Trading Psychology

When I first started trading I made the mistake of spending all my time studying trading psychology.. and not enough time trading.  I worked through the Van Tharp Peak Performance course, re-read The Investors Quotient a good 5 times, the Disciplined Trader by Mark Douglas even more, and my favorite –  Trading In The Zone which if you haven’t heard of, you were either mentored from day one or made a point of staying out of online trading forums.

Trading In The Zone by Mark Douglas is probably the only book you need to read if you actually do the trading exercise to completion at the back of it

which barely anyone that reads the book actually does.  More recently I got into the Brett Steenbarger material which I think is relevant to actually making money. Enhancing Trading Performance was one of the instigators to me starting from scratch as a day trader in 2012 in order to find my trading niche.

I was actually reading all these books for a solution to making consistent money and I think this is a mistake a lot of starting out traders can be tempted into, and I can hopefully save you some time.

Steenbarger I think conveys the message that trading is a skill.  Mark Douglas’ exercise is an attempt to develop the skill of trading.

At the end of the day – profitable trading using any sort of discretion is developed as is any skill. Training, Performance and Review.

I worked through the Mark Douglas cassette workshop last year where he actually elaborated some more on the trading exercise he aimed to get across in the final chapter of Trading In The Zone.   He expressed in the workshop regret that he had not been as clear on the trading exercise as he needed to be.  In the cassette tapes he says take ANY mechanical system and learn to execute it without any form of fear or intellectual obstruction, and according to the core market beliefs:

From Trading In The Zone (pg 121) by Mark Douglas –

Core Market Beliefs:

1. Anything can happen.
2. You don’t need to know what is going to happen next in order to make money.
3. There is a random distribution between wins and losses for any given set of variables that define an
edge.
4. An edge is nothing more than an indication of a higher probability of one thing happening over
another.
5. Every moment in the market is unique.

The system he proposed was a simple stochastic method but it can be really anything. The goal of the system is to simply give you mechanical entry and exit points so you can practice executing trades with minimum emotion.  If you achieve this and your trading is profitable after a sufficient sample set of trades of at least 20, keep on doing it or tweak the system to make it profitable.   Once you can do this mechanically you can then move onto the Subjective stage of trading and then work on creating ideal conditions for trading intuitively.  The exercise should be completed with at least a one lot so you are risking real money and bringing up emotional issues in regards to winning and losing real money.  However the roadblock to achieving this is:

a) Finding a system nowadays that makes money without paying for one.. that theoretically makes money

b) Having enough trades within the system to get a sample set within one or two trading days

There is no doubt a system that is good for the trading exercise – however I was taken through a different process to achieve the same outcome. By flipping a coin.  I had tried the mechanical method however I was way to detached from the process having spent months trading subjectively and had no issues firing trades using the perfect mindset when told to by the system, however the system itself had terrible expectancy.

By flipping a coin – Heads Sell, Tails Buy and adding a time constraint of 10 minutes to Buy or Sell at the best conceived price or hit in when out of time, you can take out a lot of the discretion.  I did this for 3 weeks and had a coach pressuring me in daily review sessions on my execution and trade management – OR you could find a trading buddy to review with you.  Manage the trade as best as possible once you are filled to maximize profits, minimize losses etc according to your rough plan, statistical goals, and try and flip the coin as periodically as possible around your trades so you have a good sample set after one or two trading sessions covering most of the intraday swings.

I actually found when performing this exercise that my probability of being on the correct  side of the market was better than if I was to decide on whether I should be looking long or short based on my market knowledge, and even lately I am happy with a Probability of 50% using discretion for buying or selling.  Flipping the coin showed that you don’t need to know what is going to happen next to make money. Alot of the trades I would normally be inclined to fade, and instead had to go with turned out to be really good winners.. anything can happen.

With 3 weeks of intense work on how I managed the trades once filled I could skew my trade stats such that I had Avg winner greater than Avg loser, and a probability of 50 – 55% (the time window gives you some subjective edge). In fact ALL of the 5 core beliefs can be realised through this exercise.  If you can get Probability ~50% and average win > average loss than you have a  system, with your edge being that small timing window to work the trade.

So it doesn’t really matter if you choose to be a buyer or seller in the end you can still make money in any market conditions.

That was a big eye opener.   You could probably trade using the coin flipping system according to the stats, but since trading is just a skill and after a month or two of coin flipping, you will have been exposed to enough market patterns and events to add some more discretion to the picture and bump the Probability side even more. Or you could work on increasing the spread between your winners and losers on average which is an ongoing process for any trader.

So still read whatever books interest you on market psyschology and definitely read Trading in The Zone (the MD version) as its also an eye opener on how you create your life experience  – however don’t use the books as procrastination for trading. The quickest and surest way to get the right mindset is to consistently take trades and work on sound trade management. Review what went wrong if you didn’t execute and manage trades well during a session, figure out which one of the core market beliefs you broke and don’t do it again.  If that is difficult – keep practicing.  The more bad habits you have to neutralize – the longer the exercise naturally takes but stick with it until trading sessions no longer feel like something you have to survive through, but something you look forward to crushing.  Wow writing it that way I am going to take some my own advice.. Happy Trading!

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