Category Archives: Psychology

Lessons from market wizards – then and now

I read Market wizards book some 11 years ago and remember highlighting so many points that made sense to me those days. After someone talked about Jack Schwager recently, i thought i should read that classic book once again.

This blogpost (long one) is just a small earnest attempt to register my reactions by then and now for the same highlighted statements made by great traders.

Bruce Kovner

1. “I never had lot of difficulty with the process of losing money, as long as losses were the outcome of sound trading techniques”

2. “A common mistake a novice trader makes is to think of the market as a personal nemesis”

My initial reaction as a new trader

1. Why would anyone want to lose money? If i want to lose money, why i would i choose this ‘lucrative’ profession? Losing money is for traders who dont have enough knowledge. If i learn more about the markets, a trader will never lose. Top of that, losing means ‘am wrong’ and i am not a loser.

2. Yes – sometimes i feel, market operates just to get to me. The whole market is conspiring against me and i guess it is fair for me to take revenge back at the markets.

My reaction now

1. It is a known fact that nobody enters a trade with the idea of losing money. But, let me assure you something – Losses are like ‘breathing out’. You cant survive just by ‘breathing in’ right?..we need to breathe out..So, losses are natural part of trading and the sooner we embrace it, better it is for our trading account. Trading has a lot more to do with repeatedly admitting that you are wrong (and also OK with it) than with trying to make huge amount of money.

2. Being accountable for our actions is a big step – both in life and trading. More on this topic at the fag end of this blogpost.

Richard Dennis

“Being consistent and making sure you do that all the time is probably more important than the particular characteristics you use to define the trend”

My initial reaction as a new trader

How can one make money without knowing where the market is gonna go next minute/hour/day? Many analysts and traders are doing it all the time. After all, this profession is all about prediction 🙂 . Once we figure out where the market is gonna go, all it takes is place an order and laugh all the way to the bank !!

My reaction now

This statement makes so much sense now as there is no way to know what’s gonna happen in the market next. Even though we enter a long position with a predilection that the market will move higher, there is absolutely no way to know if its gonna happen. We are just risking our money to know if the market wants to move in our direction. If it does not, then we move on to the next trade – simple thought.

As a popular saying goes – ‘Only two sets of people know where the market is gonna go next – God and liars’

Ed Seykota

1. “I dont think traders can follow rules for very long unless they reflect their own trading style. Eventually, a breaking point is reached and the trader has to quit or change, or find a new set of rules he can follow”

2. “Everybody gets what they want out of the market”

My initial reaction as a new trader

1. This guy is talking rubbish. All i need to do is attend a workshop/read a book/follow someone in twitter(and nag him for his system) and once i get hold of an another trader successful(?) system, then i can quit my job and trade sipping pinacolada in the beaches of the world. So, pursue (without giving up) traders/workshops/forums to get the best system. After all, if it works for him, it should work for me as well.

2. Ofcourse. People come into trading to make money and they get ‘money’ out of trading. Everyone i know makes money easily in trading. This one makes lot of sense. Little did i know about the profoundness of this statement actually.

My reaction now

1. What a true statement. The system and the trader should be like lock and key – a perfect match. Psychology of every trader is like a fingerprint and what works for person A will definitely not work for person B. Reason is very simple – a person following a trader’s system(methodology to the dot) will not have the same level of conviction, statistical comfort (based on backtesting) and mental-makeup to start taking the trades. Once he gets 3-5 losers in a row, he will start tweaking the system to avoid those losses/or find new rules set to make sure that the losses are minimal(according to his perception on losses).

This is exactly why i urge new traders to understand the concept behind a trader’s methodology and not go for his complete system. If we blindly follow another trader’s sytem (assuming the trader shares it), it is going to be a great disaster. I was aghast looking at trainers teaching system(with all exact entry/exit rules) as even a 5 year experienced(profitable trader) will completely accept what Ed is saying here. They are actually doing a disservice to the participants by spoonfeeding them a system as it almost always leads to disaster in the long run.

