The Psychology of Trading

I'd say trading psychology has a lot to do with being a failed collections agent: //www.wallstreetoasis.com/forums/still-cant-find-a-jobbecome-a-financial-…

But seriously - what discussion are you looking to have? Post some articles rather than just calling for a "general discussion".

In particular I would like to discuss the things that Douglas talks about in his book. I originally intended this thread for a discussion of Douglas' book but decided it would probably be better to discuss the psychology of trading as a whole. Perception/beliefs/attitudes and how they fit together and are forces constantly at work that are effecting every decision you make via your subconscious thoughts.

I really think its important that when you are trading that you have a "clear state of mind". I have noticed that once I start thinking about the trade and instead of just letting it take care of itself it gets in the way of my ability to focus on other opportunities that may present themselves.

When I am trading and have on a large position I tend to watch it tick by tick in the box along with the intraday charts. When I focus too much on it I will miss other entry opportunities. My first trades of the day tend to be the best because I am patient and wait for everything to line up. Typically other setups will present themselves while I am in the position but if my mind is not clear and perceiving what is going on around me I either miss the trade entirely or get in with a crappy entry.

There really are a lot of forces at work that are going on but everything starts with having a mind that is clear enough to perceive the opportunities in front of them.

"Oh the ladies ever tell you that you look like a fucking optical illusion" - Frank Slaughtery 25th Hour.

if you don't understand basic probability and math you're usually fucked. Psychology from what I gather matters less than it used to. There is definitely game theory involved in trading, but that too can be turned into a science. Beyond that I'm really waiting to find out how much psychology is actually involved.

Why do you say that psychology matters less now? Obviously the markets are becoming more and more driven by computers but there are still countless opportunities out there. Even if you are a systems trader part of that psychology is that you stick with the system even in the bad times because it has an edge. If you make modifications to the system every time it has a draw down then your playing cat and mouse with the market and that simply isnt going to do anything but make you more stressed out and questioning the system.

Personally markets I feel that markets are fundamentally no different now than they were 400 years ago. I do not believe in EMH in any form. As long as computers are controlled by people who operate under the same fear and greed cycles are everyone else markets will never be efficient because its players are not logical.

"Oh the ladies ever tell you that you look like a fucking optical illusion" - Frank Slaughtery 25th Hour.

My biggest psychological problem when I was trading was wanting to hit a home run every time, because I hated the job so much I wanted to break the bank and get out. This led me to take unnecessary risks and cost me big money a few times, thus postponing my eventual exit.

I didn't solve the problem until I sat down and said, as soon as I make this amount of money, I'm out of here. That gave me the serenity (for lack of a better word) to trade successfully because I knew when I was going to get out.

How did I determine the figure? I took the best year a trader ever had in the history of our firm and then doubled that number. Then I went into the CEO's office on January 3rd and handed him a resignation effective December 31 of that year, or sooner if I hit the number before then. He actually had the balls to laugh at me, and tell me it couldn't be done.

I was packing up my office by mid-June of that year.

I don't know how a person could trade indefinitely. Don't get me wrong, it's the best job on the street if you want to make big money and still have some autonomy. But for me, it was just a means to an end. Some miserable shit I had to do for a few years in order to bankroll the rest of my life.

If you approach it from that viewpoint, you'll probably do well.

The WSO Guide to Understanding TARP

Edmundo, you were probably smart to get out mid-June, but bear in mind that comparing yourself to the formerly #1 trader with the best year isn't a fair comparison because he traded a whole year.

That said, I haven't read Douglas, but my thoughts on the psychology of trading are largely based in the classic "Extraordinary Popular Delusions and the Madness of Crowds", which every trader should read.

The most common psychological fault I see amongst traders is a confirmation bias - building an opinion and then selectively choosing information to support it, rather than inductively taking in the whole picture and then developing an opinion. I think this bias is inherent in the fast nature of market making, and frankly, you need to develop a 'thesis' quickly - it's sort of like playing poker where you have to assume your opponents have xyz and then figure out the right odds. So maybe this isn't really a 'fault' as much as an inherent cost.

I'm getting a lot more interested in technical analysis - I'm finishing up 'Heretics of Finance' and plan on moving on to some more dense material. Starting to build the impression that a lot of psychology is embedded in indicators. I'm looking closely at Elliot Wave theory.

