Wrote this months back, I have been working on the issue ever since.
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Needing to get even.
I find a problem of mine tends to be that when I lose a few times in a row and now need to make it back up, I feel like I have to hold on and make it back up with the next trade. If the next trade is a loser, well then I feel compelled to hold the next one even longer because something in me says "Get it all back and then some".
I am trying to help myself not do that and I want to point something out.
The statistical edge of a system or method lies in a slight advantage over the long haul of hundreds or possibly thousands of trades. In my particular method, the approach is to choose a zone of price and straddle it with a buy and sell area. Losing most of the time is expected with this method as it counts on price to eventually move far away from the zone and make up the losses. However, the key to its edge is to limit risk and have a larger average winner than its average loser.
One thing that I seem not to take into account is the average daily range. If I am trading a zone that is 5 pips wide and the daily range is 100 pips, losing 10 times in a row would mean that I have to hold on to the next trade for 50 plus pips. With a 100 pip range that is less likely to happen. The more you lose, the less chance there is of the market going the distance you need it to to gain what you need back.
Lets look at this closely. If I lose once, I now need the market to move 5 pips in order to get me back to break even. If I lose 4 times, I need the market to move 20 pips to get back to break even. And as stated before if I lose 10 times in a row I now need the market to move 50 pips to break even. What if when I had lost 4 times, the market moved only 15 pips in my favor and simultaneously reached a significant area of support or resisitance signaling that may be all the market is willing to give me in the short term?
The natural motivation in me would be telling me "I need it to go at least 5 more pips!", but that mindset is not thinking in terms of probabilities anymore. Yes you could argue that "if one can survive the beating long enough that the market will eventually move enough", but you really need to come to the market with a precise plan and know what YOU are about. If your intention is to battle it out for a long time just to establish a long term entry at a particular price level... then the level at which you are going to take punishment is expected to be a lot. However, if you intend to make short work of your trading day and come back the next day when a different opportunity may present itself, you need to think "long-term" in a different way.
If I lost 4 times with a drawdown of 20 pips and the next stopping point for the market seems to be only 15 pips away, perhaps I should take the 15 pips, lose 5 for the day and come back tomorrow.
If I think in terms of realistic movement for the pair I am trading coupled with good risk to reward ratios, its best not to dig too deep a hole at once trading with only that days movement in mind.
If the market stopped at +15 pips on that 5th trade, reversed and stopped me out for another 5 pip loss, I am now down 25 pips for the day. Possibly more depending on what the market does next.
If I take the 15 pips the market gave me and end the day down only 5, the probabilities of establishing a new price level with a new day and a new risk to reward ratio put the odds in my favor of capturing more pips during the earlier trades of that day. It prevents the loss from growing too large at once, which can seriously hinder my mental state AND require the market to move beyond what it may be willing to give me.
Stop thinking in terms of what you need to get back TODAY, because the market is not aware of that. Even if it were, that would mean nothing to the market. The market is filled with thousands of people with their own personal goals that they are attached to just like you. It makes no difference who you are or what your goal is, the market does not care.
So, coming into a new day the first trade of the day may be a 20 pip winner out of the gate. now I am up 15 pips and come back tomorrow for the next opportunity. If I stayed in the battle trying to get the 20 pips back yesterday, my losses may have grown to well beyond the minus 5 I left with, which would mean that today the 20 pip winner might have turned into a loser because I still needed more to make up for yesterdays losses.... See the difference?
Ending the day at a loss and ACCEPTING it and moving on, is actually part of being profitable.
Try and think of when you trade normally. If you have been building gains in your account for the last week, have those profits been taken according to what the market was willing to give you? After a loss, try and realize that if you keep trading correctly the way you have, you will continue to build up your profits little by little.
Accept your account balance as whatever it currently is. Try and imagine that this is the amount you deposited initially, or if you are still at an overall profit, realize that you took an even smaller number than you are looking at right now and made it grow to that number through taking profits when they were made available.
Ask yourself how many home runs you scored while raising your account to that level. Probably not many right? So realize that you do not need to try and make back what you lost all at once. If you adhere to what got you there in the first place you will not only get there again, you will far surpass that mark eventually.
