How does resiliency work into your psychology as a trader?

In this first part of a back-to-back episode of 2Traders Podcast, Darren and Walter get into Positive Psychology and how limitations and resiliency impact your trading. Do you know why many traders don’t find consistent profits??

Walter shares a story about army training relates it to to learning profitable trading. He also talks about the importance of identifying this one thing and how to avoid being “eaten by the saber-toothed tiger.”

Darren suggests that trader resiliency comes from aligning this thing correctly. According to him, trading isn’t like a game of chess where you know all the pieces. You will also learn why Danish people are the “happiest people in the world” and why you can use this in your trading.

All this and more in the first part of a two-part episode of the 2 Traders Podcast.

Download (Duration: 28:46 / 69 MB)

In this episode:

01:00 – Positive Psychology
03:40 – importance of limitations
05:16 – resiliency
07:27 – cyclical behavior
10:32 – Drill Sergeants
12:11 – Transferable skills
14:27 – sabertooth tiger
16:27 – a determination-thing
18:03 – idea of expectations
20:21 – more resilient
22:51 – process over outcome
24:40 – echo chamber
27:34 – psychological edge

Tweetables:
Trading is not an evangelical thing[Click To Tweet].
You can learn to be resilient [Click To Tweet].
How can you accelerate?[Click To Tweet].

Download The Full Episode 131 Transcript Here

Walter: It’s easier I suppose, to prepare yourself for the next trade to be a loser…

Announcer: Two Traders, Darren and Walter, pull back the curtain on profitable trading systems, consistent money management, and profitable psychological triggers. Welcome to the Two Traders Podcast.

Walter: Welcome to Two traders. It’s Walter here. Hi, Darren!

Darren: Hello, Walter.

Walter: Welcome back, Darren. It’s great to have you here.

Darren: Yeah, it’s been a while.

Walter: Yeah, It’s been a while. But hopefully for the listeners, it’s just been a seamless progression of podcasts for the week. So they don’t realize that we’ve been…

Darren: The wonder of the internet.

Walter: Yes, we’ve been on the lam. So, I went to this talk and we were just talking about this right before we hit the record button. I went to this talk and the guy’s name is Martin Seligman. Martin Seligman is known as the Father of Positive Psychology and it was a great talk.

He’s pretty well known in the Psychology world. It’s interesting though, the way that he describes — just a little bit of background for people who don’t know, positive psychology is this little area of Psychology. It’s mainstream now but it’s still kind of like the redheaded stepchild.

It’s not one of those main sort of accepted areas of Psychology. It’s getting there, but certainly and actually Dr. Seligman talked about this at his talk that he had here in Sydney. What Psychologists do really well is they’re really good at looking at differences and they’re really good at looking at extremes and when things go wrong. That’s been the focus of Psychology.

What he’s done is this whole sort of mini industry has sprouted up and actually a lot of these people are in Australia, I come to find out. I didn’t realize that it was so deep-rooted here in Australia where they actually use some of the principles of positive psychology—  for example —in schools down in Victoria, Australia.

It was a really interesting talk and one of the reasons why I want to bring it up is because Seligman, what he talks about — anyone who’s kind of gone through some of my courses they know that I focus a lot on limitations. How what we do as people, as traders, as parents or whatever, a lot of what we do kind of set limits and boundaries. We do this for ourselves, we do this for other people. Sometimes it’s hard to see it. It’s like the fish in a fishbowl. You don’t really see where the glass is because your setting these limitations.

That’s one of the things I asked Seligman. I said, “What’s your take on this?” I mean, in some ways I kind of gave him a softball question which was, “You know, I see limitations as a key part of our growth because we need to realize that when we set these limitations, however obvious or conscious they are for us, these are the things that are holding us in. This is where we live. We live in this fishbowl because we don’t think it’s possible to go beyond a certain point.”

Obviously, these maps on the trading quite well. I know a lot about his work, so I think a lot about limitations. “Can you talk a little bit about the difference between or the importance of limitations and thinking about limitations versus resiliency?”

Resiliency as a concept in his work which is a big one. It’s a big area of his research and in fact, he did a huge study in the United States for the Army Chief of Staff. I think his name is General Casey – he was the Army Chief of Staff just a few years ago now.

He basically said to Seligman, he called him up and he said, “Look, we’ve got a lot of soldiers coming back with PTSD, suicides. They can’t integrate in society, blah, blah, blah. Divorces, this and that, and what does your positive psychology have to say about that?” Basically, “Hey, Marty. What does your positive psychology have to say about that?” And what Seligman said was, “Look, there’s actually a bell curve.”

Just like we know in everything, with trades. We know there are trades on a bell curve. Some of them are at this end and some at that end. He explained to the guy and said, “Look, you’re basically looking at the ends of the curve” and over-arching response, for most people, when they run into a really tough situation, like war for example. As a soldier obviously does is that they bounce back.  

Typically, they’ll go through a couple of months of really hard time, but after about 3 months, they’ll pull themselves out of it and they are actually better for it. There are specific skills that you can learn when you’re talking about resiliency that you can teach them to your kids.

Of course I was thinking yes and this actually is really important for traders because my operating theory here is that, if you go back and read the famous traders —like in the Market Wizard — what you’ll notice is the experiences that the traders have is pretty much the same.

Like, they all pretty much start out, they all make some serious mistake usually involving risk. Then, they usually swear to never make it again and they basically bounce back. At some stage, they basically get wiped out. They kind of pull themselves out and then they make good.

In other words, they’re quite resilient. They are able to keep pushing forward and I think a lot of traders don’t do that. A lot of traders, when they hit that really tough patch, they just kind of give up. Maybe those traders are not as resilient or don’t have the skills.

I guess that’s my long-winded introduction here into this idea of resiliency, which is closely associated with Seligman. I was just wondering what your thoughts are, Darren, based on that. Like, how does resiliency work into the psychology of the trader I suppose is what I’m getting at here.

Darren: Well, I have seen some data that suggests that the reason a lot of traders don’t get to a profitable stage is because they give up too soon. Suggesting that the actual skills required take a long time to learn.

And like you say, when we get a certain amount of negative responses from trading, we tend to give up. Or, even if you don’t give up trading, perhaps you give up on a process or a strategy that would be successful.

You change the elements of that. Usually, the elements are most vital and that basically makes this cyclical behavior where you don’t actually ever move forward or reach that comfortable stage.

I think that’s definitely true and I think that’s compounded by the skills of being a successful trader tend not to be the skills that are quick to learn; because it generally involves changing beliefs and behavior. Anything in life where that’s required seems to be hard for human beings to achieve because its not short term. Another example would be dieting. You know there’s only two simple rules to dieting but despite the fact…

Walter: Wait. What are they? What are the two rules?

Darren: Exercise more and eat less. That big ballpark rules and you know you can go into a lot of complexity and that tends to be what people do because they want a short term solution.

They want results that are way beyond rational expectations so they forget about the two simple rules. Then they either give up or they go down the wormhole of weird complex rules, which kind of miss the big picture.

Obviously, it is the most important thing. If you look at the preference for high win rate strategies that falls in to the same ballpark; if you test the system and clearly see that holding trades longer and cutting your losses shorter, is in the long run going to make more profit.

It is very hard to execute that because that requires a lot of resilience, like you say. Because over 50 trades or a hundred trades, you might not have seen any profit you might be in drawdown. It’s very hard then to go on and do a 3,000, 4,000 trade sample and see the results from there.

Walter: Yeah.

Darren: Here’s the thing now, Walter. It cannot be taught or does it have to be learned? Is that something that really can only come from yourself? Or is the system and strategy teach people to become resilient?

