Tag Archives: decision making

Trade 090613

Yep, they’re coming thick and fast now – lol

This trade was based on a lack of large sell orders at this point of the day. Price basically bleeding up following a serious gap down over Sunday night. The logic goes like this…

If you have a large sell position to execute you’re simply not going to drop this into the market on the wee hours of Monday morning after the pair has already dumped 100+ points

(Usually)

If you read ‘Markets in Profile’ or anything on auction market theory this will make perfect sense. Price auctions up looking for sellers and after a drop like this there are no sellers down here 😉

So there’s a (qualified) good chance that price will get back up to somewhere close to the top of the gap before the buy liquidity is available to mean this type of size actually gets executed… right? Right!

M5 AUDUSD 090613

Apart from the error I made which I’ve pointed out on the chart (trailing my stop too aggressively on/around my first target) I also could have waited for a better entry price.

I actually remember thinking ‘I want 0.9396 to buy this’ but then I decided not to wait and plumped for 0.9403 instead. The reason I mention this is that waiting could have meant I’d have been less jumpy with my stop and held the trade for longer.

This is all highly speculative of course but before anyone asks this was a +24 winner although yes, there was another +20 in there which I missed at one/both ends.

Right, back to work as obviously I’m still not a genius 😉

All my best – Robert

Advertisements

Why is learning to trade so hard?

This post is driven by the following question…

Why is learning to trade so hard?

Pulling together a couple of threads here I hope to add to the discussion and suggest an answer. I’d be interested to hear people’s feedback since it’s a pretty significant question for anyone starting out on this path.

If you’ve not had the opportunity to read it I’d suggest you get hold of a book by Nobel Prize Winner Daniel Kahneman called ‘Thinking, Fast and Slow’. The observant will notice there’s an important apostrophe in that sentence.

For a trader this covers some very, very useful topic like heuristics and biases, the endowment effect, formulas versus intuition and so on.

You know all those ‘pop-psych’ books you’ve read on the tube? Their underlying research may well have derived from this guy and his research partner Amos Tversky (now deceased) who carried out most of the original experiments over the last 40 years.

In the book Daniel explains two modes of thinking with their own strengths, weaknesses and characteristics.

FAST 

This is automatic thinking which operates at a instinctual level with little sense of voluntary control. This could include involuntary reaction to expressions, automatically filling in missing words from songs and turning to find the source of a car back-firing.

SLOW

These are effortful mental activities that demand concentration. Maths, decision making and choices. Trying to remember something or drawing conclusions from complex data… you can see where this is going.

Now the question that I asked earlier is also linked to a second question which really should follow on…

Why is trying to teach other traders so ‘hit and miss’?

If you want to learn anything in life then you find a teacher. This has been the way of the world since man invented fire. So part of the learning to trade ‘journey’ if you will is finding a system, suite of tools or approach that (as many have written) matches your personality… You can spend a long time looking for this.

Now, if there was just one way to trade that would be great – we’d all be done and there would also be one way to teach others how to trade. This is so far from reality that I’ve just seen a squadron of pigs fly past the window.

What are traders teaching non-traders mostly? They’re teaching them setups. If the blah, blah, blah and the x, y, z then it’s time to etc…

What they’re trying (and mostly failing) to do is present a myriad of complex information in SLOW thinking terms because these types of terms can actually be communicated. No wonder learning to trade is so damn hard and teaching people to trade is (maybe) even harder. I’d guess more than half the info is missing!

By the time a trader has actually gotten good (i.e. looked at a f**k load of charts) they’re not operating from this perspective at all. They’re approaching trading from the perspective of FAST – to them it’s all intuitive.

They’ll get asked ‘this trade met all your (setup) criteria but you didn’t trade it… why?’ and I’ve heard examples of this that the best answer given in reply has really been nothing more than ‘it doesn’t look right’.

Yes, you still need rules to avoid doing something really dumb but this still doesn’t bridge the gap between what’s taught and it’s implementation by someone else.

You and me are looking at the world of the market represented as a bunch of charts using our ‘slow’ brain. The guy trading successfully and consistently is looking at exactly the same data with his/her ‘fast’ brain.