Consistency is key. Fortunes can be built on it. And the best way to lose consistently is to aim soley for home runs.
Showing posts with label trading psychology. Show all posts
Showing posts with label trading psychology. Show all posts
Wednesday, April 29, 2015
Tuesday, March 31, 2015
Traffic Jams and trading psychology
I was driving in a lot of traffic today and it came into my head that traffic "jams" in particular are caused by the same emotional tendencies shared within the realm of trading. It became obvious as well, that traffic problems would never go away as long as current human psychology was controlling the vehicles behind them. My mind ran through a myriad of similarities, but to keep it short and focused here's a "not-insane" version of my thoughts.
On the road, every participant has a different destination in mind. Be they lengthy or relatively short distances, usually everyone is trying to get where they are going as fast as possible.
The ironic parallel I find in trading and Driving is that, both the people in the biggest hurries and those who are afraid to drive, tend to be the ones that cause the most problems.
As I was pondering the dynamics of a traffic jam I thought to myself...
"How many times have you been in a jam trying to keep a safe stopping distance from the person in front of you only to watch the hurried driver next to you see it as nothing but an opportunity to move towards their destination even faster?" I see it constantly, as if it were the rule of the road rather than the insanity it is.
The thing I learned long ago, is that switching lanes in stop-and-go traffic rarely increases the speed at which you arrive, and "It" (The greed) is actually the cause of the traffic jam itself.
Every time a buffer zone is depleted by an encroaching hurried driver, it causes a tidal wave of braking by the cars behind them, thus depleting the buffer zones of everyone behind them as well. I believe that is the sole cause for stop and go traffic. If there ever was a human centipede, that's it.
The reason I abandoned lane switching for the most part is because I realized that every gap that showed up was quickly filled. From the vantage point of a Semi you can look far, far down the road and see it all equaling out for the most part. After I abandoned lane switching I would laugh as I came to pass a car that had earlier on switched lanes for the quick gain they assumed they were making. Nowadays I almost always crack up watching someone zoom in to the opening in front of me... Where are you going to go dude? What are you going to do, save 20 seconds if you're lucky?
At the heart of every traffic jam is the psychological fixation upon ones own need to arrive as quickly as possible to the destination. It is both the cause and the perpetuation. Yes there are certainly moments where this mentality is not demonstrated by every driver, but it is rampant enough to cause the jam every time. Even when the reason for the jam is some distraction on the other side of the road.
Few seem to see that it's literally the difference between everyone scrambling for the door during a fire, and everyone walking in a calm single file line to safety. The bottleneck is always caused by blinding focus on self needs, which ultimately cause a jam in the system. That desperation actually diminishes any additional returns sought out initially and often to the point of Negative returns.
How many times have you seen a merge warning well in advance of a closed construction lane, only to see drivers stay in that lane until the last possible moment? It causes every one who has already merged into that lane to slow down!
So what does this have to do with trading? As I said before, every participant has a destination in mind. I imagine that most have some lofty final destination of "millions of dollars" that guides a more immediate destination of "make X Dollars today", but regardless it's all about getting to the end. And in trading the more rushed you are to get to the end the more likely you are to do yourself a disservice and unintentionally slow your own progress.
There are so many facets that align between driving and trading I could spend hours on it, but what I want to stress is the understanding that greed and impatience cause us the very "stop-and-go" performance we lament.
As much as I would love to see the roads run smoother due to emotionless, computer controlled cars, I have to say I am glad there are living breathing emotional people driving the motor of the markets. If it weren't for them I can't help but imagine us having very little opportunity to profit from.
So to tie it all up, What can be done to ease the traffic jam of our trading journey? First and foremost drill it into your head that hurrying will only cause problems. You have to believe that first. Without truly believing that, we will continually impede ourselves with detrimental practices.
With time and conscious experience along your journey, you will eventually come to discern when the opportunities to put the pedal down are present. You will see that they arrive in conjunction with the margin of safety that makes it productive to do so.
Sadly, as a truck driver I see the worst of the worst on the road. And because this world does not operate in a way that makes much sense, the barrier for entry on the roads is far too low, resulting in a lot of life changing events for people. As with driving, the barrier for entry into trading is very low and far too many people who should not be trading are.
