Category Archives: Psychology

Twitter poll on expectancy

Trading Journal

I had put a poll on twitter yesterday with options to choose from various combinations of Winrate and Risk:Reward(RR)

Here is the twitter link:

44% of the voters chose Option 4, 32% of the voters chose Option1, followed by Option 2 and Option3 respectively.

Before getting into the groove of things, I would like to elucidate a bit about ‘Expectancy’ of a system. This term was coined by Van Tharp and here it is:

Expectancy = (Win rate x Average winner) – (Loss rate x Average loser)

If we insert this formula with the numbers given in the poll, We get the following –

Expectancy of System 1 = (0.5×2.2) – (0.5×1) = 1.1 – 0.5 = 0.6

Expectancy of System 2 = (0.7×1.2) – (0.3×1) = 0.84 – 0.3 = 0.54

Expectancy of System 3 (I meant to give the RR of system 3 as 1:0.8 but gave it as 0.8:1 – we will stick to what was given in the poll)
= (0.8×1) – (0.2×0.8) = 0.8 – 0.16 = 0.64

Expectancy of System 4 = (0.35×4) – (0.65×1) = 0.75

So, what is this expectancy? Expectancy is how much one can expect to make on the average over many trades. Expectancy is best stated in terms of how much you can make per rupee you risk. Tharp talks in terms of R-multiples but let us just focus on it in layman terms.

If someone risks 1% per trade and their system expectancy is 0.5, it just means that over a large sample of trades, he is expected to make 0.5% (1% x 0.5) per trade. So, if he has 100 trades in a year, he is expected to make (100×0.5%) 50% that year.

Surface level analysis of the poll results

1. It is quite obvious from the above calculation that higher the expectancy, greater is your chances of making money in the markets. So, as a new trader, it is pretty easy to select the option # 4 from the choices. No brainer there.

2. Few people pointed out that Option 1 is better as it is easy on psychology of the trader. It is true to an extent but if one is striving for better risk adjusted returns, option 4 is the obvious choice again (especially for a pure trend follower). Different people, different choices 😊

3. Some people take profits on the way and they would have naturally gravitate towards a better winrate system with lesser R:R. The traders who trail profits will almost always have a lower WR but better RR system in hand.

4. As I always advocate that there are various ways to skin the cat, nothing is right or wrong here. We just need to pick what is comfortable for us. But, if one has to analyse logically, it is option 4. On a side note, one comment mentioned that we need to find system that have a expectancy like the choices mentioned 😊. Fair enough !!

5. The traders who are new to the market gets enamored by the high winrate for a very simple reason – typically, they don’t want to take losses (Forget about newcomers – even the experienced lot do not like to take losses). Their mind can never get around in accepting the losses. So, they naturally gravitate towards high winrate as high WR typically means more number of winners than losers. But, what they forget is the other side of the coin – the Risk:Reward. They lose more when they lose and win less when they win. This has many statistical implications. We will see that in detail in the next section of this post.

6. Winrate and Risk:Reward should be seen together. They are like peas and carrots, day and night – always go together. This is why I like this expectancy as it nicely clubs both the parameters to give a logical view of the system in hand.

7. Few people have voted for option 3 as they feel high winrate can give them the psychological comfort – again, this is just another way of telling that ‘I don’t want to take losses’. As some great trader mentioned. ‘avoiding losses in trading is like you want to breathe in but don’t want to breathe out’. But if it works for you, great !!

In-depth analysis of the poll

1. Most of the stock market strategies employ trend following concept and the pure essence of trend following is to let the profits run. So, the detailed analysis is based on that assumption.

