Tag Archives: psychology

Risk and Trading psychology video discussion

Trading psychology and risk video discussion

Trading psychology and risk are somewhat intertwined. When you look at how humans trade with their intuition, they can be very very wrong. In fact, it can lead to health problems like heart attacks or strokes. Tsk tsk. Thanks to our automation for trading.

 

Either way, here is a video on a very valid discussion on it.

 

What I take away from this, is the discussion of random theory in the markets. I keep going on about this especially in the upcoming future/options algorithm course I am starting next week.

 

Go here for the details on that

Demo of how 10 yr Treasury impacts the US dollar

I just added a new video on my upcoming Global Macro FX strategy. This shows you how the US treasury ten year is a strong indicator of Fed rate change forecasting. As you can imagine, this will be very powerful for my many drivers that I will use to forecast direction between currency pairs. As you know, it is very hard for humans to be able to analyze markets like this on a consistent basis.

 

Watch this video here

 

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Secrets for Winning Trading Psychology

 

Secrets for Winning Trading Psychology

Interesting but this appears to be a hot topic. Automated trading takes out all the emotion but I am sure you knew that

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Free psychology test provides information on the type of trade strength challenges a trader may have

Free psychology test provides information on the type of trade strength  challenges a trader may have

This came in from a local Meetup member:
Here is a free test below that will tell you and find out what kind of a trader of trader you are.  This test is a free psychology test provides information on the type of trade ,  the trader’s strength and what challenges the trader may have.

http://www.tharptradertest.com/default.aspx?question=1

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How to apply psychology of trading when you put your positions on? CRITICAL reason to automate while retail traders WILL always lose money

How to apply psychology of trading when you put your positions on? CRITICAL reason to automate while retail traders WILL always lose money

Sorry if there are any typos here. Note that there is a video below as well

To succeed at life and risk management, you need to trade in a non human way. OTW automate your trades!!

Use average true range (ATR) to apply stop loss between a long and short. You set stop loss a 1:3 ratio as a soft target for the life a trade. You analyze the volatility when to apply the stop loss as part of the soft target. You are applying risk management and look at the reward over the risk. You can the calculate your capital deployment and strategize the situation when trade becomes winning or losing.

1. Set up risk reward on your new spread position.

2. There are various scenarios that need to be applied in certain outcomes.

You need to set hard stop losses and soft targets. This is done using ATR. The stop loss needs to be wide enough on the spread to profit over the trading horizon you choose. They also need to be NOT wide enough killed on discipline. No rule book applies here. You need to look at historical volatility of the time horizon you choose.

From there, you should be able to work out a sensible stop loss. It is over the time period you choose. As said, you choose a soft target on a 1:3 ratio of your stop loss. If you have a market price of $100, stop loss of $90 (exit trade to trade out automatically) the stop loss is 10%. This will also become your hard target but this is incorrect as you could keep trading for extra profit if that hard target is reached. Stop losses will guarantee your down side, if you set a soft target you are not guaranteeing your upside. You are taking on more risk but could even be adding more that position.

During your spread trade, you want to know the history of the spread. You would even want to see how the long and the short may perform against the ISM PMI as a comparative benchmark. You also would want to calculate monthly volatility. With a long and short, you will intend to cancel out the volatility to hedge out market and sector risk. With implied volatility calculate, you will isolate if both long and short are in the same sector. As a result, you remove market and sector volatility. With no news sentiment with no market impact, you could find your long may move up 1% vs the short may move up 1.5% which cancels out the price movement and volatility on a normal day. If the market goes up + or – 1%, the long and short should move in the same direction which means you will cancel the volatility.

Get the OHLC of each asset for 10 months historical, you will see an volatility over this period of potentially 1-3 months for the trade horizon. Calculate the 9 monthly ATRs each. You can then get the average of those for the 10th month. This will be applied from a rolling ATR of each 9 months. You can use this 10th month average ATR to calculate your disciplined stop loss. If you reach the target, you could be knocked out of the market if the stop loss is reached, but you are still applying discipline on the trade. You could apply positive price action and positive technical analysis here as well if all checks out with previous rules mentioned. You could apply a sensible stop loss in the range of each calculated long 10th month ATR and short 10 month ATR.

