Excellent response, especially the part I bolded. This is one of the things I'm trying to impress upon people because often they don't consider those to be within the realm of possibility.
Actually you're misinterpreting the kind of stress I was suggesting. I don't suggest you put yourself in a disasterous situation that threatens your (real) trading existence, just an "uncomfortable" one. Although you do need to consider the disasterous ones and simulate those on paper.
Here's the thing about trading - if you are fearful of losing, then you will end up losing. If you are too confident, you will end up losing. The correct way to approach it is to be neither fearful nor confident, but simply to have your facts in line.
I'm assuming the traders you fired broke the rules because they started trading from emotion? As I've said before, there is no place for emotion in trading. Rules definitely are necessary and desirable if they are based on facts, not emotion.
Excuse me. You don't know me and you don't know my motives. I can tell you that "feeling superior" is not one of them.
And no, this thread is not dangerous. What's dangerous is blindly getting into trading without knowing what you're doing and without being in control of the emotional aspect of it.
Nobody should be trading with money they need to survive or pay the bills with.
The message of this thread can be summed up like this: There is no place for emotion in trading. You must eliminate emotion in order to have a chance at long term survival.
No I fully recognize that, and I did not suggest you put your whole trading capital at risk. Only a portion of it that is uncomfortable but not in danger of a margin call.
A trader who is susceptible to panic should not be trading. This thread is to help you recognize and eliminate it before it becomes a big issue later on.
Google "phobia exposure therapy". Admittedly the coffin thing is an extreme example, but it is very
common for cognitive behavior therapists to lock claustrophic people in trunks of cars, small dark closets, boxes, etc for lengthy periods of time.
I don't have any evidence, other than my own experience. My personal trading methods are in some sense a more or less continual "working out of losses" .... in other words, some trades are immediately successful, others begin a process of drawdown. Anytime you are not 100% cash, it means you are in a trade, which runs the risk of starting a drawdown ... The mechanical/technical aspects of my methods are particularly suitable for these situations, and so in some sense it doesnt' really matter how I start a fresh trade. Sometimes I will simply throw a dart as it were and buy or sell without caring why. From that point forward, I leave it to my strategy to work through it.
Well ..... any single trade has little signficance in the overall picture. It is the cumulative effect of all the single trades that matters. So a single loss doesn't matter (as long as it doesn't wipe you out) and a single win doesn't matter. As long as the probabilities are in your favor, then the net result from all the wins will be greater than the net result from the losses, and this is what matters.
When developing a trading system, it's important to focus on two things:
1. Stacking the probabilities in your favor over a large period of time and through different market conditions. It doesn't really matter whether you use technical analysis, or price behavior, or whatever, as long as you have the edge and it is valid through different types of market conditions.
2. Making sure your drawdown never gets to the point of threatening your trading existence and this includes making sure you can survive extreme market conditions like limit moves, flash crashes, Oct '87 events, and so on.
Individual losses and drawdowns are not contrary to this. In fact they are a natural and unavoidable part of every successful trading career, as long as the other pieces are in place: the risk management, money management, identification of the probabilities, in short the "technical" aspect.
Yes, awesome quote. THanks for including it.
Yes, you hit it on the button. Excellent exercise. The cognitive therapists' exposure therapy:
If you do this, and you are experiencing emotions, and you are gritting your teeth as that price
continues to tick against you, you don't do anything until it finally stops you out. Then you begin the process of making up the losses. Eventually you make them up. Then
repeat the process again. And again. do it until it finally sinks in that you don't have anything to worry about. Your trading method is good and you can and will make up those losses every time.
you have now eliminated emotion from trading.
Thanks for all the responses, everyone. I fully expected arguments and antagonism, which I don't mind at all, it's part of the debate. (What I do resent are the suggestions that I'm trying to feel "superior" or what not. You have to understand that I am trying to help people.)
