The Inner Game of Trading

Good quality thread AO, totally agree about making yourself uncomfortable. I don't know if it's a deliberate reference or not, but the "inner game of tennis" and of golf is one of the most influential sports psychology books ever written. His genius was in rediscovering what had been known a few thousand years ago; that the way to master any skill is about how you learn, and as you get older, you create habits that don't necessarily serve you in the way you hope they might.

I'm guessing you might already have it in mind to post on it so I'll spare any details but to anyone who's interested, it's a great practical book.

Are you writing a trading book?

The greatest enemy will hide in the last place you would ever look - Julius Caesar, 75 B.C.
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Believe it or not, most of the time "free" will is just illusion! You think you are in control of the situation, but you are not. The little "man" inside your head makes the decisions for you!
Are you aware of your own behavioral biases? You must be aware! Because this is the only way to take counter measures so you can protect yourself from yourself. Also the understanding of the biases is a very good basis to build a proper methodology/strategy because you know how the crowd will react in certain situations. (To anticipate the actions of the crowd is not only the best way to trade, but pretty much the only way for the retail trader to make consistent money).

The behavioral biases lead to irrational decisions and actions.

The behavioral biases are the major reason for the formation of market bubbles and market crashes (boom and bust)

Now, I'm not going too much down the rabbit hole on this topic (it's too long and complicated to discuss in a forum) for complete list and details and more info check here. https://en.wikipedia.org/wiki/List_of_cognitive_biases


In trading these are the most important. (Your biggest enemies)

Overconfidence Bias (Already explained in details in the first post.)

Confirmation Bias

Bandwagon Effect

Gamblers Fallacy

Status-Quo Bias

Negativity Bias

Loss-Aversion Bias

Now I'm only going to focus a little bit on Confirmation Bias" and "Bandwagon Effect".
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Confirmation bias is the tendency to search for more information to support your view or ideas. Also is the tendency to ignore information if it goes against your view.
For example:
if you search for more technical info to support already good idea/setup.
if you search for more info to support bad (losing) positions....
if you search for opinions from other traders to see if they have similar views on the market.

If you do these things - you are a victim of Confirmation bias!
It's one of the main reasons why people miss good opportunities, and hold on to losing positions too long.
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Bandwagon Effect is the tendency to follow the crowd, while ignoring the logic. (You do something just because everyone else does it). If so many people do it, it can't be wrong.....
Its a search for safety. "Herd mentality."
In trading this is often the tendency to search for trends, and to chase them. (Also the chasing of news and the chasing of breakouts.....)

The bandwagon effect is closely linked with confirmation bias.
It is the main reason why most traders and investors are so good at buying highs and selling lows.

Without proper training and a solid framework (strategy/method), most people tend to lose their minds when they join the crowd.
When you join the crowd - your intelligence drops by 50%
When you join the crowd and you risk money at the same time - your intelligence drops down to 20%
And when you are in a losing position together with the crowd (during panic or market crash) - your intelligence drops to 0% and you freeze! You'd be at the mercy of the market, or until the moment when the loss (and the pain) is so big that you just can't take it anymore.....and then you close the position.
(Usually you'll exit exactly before the market reversal).





Now, even the best traders will buy the high or sell the low from time to time. It happens....It's OK to be wrong, but it's NOT ok to stay wrong!
That's why we use stops. Physical stops and mental stops.
The mental stops are excellent way to train yourself and to exercise your free will. It really goes against human nature to cut losses fast. And anything that goes against human nature is potentially a good thing in trading.

Learn how to recognize your own behavioral biases and just go against them.
At the same time learn how to exploit the biases of other people (the crowd)
Try to anticipate the irrational actions of other traders. The fear, the greed, the unfulfilled expectations.. You dont have to beat the whole market, only the dumbest part of it. (This is the only real edge you will ever find!)

When you spot a very good opportunity - do not wait, and do not search for more confirmations. Act NOW!
Do not search for opinions/signals from other traders. Use your own mind.

Buy where almost everyone is selling (at the bottom).
Sell where almost everyone is buying (at the top).
Cut losses quickly.
Add to winning trades.
Fade breakouts.
Fade range expansions.
Fade the irrelevant news.
Fade/ignore the analysts.
Fade the people who fade the strongest trends/news.

You have to push where it hurts the most!
Destroy your inner enemies.

This is an important topic being discussed here.

I agree with most of the things that have been written. Especially that "The little "man" inside your head makes the decisions for you!" I think our subconscious makes MOST of the choices in life/trading and our conscious mind just finds the reasons to justify them. Unless we understand our subconscious we will never be able to make customized, sustainable trading/money management strategies.

