psychology of trading

[theMKR]

I did not write this. this is quite good. a guy called steve burns wrote it, in a tweet.. Link:
https://t.co/hJ7II68p3m
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Text:

Trading As A Business To make money in the markets you need to be trading as a business. Hobbies cost money, businesses make money. A business has a plan, a process, and a system. A business has customers that it sells products to for more than their cost. How a new trader approaches trading and the markets will determine their success from the very beginning. So many people think of trading as gambling and that comes from their perception of traders just trying to guess and predict the direction of a stock or a market. If a trader randomly picks and chooses trades with no system or edge then that is a form of gambling. In Las Vegas there are gamblers that are making bets against the odds and their are businesses that take those bad bets, they are called casinos. Casinos are not gamblers, they are businesses, as they have table limits, and take the bets that are too their advantage. A casino makes its money with the mathematical edge it has over its customers, the gamblers. To be a successful trader operate like a casino not a gambler. It is crucial that a trader operates their trading like a business if they want to be profitable. Emotions, egos, and excitement are generally not good business practices and have little place in operating a good business. In trading, making money should be the primary goal, and must be kept at the forefront of a trader’s mind as a focus. Fun and excitement in trading can be expensive entertainment. The reality is that the majority of the time, good trading is boring. A trader must approach their market entries, exits, and position sizing like they would operating any other business, utilizing a disciplined process to grow their capital and be successful.

1. You can’t open your trading business to having capital at risk until you have a full system with an operating trading plan that has an edge.

2.Your business inventory is your current positions; you have to buy them for less than you intend to sell them. Whether it is buy lower and sell higher or buy high to sell higher there must be a gross profit expectation.

3. Your customers are who you sell to; they have to be willing to pay more than you bought your positions for.

4. Losing trades are the cost of doing business.

5. Liquidity is the most important fundamental for inventory, you don’t want to get stuck with unmovable merchandise. Trade where there is volume and tight bid/ask spreads.

6. Your trading psychology and mindset is the manager of your business; you can’t let fear, greed, or ego lead to an unprofitable error outside your system.

7. Your business must have insurance to manage risk. Stop losses, diversification, and hedges are your insurance against big losses.

8. Location is everything. You must conduct your business on a chart price level where there are ample buyers and sellers so you don’t get stuck with positions that no one wants.

9. Your current trading positions are like your employees. You are a good boss to keep the ones that are productive and produce profits, and fire the ones that are unproductive and lose money.

10. Expansion of your business can only happen after your first buying and selling location is successful. Once you have mastered a system of entries and exits you can add new markets and signals that also have an edge.

11. Your trading capital is your business. Lose all your money and you lose your ability to operate and are out of business.

12.The only reason to be in business is to make money. If you don’t make money, you need a new business plan. Trading as a business means operating inside a systematically profitable process. Trade like a business not like a gambler, hobbyist, or for entertainment.

but doing business is higher risk and higher and faster returns..... while trading is slow

 

[stanlawj]

but doing business is higher risk and higher and faster returns..... while trading is slow

I think you are referring to business as a team vs business as a single owner.
There is higher risk in business as a team when the scale is much larger.

In trading world, that would be equivalent to a fund with multiple partners/depts like Citadel or Magnetar.

 

[wtaps300]

Think trading can be fast money also. If your methods in sync with current market conditions.

Personally I feel. The biggest risk. Doing business, you risk quite a big outlay (trading and its costs actually quite cheap in comparison). But you are able to get steadier cash flows.

Whereas trading. Is really. Who knows what your income will be like?

 

[theMKR]

Think trading can be fast money also. If your methods in sync with current market conditions.

Personally I feel. The biggest risk. Doing business, you risk quite a big outlay (trading and its costs actually quite cheap in comparison). But you are able to get steadier cash flows.

Whereas trading. Is really. Who knows what your income will be like?

if u write options, the income is sort of fixed.

but the risk of loss is unpredictable

 

[stanlawj]

ok, i talked about life-changing gains.... i just missed out on Natgas big time, because I bought UNG at 7.26 and sold at 7.88 because I thought it was going to range bound so I didn't use trendfollowing strategy. UNG just V-bounced up straight away +36%. Trendfollowing strategy is necessary for life-changing gains.

