Edge VS Mentality

[jonbig04 10]

According to Michael Douglas (author of Trading in the Zone, and The Disciplined Trader) trading is 80% mental and 20% your edge.

 

If this is true, or even if its 50-50, isn't it strange that the vast majority of threads, books, and everything else related to trading is about refining your edge? Don't get me wrong, I know having an edge is very important...I am not discounting its importance at all...but should more we focus more on, or at least as much, on our mental state while trading? 95% of futures traders blow their account in the first year...could this be because 95% of people focus only, or mostly, on an edge rather than their mentality?

Edited August 5, 2008 by OAC
Correction: Mark Douglas, not Michael Douglas

[brownsfan019 17]

The mental part of this business is incredibly difficult at times. You are truly your own worst enemy and it's b/c of what's between your ears.

[DbPhoenix 42]

Traders most often blow their accounts because they don't have a consistently profitable trading strategy. Without that, all the mental health in the world won't save them.

[jonbig04 10]

Interesting. Thanks guys. More to the point, from Douglas:

 

"...I sincerely feel that success in trading is 80% psychological and 20% one's own methodology, be it fundamental or technical. For example, you can have a mediocre knowledge of fundamental and technical information, and if you are in psychological control, you can make money. Conversely, you may have a great system, one that you have tested and has performed well for a long period of time, yet if psychological control isn't there, you will be the loser"

 

This makes me think....hard.

[MidKnight 12]

Traders most often blow their accounts because they don't have a consistently profitable trading strategy. Without that, all the mental health in the world won't save them.

 

I agree 210%!

[JBWTrader 10]

Some excellent points....

 

Have you ever heard the saying you marry your OWN worse problem....?

 

Well substitute the Married object with trading one and there you have it...

 

PS my apologies if anyone takes this the wrong way without thinking about it some more...In no way am I downplaying marriage or blaming the other in all of this. Quite the opposite ... minus the blame ! lol...

 

All the Best

John

[jonbig04 10]

Oops sorry, I typed Michael instead of Mark...but you get the idea haha

[jonbig04 10]

Traders most often blow their accounts because they don't have a consistently profitable trading strategy. Without that, all the mental health in the world won't save them.

 

First off I would like to say thanks for all the great info you provide, and I will be buying your e-book whenever paypal get their stuff straight. Anyways, I just don't think I can agree with you. There are SO many people out there trying to trade. Sure some of them are dopes who thought it would be an easy way to make money from home, but it's also true that many of them are very bright people. People that, to me, can formulate an edge. They study everything they can get their hands on and they come up with some complex and effective strategies...but they still don't make money. The stats, to me, just don't add up. The vast majority of traders lose...yet every trader I've met is trying only to refine their edge. What does that mean? To me, with so many people focusing only on their edge, it can't be the lack of an edge that impedes almost all of them being profitable...it seems like more than 5% would have something consistent figured out. I hope that makes some kind of sense.

[Soultrader 12]

I have this discussion often. Having a profitable strategy is a must. However, without the right mindset the operator will lose even when handed a profitable strategy. A fellow trader likes to talk how if Warren Buffet started with 10k.... he would make millions no matter what based on his mindset. It is who he is.

 

Lets say a trader has a very profitable strategy and has been consistently making money trading. However, his annual goal is $200,000. What this does to the trader is limit his mindset... in other words he is simply a $200,000 trader. On the other hand, a different trader with the same exact strategy has a $500,000 goal. In his mind, he is a $500,000 trader. Who is likely to make more money? What you can achieve is limited to what you believe.

 

Traders tend to give back their profits when it exceeds their goals. If one has a $3,000 daily target but makes $5,000... he may make a reckless trade and end up giving back $2,000. But in his mindset... he's okay because he met his $3,000 daily goal. This to me is sign of impulsive gambling. Common on the casino's where you will see a player up big but never knowing when to walk away. As a result he ends up losing a chunk of his winnings and goes home stressed.

 

The right mindset to be prepared daily, to maintain discpline, and to practice patience is extremely important imho. As long as one has the following traits, trading can be teached and learned. Whenever I meet a newbie who asks for trading/investing advice I tell him this... "Don't". In my opinion, this is the best advice one can give a newbie completely blind of what it takes to make money in the markets.

[jonbig04 10]

Great post. With the stats being so overwhelming, success in trading almost has to have to do with something few people realize, or work on...e.g. themselves.

