Monthly Archives: February 2012

First time in a trading room – fun and very useful

So here’s a new experience for me that’s been something of an eye opener.

I had Thursday and Friday completely off work so took up Mike’s (@FtseDay on the twitter) kind offer to hang out with him and the crew in the trading room he’s created all focussed on trading the FTSE100 using a few really simple setups.

It was great fun since trading can be an entirely solitary experience plus the banter keeps everyone on their toes. The last thing you want to do is trade like a total d**k-head in front of a bunch of people 😉

I’m pretty gutted that due to me work commitments I’m unable to spend more time in this environment because as a learning experience I’d reckon it’s pretty awesome. To come back to a previous post (here) I’d suggest that in order to be successful at trading you need someone to teach you. Books on trading don’t work. Books on psychology are on the other hand extremely useful. I’ll come back to this point in another post.

Anyway, being in a trading room would (imho) be the top of the list for the fastest way to learn and importantly make money at the same time. Some of the advantages:

  1. Multiple people looking at the same chart – many hands make light work
  2. Can see the same thing from lots of angles – you may be wrong but someone else is probably gonna nail it.
  3. See other people’s psychology at work – if someone’s more patient then it’s easier to ask/learn from them how they do it
  4. Quickly learn from others what not to do 😉
  5. Moral support
  6. It is competitive and that’s a good thing. Props to eddie and especially James for winning the ‘balls of steel’ award last thing on Friday.
  7. Nothing worse than someone taking a trade (which you didn’t) and see them making their target while you sit on the bench – thanks eddie (lol)
  8. You learn faster as you’re learning from the ‘collective’ not just yourself
  9. The market is live and you’re trading it. You’re not learning from some static chart where the resolution (and success) is obvious with hindsight… This is a key advantage

Now this was all based on everyone learning/trading using the same kind of approach that Mike trades the FTSE100 with. I can imagine that if it was a ‘free for all’ room with no underlying ‘this is our approach’ theme then it wouldn’t be half as effective. However it was extremely useful.

If you’re new to all this and want to learn to trade effectively straight off the bat then I could do a lot worse than recommend you go check out what Mike is offering. Major bonus for the newbies is that he’s not taking the piss by charging stupid amounts of money for stuff that doesn’t work.

BUT before anyone gets way too excited though I’m going to point something out that I hope is obvious by now… There are still no short-cuts. No-one is going to hand you a guarantee that trade ‘x’ is going to work because it’s still your own psychology and experience that will determine whether you take a trade/setup or not.

I missed some absolute corking opportunities on both days but I still made some money while having a blast. So if this sounds interesting to you then go check out Mike on the twitter or here

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Psychology – why it’s so important

Sooner or later if you’re serious about trading you’ll see that as well as people quoting the fact that 80% or people that try just fail you’ll also notice people writing that trading is 80%+ psychology… This simply can’t be a co-incidence 😉

As previously stated part of the reason for me writing this blog is to show that it can be done and to provide a better understanding to others about what is actually involved as a retail person. I’d define ‘retail’ as someone opening a minimum sized spread-betting account and trying to build it from the ground up. Yes, I’m a complete masochist apparently! If you’re reading this as a ‘newbie’ then you probably are too…

Anyway – trading is mostly psychological. If you have issues then being able to analyse your own reaction to dilemmas when trading is going to become a very important skill – and now I’m just waffling in order to avoid getting to the point of this post.

So I basically spent Thursday night awake dealing with the implications of realising that the major challenge I have and have always had (in life and not just trading) is that I’m afraid of being wrong.

As you might appreciate with trading this is a major problem because as a beginner you’re going to be wrong a lot and even as an expert you will still get things wrong. No-one trades with a 100% win rate – if someone knows someone that does then please can they put me in touch and I’ll ask to learn from them…

I’ve been able to break this all the way down to understand the root cause of this fear. I’m not going to detail where this problem came from but I’m happy to explain the implications as far as trading goes.

The fear of being wrong means: –

  1. Hesitating to take good trades and missing opportunities
  2. Lack of confidence in general with regards to my own ideas
  3. Overly focussing on the possible negative outcome

So in summary? Being too pre-occupied about the possibility of being wrong sucks. You can probably extrapolate a whole lot more from this and it definitely reaches out to areas of  my life outside trading.

It’s not even the being wrong that’s the problem… it’s the fear of getting something wrong that reaches out and stops me taking the right action. How f**ked up is that? In regards to trading I know the result of being wrong is that I will get stopped out and ’cause I’m not a moron that’s really not going to have any significant negative consequences.

Thing is though the ‘fear’ part was written into the back of my skull an awfully long time ago and has remained there for decades.

The major silver lining of course is that now I’m aware of the problem it’s something I can sort out – it’s impossible to change behaviour if you’re not aware of it. I’m delighted to have finally figured this out because I’ve been able to join the dots between this one thing and a whole stack of things I need to change. It’s a huge step forward to be able to combat something I can see and I expect tackling this to improve my trading of course.