Walter: Well, that’s the interesting thing. When Seligman talked to the Chief of Staff of the Army — his name is General Casey. I’m sure people can look him up, I’ll put him on the show note. What’s interesting is, he was asking Seligman. He said, “Well, how does this work? We want to get these principles out there.”

Seligman says, “Yeah, we’ve done it before. Teachers can teach their students these.” And the General said, “Well that’s great because that’s what the army has. It’s a teaching system.” Seligman said, “What are you talking about?” He said, “We have 40,000 teachers.” He said, “Really? The army does?” He said, “Yeah. They’re Drill Sergeants.” And so, that’s what they did.

They took this program that basically had been used in the schools in Australia and they just tweaked it a bit. They tweaked like 20% of it, just like the examples and stuff. And he said it was interesting watching the Drill Sergeants go through the training at the University of Pennsylvania.

I think it was a 6 or 7 day training for the Drill Sergeants. The first day that they go in there, these guys — they are all rough and thin — these are war heroes. They’re like rough around the edges. These guys are sitting back there, leaning back in their chairs with their arms folded and kind of like, “Yeah, whatever.” He said by day 2, they were all leaning forward and paying attention. To cut it short, basically what happened was, the program was a great success.

They were able to transfer these skills from the Drill Sergeants to the Soldiers. Infact, one sort of anecdote was that one of the  Drill Sergeants called home and was asking his son how his soccer game went over the weekend. You know they were having a back and forth or whatever, the kid and the dad.

Finally, the kid said to his father, his Drill Sergeant father, “Dad is this really you?” because he was so different. He was taking such an interest in what the kid had to say and stuff like that. It was obviously a different interaction and it was based on what he had learned. I just found it fascinating that it appears as though that the skills are transferable, that people can learn these resiliency skills.

I think exactly like you do, Darren. I think that probably, it’s not guaranteed but it’s almost guaranteed that if you trade long enough, if you are able to stay in the game long enough, you will eventually figure it out. You will become so obvious how this trading thing works. The problem is you have to stay in the game long enough. You know what I mean? Don’t you agree?

Darren: Yeah, a hundred percent. I’ve been noticing this a lot recently. Specially with traders that I’ve been working with closely for a long time that still haven’t quite got to that stage where they are profitable. But, you can see that they are just slowly changing their beliefs and their actions and how they’re approaching the trading.

I think it’s because that skill takes long. I’m often thinking, how can you accelerate this? How can you accelerate this learning because I think a lot of it comes from, like you say, through bad experiences, through negative experiences.

And you have to have someone explaining to you that this is what’s going to happen. This is the right way to approach it. It’s different to actually go through the experience.I think this is another reason why it takes an amount of time. But I’m always trying to think, “Is there a way? Are there systematic ways to accelerate this learning?”

Walter: Seligman would argue that they are transferable, that you just have to look at things slightly different. He admitted in his talk, he said, “We’re pretty much built to be pessimists. We’re kind of born that way and we survive that way.”  

The problem is the guy, you know back in hunter and gather days,  the guy who was walking around the field in a blissful state of happiness, not really worried about anything or concerned about anything. That’s the one that the saber tooth tiger ate. That’s the guy that’s dead.

The ones that are worried about the predators or the weather or whatever – these guys that were concerned, they are the ones that survived. Then he said, he’s had to fight his genetic disposition of being a pessimist.

It’s not a completely standard issue but pretty much all of us have that sort of makeup and work on it and that’s part of it. Same thing goes for resiliency. There are certain ways that you can look at a thing.

See, the problem with our lives today is we don’t have the saber tooth tiger. We don’t have – normally in most cases – we don’t have to worry about the hurricane destroying our village. So these things, we’re so lucky in the time of where we are in this point in history that we don’t have those concerns.

A lot of what it comes down to is basically identifying what you’re good at. Looking at your progress, looking at what you’re doing from a progress point of view rather than a goal point of view.

It can be really stressful when you say, “I wanted to make 80% this year, and I’m sitting down here at 5% and the years half over, whatever” these sorts of things. But if you look at progress – you say, “Last year I lost 30%. This year I’m up 5%. That’s a pretty good turn around.” It’s all in a kind of a way that you look at it.

It’s one of those things where I think I almost feel like the people that have propensity toward it are the ones that would keep pushing and push through the bad times as a trader. The ones that don’t have that propensity or its just not quite in their ballpark, they are the ones that give up. Or maybe it’s not.

Maybe it’s more of a determination thing where some people are just bound and determined that this is what they’re going to do and they won’t let anything hold them back. It’s just a setback.

That’s another thing with resiliency. You can look at things as all or nothing. You say, “Well I didn’t make money this year. I’ll have to go back to my job or whatever. This trading thing is not going to work.”  

You can look at it like that or you can look at it like, “Well, this is a challenge. There’s a code here that I got to crack. I got to figure out what it is and I’m going to get myself set up so that I can make this work because this is really what I wanted to do.”

That’s similar to the internal and external locus of control. The internal locus of control is when you feel like you determine your outcome and you decide what will happen. External is kind of like you’re the leaf blowing in the wind. Whatever happens is what’s happening to you, and you don’t have much say in that.

It’s kind of a similar thing to that and I’ll put it in the show notes for people who are interested in the locus of control test and things like that. I just think it’s fascinating. I mean, it’s almost universal. If you look at these biographies of traders, it’s just what happens. They all basically go bust and then they all rise from the ashes. It’s  almost like a universal story.

Darren: Yeah. I guess, I learned a lot from it. Something I do a lot is push this idea of expectations right up there in my daily routine when I am trading.

Walter: What do you mean?

Darren: I think, it’s something that we perhaps look at during the backtesting stage but then we don’t necessarily take that forward on a trade by trade basis. I think, it’s something to sort of keep repeating and going over your expectations.

My trading system has quite a low win rate. The data says my expectation should be that I have lots of consecutive losses. Every time I enter a trade, it is much more likely that it’s going to be loser than a winner.

I make that part of my daily routine. I’m expecting my trade to be a winner even if its gone halfway to my target. I expect it to be a loser. Even if it’s halfway to my target, I’m still expecting it to be a loser.

It’s about the results being in line with my expectations. Getting confidence and comfort from that, rather than just letting my mind generate the expectations through the day. I’m taking my data, this is my plan.

This is what the data is telling me to expect but I am not just going to leave that behind now and just let my mind generate the expectations. I go forward. I am going to implement now that in my process, in my actions. I’m always keeping my expectations in front of my eyes.

Walter: Yeah, right.

Darren: How many times have we developed trading systems with people and done the backtest and been really laborious with the data. Then three trades into the live testing, suddenly we’ve left those data and those expectations behind. We’re generating a new narrative to what should be happening rather than what the data suggest should be happening and that can make you more resilient.

Walter: Absolutely.

Darren: I mean, I’m in 7 consecutive losers this week on the trough.

Walter: And you expected it?

Darren: It’s within the line of my expectations. It’s possible for me to have 40 consecutive losers so seven is going to happen fairly often — and it does happen fairly often. I think, resilience comes from keeping that expectation in front of your face and say, “Okay, this is unpleasant but its not out of line with my expectations.”

Walter: It reminds me of the… When they talk about the happiest-people-in-the-world studies. I  remember Denmark usually ends up somewhere near the top or at the top. They say the secret is that they just don’t have these wild expectations so when things go well, they are surprised and they are happy with that.

When I do my trades – let’s say I have 3 open trades, which may happen then I’ll get a 4th signal. Well that 4th trade, I’ll calculate it based on the assumption that the other 3 trades are losers so I’m not going to assume anything other than the last 3 were losers.

