Naturally, we love it when things go our way. However, basking in your success may not be healthy for your trading.
In this episode of 2 Traders Podcast, Darren and Walter shed some light on the subject of seizing fortunate trades, popping the market bubble, and building your trading confidence.
How long can you be right? How long can you stay lucky? According to Walter, those questions are essential when examining your winning streaks. Darren advises to trust your instinct and take a close look at the edge for your system.
Also, in this episode, you’ll hear about the entrepreneur with a weird approach to buying and selling – he used his skill to move into a Hollywood-star house near Malibu. You can use this scheme in your trading as well.
Download (Duration: 27:24 / 31.3 MB)
In this episode:
00:53 – seize the moment
02:51 – a gut thing
04:29 – three months into it
05:52 – bizarre events
07:22 – tail of lucky streaks
10:08 – discretionary decision
11:02 – a mental switch
13:44 – major catastrophes
14:23 – the real monster
16:03 – what’s always true?
19:28 – it’s a different world
21:37 – hyperbolic discount
23:30 – find that edge
25:09 – least comfortable
26:02 – greed and ego
Walter: How long can you stay lucky? How long can you keep running the table and keep rolling these…
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. Darren, today we are going to talk about what happens when things are going really well with your trading. What are your thoughts on this?
Darren: I have heard quite a few experienced traders with a long track record and a lot of experience in trading. One of the key things in trading is to be able to seize the moment and know when the opportunities are really good and go all in.
A bit like a poker player would do, I suppose. I’ve been thinking about this personally. The last three months of my trading have been going very well. The temptation for me is I am in a zone at the moment.
I can’t put one reason why it is going particularly well. It is a combination of things: the right market condition, I am making good decisions, maybe a little bit lax in my way as well. Maybe my strategy right at this moment is particularly suited for the market conditions.
The question is when this happens should we, in that moment, should we go all in at our risk and try to capitalize on the current conditions? Or, should we — is this a sensible thing to do to — just stick to your plan, your usual money management and risk strategy and stay consistent?
Walter: It is a fair question. It is related to the question: when we have a drawdown, do you reduce your position size or do you try and get it all back? During a drawdown you up your position size, kind of the inverse of that, isn’t it?
Darren: Yeah and I’ve heard many traders say that. If they are starting to lose money, they keep reducing their position size until it comes back. It does bag the question. I mean, what it comes down to, I think a lot is why you believe that you are winning?
If you believe that it’s really more down to your performance and the fact that you are just in the zone and you are reading the market particularly well, your strategy well, and there is a gut thing going on there, sort of subconscious pattern recognition, and you are just in tuned with your trading strategy if you like.
Then if that is true, then maybe you should make the most of the moment and increase your risk. The obvious thing to do would be to do that but, perhaps, not to do it too so aggressively that it could all blow up in your face.
Walter: I don’t think that it is a good idea. Personally, I think that, essentially, any win streak or losing streak you have is a function of your win rate. If you’ve got a higher win rate, you are more likely to have some really nice win streaks. If you’ve got a lower win rate, you’re more likely to have some pretty painful losing streaks.
Two traders I know, one trader who spends a lot of his time doing technical analysis on traders — his group of traders that trade for him. He would plot the 10 and the 20 moving average. This is sort of where you are going as a trader, what is happening with your result, basically.
What he found is soon as the 20 moving average, so to speak, crossed the 10, it was time to sell. Sell the trade, get out. This trader was due for some reduced performance — and our friend, he’s got a lot of people asking questions in the forum.
He’s been really helpful at this time but what he does with his traders, he knows that three months into it — it is interesting that you say that “three months” because he knows that three months into it — he expects his traders to have a good way of a full back down to earth and that is when they are off.
They only worked for three months for him and then they are done. Two people have looked at this quite closely. Basically, have come to the same conclusion which is once you had a hard streak and you are feeling really, really good about yourself, that is probably the best time to pull back.
I am going to go with the data on this one. What are your thoughts? Here is the thing, you can make a lot of money, it’s like when there is a bubble in the market. It is like that. If a bubble is happening in the market, you can make a lot of money by trend following that bubble but you’ve better get out at the right time.
If you don’t, way it pops. It is like the game of musical chairs. Everything is all over now and if you can’t find a chair, you’re done. That is the way I look at it. It’s like of a reversion to the mean sort of thing. That is how I look at it.
Darren: I probably fairly agree with you. It’s the right thing to do here, personally. I know long term that if I stay doing my normal thing then, I’ll always be right except for some really bizarre events that goes horribly wrong.