I could have kept trading and probably would have continued to make a boatload of money. But it's only a matter of time until you blow yourself up.

I knew the temptation would be there, so I planned for it in advance. Some of you are going to think these were extreme measures, but I wanted to make sure I had no alternative.

Two weeks before I resigned, I moved and didn't tell anyone where I moved. The day before I resigned, I changed my phone number and didn't leave any forwarding info. I knew my firm would try to sweeten the pot for me to stay, and I knew they'd be as relentless as a dog with two dicks, so I moved and changed my number for my own sanity. In the days leading up to it, I surreptitiously moved all my stuff out, and some of the stuff belonging to the firm (just in case they got cute).

On the day I resigned, I showed up before anyone else (I had keys to the office - don't ask). I faxed a copy of my resignation to the NFA, the CFTC, the SEC, and the NASD. I wanted to head the firm off at the pass in case they tried any shenanigans like claiming I was terminated for cause.

Then I formally resigned and they went apeshit. The CEO happened to be out of town, so I slipped out of there without having to have a conversation with him. Of course they tried to call, but the number was no good. They showed up at my apartment, but I was no longer there.

My exit, and all the planning that went into it, became the stuff of legend in commodities trading circles for a short time.

You have to know when to pull the plug.

The WSO Guide to Understanding TARP

Edmundo - I trust that you made a lot of money for your firm, but is quitting really that big of a deal? I can understand taking some precautions to ensure the money doesn't lure you back in, but it sounds like you were worried they'd hunt you down or something. And why would they say you were fired for cause? Is that purely to prevent you from competing? I'm genuinely curious

...regardless of our disagreements, I always enjoy how colorful and vivid your posts are.

Can we not hijack this thread. Appreciate if we stick to the relevant issues to the psychology of trading.

"Oh the ladies ever tell you that you look like a fucking optical illusion" - Frank Slaughtery 25th Hour.

Not trying to hijack the thread. This is the last I'll say on the matter.

Back then (and it would be tough to convince me anything has changed in the past few years), management at firms was made up of pissy little bitches who would go to great lengths to fuck up your career if they got it in their pointed little heads that you'd slighted them in the least. I can't tell you how many times I watched a guy resign and the CEO of the firm shake his hand and wish him luck, and then go fuck up his U5 with a Termination For Cause before the guy even got out of the parking lot. It wasn't to keep them from competing, it was just because the boss was a vindictive little prick who wanted to make it near impossible for the guy to get hired anywhere else on the street.

As you may have guessed, I didn't work for the nicest of guys. I wasn't worried they'd hunt me down (because they were pussies to a man), I just didn't need the aggravation of the constant cajoling to come back to work.

For the record, the amount of money I made for the firm that year was roughly 5 times what I made for myself. My last month in the business (my biggest month), I made enough money for the CEO and his toady 2nd in command to go pay cash for two matching Ferraris, which they had the balls to drive up to the office in. When I saw how the money I generated had been wasted, I felt like choking them out. The CEO was lucky I didn't take a shit on his desk on my way out.

The WSO Guide to Understanding TARP

My username should be trade4shit because thats how today has been.

"Oh the ladies ever tell you that you look like a fucking optical illusion" - Frank Slaughtery 25th Hour.

There is definitely game theory involved in trading, but that too can be turned into a science

Jealous much?

How's that mediocrity working out for ya?

The WSO Guide to Understanding TARP

Monkeykigdom:

Plenty of guys have made a shit ton on the street and walked away. It's not so hard to believe.

Guys seriously.... I really want this to be focused on the psychology of trading. Edmundo see what you did you rogue trader you.

"Oh the ladies ever tell you that you look like a fucking optical illusion" - Frank Slaughtery 25th Hour.

"I just hate dumbfucks who use terms they are only familiar with on the most flippant level. There is no "game theory" in the markets unless you are a huge fund trying to deleverage in an illiquid market. for personal trading, the market is not reacting to your trades, hence no strategy situations."

what makes you think I'm familiar with game theory only on flippant level. I was discussing trading in general not specifically directional trading on a personal account. As a market maker you need to consider game theory all the time. You have to adjust spreads both to what you think is fair value and to how a potential buyer or seller is behaving, since they might have an informational advantage over you.