[DbPhoenix 42]

If every trader you've met is trying "only" to refine his edge, then none of those traders has one, and it is the lack thereof that prevents them from being profitable.

 

And, yes, it would seem that more than 5% would "have something consistent figured out". But they don't. Most likely they have no idea how to go about putting a strategy together. Yes, there are a great many people "out there" trying to trade. But few of them have any idea what they're doing.

 

I have yet to meet a losing trader who has a winning strategy.

[atto 20]

Assuming edges are easy to find, and the real difficulty is psychology: couldn't a new trader trivially automate it, thus elliminating the entire need for any psychology? Not saying automation is impossible (I have a few successful algos), but that's not the point. I argue that it's not either-or; it's both-and. Edges are quantifyable, so people discuss them the most (regardless if it's because they have no psychological control or not). Psychology is sticky and messy. You have to analyse yourself, prod your own weaknesses.

 

A very strong root to a lack of psychological strength is a lack of faith in a trader's edge (existant or not). Sure, if you give a very good edge to 10 people, all 10 will behave differently with it. However, it's certainly better than not giving the 10 anything. More importantly, finding an edge is very valuable. To find one, you go through tens and possibly hundreds of things that don't work, make no sense, and do not mesh with you. You have to spend screen time. Once you have found one, you can more easily learn to trust it. There's your psychological trading aspect.

 

Those who do not spend the time to develop an edge will not, with very few exceptions, succeed. It takes time, it takes screen time. I'm glad you are focusing on the psychological aspect of trading, which is very important. That said, psychology with no edge is worthless.

[jonbig04 10]

If every trader you've met is trying "only" to refine his edge, then none of those traders has one, and it is the lack thereof that prevents them from being profitable.

 

And, yes, it would seem that more than 5% would "have something consistent figured out". But they don't. Most likely they have no idea how to go about putting a strategy together. Yes, there are a great many people "out there" trying to trade. But few of them have any idea what they're doing.

 

I have yet to meet a losing trader who has a winning strategy.

 

 

I should have been clearer, when I say "edge" I'm referring only to his trading methodology. In other words, using some sort of P/A analysis, Fibs, or whatever he has strategy that, when executed correctly, is right more than it is wrong in predicting market direction. However, for example, if this person lets his inevitable losses outweigh his winners by not being disciplined enough to cut his losses...he will lose money. Or if this person lets the fact that the last 5 traders we're losers affect how he executes the next trade he will probably lose money. I hope that clears it up a little.

[jonbig04 10]

Assuming edges are easy to find, and the real difficulty is psychology: couldn't a new trader trivially automate it, thus elliminating the entire need for any psychology? Not saying automation is impossible (I have a few successful algos), but that's not the point. I argue that it's not either-or; it's both-and. Edges are quantifyable, so people discuss them the most (regardless if it's because they have no psychological control or not). Psychology is sticky and messy. You have to analyse yourself, prod your own weaknesses.

 

A very strong root to a lack of psychological strength is a lack of faith in a trader's edge (existant or not). Sure, if you give a very good edge to 10 people, all 10 will behave differently with it. However, it's certainly better than not giving the 10 anything. More importantly, finding an edge is very valuable. To find one, you go through tens and possibly hundreds of things that don't work, make no sense, and do not mesh with you. You have to spend screen time. Once you have found one, you can more easily learn to trust it. There's your psychological trading aspect.

 

Those who do not spend the time to develop an edge will not, with very few exceptions, succeed. It takes time, it takes screen time. I'm glad you are focusing on the psychological aspect of trading, which is very important. That said, psychology with no edge is worthless.

 

 

Right. Like I said I'm not downplaying the importance of an edge and of screentime etc...I'm just emphasizing the fact that your mental state is also very important (if you believe Douglas, it's much more important) and deserves just as much if not more attention...yet traders rarely give it such. I'm not saying "either or" at all. But it seems almost everyone else is...they are just saying "edge" instead of "edge and mental control".

[DbPhoenix 42]

A methodology is not an edge unless it is at least consistently profitable.

 

Trading profitably takes more than "feeling" the shift in balance between buying and selling or predicting market direction or collecting bumper stickers like "cut your losses short and let your profits run". It takes a lot of time and a lot of effort. And even then, unless one can learn from failure, he can spend years just running in place.

