Practical Trading Psychology

[Eiger 10]

Some of the folks in the VSA II thread began to get into a discussion about trading psychology and how to apply it in a practical manner, including how to apply it on your own. The discussion began to grow and seemed useful enough to warrant a separate thread. The relevant posts will get copied below, and we can then use this thread to continue.

 

Eiger

 

 

Hi Eiger,

 

that's exactly what I was thinking when this pattern happened: "I'm not going to miss this one: I have to take position". Obviously I took the wrong one.

 

I find your suggestion wise: I will incorporate this rule into my trading plan ...

 

 

Mike

 

Actually, you are the wise one. Most traders spend most of their time and effort studying charts and trying to improve their technical skills. That's a good thing. But, few spend much time and effort working on themselves. That's not such a good thing.

 

I say you are wise because you have identified a limitation, figured out how to adjust for it, and then you put it into your plan. You will only improve as a trader by doing this.

 

What you are doing is a simple, but highly effective way to improve. Here is a little more to consider. First, write stuff down. Keep a journal and write things that are meaningful. Don't just complain, (e.g., "Agh! Another losing trade; I'll never get this."); that kind of writing is rather useless. Be specific about your trading behavior, and include thoughts and feelings. Then, after a while, look for patterns that have a negative impact on your trading, like jumping in because of impatience. This is a "current limitation." Be excited! You've now found something you can work on to get better (how else are you going to improve?). Next, devise a workable plan to neutralize the limitation or even turn it into a strength. Put this into your trading plan and then track your progress on it. Write about it in your journal, and make any adjustments that might be needed.

 

This is the bare bones of how to use your journal and trading plan to help yourself improve. You have to be your own coach in a lot of ways. That means you have to be able to step back and observe (think witness) your own behaviour. Hard to do, but the journaling can really help.

 

OK, enough trading psychology. This is, after all, the VSA thread

 

Hope this is helpful,

 

Eiger

Edited May 21, 2008 by mister ed

[Sledge 13]

What you are doing is a simple, but highly effective way to improve. Here is a little more to consider. First, write stuff down. Keep a journal and write things that are meaningful. Don't just complain, (e.g., "Agh! Another losing trade; I'll never get this."); that kind of writing is rather useless. Be specific about your trading behavior, and include thoughts and feelings. Then, after a while, look for patterns that have a negative impact on your trading, like jumping in because of impatience. This is a "current limitation." Be excited! You've now found something you can work on to get better (how else are you going to improve?). Next, devise a workable plan to neutralize the limitation or even turn it into a strength. Put this into your trading plan and then track your progress on it. Write about it in your journal, and make any adjustments that might be needed.

 

This is the bare bones of how to use your journal and trading plan to help yourself improve. You have to be your own coach in a lot of ways. That means you have to be able to step back and observe (think witness) your own behaviour. Hard to do, but the journaling can really help.

 

 

Eiger-

This is great advice for ANYONE reading. Some people think "A Journal?- isn't that like High School?" Well let me tell you. I have kept a trade journal from day 1 and it is a wonderful thing to have. I not only place my trades in it, my targets, my reasons for taking the trade and why I exited.

BUT

I also brainstorm ideas in it. I test trading theories, put down a frustration or two, backtest, and backtesting results on theories. I was reading through it about a month ago and said on a few items "HA I can't believe I tried THAT!" I also go back and look at my "frustrations" and make updated notes on them in the margin. Thankfully, I have been able to update them 100% of the time with "Overcame as of X date" or "Have made great strides on accomplishing this- still working on it."

 

I suggest to anyone who trades to know WHY they are in a trade, learn from their mistakes- believe me I have printouts of days I got murdered. I printed the chart- asked questions here in this forum, and won't make them again!

 

Enough rambling from me!

Aaron

[tawe trader 10]

OK, enough trading psychology. This is, after all, the VSA thread

 

Eiger,

 

Please keep your psychology observations coming. I am very grateful for them and I am well aware that you are an expert in this field.

 

Being a proficient VSA'er is nothing without having the right mental make-up to go along with it, IMO this is where the trading holy grail can be found. ie combining the technical skills of VSA (or Wykcoff) with a sound and robust trading mindset.