Come on guys, leave your ego at the door...

In your own words, from a psychological perspective, what do the best traders look like?

Are the ways in which the best traders maintain themselves outside the trading, such as personal habits and beliefs, a large part of their ability to succeed?

Because being a good trader means going counter to what your natural instincts tell you to do.

Edmundo you strike me as a pretty passionate yet aggressive type I was wondering how you would react when your in a trade and it goes against you and approaches your stop. Did you double down? Did you exit? Did you just ride it out?

The single biggest mental shift I find is when a trade is going against you and is getting close to your stop. If your not totally about your stop I think the natural inclination is to give it as much wiggle room as possible until you know for certain the trade just isnt going to work out.

Personally I have found that your best best off getting stopped out and moving on to the next trade. Once you break it thats when ego steps in and everything goes to shit.

"Oh the ladies ever tell you that you look like a fucking optical illusion" - Frank Slaughtery 25th Hour.

Psychology matters, whether its individually or the entire market. I didn't bother reading any of the posts, because it turned into a dick swinging contest (so excuse me if I re-post a certain idea). I know of traders (and a few of these guys are big), that literally assign people to go through forums/sites like stocktwits and other places to get market sentiment and fade the market. You have to have an idea of how the "other" side is thinking.

Trading discipline requires the strict use of stops, in my opinion. That said, I didn't always use stops. I would make the decision based on the liquidity of the given market.

For example, natural gas had just begun trading when I was still working. It was extremely thinly-traded in the beginning, and the use of stops would have killed you due to the violent intra-day swings. Most of the exotics (coffee, cocoa, OJ to some extent) traded likewise, and stops were detrimental to a trading strategy. Some products didn't even offer stops (I'm referring to options trading, now). Also, highly manipulated markets (live cattle, boxed beef) would go out of their way to trigger your stops and then take the market higher.

On the other hand, to trade a liquid market (crude, S&P, metals, grains, etc...) without stops would be moronic. Even though the temptation is always there to fuck around when you are approaching a stop, you can't do it.

When trading straight equities, you should always have upside and downside targets in mind before you enter the trade. The use of computerized trailing stops is one of the greatest market innovations of the past decade, in my opinion.

The WSO Guide to Understanding TARP

Re: Philosopher & Tradeoff: Game Theory is absolutely used in market making. You can think of trading as either you v. market or a game with n participants. Traders use their spreads all the time to signal or false signal the market. Spreads and volume are information sets. Why do you think so many firms use poker scenarios as screening mechanisms for trader candidates? In fact, you could argue that trading is solely and purely game theory.

Re: trade4size's question about positions going against you. I guess your question applies mostly to prop/managing you own account, but I'll expand it to market making. If we're talking trading (short-term, high frequency), I get the hell out of positions ASAP if it goes against me. Adjust my spread and cut my losses. I'd say when you start speculating and thinking longer term, you're gravitating towards the investing category instead of trading - though you still need to consider depth and volume, it's a different mindset.

Yesman brings up an interesting point that I hadn't thought about. When I was trading full time, I set my downside stops at 40%-50% of the trade equity, meaning I would have to be down 50%-60% before the stop was triggered. I felt this was necessary to counter the volatility inherent in commodities and options trading.

When trading my own account these days, however, I always set my stops at 85% of trade equity, or a 15% drop in value. I'm only trading equities currently, so that explains part of the difference. When I go long stock options in my own account, I don't use stops because the option is its own stop (you can only lose 100% of your investment). No, I'm not trying to be glib. If you're using options as a hedge, you generally want them to expire worthless.

I think it's interesting to note that when I was doing it for a living, I was much more liberal with my stops than now that I'm just doing it to supplement income. I know part of it comes from deep down being a Bill O'Neil CANSLIM kinda guy from way back. But I wonder if I'm just becoming more cautious as I get older.

