The trader who never lost… is he a myth or trading legend?

In this second part of a two-part of 2 Traders Podcast, Darren and Walter examine the idea of predicting the market, and what may mean for your currency trading. Darren talks about how greed can pop up in your trading and how this can be dangerous. Walter shares his thoughts on the idea of the human “hive mind.”

You will also learn how a programmer was able to predict the future using social media and algorithm… And can palm readers actually “read” your future?

Download (Duration: 22:11 / 25.5 MB)

In this episode:
00:59 – it’s painful
02:18 – insane returns
04:43 – how the brain works?
07:58 – premonition
10:54 – palm reader
12:15 – reflected in language
15:10 – leaking out
16:30 – web crawlers
18:53 – splitting it up
20:12 – long term success

Tweetables:
Risk what is right[Click To Tweet].
You can have more markets [Click To Tweet].
Humans have a bit of premonition[Click To Tweet].

Download The Full Episode 122 Transcript Here

Darren: Because it’s psychology, psychology, psychology…         

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 back to the Two Traders Podcast. In Part Two, you’re going to hear Darren and I dig into the trader that could never lose, the hive mind, the Psychology of predicting the future and what this means for traders. And including information about the trader who could never lose. All of these and more in today’s Episode of the Two Traders Podcast.

…So, the other thing I want to talk about — because I knew we would be ending up talking about this idea that the entry doesn’t really matter. You can take random entries and as long as you’re consistently applying a high reward to risk ratio — basically, looking for big profits — it can work out for you even though it’s painful and a lot of traders don’t want to do that.

Maybe a lot of traders don’t want to take a really, really, really tiny small amount of risk because if you think about it, if you’re going for 10R and you’re going to have 77 losing trades in a row, you’ve really got to have a small amount at risk in order to keep going, I suppose. That’s one way where you can make this work for you. That’s one lesson here, right. If you’re used to risking 2%, what if you risk a quarter of a percent?

Darren: Yeah. I think that’s another one of the main barriers, that a lot of traders are starting out with small accounts and they want to grow them aggressively. We tend to risk more than is right for the system we’re trading so you alter the system rather than altering the amount that you’re risking.

I was having a dig around on the internet yesterday for this; because, I was thinking about this exact thing and about specifically greed, and how greed manifests itself in our trading. It’s quite hard to get any really good information on it but I think that is something that is a problem as well. We want to make insane returns but were not prepared for the downsides of that.

Walter: Yeah. It’s impatience, isn’t it? “I want to leave my job. I want to grow this account to $10 Million.” I often ask traders why do you want to trade the H1 charts and they’ll say, “Well, I need to have more trading opportunities.” It literally comes down to that. They don’t want to trade the H4 or the D1 or the W1. They want to trade the H1 because they want to have more trades.

And while it’s true, it’s true that you’ll cycle through your statistics faster if you have more trades, but it’s not the only way to do it. You can have more systems, you can have more markets. You don’t have to necessarily do that.

And for those traders who’ll have to sit there and watch it — like this strategy that we are talking about here — presumably the trader is either going to hit the 5R or the 10R target or it’s going to get stopped out. It’s either it hits the target or hits stop.

There isn’t really much to watch or do there but for a lot of systems, traders feel they need to watch it, analyze it, and reassess and do something. In that case, you’re stuck to the computer screen. Really, it’s just another job.

When you first started trading, did you look at it at the I-need-to-predict-the-market point of view and slowly come around to this other style of trading?

Darren: Yeah, definitely. That’s exactly what I did. I did multi-time frame, I had 4 charts for every instrument on 4 different time frames. I was working out the exact point where it was going to turn around, the exact point to get out again. That was all my work. Sunday night I did lose and then I went on to monthly, weekly, to work out what was going on.

The funny thing is I could go back to that system now and trade it really well because I just hold on to my winners a bit longer. Because, what happens is when you’ve had 2 losers on the trail, on the next one, your mind’s starting to see things that aren’t really there and it’s saying, “Oh there’s definitely some resistance there. That candle path is reversing here.” Because fear increases, you start to see things in a different way.

I mean, if  you study how we look at things and how we make our decisions, how the whole brain thing works, then it’s fairly obvious that that approach has got a lot of flaws in it. Probably, an advantage to it is at least simplify it and or reduce the amount of what you’re doing.

Walter: Yeah, I agree. We both agreed that it’s true that you don’t have to predict the markets to make money. It’s not critical. It’s a sign of your stage. When I first started to get into trading, all I really cared about was trying to crack the Gann Code.

Traders who’ve looked at W.D. Gann, this idea that he supposedly… There was a journalist from the New York Times who followed him around and over the course of a month or 5 weeks or something like that. All 27 trades he took and they all made money except one or something like that. He supposedly had cracked the harmonics of the universe.

I was really interested in that when I first started trading and really studying it before I came to the point of just looking for other things, just looking for other reasons. I think you don’t have to look at the market and say, “Well I think it’s going to do this.” Or, “I know the markets going to do this or whatever.” I think you can still trade the market from a probabilistic point of view. So let’s say that you’re looking at a market and it’s trending up.

You can say, “Well if it does this, if it pulls back like this and then does that I think it’s going to keep going higher and it’s going to keep trending up. The trend’s intact. But, if it does this, well maybe I’ll be looking for it to fall and maybe I’ll short it. Maybe the trend is over.” You can look at it from that point of view too. You don’t have to throw your hands up and say well, just flip a coin or whatever. You don’t have to do that. It doesn’t have to be that extreme.

Just having that other side and just thinking, “Okay, I want to go long the Euro right here. Who’s looking at the same chart thinking they want to go short? Who’s on the other side of my trade here? What’s going on?” I think that’s really healthy to do.

Darren: I definitely think I agree with that. I think you can add an edge to your trading through some sort of analysis. The problem is that people think that that is the only thing and that is the most important thing and that is where the danger is. You have to accept that there is other important elements and some of them may be more important than that analysis. Its keeping it in context isn’t it?

Walter: Exactly.  Yeah that’s right. We basically established if that’s the case, you don’t have to predict the markets to pull the money out of the markets. It’s not that critical. However, I want to get some of your ideas on some of these things that have come up because I think they are fascinating. Like I said, I don’t think they are critical to your arsenal as a trader. I do find them interesting and I wonder what the future holds. I’ve had a couple of exhibit’s here.

Exhibit A, Darren, is that we have some data from Psychology that suggests that humans have some bit of premonition. There’s this premonition out there where the classic example — and I can post some of these studies in the show notes for this episode — but the classic is where, someone’s sitting in front of the computer, and they’re shown some images. You might be shown an image like a bunny rabbit or a butterfly or some flowers. Then maybe you’ll see some scary skeleton or a gun that looks like it’s pointed at you or something like that.

And so, what they found is that people actually anticipate the scary image. Before they’re shown the image, they seem to know physiologically that they’re going to be presented with this scary image so while they are randomly interspersed in the slide deck, they seem to know before it happens.

Now, there’s really no explanation for this other than to say it seems like somehow people are aware of something happening before it happens, which is fascinating. Right? What do you think about that?

Darren: I believe that I’ve seen similar research from neuroscientists that suggests that that’s true.

Walter: Yeah. Does it mean that people are predicting the future because that’s kind of the simplest explanation here. That people somehow are aware of what’s going to happen before it happens.

Darren: Yes, possibly.

Walter: I’m just trying to get you to score them Darren.

Darren: Yeah, I know. I mean, can I make money out of it?

Walter: No, I’m not saying that. Its a separate issue. I’m totally with you. I’m just saying is there an element of humanness? Do we have something as humans that allow us to somehow anticipate the future? I’m not saying it’s necessary. I’m not saying it’s critical. I’m not saying it’s something a trader must have. I’m just saying maybe we do have this as humans.

Darren: Yeah, I think certainly. The brain can do some amazing things that we are just finding out about. We probably don’t know how to harness them but maybe on a subconscious level we are harnessing them. You don’t know what your next thought is going to be. You can never predict that. Our conscious and our subconscious, there’s two separate things thats going on there and are kind of getting in to warn us.

Now, I don’t know what I’m talking about but definitely some fascinating stuff going on there. And I like Denise Shull’s work, where she worked on this proof that you can read what other people are going to do. There’s like a skill for predicting what other humans are going to do. Obviously, that’s strongly connected with what we’re doing as traders.

Walter: Are you talking about like cold reading like when you go to a Palmist? The palm reader basically sizes you up pretty quickly and tries to get information from you, then tells you the same information in another way or something. Is that what you mean or is that something different?

Darren: Well, she kind of goes into your fractal Psychology. She works out basically what’s driving your decisions from your past like things that happened in your past and they are driving your decisions. She highlights this to the trader she works with. By highlighting these things, they start to look at the charts in a different way and then see improvement in their performance because just from being aware of how they are making decisions, basically.

Walter: That’s Exhibit A. The other one I want to talk about — because I think this is fascinating — this idea that instead of individuals having some sort of premonition or ability to anticipate the future. There’s this idea that’s coming like this “hive mind” where all of humanity as a whole, if you look at them, they can and they are aware of the future events. Particularly, major future events and that this is reflected in their language.

There’s a guy, a Programmer — by all indications a brilliant Programmer. What he has created are these little robots that crawl around the internet especially in social media. It picks up information from the internet. What he’s trying to do is piece together the most important language patterns because he uses these to say, “This is what’s going to happen 3 months 6 months a year from now based on this language.”

He starts with the presupposition that humans have this ability to tell the future, to know what the future is going to be. Like, the future is a pebble dropped in the pond and the ripples are coming towards us. Before we actually get to the pebble, we’re getting these ripples. The way that this works is best I understand it. Now, I’ll link up his work on the show notes here because it’s absolutely fascinating.

I first was turned on to these in May or June of 2008 because he was talking about this major event that was going to occur in September, early September 2008. It was going to have a name, people would refer to it, it would affect especially the financial markets and all these stuff.

This is what he had determined through the language patterns. For example, you might say something, Darren, you might say something like if I was to ask you, “Hey, how’s your trade going?” Or, “How does your trading go?” You might say, “Ah it’s going pretty well and I’m working on a new exit strategy and it looks promising.” That’ll be one way of saying it. There’s not a lot of emotion attached to that.

