psychology of trading

[Hyruga]

Anyone heard of northern light strategy? Anything to share?

 

[stanlawj]

Mark Minervini coined the term: "Techno-fundamentalist" for the combined TA + Fundamentals approach to trading over the medium term time frame (days to multiple weeks but less than 1 year).

As one of those techno-fundamentalist, I discover the most important part is having mental flexibility to recognise and accept trend change. Techno-fundamentalist have an advantage over pure fundamentalists because price action can show the change in trend ahead of the reporting of fundamental data.

Most fundamentalists are too locked into one outcome. As the result, they baghold and experience big drawdowns.

Of course, noise, ie fake breakdowns are usually the problem. The solution is again having mental flexibility to revert back to original position when fake breakdowns are detected.

As the result, techno-fundamentalist traders must be prepared with a Bayesian approach to analysing multiple possible outcomes, quick to adapt and react to incoming data (price or fundamental data) that will eventually show which outcome is most likely.

How to deal with analysis-paralysis? Consuming too much data is the same as having too many indicators on the chart. The solution is to set simple buy-sell action rules based on whatever data is being processed.

For example, in silver which I am trading now: gold must be up, XAUJPY must be up since JPY is main carry trade currency, positive China factor, and technical (price-action) based buy pull backs in an uptrend in weekly, daily and 4H frame. All incoming data get categorised into confirming or invalidating any one of these points.

 

[stanlawj]

Who says you cannot buy the dip?

Warren Buffett is doing it, but using cashflow/dividends/interest from other businesses/stocks/Tbills that he owns.

 

[stanlawj]

Trading short-term vs investing longer term:

What's the problem?
Howard Marks does not understand the difference in the time frame and drawdown.

Day traders (or shorter term trading) will capture only small moves, but dollar$ wise, the absolute profit size is large due to leverage can be applied to short-term trading. Hence both long-term investor and short-term trader makes the same profit
But the DURATION of money given to the market is different, short-term trading means less time in the market. The trader holds cash for longer time, and hence can withdraw money for living costs. The investor, however, cannot withdraw cash for long periods of time until the investment reaches its goal. Who is cash poor? The investor. If investment time frame is in years, investor needs to have another source of income (dividend, or bond interest, or job) until he can sell to cash out.

Next: drawdown is actually the same, i.e. the amount of dollars risked per trade or investment to give room for price to fluctuate before it reaches profit target. Hence it doesn't matter whether you choose to day trade or invest. All that matters is: can you CREATE your OWN EDGE over other market players, EXECUTE it successfully + consistently for a LIFETIME?

Everyone has a different brain genetically and hence perception of the market. A short-term trader is wired differently from an investor. The ultimate investor/trader is one who HAS the money (capital) and mental capacity to do both.

Eg: $2M account
$1M for investing@20% ROI without leverage = $200k profit per year
$500k for trading@40% ROI with leverage = $200k profit per year. (profits are used for income and remainder dumped into $1M investing account)
$500k for REITS/bonds@4% ROI without leverage = $20k passive income per year for really basic living cost.

vs $2M account only investing@20% ROI without leverage = $400k profit per year.
Zero income. Need to eat grass or need to have cash savings of at least 2 year living expenses (because you need to consider what if bad/subpar year occurs).

Note: I consider investing with leverage = trading. Because account can go negative (i.e. you can end up bankrupt)

 

[apple459721]

Trading short-term vs investing longer term:

What's the problem?
Howard Marks does not understand the difference in the time frame and drawdown.

Day traders (or shorter term trading) will capture only small moves, but dollar$ wise, the absolute profit size is large due to leverage can be applied to short-term trading. Hence both long-term investor and short-term trader makes the same profit
But the time when money is given to the market is different, short-term trading means less time in the market. The trader holds cash for longer time, and hence can withdraw money for living costs. The investor, however, cannot withdraw cash for long periods of time until the investment reaches its goal. Who is cash poor? The investor. If investment time frame is in years, investor needs to have another source of income (dividend, or bond interest, or job) until he can sell to cash out.

Next: drawdown is actually the same, i.e. the amount of dollars risked per trade or investment to give room for price to fluctuate before it reaches profit target. Hence it doesn't matter whether you choose to day trade or invest. All that matters is: can you CREATE your OWN EDGE over other market players, EXECUTE it successfully + consistently for a LIFETIME?

Everyone has a different brain genetically and hence perception of the market. A short-term trader is wired differently from an investor. The ultimate investor/trader is one who HAS the money (capital) and mental capacity to do both.