2. This statement gives me goosebumps every-time i read it. It is not as innocuous as it looks.

Ed was just alluding that if one cannot sort out those innermost negative traits one carries, it will be reflected through our trading. Trading is very much a mind game and one which does not come naturally to most people. Once you trade, we are pulled in the direction of what you really want. You may want to win at trading but, for example, there may be the belief lurking below which tells you that maybe it’s luck this time and that good luck always runs out. Some people win by losing. Some people win by winning.

If one is looking for thrill (adrenaline rush) in trading , market is a great place to get it. If one is looking for self-pity, you will have plenty from the market. If one is looking for ‘ego-inflation’, market will give so many opportunities to announce to the whole world how big your ego is…Now, read the statement again – “Everybody gets what they want out of the market”

Marty Schwartz

“What is the ultimate rationalization of a trader in a losing position? – I’ll get out when am even. Why is getting out even so important? Because it protects the ego. I became a winning trader when i was able to say – to hell with my eog, making money is more important”

My initial reaction as a new trader

What is wrong in removing the SL once in a while as i have seen market coming back to breakeven point more often than not (after hitting my stoploss). When i have done hours of analysis before getting into the position, how can it go wrong? I have applied my brain in so many difficult situations in life and came out with flying colors. Why trading should be any different? Mind has been fully applied, due diligence is done and this trade is a sureshot winner. So, why keep stoploss or why not change the SL when the market comes close to it?

My reaction now

Nobody wants to be wrong and that is why a simple argument eventually gets out of hand and makes two people nemesis to each other (we see this often in social media). “i’ll get out even’ usually stems from the fact that the trader has not accepted losses mentally. He knew that losses are part of the game but has not accepted it internally. On top of that, market reinforces bad habits and he would have seen market market moving in his favor after hitting his SL. So, why bother to have SL? If we dont have SL, it serves 2 purpose – satisfy our ego by not taking a loss(and thereby proving our analysis right) and gets us out at breakeven.

Amateurs resort to hope and sometimes prayer to save their trade. In life, hope is a powerful and positive thing. In trading, resorting to hope is like placing acid on your skin—the longer you leave it there, the worse the situation will get.

Van Tharp

“The composite profile of a losing trader would be someone who is highly stressed and has little protection from stress, has a negative outlook on life and expects the worst, has a lot of conflict in his/her personality, and blames others when things go wrong. Losing traders are usually disorganized and impatient”

My initial reaction as a new trader

This is partially true as i understand a losing trader will be stressed out but what does negative outlook in life has got anything to do with trading the markets? What does our personality got anything to do with our success in trading?

It does not make any sense to think that ‘taking responsibility’ for my actions has any bearing on my trading results. This is some bunch of BS because i make a bad trade in the market(despite my wonderful analysis) due to the following reasons –

1. The market makers (operators) were fishing for my stop losses
2. I was on the phone, and it collapsed on me.
3. My twitter guru gave me a bad tip.
4. The forums caused this one to pump and dump.
5. FIIs are just manipulating the markets to take me out.

My reaction now

Trading results have everything to do with our mindset and attitude. Having negative frame of mind or exposing ourselves to negativity stifles us from learning anything worthwhile. Learning and negativity cannot co-exist. Professional traders very well know that blaming others for their bad trades is such a ridiculous thing to do. So, when they have a bad trade, their thought process sounds like –

1. It is my fault. I traded this position too large for my account size.
2. It is my fault. I didn’t stick to my own risk parameters.
3. It is my fault. I allowed my emotions to dictate my trades.
4. It is my fault. I was not disciplined in my trades.
5. It is my fault. I knew there was a risk in holding this trade into a big event, but I didn’t fully comprehend it when I took the trade.

The obvious difference here is accountability. For amateurs, everything having to do with the market is ‘outside their control’ That is not reasonable thinking and really just points to individuals who have, probably for the first time, had to confront their “real self” as opposed to the perfect self or idealized self that they have constructed in their mind. People can drift through life in their own private world, where they are pretty special and can do no wrong.