 

So if you current spread is 4%, you calculate your stop loss (10%) ratio with the current spread could =4*.10=0.4. Your new stop loss target could be =4-0.4=-3.6. Using a 3:1 target, that would become 3*3.6=.108.Your new soft target price will be 4+0.108=4.108. You will be able to see in a historical price chart that it has hit that price before which means it is realistic. If you use a long term trend line, you may see the current price may hit your soft target price. On another historical price chart, it would be recommended to draw different colored lines to show the soft target price and stop loss. You will visually be able to see the risk/reward play . One line would show you would be knocked out if the stop loss is reached. It is critical for the TRUE spread to work, you get stopped out of BOTH long and short not either. You trade both on at the same time, and you stop both at the same time. You are putting automatic stop losses on single positions. For most brokerage, you cannot apply the ratio of each spread. Again, do not apply stop losses on single positions for either long or short. They both need to be applied at the same time on the entry and exits. If done manually, you may need to cross check both your spread sheet on these as well as check your broker trading account to ensure these spreadsare within the correct soft targets. Or you could automate this process!! If these soft targets are reached, you may need to trade out manually if no automation is applied.

IMPORTANT FOR RETAIL TRADERS:

This enables you now to trade like a non human which is a long term failure for most retail traders. You will lose money otherwise over the long run. If you are losing on a trade, you need to follow the above process! You will always have winners in your portfolio so don’t worry if some of these will move against you. This will set you apart from the bad traders since you will have a proper framework, you do the correct thing with the losers and winners. If you do the opposite to be human, you will lose money over the long run by seeking more risk when a trade goes against you or with you, you are trading out at the proper target levels you establish with the process listed above. This process is the opposite of human which means long term profit. We don’t worry about trades that go wrong. This is why automated trading is critical to remove all the manual processes trade above. Stick with the habits of above, you WILL make money in the long run.

 

REASONS TO SET SOFT TARGETS and HARD STOP LOSSES THANKS TO AUTOMATED TRADING

If current spread is 4, $10k deployed for long and another $10k deployed for short. If your long out performs your short by 25% in 3 months, you may not want to trade out. You can run the position or apply more capital (or even margin), you could add to the wining trade. If there is $20K in the position, you could use the soft target with the above example. Your new stop loss could be 90% of the soft target where you roll the stop loss ratio. You want your new entry price to be below the new stop loss price. On a rolling basis (only generated automatically), your average price is comfortably under your stop loss. You are now getting free trades which means your stop loss will be above the average price. Your winning trde becomes a free situation. Your stop loss is above the average price which means if you are stopped out, you are still profiting. Even if the trade goes against you, you will still profit no matter what. Don’t do the opposite by trading out of the soft target and watch it go up during a rally. Humans could do that inadvertently when the market is presenting you a winner.

As result, you need to ensure your stop loss is wide enough to profit over the time horizon you choose. FOr mid and large cap situations on all major US and European indices, the stop loss ratio will be between 7-12%. This when you analyze your ATR over 3 month time horizon. The soft targets of 1:3 will be between 21-36%. As a result, you need to understand these parameters in future positions you will take. This will help you understand the risk/rewards on your positions and to play within those scenarios. Remember you still need to add the proper spread trading idea and screen process before applying the above.

If you use this process, you will get rid of the losing trades and constantly add new winning trades by following the right idea generation and screening process. If automated, you will never notice the guilt in getting rid of the losers. Over time you will be add more positive and circumventing the larger losses.

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See our Long term constant Profitable trading foundation and psychology blueprint for a retail trader

See our Long term constant Profitable trading foundation and psychology blueprint for a retail trader

This is easily the most important video I have ever done out of the 700!

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Long term constant Profitable trading foundation and psychology blueprint for a retail trader

This is probably the most important video and Powerpoint presentation I could do for newbies, failed traders, non techies, or anyone else interested in this topic.
See more

I cover the 3 lost tips that you need in your trading framework plan to stay profitable over the long term:
1.    Current World view
2.    Idea generation
3.    Screening
4.    Risk management

So go ahead and watch to learn how I plan to move ahead with my future!

I just released a video last week explaining where the most advanced trading education exists.

What is the most advanced trading education in the world for profit ?

Watch our video to see how our education is different

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We are learning the psyschology and foundation of trading from newbie POV. This a pricey course from a very big name!!

