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Trading Well: The MOST Important Thing


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Trading Well: The MOST Important Thing

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  #1 (permalink)
 iqgod 
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Here I wish to journal each and everything that changed my trading for better.

Since trading is a journey, each day something new is learnt.

This journal is my mirror - without going into elaborate reasons as to why to maintain a journal, the most fundamental reason is that it is a most important tool to trader development.


From wikipedia
- a daily record of events or business
- a record of the transactions
- a journal refers to a serious, scholarly publication that is peer-reviewed
- a record of the daily run, such as observations, changes, or other events of daily importance

Though my journal is also a private diary, above all I have always believed that a professional activity such as trading can and must be approached with specific formal best practices that must be made available to the reader without barriers.

I promise to be disciplined and update this journal with clockwork precision.

Sharing is the most important thing, and not surprisingly it benefits the author most of all.

Welcome!

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  #3 (permalink)
 iqgod 
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Here is how I performed in the past nine months.:



It simply shows that I had been a breakeven trader. This is an Interactive Brokers account which I opened with a starting balance of $5000.

The first step in trading was to learn how not to lose money (this does NOT equate to no losing trades). This took a long time to learn.

The second part has then been how to start making money. This is where the focus of the journal is going to be.

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 iqgod 
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This is a live account funded with $150. The $150 came from a forex contest that I won. Note that Indian citizens are not allowed to remit Indian Rupees for trading leveraged products.



I am sure you may have noted the approximate 35% returns generated each year - they simply represent gains as a result of a lot of hard work which includes almost two years of prior practice exclusively on demo. I will not delude you with figures any further - these accounts have not been operated ever since I went through TST combines.

What now follows is how I simplified my trading - that is the most important thing I want to talk about for today.

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 iqgod 
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What does a Consistently Profitable Trader do?

- He has (creates/borrows after testing) defined methods that indicate a high probability of success. This is a constant learning process.

- He is consistent with his trades i.e. he takes all the valid trades and does not cherry-pick. He knows that cherry picking will ruin his system and make a high probability system useless. This is a constant uphill struggle against the weak parts of human nature.

- His works on his belief system to manage all his trades to his best advantage. This is a constant development of his intuitive part, this is what makes trading more of an art form than exact science.

[More on each of this in a later post]

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  #6 (permalink)
 iqgod 
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My system states that I need to take "with trend" trades when the price forms a pair (or more) of dojis - BUT the breakout above the dojis needs to occur for me to take the trade.

Note: Double Doji setup is documented in "Forex Price Action Scalping" by Bob Volman, an excellent book, highly recommended!

If I would have not followed my system then I would have become a trapped long.


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 iqgod 
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This is what happening right now next as Bernanke is talking:


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 iqgod 
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This is the MOST important component of a trader's business.

At the minimum, which I will state here:

- My money management plan

One liner: Capital divided into ten equal parts (and held in ten different accounts to physically minimize damage slow me down if ever I go on tilt) No more than 1% of the capital held in that account ever to be risked on any single trade.

- My trade management plan (brokers are codenamed for quick reference)

1. Broker R: LONGEST TERM

For Swing trading of equities only. Shorting using index futures ALLOWED only when flat on equities.
No intraday trading permitted; this broker is for the longest term view (months to years) - no compromise here.
Exit at breakeven or if a trade does not work within ten working days. Do not ever exit on pullbacks. Trailing stop once in profit.

It is expected that equity charts of equities held will be examined daily at 0800AM everyday.

2. Broker IfE: LONG TERM Single Stock Futures

Swing trading of single stock futures.

No intraday trading permitted; this broker is for the longest term view (months) - no compromise here. Exit at breakeven or if a trade does not work within ten working days. Do not ever exit on pullbacks. Trailing stop once in profit.

It is expected that equity daily charts of equities held will be examined daily at 0800AM everyday.


3. Broker IfC: LONG TERM Commodities

Swing trading of commodities.

No intraday trading permitted; this broker is for the longest term view (months to years) - no compromise here.
Exit at breakeven or if a trade does not work within ten working days. Do not ever exit on pullbacks. Trailing stop once in profit.

It is expected that daily charts of commodity contracts held will be examined daily at 0800AM everyday.

4. Broker IfX: LONG TERM Currencies

Swing trading of currencies.