Unfortunately, trading rips off this mask, because you cannot dispute what has happened to your account. For many people, when they start trading, they are suddenly confronting reality for the first time in their lives. Just to see the world as it really is requires a lifetime of training, and for many people, trading the stock market is their first real step on this journey.

Happy trading all !!

Master of one or Jack of all trades

Traders

Everybody wants to be a jack of all trades but many dont bother to master anything specific. This blogpost tries to analyse this topic from trading point of view.

Introduction

As an human being, we tend to naturally gravitate towards things that are complex and the situation worsens if we are an engineer 😊 (you know what i mean). As many believe, the complexity of trading is not in the charts, but it is nicely wrapped up in the mind. We see many wannabe traders and few experienced ones trying to be jack of all trades (in trading the markets).

Knowing to do a little bit of everything is very good in life as we ‘learn’ how to learn and we fit well in leadership roles. But it can also lead to lot of distractions and eventual burnout.

Trading the markets can be simple but not easy

Trading itself is not overly complicated. Well, lets look at it closer –

1) Markets only go up or down (they can consolidate, but they have to leave that state in a direction). Essentially, there are only two directions. Deciding how far, how much room to allow it to breathe can get complex, but it still comes down to one of two choices 😊

2) Markets will only move in one direction for so long before they change direction. Traders study on where the change of direction should most likely occur. Each trader might have different notion/concept for trend reversal but there has to be one.

3) Allowing winners to be larger than losers beat a lot of things that could go wrong.

These 3 simple things may require a lot of study/practice/patience and learning, but not anything that seems “complex”. Maybe price analysis, but even that can be simplified to far less than quantum physics 😊

Trading and real life analogies

Analogy Number 1

I have a 2 year old son who started walking few months ago. As humans, our ability to balance on 2 legs is complex (try programming a robot to do it as well as an human – a Robot can never walk as gracefully as a developed human). We had to practice that skill as babies until it became second nature.

But today, while there may be a lot of complexity occurring in the background for our bodies to maintain balance (and we could probably map all of that with tons of analysis and indicators/charts), if we stand up right now, does any of that really matter? Absolutely not !!

The complexity of balance is just going on silently in the background. The study of anything worthwhile can be complex, but is complexity a required point of focus? A big question to ponder.

Analogy Number 2

I have never done skiing but can draw one more analogy from it. Balance is mandatory for that wonderful sport, but that point should never enter the mind of a skier.

Gravity is also mandatory, and complex, but still not on my checklist. Skiing does not require me to be aware of the complexity. What does matter really is that ‘have I practiced enough to have the ability to ski safely?’ As simple as that. If the answer is ‘No’ to that question, then the prudent thing would be to get back to the basics/practice arena.

Conclusion

In the pursuit of simplicity, by focusing on one or two markets over time, it can harness the potential of a trader to somewhat “understand” what the market is saying at a particular moment. This cannot be immediately translated into profits but the trader can ascertain the nuances of his methodology in a more meaningful way.

Long story short – focus on a specialty instead of taking the shotgun approach and devote the attention to understanding your niche. I don’t think that the process of mastering something can be easy but I do believe it should be very simple if we follow a structured approach.

Focus on one instrument/idea, keep things simple and it pays off nicely in the long run 😇😇

Let me end this post with this quote – “Seek freedom and become captive of your desires. Seek discipline and find your liberty – Frank Herbert”

Happy trading !!

Professional vs Amateur trader

Traders

This blogpost is a small effort to delineate the thought process of a Professional in comparison to an amateur trader.

Introduction

It is a common understanding that trading profit on any given trade can be construed as the compensation we receive for the risk we took on the trade. Traders take risk, in the sense they routinely make judgments with uncertain outcomes. So it would follow then, that good traders don’t try to eliminate risk as much as manage it, and instead, can increase their chance of profitability by better reducing that uncertainty !!

