All posts by Madan

Trading workshop

Introduction

B.Krishnakumar and I, are thrilled to announce our collaboration in conducting Trading Workshops across major cities of India. Our goal is not only to teach you some technical indicator/technical analysis but to also to teach you how to consistently make money in the markets – the A to Z of trading. With a combined experience of over 35+ years in stock markets, we are confident that we can make the whole learning process simplified for you.

Trading is one of the most challenging and rewarding careers in the world. But, almost all of us might have heard that close to 95% of traders end up losing money. If you’re trading the markets, the odds are stacked against you. Every day you are up against Dalal Street’s best and brightest, who have unlimited capital and ruthless computer algorithms. That’s hardly a fair fight.

Summary of Workshop details

In the first part of the Workshop, B. Krishnakumar will build upon the basic concepts of Point and figure chart and combine advanced knowledge/experience to make the concept an actionable trading strategy that can be used immediately. Essentially, he will teach you a simple rule-based strategy that can be used as a basic building block to trade any asset class including stock, options and futures.

In the second part of the workshop, I will round out the course by teaching you how to backtest a strategy effectively (to understand its efficacy in real trading), build a money management plan based on the parameters and Risk management plan along with trading psychology that is required to make money from the markets consistently. I will also help you learn about building a successful trading plan, whether you are a part-time trader or full-time trader.

On the whole, this one day workshop will not only teach you a simple (and efficient) strategy but it will also teach how to take your skillset and apply it to trading a strategy professionally – a complete package.

Target audience

1. People with little or no experience in the markets
2. Traders with little experience but do not make money (Only lose money)
3. Traders who make money but not consistently
4. Traders who make money consistently but cannot scale up in trading size

Fees, timings and location

Workshop

Topics details

Session 1 topics – by B.Krishnakumar

1. Basic & how to plot Point & Figure chart
2. What are the benefits of Point & Figure Charts
3. Basic buy / sell signals & Major Point & Figure Chart patterns
4. Fresh signals & Follow Through
5. How to calculate high probability targets
6. Simple Strategy to Trade Nifty Futures Using Point & Figure charts

Session 2 topics – by Madan Kumar

1. How to efficiently backtest a strategy – what to look for and pitfalls?
2. What is an ‘edge’ in a system? How to quantify an ‘edge’? Do I really have an edge in my system?
3. Money management in trading – how to tailor made money management based on the backtested results?
4. Part time trading vs Full time trading – Differences and their effect on our P/L
5. Trading journal and its importance
6. Role of psychology in trading – Everybody talks about discipline/patience but how does that relate to trading success.

Contact details

If you are interested to learn from us, please contact below

Email: pftrader@outlook.com / marketswithmadan@gmail.com

Mobile: +91 – 78240 21649 (B.Krishnakumar) or +91 – 96770 36689 (Madan Kumar)

Trading Q&A – Discipline

Mentoring

Someone asked me a question on ‘how to be disciplined all the time?’ and there was no easy answer. He was disciplined in following his plan most of the times but could not do it 100%. Tried my best to address this typical mindset.

Here is the question (quoting it) and the complete reply-

Question:

“Is/was breaking system/method rules a problem for anyone here? How did you/do you plan to overcome it? It is a problem I struggle with often, I have many days when I dont break rules and suddenly, the gambler in me, the tuktuk in me all get out on a single day and try to destroy my profits. It is not a continuous thing, I do follow rules most days, the gambler and tuktuk guy remain suppressed until one day they rear their ugly heads. Would be great to get some help in overcoming this failure in part, almost feels like a character flaw”

Answer:

We all go through this from time to time. If a trader is disciplined 90 pct of the time and if occasionally there is a lack in trading discipline, the reasons could be multifold —

Probable causes of the problem:

1. Lack of fit between the trader and the trading system

Discipline problems are not due to trading woes. Usually, there is an underlying problem. Just as a problem maintaining the “discipline” of monogamy in a marriage is frequently the result of underlying relationship difficulties, failing to be faithful to one’s trading plans is often a sign of conflict between the trader and those trading plans.

When traders who are normally disciplined find themselves breaking their trading rules, the momentary lack of discipline are a symptom of a lack of fit between who the traders are and what their rules demand. A fine system on paper is unprofitable if it cannot be followed by a trader. A trading method not only needs to be good; it needs to be good for the trader. A trader and a trading system should be like lock and key – it should be a perfect match !!

2. Trader trying to fulfill his short term needs

Sometimes, the lack of discipline involve failing to take trades that are indicated. Other times, the problem is one of overtrading – taking trades that lie outside of one’s rules. If we think of momentary lack of discipline in other areas–cheating on a diet, for example, or procrastinating on work that needs to be completed–we can see that, many times, we act against our longer-term self-interest by becoming caught up in shorter-term needs. If, for example, we cannot tolerate boredom, we might eat to fill the void and break our diet.

Solutions

Problem # 1

Keep a journal and truly investigate each of your small trading discipline slips. Then view those slips as information, not as problems. What do they say about you? Which rules do you find yourself breaking, and what is actually conflicting with those rules?

Now look at your trading successes. What came naturally to you? What rules and plans can be derived from those winning trades? Don’t force yourself into a pre-made set of trading plans (usually derived from somebody else’s plan) but rather, identify what you do when you win and see how you can make *that* into your system. This is one of the primary reasons why ‘copying’ someone’s system never work in the long run.

Problem # 2

When discipline works, it’s often because people have found constructive ways to meet those short-term needs. The smoker who craves a cigarette may chew gum as a substitute oral activity.