No intraday trading permitted; this broker is for the longest term view (months to years) - no compromise here.
Exit at breakeven or if a trade does not work within ten working days. Do not ever exit on pullbacks. Trailing stop once in profit.

It is expected that currency daily charts of commodity contracts held will be examined daily at 0800AM everyday.


5. Broker Ib: INTRADAY index futures

Index futures trading only. Trade (entry / exit) from 30 minute timeframe only.

Intraday trading - preset target, preset stop - one or the other needs to be taken out! "check" HOURLY not any lesser timeframe but do not EVER move except warranted by TIPPING POINT TECHNIQUE.

Pre-market analysis MUST be complete before initiating positions

6. Broker BE

Backup broker for equities and equity (index / single stock) futures - intraday swing trades only

7. Broker BC

Intraday swing trades - positions must not be the same as (9)

8. Broker M

Intraday scalping

Multi-sectors permitted here. Can trade the "in play" chart - can be equity / equity index futures / commodities / currencies.

Pre-market analysis MUST be complete before initiating positions

9. Broker ZC: Commodities

Intraday swing trades (no scalping)

10. Broker ZE: Equity / Index Futures

Intraday swing trades (no scalping)


I will document the strategies I use with each broker the next.

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  #9 (permalink)
 iqgod 
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ME vs Market Direction:

I now have developed "creepy crawlies" that tell me that I am entering too early and against a fundamental market structure.

ME vs Mr.Market and ME vs. MY SYSTEM:

I now have developed "feelers" which tell me to recognize if the current trades I am getting into or avoiding pulling the trigger on are because of "Oh I missed the earlier nicer entry how can I enter now" type of trades.

ME alone:

I now know I don't understand the market at this moment and there is no probability on my side. Check if I am sitting on my hands (actually put them underneath and SIT, LOL)

If in position, check if I am sitting on my hands (actually put them underneath and SIT)

If under confident even now, and itching to exit and the itch is "right" e.g. Tipping Point / I am Invalidated my the Market / I entered early and had no reason to do so (very common occurence) THEN flatten position and examine why did I get in at all in the first place!

See what I learn about the market and document it here for my and others benefit.

A non-existent ME:

Feeling fuzzy / woolly / cannot access feelings / lack of sleep / drove badly (not carefully) - the last one is a big let out and means I am not ready to trade. Good driving on Indian Roads = Good trading later.

Be very watchful.

IN STONE:

Stop trading after three consecutive losers. Its a holiday from trading (ssshhh not so fast... you still have to watch the markets!)

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 josh 
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iqgod
Importance of taking valid entries and NOT taking invalid or "early" entries

How do you define a valid entry? Said another way, what "validates" taking the trade?

Thanks for your thread iqgod, much success to you by the way!

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 iqgod 
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josh View Post
How do you define a valid entry? Said another way, what "validates" taking the trade?

Coming soon.....

Please bear with me till then.

Yours humbly,
iqgod

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 Cloudy 
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iqgod View Post
Here is how I performed in the past nine months.:

It simply shows that I had been a breakeven trader. This is an Interactive Brokers account which I opened with a starting balance of $5000.

The first step in trading was to learn how not to lose money (this does NOT equate to no losing trades). This took a long time to learn.

The second part has then been how to start making money. This is where the focus of the journal is going to be.

Congrats iqqod! I've heard that's the best way to start out with a relatively small balance and to keep it at least maintained and not losing money which is maybe the biggest breakthough of the learning. If the account is depleted to the halfway point then one is suggested to take time off , maybe a few months and regroup and/or stay in sim. Then when returning live, the account is replenished so one never suffers , psychologically, a full busted account.

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 indextrader7 
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Keep up the good work buddy. You're on your way.

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 Futures Operator 
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iqgod View Post
- He is consistent with his trades i.e. he takes all the valid trades and does not cherry-pick. He knows that cherry picking will ruin his system and make a high probability system useless. This is a constant uphill struggle against the weak parts of human nature.


iqgod View Post
Stop trading after three consecutive losers. Its a holiday from trading (ssshhh not so fast... you still have to watch the markets!)