2. First let us dissect what High Winrate really means. Typically, a high WR system will have low Risk:Reward (compare to a low WR with same expectancy). This is a given. But, this also means that the average loser of a high WR system is usually larger than a low WR system(assuming the timeframe and expectancy are the same). In a trend following system, high WR is usually achieved by giving so much room for the market to catch the trend. Statistically, bigger SL will have a huge drawdown potential (am talking about maximum drawdown) and if the max DD is high, it is very difficult to proceed with the system for two important reasons –

a) The recovery factor will be high – meaning the number of trades it takes to get back to equity high(again) will be more and the problem exasperates if someone is trading higher timeframe. People grossly underestimate time drawdown – but it is a different topic altogether

b) Compounding can be a big problem for a system with larger max DD for obvious reasons

3. When a system has a bigger SL (again assumption is that we are talking about pure trend following systems with trailing stoplosses) like a moving average crossover system, the time the market spends between the entry point and stoploss is huge. This has so many psychological ramifications –

a) It can create havoc to our mind as it will feel that we are always in loss (even though it is not realized). One can draw analogy with an investor who enters a stock and the stock is underwater for 2-3 years. It is a very tough phase for that investor if he is still holding it.

b) It can force a trader to make mistakes (not following the plan) and just letting the emotions take the driver seat (how many of us have heard this ‘ I felt uncomfortable in the trade and got out but only to see the market moving in my favor again’). So, wider SL is a fertile ground for all these mishaps in the thought process.

On the other hand,if WR is less with smaller average losses, it will diminish the active trade time in grey area (between entry and SL) and give us a big advantage mentally.

4. Lesser WR and higher RR generally means smaller losses (compared to high WR and low RR/same expectancy system) and consequently, a trader can be well equipped for the proverbial series of losses in a row. One can place large number of bets or trades before we reach out max limit. So taking randomness into account, we give ourselves a fair chance to be in the game. Not to mention, these smaller SLs will also cap the maximum DD and will keep it nicely in control.

The below picture shows the 95% probability of losing streaks for various winrates. Even a 50% winrate system can have 16 losses in a row over 5000 trades. It is not a question of how but it is a question of when.

Workshop

5. On the flip side, Low WR and high RR will never have even distribution of profits as the system will turn positive only with large profits. If one misses those trades, then the performance would be pretty dismal.

6. The interesting thing is that most of us would feel better with a system that produces more winning trades than losers. The vast majority of people would have a lot of trouble with the 4th system (even though it has the best statistical advantage compared to other systems) because of our natural tendency to want to be right all of the time.

7. As I always say ‘there is nothing right or wrong’ in the markets. We just need to choose what is comfortable for us. The battlecry is ‘how to find the one that is comfortable for us?’. Very simple – try them all with minimum size. Your mind will naturally cling towards the one that is comfortable for you 😊

Happy trading !!

Law of Large numbers and its implication in Trading

Trading Journal

Besides loving to trade and playing cricket, I am an ardent subscriber to the statistical concept – the law of large numbers. According to probability theory, the law of large numbers is a theorem that describes the result of performing the same experiment a large number of times. Moreover, the average of the results obtained from a large number of trials should be close to the expected value, and will tend to become closer as more trials are performed.

Let us look at some illustrations first before talking about its implications in trading.

Law of Large numbers and Coin toss

Law of large numbers is best illustrated by the example of a coin flip, which has a 50% chance of landing on heads. If we flip the coin twice, we have almost exactly equal chances of any scenario happening: heads twice, tails twice, or evenly split. The probability of getting 5 heads and 5 tails on ten flips is just 8% but that probability keeps increasing as we increase the sample size. If one flips the coin 100 times, the probability of getting 50 heads and 50 tails (P=0.5) increases to 70% and so on.

Below is a depiction of the Law of Large Numbers in action, for 1000 trials –

Workshop

As one can see, the more the sample size (trials) is, the probability of getting equal number of heads/tails increases.

Law of large numbers and casinos

Coin flips are interesting theoretically, but the Law of Large numbers has a number of practical implications in the real world as well.

A famous example is Casinos – who can forget the ringing sound of slot machines/clamoring laughters sound in the craps table of Casino halls. Casinos live and die by the law of large numbers. Each game has a house edge built into it, representing the average loss over the initial bet. Some sample edges are –

* Blackjack – 0.75%
* Baccarat – 1.2%
* Craps – 1.4%
* Roulette – 5%
* Slot machines – 5-10%

Over longer time frames, it becomes increasingly likely that the house edge will represent the casino’s profit margin.