This can be accomplished by making better trading decisions than those that are less informed, less knowledgeable, and less skilled. Ultimately, it is not what the trader knows, but who he is. The really consistently profitable traders are able to ignore or subvert their natural tendencies to do what feels comfortable, and instead, do what is necessary, to be optimally profitable over the long run.

Amateur traders

1. Watch what other traders do and be sure to follow the crowd. After all, they have been trading a lot longer than him/her and hence, naturally they should be more ‘smarter’

2. Never worry about using stop loss orders. When the time comes, he will be able to sell his open position(s) and take a loss. Our emotions won’t even come into play. Besides, stop loss orders are for weaklings 🙂

3. Setting high standards to achieve and feeling beaten when they fail to meet their expectations. Suddenly,they are disappointed/stressed out,and prone to make trading errors. Losses start to mount,mood worsens and before they know it, they find themselves in a deep psychological hole of despair.

4. They dislike regret more than losses. Their avoidance of regret is more powerful than the fear of loss. It’s one thing to make a losing trade, but it is quite another to feel that we’ve made a mistake, and continually berate ourselves for making it.

Professional traders

1. They don’t give a hoot about anything/anyones opinions of what the market will/might do.The very news/opinions that surround them becomes the mortar for their brick wall of defense that protects their completely independent thinking (Keyword here is ‘Independent’)

2. They have incredible discipline to not buckle under pressure. They have a perfectly clear head and understand fully what they do and how they do it. Battle wounds and memories of defeat are more valuable to them than the money.

3. Their self esteem do not rise and fall with trading results. Their self concept is strong/durable and not at the mercy of the current, last, or next trade.

4. As they know that their experience in markets is a reflection of their personal life, they keep their personal life/finance in order as that will nicely percolate into their trading. They take care of their bodies with healthy diets/exercises, while understanding that recreation is a vital activity in keeping trading performance at peak level.

Conclusion

A budding trader’s goal should be to move from the 1st group (amateur trading) to 2nd group (professional trading) as early as possible. It is easier said than done though.

Please do remember that ‘Winning’ is just the culmination of lessons learned by making our own mistakes – not from other people’s mistakes. Many folks would disagree here and they believe that one can learn from the mistakes of others in trading. This statement is absurd, to say the least. Especially in an experiential profession like trading the markets where one has to go through the path on his own. Our biggest nemesis is in between the ears and one has to face their own demons(often unique) in trading.

Want to end this blogpost with this thought – ‘Professional traders attitude’ can be abbreviated as FEDCOP

Focused (on the trade only)
Emotionally Stable (treat winning and losing the same)
Disciplined (in trade management)
Confident (in methodology & risk management)
Objective (Unbiased)
Patient (to wait for the opportunity & to maximize profit)

Happy trading !!

Get comfortable being wrong

ComfortZone

Human nature is to be right all the time. Nobody likes to be wrong even in petty/useless arguments. This particular thought process is one of the primary reasons for many opting for methods that shows high winning percentage with abysmal Risk:Reward ratio. Many of the world’s renowned traders are trend followers and trend following usually delivers something that human brain is not used to – More losers than winners with superior Risk:Reward ratio.

Introduction

In trend following type of trading, the usual combination is low winning percentage with high Risk:Reward. This requires a trader to get comfortable with the fact that we will most likely be wrong more often than we are right.

That concept is tough for a lot of traders,as many of us believe that to be profitable we need to be right more than we are wrong. but nothing could be further from the truth. Yes, for scalping that is partially true, but for swing trading, with the proper risk to reward ratio, we can be profitable even if we are wrong more than we are right.

We just need to have the patience to wait for a trade to come, and also patience to wait for a trade to work.

