Over the last week, I have been experimenting with an automated trading strategy that trades on a short-term basis in the stock index futures markets. Although I have been trading systematically since last August (and doing well with it), this is my first foray into completely automated trading; that is, where the computer is actually placing trades and managing risk exposure with no human intervention.
On Friday, I was watching the strategy trade the markets in the morning and it made money on the first 4 trades of the day. Now, the system historically has a win rate of roughly 60%, and so after it had made the four winning trades, I turned it off. I felt like a sissy for doing this, and I knew exactly why I was doing it - I didn't want to give back the gains I had made on the day. Of course, as I continued to run the strategy in a "simulated" environment, it made three or four more trades, making profits on all of them. By the end of the day, it had a 100% win rate. I participated in about half of that, and, naturally, felt like an idiot for turning it off mid-day.
This experience got me to think - why did I really turn off the system intraday? I think it has to do with, in part, a mis-perception about the markets and how I, as a trader, interact with them. Underlying this perception is the idea that I am "lucky" to make profits in the market, and that if I pushed my luck, I might be rebuffed and experience a string of losing trades - which of course would be too painful to endure (I say this last statement partly tongue-in-cheek). In other words, any profits I may make in the markets are simply crumbs that the mighty market deigned to give me, and that I shouldn't ask for too much, lest I get swatted. I know, it sounds crazy, but it felt that way.
This is something I refer to as "The Beggar Mentality" - that I am not worthy of making money in the markets and that any profits I may make is because someone or something is "letting" me make them, and that it is only through that entity's good graces that I am allowed to profit in the market.
Now, before you write me off as a complete basket case, note this: in my systematic (albeit not automated) trading, I am extremely disciplined in putting trades on and managing them - it is extremely rare (maybe 1 trade out of a 200) that I will not take a systematic trade, even after a string of losses. Still, this experience on Friday made me think about the additional effort I need to make to cultivate the correct perspective on trading.
I remember watching the trading documentary "Floored" where one of the successful traders being interviewed (who happened to be quite inebriated at the time) talked about how what separated him from other traders is that when he was making money, he actually became more aggressive in his trading whereas most other traders will just keep what they are doing, or even scale back. His approach is exactly opposite of "The Beggar Mentality" - he viewed a string of winners as a signal from the market that he had found a sweet spot and that he should press his position for everything he could.
This mentality is shared by a very successful discretionary trader who I used to work for who did the same thing - when he found a trade that was working, he would increase his size in that trade and ride it for all it was worth. He wouldn't put on big size to begin with, but when the market acted in accordance with his expectations, he would add to his trade so that when the market really started to move, he would make the big money. Again, this is opposite of "The Beggar's Mentality". Maybe call it "The Speculator's Mentality?"
So, the question I am left to ponder is how to you go from "The Beggar's Mentality" to "The Speculator's Mentality"? I don't think it's necessary that you're born with it - I have grown enough as a trader over the last few years to know that I can overcome a whole lot of the self-imposed obstacles to successful trading. Again, the question is how?
Last edited by furytrader; February 19th, 2012 at 12:51 PM.
Reason: Not finished
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One of the benefits of systematic trading is that the whole notion of revenge doesn't really fit into the equation - you take a signal when you get a signal, and that's the gist of superior systems trading.
When I used to trade on a discretionary basis, I had a personal rule that I would get up and walk away from my desk for a few minutes after a losing trade so as to avoid revenge trading. It seemed to do the trick, as the market would move "without me" and legitimate opportunities could then develop. Stepping away from the desk also helped me to gather my thoughts, relax for a moment or two, etc.
One thing to think about when you are tempted to do that is by turning it off you essentially change your probabilities. At times that may help your bottom line and a times it may hurt it. But either way it changes your probabilities in a way that if done often will make it hard to know your true probabilities. Having a good grasp of those probabilities is what gives you confidence in your system as well as giving you data on when to scale etc. This personally helps me to think about and keeps me from messing with my AT. I don't want to do anything to skew my results that is not apart of my system.
Now you could take stats on turning it off after so much profit and determine over long term it gives you better results. In that case you could make it apart of your system and do it same way every time. Key is not to do random things to your system.
"The day I became a winning trader was the day it became boring. Daily losses no longer bother me and daily wins no longer excited me. Took years of pain and busting a few accounts before finally got my mind right. I survived the darkness within and now just chillax and let my black box do the work."