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Is Trading Psychology a Hoax?
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Is Trading Psychology a Hoax?

  #41 (permalink)
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There is a branch of psychology used in investigating air craft crashes called "Human Factors", which relates to how human behaviour affects safety.

As a simple observation, it is found that pilots are bad at looking at panels of instruments for hours at a time looking for matters that need attention. They are much better at responding to a situation having been alerted.

You may recognise the same pattern in your trading. How do you react to looking at a chart in a dull market for say one hour? Does your attention and concentration suffer or does it remain fully focused? Do you miss opportunities when the market turns active after being dull for a long time (insert your own definition of what counts as a long time).

This is psychology. Is it useless?

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  #42 (permalink)
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pawnbroker View Post
There is a branch of psychology used in investigating air craft crashes called "Human Factors", which relates to how human behaviour affects safety.

As a simple observation, it is found that pilots are bad at looking at panels of instruments for hours at a time looking for matters that need attention. They are much better at responding to a situation having been alerted.

You may recognise the same pattern in your trading. How do you react to looking at a chart in a dull market for say one hour? Does your attention and concentration suffer or does it remain fully focused? Do you miss opportunities when the market turns active after being dull for a long time (insert your own definition of what counts as a long time).

This is psychology. Is it useless?

You bring up a great point here, I would have to agree. It would also be nice if the psychologist had a firm understanding of trading different types of systems and could actually sit down with the trader to assess where their true weaknesses are for that system. It would be ideal if the psychologist could steer the trader in the right direction without disrupting the trader's underlying edge. I'm not sure if any psychologist would have these abilities with out already being a successful trader. If a psychologist already made a killing in the market, why would they want to be a psychologist? And then, how much could they help a trader with out changing the trader to trade like they do?


Last edited by Itchymoku; December 30th, 2012 at 08:00 AM.
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  #43 (permalink)
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Itchymoku View Post
I'm not sure if any psychologist would have these abilities with out already being a successful trader.

I think that a psychologist who specialises in trading psychology would need to know about trading in order to do the job and that experience in trading would help, but an observant person can achieve a lot by careful study.

Lets consider the generality of saying that you need to be good at X in order to study X. If that were true we would conclude that psychologists who create profiles of serial killers would need to be successful serial killers in order to do the job.

I don't think that many people would agree with that assertion, because the psychologist only needs to be able to spot patterns that can be used in matters such as screening potential suspects, to decide if separate crimes have been committed by the same person(s) and so on. It is all about being good at finding patterns, which is a bit like trading.

A psychologist would say that his field of study exists because there are also patterns in human behaviour. So it is just as plausible to me to think that a psychologist can analyse the behaviour of traders as it is to think that that traders can analyse the markets. But they are separate specialities.

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  #44 (permalink)
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It would be nice to know, if the psychologist didn't have a trading history, that the shrink keeps record of the change in growth after the trader's sessions. I know from this forum that most traders prefer their account size to stay anonymous, However I'd think a larger firm might not care so much about releasing the account details if the trader is trading the firm's money. I'm sure it would help the shrink's business if they could prove they have a decent track record of positive change in growth on behalf of the trader's account.


Last edited by Itchymoku; December 30th, 2012 at 06:03 PM.
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  #45 (permalink)
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Itchymoku View Post
It would be nice to know, if the psychologist didn't have a trading history, that the shrink keeps record of the change in growth after the trader's sessions. I know from this forum that most traders prefer their account size to stay anonymous, However I'd think a larger firm might not care so much about releasing the account details if the trader is trading the firm's money. I'm sure it would help the shrink's business if they could prove they have a decent track record of positive change in growth on behalf of the trader's account.

Agreed, this would be neat info to have.

Many hedge funds and larger CTA have a psychologist/trading coach on staff, or on retainer. I would assume this means proper psychology CAN work. I don't see it as a cure all, though (if you don't have an edge, you'll still lose, but you'll be a more psychologically in-tune loser!)

I am also sure there are plenty of ex-traders who thought improving their trading psychology would help them, and instead are now broke.

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  #46 (permalink)
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kevinkdog View Post
Agreed, this would be neat info to have.

Many hedge funds and larger CTA have a psychologist/trading coach on staff, or on retainer. I would assume this means proper psychology CAN work. I don't see it as a cure all, though (if you don't have an edge, you'll still lose, but you'll be a more psychologically in-tune loser!)

I am also sure there are plenty of ex-traders who thought improving their trading psychology would help them, and instead are now broke.

Hey Kevin, I really enjoyed your webinar about automated trading. As a side note, you have restored my faith in retail automation. It would be interesting to know if the psychologists had the expertise to help with the psychological issues associated with automated trading, however I assume the problems wouldn't be much different than discretionary trading from what you've discussed.

Also, I'm sure there is a bias with a keeping a trader's track record because most of the traders that go to psychologists are probably doing poorly in the first place. Maybe the psychologist could exclude the outliers, or at least show that they significantly delayed a trader from going bust while they would have went down a lot faster. lol

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  #47 (permalink)
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Itchymoku View Post
Hey Kevin, I really enjoyed your webinar about automated trading. As a side note, you have restored my faith in retail automation. It would be interesting to know if the psychologists had the expertise to help with the psychological issues associated with automated trading, however I assume the problems wouldn't be much different than discretionary trading from what you've discussed.

Also, I'm sure there is a bias with a keeping a trader's track record because most of the traders that go to psychologists are probably doing poorly in the first place. Maybe the psychologist could exclude the outliers, or at least show that they significantly delayed a trader from going bust while they would have went down a lot faster. lol

Thanks for the kind words about the webinar. Maybe Big Mike will have me back some time (hint, hint).