I just want to share the simple money management strategy I follow, which I read somewhere and is working nicely for me. My trade lot size depends on the levels of my trading account size. For example, if I am trading X lots when I have $1000 in account, I will start trading X+1 only when I reach above $1100, then X+2 when above $1200, X+3 above $1300, so on. Now, if I get below $1100 due to some loss or a withdrawal, I will again start trading with X+1 and work my way up.

I know this is a very basic strategy ( I am a small part-time trader) but it has helped me in checking myself during rough patches. Which has helped me immensely. If anybody else can share some of their strategies that have helped them control/bypass their bad urges, I would truly appreciate.

Thanks to you for sharing as well.

The Key word is habit such as the money management approach you described.

Another I wish to mention is personal rules. Like only trade certain times of the day/week.

I find out by my own analysis that the First 2 hours of London or NY trading day are the best times when the big elephant or market makers are more vulnerable. Most actions happen this time of day when the market movers are most active. We may restrict trading to just Tue-Thur as well.

Whatever works we make it into a habit or else our unconscious mind will decide for us.
There are always times when we are susceptible to emotions of greed, scarcity and fear of loss. So everyone has to do their own self analysis and decide which habit best support their goal or daily/weekly target loss or profit.

Contrary to what so many people think the trading is not merely against small traders who make up less than 5% of the market but its really against the big elephant/market marker who is most vulnerable during the times mentioned.

Very good thred.
I add One point. Which is confidence and consistency.
Confidence on your plan and consistency to inisiate.
Happy trading.

Buy where almost everyone is selling (at the bottom).
Sell where almost everyone is buying (at the top).

That is what I like to do.

Yes, the book is very good....and very relevant to trading!
Most of the principles can be applied in trading 100%.

I hated every minute of training, but I said, 'Don't quit. Suffer now and live the rest of your life as a champion'. - Muhammad Ali

The number one reason why people give up so fast is because they tend to look at how far they still have to go, instead of how far they have gotten.
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Everyone says discipline is the key. All trading books and gurus say you have to have discipline".........but let me tell you something - it doesn't work this way! Discipline doesn't pop up out of nowhere. You cannot just force yourself to have self discipline tomorrow.... or when you want.
First you have to build solid psychological foundation.
Several different components are necessary.

1. You must have a worthy goal and solid reasons. (You have to know your "why")
2. You have to have strong motivation and passion.
3. Good sense of progress.

I'm not going to focus on the first two components for now because they are somehow universal, and there is plenty of good material on the web about goal setting and motivation.

I think the third component (the sense of progress) is the most interesting and also the most problematic in the context of trading. Why is that? There are multiple reasons, but the two main (most important) are:

1. Lack of tangible evidence
2. Our inability to understand the exponential function.

Lack of tangible evidence
In the 21 century, the whole trading process happens 100% in the virtual world. There is nothing tangible, (material). Nothing to feel, nothing to see.....not even a peace of paper.....and almost no contact with other people. So there is nothing to hold on to. It's pretty much like a video game. All you see is a bunch of numbers on your computer screen. Very easy for people to lose sense of reality and to forget what trading is all about.

Real money!

Fortunately, there is very easy fix for this problem!
As soon as you become consistently profitable, you have to start to withdraw part of the profits on a regular basis. The amount in terms of money is irrelevant. Start with 5-10% of the profits.

Withdraw and SPEND! But you have to buy something real! (Not some online crap)
Turn the virtual digits from your trading account into real things. You have to feel the fruits of your efforts. This is the best way to get good sense of progress.
Also, this way you will become more motivated to work harder in order to improve your skills even more, so you can reach your goals faster. This is real motivation, and this is where real discipline comes from.
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The second problem - Our inability to understand the exponential function.
Given the nature of the game, it is clear that the ultimate goal is to generate profit and to grow the account. But exponential growth is very hard concept for the human brain to grasp. Somehow it is counterintuitive.
Almost all traders start with very small capital and in the beginning it takes a long time to make a little bit of profit (in terms of actual money), and then a relatively short period of time to make huge amount.

It's this long period in the beginning where most traders tend to give up, and quit. (Even very good and consistently profitable traders fall in this trap).
At first the progress feels too slow. The goal looks too far away and somehow "unreachable" and "impossible". But that's a trap! It's just another illusion created by the mind.

I made this little diagram in order to illustrate what I mean (the actual money amount is irrelevant)
Let's just say that you pull 50 bucks out of your pocket and decide that you want to turn it into 50K. It feels impossible right? You think that it's going to take forever??
NO! Absolutely not.
It's a challenge, no doubt about it.( You have to double the account 10 times)
But IF you are already profitable, and if know how to make 10% for a month, then to turn 50 into 50K is much easier than you think, and it can be done much faster then you think!
ALL barriers that prevent you from achieving such result are 100% internal! There are no external obstacles. It's all in your head.

You just have to focus your mind in the right place - the present moment!
Focus on the actual trading process. Don't think about the final goal too much.
Break down the big goal into many small steps and targets.