The key to sustaining discipline is to identify the specific short-term needs that are occasionally overshadowing trading rules. Once you’ve made that identification, it is easier to then brainstorm constructive ways of addressing those needs. Traders who overtrade, for example, often have problems during quiet market times. Their needs are for stimulation. By creating stimulating activities during the trading day that don’t take them away from their screens, they can avoid using unwanted market activity as their stimulation.

Other times, traders fail to follow their rules because they don’t truly have confidence in their ideas. They front-run their own signals out of anxiety and wait for perfection in setups before they act. Their short-term needs often are for safety and security – they need to believe in what they’re doing. Very often this problem occurs when traders have short-circuited their learning curves. They are putting meaningful capital at risk before they’ve done small real-time trading that is needed to build a successful track record. You believe in your system when you see, in your own experience, that it works over time, across market conditions.

So, keep working on your problems and am sure you will better off gradually!!

Good luck and hope it helps

Trading Q&A Audio/Video 1

Audio/Video response to the tweet posted on April 26th 2018

Here is the A/V link:

Bouncing back slowly but steadily

Mentoring

A trader asked me a question about how to develop the discipline in following his trading plan. Am sure many of us can relate to the questioner’s mindset in ‘trying to recover the losses as quickly as possible’. It is clearly evident that the trader does not believe in bouncing back slowly. He is also well aware of the risks involved in trading stock futures on result days but he could not control the urge to put on a trade.

Here is the question (quoting it) and the complete reply

Question:

“Hello Madan – i know i have to focus on maximizing gain and have to stop weighing losses more than gains. If I look at my losses, have incurred heavy losses in trading stock future and that too on result days. I need to bury this desire to recover what I lost quickly. I find it difficult but would want to know if there is any mental drill to have disciplined approach.

I understand that trading in stock future on result days is very risky, after I enter a trade if it is in my favor it nurture my belief that being undisciplined at times helps u in profit but in the long run I am at loss due to these trades only”

Reply:

First things first – please do not answer these questions but just answer them to yourself.

1. Why are you trading the markets?

2. What is the need to trade on results day (knowing well that the stock can go either way)? If it is not part of the trading plan, why trade that day? For example, i don’t initiate new trades on RBI days. There is always another trade right? I know few traders trade on earnings announcements day but they have hedged strategies.

3. Why are you impatient to make back all the lost money back quickly? Why are we not respecting probabilities, distribution of trades and climbing up steadily?

4. We are aware that ‘profiting by breaking our system/rules can create havoc in the long run’ but we still take comfort in the fact that we are making profits by not following our plan. So, what thought process is giving us this pleasure?

5. Are our goals oriented towards P/L or oriented towards the process? Why are we so focused on P/L than focusing on the process?

Common observations about an undisciplined trader:

1. More often than not, traders do not trade to make money. Trading is not rocket science. It’s like making biryani – all the raw-materials and perfect ratio/sequence has to come into play. Once we figure that out, making a great biryani is just a process of following the routine. All the major restaurants follow routine in making their special dishes every day.

Most of the traders trade to regulate their emotional state. Once the trader becomes attached to the need to trade and make money quickly —and once his perfectionist voice of “I should have bought there” enters the picture–he is no longer grounded in markets. It’s when those frustrations build over time, becoming self-reinforcing, that traders sway away from their plan/system. What derails traders is that, at some point, we switch perceptual lenses and view the trade through the lens of profit/loss (P/L), not through the lens of probabilities, risks, and rewards.

Mentally rehearsing a mindset everyday (please read psychocybernetics and see how you can implement mental rehearsing in trading. It helped me tremendously) in which it is OK to miss moves–there will always be future opportunity–traders can prevent many of these train wrecks. The practice of taking a break during the trading day, reviewing one’s state of mind, and clearing one’s head is remarkably effective in this regard. Clearly identifying the parameters of one’s trade–the optimal size, a logical way to trail SL, stop loss points that put risk and reward into proper alignment–also ensures that you are controlling your trading, not the reverse.

2. Many traders formulate intentions for their trades and then wonder why they have veered from their trading plan. When we ask them about their trading plan, however, there is nothing written down nor is there anything specific that has been planned. Often, however, we will hear from traders that they’ve violated their discipline. When we ask which rules they’ve violated, they cannot give a definite answer. How can we violate a discipline that isn’t there to begin with? The problem is not that an excess of emotion interfered with their plans and rules. Rather, they were never sufficiently planful and rule-governed to begin with. So, there is no emotion involved (or progress to be made) when there is no plan to follow in the first place.

Essentially, in my opinion, the single greatest way to build discipline is to turn rules and plans into ‘resolutions’. That means that you have to give those rules and plans a life of their own. The more you think of them (mental rehearsing/writing them down in a piece of paper whenever you find time in a day), look forward to them, grade yourself on them and reward yourself for them–the more real they become. You are most likely to abandon rules and plans that haven’t been internalized as resolutions/commitments. This is where ‘mental rehearsing’ would help immensely. It enables us to internalize our plans/goals effectively.

Unfortunately, mere intentions are not strong enough to trap these trading errors. We need the emotional force of resolutions and the reliability of routines. Turning intentions into checklists and checklists into resolutions is a great way to ground yourself into best trading practices.

Last but not the least – being disciplined is a self-fulfilling phenomenon. The more you are disciplined, the more you will see stability in your trading and the more stability in P/L (bottom left to top right angle), the more disciplined we become. And the cycle continues.

Hope it helps. Good luck with your trading !!