That’s more kind of a risk thing but I don’t necessarily want to count it as if it’s a win. Same thing if I move my trades to break even like today — yesterday, I had 2 trades today — I moved to break even and I just expect them to hit break even.

It’s like at least hopefully, I won’t lose money on this now because they are at the breakeven stage. I don’t start thinking that I’m going out to buy a new Ferrari based on these trades. I don’t want to get to that point.

I guess, you just set yourself up for disappointment don’t you, Darren? When you get really into it and you are just like “yes”, it’s easier I suppose to prepare yourself for the next trade to be a loser.

Darren: Yeah. I think it’s easier to have your expectations in line with your data because you’re less likely to be disappointed. You’re going to get what you’re expecting. If your expectations are out of line with your data, then that’s where you might get into trouble. It’s making that jump from-to-process over outcome and that’s a really difficult one to learn.

Walter: Yeah. Because you get instant feedback in trading, don’t you? I mean, nearly.  You have all these trades and the trades are looking at you in the face saying, “Loss-loss-win-loss-loss-loss-win-win-loss-loss” and so you think that you’ve done something wrong. I think that’s the trap, isn’t it? The trap is that you think that you need to change something. You have these 3 losing trades in a row, somethings wrong, you need to fix it.

Darren: Yeah and you have to accept that  it’s not chess where you know all of the pieces, or you can know all of the possible moves and you know where your outcome is really tied to process. Something like chess.

With trading, you can have really solid process all month and have a terrible losing month, and you need to know that that’s the game you’re playing. And if you think you’re playing chess, then you’re going to find it difficult, I think. I know some people will argue with that and say, “No, it’s like chess. You just don’t read the market right.” That’s fine.

I’ve listened to a lot of podcasts from traders who have been around for a long of time because they’re the people I want to listen to. I’ve never heard one telling me that it’s like chess or suggests that it is in that ballpark where it is about precision.

That’s not saying that there isn’t any out there. I am just saying I haven’t heard any. I am not going to say that doesn’t exist. I mean that is not possible. The way of evidence that I’ve seen suggests otherwise. I’m open to listening.

I don’t want to trade in an echo chamber where everybody is just agreeing with me. I am more than happy to listen if someone’s telling me they can read the market and they scalp and they have a 1 to 1 risk/reward. I’ll listen to it and take it in because that’s only going to make me examine my own process better. It’s like political parties — was it Democrat and Republican in America?

Walter: Yeah. In America.

Darren: If you’re a Democrat and you only listen to Democrats and you think everything the Republicans saying is wrong, that’s not a good way to think about it. It’s kind of suggesting that any ideas outside your political beliefs can’t possibly be true and that’s really not a good way to improve. Same in business, same in trading.

Walter: And I see that all the time in the forums, Darren. You go to the trading forums and you’ll see some guy, he’ll show what he is doing. He’ll share, “Look, this is working for me. Check it out.” Or, “This doesn’t seem to be working well. I wonder if anyone could help me with this.”

Eventually, you’ll get some other yahoos in there. They’ll talk about why so and so’s an idiot because “This will never work. You have to trade my way.” You know it’s just crazy! It’s just the same thing. It’s just like having these political discussions and debates.

It’s the same thing in trading. It’s just so crazy to me how people don’t see it for what it is. To me, it’s just everyone sees the markets in a certain way and they’re all trading it through those filters. Trading it through their beliefs and you don’t get any points.

It’s not like an evangelical thing. If I can bring so many traders on the forum to my way of trading and thinking then I win, I’m going to get the big payout in the big pit up in the sky or whatever. It’s just crazy to me.

Darren: I mean, if you are going to look at me and you…  We have very strong views to agree and we have very strong views that disagree.

Walter: Yup.

Darren: I can learn about my trading by looking at the elements that you use, that I disagree with and I can actually learn something from that. I might not agree with some technical analysis ideas that you use but I can look at that and say, “Well, they may not be a huge edge in that technical analysis but there might be a psychological edge in that and other elements might be making it profitable.” I can accept that it’s something that disagrees with my beliefs but can still be used…

Walter: That’s all the time we have in Part One. In Part Two, we’re going to get into the fear of a better option. What that means for traders. You’ll also get the best way to look at your trades. This is kind of weird but once you start to look at your trades this way, you’ll be able to analyze them much better.

We’ll talk about what poker players can teach traders, a specific recommendation for traders. The reality of big trading returns and what all money managers must do to mentally prepare for bigger returns.

And, when trading for others, your job is not to make the most money for your clients. Believe it or not, we’ll see what your job is instead and your one critical skill that predicts your longevity as a trader.

How long will you trade? How well will you trade? It all basically boils down to this one thing. All these and more in Part Two.    

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SHOWNOTES

What do road hazards have to do with your trading??

In this second part of 2Traders two-part episode, Darren and Walter explore methods for setting your trading goals, what can you learn from the UK Pension Fund, and which band is the best band.

According to the two traders, there is a universal motivation for all traders, you must become aware of this. You’ll also get more about businesses going bust and what you can learn from them and how this benefits your trading.

Download (Duration: 28:33 / 68.5 MB)

In this episode:
00:06 – vehicle for freedom
01:18 – tough road
03:02 – luck and chance
05:41 – deceiving simple problems
08:04 – safest place to be
10:28 – goals should dictate actions
12:54 – too lazy to update
15:10 – floating it out
17:04 – behavior and Psychology
19:13 – beating the drum
21:03 – so entertaining
23:00 – the best band
25:16 – language is important
27:20 – cheating the number

Tweetables:
How bumpy the ride do you want?[Click To Tweet].
Look at your criterion [Click To Tweet].
Trading is understanding who you are[Click To Tweet].

Download The Full Episode 130 Transcript Here

Darren: Because for me trading is just a vehicle for me

Walter: Vehicle? I agree. It’s a vehicle for freedom….

Announcer: Two Traders, Darren and Walter, pull back the curtain on profitable trading systems, consistent money management, and profitable psychological triggers. Welcome to the Two Traders Podcast.

Walter: In Part Two, Darren and I tackled what traders can learn from the UK Pension Fund Scheme; How to reduce your overwhelm when it comes to setting your trading goals. We’ve talked about the retired trader who is a hazard on the road and why.

The motivation behind trading that’s nearly universal for all traders. Why you must lock in to this one thing when you are setting your trading system up and going live. And, what business is going bust have to do with traders.

And finally, we’ll figure out which is the best band. All these and more in Part Two of the Two Traders Podcast.     

I think that potentially, even though I think that everyone can do it, I still think that potentially there’s a really tough road for some people and perhaps an easy road for others.

I feel like one of the interesting about our discussions is that you were, to me you were someone who is very good in the world of ideas. Like that’s where you live. You live in the world of ideas.

So naturally, it would and an extension of that, someone will come to the right approach for their trading. When they happen upon the right idea, you know what I mean? That’s just my take and it could be off but that’s how I see it.

For example, I know a guy who’s retired now. He’s a former trader, He traded for really famous diamond company. So, they’re dealing in diamonds and currencies around the world. He would trade different currencies and hedge their risk in currencies, things like that.

This individual also had a stroke. He drives around in his car and it’s totally trashed on one side because he probably shouldn’t be driving. When I see that I think is there also somebody else out there in the same situation as a trader.

It’s kind of they’re driving their platform, they’re going along, they’ve got their account but they shouldn’t really be doing it. It’s a little bit dangerous because yeah, they can do it, they can make it, it can happen but the way they’re travelling right now, someone is going to get hurt.      

Darren: I see your point now, definitely.

Walter: It’s tough.