There is something magical about 30% gain. 3 x 30% back to back = >100% gain.
30% gains are more frequent than a double.

 

[DevilPlate]

ok, i talked about life-changing gains.... i just missed out on Natgas big time, because I bought UNG at 7.26 and sold at 7.88 because I thought it was going to range bound so I didn't use trendfollowing strategy. UNG just V-bounced up straight away +36%. Trendfollowing strategy is necessary for life-changing gains.

There is something magical about 30% gain. 3 x 30% back to back = >100% gain.
30% gains are more frequent than a double.

If range bound, why take profit at 7.88 instead of 8.5 to 8.80 range?

U managed to catch the bottom tho, impressive.

 

[stanlawj]

If range bound, why take profit at 7.88 instead of 8.5 to 8.80 range?

U managed to catch the bottom tho, impressive.

just count the daily red bars. After oversold for so long, it can't drop more than 2 or 3 bars consecutively without bouncing up. This method seems to work very well in choppy markets.

As for the take profit, i think any profit is great.... the problem is the strategy. I was trying to build more capital for actual UNG reversal around mid-March (projected). Just didn't planned the multiple scenarios this time for Feb trades.

Lesson learnt, I need to really work on multiple scenarios, not get lazy with it. I think once it opened 8.10, it is a full reversal up, may not range bound anymore, but I was still locked in too sceptical. Another example where past bias affected the trade plan.

Mainly to illustrate the importance of not trading for 1% to 2% all the time...the biggest gains in trader life are these trendfollowing moments.

 

[wtaps300]

Thought of the day.


When I first started my trader's education, there was no internet those days obviously. When I heard about a book, usually via word of mouth, sometimes I had to go to this little specialty store in Hong Lim (they have a paper catalogue), placed a deposit, and then wait for a month and a phone call. And quite often, when the book finally arrived, I read it and found that it is not that useful.

These days, all one has to do, is to tap a few times on their mobile phones: podcasts, educational youtube videos, e-books, audio books, forums, twitter, on-line courses. But yet successful traders are still not that common.

What is the crux of the problem?

 

[slowmover]

Thought of the day.


When I first started my trader's education, there was no internet those days obviously. When I heard about a book, usually via word of mouth, sometimes I had to go to this little specialty store in Hong Lim (they have a paper catalogue), placed a deposit, and then wait for a month and a phone call. And quite often, when the book finally arrived, I read it and found that it is not that useful.

These days, all one has to do, is to tap a few times on their mobile phones: podcasts, educational youtube videos, e-books, audio books, forums, twitter, on-line courses. But yet successful traders are still not that common.

What is the crux of the problem?

Read 10 books see 100 videos but when trading time and losing money fast, all throw inside the bin left 1 page of knowledge.

 

[VacheronLim]

Thought of the day.


When I first started my trader's education, there was no internet those days obviously. When I heard about a book, usually via word of mouth, sometimes I had to go to this little specialty store in Hong Lim (they have a paper catalogue), placed a deposit, and then wait for a month and a phone call. And quite often, when the book finally arrived, I read it and found that it is not that useful.

These days, all one has to do, is to tap a few times on their mobile phones: podcasts, educational youtube videos, e-books, audio books, forums, twitter, on-line courses. But yet successful traders are still not that common.

What is the crux of the problem?

Successful (and profitable) trading over extended period of time requires consistent hard work, few are ready to put in that kind of effort, resources and commitment. Most are in it looking for quick buck, or get-rich-quick scheme. And understandably so, as majority have full time job to attend to, trading is not their bread and butter.

How many actually understand and respect risk management, or progressive exposure etc Many see the market as either bull or bear, why does it have to be binary?

Know your time frame, know your style, know your edge, develop a system of processes that stack probabilities in your favor. And yes hands-on experience is essential too

 

[stanlawj]

Read 10 books see 100 videos but when trading time and losing money fast, all throw inside the bin left 1 page of knowledge.

Simple. It's not the books or videos. Maybe it's the discipline that you are lacking.

 

[stanlawj]

In order to be profitable, it is necessary to cut loss at small amounts. Many times before the actual winning run starts. Because win rates are seldom above 50% especially for trendfollowing, because it is difficult to know when the consolidation period actually ends.