Do you think these two points conflict with each other, ie if one stops trading after say two or three consecutive losers as part of a daily max loss/risk management strategy and misses valid trades because of this, does this destroy the odds of the high probability system working in your favor over time, with strings of losing trades here and there needing to be taken?

Thanks for your journal and sharing!

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 iqgod 
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Futures Operator View Post
Do you think these two points conflict with each other, ie if one stops trading after say two or three consecutive losers as part of a daily max loss/risk management strategy and misses valid trades because of this, does this destroy the odds of the high probability system working in your favor over time, with strings of losing trades here and there needing to be taken?

Thanks for your journal and sharing!

Hi @Futures Operator,

Yes, they do conflict against each other.

The problem being addressed here is that after three consecutive losers I usually (always?) tend to go on tilt.

Once I have conquered that part I will provide some leeway to this rule so that the system does not get skewed because of the disruptive effect of the human hand.

Thanks for pointing this out!

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 Futures Operator 
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Hi @Futures Operator,

Yes, they do conflict against each other.

The problem being addressed here is that after three consecutive losers I usually (always?) tend to go on tilt.

Once I have conquered that part I will provide some leeway to this rule so that the system does not get skewed because of the disruptive effect of the human hand.

Thanks for pointing this out!

@iqgod, you're welcome, I point it out because I am conflicted with the same myself. Based on my past results, I believe I would be most profitable by limiting my losses to the minimum and my losing days to the minimum, even calling it a day after just two full stop outs; even if this skews the odds of the system working over time by missing valid setups. I believe this is because for my psychological skill level, I am more likely to be trading poorly at that point or out of sync with the market.

I would be interested to hear more discussion on this topic from others, but IMO the risk management aspect of protecting against huge losing days is more important than possibly reducing the odds of the system by missing valid setups.

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 iqgod 
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At this point in my life trading has become so boring - 90% of the time its a doormat position (a doormat with eyes if you will).

Suddenly (or not so suddenly if you are in the correct attitude) 10% of the time the sniper has to activate.

Once the shot is fired its back to the doormat position, the trade is now out of your hands!

Rinse repeat! (and more often than not -yawn!)

This was not what I expected profitable trading would be all about.

Of course good trading means you have a disciplined lifestyle.

The routine is almost set. Do the hard work pre-market then get into the doormat position (the market is the 800-pound gorilla stepping on you so I better be a doormat) - and trading is limitless - the more you put in the more you reap!

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 Disciple 
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Thanks iqgod for taking the time to put your thoughts in the forum

For me a big step was thinking about the goals I was after in life and working to them here and now. This helps me because I focus on trading knowing that my life is does not depend on it.

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 iqgod 
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The most important line for me as I begin another trading session:

I DO NOT KNOW what price is going to do next.

I DO NOT KNOW.

But I am aware of, and KNOW that I DO NOT KNOW.


..... but .....


"I buckle up my seat belt and take that next trade. I have a tested and verified edge. Wearing a seatbelt does not guarantee anything, yet I have to drive on a reasonably clear and safe highway ("trust my edge")."

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 iqgod 
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As I sit down to contemplate the mistakes I made, I will post my chart first - I have marked up every mistake I made:


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 iqgod 
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As you can see dear reader, while I was in the combine the reaction were either:

1. Knee jerk
2. In slow motion (waiting for confirmation)

The knee jerk part meant I was 'reading price action'.

Acceptable if I had practiced and determined the probability of that knee jerk setup working over time.

Many of the setups are tradable but consistency is the key.

Did I take the next trend channel line break after two reasons to trade presented themselves? NO. Why not? The loss of confidence i.e. another face of fear was because I had not practiced the hell out of my technique.

Practice is the key.
(Driving lessons!)

Doesn't stop there though....

Action triumphs everything! DID I buckle up and start driving? No?

Why not?
Risk aversion was in my bones. Loss aversion was in my bones.

I had to press the pedal and fight not just laziness (not practicing!) and boredom (entered early!) but had to contend with actually taking the risk when presented with an almost wrapped up parcel (setup! which could be a bomb and explode in my face or be the best gift of the year but I HAD TO open it) "trust!"

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 iqgod 
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The improvements in me happen everyday, for e.g. I was disciplined and was not taking piddling profits in the EURUSD yesterday.