But, you could also say something like this, “Wow it’s amazing! I’m very excited about this new exit strategy. I just made 20R yesterday.” There’s a little bit more emotion attached to that.

And then if I ask you the same question, you might say something like this, “This bloody thing is going to make me so much damn money! I’m going to retire to Monaco tomorrow.” Something like that.

It’s all the same question. It’s all the same answer, really. But, there’s more emotion attached to the third one than there is to the first one. That’s what this guy looks at. He puts out all of these reports where he’s trying to distill what are the most important things.

One of the things he’s been talking about forever for years and years is Bitcoin. How 2017 was going to be the year of Bitcoin and blah, blah, blah and all these stuff. Anyway, I just find it fascinating. This idea that humans are in their language almost like leaking out their knowledge of the future.

He’s essentially collecting all these data through his programs and assimilating it into the way that he views the world. I just thought it was fascinating. I’m wondering if you have any thoughts on that.

Darren: Yes, pretty amazing. I did hear. Like, there was some guy, some university guys in England who did something similar with Twitter. They had like an algorithm that took all of the tweets with regards to the financial markets, then crunched them up and could predict what was going to happen in the stock market or the currency markets. And, they did a similar thing. I don’t know. Is it an intense fundamental analysis, isn’t it?

Walter: I guess you could say that. He doesn’t talk about it that way and he’s not even really a trader. He talks a lot about social trends and political events and things like that. It’s not just financial markets, although that obviously comes up from time to time.

This guy is… I think he’s largely self-taught. He lives like in a van in the woods. He’s this really reclusive, very eccentric dude but he’s clearly very smart. He says like you were saying Twitter, he definitely… His web crawlers were pulling information off Twitter. He says he gets brilliant stuff from Snapchat.

He goes, “You won’t believe the kind of information I get from Snapchat.” This is really fascinating to hear and he’s pretty old. Like, he’s been around for a long time. He’s consulted for companies like Google and Microsoft and stuff like that. He’s a really good programmer, like a top-notch dude.

I just find it fascinating, this idea. The way I see it and he explains it I’m sure better than I do but you can read up more about it in the show notes. He has tons and tons of videos on Youtube for people who are interested. But, the way he explains it is that we’re leaking out our knowledge of the future by the words that we use.

The way that we use them and the emotion that we attach. The more emotional we are with certain words, that means that the event is closer, right? Whereas, if there’s a little bit of emotion here, it’s further out. That’s how he kind of hones in on it.

Darren: I mean that’s quite comes back to the original question where trends, cultural trends are revolving but we’re not predetermining what those trends are going to be. They just evolve.

Walter: Yeah. But, if you look at through Taleb’s point of view, we look back and we saw that Hitler was coming or whatever. We look back with hindsight, and we say, “But that was the slow rise of Hitler, that was obvious” or “That was the slow march to WWII.” Whatever it is, we look back, we color it another way and say that was the rise of Donald Trump or whatever.

Darren: That’s maybe why we buy into this being able to predict trends because when we do look back it looks so obvious. We must be able to predict them in the future. But, it doesn’t necessarily work out that way, does it?

Walter: Absolutely.

Darren: You might be better off just participating and making the most out of what you can.

Walter: Exactly. I mean, I think it’s fun to look at that stuff and try to predict the future. I think it’s more helpful to look at things in terms of probability and if your data tells you that you’re going to more likely to make money if you have a 10R exit in random, randomly assigned bullish and bearish days then go for it! But, you might feel more comfortable splitting it up, maybe you have a 5R, you use that strategy with a 5R target and you use the same strategy with a 10R target.

Darren: That’s exactly what I’m doing at the moment. I did it for the last 3 months. I take 2 positions on exactly the same entry and when I have a 5R target and the other one is a 10R target. I’m even at the moment looking at adding a 1 to 1R target of the same entry. There’s a lot of reasons for doing that and it isn’t all about making more money, just about trying to diversify risk.

These psychological things, even if you understand the Psychology of going through long runs of losses or drawdowns, it makes it slightly easier to deal with but you’re still going to feel uncomfortable.

I’ve touched on this quite a lot in the past. Things that I add to my strategies now tend to be things just to make it a bit more comfortable. I might even add something that’s going to make me less money but make the whole long process of it more comfortable for me to deal with and there’s nothing wrong with that.

Walter: Absolutely, because you’re trying to set yourself up for long term success.

Darren: Yeah and I want to enjoy it as well. I don’t want to be in pain everyday whilst I’m achieving it. If you believe the 20-period moving average is the one and you’re testing shows that the 50-period moving average is slightly better, still nothing wrong with using the 20 because it’s Psychology, Psychology, Psychology.

Walter: Absolutely, I agree. That’s why I think when you have a trailing exit and a target, like if you split your trade up to a trailing exit and a target, two different positions, it’s not because you’re going to make more money. It’s just because you want to have those trades that don’t make a lot of money on the trailing exit but do okay on the target.

You want to have those so that you feel psychologically like you did, “That was a good trade!” Even though you’re better off probably almost always using the trailing exit on all of your positions. But, it’s just painful to have so many of those trailing exit trades give back so much profit and not do well.

Darren: I’ve seen you post about that notes in the past and I always resisted that idea. With time, I’ve kind of see what you’re talking about now. At that time, I just wanted to be the best. If that’s not the best return, I’m not going to do it and do what’s the best return but then, you’re more likely to make mistakes and give money back in other ways.

Walter: Yeah, absolutely. Well, Darren, this has been a fascinating discussion and I appreciate your thoughts on prediction. This is an interesting podcast or the last 2 podcasts I should say — Part 1 and Part 2. Thanks a lot for your time.

Darren: Likewise, Walter. And  a Happy New Year!

Walter: Thank you so much. Happy New Year. See you next time.

Darren: Okay. Bye, Walter.

---

SHOWNOTES

See The Future PDF

Half Past Human

In this episode of 2Traders Podcast, Darren and Walter dig into the idea of prediction — and whether or not you should even try to predict the market. If you look to profit from the forex market, must you learn how to predict market moves?

Walter shares a unique strategy that a presenter at the London conference uses – it is a unique approach to drawdowns. Darren talks about how he determines market direction for his trades. The 2 traders also dive into trading psychology – why is it important? You will also hear about newspaper reading and losing trades. All this and more in this, the first part of a two-part episode of the 2Traders Podcast…

Download (Duration: 21:08 / 24.2 MB)

In this episode:
00:44 – predicting the market
02:39 – random decisions
04:52 – just got lucky
06:57 – drift of the market
09:18 – picking the direction
12:10 – elements of pain
15:36 – no difference
17:53 – reading the newspapers
19:25 – never “in” the market

Tweetables:
You don’t need to predict the market[Click To Tweet].
Reading newspapers can get in the way [Click To Tweet].
A high win rate can be an edge[Click To Tweet].

Download The Full Episode 121 Transcript Here

Walter: One of the things that make us so difficult is we’re not really built to withstand the 77R losing streak. That’s not the way we operate…         

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 Podcast. Hello, Darren.  

Darren: Good morning, Walter.

Walter: The topic we had discussed for today was this idea of prediction, whether or not as a trader — a trader who’s looking to pull profits out of the market — whether or not you have to have some way of predicting the market.

I think this is a really interesting topic. I think I know what you’re going to say but, what are your thoughts on this issue? I think it’s kind of assumed. Like, people who are new to trading or don’t know much about trading assume that what you do as a trader is you predict where the market is going to go. What do you have to say about that?       

Darren: I think that is definitely the approach that I’ve got to say the majority use. The majority  that I come into contact with definitely have that sort of approach. I don’t think you — I mean, obviously — you don’t need to be able to predict the market.

But, maybe as human beings, we have to have that belief that that’s what you’re doing even if you’re not. If that makes any sense because the opportunity lies in the movement of price.

You don’t necessarily have to be right about where the direction’s going to  go to make a profit. I saw that recently. Just yesterday, one of the members of the forum ran a test on a really simple trend trading idea that I posted a few months back.

He did ten years of testing on this strategy. He found out that it had a positive expectancy. I am always saying that you don’t really need to predict the market. You just need to participate and maximize your profits when you’re right and minimize your losses when you’re wrong.

What he did was he — rather than using the simple rule I had for determining the trend — he just determined the trend for the day by using essentially a coin flip but he obviously programmed it so it’s either long or short. A decision was made randomly everyday and he actually made more profit. So, quite a bit more profit.

You have to start to sort of question why did it make a profit. In this instance, you can’t prove why it did make profit. There’s a few elements working together but the core of the strategy idea is that you hold your winners for a long time. In his test, he was using the risk/reward of 5 to 1 so he’s winning five times more on his winners than he was on his losers.

The obvious assumption to make is that predicting the market direction isn’t  essential. It’s the fact that the market does actually move because for 5 to 1 you need the market to move in one direction for quite a sustained period.         

Walter: Or, you can have a really tight stop.  You can have a V winner if you have 6 pips stop and you just get 30 pips out of the market. I think that’s potentially, yeah…   

Darren: Essentially, yeah. It’s that drift. It’s that movement from A to B and B being not where A was essentially. You don’t have to be able to predict the market. But, if you go a little bit deeper into the psychology of it I think there is a subtle advantage for us to believe we are.

Even if you know deep down it’s not essential for you to do it, I think sometimes it’s quite helpful to put those things in there where you believe you’re kind of having some effect on the outcome.

It’s a difficult one to say and there might be people out there that can. By their sort of got in years of experience of looking at charts, have like a good hit rate of predicting where the market will go. As the test has shown, it’s not essential.      

Walter: Just playing devil’s advocate here, did he ran just one test of the random long short? He had the computer determine whether it was a long day to buy or a short day to sell.  But, he only ran one test so someone could argue that he just got lucky. He kind of locked in to a sequence of long and short days with the random generator. You know what I mean?     

Darren: No, he ran the test for 10 years and then he ran it 10x.  

Walter: So, 10 sequences. Ten sequences of buy and sell days.

Darren: Yes. His lowest return was 215R for the ten year period and his highest return was 614R.  It won in every year. Now, that could still just being pure luck.

Walter: Yeah because some people will say, “You’ve got to run a Monte Carlo with 10,000 sequences” or whatever, blah, blah, blah…  

Darren: Yeah. But, when you backup with the trend row in place also being profitable, then you’ve got to start telling you that the probabilities are it’s the high risk/reward and the market condition that existed during those ten years.