Darren: I suppose so but I don’t know. I mean ,you kind of have to factor in other things like luck and chance as well. You can be an amazing Physicist, great with maths and you’ve come to trading.

You’ve got this idea that is like a math problem or a physics problem. You’ve just need to get everything right and you’ve sorted yourself the problem, that’s how you’ve always approach stuff.

So, that is how you approach trading and you can’t get it right because your approach is too narrow and you are not seeing the big picture. And then, you could go on holidays somewhere and sit down at a bar. Start chatting to someone and the light bulb can go on and you could just start to see a chance meeting or you could stumble on a web page that just sparks an idea. Or, you’re saying that those sort of people would just, they would miss those opportunities?  

Walter: Maybe, I don’t know. Or maybe, they’ve got their risk all upside down. Maybe they have the system. It matches up, they can execute it but they’re just driving it to the ground because we’re all somewhere in the curve, on the risk curve.

Either over the edge and we’re headed for destruction or we’re on the conservative side where we are not going to maximize our returns. So maybe, some people are always pushing the limits. They always have their foot on the gas pedal so to speak and they just want to go hard. That is just not compatible with trading.

Darren: I find it very difficult because I see most trading systems that I look at, I see a good probability that they are profitable. So, I’m seeing say, 70% of trading systems that I look at are profitable and then on the flip side, you’ve got a large majority of traders who aren’t profitable.

So, I see the problem as what is going on there with the majority of strategies being profitable and majority of traders not being profitable. There has to be what’s the connection that’s breaking there. Although a kind of complex difficult problem, I see it as really being fairly simple to  solve.

Walter: But sometimes it’s the deceivingly simple problems that they’re seems so easy to solve but no one was able to do it. Like if you look at the, I’ve seen the statistics on the new businesses.

For example, the new businesses in Australia, they have, it’s something like in 4 years, 80% of the businesses fail. They’re no longer in existence 4 years from now, there’s only 20% left or something like that.

If you think about it, these businesses aren’t silly. They know and understand that they’re not selling their products or their services at a lost. They’re know what their expenses are and yet they still end up losing or throwing in the towel, 4 years later. The vast majority of them.

How that can be? It’s kind of what you are talking about like there are all of these free trading systems out there for you to pick up and use. You can make them work and yet, we know that most of the traders just start doing this. So, it’s a user error.

I think that is what the software people would call it, user error. Is that what is going on? That is what we end up always on this podcast. If this is your first episode, I apologize but we end up going back to the Psychology of it.

So that is where we are at, I suppose. It’s that, it is being aware of what you’re doing and understanding what you need to do, essentially. You’ve got this trading system, it’s going to make money, it should make money and it is designed to make money but how do you kick it and how to make it work? It is really about understanding what you were doing.  

Darren: I think a lot of were that. We’ve solved the problem, we’ve got what we really want. We’ve got a strategy that has a positive expectancy but we either check-in the towel too soon or we execute it wrongly.

I think that’s the disconnect that goes on or we want to be too far outside the curve. We want to double out account every month with a strategy that is going to double it in 5 or 10 years.

The majority of strategies are much closer to that average than they are way out there but we all want to be way out there, don’t we? We don’t want to be average. Actually the place you want to be, the safest place to be is near close to the average. It’s just above it.  

Walter: In the middle. I think part of it, is we focus on — what you’re saying — we focus on the doubling the account and we don’t look at the other side of the drawdowns that are part of that.  

Darren: Definitely.

Walter: When we’re living as a trader, we are somewhere on this equity curve. We could be a little valley. We could be a bit of a peak. More likely than not, we are somewhere in between the peak and the valley.

The question is, how bumpy the ride do you want? Like in Disneyland, they used to have — this is a long time ago now, but in Disneyland — we used to go there and they would sell you these tickets. Certain tickets will get on certain rides and the E Ticket was the scary, space, mountain roller coaster ride.

The A Ticket was kind of like a Dumbo or Carousel or whatever and so, you wanted to save you E Ticket for the really good ones. I kind of look at traders the same way where we have, some traders are like they’re locked-in.

They want that E Ticket, their goals, they understand it’s going to be a bumpy ride. They may blow up or whatever along the way but that’s the risk they are willing to take. And then, there are others who, they just want to ride Dumbo. They do not want anything too exciting. They just don’t want to lose it all and so they are okay with the little shallow peak, a little shallow valleys and small rounded peaks, I suppose.  

Darren: You can’t really argue, one is the right way and one is the wrong way either.

Walter: Yeah, absolutely. But I suppose, a lot of traders don’t even think of it that way. The number of traders that say, “I’ll risk 1% or 2%” or whatever, they don’t look at it in terms of what’s my goal? What is my criterion?

Is my criterion to avoid the 15% drawdown or is my criterion to make 300% in the next two years? What is my criterion? And you build everything off of that, to me. I mean, it just seems obvious but I suppose, I didn’t do that when I first started trading. I didn’t look at it that way.

I just said, “Okay, this looks pretty good. I’ll risk 2%” and see how that goes. My backtesting looked alright at 2%. I didn’t look at it from the perspective of my goals should dictate my actions.

I think that — I don’t know if that’s common or not, I think it is — most traders, they’ll just say, “What can I make with this?” and they don’t look at it from, you actually have a lot of leeway there. You can direct htat trading system in many different ways with how you manage your risk.

Darren: Do you think half of the problem is that, we’re always thinking or we’re always drawn to thinking too shorter time horizon. I very rarely hear any traders say what their 10-year plan is but I’ve heard a lot of traders say they want to make a million in a year. I very rarely hear someone say, “I’d like to make 40,000 a year in 10 years time.”

Walter: Right.

Darren: Which one is more realistic?

Walter: I think there’s a lot of that going on in life. You don’t the sports star say, “We’d really want to win a World Cup in the next ten years.” They want to win it the next World Cup or that kind of thing is pretty common. They’re short-term thinking.

Darren: Yeah. There’s a thing with pension contributions in the UK. There’s an Economist called, [11:08 Roger Fellow please confirm the name, thanks] he worked with the British Government because they have this pension scheme. Where, if you contributed a small part of your wages to your pension scheme, the government would match it.

And, if you work this out over a long period of time, it is really a good plan for you to do but you have to enroll yourself and they found out that the take out was really, really low. [11:41 Roger Fellow please confirm the name, thanks]  said to them was just auto enroll people and then give them the option to opt out.

Walter: And take out, yeah.

Darren: Yeah and the take out swing has been massive. What they found out was that, even though it’s a good plan, it’s good for you to sign up for this. It is a long term plan and in the short term, people are just too lazy to fill the form out.

Whereas, if the form has already been filled out for them then they’re too lazy to opt is out so they’ll just actually stay in. We really kind of battle against any long term ideas because we’re just entrusting what’s right in front of our noses in that moment.

I think it’s the same with trading. It is really hard to push ourselves into something, into a long term plan. Even when all of the data and the facts are in front of your eyes. Look, you can really achieve your goals but it’s going to take a little bit of time and you’re going to have to stick to your plan. Even when faced with that information, it’s really hard for us to do it. Even smart and intelligent people.  

Walter: Do you think there’s a selection bias, though? Do you think that there is a self selection bias where the people that are drawn to high leverage trading such as currency trading are really, they are just looking for a vehicle for quick short term millions.

It’s kind of like rock and roll bands or whatever, is it that drug addicts seek out music industry or is it that the music industry grows drug addicts? You know what I mean? Like, what came first?   

Darren: Are you saying that essentially currency trading attracts the sort of personality should really, shouldn’t be currency trading?

Walter: Well, maybe not. That’s wrong. Maybe something along the lines of maybe this is the kind of thing that’s self-selects for people who have these sort term goals. I think that the share traders are much more deliberate.