 

[slowmover]

Simple. It's not the books or videos. Maybe it's the discipline that you are lacking.

Not me. I read few pages throw inside bin liao.

 

[peterchan75]

Please refer to post #23. Jack Schwagger said, there is no single method that enable one to be successful. All successful traders have their own methods. It's difficult for someone to accept someone's system. Buying a system cannot guarantee success in trading. To each, his or her own.

 

[iridiot]

 

[theMKR]

In order to be profitable, it is necessary to cut loss at small amounts. Many times before the actual winning run starts. Because win rates are seldom above 50% especially for trendfollowing, because it is difficult to know when the consolidation period actually ends.

then just set all bets to have trailing stop losses?

 

[stanlawj]

then just set all bets to have trailing stop losses?

I think you misunderstand, I was talking about entries resulting in small losses afterwards due to stop loss hit first before the profit target is reached.
I think we use the term "trailing" stop loss only after the price has moved above breakeven.

 

[wtaps300]

Basic exit will be:

Initial Stop Loss -> Breakeven Stop Loss (after position show +ve) -> Trailing Stop or Profit Target or when price action suggests something has changed

 

[wtaps300]

I just want to add, or rather, to explain why trading is so hard. from a maths angle. despite the usual trading without a plan, or not following the plan, not enough efforts made, not capitalized well enough, not learning the right things/knowledge, we still have be exceptionally focused to have a positive expectancy.

supposed you are a trader, trading short-term. supposed to have a good system, a slight edge, say 50% win probability. And u are able to ride out winners and cut losses so you average win/average loss is 2:1 (not unrealistic for a short-term trader). on paper you have +ve expectancy 0.5 x 2 - 0.5 = 0.5

but say if out of those 5 winning trades you cock up one, and assuming the exit u still do properly, then it becomes 0.4 x 2 -0.6 = 0.2 the expected returns go down quite dramatically

if you cock up 2 of those 5 winning trades, then it becomes 0.3 x 2 - 0.7 = -0.1 you start to lose money

and you have to keep repeating the same performance over and over again, with no margin for error.

of course some methods you can aim for a higher average win/average lose, but your win probability will go down correspondingly, like in the case of a trend following method.

that is the level of focus we need to achieve, every 10 trades, the " right" 5 trades you cannot even cock up 1 or 2 .. that is why it is so challenging to be consistently profitable ..

so, the level of focus, and the margin of error ..

 

[ekekultra]

I just want to add, or rather, to explain why trading is so hard. from a maths angle. despite the usual trading without a plan, or not following the plan, not enough efforts made, not capitalized well enough, not learning the right things/knowledge, we still have be exceptionally focused to have a positive expectancy.

supposed you are a trader, trading short-term. supposed to have a good system, a slight edge, say 50% win probability. And u are able to ride out winners and cut losses so you average win/average loss is 2:1 (not unrealistic for a short-term trader). on paper you have +ve expectancy 0.5 x 2 - 0.5 = 0.5

but say if out of those 5 winning trades you cock up one, and assuming the exit u still do properly, then it becomes 0.4 x 2 -0.6 = 0.2 the expected returns go down quite dramatically

if you cock up 2 of those 5 winning trades, then it becomes 0.3 x 2 - 0.7 = -0.1 you start to lose money

and you have to keep repeating the same performance over and over again, with no margin for error.

of course some methods you can aim for a higher average win/average lose, but your win probability will go down correspondingly, like in the case of a trend following method.

that is the level of focus we need to achieve, every 10 trades, the " right" 5 trades you cannot even cock up 1 or 2 .. that is why it is so challenging to be consistently profitable ..

so, the level of focus, and the margin of error ..

I read in an article recently, comparing trading to the pyramid classification of super successful traders at the tip and unsuccessful traders being the base. When there's a buy, there's always a sell and vice versa. To be profitable in trading, we have to climb and rise above traders who are making a loss or break even.

Traders who trade systematically would have a "set up" that they will be waiting for, because the set up has a probability to be a winning trade. Usually we have no control over the outcome of the trade (be it a win or a loss) market moves the prices, we just depend on the probability of the setup. But it would really take a trained mind to control the emotions even if we know this.