Becoming a Consistently Profitable Trader

Tiras

Tiras

Last weekend I had some time to sit down and reflect on my trading over the past five years. I have nothing to show for it but memories of gut-wrenching roller coasters of the account value. The pattern is always the same – periods of euphoria, caused by several good trades, that are quickly followed by periods of depression (caused by several losses in a row or one big loss) that are followed by high-risk-no-stop trade, where I am trying to make up losses with one trade. Then the outcome is binomial – it is either deeper despair, caused by more losses from a high-risk-no-stop trade or new euphoria, if I do make up for losses.

As difficult as it was to admit to myself, I think I have a list of psychological shortcomings that are preventing me from being consistently profitable:
  • I have a gambling issue. It took some time for a self-diagnosis, as I have no affinity for casinos, poker, etc., but there is nothing else that can explain my uncontrolled urge to bet a farm once in a while
  • I need to work on my willpower and discipline. It happens in trading and in other aspects of my life – when I am under stress from either a string of losing trades, issues at work, issues in the family, etc. the discipline goes out of the window. As a result, I don’t follow my own trading rules, I stop working out, I start eating junk, I gain weight, I stay up late mindlessly browsing the internet. Strangely, the same exact thing happens when I am bored.
  • Occasionally, I don’t take losses. It does not happen on every trade, but after trading reasonably well for some time, something malfunctions in my brain. For some unexplained reason I decide to give some random trade “more rope” or “time to develop” (quotations are my own thoughts when I try to convince myself not to take a loss), even though price action is screaming otherwise. When loss get unjustifiably big, I make a mental commitment to close a loser on a pullback. When pullback comes, instead of closing a trade, I decide that pullback may be the beginning of the trend that I was expecting to begin with, and I stay with a losing position. In most cases losses get bigger.
  • I trade price action or at least I think I do, but I cannot get rid of a “need to know why price is doing what’s doing” addiction especially when the position goes against me. I start reading Wall Street Journal market commentary, start occupying my mind with Fed’s actions, reading other commentaries of market pundits etc. This dive into “fundamentals” always leads to great confusion, reduced ability to read price action, and worse trading results.
  • I trade against the trend trying to pick tops and bottoms of the intermediated-term moves. Without fail it leads to a big loss and then high-risk-no-stop trade to make up for a loss, basically the downward spiral described above.
The issues described above have been reoccurring for years, it is extremely embarrassing that I am still dealing with them.

This is the plan that I put for myself through the end of 2013, as it relates to trading:
  • I will pull all money out of the market and leave enough just to trade one NQ contract. I don’t think I will benefit from simulated trading, as it will not address my psychological issues. Some heat of trading real money is needed, but it should be small enough to keep my head clear.
  • I will recap my daily activity in the evening in this journal to achieve two goals – improve my method and keep me disciplined.
  • I will stop reading financial publications or watching financial-related programs. The only piece of information that I will access on the weekend will be economic calendar for next week.
  • I will be making no counter-trend discretionary trades, until I get myself in order.
 
Can I make a couple suggestions?

Take a break from trading until you have written out your entry criteria long/short along with multiple charts printed out that show your entry criteria.

EVERY entry order has a stop and target attached.

Don't trade when stressed.

Mental capital is harder to replace than financial capital.
 
My goal is to also be consistently profitable. The problem I have is similar to yours...generally sideways movement.

However, one area that has improved my ability quite a bit is the time factor. I make trades at certain intervals and I ignore what happens in between. I realize that I fit the cycles better and it avoids me having to chase the market or to do something countertrend.

I let the market come to me rather than the other way now.
 
Quote from greedytrader:

handle123 will tell you that you only need a well designed plan to make money. :D

Tell him it's not so.
More...

It is quite obvious to me that he doesn't have a well designed plan, but you must disagree and say he does. And if that is the case, every time he places a trade, he should call you up for you to take the trade.
 
Good luck with the project; I hope it works out for you!

But I think you should really be blaming the snake-oil salesmen that write trading books, or who sell trading training courses, or who offer killer indicators and strategies. All they really sell is hope … hope that above average returns can be made without accepting above average risk.

