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The Definitive Guide to Mastering the Psychology of Trading by Mark Douglas
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The Definitive Guide to Mastering the Psychology of Trading by Mark Douglas

  #61 (permalink)
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I just wanted to add... somebody mentioned earlier that Mark was a 'failed trader'... in his course 'How to think like a professional trader' he shares some of his background explaining how he was initially relying on brokers to make the decisions for him, and the first tipping point was when he was losing lots of money, couldn't take it anymore so asked the broker to get him out of the trade. Practically soon after exiting, the market started going in what would have been his favour and he recounts how he would have sat on a 400k trade on just 2 contracts. So he decided he had to figure out how to trade by himself and moved to Chicago.

Eventually he lost all of his money trading and had to declare bankrupcy but it was at that point something clicked in his mind - it was probably the ligthness of having nothing more to lose that made him change attitude - that's when he 'got it', which I assume means he started being consistently profitable.

Which brings me to a question, although I just realized I'm a bit off-topic so I'll post it in another thread

Edit: I was going to ask the question 'is blowing up an account x times a necessary part of the experience and path to consisten profitability?' but I have seen that it is sort of addressed in this thread so I'll carefully read that and make my own conclusions...


Last edited by xplorer; February 19th, 2016 at 07:42 AM.
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  #62 (permalink)
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xplorer View Post
I just wanted to add... somebody mentioned earlier that Mark was a 'failed trader'... in his course 'How to think like a professional trader' he shares some of his background explaining how he was initially relying on brokers to make the decisions for him, and the first tipping point was when he was losing lots of money, couldn't take it anymore so asked the broker to get him out of the trade. Practically soon after exiting, the market started going in what would have been his favour and he recounts how he would have sat on a 400k trade on just 2 contracts. So he decided he had to figure out how to trade by himself and moved to Chicago.

Eventually he lost all of his money trading and had to declare bankrupcy but it was at that point something clicked in his mind - it was probably the ligthness of having nothing more to lose that made him change attitude - that's when he 'got it', which I assume means he started being consistently profitable.

Which brings me to a question, although I just realized I'm a bit off-topic so I'll post it in another thread

Edit: I was going to ask the question 'is blowing up an account x times a necessary part of the experience and path to consisten profitability?' but I have seen that it is sort of addressed in this thread so I'll carefully read that and make my own conclusions...


Back in 2012 at a seminar I was at Mark spoke about the trade you mentioned. It was in silver. And he got out right before the Hunt brothers cornered the market http://www.investopedia.com/articles/optioninvestor/09/silver-thursday-hunt-brothers.asp and silver went limit up for a long time. I think it was for months. Basically Mark would not have to do anything and actually could not do anything with his silver position, if he still had it, and would have made money.

This situation had a massive/profound impact on Mark.

Ron


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  #63 (permalink)
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I listened to the interview of Mark.

I think the quote that Ron highlighted was:
"The outcome of anyone particular trade is a completely random event."


Mark later talks about recommending traders trade in "samples" e.g 20 trades groups.
He does admit that there is a statistical edge (if the trader has defined an edge) to the outcome of a series of trades
(let's say 60%) and then goes on to talk about roulette tables, con flips, and slot machines.

While I believe I understand what Mark is getting at I think it is more correctly stated.
"The outcome of any one particular trade is not completely known."

Keep your mind in the future, in the now.

Last edited by aquarian1; February 26th, 2016 at 07:32 PM.
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  #64 (permalink)
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Looking at trades as coin flips makes things easier when speaking of W:L ratios.

However, trades are dynamic and continuous in outcome - not binary (unless you choose them to be).

So if you enter a trade with a 60% setup looking for 10pt target and a 5 pt stop,
the trade can start off in your favour, say +3 pts and then the market can start to retrace.
You may see something in the action that tells you the conditions of the initial trade have been over-ridden by new info shown by the price/volume action after you entered the trade.

You may have started with a setup that was worth 10pts and new info told you to get out (perhaps up or down say up 3 or down 2)

So the trade outcome is not either a win of 10 or a loss of 5.