 

As you know the 'edge' is inside our head and everyday (well for me anyway) it is a constant battle between our basic emotions of fear, greed, impatience etc.

 

I guess that if psychology didn't matter in this business, every person who has bought Tradeguider software over the years would now be a multi-millionaire trader.

 

Regards

Tawe

[Sledge 13]

Eiger,

Please keep your psychology observations coming.

 

I second this. I don't see much discussions about trading psychology here. But Psychology is AT LEAST 50% of trading- I personally think it is much higher. If you can master the "mechanics of trading" (reading a chart and what it tells you) then you must master your own emotions to be successful.

Been in the "Oooh Ooooh OOOOOH- awesome trade coming up- lets get in NOW" camp and learned to overcome that- but it was tough!

 

Maybe it would have to be segregated from the VSA thread (even though mechanics without psychology= frustration and loss) But this could go two ways:

We could discuss the psychology of Self

And

The psychology of the herd (and what the pro $ knows about it)

 

Just a thought!

Aaron

[mike_ITL 10]

Hi Eiger,

 

your words incourage me to put effort in what I'm trying to accomplish.

 

What I found difficult in creating a journal, is to be synthetic when writing notes ... however, I will try to re-introduce this habit, trying to be more schematic. (I used to keep a journal, but as many other Italians, I have the tendency to be lenghty)

 

As regards trading psychology, I agree with Aaron and Tawe, please keep up the good work !

 

Have a good day!

 

Michele

[Eiger 10]

Hi Eiger,

 

What I found difficult in creating a journal, is to be synthetic when writing notes ... however, I will try to re-introduce this habit, trying to be more schematic. (I used to keep a journal, but as many other Italians, I have the tendency to be lenghty) ...

 

Michele

 

I know about being lengthy. I'm Irish, and my grandmother used to say I could talk the dogs off the meat wagon!

 

There are lots of different ways to do a journal. The best method is the one that helps you and helps you to do it consistently. Here are a few ideas for consideration:

 

• State your intention for the day. In Michele's example, it might be something like "Today, I will look left for a SOS or a SOW before I trade a VSA indication."
  
• Log every trade. In addition to entry, exit, stop, P/L, you can also add thoughts and feelings for each trade, which will later help you see patterns.
  
• At the end of the day, ask yourself specific things like:
  
  • 
    
  [*]Did I look left on every VSA indication? If not, why?
  [*]Were all trades taken with appropriate trading plan criteria? If not, why?
  [*]What did I learn from my thoughts and feelings? Was there any pattern that I noticed?
  [*]What did I learn about myself and my trading today that is important to my future performance?
  [*]What steps can I take tomorrow and in the future to improve my 1) mental/emotional skills, 2) trading skills?
   

   

The basic idea of the journal is to help you identify strengths and limitations, address the limitiations, and track your progress over time. It needn't be complicated, and you don't have to write a book. Just jot down a few specific things.

 

Anyway, just a few thoughts that might be helpful.

 

Eiger

[Eiger 10]

I second this. I don't see much discussions about trading psychology here. But Psychology is AT LEAST 50% of trading- I personally think it is much higher ... Aaron

 

I always liked Yogi Berra's take on performance psychology:

 

"Ninety percent of this game is half mental."

 

That sort of sums it up well, i think

 

Eiger

[mister ed 10]

The posts above have been copied over from the VSA2 thread as a seed for this new thread - thank-you Eiger for your insights, advice, and starting this discussion.

[zdo 20]

Most traders spend most of their time and effort studying charts and trying to improve their technical skills. ... But, few spend much time and effort working on themselves. ... That means you have to be able to step back and observe (think witness) your own behaviour. Eiger

 

"This mental-physical phenomenon is like a coin with two sides. On one side are the thoughts and emotions arising in the mind, on the other side are the respiration and sensations in the body. Any thoughts or emotions, any mental impurities that arise manifest themselves in the breath and the sensations of that moment. Thus, by observing the respiration or the sensations, we are in fact observing mental impurities. Instead of running away from the problem, we are facing reality as it is. As a result, we discover that these impurities lose their strength; they no longer overpower us as they did in the past. If we persist, they eventually disappear altogether and we begin to live a peaceful and happy life, a life increasingly free of negativities.