I find myself asking if I am one of them at times. Thankfully, I also look back at all the growing I've done and realize that I know a lot of parents who ask themselves if they are doing the right thing with their children. I often find that the ones asking that question tend to be the only ones actually doing it fairly well.
-Francisco
On the road, every participant has a different destination in mind. Be they lengthy or relatively short distances, usually everyone is trying to get where they are going as fast as possible.
The ironic parallel I find in trading and Driving is that, both the people in the biggest hurries and those who are afraid to drive, tend to be the ones that cause the most problems.
As I was pondering the dynamics of a traffic jam I thought to myself...
"How many times have you been in a jam trying to keep a safe stopping distance from the person in front of you only to watch the hurried driver next to you see it as nothing but an opportunity to move towards their destination even faster?" I see it constantly, as if it were the rule of the road rather than the insanity it is.
The thing I learned long ago, is that switching lanes in stop-and-go traffic rarely increases the speed at which you arrive, and "It" (The greed) is actually the cause of the traffic jam itself.
Every time a buffer zone is depleted by an encroaching hurried driver, it causes a tidal wave of braking by the cars behind them, thus depleting the buffer zones of everyone behind them as well. I believe that is the sole cause for stop and go traffic. If there ever was a human centipede, that's it.
The reason I abandoned lane switching for the most part is because I realized that every gap that showed up was quickly filled. From the vantage point of a Semi you can look far, far down the road and see it all equaling out for the most part. After I abandoned lane switching I would laugh as I came to pass a car that had earlier on switched lanes for the quick gain they assumed they were making. Nowadays I almost always crack up watching someone zoom in to the opening in front of me... Where are you going to go dude? What are you going to do, save 20 seconds if you're lucky?
At the heart of every traffic jam is the psychological fixation upon ones own need to arrive as quickly as possible to the destination. It is both the cause and the perpetuation. Yes there are certainly moments where this mentality is not demonstrated by every driver, but it is rampant enough to cause the jam every time. Even when the reason for the jam is some distraction on the other side of the road.
Few seem to see that it's literally the difference between everyone scrambling for the door during a fire, and everyone walking in a calm single file line to safety. The bottleneck is always caused by blinding focus on self needs, which ultimately cause a jam in the system. That desperation actually diminishes any additional returns sought out initially and often to the point of Negative returns.
How many times have you seen a merge warning well in advance of a closed construction lane, only to see drivers stay in that lane until the last possible moment? It causes every one who has already merged into that lane to slow down!
So what does this have to do with trading? As I said before, every participant has a destination in mind. I imagine that most have some lofty final destination of "millions of dollars" that guides a more immediate destination of "make X Dollars today", but regardless it's all about getting to the end. And in trading the more rushed you are to get to the end the more likely you are to do yourself a disservice and unintentionally slow your own progress.
There are so many facets that align between driving and trading I could spend hours on it, but what I want to stress is the understanding that greed and impatience cause us the very "stop-and-go" performance we lament.
As much as I would love to see the roads run smoother due to emotionless, computer controlled cars, I have to say I am glad there are living breathing emotional people driving the motor of the markets. If it weren't for them I can't help but imagine us having very little opportunity to profit from.
So to tie it all up, What can be done to ease the traffic jam of our trading journey? First and foremost drill it into your head that hurrying will only cause problems. You have to believe that first. Without truly believing that, we will continually impede ourselves with detrimental practices.
With time and conscious experience along your journey, you will eventually come to discern when the opportunities to put the pedal down are present. You will see that they arrive in conjunction with the margin of safety that makes it productive to do so.
Sadly, as a truck driver I see the worst of the worst on the road. And because this world does not operate in a way that makes much sense, the barrier for entry on the roads is far too low, resulting in a lot of life changing events for people. As with driving, the barrier for entry into trading is very low and far too many people who should not be trading are.
I find myself asking if I am one of them at times. Thankfully, I also look back at all the growing I've done and realize that I know a lot of parents who ask themselves if they are doing the right thing with their children. I often find that the ones asking that question tend to be the only ones actually doing it fairly well.
-Francisco
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