Law of large numbers and trading

When it comes to trading, many misinterpret(in a negative way) this law of large numbers. They think that the more they trade, they would have more losses which leads to account blow-up. If a traders’ methodology has a statistical ‘edge’, and if he does not change the underlying parameters on the way, it is better for a trader to let the law of large numbers to work in his/her favor.

Trading decisions may appear to be binary – either buy or sell or up or down, but they are not. There are a critical variables which must be accounted for, such as how much am willing to lose/how to trail the profits, or in other words, what is the risk/reward of the trade and how do I manage the trade. So, there is something other than chance that comes into play when trading, and that is skill and technique.

It stands to reason then, that the better your skills and technique, the more you should trade. While Law of large numbers is important because it “guarantees” stable long-term results for random events, it follows that it is also important that our sample of trades is large enough to maximize the number of successful outcomes from our skillful trades and therefore maximize your earning potential. So, if it sounds so simple, why does traders do not allow this law to work for themselves? Why do they jump ships on the way(changing trading systems)?

Think about this for a second. The trader starts trading their plan with all good intentions. Things may or may not go well straight away, but sooner or later as the markets behavior ebbs and flows with/against the strategy’s strengths and weaknesses, losing trades will inevitably occur. At this point of time, the trader gets scared. They don’t like to give money back to the market, so they decide to try and modify the system to filter out trades like that last losing one. They begin to add indicators to charts, coming up with new ever more convoluted combinations, furiously testing to see what cuts out the most bad signals while leaving in place the good ones. A few times round this loop and suddenly, their chart starts to resemble something a seismologist might be more used to seeing than a price chart 🙂 As a result, again, the loop starts – they never let ‘law of large numbers’ to work as they dont stick around with one idea. Law of large numbers will be rendered meaningless if we keep changing the rules on the way.

Law of large numbers and behavioral difficulties

To let the law of large numbers work for us, we need to put trade after trade, over and over again without changing the underlying parameters. Just like onerously bolting on wheels on an automobile assembly line, making a series of trades can be very tedious. It may be hard to maintain self-control at times. It is understandable. We are human, and humans have a strong primal urge to seek out drama and action.

The kind of person who is attracted to trading is not the person who prefers tedium to excitement. This is the raw fact. If we are a trader, we’re probably the kind of person who has shunned a mundane 9-to-5 job for a more unconventional, adventurous profession (many come to trading for this reason). The excitement of working as a full time, active trader appeals to us. We thrive on the uncertainty and endless possibilities. What attracts us to trading, however, may also be a reason for our downfall, unless we are careful. We may be the kind of person who gets bored easily. It is quite possible that the long hours of self-control required to make a profit may be difficult to maintain. This is why many crave for action in the markets. So, eventually, they put on trades that is not part of their plan. It is exactly at this juncture, we break the ‘law of large numbers’ as it assumes that we do the same kind of trades(based on a definite idea) day in/day out. Essentially, we never stick around (or stick around with the same idea) for law of large numbers to work.

How to gain from Law of large numbers

It would be prudent if a trader(new and experienced alike) does the following –

1. Create a trading plan
2. Backtest the plan with large sample size (never fall victim to small sample skewing)
3. Determine your risk based on backtesting parameters
4. Create a money management plan
5. Stick to the plan to let the law of large numbers work

Final thoughts

It is illogical to subscribe to the theory that ” you’re only as good as your last trade. ” If you are going to trade for a living, there is no last trade, only the next trade. Whether, our last trade was a winner or a loser, it has absolutely no bearing on the outcome of our next trade.

Unlike gambling, a winning streak by a trader will NOT eventually be overcome by the parameters of the game, unless he somehow convinces himself that this is his inevitable outcome. Trading is not gambling where the house has the edge (let us not focus on the broker’s commission and negative sum game for a moment). Trading is a performance based activity that requires skill, technique, experience and above all, practice. Most important though, the trader must have the right attitude, focus, patience, and self-confidence, and then the trader will be the one who possesses the edge – not the other way around 🙂

Happy trading !!