Deliberate practice and patience

Mentoring

Few people have emailed me about ‘being impatient’ in executing their trades (both entry and exit) and I have already written a blogpost on patience few weeks ago. Here it is..

Why do we exit prematurely from a trade

Nevertheless, let me put some more thoughts to drive that point home again. As St. Augustine once quoted – “Patience is the companion of wisdom,” and if he lived in our era and had to say it about trading, he could have easily gone on to say that patience is a virtue that should never be disregarded when trading, nor ignored when learning how to trade. Proper patience is essential throughout the life-cycle of any given trade, and is of acute importance when learning and practicing how to trade. Unfortunately, patience is one of the most challenging skills to develop as a trader.

Deliberate practice is the key

In the book ‘Talent Is Overrated’ (I highly recommend this book, if you haven’t read it), Colvin cites research presenting that only through 10,000 hours of practice can world class performance be accomplished. He is not talking about ‘being there’ kind of practice but ‘Deliberate practice’.

Deliberate practice stresses repetition, but also stresses self-awareness and the ability to analyze how we are performing and acclimatizing accordingly. It is a crucial stage in the development of a trader because it is at this time when both good and bad habits are formed. If a new trader is not patient and hurries through the process, because of their over-enthusiasm or need to make money, the chance for developing improper skills is amplified, and the odds are the trader will become overly frustrated and either quit or attempt to accelerate their learning curve even faster.

Now, the question lingers in our mind – why are we impatient? Impatience usually stems from the underlying belief to prove oneself. If we have an underlying belief to “prove our worth”, we may find ourselves hastening through things, eager to accomplish things – in myriad number of ways to prove our worth. The “need to prove oneself” belief may be formed by any number of life experiences, where we may have felt inadequate, incompetent, defenseless, stranded or unappreciated.

Patience is vital to consistent success in trading because it allows us to be selective in our trading decisions. The experienced trader will not be anxious to make a trade, but will patiently wait until a setup with a high probability of success is exhibited. Once in the trade, a patient trader will give the position time to progress and will not get out of the trade too early, but will exit the trade according to a pre-defined/ ‘well thought-out’ plan. And the patient trader will not have to be concerned with over trading as well.

Creating the ‘patient identity’

Many of us have the problem of not waiting patiently for the setup to unfold. So, we basically muscle into the trade, see it collapse (or recover after our exit) and wonder what just happened. It is basically our survival instincts overriding rational mind to create a thought process incapable of trading effectively. Research unequivocally shows that our brain is not equipped to deal with uncertainty (the basic essence of trading).

Many a times, traders take the wrong approach of using will power to become a patient trader but come out empty-handed. One can talk to himself (self-talk) that ‘I am a patient trader..I am a patient trader’ but the same mistakes seem to crop up in frequent intervals. One can also put sticky-notes on the screen but ultimately one will become a patient trader only when they experience it themselves. Usually, it means that we practice/cultivate patience in our non-trading life as well. Forcibly putting ourselves in situations that require a person to exhibit patience. One can start a garden (will teach you lot of patience), teach physics (or some other subject) to their kids, babysit a toddler (lot of patience is required) or tutor a special child (great cause too).

By doing the activities that require patience, we create that ‘patient identity’ within ourselves and that will nicely manifest in the market. We will never be organized/disciplined in trading if we are not disciplined (one common example is lack of discipline in working out – if we are not disciplined in life-enhancing activity like hitting the gym, then trading will be no exception) in our daily lives. Everything in life, approached properly, is an opportunity to exercise the capacities we most require in our trading. I always say to my fellow traders that ‘becoming a better trader is a path to becoming a better person’

Final thoughts

As someone said – “People who do the common things in this life uncommonly well will command the attention of the world”. Trading is not rocket science – it is more of an art. It is the pint-size things we do well when trading and learning how to trade, that make the difference between success and failure. Novice traders must always be prepared to put in the practice needed if they want to achieve proficiency, and experienced traders must continue to exercise their skills if they want to achieve greatness. And that ‘elusive’ patience might be the missing link.

Hope this post resonates with some of your experience/thoughts and if it does, I would like to hear it !!

Mentoring requests and my response

Mentoring

It is Saturday evening and here I am. Last one month, my email box was swamped with requests for mentoring (as of yesterday, it stands at 32 requests). I was doing ‘blanket’ denial for all the requests except one but due to my natural propensity to respond to questions/requests, I replied to those emails with the reason for denying the requests. Eventually, it came to a point where I thought it is better to compose a blogpost about it.

As trading is a mind-numbing activity for me, in the past decade, I have helped few traders (free of cost) for months together with their trading related despairs and few of them are successfully trading fulltime. As I derive colossal pleasure out of these conversations/interactions, it was a win-win situation for me.

Rough plan for mentoring

Out of these 32 requests, I already took a person under my wings to assist in his trading career. He came up with his own system (as am not a system seller, I told him clearly that I will not help him with system building from scratch but I would be able to help him out to enhance it).

Having walked his path before, I think am more like a watchtower for his trading related activities and I believe I can positively impact his trading progress. I spend 1 hr per week over the phone with him and have few conversations over email/chat about his trading related evolution. We both know that there are no guarantee of success for him due to this relationship but we hope that it will shorten his learning curve (when someone who has walked his path is able to guide).

As I don’t have a structured way of doing this activity, this is what I have in mind for him. (We are in step 2 of the process right now)

1. If needed, enhancing his existing system (if am able to spot any logical flaw in entry/exit based on my experience, would suggest that). If the system sounds logically good to me, we go to the next step.

