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To hel ou ain an insi ht into a t winning trader’s mentality
ical
To show you how your belief structure stands in the way of your being profitable
To help you understa understand nd how your natural natural wiring wiring is not ideal for the most consistent trading outcome
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following poll question:
(poll)
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You have have an expectatio expectation n of how each outcome outcome should be You believe that if you take a certain number of steps, rewarded What Wh at ou er erce ceiv ive e is os ossi sibl ble e an and d wh what at ou ex ec ectt out of the market is not what you are getting
This ha has s nothi n othing ng to do wit with h the t he marke market. t. Your disappointme disappoint ment nt is i s the resul resultt of your atti ttitud tude e and
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can sell for higher prices and can buy back at lower prices
ere are on y ou comes o any g ven trade. Do you believe this?
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There are fundamentall 2 forces that move the market:
Participants who believe that prices are too cheap and won’t go any lower Participants who believe that prices are too ex e ve w ’ y e Each one of these participants…each trader … effect on the product you are trading and on the final outcome of the trade 6
What is this 3rd force that can move the
It is the participants who have not yet taken a
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Can we measure the first 2 forces?
Yes!
What are some of the tools to measure them?
Volume profiling Market Delta VWAP Volume histograms
Fibonacci Retracements ,
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rd
Force?
This 3rd Force is the unknown and is the
Again, each participant is also a variable and represen s a rea o your very nex ra e
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What are some of the most common things traders do to
You wait too long for a pre-defined area to do business and take the trade too late. You are waiting for “confirmation” You take the trade and take rofits ver uickl because ou don’t want to lose You take the trade and it hits your stop (if you had one) and now you are too afraid to take the next trade. You are now waiting for “double ” You take a loss and you fight back to make Mr. Market pay for what he did to you. You are now revenge trading You know what you have to do but are frozen by fear while you wa c as someone e se a es e ra e you passe on an ee s c to your stomach as it gets to its targets You have been doing this for years and keep repeating the cycle of makin one or more of these mistakes and then startin over
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Our minds are programmed since birth to operate in erms o cause an e ec Our entire education, career and daily life is based on an almost guaranteed outcome for the effort expended. E.g.. + = or uy a c e o e game, en w e admitted and will have fun How does this tie in with the Market Forces described ear er s ra ng e r g us ness o e n or ose w o want a guaranteed return on their effort? This is what makes trading what is possibly one of the mos cu en eavors espec a y or ose com ng rom engineering, intellectual, medical and other highly educated backgrounds
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Knowing all of that, how does it help you to understand the difference between a consistently profitable trader and one who is
The consistently profitable trader knows with every cell in his being that the outcome of e nex ra e canno e nown It is key to distinguish between “thinking” that ’ “ ” ’ know. This is an important distinction Now let’s look at our relationshi with losses….
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Let’s looks at the results of the oll osted on June 2nd, on my blog uestion: The
“ There is an outbreak of Asian Flu at your location. If nothing is done, they predict that 600 people will . . program A is adopted, 200 people will be saved. If program B is adopted, there is a one-third thirds probability that no people will be saved. Which of the two programs do you favor?”
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Poll Results:
(302 samples)
Conclusion: Because lives were at stake, the great majority of those who took the poll are risk-averse in that they would gain by saving 200 and accept that 400 will perish. Program B gave us a chance of saving everyone but the probability was only 33%. Both Program A and Program B have the same outcome of only saving an average of 200 people If the wording had said “Program A guarantees 400 people will die” the majority would have cho sen Program B. People are risk-seeking when thinking in terms of loss, but are risk-averse when they think of lives saved. 14
are likely to give more room and more time to
You are also more likely to be risk-averse position for a small profit
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So far we have ex lored the nature of the market by defining the various variables that are essentially unknown in their action We have also defined the nature of our highly educated and highly programmed minds that we have a propensity to risk-aversion with our profits and risk-seeking with losses Let’s now look at more specific loss patterns typical to trading
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without first defining and accepting the risk? (poll)
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Wh would an intelli ent trader who knows that there are unknown forces in the market ever consider putting on a trade without first defining e r s or cos o n ng ou e ra e wou work? you to be wrong? Have you defined what the market has to feel like for ou to be wron ? Have you defined how far you would allow it to test against you for you to be wrong? 18
What is the key reason why we would initiate and repea s e av or Answer: A t ical trader will not trade until he has convinced himself that he is right! A typical trader will not trade unless he “knows” that there is no risk
Defining a stop-loss or the risk to a trade means that there has to be a conscious effort to prove oneself . Given what we have learned about market Forces and our Inner Monkey, how true can “knowing” be???