We are learning the psychology and foundation of trading from a newbie POV. This a pricey course from a very big name!!

Yes, we are watching these videos. Some interesting software may come out of it for my members in coming weeks. Keep your eyes peeled on it. Also, don’t ask about the big name as usual their affiliate marketing cronies and drinking buddies will come out with knives. It ain’t worth the hassle to post or indirectly promote the name so sorry on that!

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This video explains this:

 

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My 3 favorite books on Trading Psychology

My 3 favorite books on Trading Psychology

These are best books according to my NYC contact so thanks to him:

My 3 favorite books on Trading Psychology:

 

http://www.amazon.com/Trading-Chaos-Technical-Techniques-Marketplace/dp/0471463086/ref=sr_1_1?ie=UTF8&qid=1390088572&sr=8-1&keywords=trading+chaos

 

>> I would skip the indicators part and read the rest.

 

http://www.amazon.com/Market-Mind-Games-Psychology-Investing/dp/0071756221/ref=sr_1_1?ie=UTF8&qid=1390088899&sr=8-1&keywords=market+mind+games

 

 

http://www.amazon.com/Investing-Irrational-Mind-Optimism-Opportunities/dp/0071753370/ref=sr_1_1?ie=UTF8&qid=1390088928&sr=8-1&keywords=irrational+investing

Which books you read? Let me know by commenting below

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Quant analytics: Is my STRATEGY more important than my PSYCHOLOGY?

Quant analytics: Is my STRATEGY more important than my PSYCHOLOGY?

There is much discussion on advanced strategies as well as herding behavior of humans in this discussion group but I have come to the conclusion that the most important criterion for a trader is to understand him/herself. Let me explain – you can have the most mathematically advanced strategy known to man – at the end of the day we all agree that we cannot know the future 100%. At some point you have to decide on a strategy and stick to it. Studies have shown that very few traders stick to a strategy. When you go into a drawdown you start doubting yourself and make changes to your protocol and stop following the rules. There are many strategies out there that are very simple, and when followed closely, will make you tons of money. For e.g. anyone can google the original turtle rules – yes I agree better trend following rules exist now however I think you get the point. A simple strategy followed for long period of time makes money.

Personal (Not other people’s) psychology is important because when you go into a deep DD (drawdown), perhaps one that is 2X what your initial model said was the maximim, and you start doubting yourself only the one with strong understanding of who he/she is will be able to stick to the rules and come out a winner. I’ve experienced this many times. It is said that legendary traders like Donchian and Seykota spent more time understanding their psychology than following markets and they’ve both made tons of money. In fact I think Seykota still holds the record for highest consecutive yearly returns (I might be wrong on this).

 

Your strategy should not expose you to dd’s which you can’t stomach! Automated strategies should remove the psychology factor from trading; otherwise you might as well trade manually and deal with all of these emotions. Strategy is more important because it should restrain the psychological factor.

 

The reason I started this topic is because I thought most people would respond this way yet I disagree. I think personal psychology is more important. I think it is easier to find a winning long term strategy than a trader than can stomach DDs as described – I agree – it is very easy to say that strategy is more important and I thought so for a long time…

 

I rather agree with you. Specifically – “trader is to understand him/herself”.

Trading is all about Intelligence, Emotion and Appetite. Value investing is of little use for emotional individuals, where as day trading sucks for Intelligent investors. If the appetite to lose money is low, any strategies in the stock markets are of any use to him.

Though there are several ways to win in the market, finally it is individuals own knowledge and the mapping strategy play a key role in the success.

 

i agree with you. In trading we need to develop a completely different mindset than in all other business activities. We have to think in probabilities and we have to be confident in the positive outcome of our trading system in the long run. Single losing trades or a drawdown period mustn’t lead to changing the protocol. If the system is backtested correctly and it is successfull, then we have to stay with the rules that have an edge.

As you say we can’t predict the future and therefore we can’t predict the outcome of any single trade. We only know that a series of e.g. 1000 trades makes a lot of money. I have made the effort to manually go through all trades that my system generates in backtesting. I wanted to manually filter the worst price setups to get a better performance with less losing trades. The result was that the performance was less good because some of the worst looking price setups were big winners of e.g. 5R. If you filter out such a winning trade then you have to filter out the next 5 losing trades to come break even with the results of the original system. But this is nearly impossible. One of the next bad looking trades is maybe a winner again and you have filtered it out.

