Psychology... the poll

Does psychology matter in trading?

  • Total voters
    131
Mathemagician said:
Many people think that trading systematically eliminates emotion from the equation. This is utterly false! All it does is shift the emotions to something that is easier for some people (like me) to deal with but harder for others. I think both types of people simply cannot fathom how the other can do what they do so two religions form and do the only thing two religions know how to do when faced with each other's presence -- try to destroy each other.
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This is false. I've been on both sides of the fence, and I know what side I rather be on.:cheesy: However this side is not formalizable to any set of rules.

One of the features of systemised trading is your concept of losing runs, and statistical properties, none of which applies to discretionary.

Again, you appear to imply that taking emotions out will make you successful at trading. That is utterly absurd. Emotions play a part in hindering you when you trade discretionarily. Taking emotions out is a necessary condition for trading success. Unfortunately it is not SUFFICIENT.

I have had first hand at the above, when I was pursuing a system set up to a formal set of rules. It was going well for 2 months, then in one week the half of the account was wiped out. Emotions almost crept in, but - and this was a big but - I kept at it and did what it said to do hoping it would turn a corner (notice the hoping there, this did not stop me from following the system). I finally used my better judgement and called it a quit before it wiped out the entire account. This was REAL money by the way, not play money, not paper trades etc. . . . It was not nice to go through. Moral of the tale is that detachment of emotions is not enough. If it were more people would make it in this game.

Mathemagician said:
The reality is that you could have the greatest trading model ever written but if you don't have the ability to keep your grubby little hands off the button you'll underperform it at best and fail miserably at worst. Keeping one's hands off the button requires emotional fortitude of a different kind than is required to make discretionary trading decisions in the heat of the moment. However, the consequences of a lack of discipline are the same in each case.
jj
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But I do have a theory (which would take many pages to explain and cite certain references) which explains why some systemised traders do make money (we need to throw some Ramsey theory and stochastics and all that into a very delicate and subtle argument).
 
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OK, temptrader, I admit it. I am a loser and you are a genius. Maybe one day after I, too, fail at systematic trading as is only inevitable I can become half of what you are. Of course, I've been patiently waiting 5 years already for my inevitable failure, I guess I can wait 5 years more if that's what it takes...

jj
 
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I would agree with temptrader that emotional reactions can impact both discretionary and systems trading. Less normally for systems but in the heat of a long drawdown they cut in.

What I don't agree with is that "Taking emotions out is a necessary condition for trading success." IMO what IS necessary is preventing emotions from causing you to deviate from good trading (following your plan, say). Experiencing the emotions is fine and can be useful but your forebrain must rule your hindbrain when it comes to making the choices of how to act.
 
nine said:
I would agree with temptrader that emotional reactions can impact both discretionary and systems trading. Less normally for systems but in the heat of a long drawdown they cut in.

What I don't agree with is that "Taking emotions out is a necessary condition for trading success." IMO what IS necessary is preventing emotions from causing you to deviate from good trading (following your plan, say). Experiencing the emotions is fine and can be useful but your forebrain must rule your hindbrain when it comes to making the choices of how to act.
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It's a fair comment, but some people are naturally more emotional than others. Is it possible that for some, failure is inevitable because of thier natural tendency to be emotional, and not through lack of understanding?
 
Are systems the answer for emotional people, could systems be actually worse for an emotional person who thinks that their psychology is everything and that they are doomed without it?

For example.

The emotional person, who detests discretion, because of their natural tendency to have low self esteem and self confidence, chooses a system. The system fails for the emotional trader.

It's actually more self harming. Now the emotional trader is losing everything.
 
Yes. I wonder where the line is between the unemotional, the correctably emotional, and the hopelessly emotional.

People get into a "one thing works" mentality wrt trading strategies but I have seen people succeed with two or three different types of strategy and other people fail with all of them. The guy who passed to me the basics of what I do now has successfully traded a couple of other strategies over the last three years ... and now ... believe it or not ... he's trading end of day systems!

If it was easy they wouldn't pay us the big bucks, right Paul :)
 
nine said:
Yes. I wonder where the line is between the unemotional, the correctably emotional, and the hopelessly emotional.

People get into a "one thing works" mentality wrt trading strategies but I have seen people succeed with two or three different types of strategy and other people fail with all of them. If it was easy they wouldn't pay us the big bucks, right Paul :)
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Absolutely. Then there are the lazy ones. The worst types are the hopelessly emotional lazy traders, money is no object, trading is no object, for these types.
 
nine said:
Yes. I wonder where the line is between the unemotional, the correctably emotional, and the hopelessly emotional.

