Tag Archives: consistency

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 !!

Trend following and pivots basics

Introduction

When it comes to trading the markets, we are always inundated with so much of information (I call it as ‘Information constipation’) that we could no longer see the forest but obsessed with just seeing the trees. The process of trading or speculation (as they call it), has morphed into a pseudo-intellectual science and consequentially, traders think that they must strain their brains to profit. Trading, however, is anything but an intellectual exertion. In fact, the more we use our brain in trading, the more likely we are to find ourselves with negative P&L.

I have actively traded my own account for the last 12+ years and let me be honest – the initial few years were marked by lots of trial and error. A good mentor can obviously shorten that learning curve but that is besides the scope of this post. Becoming a consistently successful trader has got nothing to do with education and I can vouch for it. My success in trading has got nothing to do with my postgraduate degree. In fact, my formal schooling did more to hinder my ability to trade than help. Graduate school filled my head with lot of abstractions and theory but did nothing towards advancing my common sense. It caused me to think a lot about the ‘right way’ to trade, and the harder I thought, the farther I was going away from the basics of trading.

Trading is not so fundamentally difficult, but the print/visual media wants us to feel so. They have their own business reasons for it. Trading the markets can offer fantastic opportunities to make money but it is at the same time, the most self-revealing career anyone can ever choose. Now, one may wonder why this rhetoric but think about it. If any of us can structurally identify what the markets are doing currently rather than trying to ‘predict’ what the markets are going to do, job is 75% done. We don’t need to predict as we don’t know ourselves what we would be thinking this time next week. Neither can anyone know what the markets will be doing this time next week. We all trade our own belief systems. Once we identify the underlying structure of markets, suddenly, trading seems not that difficult. This is where ‘structural pivots’ can be of immense help. Pivots can help us identify the path of least resistance. Think of how, in our own life, we follow the path of least resistance. Following that path has led us to read this blogpost this very instant. Just understanding the underlying structure of the markets has served me well in the past decade.

Floor pivots vs structural pivots

Whenever I use the word ‘Pivot’, the listener always gets baffled on what I really mean as we have another set of pivots that is often talked about. This section is to clear that up a bit.

There is something called ‘floor pivots’. Floor pivots has been used for many years by floor traders to come up with a reference point based on the prices from the previous day. It is calculated based on high, low and close of the previous day. And few lines are drawn above the pivots as resistance and few lines below as support. Most of the technical trading platforms can plot these lines automatically.

The formula is as follows:

Pivot = (H + L + C)/3
Resistance level 1 =(2*P) – L
Support level 1 =(2*P) – H
Resistance level 2 = (P – S1) + R1
Support level 2 = P – (R1 – S1)

I personally find these levels not so useful for trading. Some people think that these levels have meaning because so many floor traders, and now screen based traders, watch them, and they become self-fulfilling. That may be true to some degree. On most trading days, there is no beneficial information at any of these levels. Many attempts have been made to change the formula, such as using the current day’s opening price instead of the previous close. There is little improvement with any of these variations, in my opinion.

An interesting experiment is to draw a line randomly on an intraday chart. Just close the eyes and drop a line using a horizontal line tool and place it anywhere on the chart. Then, watch as prices move away from or toward this line. It will hit and reverse on the randomly drawn line about the same percentage of times as it does off the pivot or the support or resistance levels. The randomness of the placement of the line does not necessarily make it useless. A line drawn anywhere on the chart can be a useful point of reference. With a line on the chart, one has a better sense of the market movements. You can more easily gauge the movement, or acceleration towards or away from this line. It is like being in a boat at night, in a fog, with a lighthouse at some distance away. The lighthouse becomes a point of reference, and you can tell whether you are getting closer to or further away from that point of light.

On the other hand, a structural pivot is a price level that stands out on the chart as a high point and surrounded by lower bars, or for downtrends, a low level that stands out and is surrounded by higher bars. For example, in an uptrend, a price level will be reached that attracts selling and shuts off buying, at least momentarily. Prices will usually fall back somewhat, thus leaving a price bar on the chart that has lower highs on either side. This high price bar then becomes an area to test on the next push higher. Traders mark the structural pivots in myriad number of ways and I have found my own way of marking that helps me understand the underlying structure of the markets in a more systematic/structured way (this will be covered in the first session of my upcoming workshop in Bangalore/Chennai). Pivot points on the chart create excellent reference points to interpret the developing market structure. Some traders refer to these pivots as swing points. Those who view the markets in terms of chaos theory would refer to them as fractals. They are all same concept, just with different names. This way of marking structural pivots has been around from early 90’s.

Trend following and structural pivots

Trend determination is obviously important for trend followers, but anyone trading in any style should be aware of the trend in the market they are trading. The overall trend can influence our trading style. The beginning of a trend can be easier to trade than end of a trend in many cases. Therefore, it is important to know what the trend is.

But to complicate matters, there can be many trends at play in the same market, even on the same chart. There are trends within trends. Different period lengths on a moving averages, or indicator input, can signal a different, often confusing and conflicting trend. There can be a counter trend down move on a 30-minute chart, while the daily chart is showing a powerful uptrend, while the monthly chart is showing a sideways trend. When they all line up, it is the most comfortable and reassuring time to take a trade, but if we wait for everything to be in sync, we you would probably trade very little, and often not in a timely manner (this is a common problem with ‘multi timeframe’ analysis’) And often the comfortable and easy trade is the one everyone sees, and it often turns out to be untimely. My thought, after changing my mind on this issue many times over the years, is to keep it simple and just trade off the time frame of the chart you are analyzing.

