psychology of trading

[utraeg]

Just starting a thread to share some views since it looks like there's a lot of people actively trading be it long or short term.
Personally it has been a roller coaster of emotions for me the last year.
I hope it helps someone else out there, and would like bros to advise and can get to learn more from you guys too.
I think mental capacity is the hardest part about trading.

Losses: Personally I tend to feel the pain of losses more than the pleasure of gains, which can leads to holding on to losing positions and miss the cut loss point resulting in greater loss.

Wins: Have always a set target in mind, must be discipline and take profit at set targets. Have tried holding out and the reverse happen and leads to a negative mood/mindset for the following trades.

Overall Market view: Entry price is always such a glaring reference point, since it will determine if you are making profit or loss. as a results I tend to end up with a myopic view based on my price, rather than current market conditions.

Emotional entry: (revenge attitude) especially after losses/ stopping out, might miss out on the overall bigger picture, instead of logical ones, which can lead to impulsive buying and selling.

Fear of missing out (FOMO): Missing out on perceived opportunity, if we are patient opportunity always come again, higher time frames have lesser entry opportunity as compared to lower time frame, however it will always come around.

 

[reddevil0728]

Just starting a thread to share some views since it looks like there's a lot of people actively trading be it long or short term.
Personally it has been a roller coaster of emotions for me the last year.
I hope it helps someone else out there, and would like bros to advise and can get to learn more from you guys too.
I think mental capacity is the hardest part about trading.

Losses: Personally I tend to feel the pain of losses more than the pleasure of gains, which can leads to holding on to losing positions and miss the cut loss point resulting in greater loss.

Wins: Have always a set target in mind, must be discipline and take profit at set targets. Have tried holding out and the reverse happen and leads to a negative mood/mindset for the following trades.

Overall Market view: Entry price is always such a glaring reference point, since it will determine if you are making profit or loss. as a results I tend to end up with a myopic view based on my price, rather than current market conditions.

Emotional entry: (revenge attitude) especially after losses/ stopping out, might miss out on the overall bigger picture, instead of logical ones, which can lead to impulsive buying and selling.

Fear of missing out (FOMO): Missing out on perceived opportunity, if we are patient opportunity always come again, higher time frames have lesser entry opportunity as compared to lower time frame, however it will always come around.

do you mean psychology rather than physiology?

physiology: the branch of biology that deals with the normal functions of living organisms and their parts.

psychology: the scientific study of the human mind and its functions, especially those affecting behaviour in a given context. /
the mental characteristics or attitude of a person or group.

 

[zeroX26]

Just starting a thread to share some views since it looks like there's a lot of people actively trading be it long or short term.
Personally it has been a roller coaster of emotions for me the last year.
I hope it helps someone else out there, and would like bros to advise and can get to learn more from you guys too.
I think mental capacity is the hardest part about trading.

Losses: Personally I tend to feel the pain of losses more than the pleasure of gains, which can leads to holding on to losing positions and miss the cut loss point resulting in greater loss.

Wins: Have always a set target in mind, must be discipline and take profit at set targets. Have tried holding out and the reverse happen and leads to a negative mood/mindset for the following trades.

Overall Market view: Entry price is always such a glaring reference point, since it will determine if you are making profit or loss. as a results I tend to end up with a myopic view based on my price, rather than current market conditions.

Emotional entry: (revenge attitude) especially after losses/ stopping out, might miss out on the overall bigger picture, instead of logical ones, which can lead to impulsive buying and selling.

Fear of missing out (FOMO): Missing out on perceived opportunity, if we are patient opportunity always come again, higher time frames have lesser entry opportunity as compared to lower time frame, however it will always come around.

As an ex-human physiologist, you clearly don't know the diff btw physiology and psychology.

 

[utraeg]

opps. haha made such a big blunder on the topic...

 

[waxqube]

IF OP or others are interested. There's a branch of psychology called behavioural finance. Can find many books on this in our local libraries. I think wikipedia, investopedia also contains some useful info on this.

For example, (from my memory only),

Loss aversion: generally we are 2x more sensitive to losses than gains. This may lead to us making irrational decisions if there is a big drop

Anchoring: we anchor on the price we bought at, rather than determine what's best for the future

Mental accounting: we segregate our money into different containers when actually all is our money. For example, maybe we think that losing our profits is not as painful as losing capital but it's still our money

 

[stanlawj]

There is a simple solution to all psychology problems. Size down to the smallest position that won't elicit any pain if you lose money or excitement when you win.