In this way the technique of self-observation shows us reality in its two aspects, inner and outer. Previously we only looked outward, missing the inner truth. We always looked outside for the cause of our unhappiness; we always blamed and tried to change the reality outside. Being ignorant of the inner reality, we never understood that the cause of suffering lies within, in our own blind reactions toward pleasant and unpleasant sensations."

 

Goenka :missy:

[mike_ITL 10]

Thank you for your help and for starting this interesting thread, Eiger !

 

I followed your suggestions for my trading journal format, that is divided in 2 parts: the 1st is a schematic résumé of the entry price, reason I took the trade, the trailing of the stop, the exit etc., while the 2nd is dedicated to the comments, that are practically a reply to the questions you listed (I copied and pasted these).

 

Have a great day!

 

Mike

[Eiger 10]

"This mental-physical phenomenon is like a coin with two sides. On one side are the thoughts and emotions arising in the mind, on the other side are the respiration and sensations in the body. Any thoughts or emotions, any mental impurities that arise manifest themselves in the breath and the sensations of that moment. Thus, by observing the respiration or the sensations, we are in fact observing mental impurities. Instead of running away from the problem, we are facing reality as it is. As a result, we discover that these impurities lose their strength; they no longer overpower us as they did in the past. If we persist, they eventually disappear altogether and we begin to live a peaceful and happy life, a life increasingly free of negativities.

 

In this way the technique of self-observation shows us reality in its two aspects, inner and outer. Previously we only looked outward, missing the inner truth. We always looked outside for the cause of our unhappiness; we always blamed and tried to change the reality outside. Being ignorant of the inner reality, we never understood that the cause of suffering lies within, in our own blind reactions toward pleasant and unpleasant sensations."

 

Goenka :missy:

 

 

I'm not sure who Goenka is (I assume a yogi or buddist thinker?), but I like the quote. Yogis and Zen masters have been studying the mind for an awfully long time and have made numerous useful discoveries, many of which are now being confirmed by science. Currently, the cognitive-behavioral branch of clinical psychology is undergoing a revolution in which things like an internal orientation, mindful observation, and other related practicies are becoming an integral part of clinical therapy. Sport and human performance psychologies have used some of these techniques for more than 30 years.

 

The quote above talking about mindfulness or meditation to help maintain balance and prevent reacting to the torrent of mental activity that flows continuously in the mind. Someone has estimated that the average person has over 60,000 separate thoughts a day! Most of us react to those thoughts as if they were reality. Our reactions to our thoughts is a major cause of distress, or as a buddist might say, suffering. Here's an example:

 

I am hiking quiety along a trail in Vermont and come to a vista of a small town in the valley. I begin thinking to myself, "How beautiful. I can see a church steeple, houses, a town green. I wonder what it would be like to live in such a place. Easy, I'll bet. Hardly anything to stress about ... I'm so tired of stress. About the only time I'm not feeling pressured is when I'm on vacation. Last year's vacation was great, nice an peaceful. France was beautiful. I really liked Paris. That great little cafe on the left bank. Great cafe au lait. I didn't like that waiter, though. What an ass. So what if I couldn't speak French all that well. He didn't have to talk down to me, as if i was stupid. He's the one who is stupid. What a jerk. I should have talked to the manager. I would have had him fired. That would fix him ........

 

So, here I was hiking in Vermont enjoying a nice view, and suddenly my thoughts brought me back in time and transported me 3,500 miles to Paris and I am arguing with a waiter. You can be sure that my breath would have quickened and my muscels suddenly became tight. Even though this is all going on in my mind, if asked, I would attribute my current distress to that waiter and not my mind and its associative mental flow.

 

Self-observation is the key to begin to deal with this, not just in life, but in trading as well (the two aren't really all that different). Observe your thoughts when trading (or anytime). What are you saying to yourself? Is this affecting your behavior? Are you failing to pull the trigger because of thoughts, or cutting your gains short? Anytime you notice psychiological changes (e.g., your muscels tighten or your breath quickens), or you feel an emotional change (anger, elation, sadness, nervousness), turn to your thoughts. This is the grist for your journal.

[Sledge 13]

I took a browse around Brett Steenbarger's site last night- wow is their a lot of stuff there- would take months to read and digest it all.