Here is a blogpost on patience

Deliberate practice and patience

Trend following and surfing

Unlike surfing, we don’t get the luxury of knowing which direction the WAVE we are on is headed, but trust me, it is going somewhere and is not going to sit around in any one place for very long. This is the one and only guarantee in stock markets 😀

We may spend days watching for a sequence of events, enter a trade and get stopped out in minutes. But if we are a trend follower, we have to just get back up and start watching again. That is tough to swallow for traders who enjoy the adrenaline of a fast-paced trading environment

Trading and action

If a trader cannot wait and always in need of action, trend following will never work for him. For that matter, any kind of trading would be difficult.

Many traders love the frequent adrenaline rushes that come with trading. And, the more frequently they trade, the more they feel that they are hitting the fast forward button on their way to riches.

By the way, most successful traders and investors are systematic. Systematic sounds technical or quantitative but that’s far from the truth. All it means is that there is a process to guide proper decision making. When A happens they do Y, when B happens they do Z. Warren Buffett and Benjamin Graham has a very systematic process in searching for their stocks. Ray Dalio from Bridgewaters Associates has a very systematic fundamental approach to capital markets.

Trading and drudgery

Many a times, people ask this question to me. It always pops up in different ways –

Should i pursue the dream of becoming a successful/consistently profitable trader in spite of all these drudgery?

I remember a movie honcho once said that when people asked him if they should continue to pursue their dreams of movie stardom, he would always tell them ‘NO’. His reasoning was simple – no one destined for success would be dissuaded by him anyway, nor for that matter would they even have asked the question in the first place.

It’s that solitary “march to your own drummer” mentality that mark those ordained for success 🙂

Trading and negativity

So, to be effective in trading (and anything in life), kindly distance yourself from negative energy – no matter where it comes from. Let negative thoughts roll over like water. Negative thoughts, emotions, energy is destructive multiplier. It kills creative uni-directional thinking. Detach yourself from things, other people and immerse yourself in the price. Lose sense of time and space.

Think of an activity that you enjoy, we lose sense of time and space when we get involved right? So, let me ask this question then –

Why does trading have to be stressful, painful, edgy all the time?

Get comfortable being wrong and detach from negativity

Happy trading all !!

Your trading is exciting or boring?

Trading is boring

Introduction

Many folks find trading the markets pretty exciting. Why not? Seeing the tickers move wild can give great excitement to anyone and the prospect (not actually making money..just the prospect) of making money can give the best adrenaline rush . A fun-filled activity right? As a matter of fact, they become really sad when the markets are closed as there is no fun in mundane daily activities.

And there are certain set of people who find trading the markets as downright boring. Surprisingly, majority of the consistently profitable traders find this endeavor a really boring one. For them, it is a matter of doing the same thing over and over as long as it keeps on working. Without deviating and without looking for something new. Without getting antsy about “missing out” some great opportunity somewhere else.

Hard work and belief in the process

Let me get this straight – Trading is hard work at the start, but it should be effortless during the trading process. Good or professional traders know this really well. In fact, trading should be boring to some degree when we have our system and methodology down. The reason for this is we know when to pull the trigger and when not to. If market gaps against our position, we know what to do. We know how to react when the time is right. However, it requires hard work to get to this level of professionalism.

Two sides of the same coin

Trading the markets in itself is contrasting in nature. We must be confident, but ego-less. We must be mechanical but analytical, focused but relaxed, and disciplined but willing to learn. Our decisions may appear to be binary, buy or sell but they are markedly more complex.

Acquiring the knowledge of trading mechanics, maneuvers, ideas/strategies, and risk/money management is a relatively easy and determinate process. But, developing the mental skills of focus, discipline, objectivity, and self confidence are much more challenging.

In fact, it’s the one area of trading performance that gives the pleasure of incessant learning experience for the practitioner (trader) , and for some a continuous scuffle (and might feel like never-ending ordeal)

Trading and lack of knowledge

The problems and challenges we face in trading are not due to a lack of knowledge/information, but are due to a lack of patience and self-confidence. Once again, ‘it is never a lack of knowledge’. The sooner we understand it, the faster we can pave the path to recovery.

Enhancement begins with changes in how we choose to think, act and be. Positive changes that will only be realized when we make a decision – a choice to learn to let go off the selfish/self-defeating side of our emotions which blocks our minds and garbles our decisions.

