Archive for the ‘Trading Psychology’ Category

How to Profit From the Irrational Behavior of over 92% of Day Traders

Thursday, September 23rd, 2010

Today we arrived at Caesar’s Palace in Las Vegas for the 2010 Futures and Forex Expo.  As I was walking around the casino floor, I couldn’t help but think about the ironic similarities between the casual gamblers and most day traders.

The correlation between gamblers and most day traders

There was a guy sitting next to me at the Blackjack table; I could see the hope and anticipation in his eyes.  First, he gets a 7 which doesn’t get anything but a mild frown.  Second, he lands a 4.  His eyes light up like a slot machine that just hit a jackpot!  As a fellow “participant”, I can’t help but cheer him on when he doubled down.  Boom, the dealer slams down a King.  ”21 baby!”, he shouts.

It wasn’t a split second after his big hit that I realized how ridiculous his (and my) enthusiasm was about the prospect of making money at the Blackjack table.   Sure, one can play a strategy that has the best odds… but ultimately, the house has the edge.  After all, the Vegas strip wasn’t built making gamblers rich.  Some people don’t even know the rules of Blackjack, let alone have the confidence that they’re playing a winning strategy.  Yet some still have this unrealistic hope that they’re going to make a fortune sitting at that table.

day traders

Almost every day I talk to traders who are day trading FOREX or swing trading e-mini futures, who don’t know if their strategy has a possible positive expectancy.  Some traders know their trading system isn’t winning, but out of sheer desperation and not having any better options, continue to risk their capital.

Now I’m not bashing the excitement of gambling or denying the fact that some people make money gambling.  In fact, next to poker, Blackjack is my favorite “training game” to get me ready for trading.  I don’t sit down expecting to quadruple my money (even though it’s happened more times than once).  No matter if it’s trading eminis or gambing, the end result is the same: to make money.

 The only way to run your business like a successful day trader

So, I think we should all take a step back and realize the only true way to become successful at this game of odds.  We have to become the house!  It’s vital that we find an “edge”, or something that shows you a profit potential.  Now I’m not talking about just over optimizing for historical conditions like the piece of junk trading robots.  I’m talking about using a trading strategy that gives you a statistical edge over other market participants, properly managing your risk and profits, and developing your skill to execute your strategy in the live market.  It’s easier said than done.

The market needs participants with the “gambler” mindset.  In the end, it’s the emotional decisions of the irrational traders that feed the small minority of profitable day traders.

Posted in Trading, Trading Psychology | »

Fear and Greed – A Traders’ Best Friend?

Thursday, May 20th, 2010

What do you think is a stronger emotion, fear or greed?  Let’s answer that by looking at a few examples…

Imagine a stock broker who was doing his job in during the tech boom around 2000.  His job was probably pretty easy, right?  From his perspective, everyone wanted a piece of the pie.  Typically, when the general public hears of a fast and easy way to make money, they’re usually quick to jump on the band-wagon to make a quick buck.  However, the stock broker still has to make an effort (sometimes with outbound calls) to get people to invest with his company.

Greed may be a strong emotion, but I think the fear of loss is much greater.  Here’s why…

Now think about that same retail investor, who was probably uneducated in market dynamics, when the bubble started to burst.  As prices were falling faster than a lead filled balloon, who do you think was being “proactive” then?  My guess is the stock broker didn’t have to make any outbound calls.  As a matter of fact, I’m willing to bet his phone was ringing off the hook with people trying to pull their money out of the market.

I think this S&P 500 e-mini daily chart from February 2010 up to May 2010 gives a solid example in the differences in fear and greed.  You’ll notice how it took almost 3 months for the market to gain about 180 points, yet it only took 8 days (about 9% of the time) to lose around 90% of the gains.

Let’s break this down from a perspective of two groups: professional traders and retail traders.  In my blog post on 05/05/10, when the DOW had a massive drop of around 1,000 points, I show where the retail traders got net long the market right around the same time the pro’s got net short the market.  If you look at the COT Net Position indicator over time, you’ll see a pretty steady inverse correlation between the pro traders and retail traders.  It’s almost like the money gets transferred from the retail traders to the pro’s.

As professionals, I think one of the best things we can focus on is what the other 98% are thinking… and do the opposite.  If we can recognize the actions and perceptions of the masses ahead of time, we can usually stay on the right side of the market.

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Posted in Trading, Trading Psychology | 1 Comment »

Trading Psychology – Knowing When To Push It

Tuesday, May 18th, 2010

There’s a lot of great information about Trading Psychology.  One person whom I have a lot of respect for is Dr. Brett Steenbarger.  His blog has been instrumental in developing a proper trading mindset over the years.

Apply Trading Psychology for consistent profits

So, after a single negative trading day last week, I’m back strong… I had an idea about what the market could do today based on some longer term charts.  Just to reiterate, I don’t care what happens intra-day on the monthly, daily or 60 minute chart.  But it gives me a good high level overview that can create a nice objective bias.

How we apply Trading Psychology in our professional trading group…

As I mentioned in our trading room this morning, you have to use trading psychology by learning to think one or two steps ahead of the market.  Basically, look at trading like a chess game.  Here’s what that means to me…

When I’m looking to get in a trade, I want to see the trade hit my target before I even get in the market.  If I can’t see the potential for the trade to work out, then I just sit on my hands.  Doing this gives me really strong conviction in my trade, and the confidence to hold for the target. 

A few students asked me how to develop a strong trading psychology and the ability to “think two steps ahead of the market”.  And the simple answer is this: practice, repetition, and burning those damn images into your mind.  You have to be able to close your eyes at any given moment and “define” a winning trade in your own mind’s eye.  I think about this stuff so much that I dream about it… dead serious!  And in some dreams I can actually feel the emotions and physical sensations of what it’s like to be in a trade.  If you gain control over trading psychology, then your day to day decisions making in the live market will become so much easier!

Learning to manage your trading psychology and mental state game is a process

There are no short-cuts…  Only dedicated study to develop your craft.

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Posted in Thoughts, Trading, Trading Psychology | 3 Comments »