Walter: Yeah, absolutely.

Darren: And, you have to say, “Well, was there something specifically unusual in those 10 years of market movement? Or, are they generally what the market always has done?” You have to kind of dig a little bit deeper.      

Walter: Absolutely! That’s interesting. Did you think that’s what it is? Do you think that the reason why those 10 tests over 10 years made money was because the market was basically moving? If the market was pretty, if the market had consolidated… Which market did he traded on?  

Darren: It was the EUR/JPY and he was trading the H1 chart. He did do tests with different risk/ reward as well but that was only with predetermined direction indicated whatever the trend indicator all in place.

From 2R all the way up to 10R and all of those are profitable. For me, it’s about the drift of the market. For me, it’s about the fact that the market…

Walter: Wiggles. It wiggles around.

Darren: Yeah. It wiggles and it has this kind of drift. It will stay in a range but then it will move on to a different range and so there’s opportunity there in that movement.

Walter: Yeah, absolutely.

Darren: I mean, obviously, if price just stayed in a range forever then it would be simple, wouldn’t it? Likewise, it would just have trended forever it would be simple.     

Walter: Yeah, absolutely. It reminds me of — the concept that you’re talking right now — reminds me of what Goncalo said at the conference. He was talking about this strategy of… Like, he looks at drawdowns in a completely different way. The way that he trades.

He was saying that the idea is that if you look at the coastline of, say Massachusetts, you could measure it one way and say, “Well, it’s a 300 mile coastline,” or something like that.

But if you look, if you zoom in at it, you zoom in and see all the zigs and zags, it approaches infinity with all the little moves. The question is do you want to take advantage of those little tiny zigs?

How much do you want to zoom in and zoom out? Isn’t it that kind of the way? Like, if you’re trading the H1 chart and you’re trading the zigs and the zags in the H1 chart. That’s a completely different experience to trading, the daily zigs and zags.       

Darren: In time, definitely.   

Walter: Absolutely. You remind me when you were talking about the way that you’ll approach this strategy originally before he use the random entry or the random determination of bullish days and bearish days. How did you determine whether the day was bullish or bearish? What was your indicator for that or whatever? What was your approach?   

Darren: Just really simple. It was if the previous day closed bearish — so it was down — the close  was down on the open then the next day you trade only short. If the previous day closed bullish then the next day you just, you only trade it long.

The whole point of putting the strategy forward was to say, “We’re debating too much about how to determine the direction. We’re given too much emphasis on picking the direction because we’re being led to want to be right and to be right because of how clever we were. ‘Look how learned I am. I could predict which way that the market is going to go.’”

And I was just trying to say, “Well, look it’s actually really difficult to do that and moreover you don’t actually have to be  able to do that.” Simplify that and when you adapt that mindset, then you’ll find it easier to stick the strategy over a long period.

In all of these tests that you did, if you just took one month of the trading, you probably wouldn’t have made any money in any of them. But, because he stacked it for a long time, the numbers would like to play out and that’s where he made really good returns.  I mean, people will argue that 200 R over 10 years is not enough but 20% a year compounded is amazing result.

Walter: Especially if you don’t pull money out of your account. Exactly, if you compound it. And also remember that the R that you had. The R that you returned on your one is obviously completely different than the R that you returned on year nine. It’s completely different.

It’s a completely different result because the account has grown. That’s compounding. I think a lot of traders miss that. Let me ask you this: Do you think that the reason why — because you’ve sort of just touched on this. Do you think that the reason why this five R strategy with the random assignment of bullish and bearish days, do you think that the reason why it makes money is because it was given such a long period of time?

Because in other words, if he had traded this even if it was the H1 chart for only 30 days, 30 trading days, he could have probably and there’s likely or perhaps he could have just thrown it away and said this is no good after looking at those results.                

Darren: I don’t think the reason it made profit is because it was traded for a long period of time. But it is quite likely that the wins and the losses are pretty randomly distributed and it is quite likely you could start and just lose all month.

There was very long sequences of losses. I think the 10R strategy had 77 consecutive losses but it made 600 odd R at the end of the trading period. I think again that’s what draws people to say, “No I’ve got to improve at predicting because this cannot be right.” This isn’t right but that’s the nature of trading. If you don’t learn to deal with those elements of pain, then I don’t think you can make it.    

Walter: That’s great. I think it’s great advice. It kind of boils down so when  you look at trading, the trader who’s able to somehow come to a place where he or she can deal with 77 losers, 77 R loss can live to see the day of the $600 R win. I mean a cumulative win.

But the trader who cannot do that, the trader who completely scraps the system after three losing trades in a row, never lives to see the day of the 600 R payoff.  And I would even say, one of the things that make it difficult is we’re not really built to withstand the 77 R losing streak. That’s not the way we operate.

Darren: And that’s why experienced traders always saying psychology, psychology, psychology. Because they know that you’re going to have to deal with this hurdle at some point. If you’re going to make it at some point, this is a barrier you’re going to have to cross.

Even the 2R test had 19 consecutive losers. Even the 2 R and it made a 193R at the end of the test period. Your mind is going to say to you, “Okay, I need to improve this  strategy to get rid of this element consecutive losers” drawdown or whatever and it’s almost impossible to do.

A better approach is to accept it and say, “I’ve accepted this now.” And then when the moment comes that you hit this losing streak, then you’ve least got the chance of sticking with your strategy. I presume that the majority don’t do that and that’s why the majority don’t make profit.  

Walter: That’s right because they take quick profit, basically. They like really quick short in and out sort of profits. We know that from the data. I think you posted one of those things in the forum.

The article about where they look at millions of trades and that’s basically what they found, that most traders take quick profits. They’re right more often than they’re wrong but their losers are so big it wipes out their profits.

Let me ask you this, Darren, if someone’s listening to this and say that sounds really cool. I want to do something like that. First of all, we’ve given you everything you need to know. It’s not very difficult.

You can create a strategy based on what we said. You could test a strategy where it was 5R and you’re basically flipping a coin whether you’re going to go long or short. Now, you’re probably going to mess around with your stop loss placements and all that because that’s — I don’t know what kind of stop loss that he use. Did you use a 60 pips stop or something like that?

Darren: No.

Walter: Also H1 chart.

Darren: It’s a H1 chart. If the direction for the day was short to sell then, if you had a bearish close on the H1 timeframe, you took a sell at a low and put your stop loss at the high.   

Walter: Of the one hour candle, right?  

Darren: Yeah. And that was it. There was no particular candle pattern. There was no moving averages. If the bar close down, that was the sell signal. You put a sell up.

Walter: And, he didn’t care if it was a 70 pip candle or a 15 pip candle. It was just…       

Darren: No difference.

Walter: That’s interesting.  

Darren: So, it’s really simple. It has literally taken away all of the analysis. It is essentially just a risk/reward strategy, basically.

Walter: I think a lot of the way that the Turtles originally traded was kind of like that. It makes a 55 period high you go along or whatever. You just wait until it makes the 10N period low and then you sell out. That’s your trailing exit. There’s really no guessing involved. You don’t have to know whether sugar’s going to go up or sugar’s going to go down. That sort of thing.

Darren: And Dunn Capital guy has traded a system like this for decades.

Walter: I had this running bet in my head whether or not Dunn Capital would come up. I knew they would come up because it’s a great example of this. It’s a great example of this.

Darren: Because he does no analysis at all. He doesn’t look at sugar and look at the fundamentals and look at a chart pattern. If the moving average crosses over, he goes long and he holds it.  If it crosses back again, he goes short and he holds it.

Walter: And he’s always in the market.   

Darren: Always in. He has long periods of losing but then he gets a massive winner and that’s an extreme example. And, there’s Basso who did a completely random entry.

Walter: Tom?

Darren: Tom Basso, yeah. Completely random entry and used a wide stop and then a trailing system. Again, he had lots of losers and eventually he’s going to get the trades that run. It’s one approach. I’m not saying you have to trade this way. If you want to still trade in an analytical way, just take these elements on board because they can also improve that style of trading.

Walter: It just opens up your mind and it can give you a relief. Like, I have a lot of friends. I have some friends who are retired and they’re really more investors than traders. We talk about  the way that they trade or invest and they ask me questions as well.

What’s interesting is they’ll look at me and say, “Wow. I can’t believe you do what you do because you must have to read all the newspapers”. I explain to them, “No. Actually, no.” Reading the newspaper is the last thing I want to do. It gets on the way but people assume that. They think that that’s the way that you know what’s going on. That’s the way that you’ll know whether to go long or short, is by reading the newspapers. Well, it gets in the way.

I think a lot of people listening  to this. Even if you don’t want to trade this way, what you can take away from this is… Obviously, the key things I need to be looking at here are dealing with my emotions and how am I able to withstand huge drawdowns, huge losing periods.

And two, how can I setup my trading so that I’m going for large reward to risk because if I’m going for larger reward to risk, I can really become sloppy with my trading and still make money. I know that that may not sound right, it may not be taken the right way but you can kind of mess it up. You can mess your trades up and still make money if you have large reward to risk ratio.      

Darren: I think that the further you go down this idea of being able to predict or wanting to predict everything, you’ll get into such minute detail about exactly the right setup and exactly where to place the entry and then stop.

Before you know it, you can’t take any trades at all because you’ve basically bought so many criteria that you’re actually never in the market. I know overtrading is a problem but if you’ve never entered, you’re not going to win anything, can you?

Walter: Yeah. That’s right.

Darren: I think also a friend of mine recently sort of reminded me about… Over Christmas, he said he re-read some books and re-read Nassim Taleb’s “Fooled by Randomness”. If people have never read that book, it’s really good book for just making you think about things slightly differently — in terms of trading, anyway.  

Walter: Yeah, absolutely. I think he consults for private funds or something like that. The interesting thing about the way that he trades is that it’s completely different from the way he’s mentor trade. He’s mentor just sort of just took short quick profits and he trades the exact opposite of that.    

Darren: That can be a really good edge as well. Having a high win rate can be a good edge. The  psychological pressure is slightly different with that in a such that you tend to stay around break even for a long time and increasing your account is very slow. You can use that approach as well.

Walter: Absolutely.

That’s all the time we have for this episode. In the next episode, we are going to dig into palm readers, the trader who could never lose. What it means to predict the future and be human at the same time.