[james_gsx 16]

Traders tend to give back their profits when it exceeds their goals. If one has a $3,000 daily target but makes $5,000... he may make a reckless trade and end up giving back $2,000. But in his mindset... he's okay because he met his $3,000 daily goal. This to me is sign of impulsive gambling. Common on the casino's where you will see a player up big but never knowing when to walk away. As a result he ends up losing a chunk of his winnings and goes home stressed.

 

This is so incredibly true. I have a number like that stuck in my head. Whenever I hit that magic number, it's like everything goes downhill and I'm unsure of how to get rid of it. I KNOW I can make more than that, but for whatever reason I hit that plateau and fall apart.

[strtedat22 10]

Its 100% mental. The individual is the "EDGE". He/She can control one self day in and day out. If you blowup, its your own fault. Its not mom, dad, strategy, system, everything west of the mississippi. Get it together each morning and take what the market gives you If i can control myself then i can control my good/bad habits in my trading life.

 

strtedat22

[bootstrap 47]

Its 100% mental. The individual is the "EDGE". He/She can control one self day in and day out. If you blowup, its your own fault. Its not mom, dad, strategy, system, everything west of the mississippi. Get it together each morning and take what the market gives you If i can control myself then i can control my good/bad habits in my trading life.

 

strtedat22

 

Dead On!!

 

This is the very reason that you hear that you can give a good trader a bad system and they will still make money.

 

They will look at the strategy determine the strengths and weaknesses and trade accordingly. Day in and Day out.

[ztrader 10]

Here is an article which may be of value to some of you who follow this thread.

 

What's more important: Trading Method or Trading Psychology?

Ancient argument:

What's determines success in trading:

1. A successful methodology

2. Psychology and discipline?

Answer: BOTH!

But this is not a "chicken or egg" dilemma. Clearly in this case method comes before mind.

I don't care how much self-discipline you have. If you don't have a viable trading methodology, then you will lose money.

So method is more important.

Well, maybe "more important" isn't the right phrase to use. But it definitely comes first.

The reason I say it may not be more important is because there are many valid trading methodologies available. Yet ironically, traders keep jumping from one method to another ...

• one indicator after another

• one book after another

• one mentor after another

• one seminar after another

This is the infamous "search for the Holy Grail."

Sorry ... doesn't exist.

Like most things in life, people keep looking for the answer outside of themselves, when the answer was inside of themselves all along.

Like Dorothy in the Wizard of Oz ... You had the power all along.

Okay, we've all heard that the psychological aspect of trading is the key to success. But HOW do you tap into it?

There's only one way I know.

Though the hard work and the daily drudgery of keeping a trading log of every trade you take.

By recording, and reviewing every trade you take (along with the ones you didn't take, but should have), you'll learn more than from any book, seminar or video.

This feedback mechanism is the key to success.

Like all subjects of Master:

You begin by adding. You need to acquire the information, the principles, and rules of successful trading.

After you spend a long time accumulating all the information, then you strip it away. You simplify until you find an approach that works for you.

Then you simplify further by eliminating your mistakes.

Someone once told me: "Successful trading is simply a business of not making mistakes.

We're not aware of how many mistakes we're making until we keep a trading log of every trade, and then review it every day and again at the end of every week.

I haven't met a trader yet, who following this discipline, hasn't been absolutely amazed at what a large percentage of their trades broke their own trading rules (the definition of a "mistake").

Beginners work on trading.

Masters work on themselves.

- Dr. Barry Burns

 

I work with several newbies and experienced traders alike who, after testing, using/trading with either one or more "profitable systems" and/or one or more "commercial" mentors/coaches, have come to me first and foremost with an intention to use the EDGE of my system and learn its methodology. However, after they have been qualified and accepted into my fastrack learning process, they quickly realize the emphasis on the importance of acquring the "mental edge", the discipline, first in their quest to become consistently profitable trader. I believe the industry, the many forums on the net and trading chatrooms have put more emphasis and conditioned majority of the traders to acquire the mastery of techical analysis and methods together with so called money management. Yet, the statistic on failure rate among traders remains very high.

 

ENJOY!

 

ztrader

[smwinc 20]

Interesting discussion this.

 

I have seen and spent time with a very diverse group of traders. From very successful independent & prop traders, traders at firms, traders at banks, average traders, losing traders, losing traders who think they are good traders, etc. The three things that really stand out separating the traders comes down to: 1) Discipline 2) Conviction 3) Guts.