The trade reached my target of 10 ticks but in the retail forex world there was a 2.5 pip spread to account for (need to change brokers!!) so I was not filled as the spread came short of 0.1 pips and did not fill my target order.

At that point discipline was not the right thing because now I was risking 9 pips to make 1 pip so I should have closed the trade in hindsight but didn't.


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 iqgod 
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Disciple View Post
Thanks iqgod for taking the time to put your thoughts in the forum

For me a big step was thinking about the goals I was after in life and working to them here and now. This helps me because I focus on trading knowing that my life is does not depend on it.

Yes, that is an excellent observation!

@GaryD has said that of his 2013 trading too. He is in a 'don't care about the money' trader and focused on the process.

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 iqgod 
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On day 7 of my combine I was trying to scalp corn.

The big picture was that corn had gapped down HUGE recently and any upmove would be shorted into at visible resistance points on the chart (though this is a simplistic explanation it has to suffice as one of the views I had two months earlier as a trader - not so simple today)

So I shorted at the correct place.

... but could not hold....

Thus the sitting on hands part rule was violated and I chickened out.

How not to chicken out took up a lengthy look at myself since then.

I am now feeling more powerful even when I lose if I have NOT chickened out. There is no glory in being rigid but it seems to pay off in the long run.



The 'emotional thrill' payoff had been expensive for me! I thank god that trading is BORING!

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 iqgod 
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This tiny profit taking sage continued on Day 7 of the combine.

All this knee shaking fearful trading was not mandatory.... but I realize that NOW, the key is to be int he present at that moment.


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 iqgod 
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I needed to be clear whether I was improvising or I was executing my practiced shots.

In the combine I was not seeing the difference.

To this day I still regret not having done more homework since my school days.

I however realize that regret is not a vehicle for change, merely a lazy mentor.

The real mentor is being at peace with yourself, ALL of trading is acceptance.

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 iqgod 
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Confirmation, more confirmation and then confirming that confirmation!


Is that a valid trade setup?

No, isn't it?

Yet that was what I did when I bought the top of the Japanese Yen on day 9 of the combine. (see chart with the two purple crosses at the top!)

Instead of cutting short I did something stupid like - now that it is a bad location I guess I will nurse it back to health and hold for a long time so that my winning stats improve.

Focusing on the stats is one way I was killing myself.

And did it help?

Thankfully NO!

I had to take my big loss home.

Which, now that I think of, is good.

Because there never is a good time to learn bad habits.


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 josh 
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Confirmation, more confirmation and then confirming that confirmation!

As I once heard someone say, "Confirmation is for Catholics, not for traders."

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 Big Mike 
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josh View Post
As I once heard someone say, "Confirmation is for Catholics, not for traders."

Yes, @FuturesTrader71's quote, which also is part of our homepage quote rotations because I quite liked it as well.

Personally, I look at it like this. Try to be right around 50% of the time, and still make good money. That in itself exercises discipline, patience, risk analysis, etc.

That is what works for my personality type.

I am not a scalper.

Mike

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  #30 (permalink)
 GaryD 
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josh View Post
As I once heard someone say, "Confirmation is for Catholics, not for traders."


Big Mike View Post
Personally, I look at it like this. Try to be right around 50% of the time, and still make good money. That in itself exercises discipline, patience, risk analysis, etc.

That is what works for my personality type.

I am not a scalper.


"Committing" to a method, and then fighting through all of the psychological issues long enough to decide is something just doesn't work with that direction, either technically or mentally, and then starting again... all the while still feeling out who we are in our approach, what we are wired to do best.

I have figured out that I don't have to be a scalper to benefit from scalper skills, as one example. That method by itself was something I honed for years, but also thought it was time to discard it more than once, always pushing myself for bigger swings, but not having that completely fit my personality either. More chaos and confusion in a world with no clear directions. "Am I doing the right things?" It can take years to receive any confirmation of that question.

Confirmation or not, scalper or not... something I just realized recently, is there are many combinations that could work, or not, depending on your personality. But, add that variable to the mix, on top of all of the other vague uncertainty and poassibiliti4s of combinations, and mathematically there are more chances to fail there there are to not win the lottery.

But, some still do win it. I have met two so far.

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  #31 (permalink)
 iqgod 
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I am working on a research paper about why MOST people end up losing money in the markets - this includes long term investors, position traders, swing traders, intraday swing traders and scalpers too.