The WSO Guide to Understanding TARP

Re: Yesman & Tradeoff: If you reread my post you will see I was talking about personal trading or at least non-OTC trading in a liquid anonymous market, which I am pretty sure is what the OP is talking about. I even gave an example where game theory would be applicable- a large fund de-leveraging in a illiquid market and causing its positions to be known to competitors. I hope my ego isn't flaming, but just to be clear game theory is making strategy when the success of your decisions depends on the decisions of a finite number of others. Obviously in a liquid or anonymous market nobody is trying to model a finite group of investor behavior. Your specific exceptions are valid applications, however.

Yesman I personally day and swing trade equities. I cant speak for making markets in options as its a totally different ballgame. I play reversals off support & resistance and momentum as my primary strategy using short term macro news with sector fundamentals for making my idea. Typically im trying to look to make 3x my risk as a rule of thumb.

"Oh the ladies ever tell you that you look like a fucking optical illusion" - Frank Slaughtery 25th Hour.

I sent this in a PM to someone from WSO that i talk about the trading with and found it really relevent to this thread.

One thing I have noticed is that my momentum trades tend to work within minutes and never look back. Because of this dominate tendency I should be able to use a tighter stop than usual. The hard part is having the discipline once you realize the momentum has stalled out and being content getting out with a small gain or small loss. As a natural trend follower I tend to want to give them the benefit of the doubt because these trades have done the best for me but I find myself holding them too long when I could have got out for flat and found a better opportunity. I think you know the situation, you expect an explosive move but it just stalls and does nothing... neither in your direction or against you. I often will find myself in a trade that I no longer really like but that I not been stopped out of. Do you think those trades I am best off exiting since the technical catalyst failed to develop? Honestly I find these trades to be the most stressful because they just go sideways then when they do approach my stop I tend to think its just going to reverse since it has done nothing. I admit this is a psychological flaw and I can overcome it. The more I think about it the more I think of just getting out for a small gain or loss and just moving along. That way I dont have to justify it to myself. I feel like these stressful positions are effecting my ability to perceive whats going on in the market because Im looking for some sort of confirmation that im in the right trade.

"Oh the ladies ever tell you that you look like a fucking optical illusion" - Frank Slaughtery 25th Hour.

...edmundo no offense but i dont think you accurately represent what wall st is actually like. I work at a large hedge fund and have spent 8 years on the buyside and i would not characterize the traders I have worked with as raging alchoholics or people with personality disorders. In fact, I would say I have worked with on average really intelligent and put together people. Yes people like to go out and have drinks but really where I work it is quite frowned upon to be a "raging alcoholic" and its certainly not the predominate culture. To be honest I have a real tough time believeing alot of what you say, considering that you describe a work enviornment that sounds like a bad writer trying to write a movie about trading without doing any research and you claim to have made a fortune in 6 weeks of trading at a small prop shop and then retired. Using the boiler room poster as your avatar also dosent help the credibility. I dont really care I guess but when i read your posts I always feel like you are getting ready to try to sell something...

On psychology, I think the best book on Trading psychology out there is "Trading to Win" by Ari Kiev. Kiev was hired by SAC to be an in house psychologist and I really think his book is worth reading although you will have to deal with some psychobabble.

On trade4size's question above...if something changes about a trade I will take it off immediately if it has gone against me even if it is not near my stop. I am not a systematic trader so if the reasoning behind the trade is no longer valid then I want out even if its not at my stop. The only exceptions are trades that have been signifigant winners...on winning trades i always let the price action take me out, I never try to pick a top even if the fundamental story changes. Really i dont like to take off small winners either just because I think its a bad habit...I will usually give the trade a chance to keep working if its a small winner even if it means i sometimes give up small gains and take small losses instead. Small losses are fine as long as you can catch the larger, thematic trades. The natural tendency to want to take profits will trick your mind into making up all sorts of reasons why you should exit winning positions, but as a macro trader who is trying to catch big moves this urge should be fought against. The urge to "ring the register" is a costly habit...might work for rapid-fire systematic guys but in my business small winners do not make you rich.

...i really dont need to get into a pissing match with you especially since u never even answer any questions about ur strange story. As I see it, you spent a year at a prop trading firm, had a good 6 weeks, and then blew up and left. Not really that amazing of a story. My guess is that i made more money last year then you did in your glorious 6 weeks, I just dont hate my life so much that I would leave to become a full-time profesional website contributor. I also intend to spend plenty of more years in this business provided i keep making money and its not depressing at all....goerge soros, julian robertson, paul tudor jones, etc. all spent many many years at hedge funds and i'm not shedding any tears for them either.