Like, the share traders that I’ve run across, they’re predominantly share traders and the “double my money” guys are in forex, they’ve come from a completely different angle.

Darren: Right. I was at the kind of impression that, that is a problem for every one and you are suggesting that it’s more of a personality trait.

Walter: Maybe. I’m just floating it out because it seems like, I know for example, I’ve heard people who have told me. These are traders I’ve met, shall remain nameless but people have told me, “Hey, I’m a forex trader. I’m going to off and flip houses” or another trader says, “I’m going to get into internet marketing” and to me that is like red flag.

It’s like, these guys don’t really, trading is just like a thing that they are dipping their toe in. They don’t really eat and breathe trading. It’s just kind of like this is a vehicle for them.  

Darren: Oh, that is difficult now that you say because for me, trading is just a vehicle.

Walter: Vehicle. I agree. It is a vehicle for freedom.

Darren: I’m not actually really interested in trading. It does not inspire me. It doesn’t excite me. It’s a vehicle for me. But at the same time, I am really interested in human behavior.

Walter: Exactly.

Darren: Psychology. That is something that what was not there originally. Originally, I’ve got into trading just because it was a vehicle that could…

Walter: Freedom.

Darren: Perhaps. Some experiences or benefits that I couldn’t quite achieve through my other work and profession. So, originally that was the vehicle for me and is still is in trading but I’ve developed an interest in behavior Psychology.

Walter: I would that, that is the trading. What you’re saying about your interest in human behavior essentially, that’s it. That is trading. In the end, you do this long enough, you’re probably going to come to a conclusion that looking in and seeing where you are at as a person and understanding what you are doing, that is trading. That’s what it ends up being.

I don’t care if you are using an automated EA, super robot black box whatever 2,000 system, it is the same thing. That will be my argument.

Darren: Yeah, I would agree as well. If you’ll look at the history as well, I think Behavioral Economics is perhaps considered and Psychology side is perhaps considered a new field. If you’ll look back, it’s always been around and from what I’ve read, initially that was more important than the Economics side of it.

And then it seems like we went through to a period of dismissing that and it being more technical and about the numbers and now it’s kind of coming back in vogue. But there’s still a little of it on the trading forums and that puzzles me.

The biggest trading forum that I know in terms of the numbers of people hardly ever touches on it. I go check on it everyday to see any post about it. I don’t see anything on that. I really don’t. Not one trend, not one suggestion that it might be an issue.  

Walter: But don’t you think — and I could be wrong here — don’t you think that the seekers on the internet, they are looking for trading systems? And the people who’ve figured it out how they are going to interact with the market, they’ve got their instruments.

They’ve got their systems to use, they’ve got their tools. They just go off and they’ve gone off someplace else. They’re beating the drum in the (Ed Seykota) Trading Tribe in Toronto or whatever.

Darren: I suppose there’s no real point going into sides and arguing.

Walter: It’s true. You go into these forums and you’ll see some really insightful post and then inevitably, you’ll scroll back and look. Go to the profile and oh the last post was 2007 or whatever, they’ve gone. It’s a ghost town. They’ve left and they’ve left it to the jackals to go ahead and tear at the meat.

It is funny but it ends up being that way. I agree though, I think that’s pretty clear when you look around. I remember, there was a guy in one trading forum that should remain nameless. He would just send everyone off and I think that is what he wanted to do.

He wanted to just fire people up. This is back in 2003-2004. He wanted to fire people up and I talked to him a couple of times on Skype because he would just rail against everything.

He got kicked off a few times or whatever. We’ve all seen this happened and he said to me, “You know how Rambo? The movie, Rambo?” I don’t even remember this in Rambo but apparently it is, and he said, “The guy, he is the weapon” or something like that.

He is like,  “Yeah, that is how my trading is. I’ve learned it from this guy in China and he taught me how to do it.” He was talking about how he never uses stop losses and he just keeps averaging into his losers and all this stuff.

Everyone was saying, “You’re an idiot. What are you doing? You’re crazy.” It was so entertaining. I think that’s part of why people go there. They are looking for the magic system and they just want to start a fire or be entertained or whatever.

Once you get into it, you just go off and you’ll look at the Behavior Economics or you’ll get interested  more in Psychology. A lot of these things out there can help you or maybe you’ll get into meditation or hypnosis or journaling or whatever it is. You’ve kind of grow into it from different angle.

I think in the end that is what it is. That’s what it is. Trading is that. In the end, it’s just understanding you.   

Darren: When they get into theses debates, wanting to come around to the consensus that they are right and it is difficult, isn’t it? Because, it is good to debate these ideas and it is good to argue different sides of an argument. I think the language you use when you have these debates, really says a lot about what you’re trading is like.

Walter: How do you know that? So, what are you looking for when you say it? I think I know what you are saying but when you say the language what do you mean?

Darren: Even subtle things like saying, “This is the best exit.” Using the term “the best” or saying  technical elements don’t work and technical elements do work. Being really specific I think, is always a sign that there are issues there but you have to have these debates. It is good to argue these points but you have to consider your language when you are arguing these points.

Walter: Well, everybody knows that the Beatles were the best band, hands down.

Darren: Exactly. In my group this week, we had this very debate and…

Walter: About the Beatles?

Darren: Not the Beatles but they did come up later down in the thread. One of my members posted, which is the best trader: Trader A and Trader B? Trader A had a very low win rate but high risk/reward and Trader B had high win rate and a smaller target.

Based on the other facts, the guy with the smaller target, had a better shot and in the test that we were examining, Trader B had made the most profit. Then the debate was, about which one is best and I took exception to this saying, “They’re both making profit so, you cannot really say which one is best and you can’t just break it down to profit for many reasons” because for instance, Trader A who has much lower win rate and higher risk/reward, would not really see if there was any advantage — any advantage in the short run test, say a 100 trades. But over a 10,000 trades, the figures would be very different.

My argument was just using the term “best” is not really helpful in these scenarios and that is kind of an approach thing that’s, if you are trying to decide how you want to trade yourself then, it is obvious that you’re going to think in these terms.But you also have to remember that the best for you is not best for Trader B or Trader C. So I think, language is important and it says a lot about your bigger picture and bigger view of trading.

Walter: And I think, sometimes in the beginning there’s a tendency to just defer to others and saying, “You are more experienced than me, Darren. Tell me what the better one is” or something like that.

Maybe, that’s part of it but really, obviously what you should be doing is looking at what makes sense to you. What is your criterion and what are you working on here. Is Sharpe ratio, is that really what you’re going for?     

Darren: Any of these measures in a field like trading, like sharpe ratio, there is advantages for sharpe ratio used but there’s also periods where the way it looks at data, it tends to discard certain conditions. So, it is not always perfect but if your belief is that sharpe ratio is the best then sometimes, there is an advantage to use something that might not be the best but you believe in it. Those things need to be considered as well.

Walter: Yeah, absolutely. If it means that you are going to stick with it or it is easier for you to execute it then, go for it. And sometimes, the numbers don’t make sense. Sometimes, they don’t actually fit the data.

I remember, I was trading a like-grid trading strategy and I had options to cover the downside risk. I was going into the Trading Tribe in Sydney and we were comparing our — you are not supposed to do this at the Trading Tribe but at the end of the Trading Tribe, we’ve actually had a sit down and have like, where we would go over our trading statistics and stuff like that but you wouldn’t normally do at the tribe meeting and they asked me for the numbers and I ran them. — I say, “Look, this is not going to make any sense because of the strategy, the way it works” and they were all like, “What? This is amazing.”