This is the difference between pushing a wheelie bin versus piloting the space shuttle. How can the guy in the shuttle explain to the wheelie bin dude what flying looks like? There’s an in-built information chasm here.

So what to do… These are definitely two things I think all newbie traders like me need to accept.

1) It’s just gonna take time. If you’re not able to trade full time (addressing myself here) then it’s gonna take more time than someone who can watch price for 8 hours a day. Week in and week out. Look at charts. Look at more charts. Really deeply and seriously look at charts.

2) Record keeping. Keep records of your trades, your emotions, what the market was doing in general and how you managed a trade. Put as much detail into recording what you did as you can and really investigate all your losers. Really, really investigate your winners.

Case in point is this bunch of tweets from @Trader_Dante on the Twitter losing it about people not keeping records and how it can help or hurt them.

This is cut from TweetDeck so you need to read from the bottom up.

Follow Tom on Twitter @Trader_Dante or visit his site here if you’re interested. I borrowed this as it illustrated a point so emailed Tom for permission to re-post it.

If you don’t keep records then surely, surely there’s no way you can progress other than by accident. No-one accidentally finds themselves piloting a space shuttle. Wheelie bins go out on Thursday nite all down my road though so doing that seems pretty simple.

So there’s my answer. Whatever system is being taught the person teaching it has access to a set of ‘cues from the market that they couldn’t give to you even if their life depended on it.

  1. Record and examine your own trading excursions
  2. Look at a lot of charts – figure out your own ‘cues

Whether or not this progress from ‘slow’ to ‘fast’ encompasses trading psychology is another debate but I think it does. Once the engagement with the market is that unconscious and seamless then I can’t see how negative psychology could interfere with the execution. This is where the oft quoted statistic of 10,000 hours to mastery may well come in.

If anyone else has further insights into how to cross the chasm from ‘slow’ to ‘fast’ thinking I’d love to hear them.

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.

Emotional roller-coaster survival

This blog post isn’t really related to the trades I was in this week (although I’m going to put the chart up) but more to do with dealing with the emotional impact of making a less than stellar trading decision. This began as a sort of investigative experiment but ended up telling me an awful lot about my mental and emotional approach…

First, a bit of background… In my reading I’ve seen a number of people talk about having an ‘edge’ in a trade, along with time stops and of course the all important entry point. What messes up a lot of traders early on is that they place stops way too close to their entry points in choppy markets. There’s no room or the trade to move/breathe/react to market noise. However, trading with the trend does at least give you something like a 10% advantage that the whole scenario will work in your favour.

I’ve also done my own loose monitoring/experiment to validate this belief [here] and it came out with a 25% percent advantage to following the trend over my own decision making… Possibly a shocking indictment of what goes on in my head but hey ho 😉

From what I’ve seen/experienced trading stocks it’s that money (investment capital) moves in and out of stocks roughly in time with market sentiment. So, even if you’re long on a great stock that just keeps going up, when sentiment is negative people will take profits and recover their capital to move it elsewhere. On this basis it’s challenging to make money going long when the market is dropping. This applies even if the sector you’re in is also outperforming the market. It’s just human nature that people feel at risk when things look bad.

Just as an aside here these are all my opinions/perceptions so if anyone does really disagree with me that’s fine. I’m not telling you what to think or putting myself up there as an example at all.

So what I decide to do is find an FX pair with a significantly strong up or down trend and just place a trend following trade with very wide stops at an opportune moment. This was an experiment to see what would happen and whether I could deal with the unfolding situation emotionally. Testing my faith in the idea of trends so to speak.

I’ve broken the experience into three phases.

  1. Preparing to place a trade – creating a scenario
  2. Being in the trade – managing fear, doubt and despair
  3. Exiting the trade – resisting the pressure to cut and run

Following some deliberation I saw that AUDUSD had recently reached new highs and was trending up strongly.

So rather rashly and with a disregard for what was actually happening in the moment I entered the trade long.

I also noticed that USDCHF was in a long term downtrend but had recently risen so I entered that short.

I’ll talk about the AUDUSD trade because that is the best illustration with the widest movement of the two. So no-ones hanging out for the ending to the blog and because it’s not actually the point I ended the AUDUSD trade up about 35points and closed the USDCHF trade at evens. So lets take a look at what happened.