I feel fairly confident that if I stay within my normal risk and trading that, long term, I will be alright. So I think, really, if I did do it personally, it’ll be more a case of greed and ego and anything.
I am just always interested in things I think, for some traders, it might soothe them especially if you are fairly discretionary on your entries. At some point after a long period of time, you’re going to get to a stage where there is going to be a lot of trades you take and then there is going to be trades where you just know in your gut that this is a great set up.
Even after you enter, perhaps it feels even better that it should add to your trades. I suppose that would be a style of trading in itself rather than in something that you would just decide to do because you’ve had a good run.
I’m not going to agree with you here. I am just going to stay in my normal risk thresholds and just continue doing what I have always been doing. Interestingly though, August I ain’t breakeven. Maybe you are right, maybe I’ve just come to the tail of my lucky streak.
Walter: It is interesting, the things you bring up, because you can be right. George Soros talks about this a lot where when you are right — that is the time when you are absolutely, one hundred percent convinced that you are right — that is when you needed to be a pig.
You’ve seen it in the movie “The Big Short.” I know you’ve seen that movie.
Darren: Yup. Great movie.
Walter: Yeah, it is a great movie. These guys are right but, how long can you be right and lose money? The market can keep going longer against you even though, ultimately, you are going to be right.
The great thing about being a bear — a strong bear or even an apologetic bull — is that essentially, you are going to be right. Eventually, the market is going to come around and agree with you. The issue is how long before you go bankrupt if you go really hard on your position like some of these people do.
To me that is the real thing here. It is related to what you are talking about because how long can you stay lucky? How long can you keep running the table and keep hitting, keep rolling these sevens or whatever, I don’t even know. Do you play crops? Have you played crops? I’ve never played crops.
Darren: No, I’ve never played it.
Walter: Okay, that is a bad analogy there for two guys who’ve never played crop. How long can you keep rolling it? The other thing that was interesting to me, Darren — and I’d like to dig into this a little bit — which was you are talking about earlier — because I find this idea fascinating and I think a lot about it — which is you said something like unless the market is doing something highly unusual or bizarre or acting strange… So, how do you know when that is happening?
That is related to what we are talking about here where you are having a really good streak and you do really well with your trading. The other side of the coin is what if things are going really bad, how do you pinpoint that as market related?
Darren: Usually, I just use feel. There is no avoiding it before. There is never an opportunity to avoid it before it happens. At some point, you are going to feel that pain of an extended losing period.
I had one quite recently with coming up to Brexit vote in the UK because I was trading mainly the GBP/USD. It was like an extended period where it was just very difficult and even making. There was just no breaks at all.
At some point, you just have to make a discretionary decision: “Okay, this is not working. I need to do something”. For me, I just moved to different instruments and I moved up a time frame.
Obviously, it’s not going to work for all but that works with my strategy. My strategy is easy to do that and, obviously, if you trade it in different way, there would’ve been a different answer to the problem.
You’ve got to listen to your gut every now and then and the real skill is learning when is it a particularly unusual market or particularly bad market, when is it just the normal course of your trading strategy.
You do not want every time you have a losing day, it changes then that’s probably going to be unproductive. You need some mental switch that says “This is not unusual or this is not normal, maybe I should do something to reduce my risk. Stop trading, have a break etcetera, etcetera”.
I think you can only really get to that by time and experience. When they say it takes 10,000 hours for you to learn to be a trader, I think it takes 10,000 hours to learn to trade and then maybe another 10,000 to learn to listen to your feelings and make good judgment calls on what your gut is telling you.
Walter: Absolutely ,and we are definitely not setup to know that. That is something that you can possibly gain with experience. People are not set up to know when that is going on. I don’t even know, I mean I think about this a lot.
Is it possible that the markets are doing something unusual or, is it just normal for the market to sometimes do these weird things? In other words, you’ll hear people say things like “Oh, the markets are so much volatile now than they were in the 1980’s” or, “The futures market have changed with automated trading and all the algorithms and blah, blah, blah”.
People are saying stuff like these and so my question is, is that really true? I mean, sure you can have a look at the chart and go “Look at this, this candle is much wider and this and that”. But, I just wonder if it is not something that we are trying because we are so good at seeing patterns.
I trade with patterns, we are so good in seeing these things and putting them in the boxes and categorizing them and making these mental shortcuts. A whole mindset is in and I spent a lot of time thinking about this related to trading.
Everything we do… Really, the way that we think is made easier on us because we spend so much of our energy sending that to our brain. Our brain takes up 20% of what we eat, is burned off in our brains.