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New traders have no problem losing money so this really just increases chances they will not survive. When starting you need every dollar you have just to survive the learning curve so purposely surrendering it to the market is just not a smart approach. Plenty of holes to dig out of when starting out as you will lose money without self-flagellation.
"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."
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No offense, but I find your thought process a little peculiar. My concern is some people read this and think it's a good idea. A couple of points:
You stated this is based on personal experience but make this statement nevertheless. My experience is experienced traders do not average down and "hope" for a trade to turnaround". I used to average down 25 years ago when I started trading and it took me a few years to click on why I would do well and then eventually end up suffering big losses. Lesson learned: don't average down.
Not sure what to say to that one apart from maybe time to change that approach.
I'm not seeing a strong relationship between your opening post and the above statement. I wish I could achieve this. I've managed to learn to control it over many years of experience but not eliminate it entirely. I'm fairly sure most people feel some type of emotion at/and/or during trade time.
Basically, I think the thrust of your argument is most people do not have the personality to trade which I agree with entirely. The problem is most people never recognize this. I had a friend at high school who always wanted to be an air force pilot. He passed all of the academic tests etc but failed the personality test. I wonder how many of us would pass a trader "personality test".
Here is one in this post from the great Doctor Brett N. Steenbarger, PHD. if you wish to try it out.
Part of the reason they lose money is the result of their fear of losing money (a paradoxical thing, isn't it). So what I'm trying to accomplish here is putting 'loss' into proper context. Learning to understand it for what it is and deal with it without the interference of emotion.
No problem, man. Probably because I'm trying to bring to light some of the paradoxical aspects of trading
Absolutely correct. I'm not saying average down any losses (unless you happen to have a strategy for which that's a valid thing to do.) I'm saying make sure you know how to work your way out of losses/drawdowns.
this is in regards to my statement about sometimes buying or selling with no rhyme or reason. ... What I'm saying here is that a single trade has a negligible impact on the overall results. This means I can *sometimes* buy or sell for no reason, and it's not going to impact the overall picture. But if I were to *constantly* do it, that's a different matter.
The point is that your trading edge only becomes apparent over time (lots of trades). The results of any single trade tell nothing about the effectiveness of the strategy.
Probably 0.1%. Mostly its the emotional aspect that causes so many problems
Unfortunately that link is denied access (I'm not an "elite" member), but if you could paraphrase it that would be great.
When traders run into emotional difficulties with their trading, they often assume that they have deep, dark, underlying personality conflicts that require therapy. Sometimes this is true, but very often the source of the problems is different. Often there is a mismatch between the method or system that a trader is trading and the traderís needs and personality. Instead of berating themselves for a lack of ďdisciplineĒ, traders need to ask whether their challenges in following a methodology might be because the methods arenít right for them. Finding the proper fit between who you are and how you trade is a big part of finding success in trading.
The following questions are designed to help you assess facets of your personality that are related to the kinds of trading approaches that are likely to work for you. There are no right or wrong answers, and none of the questions are designed to evaluate your emotional stability or mental health. Rather, we are trying to find out your personal style, so that you can match it to your trading style. Each item consists of two statements. Please choose the statement that best describes you:
1a) I often arrive early for appointments and events to make sure Iím not late.
1b) Iím not very time-oriented and often show up late to appointments and events.
2a) When a problem occurs in my trading, I first feel frustrated and vent my feelings either outwardly or at myself.
2b) When a problem occurs in my trading, I first try to focus on what went wrong and what I can do to fix it.
3a) When I go out to eat, I generally go to my favorite restaurants and order my favorite foods.
3b) When I go out to eat, I like to try new and unfamiliar restaurants and foods.
4a) I tend to be detail-oriented and try to get each aspect of a job done as well as I can.
4b) I focus on the big picture instead of details and donít sweat the small aspects of a job.
5a) If you could hear the thoughts in my head as Iím trading, youíd hear worried or negative thoughts.