Trading and self-introspection

I will be the first to admit that the journey onto becoming a successful trader is mired with twists and bumps all along, filled with great triumph, and frustrating distress, but everyone has the talent to succeed and the power to create value in their lives.

Now some serious questions to ponder upon —

1. Are you patient enough to wait for the planned trade set up?
2. Are you ready to wait until a valid buy / sell signal is triggered (not jumping the gun)?
3. Can you place and execute the required orders, before the prices move away from the price of entry?
4. Can you focus on your trade without any sort of disturbances, until the trade is completed.
5. Can you patiently follow your exit plan (even if the market moves up and down in-between)?

When we try to introspect by answering these questions, we readily identify that it is not our ‘lack of knowledge’ that is enabling us to lose money in trading but it is the lack of patience(in order to seek excitement).

So, let us focus on acquiring the non-glamorous skills and trading will become more boring than we would have ever imagined !!

Achilles heel of a Discretionary trader

Discretionary trading

Achilles’ heel was an unguarded weakness that ultimately brought down a hero of Greek mythology and this post is an attempt to understand the things that has to be kept in mind while designing a trading methodology as a discretionary trader.

As many of you know that am a mechanical(rule based) trader, my trading day is pretty monotonous and boring, many a times. The other group of traders are often called as ‘discretionary traders’. Both groups have their advantages/disadvantages and one should follow what they are comfortable with. At the end of the day, both discretionary and systematic traders have the same goal – making money.

What is discretionary/mechanical trading?

Discretionary trading is decision based trading – when the trading idea shows up in the charts, the trader decides(at that moment) whether to take the trade or not based on current market conditions. Discretionary trading does not mean random trading. Every trader(mechanical or discretionary) has a methodology to enter/exit the market – there are no two ways about it. For example, even if all the conditions are met for a trade, a discretionary trader will not take the trade as volatility is too low (current market condition) – so, basically the trader decides to let it go seeing the current market condition.

On the other hand, Mechanical trading is driven by rules. The trader do not make any decision on taking the trade but the system does. If A happens, then the trader go long and if B happens, the trader goes short. There is no element of decision making involved by the trader as everything is planned out beforehand and the trader just has to execute those trades.

Designing a trading methodology as a discretionary trader

There are certain things discretionary traders should keep in mind when they design their system. More often than not, the psychological pressure of making the ‘quality’ decision of whether to take the trade or not can overwhelm a discretionary trader. To understand this behavior, we need to analyze how our brain works.

A. How brain works?

Evolution has effectively given us (human beings) a dumb brain and a smart brain. The smart brain runs the show most of the times unless a threat is present/perceived and consequently, the dumb brain takes over. Why? The reason is very simple – Dumb brain is faster at making simple/resolute decisions. This avoids people taking a long time on making a choice as time is critical in predatory situations. If we take too much time to take a decision on ‘fight or flight’ situations, there is a good possibility of ending up in the jaws of a predator 🙂

B. Markets are there to get me

With this understanding in mind, one can easily comprehend why this could create a problem in trading as our natural responses can be inappropriate and the way we view/assess info changes when the dumb brain takes over.
Our brains are built to handle belligerent situations and hence, even in a normal situation in trading (like a loss – by the way, many dont consider trading loss as normal 🙂 ), we tend to do things like making “revenge trades”, which is treating the market like an adversary.

Think about it for a second – this is tantamount to curve fitting data so that it fits our trading model but only here, we are fitting the market to how our behavior and natural responses are designed to interact with predators. This is exactly why we see people saying ‘Markets are there to get me’

C. Demo trading and tunnel vision

As a discretionary trader, when we do demo trading of our ideas, we almost always get superlative results. The reasons could be multi-fold but the important one is so evident. When we practice in a non-stressful situation, we evaluate our success based on how our smart brain handles the situation. Under stress, in real trading, we might find that we fail to notice things that are obvious when we look at the same information after the stress has passed. People tend to overlook/ignore information that is contradictory to their analysis of the situation. In behavioral science, this is often called as “tunnel vision“.