We’ve got to have these shortcuts. I guess, I just wonder, is it really the taste that we can stand back and look at something that happened in the market? Otherwise, we say “Okay, that was weird”.
Or, we are just making up a story after the fact and saying this get stuck to the whole idea that Nassim Nicholas Taleb talks a lot about with The Black Swan and how we often will have these problems or these major catastrophes and things that comes straight up at left field and we explain them away.
Then we create a story around it and say “Well, this is what happened”. Is that really true? I don’t know. It is tough for me to try and get my head around this. The only best thing I can come up with, in terms of how do you counteract this, is to try and come up with very, very simple rules in your trading.
The fewer degrees of freedom you have, the less likely that you are curve fitting. Curve fitting is really the monster here. If the markets really do change and then if you overfit your system to pass data then, you will see it fall apart in the future.
Now, if you use really simple robot’s instruments then, that’s unlikely to happen. That is why if you carry your hammer around, you can do a whole lot of things with that hammer. You can bash things, you can break things, you can pry things open, you can punch a nail into some wood. You can do a lot of things with the hammer.
If you carry a USB cable around, there’s not a lot that you can do with it. You know what I mean? That is the way I look at it. It is just fascinating to me, as traders, how we view this idea that “Oh, okay the markets have changed now”.
The only solution that I can come up with is we’ve got to decide we are going to trade a very simple way and if we trade in a very simple way with a very few rules, then it‘s most likely that those rules will hold up in different “market condition” as the market “change”. That sort of thing.
Darren: I have a greater view a hundred percent there, Walter, and I think your main trading idea has to be something really simple and I tried in the sort of development of how I trade. I try to say “what is always true?” not this weird anomaly things like every Monday after a big move, Friday if the range was less than a 120, then we should get… You know what I mean? If you worked on these weird anomalies, they’re unlikely to be robust in the long term.
What’s always true? What’s always going to give me an opportunity and then I am going to build my strategy to try and make the most of those opportunities. For me, the one thing that remains true always is that markets do this random work in every light.
We have consolidation and then price moves, that was the pattern I look to build a system to trade rather than just weird anomalies that very rarely stand the test of time. This is why when you listen to people who have worked or working in these places where they use very complex algos, they’ve got use of computer power.
They’re the smartest people in the world and they are constantly revising their data because they know that if you just find one little edge and rely on that repeating and don’t continue to recalculate your data then, it’s not going to remain. It is very unlikely to remain.
Obviously, as retail traders, that is the worst route for us to go down because we are unlikely to have that. The one trader I was listening to said that they spent three million dollars developing their system and their algo.
Very, very few of us have got that money and time and expertise to throw it so, why try and compete with them when you have to try come at it from different angle and that is what I’ve tried to do.
Walter: Here is the thing, this is what some traders out there are thinking right now, they are thinking “I’ve got to do what they are doing because that’s what makes money”. How do you fight that because there is that feeling that some traders are going to say that?
They’ll going to “Well, the hedge fund don’t trade the daily chart” or, “The banks don’t do this or don’t do that”.
We’ve got to follow the suit. How do you fight that? Some people are thinking that right now.
Darren: Do you want to go against the hedge fund? Do you want to play with the hedge fund or do you want to be contrarian to them? Do you want to try and compete with all of that expertise and money that they’ve got?
I certainly don’t. I want to be like I don’t exist in the market because I am doing something so far left field to what they might be doing that it does not affect me.
Walter: Exactly, you are not competing against the hedge funds. As a retail forex trader, what you are doing is you are competing against the retail forex traders and you know very well that the brokers are doing a great job at pulling people into this game.
You have no idea what they are doing. All you have to do is be able to find money from those books, that is really what it comes down to. You are not competing against Goldman Sachs, you are not competing against Bank of America or Credit Suisse or UBS or what… Have you?
What you are doing is you are competing against those other retail traders who are in this alternate universe. I hate to say it’s not that difficult but it is a different world. You do not have to emulate those people who are spending three million dollars to figure out what the Chaos Theory can be applied to the thirty thick EUR chart.
You don’t even have to go there. I find it funny when I hear traders say these things that “Oh, well the hedge fund do this or the banks do that”. The assumptions, of course, is that “I must do that because these are the people that are making the money so I’ve got to do what they are doing”.
That was not true. There was a guy — this is actually a funny story. There was a guy in Los Angeles, I think back in the 1970’s, and so he lived next door to all of these movie stars and directors in this big giant house right on the beach. It was not actually in Malibu but it was near Malibu.
What was interesting was what he did for a living. All of these other people who were in the entertainment industry or whatever, and they were making money by, basically, through movies.