Psychology in trading? It’s not just important, it’s impossible to escape it. Bring it on 😀

The real reason ‘retail’ traders fail

I’ve been spending a lot of mental ‘time’ looking at the approaches of Jimmy Young, Chris Lori and especially @Trader_Dante off the twitter in the last couple of weeks. This also comes back to a throw away comment that Anton Kreil made at his ‘Traders of the Future II’ seminar. Added to that a spell watching Mark Douglas on youtube and then a couple of other excerpts by Brett N. Steenbarger so my brain is well and truly cooked with respect to trading.

Sometimes all this marinating can produce questions and maybe a little insight.

We all know the statistic about ‘retail’ traders have this appalling 80% – 90% rate of failure and it takes so much time to get good etc. Now of course psychology plays a huge part but prompted by this question I think I’ve gotten some way to understanding why this is true.

Retail traders are told that charts are at cause in the market or to put it another way…

Retail traders think what happens on the chart causes further stuff to happen.

This is partly correct but if something is partly correct it’s also not right either 😉

A chart is an effect – it’s the visual representation of a bunch of transactions and is only slightly causal in the grand scheme of things. A chart is an outcome. Believing that what you see represents the market and attempting to use this as a means of gaining an edge is likely to be a challenge because you’re not thinking about the totality.

Here’s a suggestion of the whole system

Now you can see that charts represent about 10% of the actual information available. Lets break the other elements down.

News = Information coming in that will have either a short term or long term (macro) effect

Market = The sentiment of the majority of the market at the time(frame) you’re in

Traders = Making bids/offers as the conditions change across multiple time-frames

So while there is a feedback loop between traders (who can move the market) and what happens on a chart (price) this image does not have the same weight for traders as the poor retail guy believe it does. For a retail trader the chart is the market. This is a key difference and a mental trap for every retail trader. It definitely pays to think outside of the chart.

For a trader with multi-millions at stake the chart is a result of their actions based on market opinion, macro economics, news and very importantly what other traders are doing. Here’s another attempt at a diagram as it relates to the actual situation…

Retail traders think the chart lives at the top on it’s own and has way more influence than it does…

What’s at cause here moving the squiggly line on the chart?

Yes, it’s how the Trader with a capital T is reacting to events, the market and to a certain extent where the price is in relation to other points. Now, what are the consequences of this for all us retail guys out here in the wilderness? What can we do to level the playing field? Well it helps to be asking the right questions for a start.

Retail newbie question – What’s the price/indicator/chart doing?

Retail improved question – What’s the market doing and how can I join in with low risk?

However here’s the question I believe you really need to ask…

How are Traders viewing the market and where can I enter for minimum risk to ride on the back of their actions

The market doesn’t move at all until a bunch of traders decide ‘we’re going to go this way’ because you and I as retail traders are simply riding on the chart which is the result of the actions of others.

A clear ‘short-cut’ for retail players is to learn to look at charts like Traders and then trade just like them or more accurately off their actions. Seems obvious when you say it like that but this may actually be the only way to achieve an edge over the long haul.

If you don’t want to spend your time thinking this through then I’m sure there’s another guy waiting to sell you the latest ‘can’t loose robot’ or ‘holy grail’ system. Putting myself in someone else’s shoes actually sounds a whole lot more straight-forward. I can’t beat them so figuring out where a Trader would enter and then doing the same means they’re doing the heavy lifting and I’m simply along for the ride 😉

Now a simple question remains…

How can you understand what Traders with a capital ‘T’ are doing? You need to look and think about what’s actually happening from the perspective of a bunch of real people that are already in the market, already in a position, trying to get in or out depending on whether the price is going up or down, rising or falling sharply. Thanks to @Trader_Dante for mainly providing the mental kicks to get this out of my brain and onto this ‘ere blog.

Traders are competing with others buying and selling actual stuff and because the retail guys is not doing this then it’s actually very challenging to look at a chart while keeping this in mind. Who is getting a kicking and who is dancing round the office? It’s that simple but until you realise you need to look at what is occurring on a chart with a completely different mind-set I’d say you may still be in the 80-90% bracket.

Ask yourself a different question when you look at a chart (price) pattern, see some news or try to get a ‘feel’ for market sentiment over the long term. Ask yourself this: –

What are the buyers/sellers and other actual Traders going to do when the price gets to ‘x’ point?

In summary and for the last time today… You are making a ‘bet’ on the price move of something that is being bought and sold so it’d probably really help to put yourselves in the shoes of those actually doing ‘buying’ and ‘selling’. How you see the price is not how the people moving the price see what’s going on so you need to look at everything from their perspective for a chance to win.

Right. I am now officially sick of thinking about trading. Possibly until tomorrow anyway 😉

I’d really be interested for people to comment on this post so please don’t be shy in coming back with your thoughts. Thanks for reading.

Trading and getting out of your own way…

I may well be jumping the gun a little bit… but let’s go for it anyway since it’s an important point. This post has been massively inspired by Rogue Traderette’s post here and it’s worth checking out for the picture of Julie Andrews (lolz) as well as the main point she makes. I might actually get around to posting a chart on one of these blogs soon – lol

So to continue… Your mind is an incredible tool which has evolved over millennia to be extremely efficient at protecting you from harm. Now that we are the largest and most successful species on the planet there’s not a lot of real threats left out there.