Edited May 21, 2008 by mister ed
add link to Brett Steenbarger's site

[zdo 20]

re Journaling

 

Make journals a part of the daily routine. Even if you don’t trade on a particular day, it is valuable to review the day’s setups and behavior at key price levels. Reviewing patterns on different time frames can also help traders internalize the context of the markets they are trading, as well as the interrelationships among those markets. The French scientist Louis Pasteur observed that, in matters of observation, “chance only favors prepared minds”. Replaying market days, reviewing your own performance, and identifying missed opportunities prepares you for future performance, as your increasing familiarity with trading patterns sensitizes you to them in real time (while static charts are better than nothing, they do not capture the unfolding of patterns, the very thing that traders need to be able to recognize and act upon; replay provides the opportunity to see patterns over and over again, accelerating the recognition process).

 

...Incorporate specifics in your journals. If I had to identify the single most common shortcoming among trading journals, it would be their absence of detail. Entries such as, “I lost my discipline; I have to be more patient,” might be nice as post-it reminders, but are inadequate as journal entries. Journals need to clearly state what happened, your assessment of why it happened, and the specific steps you intend to take to deal with the situation in the future. A good rule is that anyone reading your journal should be able to identify and follow the exact same steps that you intend to take in the future. Your journal should be a planning document, not a statement of intentions.

 

ETP Steenbarger

 

RULE#18: Learn from your mistakes... When we factor past lessons in for future play, losses are not losses, but rather stepping-stones toward future correct play. Failure, by its nature, moves us in another direction, away from failure. We need to treat these lessons neutrally. Simply learn from them. Don't take them too much to heart or put too much emotion into them.

Zen and Art of Poker

Ipersonally am starting to question even this neutral level of 'learning from mistakes'...

 

 

“Contrary to the advertisements common in the popular media, trading expertise is not a function of possessing a superior indicator, mind-set, or chart pattern. Expert traders process market information differently from nonexperts, cultivating sophisticated mental maps that enable them to eliminate irrelevant information and implicitly process the patterns amid the market noise. Armed with such maps, expert traders respond more rapidly, confidently, and accurately to market events than do nonexperts.”

ETP Steenbarger

 

"... poker players [traders] sometimes ask, “What do you do in this particular situation?” There is really no correct answer to that question because it is the wrong question… The right question is: “What do you consider in this particular situation before determining what to do?” – David Sklansky, ‘The Theory of Poker’

So good before the fact journaling is 'what is being considered in this particular situation before determining what to do?" and good after the fact journaling is 'what else could have been considered to improve that trade and its management?' etc

 

 

 

(PS Thanks to idax and dbP for the digests of these books)

[Eiger 10]

re Journaling

 

So good before the fact journaling is 'what is being considered in this particular situation before determining what to do?"

 

 

Better journaling before the fact is asking the question, "What have I been doing that prevents me from appropriately considering the situation and is causing me to act in ways contrary to my interests?"

[Kiwi 16]

That is an excellent question Eiger.

 

FWIW I ask myself these questions before every trade (but love Eiger's metaquestion):

 

1. Does the volume trend support this trade & has it gone far enough back?

2. Do the ma’s support a trade?

3. Why am I entering this trade?

4. What’s my target, stop and risk reward?

5. Will this entry point be technically perfect?

 

I find they help me stay on track for the big question.

 

 

Thought I'd add the trade I took just before I posted. Note that profiting isn't necessary for a trade to be excellent - just doing the right thing

.

Edited May 22, 2008 by Kiwi
Note: the why question is answered by the name of one of my trade setups.

[Guest forsearch]

Here is a link to a trading journal and webinar that I found on Google:

 

Trading Journal

Webinar on Trading Journal

 

Don't know how long the links will remain active but it might be of some help.

 

-fs

[Eiger 10]

That is an excellent question Eiger.

 

FWIW I ask myself these questions before every trade (but love Eiger's metaquestion):

 

1. Does the volume trend support this trade & has it gone far enough back?

2. Do the ma’s support a trade?

3. Why am I entering this trade?

4. What’s my target, stop and risk reward?

5. Will this entry point be technically perfect?

 

I find they help me stay on track for the big question.

 

 

Thought I'd add the trade I took just before I posted. Note that profiting isn't necessary for a trade to be excellent - just doing the right thing

.

