Do you know what you really want? Do you have an intense desire to win? Why do many traders want to feel like a winner?
In this episode of 2Traders, Darren and Walter dig into the issues that traders bump into when it comes to interacting with the market, including issues with trade execution, loss aversion, and information overload. The two traders also tackle an important psychological phenomena called the “recency effect” and how this can affect the decisions that you make.
Also, you’ll know in this podcast how building a stadium for a champion football team may actually help you realign your trading beliefs and goals.
Download (Duration: 19:29 /22.2 MB)
In this episode:
01:12 – uncertain endeavors
02:46 – a new stadium
04:21 – information overload
05:26 – human error
07:48 – pick and choose
09:01 – redefining yourself
11:47 – embracing the unknown
13:29 – a dramatic difference
15:01 – “why?”
18:22 – journaling lessons
You have to find your groove and just do it. [Click To Tweet].
Celebrate the wins, feel bad about the losses and let it go. [Click To Tweet].
Why must you feel like a winner? [Click To Tweet].
Walter: You know that moment when you get into a trade, or you’ve decided you are going to take a trade, and you have no idea what is going to happen? You have no feedback from the market, you are in the trade and you are just about to execute the trade. I think embracing that feeling of the unknown is really a good idea…
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: Good evening, Walter.
Walter: We are going to talk about traders and the issues that some traders have with execution. I have to say that I think all of us have these issues but where are these issues coming from, Darren? Where do this execution problems — if you can call them that — where do they come from?
Darren: I suppose ego’s probably in there, isn’t it? Fear is definitely going to be in there and greed is going to be in there. In trading, we suffer from those emotions more than in a lot of uncertain endeavors. But I think, really, we want to be right, don’t we?
Is that loss aversion before we’ve even enter the trade? I think we often get ourselves set up with the wrong mindset. We may well know that we can have losing trades but we may have a lot of experience of trading and having losing trades but it’s still very hard to deal with losses.
I think loss aversion is one of the biggest problem for traders and the best way to deal with it is to accept that it exist. Perhaps journaling about your losses, seeing them for what they are and seeing that they are not really significant in the long run helps you to deal with it.
Walter: The “recency effect” probably comes into place when you have something that happens to you — maybe you’ve had four or five, six, seven losses in a row — that may change your outlook in how you approach trading your system. Maybe you’re not going to execute simply because you think something is wrong and that you’re not doing what you should be doing because you had seven losers in a row.
There was an American football team, Darren, back in the mid-nineties they won the whole championship and they won it two years in a row. It came up to a vote where the city had to decide whether or not they were going to build a new stadium.
This is great timing for the team because the city had to vote to put a tax in, basically, to build a stadium or at least a large chunk of the money would come from the community. They had this tax that had to be approved.
Because everyone was so happy with the team — because they had won that championship two years in a row — the tax passed with flying colors and it wasn’t even close. Everyone voted it in and they build a brand new shiny stadium.
Well, if that had happened in any other time, I suppose that might not have been. In fact, if they’ve put the vote now, it might not happen. I guess, that’s the same effect that we see with trading where sometimes we get caught up in the recency and the reason effects.
What’s happened to my trading recently? It’s the same reason why people don’t want to go to a certain beach because there was a shark attack there last weekend or whatever. They think “Oh, there’s a shark out there and he’s going to bite me” or whatever.
That’s one thing I think that also leads to that and I wonder about just looking around, like socially, you see other traders or other people doing something and you think “Everyone else is buying silver. Maybe I should be buying silver now, too”.
Those are the things I suppose could play into where you know you shouldn’t be doing that because it doesn’t fit with your system but, because everyone else is doing it, maybe you feel like it’s a right thing to do. Everyone else is making money on this stock, or this currency, or this CFT, or whatever it is. That could also come into play.
Darren: People have too much information, as well. Too much information to decide when to enter and too much information to decide when to exit. It is hard to deal with all that information. It is like if you ask people a simple math question while also walking along, they struggle with it, don’t they? They have to stop walking so that they can engage their rationale for and make a good decision.
I just don’t think we have too much confidence in our ability to look at a lot of things, make a judgement call and do it repeatedly throughout the day. I put a new little simple trend trading system on the forum this week.
It would be interesting to see if people suggest adding stuff to that to improve the win rate. We have this belief that if we’ve got this more information then that’s somehow is going to affect the outcome and, really, all it’s doing is bringing more human error into play.
Walter: That’s right. We need to reinforce this car with more steel so next time it does not crumple when it hits a boulder or something like that. It’s sort of this idea that we can make it better and we can keep adding things that will do it, right?