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The this article I feel can help a trader understand the 50/50 chance of a single trade. http://www.investopedia.com/articles/financial-theory/09/probability-without-formulas.asp I have unfortunately been flat out of time last few days but almost done with these projects.

Additionally, the coin flip trading exercise IMHO is something every trade should do at some point.

As well as the marble game Van Tharp has popularized.

Ron


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aquarian1 View Post
I listened to the interview of Mark.

I think the quote that Ron highlighted was:
"The outcome of anyone particular trade is a completely random event."


Mark later talks about recommending traders trade in "samples" e.g 20 trades groups.
He does admit that there is a statistical edge (if the trader has defined an edge) to the outcome of a series of trades
(let's say 60%) and then goes on to talk about roulette tables, con flips, and slot machines.

While I believe I understand what Mark is getting at I think it is more correctly stated.
"The outcome of any one particular trade is not completely known."

Subtle, but excellent insight @aquarian1.

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  #67 (permalink)
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aquarian1 View Post
I think the quote that Ron highlighted was:
"The outcome of anyone particular trade is a completely random event."

While I believe I understand what Mark is getting at I think it is more correctly stated.
"The outcome of any one particular trade is not completely known."

Agreed. Long ago, I promised myself that I would never, ever weigh in on the phrasing that "the probability of the next trade is 50/50," since the issue is purely semantic, and everyone is always talking past each other when they disagree on it.

But I am weak.

Here's why I am saying it is semantic:

The next trade's outcome is unknown, and can't be known. You just have to shrug and take the trade that you are supposed to, knowing that you won't know the outcome until it's done. Many people will say, that means it's a coin-flip, or it's 50-50, or it's random, or it's a toss-up, or it's a matter of chance, or I don't know, or it's up to the trading gods, or who knows what will happen. All those statements mean the same thing to the people who make them: you don't know what will happen with this individual trade. From a practical standpoint, you should just trade according to an edge that you have tested over time, knowing that you are in it for the long run, not the individual trade. The individual trade outcome can never be known ahead of time. So don't sweat individual trades, just trade your edge consistently.

That's what is meant, and I have no problem with it, and I should stop typing now .... But here we go

If you say that something is 50-50, or has a 50% probability, or has even odds, you're not really saying that the outcome is not known (although that may be what you mean.) You are saying that if you do it a large number of times, about half the time it will come out one way and half the other. That is a very definite statement, not a statement about unknowns, and it matters. If you are betting on a game, and you have even odds, you should not expect to win much. If you think the probabilities are in your favor, that's not 50%, it's whatever probability it is -- but the outcome of the next event is still not known, only the likely outcome of a large group of similar events.

Say you are playing a coin-flip game where you are betting on heads or tails with a fairly-weighted coin. After a hundred flips, you won't have won much, if any, money. It would have been heads about 50 times, tails about 50 times -- maybe 49 to 51 or something, but very close to 50 of each. Now suppose you are cheating, and you use an unfairly-weighted coin that comes up heads 60% of the time. You still don't have any way to know what the outcome of any one flip will be, but you should bet consistently on heads, and you will do well over time. (And also probably have to leave the game early, and in a hurry.)

Confusion comes in because probabilities apply only to groups of events, not to just one by itself. We do want to apply what we know about the odds of a situation to a particular event. We can only do that if we understand that we really are talking about what is likely to happen if the event is repeated many times, but not actually what this one event "will" do, which the probabilities simply do not address. But "unknown" is not "50-50", it's unknown. 50-50 is an actual, definite number: it means that, in the long run, a particular outcome will happen about 50 times out of a hundred, not that this trade's outcome cannot be known in advance, which it can't, and is unknowable in advance, which it is.

OK, got that off my chest. I do agree with @aquarian1 about what the actual best meaning of the statement is.

I admit that this is semantic, and also nit-picking, so I will stop now.

Bob.

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  #68 (permalink)
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In the Investopia article Ron mentioned, it discusses 50-50, how a string of outcomes and the next outcome, and trends (fat tails).

on speaking of 50-50
"Let's assume that at a given moment in time the stock could just as easily move up as it could move down (even in a range, stocks move up and down)"
then,
"The reason this is so important is that often, when traders get into the market, they mistake a string of profits or losses as either skill or lack of skill. This is simply not true."