Eg: $2M account
$1M for investing@20% ROI without leverage = $200k profit per year
$500k for trading@40% ROI with leverage = $200k profit per year. (profits are used for income and remainder dumped into $1M investing account)
$500k for REITS/bonds@4% ROI without leverage = $20k passive income per year for really basic living cost.

vs $2M account only investing@20% ROI without leverage = $400k profit per year.
Zero income. Need to eat grass or need to have cash savings of at least 2 year living expenses (because you need to consider what if bad/subpar year occurs).

Note: I consider investing with leverage = trading. Because account can go negative (i.e. you can end up bankrupt)

i think swing better.

If every year can consistently get at least 10%, portfolio every year compound 10%, long run can beat the s&p 500 very far

can start compound 10% since 1993

 

[stanlawj]

i think swing better.

If every year can consistently get at least 10%, portfolio every year compound 10%, long run can beat the s&p 500 very far

can start compound 10% since 1993

Swing trading is short-term trading. There is no swing investing.

 

[apple459721]

Swing trading is short-term trading. There is no swing investing.

ya short term better than long term if you’re consistent.

 

[d5dude]

Trading short-term vs investing longer term:

What's the problem?
Howard Marks does not understand the difference in the time frame and drawdown.

Day traders (or shorter term trading) will capture only small moves, but dollar$ wise, the absolute profit size is large due to leverage can be applied to short-term trading. Hence both long-term investor and short-term trader makes the same profit
But the time when money is given to the market is different, short-term trading means less time in the market. The trader holds cash for longer time, and hence can withdraw money for living costs. The investor, however, cannot withdraw cash for long periods of time until the investment reaches its goal. Who is cash poor? The investor. If investment time frame is in years, investor needs to have another source of income (dividend, or bond interest, or job) until he can sell to cash out.

Next: drawdown is actually the same, i.e. the amount of dollars risked per trade or investment to give room for price to fluctuate before it reaches profit target. Hence it doesn't matter whether you choose to day trade or invest. All that matters is: can you CREATE your OWN EDGE over other market players, EXECUTE it successfully + consistently for a LIFETIME?

Everyone has a different brain genetically and hence perception of the market. A short-term trader is wired differently from an investor. The ultimate investor/trader is one who HAS the money (capital) and mental capacity to do both.

Eg: $2M account
$1M for investing@20% ROI without leverage = $200k profit per year
$500k for trading@40% ROI with leverage = $200k profit per year. (profits are used for income and remainder dumped into $1M investing account)
$500k for REITS/bonds@4% ROI without leverage = $20k passive income per year for really basic living cost.

vs $2M account only investing@20% ROI without leverage = $400k profit per year.
Zero income. Need to eat grass or need to have cash savings of at least 2 year living expenses (because you need to consider what if bad/subpar year occurs).

Note: I consider investing with leverage = trading. Because account can go negative (i.e. you can end up bankrupt)

You left out the fact that day trading is usually a full time gig, so the day trader actually needs to make far more than 200k P.A to match the returns of the long term investor (who has a regular income from a day job that might already be worth 200k P.A).

Also making 100k from a leveraged trade is totally not the same thing as making 100k with no leverage, you are taking a lot more risk for the same kind of nominal return. Saying that they are the same thing is like saying putting on 100x leverage to make 1% return on an fx pair or something has the same risk as making a 2 bagger on something with no leverage. The odds that something goes wrong horribly with the former is just far higher.

 

[stanlawj]

You left out the fact that day trading is usually a full time gig, so the day trader actually needs to make far more than 200k P.A to match the returns of the long term investor (who has a regular income from a day job that might already be worth 200k P.A).

Also making 100k from a leveraged trade is totally not the same thing as making 100k with no leverage, you are taking a lot more risk for the same kind of nominal return. Saying that they are the same thing is like saying putting on 100x leverage to make 1% return on an fx pair or something has the same risk as making a 2 bagger on something with no leverage. The odds that something goes wrong horribly with the former is just far higher.

Yes, no free lunch. Day trader does not need to find a job because it is already a job. The benefit is the cashflow. The trade-off is the effort. The ROI needs to be >50% per year to make this worthwhile. Otherwise forget about trading and just find a job.

On the other hand, the investor must have cashflow from somewhere else. If he loses his job, he is in trouble. So I also considered the case where the investor is already FIRED, and does not need a job, hence he needs to generate the income solely from his investments.

Both can succeed, which is my point. Some people will do better being one than the other.

 

[stanlawj]

Source: Reddit. (to avoid deletion, I reproduce it here).