All these and more, including the hive mind in the next Episode of the Two Traders Podcast. I’ll see you there.

---

SHOWNOTES

In this episode of 2Traders Podcast, Darren and Walter look into controlling risk and managing emotions. The two traders discuss the advantages of having a trading buddy.

Walter shares how making a “game” out of trading can lead to unexpected results and he discusses the science behind untangling your own trading biases. According to Darren, often the greatest solution to a problem is accepting human errors and to implement strategies to evade these errors.

Download (Duration: 19:03 / 21.8 MB)

In this episode:
01:31 – out of whack
02:45 – pool of resources
05:37 – trading buddy
07:35 – black and white
10:09 – limited reservoir
12:29 – loop to loop
14:22 – under control
16:18 – snowball
18:03 – dopamine hits

Tweetables:
Get yourself a trading buddy[Click To Tweet].
A glare in the obvious [Click To Tweet].
Put in implement systems[Click To Tweet].

Download The Full Episode 120 Transcript Here

Walter: To keep your self-control, what you do is you look at your trading system and you apply rewards based on how well you execute your trades, not based on whether its a winner or 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 back to Two Traders. It’s Walter here. Hello, Darren.  

Darren: Hello, Walter.

Walter: So, today we have this question: what is more important for the trader? Is it risk-control or self-control? Now I like to take a crack at this one. My thinking here is I’m not going to cop-out and say they’re both important or depends or whatever. Those are the easy cop out. It’s true, it does depend. But, if I paint it into a corner and if I had to choose one, I would say risk-control.

I would say that because my thinking is that if you’ve got your risk under control, in theory, it’s harder to sabotage. I guess self-control to me sort of insinuates that you’re talking about someone who can’t control themselves and just wants to overtrade or do some crazy things and paint outside the lines. I guess, if you’ve got your risks down like the way I look at it, reverse it.

What if you had your risk completely out of whack, but your self-control was great? I still think you’d probably lose. But, if you have your risk under control and your self-control is still a little bit loopy, perhaps you still have a chance. There’s no guarantees but perhaps you’ll still have a chance. I’m going to have to put my chip on risk-control. What say you Darren? What do you say?

Darren: I don’t want to cop-on over but I feel a strong copping out here. I will partly agree with you, risk-control over self-control. But, I still feel that both of them are like stage 2. If stage 1 isn’t right, it doesn’t really matter on either of them because I think they are both closely connected.

The interesting thing about self-control is if you’re focusing on self-control then you’re probably not going to have any self-control. The interesting research on self-control is that it’s like a resource that is not bottomless.

What happens in your brain with self-control, it’s like a pool of resources with self-control. If you set that self-control resource on say, one decision, then on the next decision, you’re going to be more susceptible to break it. It’s going to be harder to stick to it on the second one.

Like people who are trying to diet that will sort of walk past say a donut shop and they like donuts, they might be able to say, “No, look I’m on a diet. I’m going to walk past that shop.” And then, they get down the road and they see McDonalds and they haven’t got the same pool of resources to stop yourself the second time.

This research was done by a guy from Iowa University. His name is William M. Hedgecock. He’s done lots of really interesting neuroscience stuff that relates to financial markets and trading. This is really interesting.

If you’re just saying, “Look, I’ve tested my system. I know it works but I keep making these mistakes of not waiting for my entry or taking my profits early. All I need to do is learn a bit of self-control.” You’ve got a lot of forefront in your mind.

You start trading Monday. The first opportunity where you’ve got to control yourself comes up. You do alright. The second one comes up, you’ve got no resources left to deal with it.

You make the same mistake again and you see these with traders all the time. They can’t break this self-control problem that we all have. That is why it’s so common in traders.

The other interesting thing that he picked up from this was that this goes back to your thing about saying that daily timeframe is a better timeframe to start on, is that after you happen to use self-control. If you have a break from that activity that’s like making you have to control yourself. This pool of resources in your brain gets replenished.

Your idea of trading less and having less decisions to make for difficult risk-based decisions is actually really on the mark. That’s kind of mindful. I mean this self-control thing to me is not something that you can rely on. You can’t just say, “I’m going to use self-control”. We can’t do it. We haven’t got the mental capacity to do it.   

Walter: Couple of thoughts that I have. Question number one is what happens if you have a risk manager, is that no longer self-control? It’s like just reporting to your boss I suppose. For example, let’s say you’re a private trader and you do as I suggest — which I suggest to everyone — which is get yourself a trading buddy. Talk to them at least once a week.

If you know… For example, let’s say, I’m a trader and I trade the H1 charts and my big problem is I take too many trades. I take sub-par trades. I overtrade. I don’t take the very best trades.

And so every week, I’ve got to report to my trading accountability partner and I’ve got to tell her this is what I did. This is the trade I took, this is why I took it. And then, she looks at me and every week and she goes, “What are you doing? You’re not following your rules. This is what we’re going to do. Next week we’re going to limit your trades. You can only take nine. Nine trades. You’ll take them all by Tuesday then that’s it. You can’t take any more trades for the week.”

I guess you could argue, if that works for me as a trader because I know I’m going to talk with my trading accountability partner. I know she’s going to say how many trades did you take this week. It’s not really self-control, is it? It’s kind of like reporting to my boss, I guess. It’s outside of me now. Isn’t it?

Darren: It’s more of like risk-control because you’ve identified the risk in your self-control and you’ve implemented something to deal with that. You know where you’re going to make mistakes. You’ve put a risk control in there to deal with that.

What they find in this research about self-control was noticing that you need to use self-control as depleted. It is actually in the execution so you can put something in there to deal with the bit that you’re going to fail with.

Walter: Give an example. What’s an example?

Darren: Like you said, having someone that you report to. It could be a trading buddy that when you see a trading set-up, and you’re getting this issue of self-control. Do I take it? Don’t I take it.

Then you pass over to someone who knows your system and say, “Is this a valid system? Is this a valid set-up or not.” Then they’ll give you the answer. They’re not involved in the trade. They can just be very black and white and then you execute the trade.    

Walter: That’s interesting. The other thought I had here which is besides moving in and outside of yourself and basically taking outside so is it no longer self-control. I guess it’s semantics.

But, the other thought I have was, if you read through the Market Wizard books, what really jumps out to me are the number of Market Wizards who had a catastrophic loss for whatever reason.

Whether they risk too much or some sort of they risk too much on a trade, or they discounted the risk of the market basically running away and not enabling them to get out, or they wouldn’t diversify, or whatever it was. They made some sort of mistake and that kind of set them off in the right direction.

Sort of like a smoker who quits cold turkey  and says, “That’s it. I’m not going to smoke anymore. I’m never going to smoke. I haven’t touched a cigarette in 15 years or whatever.” That sort of thing. So that’s what it reminded me.

When you read these stories after stories of these traders — and I guess these books were written in the late 80’s, early 90’s, the Market Wizards and the New Market Wizards. I can link them up in the show notes if you’re like the only trader out there who hasn’t  heard of them. But, basically, I guess in theory they could run out of self-control and then 25 years later they make the same mistake but it sure seem like they learned their lesson.

It sure seem like that was like a catalyst that enabled them to kind of find the light so to speak and become a more consistent trader. That’s an interesting thought.

And also you hear like these dieters. They’ll say things like, “Nothing tastes as good as fried bacon. It was nothing taste as good as feeling good feels.” Something like that. Like, they have this mantra that they will recite every time they go by the ice-cream shop.

Instead of going in there getting a donut or an ice-cream they’ll say, “Nothing taste as good as feeling good feels” Or, “Being thin feels…” Something like that. I don’t know the saying.

It’s like they’re using a technique or something, a strategy. I get what you’re saying about the research about I guess like a limited reservoir of self-control and once you’ve depleted, it’s gone.

What’s the solution? Is it to move outside yourself and have a trading accountability partner? For example with dieting, people can think about the goal. Think about the end-result. I want to look like this. I want to feel like this.

It’s not worth it for me to eat that biscuit or that ice-cream cone or whatever. It kind of refocuses them and recenters them on what’s important. Is that a possibility or what do you think based on your research?

Darren: Definitely. I think what we need to get past is this idea of, “I’ve got a trading plan. Just trade the plan” because all the research suggest that that’s not something that we can do.

Just having your trading strategy and saying to yourself,  “All I need to do is follow this trading strategy and I’ll be alright is missing the point.” That is something that we’re not built to do so you need something a bit more than that. You need to go beyond your technical trading strategy and look at the strategy to ensure that you execute it.

Like, what we’ve talked about on a lot of the other podcast. You need to think about your Psychology strategy. You need to have something in place. They can be stops, like you say, or they can be trading buddies or they can even be routines that you put into your trading strategies.

They aren’t about whether it’s a set-up or what you do with your stop loss. Things like after taking a trade, you then go and run around the block or you go and walk the dog or something like that. You need to think about that element of a strategy as well which most people overlook.    

Walter: I just thought of a great thing. Like, if you’re that trader who needs that rush or whatever you take your trade, what you do is you move next to like an amusement park. You just live close to it.

You take that trade and you’ve got your annual pass at the amusement park or whatever. We’ll just pretend that they’re open year-round, and then you go there and you just scan your annual pass and you go ride the loop-to-loop roller coaster. It’s just like your trades are already locked-in. It’s already in.

Darren: Yeah. I mean, these are things that nobody talks about in trading forums. Nobody, you won’t find a single. You might find 1 thread in 5000 that talks about this kind of ideas but all of the study, all of the data suggest it’s really, really important.

There’s the perception gap that’s going on. When you look at the facts, if it’s true that most of us lose, most of us make the same mistakes, then most of us are using pretty much the same technical strategies that has to be outside of that where the answer lies.

It’s glare in the obvious. But, the worst thing we do as humans is deal with the glare in the obvious, isn’t it? Alcohol is legal in the UK so everyone thinks it’s fine but the facts about the health risk from alcohol, a glare in the obvious and we overlook that.

Then you have something that’s illegal like cannabis and we’re all like unfair of it because the government say it’s bad for you. The facts say that anyone’s ever died from cannabis but our perception of it is just completely the opposite.

Walter: Yeah, exactly. So funny, isn’t it? What you’re saying about alcohol I think, that’s why when you’re trying to get somebody off the alcohol or whatever, what happens is you’ll have an intervention.