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’ another aspect of integrating losses within
Which one would cause you more pain? . 2.
Losing an opportunity that you had?
(poll)
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If missing an opportunity truly causes you more pain, then you are likely risk-seeking and absolutely need to have strong risk parameters in place. Missing an painful because the blame can’t be shifted to the market If you prefer to have your stop-loss triggered, then your are risk-averse. Be cautious of conversations “ ” or “the market did that”. It is much easier and less painful to blame the market for your loss 21
Most traders spend a majority of the effort in research to technically find a trade or setup that can get as close to guaranteeing a positive
The reward of a positive outcome is the satisfaction of success, the release of n orp ns an a genera ee ng o we - e ng To short-circuit this effort, most traders will
emotionally guarantee a positive outcome to the next trade in order to even put it on 22
How does all of this information gathering work with regards to determining the risk of any given trade? It works against the effort revealed in the last slide trade until he has convinced himself that he is right The lo ic is: “I would not ut on the trade an wa unless I think I’m right. If I didn’t think I would be right, then I wouldn’t put on the trade anyway.” e resu : orge e n ng e r s or us ng a og ca or dynamic stop-loss (i.e. “I know that this will be a winner!” 23
A consistent trader has the followin core characteristics:
1.
2.
3.
4.
A probabilistic mentality that is a key to his or her approac o e mar e An approach that is based on a reading at any force as the market rotates An acceptance that the outcome of any given trade canno e nown un e ra e as unwoun se An acceptance that the market, like the weather, will be the final commander of what ha ens next 24
Let’s have a look at some sim le truths existin in the market
You can take the exact same data same rices same setup and same time of day and quantify it
This data, to a less experienced trader, will result in the conclusion that the outcome should be identical
Every moment in the market is a unique moment
Why is this moment unique? o
Because we do not know if the same participants will be there and will do the same thin as last time 25
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The outcome of any trade can only yield one of two results: 1.
The trade is a winner
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We do not know within any setup where the next winnin trade will show u and where the next losing trade will show up. There is no way to know Once the trade has been put on, we know that this s a un que momen an we o no ave any con ro except to manage the trade according to our plan
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If the outcome is only 50/50 (win/loss), then why o er ra ng a a
You might be mixing the distinction between the outcome of the next trade within a set of trades and the skew of e en re se o ra es For example: You might have a setup that yields a 62% probability of winning over the long-run. Still, you do not now w ere e oss w occur. cou appen as a streak at the beginning or it could be randomly distributed across the sample or it could happen at the end
of your edge on this next trade Are we in agreement on this?
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Let’s look at a couple of real-life examples of an exerc se a my ra ers o. ere are e ru es:
A trader flips a coin. Heads is long. Tails is short. As soon as the outcome of the coin-toss is revealed the trader enters the market short or long at market The trader automatically enters a target of 4 ticks in ES and a sto of 4 ticks in ES As soon as either the target or the stop-loss is triggered, the trader tosses the coin and does it again Minimum sam le must be 20 trades Let’s look at the outcome received from 2 out of 4 independent followers last week on Twitter
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28 trades (14 short, 14 long – Randomly generated!)
20 losers
8 winners
28.8% Win Rate
8 Trades max losing streak
Expectancy: <0.43> pts per trade
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M U R E T E R O Y R M M S E A R T
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M U R E T E R O Y R M M S E A R T
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-
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20 trades (10 short, 10 long – Randomly generated!)
13 losers
7 winners
35% Win Rate
Expectancy: <0.5> pts per trade
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The entry and direction of trade is undoubtedly random. How im ortant is trade entr reall ?
The random entry yielded an average of 33% win ercenta e on the strate
Without improving the entry at all, can this method be made profitable?
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*
With a little bit of study, we can turn this approach into a marg na y pro a e or rea even sys em n eory We enter some risk and money management parameters to achieve this Here are some rules: 1. 2. 3. 4. 5.