Your Brain is Programmed to Lose Money in Trading​

TL;DR: Academic studies prove psychological biases kill more accounts than bad strategies. Here's the science behind why your mind sabotages your trades.
I'm about to explain why most of us will fail at trading, and it has nothing to do with our indicators or "edge."

The 3 Brain Glitches That Murder Accounts​

1. The Disposition Effect​

What it is: You naturally hold losers too long and sell winners too fast.
Real example:

• AAPL drops 5% → "It'll come back, I'll hold"
• AAPL gains 3% → "Better take profits before it reverses"

The brutal data: Traders sell winners 50% more often than losers. This single bias destroys more accounts than any strategy flaw.
Why your brain does this: Losses hurt 2.5x more than equivalent gains feel good (loss aversion). Your brain tricks you into avoiding the "pain" of realizing losses.

2. Confirmation Bias (The Echo Chamber)​

What happens: You only see information that confirms your trades.
The research:

• Traders give 50% more weight to confirming opinions
• Click on news that supports positions 85% of the time
• Ignore stronger contradictory evidence

Real behavior: Long on Bitcoin? You'll find 10 bullish articles and ignore the bearish ones.

3. Overconfidence + Self-Attribution​

The cycle:

• Win = "I'm skilled"
• Loss = "Bad luck/manipulation"

Barber & Odean's study: Overconfident traders achieve inferior returns and trade excessively, racking up fees.

The Data That Should Terrify You​

Brazil: 97% of day traders who persisted 300+ days lost money
Taiwan: Only 1% of day traders profitable after fees
The kicker: These failures weren't from bad strategies - they were behavioral patterns that never changed

The Beginner's Luck Death Trap​

Here's how most accounts die:

1. Early random wins create false confidence
2. Position sizes increase ("I've got this figured out")
3. Risk tolerance grows (start gambling)
4. Reality hits with devastating losses
5. Account blown within 6 months

Sound familiar?

The Brutal Self-Assessment​

Answer honestly:
Do you increase position size after wins?
Hold losers longer than winners?
Make revenge trades after losses?
Check positions obsessively?
Blame losses on "manipulation"?
If you answered yes to ANY of these, psychology is killing your account.

What Actually Works (Institutional Methods)​

Phase 1: Awareness​

• Trade journal: Record emotional state for every trade
• Track deviations: Note when you break your rules
• Loss analysis: Review WHY you held losers too long

Phase 2: Systematic Defense​

• Mechanical position sizing: No discretion allowed
• Automatic stops: Set and forget, no moving
• Checklists: Remove emotion from entries/exits

Phase 3: Professional Mindset​

• Process over profit: Judge yourself on following rules
• Losses are expenses: Cost of doing business
• Probabilities, not predictions: Think in long-term edge

The Professional Difference​

Retail traders: "This trade will make me rich"
Professionals: "This is trade #1,247 of my career"
Retail: Emotional roller coaster with every position
Professionals: Treat trading like running a business

The Bottom Line​

Your brain evolved for survival, not trading profits. Every instinct that kept your ancestors alive will bankrupt your account.
The 3% who succeed don't have better strategies - they have better psychological discipline.
Discussion: Which bias hits you hardest? How many of you actually journal your emotional state during trades?
Sources: Barber & Odean behavioral finance studies, Brazilian Securities Commission trader analysis, Taiwan stock exchange research, behavioral economics literature

--------------
My experience: Psychological discipline isn't enough. It just enables you to determine whether your trading edge (including execution) is actually consistently profitable or not (since human operator variation/error is removed). But you can now reliably tweak your trading edge till it becomes consistently profitable and then the market becomes your infinite ATM machine.

 

[sumako]

always execute stop loss immediately after your entry. my stop loss is always at 4%.

 

[DevilPlate]

@stanlawj
Yr beloved Silver broke 11yr high.

U huat liao

 

[stanlawj]

If you cannot cut loss, leveraged trading will destroy your life.
Real-life sharing: (initial capital $300k, lose $200k).

 

[iridiot]

If you cannot cut loss, leveraged trading will destroy your life.
Real-life sharing: (initial capital $300k, lose $200k).

Do you have a TL;Dw ?

 

[sumako]

If you cannot cut loss, leveraged trading will destroy your life.
Real-life sharing: (initial capital $300k, lose $200k).

i watched his video only once. you listen to him sure..... you get what i mean?

 

[stanlawj]

Do you have a TL;Dw ?

I did: Start $300k, lose $200k. He also lost a lot more non-financial stuff too.

i watched his video only once. you listen to him sure..... you get what i mean?

Those who want to play with fire, need to make sure don't get burnt by the fire.