You have like the family and friends of the alcoholic they all come in and they say, “Look you really have a problem here” because we all think, “No, no. It’s not me.” It’s the same thing.

“I don’t really have a problem here. I’ve got this under control. I’ve got some self-control here.” But really, you need a trading accountability partner. You need a bunch of people to look you in the eyes and say, “Nope. This really is an issue.” It’s crazy.

In theory, let’s say, you’ve got your risk control right and you risk the precise amount you should. You got everything right about that in your trading but if your self- control is out of whack, then you just go crazy.

You take too many trades and that’s going to affect the risk, obviously. You do need to have both of them. I agree you do. If I had to choose I’d say, “Well, maybe I can get the risk down” and you have self-control. Can it still sabotage it? Can’t it?

Darren: I wouldn’t say, “If your self-control is out of whack.” I would say, “Your self-control is out of whack.” It is. You just have to accept that. Self-control and just trade the plan is not going to work. It won’t work for you.

You have to accept that first definitely and then I suppose what you need to do is in your risk-control, you need to put in implement systems that deal with that fact. I think that is the approach.

Like you say, even guys who’ve made a lot of money trading and perhaps even have funds have this issue with self-control. It’s not a question of intelligence or experience. It’s a human-emotion-bias-psychology issue.

You see, when people blow up it’s very rarely that they make one mistake and blow up. What tends to happen is they make a small mistake and they’ll try and correct it and they’ll make another small mistake and then, they’ll try to correct it by making a bigger mistake and it kind of snowballs like that.

They keep thinking that self-control is going to help them out but the more small mistakes they make, the less this resource gets depleted more and more. They can do less and less about it and it snowballs and then they blow up.

Then they’ll sit there two hours later saying, “I just lost 70% on my account. How did I do that?” I definitely say your self-control is out of whack. Deal with that rather than just trying to fight against it.  

Walter: There’s a book that I’ll put in the show notes called “Fake: My Life As A Rogue Trader” by David Bullen. It’s a story about basically exactly what you just said there. How they took a forex loss of 360 million. It’s about an Australian bank but it’s exactly what you say about the snowballing thing because that’s true. I just want to share something with the listeners here. This is something that you’re very interested in.

The thing that I found most useful for me and I’ve shared this with other traders is to make a game out of it. What you do to keep your self-control. What you do is you look at your trading system and you apply rewards based on how well you execute your trades not based on whether it’s a winner or a loser.

What that does is the neuroscience behind that is you want to win the game. You get a little hit. You get a hit of dopamine when you buy something. You get a hit of dopamine when you win. This little games on your watch, your phone or whatever.

And that’s kind of what I try to do with my trading as I set it up that way so that I get dopamine hits for following the system. I don’t go back and change things based on wins or losses. That’s just something I found to be very useful.

I really think everyone should get a trading accountability partner. I think that’s the number one thing. But if this is something that you are really into then the other thing that I would recommend is that you make a game out of it basically.    

Darren: I will put the link to this article about self-control in the show notes as well because it’s really a good read. It’s really interesting and quite eye-opening.  

Walter: That’s awesome. Thanks a lot. Sounds very good. Well thanks, Darren, for your time. I really appreciate it.   

Darren: Great talk again, Walter. I will see you next week.

Walter: See you next time. Bye.

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SHOWNOTES

Against the Gods: The Remarkable Story of Risk

Are feelings more important than facts?

In this episode of 2Traders Podcast, Walter and Darren delve into the idea of odds and probabilities. Should you be more concerned about a possible shark attack or dying in a car crash? Darren examines the importance of how traders perceive “facts” and whether or not feelings should be considered when making trading decisions.

How might a professional South African surfer or shark attacks help you “see” facts more clearly? Walter discusses the importance of Psychology and how you can shift your approach to see these things in a different light.

Download (Duration: 24:39 / 28.2 MB)

In this episode:
00:35 – magic of the internet
01:51 – shark attack
04:14 – pleasure givers
06:32 – availability heuristic
07:29 – gut instinct
09:29 – risky decisions
11:07 – thought-action connection
13:03 – working on the subconscious
15:31 – user error
17:28 – odds do change
19:50 – magic trading system
21:24 – build up resistance
24:26 – big gains

Tweetables:
Facts or feelings?[Click To Tweet].
It’s rarely the facts [Click To Tweet].
What if I did this?[Click To Tweet].

Download The Full Episode 119 Transcript Here

Darren: There’s a lot to be learned from focusing more on the psychological side…      

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 and hello, Darren. You’re on the line and you’re ready to go.

Darren: Hi, Walter. We’ve not spoken for a long time,  have we?

Walter: Yeah but we still show up twice a week, Darren. That’s the magic of the internet so it’s all good. We were talking about different ideas or topics. One of the ones that I thought would be interesting is this idea of odds and likelihood.

I think a really important thing for traders, especially… I believe you have to think this way but let me just give you the question. The question is something like this: We know that the odds of dying from a shark attack are 1 in 3.7 million and the odds of dying in a car accident are 1 in 84. Why is this important for the trader? Why did I even bring this up? What does this have to do with trading?

Darren: I think what you’re kind of angling at here is how our perception of what’s important is usually way off the mark with the facts of what’s important. I guess that’s what you’re angling at.

Walter: Yeah, absolutely! One of the terms that they use is “availability heuristic” which is basically things are reported. What makes the news is five guys in Australia, the five swimmers in Australia, this year that were attacked by sharks.

What doesn’t make the news are the — I don’t know. In Australia, might be what, 500 people die in a car accident every year. I don’t know. Maybe more, maybe less but the point is the car accident thing, that’s really the most dangerous thing in your house. It’s probably your car and yet we’re so worried about shark attacks.  

I found it interesting. Actually, I learned this the other day. I take my kids to the aquarium and one of the things that they had this people that take you on tours. He would explain to us that before the movie “Jaws” — and I didn’t know this — before the movie “Jaws”, when a swimmer would run into a shark, they would call it the shark incident. And then after “Jaws”, every single time that something would happen with the shark, it was a shark attack.

No matter what happened, it would become a shark attack which is so funny. It’s really funny, but it’s true. There was the big one that made the news in Australia —  and I think worldwide.

There was a professional surfer in South Africa and basically the shark was swimming by and he got his tooth caught in the surfer’s leg rope. And that was a shark attack, right? Because there was a shark involved. It’s kind of interesting.

I think you’re right. What I’m trying to get out here, in this roundabout way, is why is it that we think some things are more likely to happen than others? Other things actually are more important, are more likely to affect us, we don’t even think about. I think there’s a lesson in there for the trader.

Darren: Yeah, definitely. People always bang on about how important Psychology is and we find that quite hard to take on. We think that we’re kind of really just look at the numbers and look at the facts.

But, when we do just some general study of Psychology, we realize that Psychology really is 90% of it. Because like you say, we know the facts that travelling in cars is dangerous but it’s not the facts about that risk that are important to us. It’s how we feel about that risk.

To us cars, are convenient. They’re luxurious, they’re even sort of viewed as being kind of sexy, really. They’re pleasure givers. They’re things that we love and people even name their cars.

My girlfriend, she used to name our car and she was like deeply upset when we have to get rid of it and get a new car, like she was losing a pet or something. So, regardless of what the facts or the data say, we’re going to play down that risk.

The Psychology of that risk is more important. The feeling that it gives us is more important than the facts. You see that all the time in trading.  

Walter: There’s a couple of different ways that you can look at this from a trading point of view. One would be the thing that’s most important for the trader isn’t necessarily accessible and isn’t really thought about.

The other way to look at it is that there are some things in trading — I mean, these are the two things that pop-up for me. One is that your eyes are on the wrong thing. You’re looking at the wrong thing.

It’s not that important to look at that thing over there. You should be looking at this thing here. And the other one is that we can grossly…  Our estimates of the probability of things happening in trading are often wrong.

One thing that brought us home for me was I’ve been working with a group of traders for the last two months. One of the traders has been doing a lot of work and a lot of backtesting and he presented this thing.

I said really what you need to do here is you need to look at different exit strategies. Keep everything that you’re doing at the entry side the same and then just become more and more aggressive.

He was absolutely flabbergasted that it didn’t matter whether he went for a 3R trade or a 5R trade. In other words, he would exit after he made 300% of his risk on the trade or 500% of his risk on the trade.

The win rates stay the same and he never would have thought that another win rate dropped a lot when you win from 1R to 2R. The win rate dropped quite a bit but 3, 4 and 5R basically all had the same win rate.

And I said, “Well, get some more data because we still would expect to go down a little bit.” You know what I mean? When you get down to 5R? He was amazed and it opened his eyes because he learned that, “If I can just deal with losing more often, I can make more money just by shooting for a further target, just by being more aggressive.” And that’s kind of a reminder here.

This idea of availability here, like thinking of shark attacks and worrying about shark attacks every time we’re on the water, when really what we should be worrying about is the ride home from the beach.

How do you deal with that? If you’re thinking about the things that we know as humans, we are focusing on the wrong things as traders. We’re focusing on, for example, we’re focusing on win rate or we’re focusing on not missing out.

Everyone’s making money on Bitcoin. “Boy, I got to buy some Bitcoin.” Or, “this win rate isn’t good enough. I only have a 43% win rate on my trading system.  I need to add a filter and get it up to 60% or whatever.” We’ve always got our eyes on the wrong thing.

Darren: I know. The way I dealt with it was to just accept that my thinking is wrong. Michael Mauboussin got a good book that’s called “Think Twice”. Your natural gut instinct is most likely going to be wrong.

I just always think that way and then move on to the next thought which tends to be more rational one. I just don’t believe myself. I try and fight against that. We’re all kind of a bit… We think we’re better than we are, we’re smarter than we are. That is good enough to get us through. I just try and take the opposite stance to that.

If my gut instinct is telling me that 1 to 1 risk reward is the best way to go then I say, “Well, the likelihood then is probably more like 10 to 1.” So, I start from that point and work back. That’s the only way I found to improve as a trader. It’s to take that view on everything.

Walter: You basically are just checking. Like, I think this: “That’s probably wrong and maybe I should look at it at a 180-degree turnaround, just change my view on this. Will consider it.”  

Darren: Definitely because most of these feelings are coming from the subconscious. They’re not coming from the facts. It’s rarely the facts. There’s always these biases, human emotions. It’s how you feel that is most likely to drive you.