 

Kiwi,

Nice trade and nice pre-trade routine. Checklists like this are great little tools. They boil down your trades to the key elements and help you stay focused while trading. But, maybe more importantly, they are a summary of your trade plan criteria. You are doing a great job of making your trading plan a constant part of your trading throughout the day through the use of the pre-trade checklist. Nice job. We can all learn from your good work.

 

Eiger

[zdo 20]

This thread seems to have dropped some posts. Did I miss a firefight?

[mister ed 10]

Hi zdo - They have been moved to the Zen/Poker thread.

[zdo 20]

I am now hesitant to post in either place...

After thinking about this and the PM's I got, I’ll just speak publicly and do my part to keep things open. It seems to me this did not go past the level of a disagreement among allies – and certainly not to the level where any member needed to be protected from another member. I suspect some shadow projections and I also suspect all the parties involved with this are ‘big’ enough to deal with their own projections and be tolerant of other perspectives

Although I too have reactions to his posts sometimes, the quality and intention of db’s posts far far outweigh that. Eiger rightly intervened in db and W dabbling over in VSA – but he needs to stand up and make sure he is not cast in the role of db’s current arch rival globally and in other threads. Anyways…

 

The reply db posted was germane to the thread – it was immensely practical psychology. My earlier post about the efficacy, in general, of reviewing, journaling, repenting, whatever, mistakes and shoulda’s was not ‘practical’ nor was it ‘cultural’. In a poll I’d bet that high 90’s % of traders would believe that ‘reviewing and correcting’ mistakes is important. The leanings of the thread so far are ‘supportive’ of that belief. Real world examples are rampant. Here’s one I saw just this morning in a journal on another forum. It pretty much says it all about logging mistakes and focusing on weaknesses and what’s wrong. :crap: “Here is today's somewhat helpless attempt to discipline myself.” http://www.cyrox.com/forum/index.php?topic=209.75

Bluntly - That whole set of common beliefs may be a trap!

 

Combining this challenge with concepts of ‘state dependent’ learning brings into question the effectiveness of the ‘practical’ journaling and concomitant ‘work’ discussed herein

…whoops not practical! If I started an Impractical Trading Psychology thread, would anyone come? Probably not… :\

[Kiwi 16]

Bluntly - That whole set of common beliefs may be a trap!

 

Combining this challenge with concepts of ‘state dependent’ learning brings into question the effectiveness of the ‘practical’ journaling and concomitant ‘work’ discussed herein

…whoops not practical! If I started an Impractical Trading Psychology thread, would anyone come? Probably not… :\

 

I suspect that one of the most important aspects of journalling and also of running checklists before, during, and in a trade may be that they change your state to one more aligned with your intended discipline.

[Eiger 10]

Food for Thought:

 

If you think about it, there are really only three areas that psychology can help a trader: how well you prepare, how well you execute & manage your trades, and how you deal with results. What you do before, what you do during, and what you do after are the key areas. Everything else is ... well, maybe fun cocktail talk, but probably impractical. Focus on: 1) quality preparation (before), 2) effective execution (during), and 3) accurate self-assessment (after) to bring yourself more in alignment with your intentions.

 

Eiger

[Eiger 10]

A Little More Food for Thought:

 

When you are about to take a trade, are you checking one last indicator for confirmation (i.e., are you preparing to trade when you are executing/managing your trade?

 

When you are in a trade is your mind on the results of that trade, thinking about the outcome of the trade (i.e., are you assessing your results during trade management)?

 

Keep the three key areas separate. Prepare before, not during; assess after, not during. Focusing on things other than execution/management during a trade cuases 1) unnecessary stress, 2) lack of focus when it counts most, and 3) poor results.

 

Eiger

Edited May 24, 2008 by Eiger

[Kiwi 16]

I can't believe I said "before, during and in" a trade. Thank you Eiger. I do mean "and after."

[Kiwi 16]

Dr. Vohs notes that self-control problems occur because people are caught up “in the moment’’ and are distracted from their long-term goals. She says that in lab studies, self-control is boosted when people conjure up powerful memories of the things they value in life. Laughter and positive thoughts also help people perform better on self-control tasks.

 

http://well.blogs.nytimes.com/2007/12/06/how-to-boost-your-willpower/