 

[stanlawj]

For leverage/margin debt, the price of winning big is going through cutting small losses frequently. Another price to pay is to sometimes miss out on bigger runs due to selling too early (need to pay back the margin debt).

It's still just a small price to pay compared to losing the entire account or bankruptcy.

For married men, you don't want to lose your wife and children too (due to Women's Charter).

 

[sumako]

I did: Start $300k, lose $200k. He also lost a lot more non-financial stuff too.


Those who want to play with fire, need to make sure don't get burnt by the fire.

dont leverage to trade stock will be fine. my broker gives me 50K i also didnt use. trade with own cash will do.

 

[stanlawj]

Best analogy for trading: surfing the big waves

A ship creates big waves as it moves.
A dolphin free rides the bow wave. A dolphin cannot outswim the ship but can get a ride along the bow wave.

Similarly, traders ride the big money flows in the market created by others. Whether the flow was created by banks, AI/algos, or market manipulation (central bank intervention), it doesn't really matter.



"Enter the market in the direction of the higher time frame during a pullback in the lower time frame. "

Long-term investors simply ride along the bigger ships on long journeys. It may not be fast, but it lasts long.
Shorter-term traders jump from ship to ship seeking the fastest bow waves, that may not last that long.

 

[stanlawj]

What I learned from teaching other traders​

Most of you got one thing right and one thing wrong. One works so well for you and the other doesn’t work at all and you haven’t exactly processed it right.

I’ve taught about 80-100 traders so far I think (ballpark) one thing I’ve noticed is - all of you are hard workers, smart and quick thinking people. When I teach technical analysis I don’t find anyone messing it up - grasping the idea or concepts behind it or practicing it well and learning and honestly just working hard but in trading that’s not enough. In other areas of life, any other job, it’s enough and it’s exactly what you expect to do before making it work for you. But in trading the thing where most of you mess it up is the reason why you wanna trade. To make money.

How you wanna make money always comes in between your skill of analysing the markets. I had the same issue too, the first 2-4 years of trading and you know when you’re so skilled in technicals that you realise at some point that you have to change something if you want your skill to even work? I worked and processed about how and why I feel the way I do about money and here are some hard truths I’ve learned:

1. Money comes last in trades.

You don’t come into the market to make money, you come into the market to sense what’s happening first. Analyse it well enough to see where you can find good trades and then only when you “know” that yes this is a solid trade then you “attach” money to it.

2. Greed and fear takes control over you

When you’re in a trade, the greed about money inside you, starts working. The fear in you starts working. The FOMO kicks in. The wanting more out of what this trade can actually give you starts working.

3. Your emotional attachment to money reveals itself in the market.

It’s not visible when you’re studying charts or backtesting or learning from someone. But the second real money is on the line - your beliefs, fears, fantasies, and past experiences with money show up in full force. This is when trading stops being technical and becomes psychological. You’ll notice you start breaking your own rules, doubting your analysis, entering too early or too late, or refusing to exit. It’s not because you’re not skilled - it’s because your emotions have hijacked the process.

4. The inability to accept losses or be ok with it completely

This is the most common and the hardest one for everyone I’ve taught, including me at a point. It’s so hard. Why? Loss is seen and felt as the worst thing in the world when it comes to money right? Who would want to make a loss? Why would I trade to make a loss and not profit? Cuz after all profits is why I’m even working hard. Wrong! Sure, it can work in other areas of business - the whole point is to just focus on profits and do anything and everything to minimise losses and avoid it at all costs. But in trading - what’s the easiest thing? Making a loss. Now, in anything that you as a person have done in life where you did it well - how? Cuz you enjoyed doing it. It’s only when we truly enjoy something we can even do it better and better - likewise in trading, the easiest thing is making a loss, not profit, obviously. So, if you don’t enjoy making a loss, you can never truly enjoy trading and if you don’t enjoy trading as a whole, you never really master it, and if you don’t master it?

The only suggestion and the most important one to all aspiring traders is that process your relationship with money while you’re learning technicals. Don’t make the same mistake I did when I went full speed on learning technicals alone and letting technicals speak for my poor psych with money. Biggest mistake - learned later painfully but when I did process, my entire worldview changed.

As you learn some factor in technicals and trade it - journal your emotion and thoughts and write up about it and ask yourself why you do that. Simultaneously.

The difference between a profitable trader and a hardworking trader is this. If you don’t process your relationship with money and make it work for you, you’ll always be a hardworking trader and never fully attain your potential.

-------end of Reddit post----

The emotions above never disappear. It is how you react to them that changes over time, trained by painful big losses.