You think that your backtest is going to determine what you do but it’s not. The clear and obvious way to sort of bring this home is to look at what traders do. We all make the same mistakes in general.

The mistakes that are made the most often, we all make. It’s not about you. There’s something deeper in the subconscious that’s going on there. It’s not something that’s unique to you.

It’s something that’s built-in to human beings when they’re making risky decisions. You have to come here from a different angle. If you’re just going into forums and reading what everybody else is doing, the chances are you’re being fed the wrong information because we’re all making these natural mistakes.

Walter: Let me ask you this: As a trader, being aware of the fact that your instincts are probably wrong and you should be looking at it from a different point of view. You’re always sort of second guessing yourself. Do you think that that works against you as a trader in terms of just taking trades?

In other words, here’s another way to say it.  If you’re trading yourself to second guess yourself all the time, does that work against you as a trader? In other words —  this is like the American babbling out on me — “We believe that you have to believe on yourself then you can do it.”

I‘ve realized now that’s a very American point of view and can be misinterpreted in other parts of the world. But regardless, my question is do you think that could possibly hurt in some aspect of trading? Not all but some.

Darren: Possibly it could. But really, it’s not about stopping having those feelings. If you’ve got instinct that’s saying, “I should close this trade early.” It’s not about stopping having that feeling.

It’s about putting some checking there and saying, “Okay, that’s what my emotion is telling me. That’s what I’m feeling. but what do the facts say?” If you can just break that thought-action connection for a few minutes then you can consider the actual facts.

Then you can say, “Hang-on a minute, in my backtest this is what I did and the probabilities look pretty good doing that. Really, despite the fact that I’m feeling this urge to act now and do something different to what I planned, it’s probably not the right course of action.”

Walter: What I find it helpful is to think, just to use this phrase, “What if I did this?” You know what I mean? You feel yourself going in one way and you say, “Hang on ,what if I did this?”

For me, that’s a useful phrase if you want to snap out of the mode that you’re just falling to naturally and just consider other options. Same thing when taking a trade. Like, when I trade and I buy the Euro right here… Who’s selling it? Who is looking at the same chart thinking this is a sell? You know, that sort of thing.

Darren: Another good phrase is, “What is the worst that can happen?” Generally, if you’re 1 to 1 and in a winning trade, the worst that can happen is that trade is a loser. I think for a lot of people that is the biggest fear.

Although, again, that’s happening subconsciously. They think that they’re quite happy to accept some losses in return for their wins and the probabilities of playing it, I think, will be fine.

But, the reality is in the moment that fear of losing is deep down and it’s probably really what’s driving your decisions. Again, it’s not the rational data that’s driving your decisions. It’s that 90% subconscious deep inside that is really making the decisions for you.

Walter: That idea right there that you just said, that’s been like the biggest thing for me this year.  It’s what you just said right there, working on the subconscious. I think that’s a really important area.  

How is it that so many people, you look at the data and it doesn’t really matter what market you’re looking at. You’re looking at the data and all sort of says, most people playing the trading game, they lose. Most people lose. So, why is that? It’s like we’re built this way. We’re built this way to make the same mistakes.

Darren: I think if you knew that fact and then you started to say backtest systems and came up with your own systems and back tested them and you never find any positive expectancy in any systems.

Then, that would go someway of being able to accept that the reason that everybody loses is because it’s almost impossible to find an edge in the market. But, as most of us who have been around a while know, coming out of a system to test that has positive expectancy is fairly easy.

There has to be something else going on and that’s where you’re focus should be. What else is going on? Our gut instinct is to look at the strategy solely, isn’t it?

Walter: Exactly! It’s like you’re reading my journal this week, Darren. It’s really funny that you’re saying these things. This is exactly what I’ve been working on like I said most of this year, really.

Exactly what you said. If you think about it, you can dig up strategies on the internet and they’re going to have a positive expectancy and yet, good luck finding somebody. More than a handful of people that are actually using that to good effect.

It’s got to be something else. It’s not difficult to manufacture or pull out of your ear, a strategy that will make money. The difficult part is to actually execute it and do what the system says to do. That’s the difficult thing.

That’s what I find so fascinating about trading. It’s the fact that, of those two pieces, the one that everyone focuses on is number one which is system and finding an edge. When really, in the end and like you say, if you’re a listener and you’ve been trading for more than a year or so, you’ll probably work this out which is “it’s me”.  

It’s what they call “user error” in the software world. What am I doing? How am I not making this work? It’s something about me that really I need to look at here.  

Darren: Again, finding out that bit of data that is you is one thing but then deep down the 90% is going to be saying, “It’s not really me.”

Walter: Exactly. That’s not me. That’s other people. Not me. Not me.

Darren: Even when the facts are glaring you in the face that it is you, you’re not going to feel that. It is unlikely that you’re going to feel that. I think if we go back to the odds of a shark attack, regardless of what the figures say.

It’s 1 in 3.7 million. That figure is not like a law. It’s not a fact. That’s just  where we are at the moment. You’re going to be thinking, “I’m going to be unlucky this time because those odds don’t represent this time that I’m going swimming.”

There’s this uncertainty in that number. It’s not like Algebra where X equals 3 or something. There’s uncertainty with that. The same problem applies in the market. You will do a backtest and work out your probabilities but that isn’t a fact going forward.

There’s uncertainty in those. You’ll never really know the probabilities. You get an idea of what the probabilities were in the past but that can change going forward. Again, deep down, you know that as well. That’s where the problem comes because you lose faith in those, that data that you’ve got. Your fear takes over.

Walter: Exactly. And the odds do change like in the example of the shark attack. If I am going out for a swim in the Red Triangle or in South Africa and I see a bunch of seals floating around and stuff like that, I’ve got to think that boy there’s going to be some big sharks down there snacking on those seals.

Whereas if I’m in Bora- Bora and I can see all these sharks and those little lemon sharks or whatever, they’re well-fed. There’s plenty of fish around. I think, it’s alright.

It’s the same with trading. If I took a trade, let’s say 5 minutes before the end of the week and I had a really tight stop, what’s going to happen? The spreads are going to widen, there might be a gap over the weekend.

When the markets fire up again next week, I might not only be stopped out but I might have lost more than I had bargained on because the market  could gap over my stop loss level. That kind of thing.

Whereas, if I did the same thing in the middle of the week during the European session, maybe the chances of the market pushing through beyond my stop may be quite slim. You know it’s the same thing, I guess. The odds do change.

The person who never goes and swims in the ocean, their odds of dying from a shark attack are basically zero, aren’t they? It’s like the guy who never plays the lotto. He’s never going to win.

Even the people who play the lotto have a very very small chance of winning but at least they have a miniscule chance. I think there’s a book called “Against the Gods”. I don’t know. I’ll put it in the show notes.

Which is this idea of people didn’t really understand probabilities and how to define risk throughout history. There’s kind of a history of risk. I’ll put that in the show notes for you guys. But that’s kind of the game, isn’t it?

The first part of trading is identifying your edge and working out your numbers and figuring out what the odds are. What the probabilities are. The second part of trading is teaching yourself and learning how to manage yourself so that you execute your trading system.

That’s really trading. That’s really what it’s all about. Finding an edge, defining the edge  and then executing it and working on yourself so that you can continue to execute it. But, I don’t hear a lot of people talking about that.

I hear a lot of people talking about magic trading system and how this system is better than the other system. There aren’t a whole lot of people talking about how you can trick yourself into executing your strategy.  

Darren: What do you think about with this risk and perception of the risk? Most of us find sharks scary and we consider them high risk but you find the people who are sorting everyday about a guy goes diving in South Africa and he’s like a cameraman or something and he’s obviously seen a lot of sharks.

Now, his perception of the risk with sharks has gone away completely to the point where he’s not really afraid of sharks. He knows he needs to be aware of them. He goes and dives well with sharks everyday and he doesn’t fear them anymore.

Is this the way to deal with these issues with trading? It’s to you kind of have to experience going against the fear if you like and then you can progress.

Walter: I think you can inoculate yourself to build up a resistance, just like a good drug addict. You know what I mean? You sort of build up a resistance. If you first start trading with a really tiny amount it almost doesn’t matter. Like, it really, it doesn’t matter. It’s real money but if you can just build up that way.

I think what you just describe though is exactly what we see with cars. When you first start driving… I remembered when I first start driving I used to tell people, “I can’t change the radio right now. I’m driving.”

Now, I could probably watch a DVD, text somebody, pull a dummy out of the seat from the back seat. You can do all these things at once because I am like that abalone diver or whatever, the cameraman in South Africa. And we’re all what way, aren’t we?

If you drive a lot, you get to the point where the cars, they don’t look dangerous anymore. They don’t feel dangerous. It doesn’t feel scary when you’re driving them but when you first start driving, it was. I think you can do the same thing with trading.

To answer your question, I would say work yourself up to a way that you can build up a tolerance just like a good drug addict where you basically start out with that little bit and you get just such a high from that trade.

As you trade more and more, and you opt the risk on each trade then you get to a point where you’re focusing on execution and you’re no longer in the thrill of the trade, so to speak.

Darren: Yeah, definitely. You just need to look at the mistakes that you’re making and think a little lot deeper about why you’re making those mistakes and buy into this whole idea of Psychology being important first. Really buying into that for a bit.

If you spend a lot of time working on strategy and entries and where you put the stop loss and what indicators you use, just put that to one side for a minute. Just trade the system that you like and something really simple.

Just zoom in on your feelings, the decision making process, the Psychology of it all and really that’s where you can make massive improvements in your trading.

It’s difficult to do because even when you’re born into this… Even now, I still find myself drawn to thinking to remove entries and looking at this moving average instead of that moving average. “What if I traded this pattern?”

But, if you do buy into the Psychology as being important, you will get to the stage where you look at these things and then your memory clicks in. It’s not really going to make any difference in the long run. I think there’s a lot to be learned from focusing more on the psychological side.

Walter: Absolutely. It becomes pretty clear as you progress as a trader. It’s about learning about yourself. That’s really the big gains.

Thanks, Darren. We’ll see you next time. Thanks a lot.

Darren: Okay, Walter. Thank you.

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SHOWNOTES

Against the Gods: The Remarkable Story of Risk

In this episode of 2Traders Podcast, Walter and Darren dig into choosing timeframes and how emotionally involved should you be in your trades? Darren talks about the importance of picking the right timeframe according to your goals and lifestyle, and the negative aspect of trading – specifically, dealing with psychological pressures.