Most of us want indicators to guide us, as indicators are quantifiable. We can lean on them with more confidence. However, the purest and fastest way to determine trend is just through studying the price structure. Price does not lag. Price is not derived from anything. It is current. It might frustrate, but it doesn’t lie.

Workshop

The above chart shows a series of price bars. I took the time frame and market off the chart for this illustration. It really doesn’t matter what time frame is being analyzed. A trend has the same basic structure in all time frames. The red and green horizontal dotted lines are placed at swing points in the price action.

This is the same theory of a market making higher highs and higher lows, although this isn’t always exactly true. Sometimes a pause will form in the price structure and prices temporarily go opposite to the trend with the market making a lower high, but as long as a lower low is not taken out, the uptrend is still intact. On the above chart there is a smooth progression of structural points taken out from the first blue up arrow to the red down arrow on the right. There was only one instance, near the middle of the chart, where there was a slightly lower swing high.

I believe swing points are valid as a breakout strategy because the market views these points as areas to test. If the test fails, the market will test or create a swing point in the opposite direction. If the test is successful, the market will proceed upward, and the old swing point becomes an area of support if the market revisits that neighborhood. The market is constantly testing whether trade is accepting or rejecting price, and these structural points are the reference points for these tests.

Workshop

So, what do we do when the market chops like we see in the above picture? There is a way of avoiding these chops atleast 60% of the time if we mark the large pivots (see it as a high/low of a range) on top of the small pivots and trade only if it goes beyond that range. I have 100% mechanical way of marking it, formed rules around it which can be traded mechanically. Most of the structural pivot traders imbibe an element of discretion in their trading (to avoid chop trades) but that is exactly why, those traders suffer the most w.r.t psychological let-downs of the mind.

I should also mention that another trend following approach that was very popular in the past. It is the channel breakout. It worked in a very narrow window of time when markets trended well. The basis of this approach is to buy the breakout of the high of x number of bars ago, or short the breakout to the downside of the low of x number of bars ago. Often a stop is used with the same breakout method, but with a shorter look back period. One of the originators of this method, who was incredibly successful for a time, has not been able to be profitable with it in recent markets, even after many attempts. I think a more valid approach using breakouts is to trade the structural pivots, rather than a fixed lookback. The pivots are dynamic and reflect the structure of the price action. Fixed lookback periods don’t offer a breakout related to market structure. The market is testing structural points to see if price can be accepted or rejected at these points. The market doesn’t care about testing a price bar that occurred 21 bars ago just because it was 21 bars ago.

This has been a long post but I feel a much needed one as I often get questions on what pivots are and how to make a price action idea 100% mechanical in nature (with unbending set of entry/exit/MM rules). That is exactly what I intend to do in my workshops on August 11, 2018 at Bangalore and August 18, 2018 at Chennai. I will be showing how to identify and mark the pivots, how to mark ranges (mechanically), how to create entry/exit rules for this concept that can be traded mechanically and how it has served me well so far

Happy trading all !!

Price action based trading + System trading Workshop

Introduction

As many of you know, i have been trading just the price (a.k.a price action trading) for the last 14+ years and was receiving requests to take classes/workshop on how I do price action trading in a mechanical way (absolutely no discretion involved).

Based on past participants feedback and the time crunch we face in every workshop, i have decided to conduct 2 days workshop from hereon. I would be covering Intraday trading, Backtesting, Money management and psychology extensively (1 day workshop pales in comparison with the content/hands-on experience am gonna cover).

Workshop Agenda and participants feedback

Please click on Workshop Agenda for complete details on agenda.

Please click on Past workshop participants feedback

Fees and Timings

Fees for 2 days : Rs. 25000/person (Inclusive of mid-morning Tea/Snacks, Lunch (Veg & Non- Veg buffet), Evening Tea/Snacks)

**Accommodation not included. You will have to arrange your own accommodation**

Timings : 9 AM – 5:30 PM (on both Saturday and Sunday)

Payment details

To confirm your registration, please pay an advance of Rs.10000 (and the remaining balance of Rs.15000 atleast 2 days before the workshop)

(or)

the full payment of Rs.25000 to the below mentioned Instamojo ID (all kinds of payments like Bank transfer, Credit/Debit cards, UPI, Wallets are accepted)

https://www.instamojo.com/@marketswithmadan

Kindly mention your preferred workshop location in ‘Purpose of payment’ and send the screenshot of the payment window along with your name to marketswithmadan@gmail.com for further reconciliation and registration process.

Location

Chennai

Date: March 7(Saturday) and March 8(Sunday) – 2020
Location: Hotel Southern Comfort, Next to BMW showroom, Meenambakkam, Chennai

Mumbai

Date: April 11(Saturday) and April 12(Sunday) – 2020
Location: Hotel Suba International, Andheri East, Mumbai

Additional perks of attending the workshop

Telegram support group for the attendees (1 month duration) to clear out workshop related doubts.

Contact details

If you have further questions, please email me at marketswithmadan@gmail.com or Whatsapp at 9677036689

Trading Q&A – Discipline

Mentoring

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

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

Question:

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

Answer:

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

Probable causes of the problem:

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

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

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

2. Trader trying to fulfill his short term needs

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

Solutions

Problem # 1

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

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

Problem # 2

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

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

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

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

Good luck and hope it helps

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

UPDATE as of November 01 2019 – am not taking any new mentees until further notice.

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. 25k 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!!

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 !!