And I said, “Yes because it’s like, you know, it’s a grid-like trading system. It’s like cheating the number.” The number makes no sense when you calculate the statistics. So, that’s another thing to keep in mind. It’s that, you can have something where you kind of trick the number or the former doesn’t really apply.  

Any last words? I really appreciate your time tonight. This has been an interesting discussion about what we’ve learned and what we know. It turns out, not much.       

Darren: An episode of really helpful advice.

Walter: At least now, we all know the Beatles were the best band. Anything else to add? I hope you can make it through the snow.

Darren: The snow stopped. I’m staying home with the charts today. I’m going nowhere.

Walter: Alright, awesome. Well, thanks for your time, Darren. We really appreciate it.

Darren: Okay, Walter. I’ll see you next week.

Walter: See you next time. Bye.

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SHOWNOTES

 

Is trading for you? Should you quit?

In this first part of a two-part episode of 2Traders Podcast, Walter and Darren discuss confidence and the seduction of the “perfect” trade. According to the two traders, it helps to see the big picture rather than look at the minutiae. Darren talks about the cause and effect, how you reacting to winning trades, and how your mindset can pave your trading path.

Walter recalls a college colleague and how his mistakes helped him look at trading in a different way. He also gives some key points on trading psychology and how humans naturally react towards an event presented before them and how this affects a person’s trading decisions. All these and more in this first part of 2Traders Podcast, two-part episode…

Download (Duration: 21:17 / 24.4 MB)

In this episode:
01:08 – mountainous region
03:48 – group of events
05:08 – how you react to it
07:20 – trading is never black and white
10:03 – how we should approach trading
12:26 – weapons of mass destruction
15:18 – align it with probabilities
17:04 – bad reactions
19:05 – giving up on the outcome
21:34 – expressing your emotions
23:02 – letting off steam
25:27 – level of distrust
27:27 – verbalize your emotions
30:26 – who should quit trading?

Tweetables:
It’s what you do afterwards[Click To Tweet].
Do you have to take this signal? [Click To Tweet].
Traders often feel isolated[Click To Tweet].

Download The Full Episode 129 Transcript Here

Walter: In trading, I don’t think it’s necessary for you to defend your approach other than to just convince yourself, do you?

Announcer: Two Traders, Darren and Walter, pull back the curtain on profitable trading systems, consistent money management, and profitable psychological triggers. Welcome to the Two Traders Podcast.

Walter: Welcome to Two traders. It’s Walter here. Hello, Darren. How are you?

Darren: I’m very good, Walter. We’ve got a snow storm from Siberia today.

Walter: Oh, wow! I’ve heard. Actually, few traders told me — I think it was yesterday or earlier here in Asia — that it’s snowy London. Is this unusual, isn’t it?

Darren: It has become. I think when I was a kid, it seemed to snow a lot but now it’s kind of unusual and an inch of snow can completely shut the UK down.

Walter: That’s awesome. I remember I went to Graduate School in a really mountainous region and there were some people from California there, some students from California. I’ll never forget first week of school, which is in the States it’s like last week of August or first week of September.

I think it’s usually the first week of September so it’s kind of the end of summer. Six feet of snow, first week of school. There’s this poor girl from California, she left and never came back. She totally quit, she just couldn’t handle it. She just didn’t know what to do, she freaked out, had a breakdown and just left.

Darren: It’s so relative, isn’t it?

Walter: It’s not just the civil servants that go crazy, I guess. What does that mean fro you, Darren? When it’s snowing, does it change your routine or anything? Or, just making it harder for you to get around?

Darren: It makes me want to bring my flight out of the UK forward. I don’t mind it. Actually, it doesn’t really affect me and it’s kind of a nice for a bit of a change, to be honest. Because, wherever in UK, it’s very vanilla. We don’t really get extremes here. We’re in a kind of, on the scale of like natural disasters, we’re kind of like in the middle. We don’t really get anything extreme here.

It’s just quite funny watching people’s reaction to it though because like I say, having an inch of snow in the whole country is going bizarre. Whereas, somewhere in Scandinavia, it happens every hour and they seem to deal with it.   

Walter: I guess, thinking about that, it’s kind of like trading. When you first start trading, you react to every little thing, “Oh, I’ve got a great winner” or “I’ve got a terrible lost” or whatever and over time, it just changes, doesn’t it?

Darren: Yeah, definitely. The big events to us, everything is relative, isn’t it?

Walter: I remember thinking, when I first start trading, that I did something wrong that’s why that last trade didn’t go well and now, I don’t think that way at all. Are there some things that you look at differently now?

Darren: Yeah, specially stuff like cause and effect. I don’t try examining every winning and losing trades and consider it significant anymore.

Walter: So, you are more focused on learning how to deal with it yourself, I guess.

Darren: Yeah. And just by being much more thinking in bigger numbers and groups of events rather than, if you have that entry that’s just perfect when you’re away and blasted for your TP. When you start out those sort of things, they stand out and you’re trying to work out what do you do then, how can I repeat that.

As you go on, those individual trades are like, “Oh, that was interesting”. You’ll start to say and you’ll look at the last three months rather than the last specific trade.  

Walter: It’s interesting there was, I saw there’s a common on the Forum, she’s just had a really big winner and she’s pretty excited about it. I just said that’s great but I think it’s important to also remember that you can take the perfect trade and it can be a loser too.

You don’t want to put too much on one trade that it’s excellent when you feel things turning around and all that, that’s great. But, at the same time, the very next trade she takes, she can do everything exactly the same as on this one and yet it’s a loser. It doesn’t mean she should change anything.

Darren: One of the best things that you can learn from big winners or runs of winners is noticing how you react to it. Because as something that I know is very most, when I’m in a really sweet spot and the market is just right, and I can’t do anything wrong, and I have a long run of winners, everything is just perfect, that tends to be the time that I made most of my mistakes.

I did it just yesterday, actually, with EUR/JPY. The moments perfect for me is pretty much one directional, seem very strong downtrend. I was thinking about 75-80% win rate for the week which is way above my average.

I skipped the next trade. I was feeling so good, I skipped the next trade and obviously, you know what happens. It didn’t have a run of winners that I missed out on. I think a more important thing to look at when you have a winner, it’s not what you did on the trade, it’s what you do afterwards. How you react to that.       

Walter: So true. It’s like you’re trying to trick yourself and give yourself reasons and excuses to do things differently. And, really, you should be looking for signs that you are doing things differently.

I remember, I think you’ve talked about it before too where it depends on your trading system or your style of trading. What your big and really you, what you believe in and how you deal with the market.

What your challenges are. It could be that your challenges, you want to take a bunch of trades and you have to restrain yourself. But, it might also be, you have to push yourself to take the very next trade instead of trying to find the reason not to take it.

For example, you get gunshy when you have lots of losers in a row. This is something that I think that you’ve mentioned before. When you have this system where you’re kind of always in the market or nearly always in the market, one thing that comes up is, “Oh men, I don’t want to take another loser”. You know what I mean?

Do I really have to take this signal and then if you don’t take it of course, then that’s the one. You’re like “Ahh, that could’ve made my week.”    

Darren: It’s so hard to give trading advice because like you say, it’s a very individual thing and it’s never black and white. Every element has shades of gray in it and I think if you can at least accept that in your mind, you can buy into that concept.

I think that can help you along and trying to see it as black and white is probably a big mistake to make. That is why it’s very hard to give specific trading advice and I think you need to look at the big picture. The big simple ideas rather than trying to look at it like Physics.