Do you know what he did, Darren? Do you know how he made his money?
Walter: Okay, drum roll… Basically, this guy would buy things and he would sell them. What he would normally do is he would write a letter to someone and go “Look, I know you are selling your car, or whatever it is. You’re trying to sell it for $20,000 but I’ve only got $16,000”.
He would actually send them a cheque. “Here, if you want, you can have this and I’ll be happy to do the deal with you” or whatever. At one point, he even bought a huge tank from the army.
He is buying all these things that nobody else but he would always buy them at a discount. That was his thing. There was a principle that he was using there when he gives you the money and said, “…Because you have to send the cheque back” – – this was back when people are using cheques — “You have to send cheque back to me and say no”.
He knew that was a difficult thing for people to do because that’s related to our cognitive bias called “hyperbolic discount” which is, basically, you don’t want to give up what you have now for something possibly more in the future. You just want to keep that.
He was operating on that. All he was doing was buying stuff cheap and selling them at more expensive price, whatever he can get his hands on, and he built up his little empire that way. I find it fascinating that it is the same thing that you are talking about.
We are doing something completely different to what the others are doing on the blog. All these funds and banks are operating in a totally different way. Whereas this guy was doing something completely different but he still have the same house that all the movie stars have.
Darren: He was a really smart guy because he was thinking out of the box and he was thinking of the psychology, really, of the people who were selling the items. Probably, he would’ve have made… He was a good trader.
Walter: Yeah. He was, essentially, a trader although, probably, he did not think of himself that way but that was exactly what he was.
Darren: That’s probably the way that we, as forex traders, should think of ourselves. Maybe that is the problem. We see ourselves as retail forex traders and we read the retail forex trader book and we think that that is what we have to do to be retail forex traders.
Actually, what you need to do is you need to read the book and say “Yeah, there’s some interesting stuff in there. How am I going to find the edge knowing that is what everybody else’s is doing?”
If you follow what everybody else is doing then, you’re going to find it hard to have an edge. Moreover, I suppose that’s easier for bigger accounts to exploit if they know what the majority of people are doing. You have to read the book but not necessarily follow it. You need to find that edge.
Walter: When you take a trade thinking about what the people on the other side, the traders, are thinking, I think those are really useful things so you go and say “I’m going to buy here”, looking at this chart and thinking about “Where are the losers here?”
Like, if I’m right, if this is going to be a winner, what are the other people thinking? I find that kind of the usual way.
The other really cool thing to do is to just flip the chart. As soon as you have sell biases or buy biases, if you’ve flipped the chart around and see it in a different point of view, that is another one that can work for you.
Darren: The thing is you are going to be told when you are doing something a bit left field because whenever I take an entry, whenever I take a trade, it feels slightly uncomfortable.
If it fell perfect to me then I’m starting to question why it feels perfect. It is probably for the wrong reasons. For me, if something feels uncomfortable in trading, it’s usually because I am making a good decision.
Holding on to a trade, perhaps, when it feels uncomfortable for hold on to it longer. That is usually because that is what should you be doing. The trade’s going your direction and there’s a lot of profit there and you should make the best of it but that feels uncomfortable.
Your body is going to tell you when you are doing these things and it’s likely to be be an uncomfortable feeling.
Walter: That’s what they told the Turtles. When it comes down to when you’ve got to take one trade, take the one that’s least comfortable because we are not really geared up for finding the right spot to take a trade in the markets.
We are usually getting it all wrong. Alright, so Darren, are there any kinds of closing thoughts here? I know we’ve quite kind of meandered around here but are there any thoughts you want to leave us with?
Darren: The initial topic was whether you should capitalize on a good run and I think, really, the answer is as often down to the individual on how you trade. For me, personally, I should stay just consistent in my trading because my edge to wrap things up is most likely a bit of greed and ego.
Walter: Right. And I would say, if you’ve got really a great win streak, it’s probably more likely that you should be pulling back, more than anything. But, if you like this idea of really capitalizing on a hot streak, the way to do it I think is by the trade.
If you’ve got a really good trade, adding to a winner would seems completely uncomfortable to most traders. That’s the way to do it. Most traders are more comfortable adding to a loser. That is another story.
We can probably talk about that in a different episode but to me, it is crazy but, that’s the way we think. Generally, is that if we’ve got this really great idea for a trade and then market goes against us, we will just add some more.
Now it is in even better priced for us to take that trade. That’s the way I capitalize on a lucky streak or a great win is to just add more to your winner. That’s how I see it. Thanks for your time, Darren.
Darren: Cheers, Walter! I’ll see you next time.