People get into a "one thing works" mentality wrt trading strategies but I have seen people succeed with two or three different types of strategy and other people fail with all of them. The guy who passed to me the basics of what I do now has successfully traded a couple of other strategies over the last three years ... and now ... believe it or not ... he's trading end of day systems!

If it was easy they wouldn't pay us the big bucks, right Paul :)
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:mad::mad::mad::clap::clap::clap::eek::eek::eek::cry::cry:

For a start, the hopelessly emotional ones are well portrayed by your smilies
 
Mathemagician said:
OK, temptrader, I admit it. I am a loser and you are a genius. Maybe one day after I, too, fail at systematic trading as is only inevitable I can become half of what you are. Of course, I've been patiently waiting 5 years already for my inevitable failure, I guess I can wait 5 years more if that's what it takes...

jj
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Did I say I was a genius? Don't think so. And if you must know, no I'm not.

However, you've now shot yourself in the foot, because what transpires now is rather delicate.

Given that systematic trading is logically formalizable, it therefore follows that it can be packaged as a software program to run on a platform of your choosing. Given this I'd like to ask:

1) what are the psychological issues if any? You - or the program that does the trades - are following a fixed set of rules in relation to a fixed set of scenarios. The person who is using it is not required to "think" is he? Just like when I use Photoshop to crop and rotate images I do not need to worry about jpeg compression or rotation matrices. He either follows them or he doesn't.
2) what keeping your hands off the buttons is there? That is utterly absurd. If you know that the system is profitable and will not have big draw downs (because the person who you got it from TOLD you so - ha ha ha), it would be easy to follow it and what it asks to the letter despite going through losing runs. There can be no REAL psychological issues because, as I've said and will repeat, the system is advertised as profitable (;)).

I await your reply, because I am beginning to get a feeling there is more to work out here.
 
temptrader said:
Did I say I was a genius? Don't think so. And if you must know, no I'm not.

However, you've now shot yourself in the foot, because what transpires now is rather delicate.

Given that systematic trading is logically formalizable, it therefore follows that it can be packaged as a software program to run on a platform of your choosing. Given this I'd like to ask:

1) what are the psychological issues if any? You - or the program that does the trades - are following a fixed set of rules in relation to a fixed set of scenarios. The person who is using it is not required to "think" is he? Just like when I use Photoshop to crop and rotate images I do not need to worry about jpeg compression or rotation matrices. He either follows them or he doesn't.
2) what keeping your hands off the buttons is there? That is utterly absurd. If you know that the system is profitable and will not have big draw downs (because the person who you got it from TOLD you so - ha ha ha), it would be easy to follow it and what it asks to the letter despite going through losing runs. There can be no REAL psychological issues because, as I've said and will repeat, the system is advertised as profitable (;)).

I await your reply, because I am beginning to get a feeling there is more to work out here.
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In theory practice is a lot like theory, but in practice it's not.

Look, this is obviously a crude attempt at using me as a foil rather than engaging in open dialogue. I have no desire to play this role. Thus, until you learn to treat others with a modicum of respect, I shall interact with you no further.

Happy Trading!
jj
 
Mathemagician said:
In theory practice is a lot like theory, but in practice it's not.

Look, this is obviously a crude attempt at using me as a foil rather than engaging in open dialogue. I have no desire to play this role. Thus, until you learn to treat others with a modicum of respect, I shall interact with you no further.

Happy Trading!
jj
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I am not using you as foil. I'm being perfectly seriously since I am following what you say to its logical conclusion. It is not my fault that I what I said previously about not having losing runs is not to your liking, I'm afraid there is nothing I can do about that . . .
 
temptrader said:
2) what keeping your hands off the buttons is there? That is utterly absurd. If you know that the system is profitable and will not have big draw downs (because the person who you got it from TOLD you so - ha ha ha), it would be easy to follow it and what it asks to the letter despite going through losing runs. There can be no REAL psychological issues because, as I've said and will repeat, the system is advertised as profitable ().
Click to expand...

Regarding 2) temptrader.

If you talk to a broker who trades systems for clients (I know a couple personally who have 100s of clients with systems) you will find that even when the broker takes the signals the clients interfere with them (ring up and say, take the profit or get out now). When the client trades a system the broker is also trading then the variations from the system are more dramatic and more frequent.