2. As there are 100s of ways to make money in the markets, we quickly progressed on to this step (sticking with the 1st step for a longer time is tantamount to ‘holy grail’ search).

So, backtesting the system for atleast 5-10 years to derive parameters to analyze if it is going to suit the trader’s psychology and if it is worth putting the money in. One system will not suit everyone (so he has to come up with his own) and if a trader is already attuned with his existing system (by trading it live) but not profitable consistently, he is an ideal person for me to help out.

3. Devise a money management plan based on his trading capital, his risk comfort level and backtested parameter (and if he has real trades with the system, nothing like it).This step will take some insightful thinking from my side.

4. Risk management (can be a part of money mgmt) – maximum importance would be given to this step to ascertain the risk appetite/goal of the trader. At the end of the day, risk determines our longevity in this profession.

5. Then, real trading starts – emotions kick-in. So, it is time for the trader to understand how emotions affects trading and how to embrace them (and not fight them out). We will probably handle fear of loss, fear of missing out, taking profits early and fear of pulling the trigger. These are the common roadblocks in a trader’s mind.

6. Once we go through step #5 (which is an ongoing process), we move on to handling drawdown part – both points and time drawdown. Hopefully, I would have fortified the trader about his system drawdown in step 2 itself (during backtesting) but real trading invokes the ‘real’ emotions out of us.

7. Helping him out in increasing position size slowly but steadily – not exponentially. The money management will have a clear-cut crisp plan to do this position size increase.

8. Once the trader is successful consistently (and able to execute his system with atleast 95% efficiency), I guess my job is done. I might have created a trader who can live on his own and hopefully, help others to achieve the same.

Vital pre-requisites I look for

I like to try out new things and as i have never done this before, am thinking of assisting 2 more folks (and hopefully to develop a good friendship in the long run) but i have certain pre-requisites in mind

1. A person with good character, ethics, and morals.

2. Be a person who is committed to things, dedicated, and have a stick-to-it approach

3. Someone who is looking to do things that may be uncomfortable for him to become better.

4. Minimum of 5 lacs in his trading account (more the better as we will have room for efficient money management). If someone is an intraday player, the required trading account size can be a tad lower.

5. Atleast 1-2 years of trading the markets (part time or full time). Cannot be a complete newbie

6. At least 2 hours per day dedicated for backtesting and reading chart patterns (Believe me – this is tremendous amount of work as we will do bar-by-bar replay and few iterations would be there). System building is just 20% of the game but it forms the foundation to the remaining 80% – to be successful in trading.

Fees for this relationship

I was doing this for free all along (and still do) and have spent numerous hours with few folks when I was in Bangalore but later figured out that people do not value the time if it is done free – free meals are only worth that much, I guess. They just squander away the time spent as if it meant nothing. Honestly, it is not about the money as I don’t need this extra money at all but it will make the trader more accountable and he will come to the table more planned with sound questions/utmost sincerity. It will make me accountable too.

Am planning to charge something that is not too less for the trader to consider this as a pastime or too high for the trader to think it as a burden. 20k per month is the figure I have in mind.

So, if you think you have what it takes to be a successful trader (and meet the pre-requisites), please email me with your background in trading/what has happened so far to ‘marketswithmadan@gmail.com’. If you are a free-loader/don’t take this profession seriously/do not meet the pre-requisites/do not have a system already (atleast a skeleton), please don’t bother to email me.

Hopefully this post gives me a chance to interact with only serious folks who want to do something about their trading profession (or take it to next level).

Happy trading all !!

Trading psychology Part two

Psychology

This is in continuation with the previous post on psychology and subconscious mind. There were some interesting messages in twitter after I posted the first blogpost on psychology. Here is the link to the previous post.

Trading psychology and the role of subconscious mind

In this blogpost, I would like to highlight the similarities between trading and other common psychological issues/observations. To make the concept richer, I will give it a try again on the same topic with a different flavor.

Trading and Sports

We all understand that to trade the markets, we need to learn how to trade. That is the baseline. If we believe that trading is a skill based competitive endeavor, then it follows that psychology may have a part.

Like any sporting endeavor, psychology can’t make up for us being crap in the first place. So, no point getting a sports psychologist to attend our first golf lesson. On the other hand, let’s say we have a 15 yard put on the 18th hole this shot and if we putt it right, we win the tournament (plus a cool 10 crores prize money). Fluff the shot and share 2nd place with five other folks. As we line up for that shot, our visits to a sports psychologist could make or break us.

Think about it – this is an easy shot we took a million times. But now there is so much riding on it, can we just saunter up to the ball and pop it in the hole? Or will we be deliberate, think things through too much, not rely on just letting our body do its thing in taking the shot (use of muscle memory). In short – will we f*** it up?

With any skill, our performance can degrade under pressure. We need skill before this will show up in my opinion but anyone that has played a sport competitively will know that feeling of pressure that mounts as the outcome becomes more important. This is our mind/psychology in full play.

Trading and primitive fight/flight response

When we trade the markets, lot of traders feel that that markets are there to prey on them. In fact, market does nothing to affect us individually but our brains are primordially built to handle adversarial situations. Hence, we do things like making “revenge trades”, which is treating the market like a contest between people. That is equivalent to curve fitting data so that it fits our trading idea, but we are fitting the market onto how our behavior and natural responses are designed to interact with people and predators.

