As children, we were taught by our parents to always follow the rules because they are going to get us to where we want to be. But did you ever think that maybe some rules are not really meant to be followed? In this episode of 2Traders Podcast, Walter and Darren talk about the importance of market perception and its relevance to your trading behavior, learning to trust your instincts, and how your trading system should be based on one key word: personality.
Also, Darren and Walter touch into answering a common question: Do I need to be very smart to become a successful trader?
Download (Duration: 16:58 /19.4 MB)
In this episode:
01:01 – how big is the universe?
03:29 – one simple idea
04:19 – a different point of view
05:45 – how do you keep track of it all?
07:06 – it’s like a videogame
09:05 – just question your trading
12:03 – a definitive answer
13:57 – a negative element
16:14 – what affects decision making?
The real discoveries are made by those who don’t follow the rules. [Click To Tweet].
Sometimes, it’s just how you perceive the market. [Click To Tweet].
There is no magic key. You have to learn to deal with the negatives. [Click To Tweet].
Walter: When you are thinking about your trading, don’t just restrict it to trading. Look at other fields, look at other things. What do they do in psychology? What did they do historically? Like for example, you can look at history and see…
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. Walter here and I’ve got Darren on the line. Darren, you have really an interesting topic for us today. I’m actually looking forward unpacking this because I don’t know where else it’s going to go. Let us all in on exactly you’re thoughts in terms of this.
Darren: I was watching the story of how we are able to measure the universe now. Apparently, now we’re at the stage where we can pretty accurately measure how big the universe is. As I was watching this, what was interesting was, from some sort of the 1700’s — along the way, we’ve made just key discoveries — or people have made key discoveries — that accelerates towards this understanding of the universe.
Obviously, it’s like a really, really complex question how big is the universe. What was interesting to me was that, these key people who’ve made these discoveries as we’ve gone along the way, they’ve done it by breaking the rules.
Each day is kind of an understanding of the rules of what we know. Each of these people have been able to apply original thought to that. In effect, they kind of ignore what is the status quo and think outside of the box. Their ideas have been fairly simple ideas but at the same time quite ingenious, obviously thinking in terms of trading.
Walter: That’s interesting, Darren, because I have always thought that if you look back in history those people who become the statues, the monuments, and the history books, even the scientists, if you look back those guys didn’t get to be a statue.
George Washington, for example, he didn’t get to be the founder of the country because he followed the rules and did what the king wanted him to do. This is the sort of things that I think is overlooked.
We teach our kids to follow the rules, to do the right thing, to do this, that and other. But then, we reveal throughout history those scientists and those revolutionaries and those people who’ve actually said “hang on, maybe it shouldn’t be this way. Maybe it should be this way. I think this is wrong and here’s why we should change this. This is a different way of looking at this.”
I think you’re really on to something here. This is really where if you look back, in any scientific field, you’ll find a whole lot of people who are just bearing down and scribbling and working hard on a really one simple idea.
They might just study the digestive system of some green newt that lives in the Amazon forest and that’s all they’re doing. Often times, they don’t pull in informations from other fields — like these biologists, they’re looking at the frog or the newt or whatever. They don’t really take in things from neuroscientist or from geologist or from — I don’t know what you call the people who study the atmosphere, atmospheric scientist or whatever — those sort of things happen all the time where we get stuck in this rot.
It’s not directly what you’re talking about but part of what you’re talking about here is that, the real discoveries are made from those who don’t follow the rules.
Darren: That’s it. You have to sometimes just take a different point of view. What you’ve been told is the right way to do something. In trading, as well, not necessarily the strategy you use or the method you use to trade but sometimes just how you perceive the market.
We are told that we need to know the cause and effect in the market to be able to trade, almost like you have to understand the market and then you have to understand trading. You have to join the two together and I think everyone goes down that route and strongly believe that you do.
I question that. Do you need to know why the market moves? Do you need to know the reasons that the price turned around? Can you just trade? Can you treat it like it’s a random generated computer game? Can you trade in that environment?
From a slightly different mentor point of view, it’s how you’re perceiving it and be profitable, and I think you can. I often think that people can get crippled by feeling that they have to understand the reasons for what the market does rather than just trading it.
Walter: Absolutely, this is the biggest concern that people have — non-traders, when they talked to me about trading. The biggest thing that comes up is how do you keep track of it all? Have you heard the news on what the Reserved Bank of Australia is going to do?, these sort of things.
Then they’ll send me reports on the banks and stuff gives you the forecast on what’s going to happen with the Aussie or whatever.