Darren: Yeah, and maybe some people are better in executing than others. I know when I watched your webinars and I see you talking about your thought process and your process for entry.
To me, I would really struggle to trade that way but it seems to work for you and that might just be that the analysis gives you the confidence to execute whereas, for me it will work in any other ways.
You really have to know your own personality, as well, and develop an entry system that you feel comfortable with. You’ll find it easier to execute that system rather than trying to enter the way someone else does because you feel that that in itself is the particular edge. Do you know what I mean?
Walter: Yeah. In the end, that’s what you have to do. You have to find your groove, what makes sense to you and just do it. When you first start out, there’s a real temptation to bend your ear and change your approach because someone else who has more experience is telling you this is the way that you should do it.
Although that seems like that is the right thing to do, I think for a lot of traders, it’s not because in the end you won’t be doing that. You won’t trade like if Darren says “Do this..” and you think “Well, maybe. Okay, I’ll try that because Darren says so”. Or, I’ll say “Why won’t you try this because this make sense”.
What we’re saying really make sense to us. When you are trying to adapt too much and bend too much toward the way that someone else trades, I think that’s not necessarily a good thing. It’s just means that, later on you’re going to have to make the adjustment to go back to where you are and what you believe in.
For the people listening to this, if you really want to do well at this for a long time, you have to settle in on what you believe in and trade that way. It doesn’t mean that you can’t pick and choose.
Go through the buffet, find out how are you going to build your system and how are you going to build your approach. That’s great to do that, to try different things and taste different things, see if this is going to work or this jives with the way you see the markets.
In the end, if you’ve bend too much, if you really try to become a little Darren or a little Walter or whatever or whoever you listen to, I think that’s the wrong choice. Eventually, you’ll come to that but hopefully from the get-go, you can become aware of the fact that we all trade our beliefs. Everyone, every single person in the market, is trading their beliefs. If you believe in something strongly, that’s going to come out in the way that you engage with the market.
You should just acknowledge that upfront from the beginning and be deliberate about it. Make sure that you are aware of why. Why are you using that trailing exit? So, you believe in the extreme volatility of the markets and you believe the markets are going to go really far.
Occasionally, much farther than they should or than they’d be expected to and you want to take advantage of that with the trailing exit “Okay, that make sense”. These are the things, I suppose, that I would say you need to focus in on this as a trader. That is going to do a lot for you over the long haul so you’re not always changing and redefining yourself.
Darren: Another good technique that I heard, as well, was when you’ve had a particularly bad loss or a run of losses then your gut instinct is to try and get rid of that bad feeling by acting out and trading out so we can replace that bad feeling with a good feeling.
The technique I’ve heard was that when you take a loss or a string of losses, you should learn to just sit back and feel bad about it, allow yourself to feel bad about it. Whereas, what you’ll intend to do is trying to get rid of it and trying to replace it and remove that feeling. If you allow yourself to just accept that you feel bad and feel bad about it, then you are less likely to then make a mistake with your next trade.
Walter: That is interesting. I’ve heard that in the United States, for example, about forty percent of the people are clinically depressed. The reason I bring this up, of course, is because it is related to what you just said and that’s probably what you are thinking right now.
The reason why I bring it up is because I was listening to an expert. He’s basically saying “You know what? It’s actually okay for people to — it’s a natural part of life — to maybe not go outside as much and sort of retract from the environment. Feel bad and become really introspective and be sad and go through these periods”.
It’s not good if it’s prolonged and if you do it for twelve years or for lunar cycle or whatever. That sort of thing isn’t necessarily a good idea but it is a natural part of being alive.
That is something to take into consideration because, as a trader, you are going to have those high and lows. Some people are going to tell you that you need to sit there and it doesn’t matter if you’re up two thousand pips this week or down two thousand pips this week. You have to be at that robot and just keep trading.
That is not necessarily true. Maybe you can celebrate the wins and maybe you should feel bad about the losses and let it go. That is really an interesting piece of advice that you’ve offer because I think it makes a whole lot of sense that we would normally go through these things and that we should allow ourselves to feel those things.
I think that it also works, Darren, with that moment when you get into a trade and you’ve decided you’re going to take a trade and you have no idea what is going to happen. You have no feedback from the market but you are in the trade and you are just about to execute the trade. Embracing that feeling of the unknown is really a good idea like what you are saying with embracing the feeling of the loss. I think it is really good to do that.
