The most important thing in trading

[sirfraijo]

I was hearing an interview with psychologist Brett Steenbarger and it was an eye opener.

Trading is extremely hard and it has to be. ¿Why to make the hard job of create business, hire people and deal with customers if trading was easier?

The great difficulty in trading is to find an objective edge in the markets. And yes you need the psychology to maximize the profits from your edge and money management to not blow up and compound, etc.
But without an edge all that is worthless.
Not having an edge also creates psychological troubles.

That's why internet marketers sell psychology courses, because that's easier than find an edge in markets.

Another point is that markets evolve with the time and you can lose your edge at any moment. So you need to innovate and adjust to new market conditions. Or find new markets.

 

[tomorton]

Need for an edge - yes, I can see and accept that.

Markets change so a system stops working - what does that mean? A trend is a trend, PA is PA, an MA is an MA, Fib ratios don't change. So what does a changed market look like?

Psychological self-sabotage - I had thought it was more common than he suggests but he's the psychologist, not me.

 

[tomorton]

And yes, becoming an expert in how you made a profit in your successful trades is much more productive than becoming an expert on what went wrong. I like this.

I have said on another thread this negative focus is a problem in organisational management too. Its negative and de-motivating, while ignoring some good clues and cues for improved performance.

 

[sirfraijo]

Need for an edge - yes, I can see and accept that.

Markets change so a system stops working - what does that mean? A trend is a trend, PA is PA, an MA is an MA, Fib ratios don't change. So what does a changed market look like?

Psychological self-sabotage - I had thought it was more common than he suggests but he's the psychologist, not me.

A trend is a trend, yes.
But the one of the greatest trend followers, Richard Dennis, begin to lose money at some point of his career.

Dennis managed pools of capital for others in the markets for a while, but withdrew from such management in the spring of 1988 after his clients suffered heavy losses. In the Black Monday stock market crash of 1987, he reportedly lost $10 million,[8] with a total of $50 million reportedly lost in 1987–1988.[2] In 1990 his firm settled investor complaints of his failure to follow his own rules, for over $2.5 million, without admitting or denying any wrongdoing.[9] He also managed funds for some time in the mid and late 1990s, closing these operations after losses in the summer of 2000.

https://en.wikipedia.org/wiki/Richard_Dennis

According to Larry Williams, Fibos don't have an edge, they are around 50% probability.

 

[mlawson71]

If you ask me you can have psychological issues with trading with or without having an edge. Some people don't even recognize when they have an edge because they are so stressed out.

 

[ReneLH]

Good Risk management and money management. Thats the most inportant thing in trading. Thats called discipline.

 

[sirfraijo]

Good Risk management and money management. Thats the most inportant thing in trading. Thats called discipline.

They are very important, but again, without an objective edge they are worthless.

The discipline is very important too. But for the sake of discipline you can fail to adapt when the markets are changing.

 

[sirfraijo]

If you ask me you can have psychological issues with trading with or without having an edge. Some people don't even recognize when they have an edge because they are so stressed out.

That is absolutely true.
However is not often the case.
Not having an edge is the more common problem.
The psycology is overstated by internet marketers who want to sell courses.

 

[mlawson71]

That is absolutely true.
However is not often the case.
Not having an edge is the more common problem.
The psycology is overstated by internet marketers who want to sell courses.

I only speak from a personal experience, to be honest. I know I have stress issues when I trade and I know badly they affect my trading. I am sure I am not the only one.

 

[timsk]

. . . Another point is that markets evolve with the time and you can lose your edge at any moment. So you need to innovate and adjust to new market conditions. Or find new markets.

. . . Markets change so a system stops working - what does that mean? A trend is a trend, PA is PA, an MA is an MA, Fib ratios don't change. So what does a changed market look like? . . .

I guess 'market change' or 'markets evolving' means different things to different people. Investors may think of it in terms of it being a bull or bear market, while short term traders may think of it in terms of volatility, or being driven by fundamentals (news) or TA (trending, overbought/sold etc.). Personally, I view the market as something that's changing constantly; that's one of the few constants there is.



By way of example, take the chart above of the Dax today. The first hour circled in blue was a complete nightmare, very messy - choppy price action. From 9.00 am onward it's been okay; some half decent 'clean' swings indicated by the green and red diagonal lines. Heiken-Ashi charts show how the market switched from one state to the other quite well, as there are no lower shadows in a clean up move and no upper shadows in a clean down move. The moves circled in blue are very 'spiky' which results in me being stopped out a lot.

Needless to say, the problem I have is in detecting which state the market is in and when it changes from being 'spiky' to being 'clean'. If and when I ever solve that little conundrum I'll be hobnobbin' with billionaires!

Tim.

 

[tomorton]

My thinking is still that we shouldn't believe markets change until we can articulate what has changed, why and how. Prices go up and down, that level of change is constant - clearly a long-only strategy is going to stop working in anything other than a prolonged bull market. But even in bull markets we hear that this or that long-only strategy stopped working - but we don't hear what changed in the market.

I think its hogwash used by charlatans, system vendors and textbook writers to cover the eventual exposure of their inadequate systems. Unless you can see it on a chart, it ain't there.

 

[sminicooper]

I guess 'market change' or 'markets evolving' means different things to different people. Investors may think of it in terms of it being a bull or bear market, while short term traders may think of it in terms of volatility, or being driven by fundamentals (news) or TA (trending, overbought/sold etc.). Personally, I view the market as something that's changing constantly; that's one of the few constants there is.


Needless to say, the problem I have is in detecting which state the market is in and when it changes from being 'spiky' to being 'clean'. If and when I ever solve that little conundrum I'll be hobnobbin' with billionaires!

Tim.

