Is Trading Psychology a cop out for not having an edge?

Beginner Questions Trading Psychology
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I have my views and have tried it all in the past but I would love to hear other experienced traders opinions on the matter. I love having my views challenged as it expands my thinking :slight_smile:

Is ‘Trading Psychology’ just a cop out for those that don’t have a defined edge in the market that they are confident in?

Has it been pushed onto the masses by the ‘mentors and educators’ as a way to push the lack of results back onto the individual as opposed to the quality of the edge.

This is obviously assuming that one is following set rules/criteria and not emotionally trading.

Keen to hear what peoples thoughts are on this?

Nathan

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@TraderEvolved

I’ve read it a few times of late that psychology in trading doesn’t matter. And that really it’s just an excuse used by mentors and trading course vendors.

Such views it appears are put forward by the quants who say markets are just cold hard math - and if we are geeky enough to understand calculus or whatever the **** we can make a fortune.

All I can say is when I was at the height of my worst trading - psychology was very real.

Revenge trading was a bitch for me - and no quant can tell me it’s not real.

Or the few occasions when I let small losses become large losses, again that was very real

Or when a mass mania takes over, when Tesla is trading at 10000 times earnings, or when tulips were exchanging hands for 100,000 florins, or when Barings bank went broke - these were or are very real events that were kicked off on emotions

Now I think a poor trading mindset DOES go hand in hand with not having an edge in the market - but to say that as soon as we find an edge we all become master traders with zen like focus frankly is a load bull.

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@Johnscott31

Awesome response and perspective, thank you!

I can definitely see both sides of the coin. I still have periods now when I am going through a drawdown and all of a sudden I start doubting my edge and ‘looking’ for improvements. I’m definitely not an emotionless robot so can relate with your reply.

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It certainly could be. Traders who are not successful look to blame anything other themselves for their lack of success.

@Johnscott31 makes several good points about revenge trading and the fear that drive market crashes.

But I guess the bigger question is which comes first the chicken or the egg. Does the trader find an edge and then develops the mental fortitude to trust that that edge will make money. Or does the trader have to develop a traders mindset in order to establish a winning edge.

It’s difficult to say and from a personal perspective I cannot remember what I developed first. Maybe they go hand in hand and develop equally over time.

Good post. Look forward to some further comments.

Cheers

Blackduck

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@Blackduck

And you too make a good point, on which comes first.

Here’s my philosophical take on it.

Most if not all of us when we start out cannot believe that we can make money by drawing a few lines on a chart and funny coloured little bars.

It goes against all our previous thinking. We are led to believe that markets are a highly intellectual pursuit that only the brightest can make money from.

We believe that we have to follow crop reports, gdp growth data, understand nuance of the latest fed governor speech and know every bit of market news there is.

When we are given a trading system (or buy one ) we simply cannot believe by following it we can make money

In short we don’t trust technical analysis

This is where our problems begin. We start overriding it, we second guess it - or we micro manage the position.

Over time we deviate more and more and it all comes from a lack of trust.

Throw in a belief system of lack of abundance in our life, a few anger issues and a few we are not good enough beliefs and heh presto we have a poor trading mindset.

It can take a long long time to get rid of all this - it takes a complete over haul of your thoughts

Eventually you can come to trust technicals - you see the same set ups making money year in year out even though your never on board

One day you are so used to these funny lines on charts and what happens to price around them that you now have that trust.

But there are still the other beliefs that can mess you up.

Life is nothing but a mirror of your internal believe system and so if you have lack of abundance issues that can still manifest in poor trading habits.

I read alot recently on how markets are scams, brokers are scams, vendors are scams, charts don’t work - and I agree if that is your predominant belief that is what you will be drawn to

Meanwhile the rest of us who have mastered our own internal belief system will be there day in day out making money.

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Imagine you have been invited to take a bet on a coin toss – heads or
tails. If you call incorrectly you lose $100. How much would you
want to win, if correct, in order to take the bet?
This is a question from research in behavioural finance that I often ask in
my trading psychology workshops. The most popular answers are between
$101 and $300 (the market makers, scalpers and high-frequency traders
looking for multiple plays at the $101 end of the spectrum; the directional
traders with their 2:1 or 3:1 risk-reward ratios at the $200–300 end).
Occasionally a few people come in at around $500, with the odd person at
$1,000.
Research into loss aversion suggests that, in the example above, on average
people want to win around $200.
That is, they would like $200 to offset the risk of losing $100, such that $2 of pleasure is needed to offset every $1 of pain.
Flipped around: the pain of loss is twice the pleasure of winning.