Evolution has effectively given us a dumb brain and a smart brain. The smart brain runs the show unless a threat is present and then the dumb brain takes over, because the dumb brain is faster at making simple decisions. This avoids people taking a long time to arrive at a conclusive decision (whether to fight or flight) only to find that it is too late and they are in the jaws of a predator. This can create a problem in trading as our natural responses can be inappropriate and the way we view/assess information changes when the dumb brain takes over.

When we practice trading in a non-stressful situation (read it as ‘demo trading’), we evaluate our success based on how our smart brain handles the situation. Under stress, in real trading, we may find that we fail to notice things that are obvious when we look at the same information after the stress has passed. This is why demo trading is so deceiving.

Trading and owning up for our actions

Some people like to say psychology has no place. We are either a skilled trader or we aren’t. Maybe that is true if we are an Android or computer, but as a human, we have emotions. Our mind plays tricks on us. If we don’t believe that to be true, then we need to do some more research on how memories work with the human brain and it would be wise if we do some research on why wall street employs trading psychologists for millions of dollars to train hedge fund managers.

When we put all these things together, “the psychology of trading”, we come up with a collective of reasons that can explain away why we held on to that losing trade, even though our trading plan said to get rid of it. This is both a good and a bad thing.

For most, it is a good thing when we finally realize that our poor trading performance is a direct result of our own actions. Too many traders never get this far. They blame the market, indicators, vendors, platforms, data feeds, family, neighbor’s dog, phone calls and myriad number of reasons. But never themselves – Zero accountability.

When we finally realize that it was our own actions that caused us to mismanage a trade,that is progress. When we realize that it was our own actions which made as a ‘failure’ trader, that’s real progress as well. But why did we do it? We know we did it, but why?? I call this the psychology of trading. Why do we as humans want to be right? Why is it our memories fault us, convincing us of something in order for us to be right, when in reality we were wrong? This is a really important point to ponder.

Trading and stress/emotions

Am sure many of aware of backtesting a trading idea. But here is the question. When we all can see ourselves as multi-crorepatis in backtesting/demo trading, what happens in real trading? The moment that real capital is put at risk in trading, everything changes. Trading goes from a scholarly exercise where loss is theoretical/on-paper/not personal to a primordial experience where potential loss deranges the rational mind and primeval emotional responses take charge of the trading mind. After experiencing real losses, the emotional brain even starts anticipating potential losses (rather than gains) and hijacks the trading mind (and consequently, disabling it to take decisive actions) If one has dealt with fear of entering a trade or fear of pulling the trigger on a perfectly good set-up, he has experienced the incomprehensible power the emotions have over sane thought.

Others are primed for over trading when their desire to experience the feeling of winning big (and to feel that drop of dopamine creating euphoria in the brain – lot of research has been done on how the brain gets addicted to gambling) transforming the coherent trading mind into the gambler’s mind. All these inexplicable behavior during real trading can be termed as ‘trading psychology’ too.

Unless we have won the genetics lottery (to get to be in nirvana stage from age 2), the brain/mind we have brought to trading is simply not equipped to produce success in trading. It was not built to deal with uncertainty.

Final thoughts

In stock markets, riches are made in a matter of weeks and lost in a matter of minutes. This pattern recur itself as each new generation of traders hit the market. Most of us have been raised hearing (through our kith/kin or media) that rich people are immoral/unethical and downright dirty. Once we grew up and become a trader, whenever we reach that mental threshold in trading and we start feeling rich, our subconscious mind will start to help us to adjust that behavior. It pretty much helps us to push the button when we shouldn’t and so on. It is about that much-hyped (pun intended) self-image we carry inside of us. The outer world is mirroring back that to us. If we feel bad one day, our trades are going to be bad as well. This is so relevant to ‘discretionary traders’. Why? Simply because we’re actually not trading the markets really, we are trading ourselves. So, it is prudent for any trader to keep the mind and body sharp, in that aspect.

We can exercise our body (to keep both mind and body healthier) but only if we believe that mind is important in trading, we can exercise the mind as well.

Happy trading!!

Trading psychology and the role of subconscious mind

Psychology

How many times have we heard this word ‘psychology’ getting associated with trading profession? Innumerable times. To the uninitiated, it seems to be an over-rated (probably abused) word. I will make an attempt to give a different perspective about psychology’s part in trading as there are lot of literature that talks about cliched topics like ‘handling fear/greed and discipline issues’. We will not focus on those items in this blogpost.

To all the readers reading this post, have you ever faced any of the following issues?

1. Not taking a trade in your plan because you did not think it would work (after a couple of losses in a row)?
2. Taking a trade immediately after a loss that is not in your plan? And then after another loss, another trade not in your plan?
3. Chasing a price move because you are afraid it is going to run without you only to see it reverse after you jump in?
4. Averaging into a losing position because you just believe you are right and price will come back to where you bought?
5. Moving your stop further away from your original stop to give the trade more room or moving to breakeven too early?
6. Continuous counter trend trades because you feel price has moved too far and you expect a reversal?
7. Refusal to close out a losing trade and holding it until later in the day or the next day taking a bigger loss than your original stop?

If you haven’t had any of these issues, please stop reading this blogpost further – you are either a master/legendary trader or have never traded before!! Chances are if we have had several of these happen to us, we either have no trading plan or should not be trading or our mindset around trading needs some work. We can call it psychology, call it mindset, call it mental discipline, or whatever suits our fancy.

The difference between unsuccessful traders, net profitable traders, and big money making traders is smaller than we think. It usually boils down to a small but perceptible edge, and while it can be related to poor money management, inadequate funds, or a bad methodology, it is usually an internal factor – a lack of discipline, emotional control, patience, and especially an improper attitude about losing and risk. Mind you, all these factors collectively called as ‘trading psychology’. So, it does not matter what we call it, but the intrinsic difficulties are real and they reflect in our trading P&L.