Where there is this problem and there’s this like one solution and it’s just the case of working out that solution. I think that is one of the hardest things to take onboard and then when you do develop your own style, you have to go against it. Go against that idea and say, “Okay, I don’t trade with any analysis at all. I’m just running numbers and probabilities. What’s happened running up to my particular set up is there’s no relevance to how I trade at all. I am not working out what the market is likely to do next based on what it has just done.” But, you can do that.

So, I can’t sit here and say, “Look, don’t do analysis because it doesn’t work. I’m making that idea work for me.” I can’t do that because it is so gray. It’s not black and white. You can do analysis and make it work. Which makes it a very hard thing to advice people on.  

Walter: Do you think that you can help somebody discover where they are? Hearing you describe this, it reminds me of, sort of the debate in Psychology about personality. How can you possibly give somebody a personality type?

People are so unique, how can you possibly say that there are 5 types of people or whatever, 17 types of people or 32 types of personality when people are so diverse? In a sense, it’s exactly what you say. It depends on how broad you want to go.

You can say that there are many. Many different infinite types of people but in general, some people are more outgoing than others. Some people are more conscientious than others and that’s the way they approach personality types and personality inventories.

Would you say that, that could also apply to trading types or trader types?

Darren: Yeah, definitely. I think that is how we should approach trading, as broad groups and broad ideas. Don’t say that 3R risk/reward is the best risk/reward. Say a positive risk/reward is, can be an advantage.

You don’t look for the best risk/reward, you work in a field of positive risk/reward being an advantage. I think that’s where big ideas come from.

Walter: Yeah, I totally agree.

Darren: Yeah, in something like trading.

Walter: Yeah, I’m with you. I put together a webinar the other day and I was looking for discussions on the internet forums of traders. Just to pull out examples of where people are saying, “No, you’re wrong. You can never do this and you can never do that in trading because it’s so prevalent.”  

I don’t know why but, it’s just funny to me. It’s funny to me that there are people out there and trading is not unique. I’m sure that if you are to look at politics or religion or any other hot-button topic, gun control or abortion or whatever, you can find these sorts of arguments.

Where people are just locked-in to their approach and there really isn’t anything that you can say to sway them. In fact, one of the interesting things I found in the research is that when you give somebody information like I say, “Darren, here’s this that shows that trend lines, this is a study of all these trades and trend lines trading works” or whatever.

What happens is, it’s interesting. When you give people evidence, they actually hold to their beliefs stronger. The classic example was the Iraq war, the second Iraq war with the US going in and everytime Colin Powell who was the Secretary of Defense in the United States at the time, everytime he spoke, it would make the Euro jump around.

He was basically the news for the currencies. When he’d spoke, everyone is trying to figure out if he was saying that they’re going to war, or do they find weapons of mass destruction.

He talks to talks to these people who believed that there were weapons of mass destruction in Iraq. And when they couldn’t find them, they just said, “Well, that just proved that Saddam Hussein is hiding them.” You know what I mean?

Darren: Yeah.

Walter: It’s so true. It’s the same thing with trading. We just hold to our beliefs and it’s hard for us to actually to take the other side or see it.

Darren: And there’s a lot of evidence that the smarter you are, that becomes even worse. It’s even harder to change your opinion because you’ve just become more skilled at supporting your own beliefs and your own evidence. You become really more skilled at telling your story that basically confirms what you believe and this is everything else. Which is good for me, I am happy with that.

Walter: I think the key is to separate the theory from the evidence. I think that’s the key. People will take these debates personally and take them as personal attacks. But if you can just tease apart the theory from the evidence, and just say, “Here’s my theory. Here’s what I think is going on here and here’s the evidence to support it” and then you can let other evidence come up and weigh it.

And say, “That doesn’t fit the theory. What does that evidence suggest? Does it suggest that my theory is wrong? What’s going on here?” Sort of the scientific way of, that’s we’re meant to do in Science.

I don’t think that actually happens in Science but that’s what they’ll tell you in the textbook that the Science does. So first of all, do you even need to do that? Is it necessary? I don’t think it is.

In trading I don’t think it’s necessary for you to defend your approach other than to just convince yourself, do you?     

Darren: No but people do it, don’t they? People do it a lot.

Walter: They want to be a winner. They want to be in the winning side.

Darren: I think anyone who says, trendline don’t work. Support and resistance don’t work. Price action doesn’t work. If you say stuff like that, it’s not going to work then I think you’ve got the wrong mindset.

Walter: So, what should you be thinking? Like, this is the evidence or I don’t believe it’s useful. Is that really the idea? Would you say, like I say to you, “Darren look, the NZD bounce off of this support level that goes back 12 months. What do you say about this support level?”

Would you say, “It’s irrelevant. It doesn’t matter if it bounce off there. I’m not going to use it. It’s not my approach.”

Darren: If you are going to say something doesn’t work then why are you saying, it doesn’t work? Have you got any evidence to back that up? Have you got proof that it doesn’t work? If you can’t back it up with evidence then you can probably at east align it with some sort of probabilities.

I would argue that support and resistance is 50-50 but I would base that on my examination of support and resistance. If you can enter randomly then surely anything can be made to work. If you can enter randomly with other elements, controlling how you trade then surely anything can work.

It’s really a difficult debate to get into. You could come to trading with a very strict belief that these elements that I’m using work. Nothing else work. You can be profitable trading that way but you could also be wrong. I think that sets you up for difficulties in the long term to have that kind of really fixed mindset.  

Walter: Is it because trying to be right gets in the way of trading, of making profits from the market, is that the issue?

Darren: Yeah, because the evidence suggest that at some point you’re going to be wrong and if you were so borne into the idea that you are a 100% right then it’s going to be a very difficult to deal with those periods where you’re wrong.

Whereas, if you come with the mindset where you know that you are going to be wrong, you know there’s going to be periods where you perform worse than you planned or your data suggested then you are less likely to make bad reactions to those periods.   

Walter: Yes. I hear traders say, “Hey, I’ve done this and I backtested that and these are the results” and then they’ll say, “So, I need to fix this. Obviously, my win rate is not high enough. I need to do this, this and that.” I’ll say, “Wait, why?” Why do you need to do that? The answer that we’re getting at is because you want to be right. You want the satisfaction of being right. It’s what it comes down to.

One of the things I was just thinking about when I first started trading, one of my biggest mistakes was, I would have trades that I would be languishing over and over days or whatever, and that would be going against me. I’d like just to keep moving the stop and I think that is because I didn’t want to be wrong.

I want the trade to be right. What end up happening is I kept increasing the risk on these positions from what I originally intended to risk.

Darren: And moving the stop away?

Walter: Yeah, moving it away. For example, I remember one, I was on the CAD/USD. I think it was a buy trade on the USD/CAD and then I’ve got on a flight. When I’ve got to the other side, scrambled internet and I’m like, “Arh! I’ve got to move this stop a little bit farther so it can bounce here and I’ll be alright” that sort of thing. I just did that too often.

Today, it actually doesn’t matter to me. I don’t want to say that it doesn’t matter because it’s never fun to take a loss but it’s not nearly the big deal that it was when I first started trading. Do you find the same thing?   

Darren: I think so. I think when you start, you plan what’s going to happen and it’s very hard to give up on that outcome. So when you see it coming close to your stop, you’ll still be convinced that it’s going to turn around and hit your profit target. You’ll do anything to hold on to that, that outcome that you’ve already brought into. I think you just have to get more comfortable with losing much more.

Walter: I totally agree but how do you do it? Is there a shortcut? Do you just to take a lot of trades and grow lines on your face or what do you do? What’s the trick? I’m asking you because I can’t figure it out.

Darren: I don’t know really. It takes time I think. It takes time to become comfortable with losing. It always feels much greater than it is as well. You can backtest 45% win rate, 50% win rate strategy all you like but in live trading, it will feel like you’re losing way more than you did in your test. Even if you’re perfectly in line with what your data suggested.