Walter unveils a unique exercise for weird candles… And what is the secret of being a “happy trader”? Is it really important to look at timeframes or should you focus more on your risk/reward? Walter and Darren examine this and more in this episode of 2Traders Podcast…

Download (Duration: 26:36 / 30.4 MB)

In this episode:
00:56 – lots of action
02:59 – shifting goalposts
04:44 – negative aspects
07:01 – waiting for setups
09:49 – anomalies
12:06 – full moon
15:22 – edge of the knife
17:31 – blocking off
19:07 – covering up
21:10 – real problem
23:27 – the secret
25:41 – on point

Tweetables:
Know who you are.[Click To Tweet].
Move to a higher time frame [Click To Tweet].
Plan your trades out[Click To Tweet].

Download The Full Episode 118 Transcript Here

Walter: You really need to look at this from a longevity point of view. I don’t know any traders who’ve traded the lower time frames and not burned out. The only way you can do it, I believe, is you need to take breaks…      

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 the Two Traders Podcast. It’s Walter here and I have Darren. Hello, Darren.

Darren: Good afternoon, Walter.

Walter: So, we have a question from a trader here who says that his biggest challenge — I don’t know if he’s a “he”. I’m just going to use “he”. He says, “My biggest challenge is, is daily chart trading best for me or I’m not so emotionally involved in the trade? Or, should I look to the lower time frames with lots of actions, adrenalin, and fast decision-making? Which trading style best suits me? “          

Darren: Am I going first on this?

Walter: And also, I’ll just say here that as a sort of a preface to the question, he says he always gets sucked into the M5 and the M15 charts because there is action. He’s wondering, “Should I block this out?” He says, “Should I block these time frames out of my MetaTrader?”

What he’s saying is, “I’ve heard you talk about it.” I talked a lot about the gambling part of your brain and how that’s activated when you trade the lower time frames. I’m not saying that you should necessarily throw that away and just trade weeklies or whatever or monthlies.

All I’m saying is that there’s a certain type of person — and I think you know who you are. When you’ve run into this problem where when you’re seating in front of the charts, you keep pressing the buttons. You keep getting rewarded by taking those M5 charts and even if you’re in a big hole, you keep doing it.

It’s the same kind of a guy who will sit in front of the video poker machine and keep gambling away all of his pot. The question really is, is that you? Because if that’s you and you still want to trade, I think you need to move to a higher time frame.

That’s all I’m saying because in higher time frame, you’re using your frontal lobes. You’re   planning things out and that happens in slow motion. You’re not under pressure. It’s typically a lot easier because it sorts of unfolds slowly.

The bad news is you have to take more of those trades to get the same effect so you don’t run through your statistics as fast as you would if you were trading the M5 charts. Because M5 charts, maybe I take 20, 30 trades a week whereas the D1 charts, maybe I take 4 or 5 trades a week. That’s the drawback for that. What are your thoughts, Darren?           

Darren: Yeah. I’m with you there, Walter. I think the mistake that a lot of people make is they assume that they can remove negative aspects of trading by shifting the goalposts. The problem is so you’ve got the M15 chart which is fast in acton, but the downside to that is that you can lock up your losses much more quickly.

You say, “Okay I’ll switch to the D1 time frame.” You switch to the D1 time frame, that’s sold out with. Now, you have to wait a really long time to get to your profit target. What I’m trying to say is  just shifting time frames is not going to remove the negative aspects.

It’s just going to make different aspects negative. For me, the answer really is to get in this mindset where you accept that there aren’t negative aspects of however you trade; and dealing with how you deal with those negative aspects is what your focus should be on.

Unfortunately, what we do is we just try to do something simple like change the time frame. Like I’ve said that all it does is move the goalposts. If you often doubt with your reaction to negative aspects of trading, you’re just going to come up against a brick wall again.

That is not denying the fact that certain people will be more suited to a slower time frame where they have to make less decisions and they can deal with the negative aspect of that which is waiting longer to reach profit targets and have a slower or less volatility in the results.

I think you do need to pick the time frame that suits you. But, more importantly you’ve got to appreciate that wherever you move, there’s going to be a negative aspect. They’re just slightly different and they offer slightly different psychological pressures to deal with.

Walter: Yeah. That’s a great way of looking at it because if you’re trading lower time frames, I would argue… And I have argued that while it’s possible to get out of a losing position before it hits your stop loss, it’s much less likely than if you have a daily chart position.

If I have a daily chart position… And I’m just arguing here that you’re the type of trader that doesn’t just put the trade in and say, “Well, it’s either going to stop me out or it’s not.” That sort of thing.

If that’s the way you trade, then that’s fair enough. But, some traders like to reassess and go, “Well we’ve had three more candles print here and what is this telling me? Is it telling me that my trade idea is still a good idea or is it telling me that I should probably rethink this, tighten up the stop or something like that?”

I would argue that one of the negatives of lower time frame trading is the percentage of trades that are likely to hit the full stop up is greater. You’re probably more likely to get slipped than you would.

Exiting on a daily chart trade just because your stop loss is so much closer. But, as you say, the negatives to higher time frame trading — like daily chart trading, for example — are that your trade takes a long time to unfold.

What does that mean? It means that you’re not going to compound your account as quickly. More likely that you’re going to see the result, win or lose, of your M5 chart trade much more quickly than you would your D1 chart trade. That’s just kind of obvious so you don’t have as many. It’s much slower.

To me, that’s positive because when you first start trading, you wanted to be slow. You don’t want to be pressured. You don’t want to feel like you’ve got to do something now. When traders are trading on the lower time frames, it takes a very special type of person to be able to go, “Okay, you know I’m under control here.” You know what I mean?

Either they’re not feeling too pressured because they know exactly what to do, they’ve planned it out beforehand and they execute it under the gun. But, a lot of traders aren’t that way. They feel pressured. They just feel like they have to react instead of execute the plan.    

Darren: Yeah. I find another issue with the high time frame is waiting for setups, if that is a problem for you. For me, if I know I’ve got to wait a whole day before I’m going to get a setup. For me, that just feels like surely I’m going to miss out on the opportunity of today. I mean, that’s a whole day of trading that I’ve wasted.

It might be that your kind of  personality needs that more action and you know the great thing is you really can design the board you want to play on. You can make the game whatever game you want it to be.

If you want to trade the daily moves — let’s say, you’re like me. You’re impatient waiting for setups. Well, look for your daily moves that you want to trade and then go to a lower time frame to look for entries into that move.

Then, there’s obviously the negative side to that as you might have to take 2, 3 or 4 bites of the cherry to get into that move. You have to appreciate that you’re going to have a slightly lower win rate.

But, at the same time, you’re going to be able to get in with a smaller stop loss and you can aim for a daily trend, a daily entry would probably have given you 3 to 1. You could go down and enter on a faster time frame and get a 10 to 1, or a 5 to 1 trade out of that.

You can really manipulate it to be exactly how you want it to be. Then, it’s a case of testing it and if it tests positively. Then, it’s a case of executing it. I don’t think we should restrict ourselves to “I’ve got to be a low time frame or high time frame trader.”

Time frames only exists in someone saying, “Okay, I’m going to split this price movement up into 15-minute sections.” Doesn’t actually mean anything. There’s no magic going on there. Someone’s just decided to cut them up every 15 minutes. The actual movement of price is exactly the same on all the time frames.   

Walter: Yeah. Which is why we should all be using point and figure charts, right?

Darren: Well, we should. But, there is an argument for the fact that some tools can be useful just to make us feel comfortable rather than actually giving us any technical advantage as well although a lot of trading is about feeling uncomfortable in doing stuff that’s not natural. If it’s something that you do everyday, it’s quite acceptable to add some elements in there that  just makes your day a little bit easier.

Walter: Yeah, right. When you’re trading the 1 hour chart time frame, do you notice that at the end of the candle that it gets a little bit weird? Like the last 5-minutes of the hour?

Darren: I’ve heard this and I’ve heard it about the start of the month as well but to me, those are anomalies. I don’t even want to go there.    

Walter: Yeah. That doesn’t surprise me that you would say that. I’ve just heard that from other scalpers who refuse to trade the last 5 minutes or 10 minutes or whatever it is of the 1-hour candle because you know it jumps around a bit. It is interesting.

A fascinating exercise for anyone listening to this is to screenshot the candle. You take a screenshot of the 1-hour candle every 10 minutes and just see how it changes; or the screenshot of the daily every four hours or whatever — a screenshot of the 4-hour every half-hour or something like that — and ask yourself what you think the candle’s going to look like in the end. It’s fascinating to me how different they are in the end. You just never know what it’s going to end up looking like.   

Darren: It wouldn’t surprise me that at the end of a nice round of 1 hour, there’s going to be more traders taking action than there would in the middle of the 1 hour. It’s like big round numbers.

There’s been a lot of research on big round numbers and they reckon the reason that there’s so many orders placed. That is because it’s just easier to say 1-13 than it’s to say 1-13.685.

It’s an easier round number and it’s nice and clean, and psychologically, that feels more significant than with numbers in between. This is no surprise to me to find out that right at the end of the hour, everyone’s going to suddenly burst into action. That’s just not where I like to look for edges.      

Walter: Right. I’ve heard similar things where the trader will say, “If it goes to 80”, like 1-15-80, “Then it’s going to go to 1-16.” It’s going to go that extra 20 pips or whatever. If it goes to 1-16 even, it’s going to go to 1-16-20 or whatever. You hear things like that and it’s crazy.

I’ve never tested it but it’s one of those things where if it doesn’t make sense to you, then it gets nothing. Unless it makes sense to you. I guess it’s like full moon. It’s a full moon. That means we hit the end of the Euro-cycle or whatever. I used to had that right.

I had mapped on. I was really into the Gann and  everyone of course has their own ideas of what Gann was doing. I was looking at the new moon and I was convinced that the new moon would predict sort of these turning swing points in the Euro.

I mapped them on there for years. This is when the Euro had been around for three years as a tradable currency. Going back, I was convinced that I found something. But, if that doesn’t make sense to you, if you think full moon or new moon or whatever, that’s crazy. Then you’re not even going to look at it but I guess that’s the case for every trading system, really.

