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

@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?

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

@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

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.

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

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.

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.

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.

@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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Hi, and welcome. First I have to say that @johnscott31 response is perfectly aligned with my own “technique” if you can call it that. About five years ago, I stopped thinking about the actual money I trade, and started to think about placing a trade as one action of a sequence of thousands that, if applied with the same method again and again, would soon tell me whether I had an edge or not. So that was about 370 trades ago. Without even trying to deviate from a set pattern, I found that timeframes did not always agree with my free time (meetings, outings, family life), but I also found that the market did not always “allow me” to be consistent in my application of trades. But I have maintained a log of how many times these “unintended events” affected me, both in a positive sense in that if I did not place a trade that lost, and in a negative sense in that if I did place a trade but the entry was not, with hindsight matching my exact criteria for entry. At times I almost feel stupid trying to unswervingly stick to the same process, and I have a long way to go to prove a point because this one “trial” needs to run for around 800 trades to demonstrate an edge and so far it has not. I am convinced that the worst thing a trader can do is to spend a huge amount of time defining a strategy followed by a plan, backtest that plan to convince oneself that it has an edge, then proceed to deviate from that plan. I am so convinced of this that I am prepared to spend around one year to see out the entire duration of the plan before changing that strategy and plan. For some this may seem like a year of your life wasted. For me, it is the only way to go.

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Try not to take so much risk at once. Focus on your risk management techniques and work on your strategy. Good luck.

If you are an emotional person in general it will effect your trading. In saying that if you are aware of this then you can take steps to overcome it. One thing that could help is extensive backtesting of your strategy… Eventually the moves in the market will not trigger an emotional reaction as you have seen it 1000 times.

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@TraderEvolved
100% agree with your first post.
99.9% of mentors aren’t able to extract profit from the market.
They are able to teach you the basics.
When you use their methods and you don’t make pips they blame you.
Psychology comes into play once you have a profitable strategy, 99% of wannabe traders never reach that point, including mentors.