Walter: That’s so true.

Darren: 3 losses on a trough, 50% win rate will just feel completely wrong.

Walter: It’s so true.

Darren: It will. I think you have to battle through that. Half the problem is we’re trying to do that on our own. I really think if you team up with somebody with the same strategy and have that dialogue with someone as it was happening rather than just by being on your own, sat in your room on your own, actually experiencing the losses, I think that is something that can help a lot but it’s an unusual scenario.

I think the majority don’t trade like that. Recently, a trader I know started trading with his wife. They are not trading exactly the same strategies but similar strategies and they’re both seeing an improvement in their results.

I just wonder whether there’s a bit of dialogue going backwards and forwards there. It comes with this idea of when you express your emotions rather than just internalizing them. When you can actually talk about them, it seems to kind of calm everything down. That is something that you can try.

Walter: Have you read the “Trading Tribe” book by Ed Seykota?

Darren: No.

Walter: I’ll put the link in the show notes for everybody. I think we’ve talked about in one of the earlier episode. He basically said exactly what you said. He said, it’s the emotions, getting those emotions out that is going to help you.

His whole Trading Tribe concept is that. You go these tribes, it’s free to meet them, to meet with these groups and you just experience the emotions that you don’t have to play up little dramas in your life or in your trading or whatever. That’s the idea.  

I think writing can definitely do that for some people but he has a strong argument. Which is, the reason why — and this isn’t funny at all but the reason why — you are sitting there, crying into your keyboard because you lost too much money on the Euro is because you’re not crying with your family members or whatever in your everyday life.

What you’ll have is you kind of setup these little dramas in different scenarios so that you do experience those emotions. One easy way to do that is to set yourself up trading that way.

It’s kind of like the subconscious way of letting off steam or whatever. His argument is, “Look, you just do this instead. Just go these tribe meetings, it’s a safe place. Let it all out and then you’re clear. You are all clear when you go and sit down in your trade.” That’s the idea. What do you think about that? Is that similar to what you are saying? It sounded like it’s the similar idea.   

Darren: Yeah. I work a lot in — when I’m trading in — online groups where posting in our entries and the outcomes of the trades and discussing ideas as we go along. That kind of help…

Walter: That’s different, right?

Darren: I think it’s different, I think it’s about having someone actually there face to face with you.

Walter: Oh, right. So you’re not talking about, even just having an accountability partner you talk to every week or whatever. You’re talking about a face-to-face kind of interaction, right?

Darren: Yeah. I think it would help if you actually face to face with people and were discussing the trading as it went along. So, it’s quite hard to put your finger on but I think settling differences there than just sharing results online.   

Walter: I think what you’re talking about, it’s like to me, what I am hearing is, it’s more about the experience and sort of the experience of the trades rather than the sterile stats or whatever.

Darren: I could say, “Look, these are the precise rules to my trading plan. There’s no discretion at all. This is how I am going to trade.” And then at the end of the week, I could just post my results.

Now, if anyone wants to check my results with very strict rules, no discretions and saying, “This is what I’m trading on this time frame.” You could go back and you could verify my results. But, people say stuff like, “I actually want to see your account. Share your account. Show me your actual trade report.”

When it’s online, there’s a level of distrust, which is quite hard to overcome. I think when you’re face to face with people, that’s slightly different. I think we can read people fairly well.

Walter: It’s sounds  like UFO’s. If only I had this scrap of UFO metal, I would know that it was a real UFO or something. It’s like a never ending, you’re always trying to overcome the next barrier or proof or whatever.

Do you think that people when they with another trader, do you think that they get more out of the ideas when they exchange ideas with another trader or simply unloading the emotions of the experience of trading?

Darren: I don’t think it even needs to be another trader.

Walter: Just another person?

Darren: Just another person, I think.

Walter: But what if they don’t know a cent in trading? Traders often feel isolated like, “Oh, my wife doesn’t trade. She doesn’t understand.”

Darren: I think you’re probably just over again the skill and knowledge there. Most people understand trading. We kind of get bogged down in all technicals like we’re being scientist, we’re being really smart and clever but you know, you’re taking bets. You’re gambling.

When I first explain what I did to my Thai girlfriend, I went into this long drawn out and I have to kind of use translations online, trying to explain what I did and then she just turn rant to me saying, “Oh, you’re a gambler.”

So, I think most people understand, really it’s about the emotions that you’re dealing and it’s about verbalizing them as a tool to trade better. Also, the actions that you take based on the emotions you are feeling become more rational.

Also because, let’s say that I trade 50% win rate and every 100 trades, I am expected to get 10 consecutive losers. My data backs that up and I still have a positive expectancy. Regardless of that fact, if you’ve taken 4 or 5 consecutive losers on a trough, there’s a possibility that, that’s going to affect your actions.

If you are able to sit down with somebody and say, “How’s your trading going?” and you are just good to say, “Well, I just had 5 losers this morning.” No one is at all at that 5 losers. And then, I need to tell mine and say, “Is that bad?”

You are already just in a dialogue to start considering the data rather than just how you were feeling because you will be feeling rotten. No matter how good a trader you are, you are going to be feeling some level of rottenness in there for your 5 losers that morning.

But I think, just that dialogue you’ll start to consider the bigger picture. You’ll break out the little vacuum that your emotions have suck you into. I quite often have 3 losers on a Monday.

My Monday was a little sort of in-joke in my Facebook group when Monday comes and I posted the result for the day, 3 losses. It was a bit of an in-joke. I could react badly to what I’ve grown to accept it as part of the process. I think that’s somewhere you need to get to.    

Walter: What if you just don’t have it?

Darren: What? 3 losers?

Walter: No. What if you just don’t have that ability where you just feel like you’ll never going to get there. Should some people just thrown it in and say, “Well, maybe this is not for me.”

Darren: I think, we’ve all got the ability.

Walter: I agree. I think we have many more abilities than we give ourselves credit for but is there a trader who probably shouldn’t push on, even though we have faith?   

Darren: I know you really like this question because you pushed me on it all the time. I don’t think I really know enough to be able to answer that question, is the honest answer.

Walter: Who should quit trading?

Darren: My gut feeling is that the majority of people can become good traders but I’m basing that on my, because I don’t think the skills are really that hard to learn. It’s just more a case of becoming aware of them.

I think sooner or later, most of us kind of looked down those alley ways. For some of us who takes longer than others and certainly some people will never go there. But I think, even if you’ve been losing consistently for 3 or 4 years and you’ve blown up every small account that you’ve started, I think there comes a point where you will say, “Okay, look I’ve been round this roundabout a million times, maybe I’ll start reading some different information and taking some different ideas on board.

Am I being over simplifying it there. Are there some people that will just blindly keep banging away on what doesn’t work? I know we all do that for much longer than we should but my gut feeling is that sooner or later, people are going to say, “Okay, these ideas that I’ve been trying are just not working. I need to look at some different ideas and information.” Am I missing the picture there?

Walter: Okay, that’s all the time we have for today. In the next episode, Part Two, you are going to hear about what traders can learn from the UK Pension Fund; How to reduce overwhelm when it comes to your trading goals; The retired trader who is a hazard on the road and why.

The motivation behind trading that’s nearly universal for all traders and perhaps for you as well. Why you must look into this one thing when you are setting your trading system up and going live. And, what business is going bust and what it has to do with traders. We’ll also talk about the best band.

All that and more in the next episode, Part Two of the 2Two Traders Podcast.

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SHOWNOTES

 

“Trading Tribe” book by Ed Seykota