Monthly Archives: October 2011

Fear and acceptance

I’m going to point out in advance that the following post is possibly a bit long and is an amalgam of a few references. However I hope it will help any newbie traders who’ve hit this point.

There’s a bruise on my forehead from this one kids so pay attention… 😉

Anyone who starts trading and actually wants to succeed has the odds stacked against them on two levels. Number one… They have no idea what they’re doing. Number two… They don’t have the psychology in place that will help them trade successfully. It’s possible that number three is ‘unrealistic expectations’ but I’m not going to go there ’cause I’ll end up on a 20 minute rant about training companies (calm down dear)

So, this week has seen the coming together of some information from a number of diverse sources…

  1. Reading ‘The Disciplined Trader’ by Mark Douglas as recommended by Jimmy Young during his excellent two day FX course
  2. Free online training from Mike (@FtseDay on Twitter who writes an excellent blog here) who basically spent 100+ minutes talking about trading psychology
  3. Japans very own ‘Gone with the Wind’ called Musashi which is a ridiculously long book about the Samurai ideal and the pursuit of perfection among other themes
  4. As mentioned before – 21 weeks of getting my arse handed to me on a plate by the market

The problem I’ve been trying to deal with is basically fear associated with pulling the trigger on trades. It’s clear from the previous post that not having a clue what I was doing (problem number one) has created a certain reticence with entering a position.

But… when I thought about this it didn’t seem ‘enough’ somehow. This issue I’ve been struggling with couldn’t really be held by this one idea as the feeling I was experiencing was too large. So let’s work on the basis that I now have a certain idea about what I’m doing. I’ve spent enough time on the mechanics of how to drive the car but I’m still scared to pull out of the driveway into the traffic… Seems a bit dumb, right?

Mark Douglas’s book has some great insights into trading especially with respect to the relationship between the trader and the market. It also contains some pointers to overcoming issues with trading. He tells it straight and is (imho) more accessible than Brett N. Steenbarger. Anyway I picked up a lot of tips but it wasn’t quite fitting together…

Then listening to Mike (@FtseDay) talking about how he went through the process of learning to trade he said something that stuck in my head which clearly hadn’t penetrated my thick skull before.

It takes a trader to take a loss

Now what that doesn’t mean is that you trade like a moron. What it does mean (to me) is that when you place a trade you accept that it could be a losing trade (obviously don’t expect it to lose) but the key point it that you’re not afraid of it failing to meet your expectations. Or if you happen to be a Samurai you’re not afraid of the other guy cutting you into tiny little pieces – lol

The samurai ideal was crystallized in the legend of Musashi who sought to become the greatest living swordsman by eradicating his fear of death so that he was able to fully commit to every action/movement in each battle to defeat his opponent. In the story he gets to a point where he realises every conflict is actually a battle with himself and the enemy acts as nothing more than a mirror.

Also this isn’t about abandoning hope but a complete acceptance of the reality that the trade will go your way (profit) or not (loss) without you being attached to the former or fearful of the later outcome. It should go without saying that you’re only going to place trades that meet your other criteria for a ‘high probability of success’ trade!

What’s pointed out in Mark Douglas’s book is that fear very much restricts the brains ability to gather, weigh, and process all the information available. Being afraid is not a state of mind that allows you to calmly consider all the options. Tunnel vision isn’t a good state to trade in! If you’re afraid then you’ll miss vital information. Calm is the order of the day.

What I resolved to do and actually did on Friday was put a trade on, accept the outcome of the trade in advance and then leave it to play out. All the usual OMFG nonsense about putting the trade on, watching it going (for/against) and then putting the stop too close or closing it out for a loss only to watch it reverse… none of these things happened to any great degree internally. Overall my emotional state was detached, un-afraid and interested.

I managed the trade without my lizard brain freaking out in the background… Much better!!

I put my stop in a logical place, I had a take profit target and I was able to calmly think. In fact I realised that my reason for entering the trade wasn’t actually playing out and was totally invalidated by the time I got out.

I closed the trade for a tiny loss by patiently waiting rather than panicking out for a 20+ point loss. Funny that my lack of trading experience defeated me on this occasion rather than crappy psychology!

  • Bad trade + bad psychology = massive / possibly irrecoverable loss
  • Good trade + bad psychology = still possible lose / possible small win(luck?)
  • Bad trade + good psychology = possible loss / possible small win(luck?)
  • Good trade + good psychology = possible win / very good win

Now, you can see that new, inexperienced traders or anyone with bad psychology with respect to trading is more than likely going to lose. Yes, you might get lucky a couple of times in the middle there but luck isn’t the basis for any sort of long term success. Relying on luck is called gambling 😉

Being realistic it may well be that only by being in the last category (good trades+good psychology) does a retail trader even begin to have a chance to be successful… and then they’ve still got to get everything else about trading right too! You can place a good trade and have good psychology but STILL lose due to some un-foreseen news etc.

Anyway, next step will be to practice the mental/emotional approach I took on Friday till it becomes automatic.