Increase the size only after 500 winning buy-sell trades, which should be enough times to dull the pain threshold to be higher and also give enough time to increase account size. Do not increase position size by % of account alone. Without enough live winning trades to confirm strategy and confidence, large position size will lead to disastrous emotional swings which will lead to self-sabotage. Most ppl lose all their gains due to self-sabotage.

 

[Euqorab]

This is interesting read

 

[utraeg]

There is a simple solution to all psychology problems. Size down to the smallest position that won't elicit any pain if you lose money or excitement when you win.

Increase the size only after 500 winning buy-sell trades, which should be enough times to dull the pain threshold to be higher and also give enough time to increase account size. Do not increase position size by % of account alone. Without enough live winning trades to confirm strategy and confidence, large position size will lead to disastrous emotional swings which will lead to self-sabotage. Most ppl lose all their gains due to self-sabotage.

Was looking around some forums people always say do demo first, 3 months dull the senses to wins and losses. Achieve min. 3 months of positive before going live. But once trading live with actual money it starts to cloud the decisions again.

Maybe instead of going back to demo, I should reduce to the smallest size possible like you advise

 

[stanlawj]

Was looking around some forums people always say do demo first, 3 months dull the senses to wins and losses. Achieve min. 3 months of positive before going live. But once trading live with actual money it starts to cloud the decisions again.

Maybe instead of going back to demo, I should reduce to the smallest size possible like you advise

There is also the concept of trading regimes / volatility regimes. Mark Minervini use the analogy "hard pennies, easy dollars". Don't trade to earn hard pennies. Trade for easy dollars. Which means, determine when your strategy works, and when it doesn't. When it doesn't, just sit out and do nothing, maybe days or weeks so the portfolio equity curve stays flat instead of keep dipping downwards. The goal is to preserve capital for the next easy dollar environment.

In a way, it is like driving in an unknown trail in an unknown region with just a GPS map (chart). Our job is to determine the road condition and the weather which the GPS can't show (chart can't predict future). When they are both bad, stop & rest. If only road is bad, maybe go slow. Wait for better weather, and only then press the accelerator to catch up (increase position size, leverage up, multiple positions) when both the road & weather are good condition.

So majority of the time in trading is checking the road and weather, and also occasionally checking the vehicle (strategy) is in stable condition.

Psychology problems come in when traders earn hard pennies, and then blame themselve for all the mistakes or losses in the bruising battle to earn the hard pennies.

The simplest type I use for current market is "risk on (DXY down). risk off (DXY up)". It works pretty well for speculative commodity mining stocks.

 

[starbugs]

Confirmation bias is also quite present in some of the posts in this forum, especially among those vested in FCT and FCLT

 

[utraeg]

There is also the concept of trading regimes / volatility regimes. Mark Minervini use the analogy "hard pennies, easy dollars". Don't trade to earn hard pennies. Trade for easy dollars. Which means, determine when your strategy works, and when it doesn't. When it doesn't, just sit out and do nothing, maybe days or weeks so the portfolio equity curve stays flat instead of keep dipping downwards. The goal is to preserve capital for the next easy dollar environment.

In a way, it is like driving in an unknown trail in an unknown region with just a GPS map (chart). Our job is to determine the road condition and the weather which the GPS can't show (chart can't predict future). When they are both bad, stop & rest. If only road is bad, maybe go slow. Wait for better weather, and only then press the accelerator to catch up (increase position size, leverage up, multiple positions) when both the road & weather are good condition.

So majority of the time in trading is checking the road and weather, and also occasionally checking the vehicle (strategy) is in stable condition.

Psychology problems come in when traders earn hard pennies, and then blame themselve for all the mistakes or losses in the bruising battle to earn the hard pennies.

The simplest type I use for current market is "risk on (DXY down). risk off (DXY up)". It works pretty well for speculative commodity mining stocks.

That's a very good explanation.

In a way, one of the biggest issue is always be patient to wait for the correct setup according to our strategy.

 

[stanlawj]

That's a very good explanation.

In a way, one of the biggest issue is always be patient to wait for the correct setup according to our strategy.

Setup can trigger but exit can also trigger but at a loss. Consecutively. Then once in a while profit. This is what is meant by "hard penny" environment. The end results is a long slow drawdown in portfolio equity curve which is psychologically frustrating.

If rules are only technical, you cannot pick and choose but have to enter every time entry triggers, because that is how technical chart-based only trading works based using probability which assumes you have to take every entry triggered is actually taken and every exit triggered is also taken.