But to understand this phenomenon more deeply, we need to understand how mind works and how it relates to trading profession. Let’s start by dividing the mind into three divisions – inner subconscious mind, the subconscious mind and the conscious mind. We’re not going to talk about the inner subconscious mind (its primary function is to run our organs automatically) and the conscious mind (as our emotions are not relevant to them). Our focus will be on the ‘sub-conscious mind’. On a daily basis, we spend about 1-5% in the conscious mind. The rest is spent in the subconscious mind. The conscious mind perceives about 40 bits of information per second and on the contrary, the subconscious mind about 20 million bits of information/second. As they say -“Your brain (subconscious mind) sees even when you don’t”. And it’s never dormant. In fact, it has been awake and recording since the time we were a fetus.

Subconscious mind and the way it works

Subconscious mind can be divided into 3 subsections –

1. The Memory Mind – It has recorded all our memories, all events, and actions, everything that ever happened in our life since the time we were a fetus. Think of it as a video camera with five senses. All of our memories (from brain’s inception) are there and they are present constantly in every moment of your life.

2. The Emotional Mind – It’s the part that contains all of our emotions. Whenever we act, react on an emotional basis, the subconscious mind is involved. Have you ever thought of that situation when we reacted so silly, and we asked ourselves later, why in the whole world did we react like that, or why did we say that? It’s because of the emotive information that’s stored in our subconscious mind. Remember, that conscious mind has no role here – analytical part of the brain (part of conscious mind) cannot even start processing the information yet.

3. The Protective Mind – It has the role of protecting us against what it perceives as dangerous.

How subconscious mind is built

The basis for sub-conscious mind is created from day zero of our life till the age of about 7. That’s because, our brain waves, in that period are in a kind of hypnotic state. They move very slowly, and our whole subconscious is very much completely open. During these years, we lack the critical factor –the analytical and rational mind. And that means that every little thing that’s put there (not that it stays there) creates the fundamentals of our character, and our outcomes in life.

Subconscious mind and need for security

We understood how the mind is built but who’s putting in the information? Well, most of it comes from our parents or the people who raise us up. They are the ones in charge of our lives. One of our primate need is the ‘need for security‘. As I have a 8 months old baby now, I can give an example w.r.t to a baby. Normally, when a baby starts crying, it is taken up by the mother, it continues to cry. The mother checks the diaper, changes it. The baby keeps on crying. The last step – the one that always works – is to bring the baby to the bosom and feed it with breast milk (or stick a bottle with milk in its mouth if one is not breastfeeding). That’s when the baby finally stops crying.

What’s actually happening? The need for security is fulfilled. Being brought up to the bosom, the baby feels the warmth/care from the mother and the need for security is fulfilled. The only problem, is that it creates an association. The brain creates that association to food. In other words, when I get food, then I’m secure. We grow up, and every time, we had a stressed day or we feel depressed, we find ourselves putting something in your mouth. If we start to abuse food, we give birth to obesity. But, remember it has to do with the need of fulfilling ones security. Other quick examples are classical as well. Just think of how many parents out there telling their children, things like “you’re not worthy”, “you can’t do that”, “you’re bad”, “you’ll never be able to” and so on and so forth. So, it is prudent for a parent to watch what they are really telling their kids as that information is shaping up our kid’s future (more so, when they are in their young/blossoming years).

The real us, is our subconscious mind, because we’re spending there about 95% of our daily lives. The subconscious mind is this device ‘playing on’ the program we got and it is put there by our parents and by society.

Subconscious mind and trading

Ok great!! But, what does all this has to do with trading then? Have you guys ever heard of, fear of success? We do want to make money, we love money, we love trading but we’re still losing money. What we’re experiencing here is a conflict between the conscious mind and the subconscious mind. Remember, who the real you is! We’re actually the sum of all our programming. Funny thing right? So, being the sum of all our programs and given the fact that subconscious mind has the role of protecting us – Bingo, we got a great recipe!! It doesn’t allow us to make money. Because somewhere in the program, we’ve got a bad experience that has a negative charge and it keeps holding us back from getting hurt again.

See this innocuous looking statement – “In order to earn money, you have to work hard”. It has probably been put there, somewhere between the age of 0-7. Unfortunately, our parents became parents without getting any instruction manual on how to raise kids and we have the social construction as well in the picture. Nothing against the parents here but just wanted to put the facts across. Our parents inadvertently created ‘reward and punishment’ mechanism. They punish us when we’re not following their instruction and reward us when we do as we’re told. The kind of reward we get is, acceptance. When we get that acceptance, we then fulfill one of our basic needs – the need for security.

This creates a dogged association here –”In order to earn money, we have to work hard” which in turn equalizes to ‘safety’. We grow up, and start to work, and eventually we find out that, working hard equals earning money. And the safety need is fulfilled. Now, fast forward few years and you enter the arena of trading. We get into situations that can make us money easily, without having to work hard. BANG – That’s when we blow it!!

Dealing with the core issue

It is very difficult to buy this concept. I understand that. Personally, it took me a while before I finally had the courage to face it, and to understand that, it doesn’t matter how I take it or perceive it, by my conscious mind. The subconscious plays the lead here. And no matter how much I refused to accept that, it wasn’t that way. Any amount of self-talk and affirmations were not helping here and the subconscious mind just snickered back at me by decreasing my account. This was of course a very basic example but am sure you get the drift. There are various ways of overcoming this obstacle – NLP (Neuro-linguistics programming), Hypnosis and many more. I do not want to dwell in to those vast topics in this blogpost but I hope I have enabled the readers to think in that direction.