This also includes professionals who keep minting money day in and day on 'normal' days out selling options and lose everything one dark murky day when the market makes an abnormally deep 'black swan' shock move.

The one observation is that time frames are not relevant in whether a trader net makes or loses money.

The second observation is that the winners take money from the losers 'right in front of their eyes' with their consensus and merely by being masters of exploiting human nature.

In the next few posts I want to present the premise of how great traders do not really trade the markets but simply 'trade other traders'.

In the next few posts we can clearly 'see' why the great traders are simply playing a game of subterfuge day after day after day.

It will also explain why patterns are exploited as edges rather than being edges themselves and why visual edges are incomplete information and why the critical missing piece of trading is the understanding of the human mind and cognition itself.

I will be omitting all the relevant data and simply make my point 'as is' without formal proof and mostly by empirical evidence.

Feedback and comments will be greatly appreciated!

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 iqgod 
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The human mind does not process everything it sees. We usually only process outliers and conflicting information.


Our visual senses which constitute 70% of all sensory information sent to the brain bombard the brain with overwhelming amounts of continuous data which would need an incredible amount of processing if processed in a linear method.

Thus, our information processing is a selective process based on choosing one part of information over the others.


Take a look at the picture that follows. Forget this discussion for a while and share what you FIRST saw distinctively
when you glanced at the picture:


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 iqgod 
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I am sure you have been through this process before, but just to reiterate, the two blobs of design that differ from the surroundings were distinctively highlighted by your brain.

Also, I saw the blob on the left side having thinner pattern lines while the blob on the right as having thicker lines.

However, and you may have already guessed where this is going, the two patterns have lines that are of the exact same thickness.

Thus the context in which the patterns appeared changed their interpretation completely.

This is how for a trader faced with uncertainty allows his selective cognitive processes to alter actions that otherwise would have resulted from his logical verbal reasoning.

An important point to be made is that visual and verbal information is stored in separate silos and are processed with the aid of 'memory'. (will be discussed in the next post).

The next post deals with how a experienced trader shields himself from the above bias and how his actions are carried out in complete awareness of the shortcomings of his own sensory apparatus.

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 iqgod 
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Here is where this gets interesting.

Even though our cognition does not cater to all bits of information we see, and though we process information selectively, the instinctual reaction is that we are drawn to familiar patterns i.e. we 'see' what we know and what we expect to see.

A master trader however has trained his eyes to look beyond the obvious, to process information apart from what our minds quickly categorize into a familiar pattern, to patiently wait for that critical 'hidden' information to seep into their consciousness before taking action.

Acting upon the obvious and most comfortable has been proven time and again to result in unexpected consequences for investors and traders, and the resulting spiral of inaction, shock, inaction, shock results in the premature and completely avoidable death march of a trading account.

However master traders are able to maintain their mindset because they have trained themselves to react deliberately and with a practiced deliberation, not instinctively. they realize that the visual cortex is a pattern seeker - and is subtle enough to overwhelm and overthrow their conscious decision making. They have firstly trained their cognition to 'look for' and actively seek out and react only when the hidden (to the masses) is easily visible to their trained eyes.

While this forms only a small part of a trading methodology, the other parts being managing risk by risking a small fraction of the bankroll without delusions of grandeur due to recent wins and executing the trained response action over and over without bias due to recent adversity.

However at all times the hidden and the obvious blend in front of a trader's eyes and the trader needs to focus on training the self to perceive the hidden parts which favor probability play.

For example in the following image of a rose another familiar but hidden shape has been cleverly concealed, yet it is obvious and visible only if you are looking for it:



Do not read the next post until you have eyeballed the rose image for the hidden image!

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 Outlander 
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iqgod View Post
The human mind does not process everything it sees. We usually only process outliers and conflicting information.


Our visual senses which constitute 70% of all sensory information sent to the brain bombard the brain with overwhelming amounts of continuous data which would need an incredible amount of processing if processed in a linear method.

Thus, our information processing is a selective process based on choosing one part of information over the others.


Take a look at the picture that follows. Forget this discussion for a while and share what you FIRST saw distinctively
when you glanced at the picture:


For me it reminds me of the screen of a old black and white TV with no antenna plugged in. Regards Outlander

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 iqgod 
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If you haven't already, look at the picture below and now try to find it in the above image:




Once we know what we are looking for the exercise becomes a mere formality.