Just look how counterintuitive it is in terms of progress and distance to the final goal!

You start with 50 the final target is 50 000

At 55 you have only 0.11% of the final target, BUT you have completed 1% of the challenge!
At 100 you have only 0.2% of the final target, BUT you have completed 10% of the challenge!
At 1600 you have only 3.2% of the final target, BUT you have completed 50% of the challenge!
At 12800 you have only 25.6% of the final target, BUT you have completed 80% of the challenge!


Now can you see why it's so easy to lose the sense of progress? And why so many traders quit too early (even after they have learned how to generate profits).
Do you realize that the starting amount is absolutely irrelevant?
Consistency is the key!
Do NOT focus on the final target! Do not focus even on the small short term targets!
The only thing you have to do is to strive to be your best every single day. Focus on the little things. Take one step at a time. One good trade, after one good trade. Day after day........and that's how you make the big money. (There is no other way).

Some quit due to slow progress, never grasping the fact that slow progress is still progress.

I humbly submit that discipline is just another cop out (there are many) to justify failure
i.e "Even though I gave it my best, I failed because I lacked discipline"

Thank again AO another master piece.

As an academic achiever I can attest to the fact that discipline is the main thing preventing most achieving what they want, be it trading or just general life goal. As you said when the "why" is weak not much can be achieved.

So anyone who believe discipline is not getting them anywhere they must ask themselves why they want to do what they are pursuing.

In the end it comes down to belief and desire (these are internals) that manifest as lack of motivation (externals).

These are must haves to attain any goal.

Taking the eye off what does appear is also a great principle that applies, not only to trading but anything else being pursued, as the eyes often times lead us to forming wrong opinion and conclusions. Many refuse to complete a 4 year course because they want to finish now as four years seem so long, instead of focusing on the interesting subjects and skills being developed.

Our focus must be on the process not results.

LOL (-;

- the whole bunch of 95% cant be stupid. acknowledge that, there is no winning strategy. if there would be, big players would be using it and making easy money. instead, those employee thousands of phd mathematicians senior traders etc to find a new way ever day

- mental failures makes you spend your money, not lose. losing is the fact happens when you play in rules. spent money is where you fail with emotions break rules and spend your money for your excitement

- same technical setup makes price go up and next day makes it go down. technical analyses are good to define better entry points, direction is defined by the fundumental analyses

The 95% are not necessarily stupid. They just lack proper skills and motivation.
An yes, there are no profitable strategies..... Only profitable traders!

2014 best performing WS hedge fund had 25% annual and the profit partially made on betting special day actions on stocks or commodidties or currencies
nothing technical, the head guy didnt explain futher

Not trying to be a dick but.... what does the best performing hedge fund have to do with The Inner Game of trading?


as a side note to your post. Be aware..........
25% if that's the number is awesome when the fund is in the millions/billions. Hell 5% is awesome when talking million/billions. It's extremely difficult entering and exiting positions even in blocks with that kind of capital and not get noticed. The little guy /pro trader has a nice advantage with their measly position size. Thousands of dollars can be traded without anyone batting an eye. To the single individual, their percentages can be 100% to 1000% of their capital which is AWESOME. It's all about what's in the account Papi.

but anyway, back to the topic....

Hi

What a great thread and that last quote of yours is so true,

"An yes, there are no profitable strategies..... Only profitable traders!"

I have a trading buddy that changes his strategy practically every other day, but he makes 100 pips everyday day in , day out, trading 1 minute charts, renkos, 5 minute charts, you name it he'll trade it and still make 100 pips everyday...

He has set himself that goal everyday and he usually achieves in within the first 4 hours of London session. I've never known him to fail yet.

I always have to smile when I read some trader complaining about the broker or the banks or the stop hunters or the market makers or whatever as the reason they lose, but all the time the real enemy is within...and thats where we all need to look to find our way..

Great thread really enjoying every post you've done and looking forward to the next one, keep up the great work..

count me subscribed....

VERY good stuff here alpha..

So, I liken trading to bowling. Most don't realize where the game is played. It isn't played when the ball hits the pins. That's merely the result of the bowler(trader) executing his strategy.

Once you the ball leaves your hand(order is entered), you've played the game. Every step/motion you've made between getting up from your chair because you saw it was your turn to releasing the ball onto the lane is where you "play the game". Once the ball is on the lane you've "played the game" and you can go sit down. You're not going to change what the ball does at that point, it's only going to do what you've told it to do. If it goes in the gutter, well, there was something wrong with the way you released the ball. There are three main components to a game of bowling, the ball(trade), the lanes(charts) and the bowler(trader).
The first two are usually very easy to cancel out as the reason for a gutter ball.

I enjoyed reading the whole thread, Alpha!