IMO, forget the hope sellers, and instead delve into what academics in the finance arena can tell us about markets. After all, to my knowledge most financial academics are not selling trading books, or offering training courses, or trying to get you to buy their latest indicator or strategy… so perhaps their view point is less conflicted than the snake-oil saleman’s?

Financial academics tell us (Burton G Malkiel, The Efficient Market Hypothesis and Its Critics, CEPS Working Paper No. 91, April 2003) that capital markets appear mostly to be efficient to the extent that they do not allow investors to earn above-average returns without accepting above average risk.

Unless you are the fastest UHFT with the lowest cost of doing business; or the fund with the best, all encompassing source of global information about everything, together with the best ability to process and interpret this information more effectively and faster than anyone else; or you are an insider that gets private information more quickly than everyone else …

… then the capital markets are efficient from your perspective.

Therefore, if you want to make 30% per year, you have to expect also to be down +/- 30% at some point during the year, and you need to plan for that and expect it, and be able to survive it, and then recover from it to be 30% up by the end of the year … perhaps you can defy the odds for a few years in a row without big drawdowns, but on average, bad runs are to be expected and planned for.

That’s what “consistently profitable means” … not what the snake-oil folk would have us believe …


Quote from Tiras:

Last weekend I had some time to sit down and reflect on my trading over the past five years. I have nothing to show for it but memories of gut-wrenching roller coasters of the account value. The pattern is always the same – periods of euphoria, caused by several good trades, that are quickly followed by periods of depression (caused by several losses in a row or one big loss) that are followed by high-risk-no-stop trade, where I am trying to make up losses with one trade. Then the outcome is binomial – it is either deeper despair, caused by more losses from a high-risk-no-stop trade or new euphoria, if I do make up for losses.

As difficult as it was to admit to myself, I think I have a list of psychological shortcomings that are preventing me from being consistently profitable:
  • I have a gambling issue. It took some time for a self-diagnosis, as I have no affinity for casinos, poker, etc., but there is nothing else that can explain my uncontrolled urge to bet a farm once in a while
  • I need to work on my willpower and discipline. It happens in trading and in other aspects of my life – when I am under stress from either a string of losing trades, issues at work, issues in the family, etc. the discipline goes out of the window. As a result, I don’t follow my own trading rules, I stop working out, I start eating junk, I gain weight, I stay up late mindlessly browsing the internet. Strangely, the same exact thing happens when I am bored.
  • Occasionally, I don’t take losses. It does not happen on every trade, but after trading reasonably well for some time, something malfunctions in my brain. For some unexplained reason I decide to give some random trade “more rope” or “time to develop” (quotations are my own thoughts when I try to convince myself not to take a loss), even though price action is screaming otherwise. When loss get unjustifiably big, I make a mental commitment to close a loser on a pullback. When pullback comes, instead of closing a trade, I decide that pullback may be the beginning of the trend that I was expecting to begin with, and I stay with a losing position. In most cases losses get bigger.
  • I trade price action or at least I think I do, but I cannot get rid of a “need to know why price is doing what’s doing” addiction especially when the position goes against me. I start reading Wall Street Journal market commentary, start occupying my mind with Fed’s actions, reading other commentaries of market pundits etc. This dive into “fundamentals” always leads to great confusion, reduced ability to read price action, and worse trading results.
  • I trade against the trend trying to pick tops and bottoms of the intermediated-term moves. Without fail it leads to a big loss and then high-risk-no-stop trade to make up for a loss, basically the downward spiral described above.
The issues described above have been reoccurring for years, it is extremely embarrassing that I am still dealing with them.

This is the plan that I put for myself through the end of 2013, as it relates to trading:
  • I will pull all money out of the market and leave enough just to trade one NQ contract. I don’t think I will benefit from simulated trading, as it will not address my psychological issues. Some heat of trading real money is needed, but it should be small enough to keep my head clear.
  • I will recap my daily activity in the evening in this journal to achieve two goals – improve my method and keep me disciplined.
  • I will stop reading financial publications or watching financial-related programs. The only piece of information that I will access on the weekend will be economic calendar for next week.
  • I will be making no counter-trend discretionary trades, until I get myself in order.
More...
 