An experienced trader has familiarized himself to the point of being an automaton as to what He/she has also practiced his correct response to the observed fact especially in time frames such as those found in scalping where the analysis-recognition-action response is to be acted out in extremely limited periods to optimally capitalize on an opportunity.

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 Outlander 
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iqgod View Post
If you haven't already, look at the picture below and now try to find it in the above image:




Once we know what we are looking for the exercise becomes a mere formality.

An experienced trader has familiarized himself to the point of being an automaton as to what He/she has also practiced his correct response to the observed fact especially in time frames such as those found in scalping where the analysis-recognition-action response is to be acted out in extremely limited periods to optimally capitalize on an opportunity.

Well could not see the fish until you told me what to look for and even then I know what to look for it took some time to see it. Looking at you pictures is the same as looking at charts that I am not used to. Regards Outlander

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 iqgod 
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The essence of the above two arguments thus leads to the logical premise that:

Memory is the most important foundation of the cognition process.

Though this is stating the plain obvious (what is there to recognize, unless already experienced? what can be retrieved if it is not stored?

This implies a memory stored that only needs to be retrieved that results in cognition.

But the way the human mind records a memory contributes to the third and final leg of the three-legged stool of self-deceit in the markets.

The minds only remembers the details that it attends to - only those parts of information enter the consciousness that the trader has focused on. This becomes a dangerous state to trade from - if a trader remembers the bullish implications to a pattern that he has successfully traded earlier then the bearish implications which are obvious to an otherwise neutral observer result in an extremely self-limited perception of risk that cause a trader to ignore those signs. Thus when the 'unexpected' happens the trader is susceptible to disbelief and unless he hs trained to adapt himself to the hew situation and move on, there may be uncomfortable periods where his instinctive reactions of self-preservation and survival may suddenly kick in causing unwanted behavioral traits to surface such as for e.g. moving his stop, freezing up and not managing the trade correctly, bailing out when in a small profit etc.

Here is another illustration where a trader 'needs to attend' his attention to specific areas to which he would otherwise be 'blind'.

For example 'Spot the difference' in these two photos:




Photo source: Viewable/Downloadable Examples

In experiments conducted by Ronald Rensink when these two photos were flashed alternately to an audience with a blank screen in between for a fraction of a second, none of the audience would recognize any difference between the two unless they were focusing on an area that was actually different between the two while the change was being effect.

P.S.: The clump of trees to the left of the sphinx' head is missing in the right photo!

Thus now the astute trader needs not only to remember, he/she also needs to remember the right things and the fact that it may not have been a complete picture. Is it remarkable then, that finding and exploiting an edge in the market consistently is such a difficult task?

A trader truly is his/her own worst enemy till the above realizations are consciously and deliberately self-studied and then prevented from becoming subtle traps culminating into action / inaction.

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 zt379 
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@iqgod

Very much enjoying your observations.

"the present changes the past" Alan Watts

Many thx
Kind regards


"Every moment I wake up I realize I know nothing, and then I smile..." zt379
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 josh 
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I love stuff like this. If you like this, you should not miss the show "Brain Games" on the Nat Geo channel. It's very similar to the kind of stuff you're doing and one of the most entertaining shows.

LIAR, LIAR | Brain Games | National Geographic Channel

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 iqgod 
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Outlander View Post
For me it reminds me of the screen of a old black and white TV with no antenna plugged in. Regards Outlander

Ah yes.... I remember THOSE days alright:



Sometimes the crows would adjust it for you:



But those days are now gone and all we are left with is this.....



Thanks for reminding me of the good old days!

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jamusued
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what software do you use to keep track of your trades?

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 iqgod 
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jamusued View Post
what software do you use to keep track of your trades?

Excel.





Many thanks to @vvhg.

For more choices use

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 iqgod 
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You need to get into a situation where you can get away with a profit because your opposition has already made asses of themselves. You need to wait patiently for such situations, where it is apparent who has run out of money and will be in no position to resist because all of them have already tried too hard and yet are stubbornly sticking to their guns and will be having their butts being handed to them soon - your moment to enter!


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