These sort of things that I push aside because my beliefs are that you don’t need to jump into all of that. Number one, you don’t need to understand all of the reasons why. Sure, the news makes the market move but you can see everything you need to see on the charts.
I know you’ve gone one step beyond that where you’re basically saying, you’re just trading it like a video game — wait for certain thing to happen on the chart and take every single one of them.
One of my friends, he was in Queensland and he was really a good scalper. He was very similar to that. It was like a videogame to him and he accumulated a lot of profit really quickly. Unfortunately, his mindset became an issue later and it kind of all collapsed. That’s what he was doing to get to that point. He’s simply looking at it like a videogame.
In some ways, some of the best traders — and I hope people understand this as the right way and don’t take it the wrong way — I think some of the best traders have some sort of low I.Q’s or even like kids. You teach a kid how to do it like a videogame. Those are the sorts of situations where being a really smart person doesn’t necessarily set you up for trading successfully.
You can overthink it, you can add too many variable, you can wonder about this, and you can tweak that. You’re doing a lot. It’s all based on your personality how are you going to approach this , how are you going to tackle it.
In some ways, just looking at it and saying “Okay, I’m going to approach this like a video game. When they come up at me, I’m going to shoot them”, that sort of idea. I think that often work.
Darren: Definitely. I think you have this perception of it being banks and guys in suits in Wall Street that puts a lot of people of who would perhaps otherwise be successful in trading.
Certainly, that way of looking at the market and trading works for some people. They’re comfortable in that environment and people… perhaps gamers and people when they’re playing computer games, they’re not thinking about how would the program or how can I outsmart the program.
They don’t think like that. As much as anything, they’ve kind of feel it and I think in my trading I use a lot of feel as well. It’s why sometimes I have difficulty explaining some of the last minute direct question about whether this is better or that? I find it really difficult to give them a solid answer on that because I don’t believe those answers exist.
I just like this idea of having original thoughts when you’re approaching your trading. You don’t necessarily have to throw everything out and start again. It’s really good to just question your trading.
Perhaps when you go through a day’s trading, looking back at all the decisions you made and why you made them, just questioning that and looking at it as if there’s another way to approach it. It’s really hard for people to do. Sometimes doing that, you can find little gems that just kind of turn things around for you.
Walter: Okay. That’s interesting, Darren. Can you give me an example because I’m interested in specifics of this sorts of questions that your student’s say “Hey, Darren, what do you think about this?” When you say “Well, I really don’t have any answer for you.” Can you give examples of why is that? I understand why, but give examples of some sort of those questions.
Darren: Common questions are: What time to start trading? Should I start trading at eight a.m. Frankfurt open or should I start trading at nine a.m. London open. For me, it would be really difficult to say which one is best. My thought process is if you tested it in a year and eight a.m was better, then it doesn’t mean that next year eight a.m is still going to be better — other things like managing trades.
My personal view is that when you come to a point where you need to manage your trade, you have — essentially, in my mind — got two options. You can move your trade to break even, you can take profit or move your take profit up to a point and profit, or you can just leave the trade as it is.
People think that I’ve got an answer to that at any specific time. In my thought process is that you’ll never know and it’s essentially a coin toss at that point. You don’t know. Some of those decision you have have to just go with the feel and people find that really hard to take on board.
Those are the main ones because number one that I’ll do is when I start trading, the first bar is I will go long or short at first bar. I’ve a break out or take. Then the question I get often is: if it breaks out long and reverses and go short, do you also go short? Again, it’s just a coin toss. It’s really what happens next.
Specifically with the way I trade, that decides whether you’re going to make profit or not and so many more complex elements on top of that. Like, how far it goes in that direction. Did you move to break even? A lot of those questions people really want answers for. I don’t think there’s a definitive answer and I feel a lot of those elements you need to rely on feel.
Walter: I think essentially, what you’re saying is “I strongly believe”, which is to you, the feel that you get is really coming from what you believe. For example, if you’re a trader and you have a really hard time experiencing a trade. Where in that trade, you made two hundred pips but right after you got ou, it accelerated for another six hundred pips without you.
If that is the most painful thing for you then that determines how are you going to exit from your trade. You’re going to have to use some trailing exit or some way of giving them extra breathing room. That is clear.
On the other side, what if it’s really really difficult for you to have a trade. Where you’re up two hundred pips and then by the time you get out of it, you only make a hundred and twenty pips and you lose those eighty pips.