Social media and its impact on the mindset of a trader

Mentoring

I have been active in Twitter for the past 6 months and this side of world seems to be filled with overly-expressive folks, especially, when it comes to trading. Traders bicker with each other like kids for everything under the roof and keep fighting that their method is the best in the markets. Even a 5-year experienced trader knows that there are many ways to skin a cat and one method is not superior to other.

Open disclaimer first – right off the bat, it may piss some people off but in long run accepting and learning to deal with these basic tenets will definitely help us to move into the small realm of successful traders. Please adopt the supermarket approach. If you don’t like something in this post, please ignore this rambling. This post is not intended to hurt anyone as I do not know 99.99% of the traders in-person. So, not directed to any individual or group. The pointers that are covered below are few of the several reasons that hamper a trader’s progress if he is active in social media during market hours. Whether you are involved in bickering/ego-fighting or just a spectator, the end-result is same, albeit with varied intensity.

1. When one is trading profitably and wishes to teach it to others (the psychological urge behind this teaching could be many but let’s stick to the point), he cannot expect his students to understand it the same way as he has understood. As it is almost impossible to convince a bear to be a bull once he or she has taken a position, it would be even more unfathomable to convince each trader to trade a certain way. I also conduct workshops and I don’t expect my participants to understand the mechanics of my trading style in a day. Once they keep practicing the concept, it might get internalized well in the mind (after dedicated practice) and the idea can open up many possibilities.

While we are at it, would also like to mention that just because we don’t understand a method, does not mean it is not making money for others. ‘Lack of understanding’ cannot be construed as the ‘failure’ of the method discussed. On the flip side, there are 100’s of ways to make money in the markets and it would be childish of us to ridicule other methods. It would be more childlike if we say that my method is superior to others and start chest-thumping – this is so prevalent in facebook/twitter unfortunately. Market returns are cyclical and method A might do better in certain circumstances than Method B – vice versa is equally true. Please understand that everyone has different time frames, methods and objectives. It is also prudent to remind oneself that “every dog has its own day

2. Stop justifying your methodology or trades – who are we are trying to prove here? We don’t need to prove anyone that we are successful in anything. So, why to some strangers? If one is successful in trading, he will exhibit patience as patience is every successful trader’s virtue – without exception. Patience comes with a sense of calmness and confidence. You know you are doing the right thing. Thus, there is no need to justify excessively. On the other hand, stubbornness often comes with anxiety and over-justification. When you find yourself trying too hard to explain what you are doing, you are being stubborn.

Any successful trait needed for trading (like patience, emotional control and discipline) will definitely be reflected in our other aspects of life too. Our family/friends would definitely see the massive difference once we become successful (not only in our finances but also in our behavior) – One of the important perks of being successful in trading.

3. Actually, most of the traders know the reason (or set of reasons) that make them lose money in the markets. But taking corrective action and doing the right set of things to turn profitable is something that individual has to do. Please do keep in mind knowing, and doing are two very different things

4. While people are told they won’t be successful overnight, most new/struggling traders don’t actually believe that. Social media never lets them believe it completely as every other trader is supremely successful in social media 🙂 They have an idea in their head that they’re smarter (Lake Wobegon effect), have it worked out, and will be able to make money quite quickly. So, always in the urge to make money faster and lose it actually.

5. As Master Oogway tells in the movie Kung Fu Panda “One often meets his destiny on the road he takes to avoid it.” (this quote is actually from a french poet Jean de La Fontaine). Most of the traders are determined not to lose money (rather than having a determination to ‘make money’) and in the process, they actually lose more money. Am not saying we are pre-destined to results but this one needs to be taken seriously. Knew many folks who have the aversion for loss and unfortunately, end up in trading (trading needs that loss digesting stomach) and struggle for years.

6. False hope also keeps our enthusiasm going in trading. We can attribute this ‘false hope’ to survivorship bias – We are likely to hear more stories of people making a killing than hearing about people losing everything because the people who lost everything are gone from the public eye and are not talking about it. The few who make money are sure to let everyone know about it (or others talk about them a lot) and thus create a sort of illusion–intentionally or unintentionally– that anyone can do what they did/do.