We have to accept the losing trades. This is the price we have to pay to get to the next winning trades. Even if you have the best system in the world the system will have drawdown periods and you have to handle the psychological aspects that come with this drawdowns. The result should be: stay with you backtested rules and take every trade without the expectation that the next trade is a winner (then you won’t get hurt). Therefore i think that the psychologie is more important than the system. There are a lot of very profitable systems. But the same system will have different results if it is traded by different traders. With the wrong mindset the best system would generate negative results.

 

==

You are quite correct. personal psychology is more important. – It is the foundation stone which supports ones overall strategy.

Think of ones trading strategy as a building with three pillars supporting a roof. Your trading strategy (system, method, tactics ,etc), your risk and money management, and your knowledge, know-how, etc are the Three Pillars, – Over-time, they should get stronger and stronger, able to support a bigger roof. — The Roof is the goal, The roof is your mastery of trading. – If you achieve mastery you will be successful, the greater that mastery the more successful you are.

But the whole thing relies on a strong and solid foundation. The stronger the foundation the more support if can offer to the whole structure. – This foundation is your psychological and emotional awareness and understanding. It is what will enable you to manage yourself and support your efforts.

Here is a link to an article I wrote in ‘Traders mag’ expanding on this.
http://www.linkedin.com/groups/Boost-your-performance-in-great-3863963%2ES%2E63825433?qid=5ef42de8-ddb5-4438-813f-58a13c1b8a9b&trk=group_items_see_more-0-b-ttl

I also have a group on linked in called ‘Trader, Trading & Risk Psychology’ which you may wish to join, it is a forum for debate, discussion and dissemination of articles, about trading Psychology.

I always think of the quote from Sun Szu’ ‘Art of War’ – it could be equally applied to the ‘Art of Trading’. :
If you know the enemy
and know yourself, you need not fear the result of a
hundred battles. If you know yourself but not the enemy,
for every victory gained you will also suffer a defeat.
If you know neither the enemy nor yourself, you will
succumb in every battle.

The Enemy is the markets. To defeat them you use the 3 Pillers.
Yourself. To defeat yourself you understand yourself, and your psychology.

One more quote from Sir Edmund Hilary, the man who first conquered Mt Everest.
‘It is not the mountain we conquer, but ourselves’.

 

 

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How important is psychology in forming price action?

How important is psychology in forming price action?

Is its effect less in markets heavily traded by algos?

Psychology plays a crucial part in forming price action. – Markets are formed by opinions and framed by the decisions made as a result of these opinions. –

Opinions and decisions occur as a result of how people perceive information and stimuli and react to them, that is what makes markets move. Algos work because the price patterns and movements occur due to peoples decisions, with so many millions of decisions every second in many markets, with many products, this creates patterns and imperfections in markets. – The creators of models look to recognize these imperfections, and create algo models to take advantage of them.

 

Price patterns re-occur because history tends to repeat itself.

Although the market is made up of numbers, it is people with emotions and predictable behaviors that trade the markets and cause the movements.

Although the instruments and products and the way markets are analyzed and the tools and methods used to trade it have changed. Human psychology is the same, and is a constant. – Thus, the same chart patterns which we have seen over decades and going back to the 19th century are still valid to this day. As long as a market exists, the same patterns will be repeated time and time again. – If you are smart enough, and can avoid getting sucked into the mistakes most humans make when trading, you can learn to take advantage if these patterns.

This is a quote from Reminiscences of a stock operator’ written in 1927. ‘The speculator’s deadly enemies are: Ignorance, greed, fear and hope. All the statute books in the world and all the rule books on all the Exchanges of the earth cannot eliminate these from the human animal.’ – That is as true today as it was nearly a century go when written and will be as true in 100 years time.

 

Okay what if we monitor 10,000 novice traders trading patterns, their account size, collective trade size and direction, stop placement and reaction to price patterns.

Knowing that the market is somehow a zero sum game and human psychology has’t changed and someone has to lose in order for another to profit, isn’t 10,000 losing trader’s a good sample of the overall population of losing traders which the price will be going against or vise versa to achieve this, therefore a good indicator to trade against?

 

 

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