Let us sit on this ‘tunnel vision’ for a moment. Like the airport traffic controller who ignores contradictory information (as he is affected by stress), traders fail to exit a losing trade, because our discriminative attention ignores things that indicate it’s time to get out of the trade. Practice (or demo trading) does help, but many traders find that their behavior is different under stress.

So, when a discretionary trader designs/practices a system, he needs to consider human behavior, psychology, and the human factors that were discussed here. In another post, i will discuss the difficulties in being a mechanical(systematic) trader.

Final thoughts

As it generally happens in any endeavor specific to a competitive pursuit, people end up with hallowed beliefs without subjecting them to rational scrutiny. The subject of ‘which style of trading is better’ is one such associated with the business of trading and is a favorite ‘peg to hang’ blame for failure in becoming a successful trader by many.

This blogpost does not favor one over the other – Pick the one that best suits you and pursue trading in that direction.

Happy trading all !!

Great lesson from Mahabharata – Visualization

Visualization

Most of you already know that am not a religious person but the mythological books can teach us many life lessons. So, my reading habit obviously gravitates even towards mythological stories/ books.

One such lesson can be learned from Mahabharata – it is about visualization.

What is Visualization?

Visualization is simply a mental rehearsal. We create images in our mind of having or doing whatever it is that we want. Visualization techniques have been used by successful people to visualize their desired outcomes for ages. The practice has even given some high achievers what seems like super-powers, helping them create their dream lives by accomplishing one goal or task at a time with hyper focus and complete confidence.

The typical visualization pattern comes from the sports world, where an athlete would imagine themselves winning a championship or standing on the podium receiving a medal.

The key to visualization is to visualize that we already have what we desire. This is simply a mental trick. Rather than hoping we will achieve it, or building confidence that one day it will happen, live and feel it as if it is happening to us right now. On one level, we know this is just a mental trick, but the subconscious mind cannot distinguish between what is real and what is imagined. Our subconscious mind will act upon the images we create within, whether they reflect our current reality or not.

Elite athletes use it. The super rich use it. And peak performers in all fields use it.

Visualization in Mahabharata

After losing in a game of dice, the Pandavas were exiled to the jungles as per the bet waged. So, one of those days, Arjuna – the great archer was eating his dinner in the light of an earthen oil lamp, when a gust of wind
extinguished the flame. Arjuna continued to eat, his hand accurately reaching his mouth every time he ate a morsel of grain in the dark. At this exact moment, a sudden flash of thought embraced his mind.

If it was so easy to accurately place a morsel of food in his mouth, due to force of habit, the food not going into his eyes or nose by mistake, why was it so difficult to aim and shoot down a target in the dark ? This fired him up and the restless soul set about practicing archery in the dark, after staring at the target all day in the sunlight.

The mission was very clear and simple – the mind should be trained to know where to shoot from memory, just as it knew where to guide the hand containing a morsel of food in pitch dark. After months of rigorous practice, twanging his bow all night, for months, Arjuna attained mastery of the dark. The hard work paid off and helped the Pandavas win the battle of Kurukshetra years later. This is sheer Neuro linguistic programming (NLP) in work and ofcourse a lot of visualization before entering the actual arena.

Key take way and usefulness in trading

We all are Arjunas but we just lack something important – a sheer target practice. The mind can and should be trained. Samurais train with their Katanas thousands of times before attaining mastery of the sword. History tells us again and again that it can be done.

In trading terms, Visualization can help us cope with stressful situations (like visualizing to stay calm when we are in a trade) and to reinforce good habits. If one has issue in pulling the trigger/exiting early/jumping the gun, Visualization can be immensely helpful.

Thoughts are things and they create the beginnings of getting any result. The thought process includes not only what we’re telling yourself, but also the pictures that those thoughts summon.

Happy trading all !!