5b) If you could hear the thoughts in my head as Iím trading, youíd hear me analyzing the market action.
6a) If I had a choice of car to drive, I would choose one that is comfortable and quiet.
6b) If I had a choice of car to drive, I would choose one that is fast and that handles well.
7a) I would be good at following a diet or exercise program.
7b) I would often cheat on a diet or exercise program.
8a) It is hard for me to shake off setbacks in the market.
8b) I take market setbacks as a cost of doing business.
9a) I like vacations that are peaceful and relaxing.
9b) I like vacations where you see and do a lot of different things.
10a) I get routine maintenance done on my car when it is scheduled.
10b) I donít follow deadlines for routine maintenance on my car.
11a) Sometimes I feel on top of the world in the market; other times, Iím down or down on myself.
11b) I donít have many emotional ups or downs in the market.
12a) I would like a job with a stable company that pays a guaranteed salary and benefits, even if I might not get rich.
12b) I would like a job with a startup company that offers me a chance to get rich, even if I might get laid off if things donít work out.
13a) I try to eat healthy foods and get a good amount of exercise and rest.
13b) Iím very busy and donít always eat, exercise, and sleep as I should.
14a) I trade by my gut.
14b) I trade with my head.
15a) I avoid arguments and conflict.
15b) I like to argue and hash things out.
Items 1, 4, 7, 10, and 13 measure a personality trait called ďconscientiousnessĒ. A conscientious person is someone who has a high degree of self-control and perseverance. If you scored mostly a) responses for these items, you are high in conscientiousness. Conscientious traders are good rule-followers, and they often do well trading mechanical systems. Traders who are low in conscientiousness will have difficulty following explicit rules and often trade more discretionarily. Ideally, you want a style of trading that is more structured and detail-oriented if you are more conscientious. Trying to trade in a highly structured manner will only frustrate a trader who is low in conscientiousness. Such a trader would do better with big picture trades that do not require detailed rules and analysis. Similarly, very active trading with rigid loss control will come easier to the conscientious trader; less frequent trades with wider risk parameters will come easier to the trader lower in conscientiousness.
Items 2, 5, 8, 11, and 14 measure a personality trait called ďneuroticismĒ. Neuroticism is the tendency to experience negative emotions. If you scored mostly a) responses for these items, you are relative high in neuroticism. The trader prone to neuroticism tends to experience more emotional interference in his or her trading. Wins can create overconfidence; losses can create fear and hesitation. The trader who is low in neuroticism is more likely to react to trading problems with efforts at problem solving and analysis. He or she will not take wins or losses particularly personally. Neuroticism is a mixed bag when it comes to trading. Often the person who is high in neuroticism is emotionally sensitive and can use this sensitivity to obtain a gut feel for market action. The trader who is low in neuroticism may experience little emotional disruption with trading, but may also be closed off to subtle, intuitive cues when a trade starts to go sour. In my recent experience, I have been surprised at how successful gut traders are often relatively neurotic traders. Very active trading methods are particularly challenging for such traders, as they donít allow much time for regaining emotional equilibrium after losses. This can lead to cascades of losses and significant drawdowns of equity. It is much easier for the non-neurotic trader to turn losses around, since these are less likely to be tied to self-esteem.
Items 3, 6, 9, 12, and 15 measure a traderís risk aversion. A risk-averse trader is one who cannot tolerate the possibility of large losses and who would prefer smaller, more frequent wins with controlled losses to larger wins with greater drawdowns. If you scored mostly a) responses for these items, you are a relatively risk-averse trader. Trading with careful stops and money management, and trading smaller time-frames where risk can be controlled with the holding period will come most naturally for the risk-averse trader. The risk-seeking trader is one who enjoys stimulation and challenge. Larger positions and longer holding periods are easier to tolerate for the risk-seeking trader. Very often, the risk-seeking trader will be impulsive in entering trades and will have difficulty trading during periods of boredom (low volatility). The risk-averse trader often experiences difficulty hanging onto winning trades and will cut profits short to avoid reversals. This trader will be challenged during periods of high market volatility. Position sizing is key and often overlooked as a trading variable. Trading too small will bore the risk-seeking trader, who will then lose focus. Trading too large will overwhelm the risk-averse trader, who will also then lose focus.