I wish I had a nickel for every time I've heard someone say "Emotions/psychology will not affect me - I'm trading automated!" If only it were that simple...

I've read the works of a lot of trading psychologists and psuedo psychologists. Only one or two said things that resonated with me.

Like you, I'd love to see a psychologist's "track record." But I suspect it would be as reliable as most backtest performance reports you see!

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  #48 (permalink)
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TRading psychologist - untried but sounds interesting

I have not tried the services of the below active Trader and Psychologist, but he seems to be successful at both. (Disclaim, Disclaim) I have ZERO financial interest in the below and am considering taking up his services in a few months.


From website: Daytrading Psychology - Trading Coach, Trading Psychology Coach | Advanced Coaching Psychology for Traders

Dr. Kenneth Reid here. . I have been actively involved in the equity and futures markets since 1996 as a trader, trading coach, financial newsletter editor and pundit. You might have read articles Ive written for Forbes, SmartMoney and SFO Magazine, or perhaps you saw me on CNBC.
I hold a Ph.D. in clinical psychology, so I am aware that academic studies show that most traders lose money, even in a roaring bull market. This statistic is both intriguing and disturbing. It is intriguing that trading is much harder than it appears. In hindsight, after all, it looks fairly easy. The high failure rate is disturbing, however, because it means that most traders get hurt, both financially and psychologically.

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  #49 (permalink)
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"Psychology" is the pop word when it should be "Practice". With practice you'll quickly know if you have an edge or not. But no one will tell you that because there isn't any income stream associated with it for a third party. It's free! Any trader worth his or her salt became accomplished by practicing. What percent of the fallout traders really practiced for thousands of hours? Any accomplished person becomes great by practicing. Every athlete developed strength, coordination and power by cross training. Be creative and think up different exercises to practice your setup ad infinitum. If you use an oscillator then eliminate your price chart and read the action from the lower panel. If your chart is naked, then practice on a very, very fast timeframe. Mix it up, shake it up! Nothing in the world can provide the same empowering confidence that relentless practice provides. There is no substitute for practice, and then you won't think something is lacking or missing from your "psychology".


Last edited by plethora; December 31st, 2012 at 01:08 AM.
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  #50 (permalink)
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plethora View Post
"Psychology" is the pop word when it should be "Practice"

There is some dislike of psychologists, especially in men. If I take my car to a mechanic, I do so because there is something wrong with the car. So, there is the unpleasant thought that going to see a psychiatrist implies that there is something wrong with me, that this will be exposed and used to embarrass me. That's possibly why the less threatening term "human factors" is used in some fields. Perhaps we would view things in a different light if we consider psychologists as teachers, who can give us useful insights, rather than mechanics whose job is to find and fix faults.

The truth is that there are intrinsic things wrong with the way the human mind handles many activities, including trading. The mind is evolved to maximise your chance of survival under threat. That means dealing with situations where something or someone is a threat directed at you.

In contrast, the market does nothing to affect you individually, unless you trade in large size. But our brains are built to handle adversarial situations so we do things like making "revenge trades", which is treating the market like a contest between people. That is equivalent to curve fitting data so that it fits our trading model, but we are fitting the market to how our behaviour and natural responses are designed to interact with people and predators.

Evolution has effectively given you a dumb brain and a smart brain. The smart brain runs the show unless a threat is present and then the dumb brain takes over, because the dumb brain is faster at making simple decisions. This avoids people taking a long time considering choices only to find that its too late and they are in the jaws of a predator. This can create a problem in trading as our natural responses can be inappropriate and the way you view and assess information changes when the dumb brain takes over.

When you practice in a non stressful situation you evaluate your success based on how your smart brain handles the situation. Under stress, in real trading, you may find that you fail to notice things that are obvious when you look at the same information after the stress has passed.


To show how general these matters are, here is a quote from a study concerning selective attention under stress in people who look at CCTV screens to monitor traffic. You are likely to notice similarities to trading situations.


Quoting 
For selective attention tasks, load stress is more important than speed stress in degrading performance.(56) When people must attend to multiple channels of information, they usually concentrate on channels in which signals occur frequently rather than those where the signals occur infrequently.

Further, due to human memory limitations, channel scanning strategies may be less than optimum. People often forget to examine a specific source when many sources are present, and people tend to check other sources more often than would be necessary if they remembered the status of the source when it was last experienced.(105) Under high stress conditions, fewer sources are attended to and the sources attended to are likely to be those perceived as the most important and salient. People tend to overlook or ignore information that is contradictory to their analysis of the situation.(90) This characteristic frequently has been called "tunnel vision" although it is in no way related to the operator's visual fields.

source

The traffic controller who ignores contradictory information is affected by stress in the same way that you are when you fail to exit a loosing trade, because your selective attention ignores things that indicate it's time to get out of the trade.

Practice does help, but many traders find that their behaviour is different under stress. That's normal and it is more likely to affect your decisions if you use many indicators. Boredom also affects our attention, so waiting for good opportunities can affect your decision making too, even though we are not under stress.

You may ask why people add many indicators in the first place. One reason is to gain a sense of certainty, but having many indicators can cause problems in decision making and degrade the traders performance.

So you need to consider human behaviour and psychology, the human factors, when you design and practice a discretionary trading system.


Last edited by pawnbroker; December 31st, 2012 at 04:35 PM.
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