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Psychology Vs. Adaptation

  
  Education
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The biggest question I have here is when do you ‘adapt’ and when do you stick with your trading strategy.

We do not know whether our strategies truly work… how do we know if we have just been ‘lucky’ verses by ‘smart’. (more…)

What characterizes great and successful traders

  
  Education
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  • Great traders graciously accept mistakes. They don’t need to be right all the time. Thoughts-Trading
  • Great traders focus on proper execution not on the outcome of a single trade.
  • Great traders concentrate on good risk management. They constantly manage their open positions.
  • Great traders are emotionally detached. Single trades do not affect their mood.
  • Great traders don’t compare themselves to others. They isolate themselves from the opinions of others.
  • Great traders are not afraid to buy high and sell low.  As you probably know by now the single biggest mistake a trader can make is to hold on to a losing position. Failing to cut losses quickly and letting them develop into huge losses is mentally and financially devastating. The underlying psychology which is responsible for this behavior is the ‘need to be right’ and the fear to sell at a loss. What aggravates the situation is adding to a losing position.  “Do more of the things that work and less of the things that don’t.“

  • Conclusion:Isolate yourself from the opinions of other people. Make trading decisions your own. Focus on proper execution. Have the courage to do the right thing because it is right.

    • Risk and Loss

      
      Education
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    Risk– when it comes to life risk can be a bad thing.  It means not looking both ways before crossing the street.  Risk is like breathing when it comes to trading.  It is the only way to stay alive.  It can be toxic air or clean air know the difference before taking a deep breathe.

    Loss– losses are a part of trading they need to be handle the same way as wins, the psychology should be determined by the way it was realized more than what was realized.  The exception is big losses/risking more. You will have more control of amplitude than frequency so take advantage of it

    Psychology and Gaining Confidence

      
      Education
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    CONFIDENCEThere has been a lot of talk on the  psychology of trading and getting rid of fear etc. I think that one way to help is to understand the performance parameters of your trading system and this means extensive  backtesting and changing the way you think when entering a trade.

    Now whenever I have placed a trade I have assumed that I was wrong and so if the market did not immediately prove my position correct I would be taking measures to reduce my position and, if necessary, get out. This kept my losses small and when correct I was able to do nothing and just move my stop up. This is contrary to the way most people trade in that they place a trade assuming they are right and wait for the market to prove them wrong.

    IAlso if you have backtested a system thoroughly you will know what percentage of profitable trades you can expect. From this you can also determine the number of consecutive losing trades that you can expect for a given number of trades. The formula is quite straight forward and is:
    Consecutive losses = LN(N)/-LN(S) where
    N = Number of expected trades
    S = (100-strike rate %)/100 (more…)

    Inside the Mind

      
      Education
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    When I impulsively take the first type of countertrend trades (i.e. missed a good trend), here’s what is going through my mind:

    1. Woah, the move has already gone quite a distance.
    2. Sigh, I should’ve taken that entry earlier. I shouldn’t have followed my trading plan so strictly.
    3. Should I get in now? No, I cannot get in any more, I cannot chase the market, it’s too risky, I have no logical stop nearby, you don’t know when it might reverse down quickly.
    4. I have already missed the move. I need to wait to enter in the opposite direction when the trend ends.
    5. The trend has gone too far, it must turn soon
    6. Look! There’s a bit of resistance, the trend is about to turn, go short! (for an uptrend)

    And the countertrend trade is made! Below are what I think are the psychological process at work:

    1. Observation
    2. Regret
      • Trading is always full of regrets. You always think you can do better.
    3. Indecision, uncertainty, anxiety
      • Fear of losing out starts to take hold.
      • When you don’t have a well-defined trading plan that caters for all scenarios, or if you don’t believe in your trading plan, you will face indecision and anxiety.
    4. Resignation
      • I  accepting that I can no longer enter in the direction of the trend.

    (more…)

    Trading Psychology Quotes

      
      Education
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    thinker-

    • Assumption 1: We have not learned everything there is to know.
    • Assumption 2: What we have learned, unwittingly or by choice, may not be very useful with respect to fulfilling ourselves in some satisfying manner.
    • Assumption 3: What we have learned that is useful and works to our satisfaction is still subject to change because of changing environmental conditions.

    “If you operate out of the foregoing assumptions, you will begin to recognize how every moment becomes a perfect indication of your state of development and what you need to do to improve yourself.