There must always be human input somewhere that looks at things outside the chart. This is the reason big firms buy so much machine readable data not found in the chart and crunch them to decide on the buy/sell price. As small fries, we can't afford all the cleaned-up data, and must manually crunch the original data sources ourselves (Fed minutes, PMI, speeches, major impact news etc).

 

[churnmaster]

There is also the concept of trading regimes / volatility regimes. Mark Minervini use the analogy "hard pennies, easy dollars". Don't trade to earn hard pennies. Trade for easy dollars. Which means, determine when your strategy works, and when it doesn't. When it doesn't, just sit out and do nothing, maybe days or weeks so the portfolio equity curve stays flat instead of keep dipping downwards. The goal is to preserve capital for the next easy dollar environment.

In a way, it is like driving in an unknown trail in an unknown region with just a GPS map (chart). Our job is to determine the road condition and the weather which the GPS can't show (chart can't predict future). When they are both bad, stop & rest. If only road is bad, maybe go slow. Wait for better weather, and only then press the accelerator to catch up (increase position size, leverage up, multiple positions) when both the road & weather are good condition.

So majority of the time in trading is checking the road and weather, and also occasionally checking the vehicle (strategy) is in stable condition.

Psychology problems come in when traders earn hard pennies, and then blame themselve for all the mistakes or losses in the bruising battle to earn the hard pennies.

The simplest type I use for current market is "risk on (DXY down). risk off (DXY up)". It works pretty well for speculative commodity mining stocks.

Very well explained.

 

[wtaps300]

@stanlawj very sound advice

& @utraeg it is very good that you are aware of role emotions play in trading early. one of the mistakes that I made early (and still do) is that I am focus too much on the entries - the holy grail, and di not pay attention to the emotions, to the correct attitude when approaching a trade, and of course having the plan, the position sizing, and various small rules that will keep you away from all the small skirmishes/sub optimal trades that will bled you, and to keep you from throwing good money after bad, ie minimize your losses, so that you can survive and stay in the game.

I can only chip in one advice here, be patient. this whole trading/investing thing will take a long time to internalize, and learn

(and not that I am there myself}

 

[DevilPlate]

I can only chip in one advice here, be patient. this whole trading/investing thing will take a long time to internalize, and learn

(and not that I am there myself}

Patience is KEY to all mother of investing.
Investing is a marathon.

However I thought traders are generally impatient and that's why they go for trading instead of buy and hold?
They need constant trades to satisfy their itchy finger syndrome hehe.

 

[stanlawj]

There is a common concept among technical traders that one can earn a consistent % every fixed duration.
eg. 1% per week, or 4% per month, or 20% per year etc.

Actually, that daily grind is not the whole story. The real juicy story in traders life is the LIFE-CHANGING GAINS!
Some men say more than that, it's WIFE-CHANGING GAINS: 100 to 1000 times and more.
Overnight Multi-millionaires. Ok, not overnight, but in a short period.

Our goal should be to catch the biggest wave when it comes. This psychological mindset shifts the trader perspective from the usual self-employed perspective to an enterprising businessman.

PETER LIM & his Wilmar investment
CG & his Tesla stock
ESSEX BOYS & their crude oil short to zero
The Bitcoin & Ethereum millionaire nerds all over the world.
Chandler Brothers (must read)

If we train ourselves well enough, we'll eventually SEE & TAKE opportunities like buy Bitcoin at 20cents in 2010 while managing the risk properly. This is why we are willing to cut losses early, review trading mistakes, observe/scan the market regularly, record our learning, learn more asset classes to trade if we can, generate ideas for trading, because we want to have both the capital to play & ability to spot+ride the biggest wave ever in our lives.

And then after making it big, not falling apart in exuberance and giving up those gains back to the market ! (Masayoshi Son is the latest casualty).

This I feel is the essence of HOPE in trading... I'm not trading just for 1% per week, but the hope to ride the biggest LIFE-CHANGING gains ever in my life.

 

[stanlawj]

Patience is KEY to all mother of investing.
Investing is a marathon.

However I thought traders are generally impatient and that's why they go for trading instead of buy and hold?
They need constant trades to satisfy their itchy finger syndrome hehe.

Different strategy. Because using different time frame and using different asset classes usually. eg. trade forex/options only, but invest stocks & property.
Or trade options on bluechips, invest the same bluechip stocks on weekly time frame.

Diversification of income so that one strategy earns when the other strategy is not earning.

 

[wtaps300]

@stanlawj interesting read on Chandler Brothers. I think I remotely came across them in my line of work, but didnt know their back story.

If you guys don't mind, I have started writing a series of articles for the beginner in trading/investing. I will share it here. Welcome any comments.

