CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 66 % of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

Trading Psychology And Discipline

Dear Darwinex Community,

I open this thread in order share my thoughts and open discussion about an extremely important aspect in every traders life - Trading Psychology And Discipline.

It seems impossible but the first book i have read regarding financial markets was Reminiscences of a Stock Operator, from Jesse Livermore. The book is on my trading desk till today, because it remembers me the pain that i felt when for me trading was like a flip of a coin game. After i blow up my trading account in 36.5 days ( trading s&p emini futures - early 90´s) i decided to STOP and begin build a solid structure for my trading. After build a trading system ( based on Trend Director and Trade Activator rules ). Very simple rules but i wasn´t able to follow them, was like driving an automatic car and was always trying change gears. Then i came across what changed my trading life forever, trading psychology and discipline. I started study, read dozens of books, attend to seminars, but what changed me completely was a couple of sentences from Mark Douglas :

“I haven’t seen much correlation between good trading and intelligence. Some outstanding traders are quite intelligent, but a few aren’t. Many outstanding intelligent people are horrible traders. Average intelligence is enough. Beyond that, emotional makeup is more important.”

“Fundamental analysis creates what I call a “reality gap” between “what should be” and “what is.” The reality gap makes it extremely difficult to make anything but very long-term predictions that can be difficult to exploit, even if they are correct.”

“Why do you think unsuccessful traders are obsessed with market analysis? They crave the sense of certainty that analysis appears to give them. Although few would admit it, the truth is that the typical trader wants to be right on every single trade. He is desperately trying to create certainty where it just doesn’t exist.”

“Forex trading requires the learning the type of skills that people just aren’t simply used to learning – Mental Skills.”

“You don’t need to know what’s going to happen next to make money. Anything can happen. Every moment is unique, meaning every edge and outcome is truly a unique experience. The trade either works or it doesn’t.”

“No man ever reached to excellence in any one art or profession without having passed through the slow and painful process of study and preparation.”

Saying this, forget the indicators, forget the holy-grail system, if you are not able to master discipline you will never be able to be profitable on trading.

Happy Trading,
Onikami

8 Likes

Books :

Trading in the Zone - Mark Douglas
Reminiscences of a Stock Operator - Jesse Livermore
Bird watching in Lion Country - Dirk du Toit
SWAY The Irresistible Pull of Irrational Behaviour - Ori Brafman and Rom Brafman
Market Wizards - Jack Schwager
The Art of Thinking Clearly - Rolf Dobelli
The Investor’s Quotient - Jake Bernstein
Extraordinary Popular Delusions and the Madness of Crowds - Charles Mackay
The Alchemy of Finance - George Soros

Happy Trading,
Onikami

5 Likes

“TRADERS” HAVE UNREALISTIC EXPECTATIONS

There can be many flaws (limitations) in a trading system but sometimes the damage is done before the first button is pressed. I think most traders that fail, do so before they have made their first trade. They’ve bought the hype, they’ve believed the ads, they think they can get something for nothing. You can’t, no one can, trading requires dedication and sweat just like anything else. If you don’t have realistic goals you won’t make it and it won’t be the market that gets you. It will be you. I don’t let my students start without setting their goals first. Do you know yourself and what you want? Have you thought about risk and what your attitude towards losing money is? How will this affect your goals? Is your currency trading going to be a full-time profession or a hobby? What are the implications of this?
These are only some of the important questions you will have to answer in order to set proper goals. If you don’t ask them of yourself, the market will. If you don’t set your goals the market will set its goals for you, and the market can be cruel. Don’t get yourself into a position where the market is the Grand Inquisitor and you can’t come up with the answers. That is why trading is not exclusively about understanding the market. It is also a test of your discipline and self-knowledge. Some traders may not agree with this statement. Most probably would. In trading, YOU matter. Your personality, your strengths and weaknesses, your character. They don’t matter to the market. The market doesn’t care. They matter to you as an aspiring trader.

(in Bird Watching In Lion Country)

4 Likes

A friend of Jess Livermore meet him at their club :

  • Hi Bob what’s up ? said one of the most famous trader in the place.
  • I have very good positions on gold, I win much !
  • Happy to ear that
  • I have just a problem.
  • Yes ?
  • Well, my position is so heavy that I can’t sleep any more. What must I do ?
  • Hum, I think you have to reduce you position until you sleep well.