The challenge is that your brain and emotional responses are still wired to deal with the chemical signals triggered by stress and worry. Which is a bit of a pain in the arse when it comes to trading 😀

Anyone who’s just started in this arena will be in the middle of getting a rude shock when they put actual real money on the line. All sorts of extremely compelling signals will be dancing about your brain as soon as the trade looks like it’s going to go off-side… It may also be on-side but if you don’t ‘get’ how price moves you’ll still be freaking out.

There are a couple of ways to help counteract this and so I’ve made a list 😉

  1. Trade smaller size. If you’re freaking out all the time you’re trading too big. There are brokers out there that will let you trade 6p per point – there’s no excuses here
  2. Knowledge. I don’t care what anyone says but you absolutely cannot learn to trade from reading a bunch of trading books. I’ve tried. While many authors are well intentioned I’ve not read one yet that actually defines what works today in a general sense and even fewer begin to tell you how to figure out how to develop your own approach to the markets which matches your personality/ psychology/ approach/ beliefs etc. There is no overall blueprint. Find someone who is trading in the current market and who is nailing it. Then see what it is about their approach you like/understand and see what bits you can implement effectively. Then practise, practise, practise… Hang on, I’m getting side tracked into writing another whole post here. Will do this topic later!
  3. Do all your worrying in advance. Realise that once the trade is on there is nothing you can do to influence the outcome. The most effective way to do this is to cover all the bases before you place a trade and then take a mental step back from the screen. Get out of your own way. Your trade idea is now out in the wild. Getting attached to the outcome and worrying about the future (which you can’t control) is a pointless waste of energy which will compromise your ability to manage the trade.
  4. Focus instead on watching your reactions as the trade unfolds without being too judgemental over the results. It’s only a bad trade if you fail to learn from the experience, you puke the low/high before you get stopped out or you get out for no reason (giving into fear).
  5. Do not look at your P&L because it will only make you tense. This is like looking in the rear view mirror when the tyrannosaurus is chasing you down. Not a good move overall… Your trading results are invisible to the market and no-one cares about your position except you.
  6. Focus on the process and the present moment – not the outcome. What ‘could’ happen next is entirely outside of your control. You’ve stacked the deck in your favour but you aren’t dealing the cards
  7. Here’s another way to think about placing a trade. The ‘work’ is actually in the analysis before you go anywhere near entering a position. Once the trade is on you’re no longer working but simply waiting to see what happens next. Sort of like watching a film unfold. You have a script in your head and the point at which you shouted ‘action’ is under your control. Once the camera is rolling you’re no longer in control as the market is going to do what it wants. It will go badly, it can go well or it can exceed all expectations

The bit everyone has problems with is that they’re not in control of the outcome. Newbies will spend a ridiculous amount of time searching for a ‘holy grail’ that will give them an illusion of control. Most people are actually looking for someone/something to tell them what to do and give them the answers (I know this as a project manager) rather than think for themselves. Independent thinkers are few and far between. Leaders even rarer beasts.

Here’s an interesting point. When people crap out they blame the market, their strategy or maybe the news. When a trade goes very well they take all the credit which is of course fundamentally flawed psychologically. People avoid taking responsibility for taking crap/low probability trades. Human nature once again kicks us in the goolies…

You really only have control over a few things

  1. Your analysis of the situation and what this means for an entry point
  2. Where you put your initial stop/ take profits and how this controls your position size
  3. What you focus on as the movie rolls – see the list above

Watch the position but try very hard to do so from a detached perspective. Watch ‘you’ watching the trade and look very hard at what’s actually happening as the candles print right. Do not look at your P&L and also keep in mind that if your take profit is 50 points away that getting there could take a few hours (at least) plus involve maybe at least one major retracement move. All this depends on so many variables that only screen-time can give you a sense of. You’ll learn a lot about your own brain if you keep half an ear on all the trash-talk it’s chucking out in your direction about how your position is about to go completely wrong 😉

A great point from meditating is that ‘you’ are not the thoughts in your head. Learning not to identify or listen to that sort of incessant mental chatter is a great skill to learn.

Now, why am I jumping the gun talking about this? [got back there eventually]

I’m feeling that I’m near to having sorted this out from the last couple of trades I’ve put on. Yeah that’s me asking the universe to kick me right in the balls there 😉

This really derives from having covered all the points needed in advance then taking a mental step back when the trades actually on. Having placed a lot of dog**t trades I now know what one looks like so avoid them at all costs. So I’m maybe jumping the gun because I feel as though I’m now on the border between conscious incompetence and conscious competence… Time will tell. Here’s a reminder of the stages…

  • Unconscious incompetence = you don’t know what’s needed to succeed (ignorance)
  • Conscious incompetence = admitting you don’t know (acceptance)
    • I reckon I’m just leaving the borders of incompetence although I’m sure a relapse is completely possible!
  • Conscious competence = success is possible with constant effort (doing the practice)
  • Unconscious competence = success is effortless (enlightenment)

So it takes >570 hours to wade through the first two stages… Being stubborn is under-rated!