Preparing to place a trade – scenario creation

I’m guessing that experienced traders can probably go through this process in lighting fast time. It may also be that at shorter timescales (15 mintues and below) I’ve consistently lost money because I’ve just not had enough thinking time to step through all the options.

So coherent trades I’ve entered have all worked because I’ve created a scenario around them about what is happening now and what I expect to happen in the future. Here are some quick bullets about the AUDUSD trade

  • The aussie dollar has been on an up-trend for ages
  • There’s decent amount of support to halt any retracement
  • The price has bounced off a level (x) a number of times and headed back up
  • I’m going to place really wide stops because I believe eventually the aussie will keep rising
  • I’m prepared to let this trade play out over several days if I have to
  • I’m going to have a >100 point stop so that I don’t get stopped out by market noise
  • I will not fold the trade early because I’m uncomfortable
  • I will only move my stop up when it’s really safe to do so i.e. when the trade is up at least 20 points
  • I will not spend my time watching the trade or looking at my P&L

So happily the AUDUSD fell like a brick on Wednesday and I decided to go long.

Now, at this point this was actually a bad entry decision (isn’t hindsight amazing!) because I’d not really had any kind of confirmation that a reversal was even close or the downward momentum had ended… Not a good start.

For those interested purely technical point my entry was at point A at about 21:30 on Wednesday. I was looking at the bounce off a new low without taking into account there was still plenty of scope for the price to keep dropping…

Being in the trade – managing fear and despair

Now, the one thing I had in my favour as this trade went south for 36 hours was that I’d already mentally rehearsed my reactions based on my beliefs about this trade. I checked this trade at one point yesterday and it was 81 points down (see point B). At that time I quickly logged out of IG Index and got on with what I was supposed to be doing!

I’ve found that dwelling on a situation is counter-productive and you have to eventually have faith in your own ideas and decision making. The fact that, although I wasn’t ‘happy’ about how this trade was going I also wasn’t beating myself up about it or letting it get to me too much. Now, I’ll of course admit that I wasn’t jumping for joy either 😉

The thing that helped, apart from having already thought through how I was going to react if indeed the trade did go against me, was realising that emotionally ‘I am not my trade‘. The trade that is currently in play is a completely separate thing from me. There’s no reason for me to really credit the emotional reaction to a situation in this trade with any ‘weight’. It’s a separate thing over which (now it’s in the market) really don’t have any control. So if I can’t control it why worry about it?!

Of course this is the conclusion I came to as the roller-coaster went up and down as my emotions went the same way. What I’m pleased about in all this is that I had the patience to hang on and trade the scenario I had laid out mentally in advance. It wasn’t a particularly pleasant experience but by un-linking my ‘self’ from the trade I managed to stay the course…

Exiting the trade – resisting the temptation to cut and run

The most difficult part for me, or the part with the most intense ‘feeling’ component is actually all around exiting the trade. Again, especially for beginners, this is difficult to deal with because we’ve not experienced a lot of winning trades to practice this bit on! 😉

After two days of doooowwwwnnn then slow climb to even (no loss) I felt under huge emotional pressure to walk away and just get out of the trade! How dumb is that? Now, also notice that there are entry and ‘in the trade’ rules in my scenario but I’ve not written any ‘exiting’ scenarios. I found I had to make these up on the spur of the moment!

As I got to +1, +5 and +10 points I was incredibly tempted to just close the trade. A couple of things stopped me… The scenario points I made up on the spot were: –

  • I’ve not done all this ‘work’ and been through the 36 hr rollercoaster for nothing (emotional)
  • EMA’s were all moving up
  • Trying to limit loses but need to let profits run – the great maxim
  • I can move my stop up to a sensible point (i.e. open) after 20-30 points and not lose money
  • It could always carry on going up further, as it dropped further than I thought it would initially – lol

This temptation to quit out happened twice – at point C and at the second break through my entry where I was 5 or 6 points up and the price was going plus 1 plus 2 then back to entry…

So I managed to hang on till I was about 35-39 points up (point D) when the whole work scenario got in the way and I felt happy to close the trade and not have this going on in the background while I was having to deal with a significant project problem.