    “When we refuse to acknowledge or accept the perfection of each moment in our lives, we deny ourselves access to the infomation that we need to expand ourselves. Any skill that we need to learn to express ourselves more effectively has a true starting point. To find that true starting point requires our acceptance of each outcome as a reflection of the sum total of who we are so that we can first indentify what skill needs to be learned and how we might go about the task of learning it. Without this true starting point, we will operate from a base of illusion.

    A Study in the Psychology of Gambling- Written in Year 1873

      
      Education
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    In a 1873 letter to The Spectator entitled “A Study in the Psychology of Gambling” Saxon-les-Bains describes his gambling experience in Monte Carlo.

    And what was my experience?  This chiefly, that I was distinctly conscious of partially attributing to some defect of stupidity in my own mind, every venture on an issue that proved a failure; that I groped about within me something in me like an anticipation or warning (which of course was not to be found) of what the next event was to be, and generally hit upon some vague impulse in my own mind which determined me: that when I succeeded I raked up my gains, with a half impression that I had been a clever fellow, and had made a judicious stake, just as if I had really moved skillfully as in chess; and that when I failed, I thought to myself, ‘Ah, I knew all the time I was going wrong in selecting that number, and yet I was fool enough to stick to it,’ which was, of course, a pure illusion, for all that I did know the chance was even, or much more than even, against me.  But this illusion followed me throughout.  I had a sense of deserving success when I succeeded, or of having failed through my own willfulness, or wrong-headed caprice, when I failed.  When, as not infrequently happened, I put a coin on the corner between four numbers, receiving eight times my stake, if any of the four numbers turned up, I was conscious of an honest glow of self-applause…

    Evidently, in spite of the clearest understanding of the chances of the game, the moral fallacy which attributes luck or ill luck to something of capacity and deficiency in the individual player, must be profoundly ingrained in us.   I am convinced that the shadow of merit and demerit is thrown by the mind over multitudes of actions which have no possibility of wisdom or folly in them, granted, of course, the folly in gambling at all, as in the selection of the particular chance on which you win or lose.  When you win at one time and lose at another, the mind is almost unable to realize that there was no reason accessible to yourself why you won and why you lost.  And so you invent what you know perfectly well to be a fiction, the conception of some sort of inward divining rod which guided you right, when you used it properly, and failed only because you did not attend ‘adequately to its indications.’

    (more…)

    Chasing A Trade and Fear

      
      Education
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    Everyone knows that chasing price is usually not beneficial, we either end up catching the move too late, or we get poor trade location, which makes it more difficult to manage the trade.

    However, there are other forms of chasing that are just as common, maybe more common, and just as counter-productive.   Traders who are not profitable are often too quick to chase after new set-ups and indicators, or a different chat room, if that’s your thing.  Obviously, we need to have a trading edge, whether it is from the statistical perspective of a positive expectancy, or simply the confidence in a particular discretionary strategy such as tape reading, following order flow, market profile, etc.

    Chasing a trade is the fear of missing out. The fear of missing out is associated with various emotions, including regret. In my work with traders and in my own trading, I’ve seen the incredible power of regret. There’s a lot of talk about fear and greed in trading, but the power of regret is often overlooked. Some of my own worst trades, and those of my clients, often have a ‘regret from missing a prior opportunity’ component. When I finally finish my book on the psychology of financial risk taking, I will include much about this overlooked but very powerful emotion.

    Somewhat related to chasing a trade, is impulse trading.  They both have in common the underlying feeling of the fear of missing out.  It’s tempting for me to talk about impulse trading here, but it really deserves its own piece. 

    Possibility

      
      Education
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    Traders often hear about the potential benefits of preparing actionable trade plans prior to the next trading day. The goal of such preparation is to make yourself immune to mental edge breakdown. One of the greatest threats to your mental edge is coming across something that’s unexpected during the trading day. Seeing an unexpected price move (especially one you perceive to be a big move) is likely to stress and panic you and therefore cause your psychology to shift into an emotional, reactive state. An effective way to prevent this is to prepare with possibility mapping. 
    Possibility mapping is a process which will mentally prepare you to expect the potentially unexpected, and therefore will allow you to numb, in advance, any potential emotional responses.  (more…)

    PSYCHOLOGY & RISK for New Traders

      
      Education
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    The issues faced by the New Trader are greed, stress, impatience, fear, and lack of desire to learn.

    “When a new trader enters the stock market with money but no experience, the odds are he will quickly gain experience by losing money.”

    RISK

    The New Trader must make managing money a priority, run trading like a business, control trading size, admit when he is wrong, and lock in strategy driven profits.

    “When you go to your computer to trade, you should approach it as if you are entering an auction, not a casino.” 

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