7. Easy money lure – the lure of making money each day in only a couple hours gets people’s minds spinning with possibilities. They imagine stopping everything and just start trading for a living immediately (For example, lot of chatter happened on Sept 21 2018 EOD about people buying far OTM puts for pennies and selling it for 200s..this kind of chatter happens a lot when mkt moves violently..this also feeds the mindset that money is easy in trading)

As a matter of fact, they would start dreaming about trading in a beach while sipping pina colada. Unfortunately, sand, water, sun glare and laptops don’t mix. You are not gonna get paycheck every month and you must be absolutely at the top of your game without distractions to make money long-run (this is exactly why I keep advocating to get off from social media/forums during market hours). Distraction and ego fights can damage our psychological forte and eventually, we start focusing on things that does not matter.

8. Long story short – stick to a well-defined plan and trade that plan even when it is uncomfortable (and it often will be). The vast majority of the population, and thus the vast majority of traders, buckle under this uncomfortable pressure – the same way we reach for the ice-cream instead of the carrots.

9. On the other side, social media and forums can have a positive/lasting impact on a trader if he can figure out a virtual mentor(mentor does not have to know you but you can follow his principles/thought processes). It can be a great resource of authentic information for new traders as well. But overall, it has never served a trader well if he loiters around in social media during market hours. This is not even debatable any more as the negatives over-weigh positives by a huge margin.

10. So, if you are a losing/struggling trader, try getting off from the forums/social media (for few months) during market hours. See if it has changed your overall mental resilience/trading. I can bet that this will be a great trade to put on as Reward:Risk seems very high. Risk = not being able to participate in conversations/getting updated about latest news, Reward = profitable trading without outside distraction.

Happy trading !!

Reasons and lessons behind blowing up trading accounts

Mentoring

“Blowing up” means we took the account down to basically zero, where we couldn’t place a trade any longer, or something similarly distressing.

As many of you know already, I have blown up a couple accounts in my days. None for many years thankfully, but it has happened. I view it as part of the learning experience, and naturally in hindsight it would be very easy to see why I blew up, and that I deserved it.

We can’t expect to make poor trades and be consistently profitable. Blowing up an account (no matter how large or small) isn’t necessary to become successful, but it has a tendency to smack us on the head with reality. It also seems to separate the pretenders from the contenders.

If we are willing to evaluate the damages after blowing up, then regroup and come back to attack with the new knowledge gained, we’re on our way. There’s no guarantee of success, but we’re a step closer than we were before. Like the old proverb says – “A man who wishes to travel a 100 miles should consider himself halfway at 90 miles.

Let us stick to the point here for a moment. There are numerous reasons for blowing up an account and I would like to highlight a few here.

Reasons for blowing up an account

1. Trading without stoploss

I can still clearly recall several times in my trading career where I thought I had solved the puzzle, and literally unlocked the mystic gateway (holy grail) to making money in trading. During those times, I would repetitively see the price hitting my SL and atleast come back to original entry point(or move into profits). This created a new connection in my brain and the next time the trade goes near the stoploss, I would gladly remove(or move the SL away from the entry further) the SL as market has a tendency to come back to breakeven point. Boy, I was so wrong. This can be brutal to the trading account.

2. Focusing on potential gains and not potential losses – ignoring risk

When we do focus on potential gains and not on potential losses, we tend to trade bigger (by usually using more leverage and not necessarily more capital) or risk more to get those desired returns.

Those who focus on making as much money as possible while ignoring risk will invariably lose the majority of their accounts. No matter how talented we are, we will face ruin, just as Jesse Livermore did and Victor Niederhoffer did on several occasions. Even the best traders like Alexander Elder and Nicolas Darvas blew up accounts when they first got started. Why? We simply can’t out trade the risk of ruin. If we risk a consistent 10% of our initial starting capital per trade we are done after just 10 losses. Everyone who has traded for any length of time has had ten losses in a row. If we risk 1% of our total starting capital per trade, 10 losses in a row will only bring us down 10%.