Bottom line, discounting psychology is the same as discounting your mental health. Psychology doesn’t mean seeing a shrink. It means being aware of your mind and its behaviors. Surely, we are not going to try and make an argument that mental health is unimportant. Skill is composed of more things than just physical prowess. There is also mental aptitude. And in order to exercise our mind, we must at least accept that psychology (and the subconscious mind) is not a “prank”.

Happy trading all !!

Egoless trading, the best trading strategy of all

Egoless

There was a small surge of direct messages in twitter this weekend on why I should not bother about people trolling about the recent drawdown in my daytrading activity. I casually mentioned in one of the tweets that “My ego and self-image are not attached to trading success” and it made me thinking on why people give priority to ego over making money in trading. Hence this post.

Ego and trading – If we have to make an attempt to extrapolate on what Albert Einstein said “More the knowledge, lesser the ego and lesser the Knowledge, more the ego” into trading, we could say something like “More the trading success, lesser the ego and lesser the trading success, more the ego”. A regularly encountered view in writings on trading psychology is that a trader has to let go of ego in order to attain that ephemeral trading success consistently. In simpler terms, we can say that ego is inversely proportional to consistent trading success.

Ego and prediction – In order to understand how ego clouds our judgment in trading related decisions, it is imperative that we understand on why people are enamored with ‘prediction’ so much. Think about this scenario – a trader calls a move (market will go up from here or go south) and try to lead the markets (or at least expect the market to move in the direction of his prediction). On the other hand, a sound trader usually lets the market to lead and takes his cues from the market’s moves. But, when a trader embraces prediction, he seeks to lead the market. So, it boils down to the trader – ‘us’.

If we’re making a market call and looking for confirmation (often called as ‘confirmation bias) by forestalling a market move, then it will be particularly annoying if and when that move doesn’t materialize. We no longer feel endorsed and the problem exasperates even more, when we announce our prediction to public. If a trading decision is not about us (or about the ego that drives prediction), being wrong doesn’t feel like being stupid. Being wrong becomes information – an information we can use to hone/fine tune the trading decisions.

Ego and conviction – The usual trading coaches tell us to trade with confidence and double down on bets when we have our greatest conviction. It is as ironic as William Eno (“Father of Traffic Safety” – invented the stop sign, crosswalk, traffic circle, one-way street, and taxi stand) who never learned how to drive. In fact, listening to markets and following its lead requires the utmost of humility and open-mindedness. The trader with supreme conviction is the one most likely to be blinded as markets change their direction. Conviction and ego are like twins.

Ego and stubbornness – If one is successful in trading, he will also exhibit enormous patience as patience is every successful trader’s virtue – without exception. Patience comes with a sense of calmness and confidence. We know we are doing the right thing. Thus, there is no need to justify excessively (excessive justification often leads to confrontation with others to defend the supremacy). On the other hand, stubbornness often comes with anxiety and over-justification. When we find ourselves trying too hard to explain what we are doing, we are being stubborn. Stubbornness can also be construed as mild form of ego. I always tell folks that Obstinate traders become obsolete, sooner or later.

Antidote for trading related ego – So, how do we tackle this ego then? ‘Balanced life makes for balanced living’. We need to live a fulfilling life outside of trading. If we don’t need markets for our self-validation, we’re less likely to seek those “good call” compliments (from others – this seems to be a big problem in social media like twitter), and we’re less likely to make our profit/loss statement a barometer of our personal worth.

If we make trading as a medium for satisfying our ego, then trading can be a very expensive profession to be. Fulfilling the ego outside trading gives that ‘much needed’ room for the traders to operate at optimal level and start the path towards consistent trading success.

Women and trading success – I cannot end this post without mentioning this point. If you are a woman reading this article and a trader, you have a brighter chance of making it in trading. And am not throwing this stuff out of thin air. Strong reason is there. Women simply don’t seem to have the mental blocks and ego barriers that males have (some women do though but we are not talking about exceptions). They are more readily able to learn from their mistakes. A man will repeat the same mistake over and over again, unable to admit to himself he is wrong because of his ego. Women also listen to those they consider experts. Men usually consider themselves experts at everything already, so while they may listen to what a real expert says, they typically don’t do what they are being taught.

Happy egoless trading !!

Basic pillars of trading success

Impatience

When I first started full-time trading, I was always looking to find/figure out a system with best win-rate and highest return possible. As years passed by, I came to terms with other tenets of trading that ‘actually’ makes the difference in shifting from unprofitable to a consistently profitable trader. This post is about those tenets and it might sound trivial to seasoned traders but it is always good to revisit basics every now and then. We tend to ignore the basics as we move on (this applies to all kinds of profession/business).

1. Trade Plan – In order to be successful, we must have a detailed trading plan that we trust, respect, and most importantly — follow (easier said than done, right?). We wouldn’t decide to build our next home from scratch without blueprints/floor plans, why would we step into trading without a plan?

Firstly, we need a written plan that goes over rules. I repeat – ‘written plan‘ covering every scenario of our trading profession. These are when we will, and when we will not trade. I am not just talking about technical analysis, I am also talking about “I will not trade when I am not 100% focused and in the zone”. “I will not trade when am traveling or my dog is sick” The trading plan also needs to describe, in detail, our trading methodology. Describe our setups. What actions do we take when we get stopped out? What actions do we take when a trade is going against us?