When I started my own journey, I had no mentor - though strangely I do know the 2 largest private trades in the KLCI futures on a personal basis - they are good friends though somehow we never talk about trading. So I thought by sharing this will help save the newbie some time, and money.

Here we go:

BASIC: This Whole Trading/Investing Thing, is a lot more dangerous and will be a lot harder than we think

Suppose you come across a story: this young adventurer sailed solo across the Atlantic in 28 days. You are inspired by it, and think hey, we can do the same. You know next-to-nothing about sailing, so you started reading about it. Perhaps you will enroll yourself in a sailing course, practice in a safe bay area. Watched a few Youtube videos. You can also get yourself the necessary equipment, and so on and so forth. So, question, after a few months drabbling in sailing, would you embark on that trans-Atlantic trip, alone, with no or minimal backup? I would reckon, for most of us, the answer is no.

But that's what exactly most of us do when we first start out to trade/invest our own money.

Consider this: a young kid started trading futures. Not too long thereafter, the pandemic struck. Crude oil fell precipitously. The kid wasn't aware that prices could go below zero; his broker didn't adjust the margin requirements to factor in a negative price. So when the price of WTI fell to 10 cents per barrel, he figured he would buy 10 lots. One lot is a 1000 barrels, at 10 cents that will be 100 USD per lot, and the maximum he could lose if crude prices went to zero is 1,000 dollars? The price eventually went below minus 40 dollar per barrel, and the kid was staring at a loss of 400,000 dollars upon liquidation. True story. Was reported in the media, though if I don't recall wrongly the actual loss was a couple of millions for this poor soul.

POINT: WHAT YOU DON'T KNOW CAN KILL YOU IN THIS BUSINESS

As a side note. Luckily for this kid, his broker covered his losses - they should have factored in that prices could go negative in their margin calculations. The broker is Interactive Brokers by the way. I don't use them. But they look like decent chaps from this episode.

So, next question. How long will this learning process realistically take? Consider this: Jim Simons, of Renaissance Technologies, and the famous Medallion Fund. It took him 10 years to crack the secret code to the markets. And the best part of the story, to me, is he didn't do it alone. If I don't recall wrongly, he had 3 of 4 different teams to move it along in that 10 long years. And these people are the smartest guys in the room. They are physicists/mathematicians that can teach themselves to code, and they have approached markets from a totally different perspective. Robert Mercer, who joined in the 1990s, had actually worked as part of a speech recognition program at IMB using statistical methods. I mean, like, really? I can’t even pretend to know what’s speech recognition got to do with statistics?

So the next time you put in a trade in eminis, just remember. You could be trading against these guys. How did that make you feel?

And there are others in the same market where we trade. There is this HFT firm who would spend over 20 million dollars, to buy over a piece of real estate, and then built a radio tower on it, so that their trade executions can go into the exchange at like a nanosecond faster than everyone else. Or my buddy at a global hedge fund - one of his execution traders is a Stanford PhD holder. These examples can go on and on. These are the people we are up against everyday.

POINT: IT WILL TAKE A LOT OF TIME AND MONEY AND FOCUS TO DO THIS

POINT: WE ARE UP AGAINST THE SMARTEST AND OTHERS WHO HAVE A LOT RESOURCES THAN US

What do you think it's our survival rate in a business like this? Take a few moments to ponder this. Do we really want to continue on this path?

Let me know if this is useful, and I can keep posting.

 

[limster]

This I feel is the essence of HOPE in trading... I'm not trading just for 1% per week, but the hope to ride the biggest LIFE-CHANGING gains ever in my life.

I've seen this term 'life-changing' money used quite a bit, I wonder when people use this term, is there a specific target % (eg: double your networth) or is it a specific $ value ($1m, $10m, $100m?)

I am not sure how much money would be "life-changing" for me. Between 2016-2022 I have tripled my passive income but my life is sort of the same with a few lifestyle 'improvements' - I have been spending a little bit more on items like healthier food, etc.

If I can increase my passive income steadily at an average of 10% a year for the next 8 years, that will be a doubling of my passive income... I think that's a decent target but I don't consider it a 'life-changing target'... I guess I don't have the ambition and desire that makes a good trader.

 

[DevilPlate]

Different strategy. Because using different time frame and using different asset classes usually. eg. trade forex/options only, but invest stocks & property.
Or trade options on bluechips, invest the same bluechip stocks on weekly time frame.

Diversification of income so that one strategy earns when the other strategy is not earning.

Catch no ball….thought we are discussing about trading as per the topic.
are you saying hybrid? Investor cum trader?