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

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

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.

SHOWNOTES

Against the Gods: The Remarkable Story of Risk