To get comfortable with this idea, that I don’t know what is going to happen, and that makes me feel alive not knowing what is going to happen. It does not mean I am a gambler, it does not mean I am crazy, it does not mean any of that stuff. It just means that I am alive and what is happening right now is the unknown.
Who knows what is going to happen with this trade and this is all part of trading. That is really a good advice and I appreciate that you share that with our listeners. I think that is something that we should probably do more often instead of trying to jump back in, get revenge or whatever.
Darren: As soon as you enter a trade, you are instantly in this mindset that this is a winner. This is going to go to my target, is probably going to blow right through my target and give me a four hour instead of two hour. You automatically go into that mindset.
You are doing that at all stages of your trading. This is why you need to tune in to your feelings and examine them, ask yourself why are you feeling like that. What is the reality of that feeling? So then, when the unexpected happens, you are already tuned in to that uncertainty.
Again, you’ll less likely then to go on and make human error. We talked about listening to previous podcast. If you could just reduce half of your mistakes out of your trading, it could make a dramatic difference to your bottom line and you should, in your journaling, be making notes of how many mistakes you make. You should see, as you progress and become more experienced as a trader, you should see those human errors reduce.
We will go through at the start and it does seem to stay longer than it should. It does feel like you are never going to be able to get over it and stop making these mistakes. With this simple techniques and just being aware of why you’re thinking what you are and why you are making the decisions and acting them out in the way you are, then you can progress really quickly.
Walter: Absolutely. You’ve really highlighted the important piece of this, Darren, which is when you say when you take that trade and then something happens and you’re asking yourself: why am I feeling this way? This is one of those critical pieces of trading. This is one of those puzzle pieces that come with experience that you know, “Ah, I get it now.”
Focusing on why am I feeling that way? For example: why must I feel like I am a winner? Why do I have to have a high win rate? Why must I end the week on a positive note? Why must I close my trades out before I go to sleep? These questions, when you’re asking yourself “why”. I think that’s an important piece.
One of the things that we have to do as traders is we have to decide. Are we going to be the type of trader who really wants to win all the time and probably win rather small? Or, are we the type of trader that’s okay, losing a bit more but winning really big when we do win? These are the sort of things I think that you need to ask and really critically examine this. I think “why” is one of those really important questions for traders.
In the end, I suppose, Darren, when it comes to execution, it is important to know what your goals are, know who you are as a trader, know what are your approaches. Understand that your interaction with the market is likely to give you highs and lows and that is not necessarily something that you should fight against.
It really comes down to learning about yourself, learning from your experience with the market, and trying to execute as best you can. We’re all going to make mistake but I think if you keep a good record of those, that is going to help you also to identify some of these reasons why maybe you keep falling into the same pattern.
For example, like you say, if you have a journal and you follow in journal — it takes time. I mean, one of the things that is nice about journaling is that it helps you clarify your thoughts but the other thing is you know now you have a record.
You can go back and look at “Okay, eighteen months ago, I noticed that every time I felt flustered or if I didn’t feel like I have enough time because I was racing through things, I tend to make mistake with my trading” or whatever it is.
These are the things that your journal can highlight for you if you are very vigilant and you are very religious about using your journals. When it comes to execution, I think it is not just about the execution, it is also about understanding who you are and how you relate to the market as well.
Darren: Any of those actions where you are trying to execute your strategy, there’s going to be an emotion behind it. You are going to be using whether you are sticking to your plan or not, there is always going to be an emotion attached to those actions.
If you study that side of trading psychology and the emotions, then you are much more likely to execute your trading plan effectively.
Walter: Exactly. I have one more question for you, Darren. Did you journal back when you first start trading or is that something that you’ve been doing? I guess my question is where you journaling as a trader when you were not consistently making money?
Darren: No, I wasn’t. I journalled by accident and it was not my intention to be journaling my trades to improve. What I was doing, actually, was writing threads on forums. That was then something that I could refer back to and look at what I was thinking, what I was saying, and why I believe in it then.
As I improved, I could look back and see where the mistakes I was making. By just starting a strategy thread on a forum was in effect, my journal and I was writing my feelings and my experiences down.
Walter: Right, so that is how you came up on it. I didn’t know that. That’s interesting.
Darren: Yeah, because I’m lazy. I’m really lazy, I am the world’s laziest trader. It’s definitely a case of do-what-I-say-not-what-I-do. I know now I could’ve improved much quicker if I am taking some of my own advice.
Walter: Right. Yeah, that’s right. Cool! Well, thanks for the session, Darren. I really appreciate it. We will see you next time. Thanks a lot.
Darren: Okay, Walter. Sure!