Secondly, we must be ready to execute our trade when our setup shows up and meets all of our rules. If we hesitate as the market unfolds, we can/will lose money.

Hope we all have written rules and read over them every day to make it second-nature. After few months, we should be able to say if we have a setup or not in 20 seconds (looking at any chart).

2. Focus – Trading profession must be respected. We must be focused. Disciplined. No two ways about it. We can’t have constant interruptions and distractions around our workplace if we expect to become a good trader. Many traders say it is like war, we are literally doing battle for life or death in the trading world. This is the only profession I know of, wherein we put a part of our net-worth on line every single day. How can we expect to win if our phone is constantly ringing, or if our kids are playing in our office, our dogs barking, or if we are replying to emails/forum posts? I don’t think those things would go over well in a real battlefield. The amount of respect and diligence we give to a profession is directly proportional to the level of success in it (Work is Worship)

Our trading environment needs to be calm, private, and comfortable. Turning our cell phone off (or atleast put on silent), closing email inboxes, and explain to the family that we cannot be interrupted. Make ourselves comfortable, relax. Buy a nice office chair and comfortable table. We need to be “in the zone”.

Many of us enjoy the ability to work from home, but it must be treated with respect. If we can have a few uninterrupted hours/make great trades and earn a living, then have the rest of evening to devote to the family (am not sure what to say to folks who trade equities and commodities in a single day – work/life balance is the biggest factor in determining happiness in any profession)

3. Education – It is interesting how many traders believe they can make 50 lacs/year after one year of looking at charts and reading books. Why would one think that trading requires less education than a lawyer or a doctor? These professionals spend years, learning their trade. A successful trader should expect to spend years as well.

Education is not free. Most successful traders blow out their account at least once or twice before they went on to make money. It might help to think of this as tuition, instead of as losing money. Education is expensive in other ways as well, not just financially but also mentally, emotionally, and time consuming (a typical professional degree takes 4 years). We have to devote ourselves to it in the same way a professional athlete would do before running a marathon. They don’t just wake up one morning and grab something at a restaurant to eat before they run the marathon. No – they train for months to condition their bodies, have strict diets, follow rigorous training day-in/day-out.

We need to condition ourselves for trading, and to do that we have to educate ourselves. Books, videos, classes, the Internet, and probably most important – ‘firsthand experience’ which takes us to the next point.

4. Experience – Education is important, but experience is key. Why do employers prefer candidates with not only college degrees but also on the job experience? Simple – experience is the most powerful way to learn/hone our skills. Putting what we’ve learned into practice is not easy. The experience of actually trading, not just reading about it, is what will really motivate us to learn and be successful.

We can read about support and resistance, or read about taking the emotion out of trading. But until we experience a trade that stops on some value because of support/resistance, and furthermore, it stops us out of a trade that we were confident would be a winner, then we really can’t fully understand the importance of what we read about (support/resistance and emotions). Best analogy I can think of – reading 100’s of books about swimming and dreaming to be a great swimmer. Unless we jump into the pool, real swimming can never be learned.

With experience comes wisdom, and wisdom is required to properly assess our trading. I think most successful traders had that “ah-ha!” moment when they realized that they were the problem (ie: look ourselves in the mirror, the problem is that we are not following our own rules). We cannot have that epiphany if we lack the experience and wisdom to be a proper judge, even of ourselves. Very important point to remember.

Everyone will recommend that new traders do ‘demo-trading’ until they are profitable. But they also realize that 1) they didn’t follow this rule themselves, and 2) even if they had, they would not have learned the same lessons until they traded and lost ‘real’ money. Demo trading is great (am not striking that down), but it is more like being on the outside looking in. It is not until we’ve placed real trades and lost enough money to be “painful” that we will start to change our ways, our rules, ourselves. That is because we are gaining experience by learning from the past.

5. Tools of the trade – The proper tools are essential for making money in any profession. Tools can range from our computer, our software, our internet connection and backup facilities. We need to probe our tools for weaknesses and if it is displaying a major flaw, correct it. For instance, don’t trade if the Internet connection is unreliable. We need to correct that. Don’t trade if our computer is too slow and our charts freeze during heavy market volume. Don’t trade if the broker terminal freezes during busy market hours (seems to be a popular topic among traders nowadays)

Indicators are also tools and many traders have way, way too many indicators on their charts. Some traders have none, trading strictly based on price action. If our chart has too many indicators, we will get conflicting signals. I suggest starting with a clean chart, and then adding only the absolute essential tools/indicators(if one trades based on indicators) to it. Too many of them can lead to ‘paralysis of analysis’.

Also want to emphasize the importance of picking the right broker (w.r.t cost) and data feed, not to mention charting and execution platform. Official data feeds are not expensive nowadays and am sure we would not let our head go into a MRI machine if we know the lab is using unauthorized MRI machine to image our skull. All these things matter in the long run!!

To end this post, take what I have said to heart. Trading is not for everyone – so if we are having trouble accommodating the above-mentioned information, then we might want to consider another profession. It would almost certainly be a lot easier on ourselves, our family, and our bank account. However, for those of us who push onward and conquer our demons, the benefits of being a successful trader are endless. It is, after all, the near-perfect job – in my opinion.

Force ourselves to realize there is no Holy Grail. The way to make money in trading is not by having the perfect indicator or automated strategy or the perfect Amibroker AFL. No, no, no – the way to make money in trading lies within our ability to understand ourselves and become an expert in the market we are trading. There are no short cuts.

Happy trading !!