The reason this thread is as long as it is, is that I've done nothing but answer questions.

I made it clear that I didn't work in a prop shop, and that my run took longer than 6 weeks to put together, but whatever.

If you made more last year than I did in my "6 weeks" (you'll forgive me, but highly improbable), congratulations. Some people are wired to work for someone else their whole life. I'm just not one of them.

The WSO Guide to Understanding TARP

...u r working for a website answering the questions of college kids so try not get to be self-righteous. Your characterization of traders as substance abusers and drunks is absurd. If you had more broad experience in the business aside from a year at a small "boutique trading firm" you would know it is ridiculous. This is 2009...you sound like you were brought here in a time machine from the floor of the NYMEX in the mid-1980s.

Your assertion that people at hedge funds arent "trying to make a buck" is even more absurd...I dont even know where to start on that one. I understand that you worked at a "boutique trading firm" but surely you must at least respect that some of the richest traders in history traded at hedge funds and that the capital possesed by many funds can be quite a vehicle for a trader to get rich...no?

And I actually do enjoy trading and it is one of the few professions where if you are good you can make your own hours, come and go as you please, etc. so I really don't see it as "working for someone else" in the traditional sense.

Edmundo im going to ask you nicely to just stop posting on this thread. I know you are determined to defend yourself but can you please not make it at the expense of this thread.

Bondarb, thank you for the input on the situation I have been running into. I think the simple answer to my question is that its ok to get out of a trade going nowhere even if my stop has not been hit.

"Oh the ladies ever tell you that you look like a fucking optical illusion" - Frank Slaughtery 25th Hour.

what firm do you work for or do you day trade yourself? do you think that would make a difference in how you trade (such as in terms of risk attitude)?

Its a very small prop shop. I actually am a remote trader but planning to move to where the office is located in a couple months. No doubt trading at home by is a lot more difficult because you lack the atmosphere of a trading floor. I am on AIM with about 10 other traders all day but its just not the same feel. We all have our own styles and my style is very different. A trading floor would provide that competitive environment and I am looking forward to that but I dont see it changing how I view risk.

As far as the way I view risk I dont see being on a floor changing that at all. I have been trying to branch out in terms of the type trades I take and there is a learning curve associated with it as with anything else. In particular the toughest part of these new types of trades is figuring out the optimal stop. I have paper traded and tested these setups for years but when real money is on the line things are different. Not all trades are psychologically equal. What I have found are the best trades are the hardest ones to make. The trades that feel good are often wrong. This does not mean that I am a contrarian though. Exits have always interested me a lot more than entries because thats where the money is made. I am not a great trader yet by any means and I am honest about this but I am always looking to learn.

"Oh the ladies ever tell you that you look like a fucking optical illusion" - Frank Slaughtery 25th Hour.

thanks for explaining that,quite interesting.

I am not trying to hit home runs but I am trying to catch the big intraday thematic moves in the market. Having a favorable entry gives you so much more flexibility with how you want to exit. Typically I am not holding trades over night unless I have a solid gain in them of several percent. I am willing to let my winners run as much as possible if I have a strong bias.

For the most part for the past 2.5 months I have just been picking up scraps as I have not seen a lot of opportunity in the market to catch big directional moves. Trading to the short side has been painful with the countless late day rallies out of nowhere. In fact the way this market has behaved I have been unable to catch any of this downtrend because my internal thoughts have been that its just been a correction within the rally and that bears have yet to take control. For weeks what was working was to buy the dips because the market kept snapping back. The past week or so this has stopped working. I have been waiting for bears to take control for the past 2.5 months and today they finally managed to take the S&P under the pivotal 883 level.

Glad to see the thread sort of coming to life. I will keep posting as long as people are commenting.

"Oh the ladies ever tell you that you look like a fucking optical illusion" - Frank Slaughtery 25th Hour.

bump... not letting the thread die yet.

This is one of the most critical aspects of trading I am surprised the interest died off so quickly.

"Oh the ladies ever tell you that you look like a fucking optical illusion" - Frank Slaughtery 25th Hour.