Rarely do the client alterations result in annual performance better than the systems.

Those are the facts. I'll leave the interpretation to you guys.
 
You can have a winning system which afterall is the prerequisite to making more money than you start with, BUT whether you can actually trade it to achieve a winning performance consistently year after year is all about psychology in the broadest sense.
The markets littered with people who ; went bust before they even managed to forward test a winning system , went bust having 'succeeded' ,but then decided to tweak the system for an even better performance , went bust in a similar fashion not by tweaking
per se ,but by getting too greedy and wanting more than risk control rules would allow (f..k we have an whole industry on this road..think hedges etc)and did you see all the wonderful very believable reasons they managed to construct to enable this ? Absolute bullsti ,but if you're primed to want to believe then the reasons don't actually have to stand up to any real rigorous scrutiny.
LOL...their are LAWS in economics and the ability to bend these with over performance is very very limited so when you see virtually an whole industry geared to attempting that then you know the broad population as an whole are well and truly challenged psychologically. I'm not being cycnical , I'm telling you exactly what I have seen around me for virtually my whole life. People willing to go for broke using any and all rationalisations that you can think of and broke is exactly what most of them got ,or will get to some degree.
If you cannot control yourself then you have absolutely no chance of controlling anything else you might be involved with.
 
nine said:
Regarding 2) temptrader.

If you talk to a broker who trades systems for clients (I know a couple personally who have 100s of clients with systems) you will find that even when the broker takes the signals the clients interfere with them (ring up and say, take the profit or get out now). When the client trades a system the broker is also trading then the variations from the system are more dramatic and more frequent.

Rarely do the client alterations result in annual performance better than the systems.

Those are the facts. I'll leave the interpretation to you guys.
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And I would hazard a guess that the clients interfere because they probably had bad experiences in the past or that the losing run is getting too close to comfort. I happen to know of one hedge fund that had about 800 million invested in it (which is quite small as hedge funds go) and in one year they lost 10%. Most clients reaction was to withdraw and the fund ended up with only about 70 mill left.

Like I said, if you KNOW your system is definitely going to make money, then clearly the user will have the psychology to leave it alone. I repeat, psychology will NEVER be an issue if you KNOW that. Point is, you don't know that when you use a system, and especially if you are using someone else's, you are doing something rather brainless.

"Rarely do the client alterations result in annual performance better than the systems." is a probabilistic statement. What about the ones that do interfere and results are better, this now gives the users psychological distrust of the systems they use or wanting to tamper with it.

I never said you can't make money with systems, I'm just stating that if doing the markets was just one fixed system there might as well be no market. I'm certain some systems can make money, and past performance of some is impressive. But note, that's backtesting, and we can be CERTAIN of backtesting. Forward testing is what matters, and when you only have probabilistic edges (because that's what all systems are), you get drawdowns and other probabilistic effects. And no amount of probability theory will guarantee 100% that during a losing run it will turn and get better, and I personally think that is where the psychology comes in.

chump,

the operative word here is "know". If someone were to 100% guarantee the system they sell was fool proof, then believe me, there would be no psychological issues from users. It' only when it starts to get bad do the users start tweaking - or complaining. And if someone had a 100% fool proof system they would not be selling it to the general public for a few hundred, or indeed a few thousand, pounds.

There are no fixed profitable systems over the long run that I know of - otherwise quants might as well be out of work (although their work is only sometimes systems related).
 
temptrader said:
..... Forward testing is what matters, and when you only have probabilistic edges (because that's what all systems are), you get drawdowns and other probabilistic effects. And no amount of probability theory will guarantee 100% that during a losing run it will turn and get better, and I personally think that is where the psychology comes in.
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Nothing can give you a 100% guarantee.

Even if you trade completely discretionary and have been profitable every day for 10 years something may change and you could find yourself on a massive losing streak.

Are you susggesting that the psychological component can only be negated by having a 100% guarantee?

Cheers,
PKFFW
 
temptrader said:
. . .
Like I said, if you KNOW your system is definitely going to make money, then clearly the user will have the psychology to leave it alone. I repeat, psychology will NEVER be an issue if you KNOW that.
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Since the future is unknown one cannot KNOW that a system will make you money. As your arguments rest on this assumption they are invalid.

Quad Erat Demonstrandum.
 
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