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Trader Psychology

Posted: Wed Jul 15, 2015 9:24 am
by sinkpretend
I have been reading Trading articles and all the stuff mean while I stumbled upon a very interesting text on a site called newtraderu which provides me many of my answers hope this should be helpful to all of you as well..


1. Be flexible and go with the flow of the markets price action, stubbornness, egos, and emotions are the worst indicators for entries and exits.
2. Understand that the trader only chooses their entries, exits, position size, and risk and the market chooses whether they are profitable or not.
3. You must have a trading plan before you start to trade, that has to be your anchor in decision making.
4. You have to let go of wanting to always be right about your trade and exchange it for wanting to make money. The first step of making money is to cut a loser short the moment it is confirmed that you are wrong.
5. Never trade position sizes so big that your emotions take over from your trading plan.
6. “If it feels good, don’t do it.” – Richard Weissman
7. Trade your biggest position sizes during winning streaks and your smallest position sizes during losing streaks. Not too big and trade your smallest when in a losing streak.
8. Do not worry about losing money that can be made back worry about losing your trading discipline.
9. A losing trade costs you money but letting a big losing trade get too far out of hand can cause you to lose your nerve. Cut losses for the sake o your nerves as much as for the sake of capital preservation.
10. A trader can only go on to success after they have faith in themselves as a trader, their trading system as a winner, and know that they will stay disciplined in their trading journey.

Re: Trader Psychology

Posted: Fri Jul 17, 2015 5:58 pm
by fab1usa1
With regards to the aforementioned item:
7. Trade your biggest position sizes during winning streaks and your smallest position sizes during losing streaks. Not too big and trade your smallest when in a losing streak.
Another name for this position sizing method is "The Market's Money." A person described it me by using the analogy of a gambler in a casino. She walks in with $10,000 in her pocket. She places her first bet and places a modest wager, nothing too aggressive and nothing too conservative. She bets $250. It's a winner and now she has $11,000. For her next bet she decides to wager $500 since she already has $1000 of the casino's money. It's another winner and now she has $13,000.

So you get the idea: Be more aggressive with the casino's money (i.e. "The Market's Money"). Be more conservative when it is your own money.

I've also heard it said that one should place time boundaries: Cash in your chips and call it a night if you are fortunate enough to double your money. Or walk out the door after losing 15% to guarantee that you can play again tomorrow.

I've always had a keen interest in this method. I once coded a Money Manager block and it seemed to improve my returns. But one thing that never seemed quite right to me was this concept of a "time period" where in the analogy above you exit the casino and then return the next day anew. This very method was espoused by a Forex advisory service that I once subscribed to. There they predominately swing traded short to medium term. Their suggested time period was one month. It never made sense to me to essentially say that a winning streak was over just because it was the end of the month! Why on Earth would I reset my position sizing to an initial level just because it is the first day of a new month?

This week I plotted my trading system's Win Ratio year-to-date: Position Number on the horizontal axis and Win/Loss on the vertical (100 is a win, 0 is a loss.) Then I plotted two moving averages: 5-position and 10-position. The results were eye-opening. There was a two and a half month long period of time where the win rate was significantly above the historical win rate average. And then that was followed by a somewhat choppy period of below average win rates. Would it not make sense to increase position sizing during that two and a half month period, and then pull back?

I was wondering what the pros in the forum think of this.

Re: Trader Psychology

Posted: Sun Jul 19, 2015 11:03 am
by sluggo
An idea that's been around a long time is the two-buckets-of-equity method. It makes an assumption: the psychological pain of losing "the market's money" is much much less than the psychological pain of losing "your money". So you bet big with the market's money and you bet small with your money. Presto, higher gain and lower pain. We hope.

One serious drawback of this approach is that people analyze it incorrectly and their incorrect analysis leads to incorrect conclusions. Traders use easily available software tools that calculate standard single-bucket-of-equity measures of goodness, and (foolishly) apply these tools to a NON-single-bucket-of-equity betting method. So they look at "the max drawdown%" or "the MAR ratio" which is, of course, terribly misguided. There are two MAR ratios: the markets-money MAR ratio, and the your-money MAR ratio. But most people aren't willing to put forth the necessary effort to create the appropriate measures of goodness software tools. I imagine there is a pretty good chance we'll get a demonstration of this faineance, right here in this thread.

Traders have dreamed up several different ways to implement the two-buckets-of-equity idea. I'll mention just one of them here, and then you can let your imagination go wild, inventing others.

This example is a calendar based approach. Every year on January 1st you empty the Market's Money bucket into the Your Money bucket. 100% of your total equity is Your Money on January 1st, and Market's Money is zero on January 1st. Now for the rest of the year, whenever you make a new trade, you calculate position size as (1% of Your Money) PLUS (4% of Market's Money). (4/5ths) of profits go into the Market's Money bucket, and (1/5th) of profits go into the Your Money bucket. Same with losses. Then you trade this way for a year and on January 1st you empty the Market's Money bucket into the Your Money bucket and start again.

I'm sure you can dream up some more. Instead of (reset the buckets every 52 weeks), you could (reset every XXXX YYYY) where XXXX and YYYY are ideas that spring out of your own head. Instead of (reset whenever a January_1 happens) you could (reset whenever a ZZZZ happens) ... and you get to invent what ZZZZ means. Give it to your programmer and tell her to create some theme-and-variations.

Re: Trader Psychology

Posted: Sun Jul 19, 2015 11:37 am
by stamo
great ideas, thank you, sluggo...

Re: Trader Psychology

Posted: Sun Jul 19, 2015 4:59 pm
by fab1usa1
For fear of being the possible faineant, I want to thank you profusely for your contribution. I am still digesting it!

Re: Trader Psychology

Posted: Sun Jul 19, 2015 5:24 pm
by fab1usa1
Sluggo, recently you replied to oem with the suggestion to read Ralph Vince's Optimal-f. Please, if I may ask you how would you compare Optimal-f to the Market's Money?

Re: Trader Psychology

Posted: Mon Jul 20, 2015 4:18 pm
by sluggo
On page xv of Ralph Vince's book The Mathematics Of Money Management, in the section called Introduction, he says
It requires discipline to tolerate and endure emotional pain to a level that 19 out of 20 people cannot bear. This you will not learn in this book or any other. Anyone who claims to be intrigued by the "intellectual challenge of the markets" is not a trader. The markets are as intellectually challenging as a fistfight.
(emphasis mine)

"Markets Money" seeks to avoid emotional pain. Thus it has a completely different goal than Ralph Vince.

First choose your goal. Then find tools that help you achieve that goal.

Re: Trader Psychology

Posted: Mon Jul 20, 2015 4:26 pm
by fab1usa1
That was my analysis as well. Sorry to make you work for that reply but I value your input.