Summary

The points I had in my favour…

  • Having thought my way through the trade (and holding my nerve) in advance
  • Understanding that how the trade was going didn’t reflect on ‘me’ and wasn’t linked to me emotionally
  • Having wide stops
  • Being patient – letting the trade ‘do the work’

Things I didn’t do particularly well

  • Should have waited for a better entry point – 10 period EMA not still nosediving would have been a start!
  • Hadn’t thought the exit scenario through in enough detail – would have made resisting temptation easier!

This trade also broke the 1% risk rule by a significant margin so although it was a very useful experience I’m not planning to do any more of these soon… Will be adopting a more sensible approach  next week.

Technical analysis brain fart

Had a bit of a brain-fart over the weekend but still like this idea/way of thinking about the whole subject, so I decided to post it… Would be interested in people’s views on this perspective…

So what is technical analysis? My (very humble) opinion is that it’s like creating a map of what’s going on with a particular instrument. Why do you need a map? To get where you want to go. You need to be able to decide, based on the map you superimpose over the chart whether to accept or decline a particular trade based on risk.

It’s worth remembering again that at each given moment no-one has any faintest idea what might happen to the market next. It’s the mass decision impact movement of literally millions of other people deciding to buy or sell.

They can’t see what everyone else is doing either and are fiercely considering only their own position and unique circumstances… (selfish lizard brains running around in survival mode – lol)

You’re trying to create a probability map of the random movement of thousands of people. However, in large groups people aren’t random – in fact they are sometimes predictable or at least they will probabilistically move en mass in a certain direction. With this last point in mind we at least have a chance to move the odds of spread-betting successfully in our own favour.

How do we do this? Fierce observation of what’s actually happening without being attached to any particular opinion about a stock or share or particular market direction. An awareness of the likely probability of something recurring coupled with a risk managed approach and finally some sort of confirmation that essentially a large part of the market is in synch with your assessment. (i.e. an entry trigger)

Now, these ‘maps’ can of course get fiendishly involved… and I’ve been completely guilty of trying to read too much into a particular indicator or set of numbers. Sadly this hasn’t helped me in the past at all. You tend to start seeing the map swim before your eyes, no decisions get made and everything becomes loud and complicated. The data begins to conform to a particular bias or random piece of news you happened to see by accident.

Since you can’t predict price I suspect many people are asking the wrong question. They ask themselves “Where is the price going to go?” and the answer is no-one knows. Well, if no-one knows the chances of you or I being consistently right are quite slim!

Maybe we should instead be asking “Where is the price right now?”

To know where something is right now you have to place it in the correct relationship to other things. “Where is the price right now in relation to other points on my map?”

What are the other things that will help me figure out where I am? Levels, trends, previous highs/lows, size of bars etc. These will all have a certain ‘weight’ that affects the price right now. The decisions made by the millions of traders to get the price of an instrument to where it is now essentially creates it’s current position.

[It should be possible one day to create a statistical model that visually defines from previous probability data where the price should go next based on the influences of previous objects on the map and their effects based on probability numbers]

Look at this a different way. All the decisions you or I have made in our lives got us to where we are today. We can’t see the future however. It’s completely un-knowable and so the position of a stock or currency pair in the market in the empty space to the right of the graph is (and always will be) a mystery. However, based on the history of our own decisions (like previous price movements) and the influences of past external events we can get a ‘feel’ for how our own and other people’s future’s might turn out. If anyone has seen the film ‘The Adjustment Bureau’ then you’ll have an idea what this map could look like 😉

As a complete aside it’s possibly easier to ‘predict’ what will happen to people who’ve had more extreme pasts. Maybe this is why looking for extremes on a chart is similar in that when this does happen the likely hood of being right is higher? Possibly getting a bit too metaphysical now! 😉

Anyway, once we’ve got a pretty good idea of where price is in relation to the objects/points/levels/trends we think are significant then we at least have a fighting chance of making good (risk managed) decisions when the price gets near to a point it was at before.

Stop trying to figure out where the price is going to go next. YOU DO NOT HAVE THIS INFORMATION. All you have is where price has been and (if you’re looking properly) what happened at significant points earlier along the journey.