Is that something that really, really eats at you? Which of those is harder to deal with? And depending on your answer, that’s going to determine the way that you get out of your trade.
To me, that’s a really simple concrete example of what you’re talking about which is it really depends. I don’t have the answer, Darren doesn’t have the answer. These sort of things come down to personality, what really matters to you as a trader.
Darren: Also, when you decide on either a or b, you don’t have to accept that both a and b have got consul and have negatives side to them as well. You need to learn what those are and then learn to live with those. Often, when you’re picking elements to your strategy that fit in with your personality, often people will expect to be a no downside slack. There’s always going to be a negative element to that as well. You need to learn to live with that.
Walter: Absolutely. Exactly, that’s spot on. What we’re saying, Darren, is that just like any trading system, there’s going to be cons to that. If I’m a reversal trader and I like to pin point those spots for the market reverses, sometimes I’m going to get blasted because I’m picking these reversal points during a strong trend.
Likewise, if I’m going to be a trend trader, sometimes there’s going to be reversal and I’m just going to think it’s a pullback. If I’m a breakout trader, sometimes what’s going to happen is the market is consolidating and is getting ready to breakout. Every time it makes a breakout — a false breakout — and I just get blasted by a false breakout up, a false breakout down. I’ve got a bunch of losers in a row because the market hasn’t truly broken out yet.
These are the sorts of things that happen and it’s not just relevant to exit, it’s relevant to everything. I think you really have that important thing here which is, not only you’ve got to decide “what do I believe in and how am I going to trade that”, but you also have to really bear down and tackle the issue of dealing with accepting and coping with the Achilles heel of your chosen method.
Of course, if you’ve got several… you’ve chosen methods so you’re really thinking here “okay, I know I’m a trend trader. I know that when the market reverses, I’m going to get into trouble.” or “when the market seems like it’s trending but it’s not really then it moves back into consolidation, I’m going to get into trouble. I’m going to lose on this situation but when it really trends beautifully, I’m going to do quite well for myself.” That’s really what it’s all about.
It’s all about allowing yourself the leeway, allowing yourself to be wrong, allowing yourself to adjust and cope with the negatives of your chosen approach because they all have negatives. No matter what you’ve heard on the internet, there are no magic keys in ace. There’s always some negative that you’re going to need to deal with.
Darren: Do you leave any element of … because here is something that I also include in my decision making. What has happened before, specifically with profit and loss. If I’ve had like a particularly bad round, I’m on a drawdown of the week — big drawdown — then that will affect my decision making on my next trade if it’s in profit.
I think it’s quite an original of thought in trading as well. We’re told that we shouldn’t let that affect and we should stick to our plan but I’ve made that work for me because what I’m doing when I trade is I’m not looking at the individual trade, I’m looking at a period of trades.
For instance, if I’m trading in a sixty minute charts and I’m thinking about the week so if I start the week badly, let’s say I’m a hundred pips down and then in my next trade is seventy pips. I’m looking at that profit but I’ve got there in context of what’s already happened, the loss that I’ve already made and what I’m trying to achieve over the week then, I will include that in my decision making.
Whereas, if it was my first trade of the week and it was on seventy pips, I may have left my stop loss where it is based on what’s happened before. This time, I think “okay, I’m going to cover some of those losses”. Almost like a sort of like a poker player would do. “Well, if he was really having a good run and then he started giving some back and he might consider playing more cautiously for a bit until things turns his way again.”
That’s not something that I have really seen discussed in trading terms when it comes to management. I think that’s quite an original thought. Obviously, there is a downside to that. You will make your next decision purely based on whether you have a loss or a win before.
Essentially, cut your winners short and let your losers run and get it completely wrong. I think that’s something that you can learn as well. I’m not really suggesting people do it. Again, I’m just trying to suggest that you can think outside the box and some of these ideas might work for you.
Walter: That’s it for part one. You’ll have to stay tuned and listened to part two when it becomes available. Just know that in part two, you’re going to learn all about the weird fund that made winning traders out of losers. You’ll also see, why you should pay attention to this one weird thing that other traders are doing and how these can help your trading.
You’ll see why the institutions such as hedge fund and banks are now changing the way that they recruit traders. You’ll also see, where you can get your best trading ideas from. This is a kind of weird way to do it but it does work.
I talked about the weird rainforest meeting, where two people met in the rainforest and how that led to completely new and profitable idea. Finally, Darren gets into the idea of gambling and where is he looking right now for his ideas about trading and why he is paying attention to this particular gambling game.
All these and more in the next episode, part two, of the Two Traders Podcast.