  • Examine the trade setup and other factors – reasons to enter
  • Confidence to place the trade with stop/take profit and without fear
  • Accept the outcome and detach from the result emotionally
  • Monitor in relation to my reasons to place the trade (reasons still valid?) not emotions
  • Close the trade at an appropriate point
  • Rinse and repeat for the next few decades 😉

I suspect this won’t be as simple as writing about it but I feel very happy to have made this breakthrough. To quote the great sage “Do or do not, there is no try!’

Psychological damage

Continued progress this week with regards to noticing what’s going on.

Much to my consternation (and further confirming my ‘newbie’ status) it’s clear that there’s at least 10 different questions you need to ask yourself before placing a trade… This isn’t an exhaustive list and I’m writing this off the cuff Saturday a.m. on not enough sleep so it will contain errors.

  • Macro environment – What’s the market focussed on? Bullish/Bearish? Risk on/off?
  • News events impacting or imminent?
  • Entry signal valid
  • Target price risk/reward
  • Correlation to other indexes for confirmation
  • Support/Resistance in play?
  • Time of day factors
  • Previous days high/low prices in relation to the current price
  • Avoid getting into a retracement that’s about to reverse
  • Looking for a low risk point to get into an existing move
  • Position size

For anyone who is already trading successfully this isn’t going to be revelatory but for new traders this may come as something of a shock. You need to create a composite view of the world at the point where you’re considering placing a trade. From all this you may come up with an idea to trade. If it looks as though your idea is going to come off then you need to place the bloody trade… After that you need to manage the trade – to a bunch of entirely different rules that I’ve hardly begun to figure out.

This is the point at which I’ve discovered a psychological issue driven by 9 months of not having any clue what I’m doing. Nine months of failure means essentially I’m now very risk averse because previously if I didn’t want to lose money trading (as I had no clue) then the simplest thing to do would be not to trade.

I’ve managed (through continued failure) to teach myself to expect a negative outcome to placing a trade. Obviously this is not a good thing and something I will be unlearning over the next few weeks. Happily I picked up an excellent book by Mark Douglas which addresses this and other issues called ‘The Disciplined Trader’.

So because of this factor I had a pretty frustrating week where I saw some great setups but failed to take them… Still, at least the problem is in my head and not with the approach I’m learning. Newbies have two problems to overcome… The bit between their ears and not knowing that they don’t have a clue about the technical side of trading.

Technical side – check (or getting there, need more practice) 😉

Mental side – needs work

Overall? About 50% there? Onwards!!

That was the week that was

So as I continue getting to grips with Jimmy Young’s approach to FX this week ended very slightly on a low for me as I reverted to ‘old style’ i.e. losing approach trying to substitute a system for using my brain…

As with so many things in life generally getting too attached to outcome means you can’t look at a situation rationally and make good decisions.

If some strategy or tool gives you a signal then it’s only the beginning, a hint to think about taking a trade. You still need to ask yourself why you should take the trade. One big part which I consistently forget is knowing where my target is for the trade…!

In other words Friday saw me taking a short with only a 1:2 reward risk ratio so immediately that’s a recognizably dumb idea. Now, I tried to short-circuit this by putting my stop way too close to the price.

Rather than accept it was a dumb position to take I compounded the error by changing all the criteria to fit the picture I’d become overly attached to.

Overall this week I’ve learnt quite a few things and am down this week a single point. Tools/Strategy is working but the trader (me) still needs more practice 🙂

For those of you who might be considering learning to trade please see updated ‘Read this first‘ page which now includes an educational video!

Thanks for reading

Redemption

It’s Thursday the 6th of October and today I am a happy trader 🙂

Why?

Well, nothing spectacular actually but I feel a certain sense of achievement.

I began the week on Monday morning long AUDUSD, EURUSD and GBPUSD from about 8am with all finally getting in to profit… Closed the first two just before 9:30am (phew) and then got taken out by the UK trade numbers (-27pts) when I should have closed my position before the news release. I wasn’t paying enough attention otherwise I’d be +40pts up… So I walked away slightly battered and kicking myself for missing this obvious point where I should have closed everything. I’d rather recognise that I wasn’t paying enough attention than blame this on ‘bad luck’. News really matters!

Later in the morning I clawed back 17 pts from another news release by following a better strategy but not before I’d lost another 10pts to entering an idiot trade ’cause I was pissed off. Bad psychology reared it’s ugly head again slightly there though… need to pay attention to that still 😉

Today was good though for a number of reasons. I went long GBPUSD after the BoE announcement and picked up 45 points so am back in profit slightly for the week. This was based on a proper entry strategy and some confirmation so I was also happy to sit out the whole move as the position got into profit. This was a good trade.

Now I’ll be the first to admit these results are not earth shattering overall. However, even with some glitches (bad lizard brain) and Monday’s mistake I’ve continued to make progress as a trader. Of course great opportunities have been missed but I’m really beginning to enjoy the process as much as the outcome.

Today I did good, learnt some more things, I’m content and looking forward to tomorrow

Thanks for reading.