Getting out of comfort zone

Comfort

We have often heard successful people mentioning in their speeches/articles that one should ‘Get out of their comfort zone’ to taste success. What this phrase really means?

If we really break down the phrase “Getting out of your comfort zone” it means doing things that we don’t feel comfortable with doing.

Historical references

1. In the 3rd century B.C, General Xiang Yu sent his troops across the Yangtze river to fight the Qin dynasty. While his men slept, he ordered all his ships to be set afire. Basically,they cant go back quitting. There is only one way ahead.

Next day he told them, you now have a choice – fight to win or fight to die. This technique was followed by the Spanish conquistador Cortes in the Sixteenth century in Mexico.

2. In World war – II, Group Captain Adolph Gysbert “Sailor” Malan of the Royal Air Force instructed rookie pilots – if you want to be a crack fighter pilot lad, learn to ditch your parachute !!

3. In Indian history, we have a great example of the battle that happened to capture Singhad fort. After the fall out of Tanaji, his Brother Suryaji cut the ropes with which the troops entered the fort and addressed them ” Either die fighting or Jump off the fort and die – Your choice” This happened around 1670 under Great Shivaji in the battle of Singhad fort near Pune.

Behavioral references

Psychology professors Dan Ariely (he is my personal favorite) and Jiwoong Shin conducted extensive tests on subjects on why people cling onto multiple dating. They found that male and female subjects often latched on to multiple dating partners, refusing to commit to a formal relationship for the fear of losing the comfort of other date partners. They wanted the “safety” or “comfort” of numerical strength.

Often in life, we are required to burn our ships like General Xiang Yu to cut out the option of retreat from a difficult situation as a measure of self-motivation. In extreme circumstances, ditching our parachute like Group Captain “Sailor” Malan advocated becomes necessary to come out of our lazy, comfort zone.

Disclaimer: This tactic however, needs to be extremely/well thought-out and strategised. Cannot be applied to every situation in life – extreme due diligence is required !!

Nevertheless, as they say, “Life begins at the end of our comfort zone”. So, lets get out of comfort zone and the whole world is ours to explore 🙂

Never start your trading day with an hungry stomach

Brain

Indian stock market starts at 9:15 am. Well past the usual breakfast time for many. Yes – this post is about food 🙂

Behavioral science has been blessed with many stalwarts. Roy Baumeister is one of them. As a behavioral scientist, he wanted to ascertain whether remaining hungry and / or craving for food (though not starving) impacted a human being intellectual performance. As it goes with many researchers, he conducted an experiment.

Details of the Experiment

Two batches of 30 students each, of equal IQ and academic performance were selected. They were locked up in separate rooms for 60 minutes and given an exercise to master in mathematics. In both rooms were ovens, which were halfway into baking cakes and cookies. B

Batch # 1 was instructed to stay away from the oven even after it finished baking and was banned from consuming a single cake/cookie. Batch # 2 was instructed to wait for the oven to cool off before enjoying the confectionery.

Result of the experiment

After the designated 60 min timeframe, Roy Baumeister found batch # 1 floundering in their mathematical questions, whereas batch # 2 breezed through it.

Upon interviewing them, students of batch # 1 admitted that majority of their mental energy was spent in fighting their salivating mouths, the aroma of the cakes & cookies and deep emotional craving for the goodies. This was a great revelation.

But, the experiment did not end there. The roles were reversed and batch # 2 was forbidden from savoring the cakes & cookies and their performance went south as well. This is a very critical piece of information that can be used by traders as it can affect our logical decision making capabilities.

Final thoughts

Next time you decide to skip breakfast because you’re in a rush, please do remember this experiment and how our mothers force-fed us before packing us off to school. One might call that as ‘love and affection’ but indirectly, it served us well.

Moral of the experiment – Never start your trading day with an hungry stomach 😊

Roy Baumeister Profile

https://psy.fsu.edu/faculty/baumeisterr/baumeister.dp.php

Happy trading !!

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 !!