Only 2% of account equity can be at risk We can onl trade this s stem in a balanced market Our targets have to be at least 3 to 3.5 times our stop-loss We trade only in times of less directional bias (i.e. avoid first and last hour of cash market trading) All other rules remain the same
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many trades can this system take before it
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450
400
390
350
300
194
200
150
129 97
100
77
64
54
50
47
42
38
34
32
30
26
26
24
22
21
20
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0 1%
2%
3%
4%
5%
6%
7%
8%
9%
10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% No. of Trades
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The Trader’s Ed e is sim l a measure of the “skew” or favorable probability of your setups understanding, research and a sample of trades lar e enou h that will indicate that ou will have a consistent positive outcome at the macro level
Risk control and mone mana ement are ke to drastically raising the outcome of your trading as shown in the random exam le earlier 38
Emotional capital is essentially the amount of stability and positive
Think of it as a bank account:
The more often you execute good trades (regardless of outcome),
The more often you get emotional and lose control of your execution, the more debits you will have in that same account
If you make enough debits on our emotional capital account, we go n o ver ra ro ec on w ere we exper ence excess ve ear with every trade Trading with fear results in hesitation, seeking more confirmation , . So let’s go back to the most common trading mistakes that we discussed earlier
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You wait too long for a pre-defined area to do business and take the trade too late. You are waiting for “confirmation”
Risk-Averse Monkey; Low emotional capital; Non-belief in random effect
because you don’t want to lose
Non-belief in probability of setup
You take the trade and it hits your stop (if you had one) and now you are too afraid to take the next trade. You “ ”
Risk-Averse Monkey; Low emotional capital; Non-belief in random effect
You take a loss and you fight back to make Mr. Market pay for what he did to you. You are now revenge trading
Risk-Seeking Monkey; Ok emotional capital and about to debit; Non-belief in random effect
ou now w a you ave o o u are rozen y ear while you watch as someone else takes the trade you passed on and feel sick to your stomach as it gets to its targets
Risk-Averse Monkey; Low emotional capital, non belief in anything at all
You have been doing this for years and keep repeating the cycle of making one or more of these mistakes and then starting over
Risk-Seeking Monkey; Low emotional capital; non-belief in probability of setup 40
following poll question again:
(poll)
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Practice trading more mechanically. Know that you do not know. How do you achieve this?
I have given you the tools you need to form your hypothesis Switch to a sim account for a few days and take every trade of a specific s etup that shows up without fail and while knowing that the outcome of any trade is unknowable Define and accept either a fixed or dynamic stop-loss for every trade before taking it . Give your execution of every trade a grade of your choosing Keep a journal or log of your trades. Do something as simple as plotting or marking trades on a 3-minute chart at the end of each day for a couple of weeks. You will recognize a pattern ear your screens o every ng excep w a you use. y screens ave on y w a nee o support my trade decisions. This is a key step Your ultimate goal is to become ONE with the fact that every trade has an unknown outcome for EVERY market participant Never think in terms of “should”, “will” and “must”. Keep a flexible mind Don’t listen to the idea of “controlling” emotions. Don’t control them, use them to identify issues Never trade to m ake money. Trade to be a superio r trader.
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Left half of our brain is rational. It operates from prior information . . Because the right half is creative, it essentially goes beyond the rational mind and taps into a belief system and the flow of the subject which you are focused on . . Gladwell’s “Outliers” of 10,000 hours of practice), then the intuitive mind begins to take over and to help us make decisions without the rational half being involved
tennis player, golfer or artist perform his or her craft. The same can be achieved in trading How does it work? Nobody knows, but it essentially is caused by unleashin the full ca acit of our mind to “see” thin s that are too subtle for our rational mind to describe When someone is trading from this place, it is known as “trading in the zone” or “trading with the flow”
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1.
We have looked at a small portion of the mental aspect of a consistent
2.
We have looked at the nature of the unknown aspect of trading We have looked at the nature of our mind as affected by our natural aversion to risk as well as the effect of our education and programming We have looked at the nature of losing and losses on our decisions and emotional capital We have looked at the relative unimportance of trade entry when
3. 4. 5. 6. 7.
8.
We have discussed the random effect on your very next trade We have discussed some basic steps that can be taken to improve your mental readiness to take on the next trade and to accept the wins or losses We have looked at the role of intuition
– Brett Steenbarger, The Daily Trading Coach 44