(Notice the choice of words "simply not true" When a person is trying to make a case that is not supported by their logic they include emotive words to guide the reader . Here they include the unnecessary word "simply". This is to guide the reader for if its "simply not true" then they case is close and no-one but a simpleton should question it, even if/though empirical evidence shows otherwise

So they could -and should have said- "In many cases this is incorrect."

-------------------
I think that statisticians like to apply statistics to the markets. In formulating statistics, assumptions are made about the observed events such that statistics can be applied to them an statistical inferences made.

If your assumptions are not applicable neither are your conclusions or inferences.

Keep your mind in the future, in the now.
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  #69 (permalink)
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If the market was a matter of applying statistics (the fat tail) and obtaining an edge, then the Goldman Sachs of the world have:

huge amounts of money
vast armies of statisticians
armies of programmers
vast arrays of computers
lightening fast data feeds
and many other resources including the desire

They can throw $50M of cash at an single experiment with an algo
They know that via compounding the potential profit of an edge grows to a staggering amount of money and $50m is chump change.


In my opinion if application of statistics to the market gave them a trade-able edge, then it would have been done.
I do not believe the answer (for me) lies there.

But I do believe psychology - and hence this thread - is very important.

Keep your mind in the future, in the now.
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bobwest View Post
Agreed. Long ago, I promised myself that I would never, ever weigh in on the phrasing that "the probability of the next trade is 50/50," since the issue is purely semantic, and everyone is always talking past each other when they disagree on it.

But I am weak.

Here's why I am saying it is semantic:

The next trade's outcome is unknown, and can't be known. You just have to shrug and take the trade that you are supposed to, knowing that you won't know the outcome until it's done. Many people will say, that means it's a coin-flip, or it's 50-50, or it's random, or it's a toss-up, or it's a matter of chance, or I don't know, or it's up to the trading gods, or who knows what will happen. All those statements mean the same thing to the people who make them: you don't know what will happen with this individual trade. From a practical standpoint, you should just trade according to an edge that you have tested over time, knowing that you are in it for the long run, not the individual trade. The individual trade outcome can never be known ahead of time. So don't sweat individual trades, just trade your edge consistently.

That's what is meant, and I have no problem with it, and I should stop typing now .... But here we go

If you say that something is 50-50, or has a 50% probability, or has even odds, you're not really saying that the outcome is not known (although that may be what you mean.) You are saying that if you do it a large number of times, about half the time it will come out one way and half the other. That is a very definite statement, not a statement about unknowns, and it matters. If you are betting on a game, and you have even odds, you should not expect to win much. If you think the probabilities are in your favor, that's not 50%, it's whatever probability it is -- but the outcome of the next event is still not known, only the likely outcome of a large group of similar events.

Say you are playing a coin-flip game where you are betting on heads or tails with a fairly-weighted coin. After a hundred flips, you won't have won much, if any, money. It would have been heads about 50 times, tails about 50 times -- maybe 49 to 51 or something, but very close to 50 of each. Now suppose you are cheating, and you use an unfairly-weighted coin that comes up heads 60% of the time. You still don't have any way to know what the outcome of any one flip will be, but you should bet consistently on heads, and you will do well over time. (And also probably have to leave the game early, and in a hurry.)

Confusion comes in because probabilities apply only to groups of events, not to just one by itself. We do want to apply what we know about the odds of a situation to a particular event. We can only do that if we understand that we really are talking about what is likely to happen if the event is repeated many times, but not actually what this one event "will" do, which the probabilities simply do not address. But "unknown" is not "50-50", it's unknown. 50-50 is an actual, definite number: it means that, in the long run, a particular outcome will happen about 50 times out of a hundred, not that this trade's outcome cannot be known in advance, which it can't, and is unknowable in advance, which it is.

OK, got that off my chest. I do agree with @aquarian1 about what the actual best meaning of the statement is.

I admit that this is semantic, and also nit-picking, so I will stop now.

Bob.

100% gold, just like all your other posts Bob.

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