Extract from Bulletproof Trader - Steve Ward

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In my case, definitely a YES. My edge is faith in my bulletproof strategy - funnily enough, based on a refined ‘three ducks in a row’ technique, which should amuse you.

But, it took a few months for me to weld my mindset to trust my system to become profitable. Which meant, among tweaks and experiments, to regard ‘money’ only in percentage terms - my biggest successful hurdle - and to accept inevitable losses with a spoken comment of ‘look at that’ - which relieves the stress.

I’m not quite there yet - a sticking point is not ‘closing losing trades’ which is easy-peasy for me, but letting ‘winning ones run’, particularly in a volatile voluminous market. My ‘solution’ is simply that I’m entitled to take a profit providing it’s at least equal to the initial risk, and because my strategy is capable of producing more winners than losers. IF I’m glued to the screen, I’ll set up a trailing loss instead, but that’s not ideal, IMO.

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Yes I know that strategy well and it’s a sound technique.

That’s not bad either. Lets face it there are two ways to turn a profit. Less winners than losers with a 2:1 ratio or win more than you lose with a 1:1 ratio. At the end of the day all roads lead to Rome as they say.

Cheers

Blackduck

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Hello Steve, Are you referring to Captain Currencies 3 ducks or someth
ing else?

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No doubt. Emotions get into our trades when we take too much risk on a single trade or we do not understand what are we doing.

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My strategy is similar in that I use 3 time frames - Daily (the godfather) 1 Hr (the trading persuader window) and 15M the enforcer). All must line up with the Ichimoku cloud trend and be in accordance with either below (buy) or above (sell) the 60 EMA. With the Ichimoku (set at 8:22:44) - NO trades inside the Cloud on the Daily timeframe. An upwards trend above the cloud on all 3 charts is required and the (fast) red line must be above the (slow) blue line. A downward trend below the cloud on all three charts is required and the (slow) blue line must be above the (fast) red line.

On an upwards trend, two consecutive red candles are a warning to wait and see on the 15 minute chart. Similarly, on the downward trend two consecutive green candles is a warning to heed the 15 m chart.

best of luck.

Use any other favourite indicators of your choice - I review Marketmilk on this site, but pay no attention to overbought or oversold stats.

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Thanks for sharing Steve and best of luck yourself.
John

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@steve369
Thanks for the details, interesting and not far at all from my approach, but I am confused by:
‘be in accordance with either below (buy) or above (sell) the 60 EMA’
I would have thought below = sell and above = buy. Did you really mean that?
Thanks again

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your psychology linked to your results like a tennis player or golfer,trading a psychological game

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Yes I really meant that. With candle sticks heading upward, a buying trend, the 60 EMA must be below the candles outside the cloud, and the red line above the blue line - and on the selling, outside the cloud above the downward candles, with the blue line above the red.

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Ah ok, said like that it makes sense! I misunderstood your first explanation. Thanks and all the best

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Psychology in trading is very interesting topic. Indeed, I have also experienced huge emotional swings when I was beginner. But, I think that during time, it all settles down somehow.

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This is a great post, and I think your example here is a great way to define two different strategies from which two different plans can be created. There is no rule to say you can’t try both plans at the same time and measure their relative edges. One may shine more than the other in one market direction, but that may change as the market direction changes (bullish, choppy, bearish). Worth a try.

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People say that your mindset plays a big role when you are trading Forex. I am a bit afraid because I am a very emotional person. Want to know what techniques other traders are using to control their emotions.

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@jassrayder

Changing your trading psychology in itself is an uphill struggle - this is what I believe anyway.

You can’t just say ‘okay when it comes to trading I’ll think like such and such, but outside of trading I’ll carry on the way I am’ - that ain’t gonna work.

You need to change who you are, and your belief systems in regards to everything.

One of the best non financial benefits of trading is an opportunity to make yourself a ‘better’ version of yourself.

That can be interpreted in many ways - but one way I have overcome my trading deficiencies is to actually diminish the role money plays in my life.

For example - most of us go round obsessing about a lack of money in our lives, but this only perpetuates that lack.

You need to start thinking that money in your life is abundant, it will always come and generally think in the same way and affluent person does.

Not always easy I know especially if you’ve lost your job, or money isn’t making ends meet, and yes it all sounds very new age.

Im not going to get into metaphysics or arcane spiritual principles - it’s the wrong forum for that.

But altering beliefs around money will mean you are NO longer desperate to win trades.

It means losing trades won’t be so scary.

And you are not going to snap at the smallest profit for fear it will reverse on you.

Changing your belief system will in effect change your trading habits.

A good book to start with a this is What to say when you talk to yourself.

Is it the best book? No way, but it’s basic enough to give you the concepts needed to radically alter your mindset.

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