by a trading
regime that is organized, consistent, and reflects prudent money-management guidelines. Now, I'm not
implying that you have to reconcile all of your past frustrations and disappointments to become a
successful trader, because that's not the case.

 

[Yamato]

That's it: I placed a trade. As simple as that. After reading Mark Douglas, I kind of digested it already, I saw an unequivocal opportunity, and I said: what do i risk on this trade if it doesn't work? 250 dollars, 20 ticks.

I added my stoploss, and will let the trade go for hours and hours, as I'll sleep.

I felt greater courage than usual, because now I am accepting my risk: I am accepting that I could lose 250 dollars on this trade. So where's the hesitation that I felt? Gone, because now I am not risking my entire capital each time I open a trade.

I got my stoploss in, and tomorrow I may wake up with either a loss of 250 or with an extra 1000 dollars. That wouldn't be bad if I coud inaugurate a new type of trading, whereby I trade whenever I see an opportunity with the only requirement being a stoploss.

If I can actually change my way of thinking, I, mark douglas, and also elder, made a miracle happen.

 

[Yamato]

I am not even going to tell you what market I traded, because all i need to say is that my risk is 250 dollars. And my potential reward is up to a 1000 dollars. And I think that it is likely to happen, at least more than 50%, so why shouldn't i have made it? I went for it.

Once I'll be sure to always follow the rule of the stoploss, since I will only make trades where I have an edge (or the stoploss would punish me repeatedly and signal the lack of edge), I will be able to make just about any trade in the world, and seize every opportunity. I have to learn in terms of risk and probability.

 

[Yamato]

No more greed-driven entries and fear-driven exits

No more greed-driven entries and fear-driven exits. From now just thinking in terms of risk/reward and probability. If the combination of those two factors is on my side, I'll make the trades, wtihout focusing on how much money I want to make. If my calls are right, the money will come.

 

[Yamato]

It's amazing how I finally grasped something that was not tangible, something that was so conceptually invisible. Yeah, even mentally you look around... as a trader you look around you and all you see if the concept of edge, which means getting a majority of trades right. That's what you call edge. But you're overlooking the concept of risk/reward, that means that you may actually lose everything when you lose, and that will invalidate all your efforts.

Wprins, remember how we said these guys talking about risk-reward were talking nonsense because they forgot win-loss ratio? Well, I think I understand why they forgot it. Because everyone is always focusing on that the whole time: on how likely they will get it right. So the continuous emphasis on risk-reward is probably just there because of how people tend to otherwise focus on % of wins (win-loss ratio), and forget risk-reward.

So they mean to emphasize the concept of risk so much, that they forget to mention the part they're taking for granted, that is win-loss ratio.

Risk, risk, risk, risk... let's never forget it.

How many times I've read on forums sentences such as:
A good trader doesn't dream of how much he will make, but worries about how much he may lose.

I was bothered by these sentences, because I don't like anything that's popular, but these guys were all correct. Basically the whole financial forum community is saying nothing but right things. But few of us can really put everything together and make it work and produce money.

This I really wonder.... I wonder why so few people are profitable, when the answer to the problem is on every financial forum on the web. The answers are all out there and making money seems easy to me now.

We'll see how long this feeling lasts. Usually I lose 3000 dollars within 24 hours when I feel so good...

 

[Yamato]

Anyway, now that all problems seem solved, let us focus on what I'll do with the money. The money will come, so let's not even add more worries, such as how to spend it. The spending will take place naturally.

Let's just relax and remember this lesson. And if I ever forget there's elder chapter one and douglas chapter one and two to remind me of it.

 

[Yamato]

You have to see each trade like a lottery ticket

Ok. Got it. Woke up and closed my trade. Made over 300. The risk was 250. Probability was on my side... it was perfect. I woke up, looked at it, let it run for a few more minutes, and cashed in the winnings. Just like a lottery ticket.

Capital is now well over 6k.

Then looked around and saw another opportunity. Here the lottery ticket (the stoploss) cost me 100 dollars. Bought it and I'll be refunded if it makes money (probably as much as 500 dollars). If it doesn't, I'll have lost the cost of the lottery ticket: 100 dollars.

I think that if I get this lottery ticket concept into my head I am set. Nothing more to worry about. Also, the small trades, according to my previous sniper system, are good and have probability on their side, yet take too much work compared to the reward. I might continue or not. Now, with the lottery ticket approach, I am free to do whatever I want, as long as I keep in mind that each trade has a lottery ticket cost: the cost of your maximum predetermined loss.

You buy your ticket and then you leave. You come back in a few hours, waiting for as long as you expect price to go in your favor (I believe in appraising/forecasting moves in terms of time more than in terms of point). And you cash in the winnings or accept that you didn't win the jackpot.

And now I am going back to sleep, which is my best trading mode. You water your plants and then you let them grow. You don't go there messing with them to see how fast they're growing... once you have an edge and the lottery ticket approach, trading is something to forget about.

OK, now I am feeling like a genius just because my last trade was a win... the emotions are still all there. We'll see how I'll take my first lottery loss.

 

[Yamato]

Other advantages of the lottery ticket approach

Another good thing with the lottery ticket approach is that, like the sniper approach, it gives you a sense of patience. It tells you can only buy a lottery ticket so often, and also the fact that you have to wait for the lottrey draw, and also that it is not 100% sure that you will win, and actually that you should consider your stoploss like a ticket you have already paid. Only like I can accept the idea of a loss. Like a ticket I paid in advance.

So, point by point, here's what the "lottery ticket" approach conveys to a trader and helps him accept and understand the following concepts:
1) the need to wait patiently before you enter and the concept of a limited number of opportunities (lotteries don't start and end within two hours)
2) the need to wait before you exit, to let price go your way (you have wait for the lottery draw)
3) the uncertainty of the outcome (with the lottery you actually do not expect to win)
4) the need to see your stoploss as a cost (the cost of the lottery ticket)
5) the great potential of your trades, that could have a low risk and a high reward (with lottery that is the key concept: the risk/reward ratio is very advantangeous, even though probabilities are so disadvantageous that playing the lottery does not make sense for the overall population).
6) the fact that you do not control the markets, which is hard to accept otherwise (as in the expression: "it's a lottery"). Even though we know you can forecast the market better than the lottery, but you need to remind yourself that you are not god.

I think that today, 30th of December, as I've finally grasped this final concept and developed this last analogy, I may very well have turned profitable. About 12 years since I started trading.

So, thanks to the journal, thanks to the readers, and thanks to trade2win managers, who have given so much space to Journals (with a title on the header). Otherwise I never would have started this journal. That's one problem with elitetrader.com: journals are not as pretty in terms of customization possibilities, they are not as important in terms of space on the site, and very importantly you get treated like crap by the readers, which does not happen here. Had I had to defend myself every day for what I wrote, I would have quit writing after a few days. For journals, you need a friendly community, like this one (on elitetrader.com moderators are great, but the users tend to be more offensive), or you need a semi-deserted forum, like this one: this way it filters out all the morons, since they're attracted by crowds and action.

 

[Yamato]

I will seal this last analogy with a few lottery videos now, to convey all these concepts better:
1) Need for patience
2) Uncertainty of the outcome
3) Implicit cost, which should be kept fixed like for the lottery
4) Great potential in terms of risk/reward