Trading and the Placebo Effect

[Skimbleshanks]

I would like to suggest that one of the answers has to be how successful traders handle the situation when the trade goes against them. A coin flip may get them in, but their ability to recognise a losing trade and exit it promptly with tiny risk has to be the most important element.

Whereas, a mediocre trader is more likely to hang on in an unsuccessful trade hoping that it will turn into a winning trade.

 

[Les Carlin]

There's been several experiments regarding market entry based on coin flips. Traders are given entries supposedly generated by a "scientific" system. In actuality, it's merely coin flips. Heads, go long, tails, go short but the signals are shown to the traders as if generated by a highly sophisticated program.

Traders who were consistently good traders before engaging in this experiment made money. People who were mediocre, money losing traders before the experiment lost money.

I think skimbleshanks is closer to the mark. My comment on top is that you have assumed that it must be a psychological factor at work that differentiates the winners and losers. If the experiment truly randomized the entries then the exits would have to be also be programmed in some way. Likewise the stops. That could get tricky.

A purely random exit would probably be meaningless, but maybe something like heads= sell after 10pt gain, tails= sell after 20pt gain.

Perhaps it would help to define what you're interested in looking at? Is it one's psychological discipline re trading decisions etc, or is it one's trading judgement re those decisions. These 2 ideas may be hypotheses about what the human factor is in trading, so comparing that to a mechanical system would show up such differences. But maybe you don't have to do that. Just compare experienced traders to inexperienced! My guess is you'll find differences on a host of factors, eg: temparament, psychological health, intelligence, age, length of time trading, etc, etc. Such studies have probably already been done, but i've never gone looking for them.

So what aspect would you find interesting for me to focus on on the trading day? I don't come at such problems by looking at general traits or factors, but rather to find ways of identifying where things get stuck for an individual, then look at solutions.

 

[Les Carlin]

A coin flip may get them in, but their ability to recognise a losing trade and exit it promptly with tiny risk has to be the most important element.

I agree. Equally important is the ability to run with a winning position and not exit too soon for less profit.

 

[Austin_Clone]

Hi Les,

Didn't realize it would get so complicated!

My point in bringing up the "coin flip experiments" was not to ask for a "correct" answer, but merely to throw it on the table as a possible area you might want to investigate from the psychological angle for the Traders Day.

What exactly are these differences that make one person successful and another a loser in the markets when they are given the same entries?

Of course, it's implied that the successful trader has the psychological makeup that allows him to consistently earn profits in the market. But what are these traits? Are they something we're born with or something the losing trader can learn?

Van Tharp has done work in this area and has identified certain traits all successful traders have. Unfortunately, he charges $5,000 and up for his seminars and therefore his work is unavailable to the majority of traders.

Mark Douglas, though not a psychologist, seems to have a good understanding of trader psychology as illustrated in his books, The Disciplined Trader and Trading in the Zone.

Again, not looking for an answer here, just throwing out the concept. I understand that you may have a completely different area of investigation in mind for your presentation.

Thanks for your response.

 

[Helenqu]

Hi Les,

I agree with you that we should attempt to be solution focused as far as possible in the 90 mins you have. I think we could maybe look at the types of trading problems that people commonly face and strategies to deal with them.

I don't know if you have read trading in the zone but it does put forward one way of tackling the emotional blocks around trading. I'm actually going to be trying it out this week as I'm suffering from the inability to pull the trigger at the moment combined with exiting too rapidly. All fear reactions I think.


Cheers

 

[Les Carlin]

I think we could maybe look at the types of trading problems that people commonly face and strategies to deal with them.

Austin and Helen:

I'm thinking very much along these lines. It may be helpful first to define what kind of problems. I have a kind of mental list, eg:

A common fault is to hang on in a losing trade for too long. Many people mention this one, but to break it down psychologically would be a really fascinating and illuminating process. I can think of a whole host of variables at work here - personal belief systems, attitudes to failure, attitudes to money, attitudes to learning. Screening out negative emotions, perceptual twists (ie you don't really "see" what's on the screen), rationalisations.

These variables may apply in varying degrees to other faults, such as tendency to set stops too wide or narrow, to exit from a trade too quickly, to risk too much money too quickly, or risk too little and so never know whether the system can work. Then there are the wider issues: why are you trading, what goals etc. PT was very good at getting people to make such things explicit, so the question will always arise as to why one might avoid such matters, or form unrealistic notions about them.

Whew! Didn't realise it was so complicated.

 

[Les Carlin]

I don't know if you have read trading in the zone but it does put forward one way of tackling the emotional blocks around trading. I'm actually going to be trying it out this week as I'm suffering from the inability to pull the trigger at the moment combined with exiting too rapidly. All fear reactions I think.

Helen,

Yes i have, but a while ago. I'd like to know what you get from doing this and what specific remedy you apply to dealing with the "at the moment" situation. That's where the core lies - what one does in that moment is either based on personal stuff intruding, or else its a product of your trade plan.

I had a real tussle with that one - hesitating too much on entry. This was back in Sept/Oct. I finally cracked it one day when i realised that if i didn't pull the trigger when the trade plan told me to, i would never know how good the strategy was - EVER. So for a few days after that i told myself, just before each entry: "You'll never know unless you do it precisely when you are supposed to, no matter what is happening in your thoughts and emotions" "You'll never know "You'll never know "You'll never know". I had this echoing round my brain while in front of the screen during those few days. It worked, because after that i saw how my predicitions were mostly accurate and that when i enter too late there's no way of testing for this accuracy. Since then i've very seldom had a problem with hesitating during a market entry.

 

[Austin_Clone]

20 Trade Exercise

Hi Les,

I've been trying to get through Mark Douglas's "20 Trade Exercise" that he describes near the end of his book, Trading in the Zone. The ideas is to complete 20 trades "flawlessly executing" your trading plan. He doesn't stress win/loss, just that you do EXACTLY what you plan calls for for 20 trades in a row.

I've gone through 6 sets of 20 trades and have yet to get an error free set. If you're interested, you might scan the thread at

http://eurostoxx50.co.uk/cgi-bin/yabb/YaBB.pl?board=Strategies;action=display;num=1044205429

The theory here is rather than try to root out the reasons behind the failure to be a consistent winner, the trader just "practices" over and over until he pulls the trigger and exits the trade at EVERY signal the system gives him without fail. The result, says Douglas, is that by taking every trade, the "edge" of the particular system will work and provide consistent profits.

The trader then turns his intellectual understanding of a trading system's "edge" into a "core belief" on which he acts automatically. Forgive my simplistic analogy, but it's a bit like cognitive therapy: "We don't really care what caused this problem, but here is the way to solve it."

I will doing the segment on "Simulated Trading" on Traders Day and will base my presentation on how this 20 Trade Exercise can be done using simulators. Please e-mail me if you want to discuss this in a more thorough manner.

It's another approach that complicates the matter even more, eh?

 

[Les Carlin]

I will doing the segment on "Simulated Trading" on Traders Day and will base my presentation on how this 20 Trade Exercise can be done using simulators. Please e-mail me if you want to discuss this in a more thorough manner.

Hi Austin,

Yes i'd love to discuss this with you via email. I've been having volumes of ideas re what to do with my slot, one of which has been to connect it somehow with the simulation.

I couldn't get an email to you via this site - you've not given permission for that in your profile. Perhaps you could kick us off by contacting me on:

[email protected]

Regards