  • :sunglasses:
3 Likes

UNDERESTIMATE LEVERAGE

This is crucial. Leverage and an undercaptilised account are two sides of the same coin. Most beginners will at some point underestimate the potentially devastating damage leverage can wreak on their account. Understanding leverage and specifically its selective application, is key to currency trading success. I will discuss leverage in detail. For those who find the term “leverage” or “gearing” unclear, it basically refers to the “size” of the position you take or the value of the contracts you trade in relation to the margin you have. It is a very powerful tool, but losers use it to great effect to destroy their trading capital simply because they underestimate its destructive force.

(in Bird Watching In Lion Country)

One question : do you know why Kelly formula exist ?

1 Like

For what i know, Kelly worked at a phone company, if i´m not mistaken AT&T. After theory was adopted to gambling and later to portfolio management.

  • Do you know why is it raining ?
  • Because I have an umbrela :sweat_smile:
3 Likes

UNDERSTANDING PROBABILITY

There are many advantages which traders simply ignore. They either don’t know they are there or they know of their existence but don’t think or understand that these are advantages which can give them an edge. In a sense trading successfully is nothing more than the conscious accumulation of advantages until the odds, probabilistically speaking, are weighted in your favour. Once one talks about probability, the issue of time is automatically introduced and this is a crucial insight which winners have. They understand that once they have swung the odds in their favour they must give them time to work. That is another reason why too short time frames are the wrong perspective for most traders.
Think about this for a moment. A common attitude found amongst winning traders is how little they worry about what the market is going to do next. That’s right, they don’t care. Why is that? Winning traders understand that anything can happen next. To think you know what will happen next is to fool yourself. But that is something entirely different from saying I have an idea, a view, on what the market will do in the longer run. If I couldn’t say that with enough certainty to take positions confidently then trading would simply be gambling. There are people who believe this, that trading is a lottery, but I am not one of them. I believe that trading is more like gambling than most people would care to admit, but it is not gambling. Those traders who require certainty, or who say that they trade only when they are certain that this or that will happen do not understand what trading is about. You need to prepare yourself for any and every eventuality, but, smoothed out over a longer period of time, using all the advantages available to you, you will, based on the theory of probability make money. Much of what this book is is the identifying, describing and employing of these advantages. Whatever gives me an edge, I use.

(in Bird Watching in Lion Country)

3 Likes

This is 100% my attitude these days - I have looked at every combination of every indicator known, even made a few myself and it just kept coming back to the same thing.

Which is - at what point did I develop the ability to predict the future? I didn’t, so therefore I have to accept that there are only two things to trade.

Price and Probabilities.

Once this finally sunk in I have adjusted everything else to fit with this humble and honest view of the markets such as entries/trade management etc and hopefully now will finally achieve some kind of long term consistency.

My own flaming ego got in the way of arriving at this point sooner.

3 Likes

Actually I do know what will happen next - price will either go up, down or sideways… that’s it… Its more probable to do one of those three things but that’s about it.

This is the only true edge we can exploit consistently over the long term

3 Likes

Hi @TevershamCapital,

“You don’t need to know what’s going to happen next to make money. Anything can happen. Every moment is unique, meaning every edge and outcome is truly a unique experience. The trade either works or it doesn’t.”

Happy Trading,
Onikami

3 Likes

Was also for me the book, that inspired me the most, till today. But it is only one aspect, that drove me for many years: Jesse “knew”, how stocks will behave, from writing the numbers on the board. That was my dream and motivated me much more than fame and riches!

1 Like

Excelent thread :ok_hand::kissing_smiling_eyes: we all have been there

2 Likes

Yes yes and yes.
I love Mark Douglas for sure and his “Trading in the Zone”. I watch his videos too so I can learn from his wisdom and experience.
The channel he is on is called WIZETRADE
“Mind over Market - Psychology in Today’s Market”
He gives such practical, down-to-earth advice.

The other guy who I believe is a master of forex trading is Chris Capre of 2ndSkiesForex
He goes into Mental Toughness, Meditation for your Trading, and his experiences in the market over many years.