You raise some very valid points. Although the markets do change (but one trader's change can be very different to another) seemingly causing "systems" to stop working, I'm not convinced that the system has stopped working rather than the system no longer applies to the current situation – even if the end result (a bad trade) is still the same.

It's very difficult if you are a system enthusiast to find one system that applies to all markets at all times: what I have found useful is to find a system that works in certain situations and then spend time identifying those situations and trading them. E.g. as a trend trader I look for certain characteristics and this will rule out many trades – even the same share can look "wrong" on different time frames – but that's not news to a trend trader since a long-term uptrend can easily be a short-term downtrend. And sometimes a system may not be applicable at all – so long as you can recognise that and have the self-control to stay out of the market temporarily, it isn't a problem. But for me certainly, that was something I had to learn to do – didn't come naturally!

Perhaps some traders concentrate on perfecting a system rather than analysing the market. Possibly this is a result of trading FX? (seems to be the most popular instrument but not one that I use) where there is a limited number of major pairs: with the consequent result of taking a trade because "you have to trade something if you are going to make any money at all". I have no hard evidence this is true for other people but it is a psychological phase that I have been through in the past and it didn't often end happily. With something like the SP 500 I can almost always find something that meets my requirements and I learned to do this by recognising the right looking chart – visual recognition is so much easier for me (and I suspect most other people) rather than a list of numbers – these of course have their other more appropriate uses in analysis. Having found the "right" sort of chart it is then reasonably straightforward to code up a scan which will throw up good potential trades – finalised with eyeball inspection. You can then look at the numbers and spreadsheet them to assess viability.

In short, if you think you have a good system make sure you know the situation where it will work. (Your P/L column will soon tell you whether you've got this right or not).

 

[dbphoenix]

My thinking is still that we shouldn't believe markets change until we can articulate what has changed, why and how. Prices go up and down, that level of change is constant - clearly a long-only strategy is going to stop working in anything other than a prolonged bull market. But even in bull markets we hear that this or that long-only strategy stopped working - but we don't hear what changed in the market.

I think its hogwash used by charlatans, system vendors and textbook writers to cover the eventual exposure of their inadequate systems. Unless you can see it on a chart, it ain't there.

Usually when traders say that "the market has changed" what they mean is that their method doesn't work as well anymore. The "market" may not in fact have changed at all. The problem may be rather that their method was inadequate. If one "can lose his edge at any moment", he never had one to begin with.

Price, as you point out, changes constantly, at least in an active market (though there may be a few seconds during which contiguous trades are made at the same price). However, traders never change and never have. Their greed, fears, and hopes continue to motivate their trades just as they always have. If anything changes at all, it is only the quality of these motivations, e.g., deliberate and measured selling vs panic selling.

The difficulties in which most traders find themselves stem from their focusing on illustrations of price behavior -- indicators, candles, bars, diagrams and so on -- rather than on the price behavior itself: how active traders are (volume), how quickly price reaches its destination (pace), how far each buying or selling wave goes (extent), how long each of these waves lasts (duration), and where and how and for how long trades come to rest (equilibrium). These elements are omnipresent and never change; all that changes is their quality. If one builds his edge on an understanding of how these elements interact to move price, he will never lose it.

 

[kalott]

trading is easy

you just need to find someone who is willing to pay your profits and keep on doing that

 

[Jason101]

Needless to say, the problem I have is in detecting which state the market is in and when it changes from being 'spiky' to being 'clean'. If and when I ever solve that little conundrum I'll be hobnobbin' with billionaires!

Tim.

Tim, you are joking right?
You are using the whipsaw indicator on your charts before trading aren't you?

 

[NVP]

Edge and psychology are mentioned in above posts ........you need a serious edge to,trade,successfully and you need your head right in the zone as well.....plus bucket loads of other important things in your toolbox

That's why successful and consistent trading profitability is so hard to achieve ........you have to be the full package every time you step into the market ......

N

 

[NVP]

Usually when traders say that "the market has changed" what they mean is that their method doesn't work as well anymore. The "market" may not in fact have changed at all. The problem may be rather that their method was inadequate. If one "can lose his edge at any moment", he never had one to begin with.

Price, as you point out, changes constantly, at least in an active market (though there may be a few seconds during which contiguous trades are made at the same price). However, traders never change and never have. Their greed, fears, and hopes continue to motivate their trades just as they always have. If anything changes at all, it is only the quality of these motivations, e.g., deliberate and measured selling vs panic selling.

The difficulties in which most traders find themselves stem from their focusing on illustrations of price behavior -- indicators, candles, bars, diagrams and so on -- rather than on the price behavior itself: how active traders are (volume), how quickly price reaches its destination (pace), how far each buying or selling wave goes (extent), how long each of these waves lasts (duration), and where and how and for how long trades come to rest (equilibrium). These elements are omnipresent and never change; all that changes is their quality. If one builds his edge on an understanding of how these elements interact to move price, he will never lose it.

Good points ......most traders are looking in the wrong places for clues .......that's the reason most fail as well.....

N

 

[Melodiousmelody]

For me, the main thing in trading is to not get affected by what people say and do. one should be open to advice,suggestions etc but at the end you should use your own logic behind every decision that you take.
ALSO, equally important is to be disciplined while trading.

 

[Dreamer8]

For me, the main thing in trading is to not get affected by what people say and do. one should be open to advice,suggestions etc but at the end you should use your own logic behind every decision that you take.
ALSO, equally important is to be disciplined while trading.

That's right, I strongly agree on the discipline part. Without being disciplined, success cannot be achieved.

 

[Melodiousmelody]

That's right, I strongly agree on the discipline part. Without being disciplined, success cannot be achieved.

Well said. And for discipline its important to follow a trading plan.