At point (a) something happened and price dropped hard. The reasons could be manifold and we don’t care about them anyway. If price get’s back to (a) is it going to drop again? Who knows? Who cares? All we need to make sure of is that we’re around when it happens, have a risk managed strategy to take advantage of this potentially high probability event and there’s some sort of short term confirmation that indeed, the same behaviour is happening again. Now all we have to do is manage our exit properly!

The right question is actually more likely to be, “What are the significant points on the map I’m seeing and how do they compare to and influence each other?” More on how I’m actually using this to appear later 🙂

One thing you CAN control in trading…

Here’s an interesting thought that occurred to me on the way back from the gym today. Partly because I’m short right now on GBPUSD but mainly because it’s been quietly forming in the back of my mind for a while…

In trading there absolutely are a number of things that are totally within your control. I think that in the beginning of learning to trade even these things seem like some sort of voodoo science. Every small detail forms part of the elusive ‘holy grail’ which everyone starts off looking for in order to become an excellent trader. Let’s just get one thing clear straight off – there is no ‘holy grail’ and what works for me will not necessarily work for you. Bummer eh? 😉

However – salvation is at hand because (I’m finally getting to it) there really are a number of things you can do to elevate yourself above a great number of people out there who are also trading… or learning to. I think we should all be able to draw comfort from the following: –

  1. You can absolutely control the amount you risk you take when placing a trade. Just make an inviolable rule. I will risk no more than 1% of my account per trade. Now, my number is actually 1.5% because for me 2% sounds like too much (it’s a gut thing) and from experience, because of my account size, I like as much leeway as I can get on my stop losses. So, maximum risk per trade? It’s up to you. You control this. Bloody well use a stop loss!
  2. You can choose how you react to a loss (If you have one) so treat it as an opportunity to learn and get better. Do NOT pile back into the market like an idiot looking to make your losses good. Emotional decisions are usually crappy decisions…
  3. Accept that you don’t actually know whether the market is going to go up or down and plan accordingly. Along the lines of the following dialogue example “GBPUSD overall is in a downtrend and on three previous occasions has got close to 16,300 and dropped back. So I am going to short this with a stop above 16,300 risking just 1.5% of my account to make 3% return as a first target then moving my target down to 16,100 which is the previous low.” “If the trade goes in my favour I will consider bailing out at below 16,200 because there’s a lot of support here.” By time this happens I may well be asleep…

Now, actually points 2 and 3 rest on you reacting to the original decision of “I will risk no more than X% of my account per trade”. Just doing this and considering what you’re doing is probably the one thing I’d absolutely stick to in order to keep trading and so that you stay in there for the long run as you improve. Focussing on this one thing gives you enough power over this strange new environment to help make better decisions.

Psychologically having a sense of control is a deep, deep need linked directly to the fight/flight response and this has a huge impact on your overall sense of well being. Try making a trading decision when your lizard brain is running around like a lunatic in the background going “AAAAAAAAARGH! OMFG! We’re all gonna DIE!”

Yep, it doesn’t work because if there’s any part of your brain doing that your emotions will be all over the shop.

If all else fails you can repeat to yourself “I am only risking X% of my account, let’s make a positive decision whether this is a good trade to make and then place the trade” Hopefully lizard brain will get the message that this is no biggie and let you make a rational and stress free decision.

Personally I’ve found the voice in my head (audible learning modality, taking information in and internalising it by listening) to be quite a negative influence on my decision making when I’m in a trade or thinking of placing one. Interestingly I’m a very, very visual person (of course this helps with charts) but since my ‘eyes’ don’t have a voice (keep following me on this) the negative part of my brain gets too much airtime. So I’m essentially using my conscious, reasoning mind to exert some control over my emotional reaction (triggered by the audible voice in my head) by talking out loud over the part of my mind which has a tendency to be too filled with  doom and gloom…

Discovering how to control what goes on between your ears when trading means, as you gain more practice/exposure to the process, your results will improve and lizard brain will chill the heck out.

Control risk = positive decision = sense of control = carry the trade through = less stress = happy lizard brain = kerching! (LOL)

Oh, and taking deep breaths also helps 😉