Ultimately it is the blending of these three dimensions of trader personality and not any one in isolation that is most important in shaping trading outcomes. In my experience, the traders who are most poorly suited to trading are those that are risk seeking and who are low in conscientiousness and high in neuroticism. Such traders often take large gambles on impulse, and very often those impulses are driven by emotional frustrations. An example would be a trader who gets frustrated after a loss and doubles his position size on the next trade just to make the money back quickly.
Conversely, I have seen very few successful traders who were highly risk-averse. The risk-averse trader, particularly who is high in neuroticism, is motivated more by a fear of loss than a desire for gain. This makes it difficult to sustain meaningful position sizes during promising trades. Often such traders berate themselves for being self-defeating or sabotaging, but the reality is that they might be better suited for investing than trading.
If I had to identify an ideal personality pattern for traders, I would say that such a person would be risk-tolerant, low in neuroticism, and high in conscientiousness. Such traders are generally good at following trading rules (entries, exits, money management) and disciplined in their preparation. They donít take losses personally, which gives them the perseverance to weather losing periods. When they see a good trade, they are comfortable trading in size, so that the average size of their wins exceeds that of their losses.
Finally, let me mention one other important dimension that is related to neuroticism and emotionality. I strongly suspect that cognitive style is just as important as personality style in trading. Some people process information intuitively, relying on gut cues and subtle, non-verbal information. Others process information explicitly, through reasoning and analysis. Both cognitive styles can make traders money in the markets, but it is essential that oneís cognitive style match oneís trading methodology. As one trades shorter and shorter time frames, moving from swinging to scalping, it is less practical to expect explicit analytical routines to guide trading. Very short-term trading is more about pattern recognition than historical research. Conversely, longer-term trades often benefit from modeling and statistical analysis that inform traders where the edge might lie. How traders process information most effectively is a neglected variable in selecting proper time frames to trade.
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I have gotten very nervous pulling the trigger on all the trades that went best. The weeks I made the most I got the least sleep.
All I can do is stick with:
1. The rational for initiating the trade (right or wrong as it may be)
2. Stop loss that gives some room for error in relation to payoff
3. Following the progression to add to or exit from it
4. Use the larger time frames
100 ticks is a ridiculous loss for some trading styles - but wouldn't be if your profit target is hundreds in the other direction.
About dealing with the potential for uninsured brokerage failures, bank failures where withdraws may be limited and the FDIC is questionable at best: most I can think to do is not put all the eggs in one basket. Having market stops opposed to limit stops may not prevent a flash crash event - but what are you going to do?
"Be right and sit tight." - Jesse Livermore
Last edited by whatnext; February 27th, 2013 at 11:15 PM.
I finally voted for "It's a good idea" subject to the following conditions
1. it's on paper (initially at least )
2. only when we suspect we're trapped in the box we build for ourselves from time to time.
The problem with item 2 above is sometimes it takes a long time to realize we're thinking inside the box so it might be better to just go ahead and do it.
Another exercise that I find scary on an existential level is trading NT's synthetic data feed.
Edited to add: while IMO the proposed suggestion is an excellent idea for newbies it also applies to those of us who have been at it for a while but who still don't have it all together, need a shock to the system that stimulates meditation the same way the folks on the covers of fan magazines benefit from a visit to detox or the fat farm now and then.
As long as we're sure it's an exercise and not the voices in our head telling us to do bad things
Last edited by bnichols; March 1st, 2013 at 12:38 AM.
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If you always protect yourself against devastating losses, and if you know you can recover from day to day losses in the normal course of trading, then you won't have any problem letting your profits run.
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