3. Not tracking the trades

A trader executes a strategy (usually not well-tested) and accumulates losses due to standard drawdown. But, without a trading journal, it is almost impossible to know where we are or are going, if we have no record of where we have been. I strongly believe one of the best things a trader can do is start keeping a journal.

Unfortunately, this does not seem to be the case for most of the traders. In the process of selecting candidates for mentoring, I had talked to at-least 60 people and the common theme among these budding traders is that they never maintain a history of their trades.

Lessons learned from blowing up an account

1. Taking responsibility for our actions

What I learned during these painful events was that I was wrong. I took responsibility. That is the first step.

Taking responsibility is the key. Accepting that we (temporarily) failed, and that we don’t know everything. From there, we can start building a solid foundation. We should be asking questions like what happened and why. This isn’t so much about investigating specific trades, but instead analyzing our overall behavior.

For example, did we bring a new methodology from forums/twitter without fully testing it? This is a difficult lesson to learn, particularly because most people simply don’t know how to properly test. So then, we would have to acknowledge we didn’t test properly (if at all), and go about learning how to do that.

2. Maintaining proper risk management

Another very difficult lesson was that we can be right about a trade, but still lose money. The market can remain irrational longer than we can remain solvent. This lesson involves learning about risk and proper money management, so that when we are in a bad trade it doesn’t do crushing damage to our account.

A key lesson is that we must live to fight another day. The single most important factor in trading is survival. The longer our survive, the more experience we gain, and eventually given enough time that experience will become valuable by providing we an edge over all of those with less of it.

3. Recording the trades – Trading Journal

The lesson we learn from the journal is not about recording our trades and screenshots, it is about learning our behavior. We must routinely go back and analyze what we have written, identify mistakes and patterns. Learning about our strengths and weaknesses in an objective way is crucial, so that we can then further develop in those areas. It is critical to be honest in our journal. It is important to talk about why we made a trade or decision, not just list the entry and exit price. It will also be helpful if we record our emotions during entry, while in the trade and during exit. This would clearly demarcate our emotions during those times and would reflect back on which feelings are overwhelming us and when.

4. Get out of simulated(paper) trading

Many aspiring traders sit on simulated environment (paper trading) for a long time – sometime months and even years together. I always advocate that paper trading is virtually worthless as a learning tool (unless it is done to understand about the trading software nitty-gritties) and when I unequivocally put that point across, people can’t reconcile that thought easily as it directly undermine their dream of becoming a successful trader one day.

The fact is, the majority of people are not good traders and are not cut out to make it in this business. It is a very harsh reality, but there is no denying it. Unfortunately, everyone thinks they are the exception to the rule.

If we want to be the exception to the rule, then we have to be put ourselves in a competitive position. That means being sufficiently capitalized, and having sufficient real trading experience (again, paper trading does not count).

You don’t have to take my word for it. Everyone that goes from paper trading to cash loses money, no matter how much of a rock star they were on paper trading. It’s my belief that the longer we are on simulated environment, the worse we condition our mind for bad behavior and thus the more likely we are to fail as a real trader. Again, you don’t have to take my word for it, it has been proven countless times before.

The entire point I am making — paper trading is not trading education. The real education is obtained once we start trading cash. We do not need to risk our monthly salary. Just start by risking a small amount and get off that orgasm-inducing paper trading.

Final thoughts

When we blow up an account, it is time to ask tough questions to ourselves – are we willing to commit the time (and money) that this profession takes to succeed? Look at it like any other profession. We need years of dedication and experience to become successful and even then, it still doesn’t happen for everyone.

When we have a stake in the game, it is completely unlikely what it seems to be when we are just watching it. We will find that trading is mostly about the acceptance and management of risk, and the management of our own reactions when we have money on the line, and are either making it or losing it. Both success and failure have their own psychological/emotional pressures, both can garble our judgment, and learning to handle the issues that both give is probably more than 90 percent of what real trading is about. The things that we are able to learn by studying the market are about 10 percent of the puzzle, if that. Really.

Happy trading all !!

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 !!