Darren: Yeah. Sure.

Walter: You just can’t throw it away. Well, I’m not going to look at that. Why would I look at that? It doesn’t make sense. Why would I do that? It can’t be. It can’t be true, right?

Darren: Yeah. I know you’re a big advocate of higher time frames over lower time frames. Would you say that that’s more psychological than it is and from an execution side of things? Would you say that this clearly, in technical analysis — say for instance, support and resistance — on the daily is more reliable than support and resistance on the 15-minute charts? Where’s your gut lying on this or your belief on this?

Walter: I don’t really look at it that way but this is what I think. I think that when my kid learns how to ride a bike, he’s going to have training wheels on. When someone’s learning how to trade, I think you should — especially most traders I know, they’ve got a job and they’re doing this on the side.

Well if that’s the case… You need your sleep, you can’t stay up all night after your job is over. You really need to look at this from a longevity point of view. I don’t know any traders who’ve traded the lower time frames and not burned out. The only  way you can do it, I believe, is you need to take breaks.

All the traders I know — and I would include you Darren. I don’t know if you’re still doing the one-hour trading but the trades you trade and I can consider one-hour charts to be lower time frame.

Those traders, they’re very good at when they’re going to trade, they’re very good at leaving the charts and not coming back for like months. You have to do that. You do. That’s my belief. Like I said, I don’t know any traders who have long term who’ve been able to do that.

You might find a scalper with, “Oh, I’ve been scalping on the 5-minute chart for 25 years.” Yeah, how many days do you trade a week? Two. You know what I mean? That’s what you see. That’s what you see over the long also.

I think the reason why it makes sense to trade the lower time frames is because you’re probably doing this. You have a job, you probably do not want to spend an extra 5 or 6 hours in front of the computer which is going to cut into your sleep. Obviously, it has to.

You probably don’t want to. When you’re new at this and when you first start trading, and trying to get it right, you probably don’t want an extra pressure of operating on the edge of a knife where basically your lizard brain, your emotional brain, is ruling the rules in making the decisions for you.

You don’t want that. What you want to do is plan it out. Put everything in a nice little tidy box and then wait for the market to do the right thing and then when it does that, you jump in.

I don’t think you want to be reactive. I don’t think you want to be cutting in to your sleep time. I think when you’re trading, especially in the beginning, use the training wheels. That’s what I think.

There’s nothing wrong moving down the lower time frames later. I just think you need to get it right in the beginning. It’s sort of like teaching your nephew how to drive. Do you give him the old Ford or do you say, “Well, yeah, you can take the Porsche out the first time you’re driving.” You don’t do that right? It just doesn’t make sense. That’s how  I see it.

Darren: Yeah. I think it’s really good advise. I’m not convinced anybody is going to listen to it. I think he’s going to take the Porsche out. If it’s time for him he’s going to take the Porsche.

If you’re  deciding what car is taken, then you know that that’s a different issue but, yeah, I think psychologically you can learn. You can learn the same lesson on the daily time frame but with a lot less risk. At the same time, you could argue that it’s all your mistakes early on that actually make you a trader in the end anyway.

It’s very difficult to give people advice on things like time frames. I just try and always get people to think of the mindset regardless of how you trade. There’s always going to be elements that are hard to deal with naturally and whatever time frame you end up trading on, that is a lesson that you’re going to have to learn.  

Walter: Yeah. And those are lessons that we remember, aren’t they? The ones that we learn by ourselves, making our own mistakes. Not necessarily listening to what Ma and Pa had to say or what the old guy down the street said but just making our own mistakes. Sometimes, that’s what it  takes, I guess.

Darren: I think the idea in the question he said about, “Should I find some way of blocking off the lower time frame charts?” Things like that are actually really good idea. Not necessarily blocking off charts but he’s clearly noticed something that is an issue for him. He’s trying to put a plan in place to resolve that and that kind of thinking is really smart.

If you find that whenever you go on the forum — the new hot thread makes you change your trading system or something like that — then write a plan and to stop you doing that. It’s about spotting where you’re making your mistakes, what those mistakes are and then planning a way of dealing with that.

I think that the greatest way to improve rather than just continue doing what you are doing even if you’re losing and it’s not working out for you and you just keep banging away doing the same thing. You’ve got to step back. You’ve got to step back and assess where you’re going wrong and plan ways of dealing with it.  

Walter: Yeah, that’s right. Do you find it sometimes like it’s hard to see where you’re going wrong? I mean is that where journaling and stuff like that, you think that’s where the value comes in there?

Darren: Yeah, definitely. I think, initially, it is really hard to because I find it that you start to like yourself. What you do is you find ways of covering up your mistakes and you’ll give them a reason, “Ah well, I didn’t take that trade because of such and such” or, “I took profit early there because the news was coming out.”

You’ll find ways to kind of glossing over and covering up. You’ll start reporting any  wins instead of your losses. Really, that’s the kind of trap that we all get into at a certain extent, I think.

Walter: Yeah, I agree. I think that’s where, for me, the Forex Tester Backtesting Solution was invaluable because that’s what I was doing when I would go back. I can scroll back on the MetaTrader charts and trying,figure out if this system would have made money.

You know you do a lot of that and you say, “Well, you know that’s not really a valid signal because this happened or whatever.” But, you’ve got advanced knowledge of what happens after that.

It just colors all of your back testing and your decision making when you know that trade wouldn’t have worked out so you find reasons to discount that signal or whatever. Yeah, that’s a big one.   

Darren: Yeah. I say all the time that you have a rule set and you backtest it. And then, Monday morning you start trading and there’ll be a news release and you say “Ah, I’m not going to take this one because of the news.”

When if you backtest it, “No, no. It’s not the news at all.” Now, suddenly it’s like a significant thing that you should be thinking about. Trading does that to you all the time. I don’t think you ever get rid of that. You just get a little bit smarter at noticing when you’re having those feelings and you don’t act them out.  

Walter: Yeah, it’s so true. I’ve been thinking a lot about that because here’s the thing, you’re right. You do your backtesting. You have no idea when the interest rates announcements are when you’re going through backtesting 2002 data and then of all a sudden, “Oh well, you know this announcements coming out today so I’m not going to take a trade and we’ve got the non-farm payroll tomorrow.” And, “Ah, better not take a trade the day before that.”

You do all these things differently and yet, you know you have this beautiful system that you developed and it was all based on not taking notice of any of that stuff. And yet, we can’t help but do that. Over time, you get more and more aware of that.

What you have to fight is the real problem of having a situation where you take a trade, then the news comes out and it squashes your trade and you lose money.  Then you say, “See, I shouldn’t have done that.” That’s where I think you go wrong.

Trying to figure out the reason why that trade went bad when really what you should be saying is, “Oh! well that was an unlucky trade. It was and unlucky losing trade. That’s part of the system.“ If you can do that, you’re so much further ahead than most of the retail traders out there. If you can see it that way.  

Darren: Yeah. I think you know this is why I favor lower win rate systems because once you get it ingrained that you can still make profit from not winning very often — which takes time. You have to get through a few mental barriers of sticking to something for quite a long time.

But, once you got that ingrained, then it deals with all of those psychological issues as well. Because you’re just like, “This is probably going to be a loser but this is all I need to do to make profit so it doesn’t matter.” You put an end and it could stop straight out and it sets up again. And again you’re like, “It’s probably going to be a loser but I’m going to stick in again.”

Also, this kind of cumulative effect where because your winners are so much bigger than your losers, the actual significance of those losers tends to go down overtime as well to the point where they seem so small and insignificant.

The all other elements like execution in that certainly becomes a lot common. I’m not saying this is going to be like this for everyone but for me that’s what I found. I find myself now wanting to stretch my targets further and further and further away.

Because as I do that, those losers, and the execution, everything… The losers become less significant, the execution becomes easier. Everything seems to get a lot calmer even if you’re entering on a lower time frame.     

Walter: Right, and isn’t it interesting that one… When you’ve read those stories about the happiest country on Earth? Sometimes, I always chuckle because they have things like in Denmark, the Danes always win. They’re “Oh, the happiest place on Earth”. The secret is that they have low expectations and that’s kind of like the style of trading you’re talking about.

You just, “Ah, chances are this next trade’s going to be a loser.“ I mean that’s the most likely result. That’s a low win rate strategy. And the other thing that’s interesting about what you’ve just said is for the scalper, it’s the opposite.

For the scalper, the scalper has to execute on point or he’s dust. He’s done. He’s over. Contrast that with a high reward to risk ratio trader. It doesn’t matter. The execution is not nearly as important. Why? Because, you have these huge ginormous winners and you’re not relying on executing perfect little tiny winners all the time.

Darren: Yeah, I find that as well with my entries. I can be much more relaxed with my entry patterns. It doesn’t need to fit in a perfect box because I know that the point from entry to a winning trade so much goes on in between there.

News releases, Asian Quiet Sessions here in Asia,  London Open says 2 or 3 of those in between. There’s so much more information coming to the table before that entry point gets to an exit point. The actual precise moment I enter seems, “Well, I kind of not need to be in the right area. It looks pretty good. I’ll take the trade.”

Walter: Yeah, that’s great. That’s excellent. Ah, it’s good stuff. Thanks, Darren, for today. I think in a roundabout way, we’ve said it’s not that important the way that you approach your trading in terms of time frames. You have to define yourself and what’s important to you and know your limitations.

I suppose that in the end, it may not be that critical that you look at it in terms of time frame. You might want to look at it in terms of risk/reward. We’ve spent the last ten minutes talking about this.

Once you get a hand on your risk/reward and what you’re comfortable there, that defines what you’re going to look for as a trader. If you’re doing those short little quick profits, then you’re going to have to be on point.

Like Darren says, if your trading for this really high reward to risk ratio system with low win rates then you can. It’s not as critical. You can be a little bit more relaxed with the way that you approach it. That really takes the pressure off. That’s a great point.

Darren: Yeah. I definitely agree. I don’t think time frame is as important but I think the guy or girl who posted the question is looking in the right areas. They’re looking at perhaps the mistakes they’re making and they’re looking at planning to resolve those issues. I think they’ll get there.

Walter: Excellent! Well thanks for your time, Darren. We’ll see you in the next episode. Thanks.   

Darren: Ok, Walter. See you next meeting.

Walter: Bye.     

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SHOWNOTES