 

In my experience, having an edge to pull an income from the markets is actually not that hard at all. I would go so far as to say it is easy. Some of the most consistent traders I know have particular setups, and they just don't really question it. They don't make a killing, they just grind it out, working their small edge.

 

Mentality is too general a word. The more specific problem: The majority of people have no discipline. It takes a huge amount of discipline to know what your specific edge is, sit infront of a screen and only take those setups. To only trade your edge, entires & exits.

 

I do NOT think the problem is exactly about having a profitable strategy. It's about having a profitable strategy, and trading that and only that.

 

The average person simply can't sit infront of a screen all day, every day, to only take one very specific setup. Even if it were to make them more than their current income.

 

If you can't follow an exercise plan, can't follow a diet, can't follow a study plan, etc - It is unlikely you will succeed at trading until you can address those issues.

 

This is one of the key reasons why there is a correlation between successful athletes following on to become successful traders - it is the discipline aspect.

 

Subsequently, it is also a key factor in why there is very little correlation between being successful in a white-collar job, to becoming a successful trader. Most 'real jobs' (as I call them :-) ) do not require and test your discipline on a daily basis.

[Nvesta81 10]

If every trader you've met is trying "only" to refine his edge, then none of those traders has one, and it is the lack thereof that prevents them from being profitable.

 

And, yes, it would seem that more than 5% would "have something consistent figured out". But they don't. Most likely they have no idea how to go about putting a strategy together. Yes, there are a great many people "out there" trying to trade. But few of them have any idea what they're doing.

 

I have yet to meet a losing trader who has a winning strategy.

 

I completely agree with this guy. Most jobs are repetitive in nature, and almost everyone endures them just for the paycheque. Show me a method that works and I'll grind it out if it means I can sit at home and have the freedom that day trading brings. I'm almost convinced that most people would be able to do this easily. Here's why it's not common, because it is my opinion that finding an edge is near impossible. I know that I'm still struggling to find one after countless hours of research, but maybe I'm just dumb. :crap:

[jonbig04 10]

Great posts guys.

[BlowFish 10]

Recognising an 'edge' is probably what is difficult for many, maybe because they don't really know how to 'test' it. Or even going back one step further are not prepared to document it adequately - making testing impossible. Of course this leads to the behavioural problems of the title, it is impossible to execute consistently with the right mental framework if you have not got confidence in your plan.

 

I think if one starts being a bit more rigorous in setting out what they are going to do an 'edge' is more likely to present itself.

 

Then there is the complexity issue. There are some pretty simple ways to trade but there is a tendency to want to complicate things (to improve the edge maybe?). Result being either confusion of the trader or diluting what is effective.

 

Another issue is not truly accepting that trading is a numbers game and so abandoning perfectly good 'edges' in search of something better.

 

I've done all these things and have to be pretty disciplined not to do them again.

[jonbig04 10]

The more I trade the more it seems like poker. Which is difficult to say because there are so many smart people who see trading just as they see any other profession, and would probably cringe at that comparison, but to me it's more like poker. You can become a great poker player by developing all kinds of skills and, more importantly, discipline. But in the end it's still about being mindful of the odds as opposed to trying to fight them I guess you could say. I'm a noob trader, but I'm a pretty good poker player and I really do see some similarities.

[DbPhoenix 42]

To all traders who are reading this thread and who are having difficulties:

 

If you do not have evidence of a consistently profitable trading strategy, then your problem is not "psychology". It is not "discipline". It is not ego or greed or fear. Your problem is that you don't have a consistently profitable trading strategy. Until you do, you can be mental health poster child with the strictest discipline on the planet and you won't be profitable. You have to have a consistently profitable trading strategy.

 

Cranking up your software and logging in to your data feed, then waiting for the open to "see if something is going to happen" is not a trading strategy (or at least not one which is likely to be consistently profitable). Going short because "buying seems exhausted", then going long because "selling seems exhausted" or because the "big boys" seem to be "stepping up to the plate" is not a trading strategy.

 

If you're trading and you don't know exactly what it is that you're looking for, then stop trading until you do. If you know exactly what it is that you're looking for but you don't what exactly what it is that you're going to do if and when you see it, then stop trading until you do.

 

If you elect to view trading as a game, then don't be surprised at how much money you can lose and at how fast you can lose it. If instead you view trading as a business, then don't be surprised at the amount of time and effort required to make it a profitable one.