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Wednesday, November 10, 2010

Too good to be true

Not sure if any other traders get this feeling now and then, but sometimes when I’m trading and picking up easy money off the table, it feels too good to be true and I can’t help thinking that it’s all about to go downhill. It’s harder than it seems to get these thoughts out of your brain but it’s something that needs to be overcome.

When I’m trading well, it feels good but there is always a niggling doubt that things are going to go belly up and that easy money is simply not possible, certainly for a sustained period of time. However, I’m finally coming around to realising that sometimes it is, and I’m trying to change my mindset on this issue.

For various reasons (sometimes cultural, religious, moral etc) many people don’t feel that they deserve easy money when it comes to them and they put a lot of psychological barriers in the way. Even when it’s on the table in front of them, they won’t pick it up. People who are lacking confidence in themselves will put good trades down to luck - and when a bad trade comes along, they almost get a masochistic pleasure that the market has twarthed them. It confirms the low self belief they have in themselves as a trader – that ‘someone else’ is better, more clued in and somehow more deserving. They get a ‘told you so’ feeling about themselves and it compounds the negativity they have and their ability to make money in the markets.

I’ve been in similar situations myself where I felt that the market has beat me up. The outcomes are not always pretty – there have been times when I’ve started to stake erratically following a loss in a pathetic attempt to somehow ‘get back’ at the market. This, of course, will eventually lead to a bust bank which, in turn, will confirm your own belief that you are a bad trader. I’ve had times where a small loss has got bigger through chasing, then bigger, and bigger again - and I’ve chased to the point where the stakes don’t really matter anymore. It seems like utter madness to look back on. But when you are in that frame of mind, you don’t really care because you almost feel that’s what you deserve.
Do this often enough, however, and you will end up on the scrapheap of failed traders with wasted money, time and self-esteem discarded along the way. The funny thing is, most of these failed traders have lost the battle with themselves, rather than the market. It’s easy to say that these traders should ‘snap out of it’ but I’ve been down that road and you will always come up with an excuse for not listening to the voice of reason. Eventually, you will lose enough banks to either (a) cop yourself on and work on the mental side of trading or (b) exit the game, having lost a lot of money (and in some cases, family and friends). I feel lucky to have chosen option (a) but there have been many times when I’ve been close to packing it in.

So why do we feel like this sometimes and do these things to ourselves? I think it’s down to memory and not being able to let go of past experiences – in this case, past losses. A loss hurts much more than a gain in trading (and generally speaking, people will let their losses run much higher than their gains) so when they see their figures starting to go red, all those negative feelings and memories come flooding back. These negative feelings can be overwhelming and make some people feel worthless. It’s amazing, because an otherwise rational person can start acting in a crazy manner as soon as this rush of negativity is released around his body. Often, the trader will go on to lose a packet through chasing and this will instil yet even more fear in him the next time a trade goes red.

On the opposite side, a green position can be good but you don’t enjoy it as much as you should - as you are worried that it will turn bad. So we trade out for a small profit (and then watch the market go sky high in our direction!). This is frustrating and partly the reason why bad trades stick much much deeper in the psyche than good ones.

When we are in a bad trade, we must try to step outside the situation as I explained before, and almost be an independent observer to what is going on. When the bad days come (and they will!), we find it hard to switch off this flood of negative emotion, fear and worry.

Of course, all of this is easier said than done but that’s why it is estimated that over 90% of traders fail. It’s my guess that these failed traders are not terrible market readers – they are simply bad at managing emotions.

Then we have some good days…

Instead of patting ourselves on the back for a job well done, we get nervous and feel we don’t deserve it. For whatever reason, we just can’t possibly believe that we are good traders. Luck, randomness and other thoughts come into our heads as excuses for our good trades. We always think there is ‘someone else’ or the ‘big players’ in the market that deserve the money - but not us mere small fry. We got lucky today but will never sustain it. But the reality is this; little old you is just as entitled to that money as anyone. There are times in the markets when it is just easy to make money. Other times are hard. Simple as that. That applies to traders with banks of 100 quid or 100 grand. When the easy times come, don’t put up barriers or excuses, take it while its going and enjoy your trading. Sometimes, it’s easy. Sometimes there is such thing as a free lunch.

In a book I’m reading, ‘The disciplined trader’, the author talks about an experiment done some years back where a guy stood on a busy street corner with a sign saying ‘Free money here, just ask’. There was no catch – if you asked for some money, he’d give it to you. Thousands of people passed him by that day but only a small number actually went up and availed of his offer. Nearly everyone who passed by couldn’t, or wouldn’t take the free money. This is a perfect example of what I’m talking about above. Our memories tell us that there is no such thing as a free lunch and there has to be a catch. In the real world, we know that no-one hands out free money so we convince ourselves that this has to be a scam or a trick. Our past memories of these type of events won’t allow our present mind to try something new or accept the situation for what it is. We think we know better. Besides, we have grown up believing that no-one deserves money for nothing and that hard work is the only way. We simply can’t accept that there is free money out there and we walk away.

Trading is all about breaking down the barriers and changing the way you view work, money and life (for the time you are active in the markets at least). The general ‘rules’ of this world we’ve grown up to believe don’t often apply in the trading game and this presents both opportunity and pitfalls. The profit you can make from trading is virtually limitless – but so too are the losses. I can’t think of any other job like that in the ‘real’ world and that’s why the rules of the trading game are different from the real world. It’s also what makes it (sometimes) devastatingly appealing.

I don’t want to come across as too philosophical here as I’m certainly no expert - but I think there are a few things that traders, including myself, must realise to become successful. These are just my own thoughts by the way, feel free to disagree – but here’s my take on it:

  1. It is possible to make money from trading. Most people who fail are probably not really bad market readers at all – it’s just that they can’t handle the big rushes of negativity that invariably come quite often.
  2. You deserve success as much as any ‘expert’ or ‘big player’ in the market.
  3. Sometimes trading is very hard – but other times it’s quite easy. We can all accept the fact that trading can be hard – but won’t seem to accept the opposite at times.
  4. Your memories of bad trades are much stronger than your memories of good trades. Realise this and try not to panic when a trade goes bad. When you are looking at a red book, think about this fact and recognise the feelings you have. Don’t become paralysed and miss your stop loss. This will lead to chasing later on. You’ve called it wrong which always painful - but make sure your bank lives to see another day.
  5. Opportunities for profit often pop up unexpectedly from nowhere. The rules in this game are not like in the ‘real’ world. Sometimes there’s money on the table there for the taking. Free money basically. We often put up barriers in our head and won’t pick it up: (how come someone else hasn’t spotted it, it’s too good to be true, why has no-one else made that trade etc.). Take the market for what it is; a head-case that sometimes gives away money. To paraphrase the shampoo ad: You are worth it.
  6. As great as all the above sounds, it’s a lot easier said than done. But that’s probably why most traders fail. Recognising that the psychological end of trading is harder than the actual trading itself is one of the steps to becoming a better trader.


Sorry about the ramblings but I like to get these things written down – it helps me think more clearly going forward. Thoughts and comments, be they good or bad, are most welcome!

As regards my own trading, I haven’t been doing any lately due to work but I’m off over the weekend including Monday so will definitely try to get a few hours in at the very least – a full day at it would be nice if possible so I’ll report back in a few days with how I get on.

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