3 Likes

I believe Ed Thorpe worked on the Kelly Criterion Investment Strategy
I have read this paper and agree completely with his probability-based sizing and entries.

3 Likes

How to think like a professional trader - Mark Douglas

Part 1 Part 2 Part 3 Part 4

Enjoy and Happy Trading,
Onikami

3 Likes

That Mark Douglas Interview was awesome!

Thanks for sharing that!

Did you read his book? If so, is it worth the read?

1 Like

Hello all. I came across this thread a while ago and found it an interesting read at the time about trading psychology & discipline and the importance of this aspect of the game. I recently had an experience with my own trading that relates directly to this topic that I would like to share.

There is a famous saying “Once an addict, always an addict” which is a well-known term linked with drug addiction. The thinking behind this statement by some scholars is that an addict will always be at the same risk for relapse when put in certain situations when their resolve will be tested. When addicts go into recovery/rehab for their addiction, they learn tools that aim to significantly minimize a risk of relapse (i.e. 12 step process, therapy and so on)

I believe us traders have our own ‘vices’ from a psychological/discipline standpoint that range from over trading, revenge trading, unable to pull the trigger, not sticking to the game plan when performance drops and outright gambling to name a few. I feel these trading psychology/discipline deficiencies and how to manage these deficiencies have some parallels to addiction and how addicts use tools to cope with their addiction (*Please note I am not saying trader psychology and discipline problems are in any way as serious as drug addiction. I am just comparing some similarities I believe exist between the two)

Me personally, my ‘vice’ is Loss Aversion. I hate giving gains back to the market when I am in profit. Compound this with the fact my trading methodology is based on asymmetric returns, cutting losses short and letting winners run, means I have to have a good handle on my emotions to stop me from interfering with my own trades.

I have been trading my strategy for 2 years now with no interference from myself on trades. I thought I had kicked my Loss Aversion ‘vice’.

My trading strategy is automated and I run it on a 24 hour VPS platform. I have a full-time job so I periodically check in on my trades around 4 times a day at most while at work. Because my full-time job is quite intensive, I don’t get to watch my trades all day on a chart, as I used to in my early trading career. This in turn helps me with my Loss Aversion I believe.

I have an upcoming surgery coming up so I have been off work for the past week. Last week my trading software entered me into a trade while I was resting at home watching the chart screen. This particular trade was going well, was a few pips away from its TP and I was feeling comfortable and relatively confident, so I thought “I’ll pop down to the shops. By the time I get back hopefully I will have hit TP”

Well after I got back from the shops around an hour later I saw that it had not hit TP and price was heading back to entry price where I had locked my SL to for a minimum breakeven trade. Right there at that moment the old Loss Aversion ‘vice’ I thought I had kicked started rearing its ugly head again. My urge to manually close out the trade for some gain was strong and I sat there for a good 15 minutes or so, watching the price go up and down while hovering the mouse over that close button. Eventually, I took a breath, recomposed myself, switched off my VPS, without manually closing the trade, and went downstairs to grab something to eat and watch TV to distract myself.

I went back upstairs a few hours later to see that price had shot back up and hit my TP. All I was thinking is that my old Loss Aversion problem nearly cost me a full profit trade. I realised at that moment 2 things:

  1. My Loss Aversion was still in me and not going away.

  2. I need to accept this and work on my ‘tools’ to manage my Loss Aversion so I don’t ‘relapse’ (i.e. interfere with my trades)

My ‘tools’ that I use to cope with this include:

  • Don’t screen watch. Log out and focus on something else

  • Write down my experiences with Loss Aversion in my daily trade journal whenever it rears its head

  • Watch videos or read articles about trading discipline that reinforce my good behaviours.

At the top of this thread, Onikami Capital used a quote by Mark Douglas:

“Forex trading requires the learning the type of skills that people just aren’t simply used to learning – Mental Skills.”

I truly believe in this. I hope my post can help anyone with acknowledging their own trading discipline ‘vices’ and more importantly, identifying tools to help with them.

Thank you for taking the time to read.

Finally, I listen to the excellent Chat with Traders podcasts. This episode really helps with my trading discipline. It may help you too: https://www.youtube.com/watch?v=yymerGGwQ-s&t=3s

5 Likes