Quote from Tiras:

As difficult as it was to admit to myself, I think I have a list of psychological shortcomings that are preventing me from being consistently profitable:
  • I have a gambling issue.
More...


  • You may understand price action, but your gambling has addicted you to random rewards, and you're not trading a plan.

    Willpower rarely overcomes addiction, but 12-step recovery programs have helped "hopeless" cases turn their lives around as long as the addict continues to do what works every single day.

    In the Foreword to Mark Douglas' Trading in the Zone, Thom Hartle writes:

    "The 95% failure rate makes sense when you consider how most of us experience life, using skills learned as we grow. When it comes to trading, however, it turns out that the skills we learn to earn high marks in school, advance our careers, and create relationships with other people, the skills we are taught that should carry us through life, turn out to be inappropriate for trading. Traders, we find out, must learn to think in terms of probabilities and to surrender all of the skills we have acquired to achieve virtually every other aspect of our lives."

    Nearly every facet of our lives revolves around the quest for something as close to certainty as possible, and success is often defined by finding oneself rated in the top percentiles. Yet successful trading depends on narrow margins of positive expectancy and the ability to accept what feels like "failure" all the time. Trading losses in a winning system are crucial to the profitability of the system because we cannot know the outcome of any individual trade, only the odds of net profitability over a series of trades.

    Mark Douglas captures the essence of profitable trading with what I like to call The 5 & 7:

    The 5 Fundamental Truths of Trading:

    1. Anything can happen.

    2. You don’t need to know what is going to happen next to make money.

    3. There is a random distribution between wins and losses for any given set of variables that define an edge.

    4. An edge is nothing more than an indication of a higher probability of one thing happening over another.

    5. Every moment in the market is unique.

    The 7 Principles of Consistency:

    1. I objectively identify my edges.

    2. I predefine the risk of every trade.

    3. I completely accept the risk or I am willing to let go of the trade.

    4. I act on my edges without reservation or hesitation.

    5. I pay myself as the market makes money available to me.

    6. I continually monitor my susceptibility for making errors.

    7. I understand the absolute necessity of these principles of consistent success and, therefore, I never violate them.

    Douglas tells us (and the emphasis is mine), "...to whatever degree you haven’t accepted the risk, is the same degree to which you will avoid the risk. Trying to avoid something that is unavoidable will have disastrous effects on your ability to trade successfully. To operate effectively in the trading environment, we need rules and boundaries to guide our behavior. It is a simple fact of trading that the potential exists to do enormous damage to ourselves – damage that can be way out of proportion to what we may think is possible. In trading, no one (except yourself) is going to force you to decide in advance what your risk is. In fact, what we have is a limitless environment, where virtually anything can happen at any moment and only the consistent winners define their risk in advance of putting on a trade. For everyone else, defining the risk in advance would force you to confront the reality that each trade has a probable outcome, meaning that it could be a loser. Consistent losers do almost anything to avoid accepting the reality that, no matter how good a trade looks, it could lose."

    If you want consistent success in trading, over time and through varying market conditions, if you want to trade for a living, at the very least you have to do ample research and develop a plan based on favorable probabilities. That’s the absolute minimum requirement. Then comes the real work: learning to trade your plan or automating your plan without overriding it.

    Mastering one part of your plan isn't good enough. It must be mastered as a whole. Positive expectancy comes from a combination of win rate and risk:reward ratio, just as hydrogen and oxygen are required to make water.

    If you learn to hold trades until you're stopped out or your profit target is filled, that may be a huge step forward for you psychologically, but if you haven't mastered the ability to trade every valid setup without hesitation, your excellent trade management ability won't help much at all. Or maybe you have no problem jumping on every valid trade opportunity that presents itself, but you move stops and targets around. There goes your edge!

    A positive expectancy trading plan offers an environment of certainty, but it doesn't feel like certainty in real time because it requires what we refer to as "losses" and the concept of "loss" has a negative connotation for us due to a lifetime of programming. In trading, losses that occur as part of a well-research trading plan are absolutely necessary, Without embracing them, you're attempting the equivalent of trying to quench your thirst by inhaling some hydrogen and then later inhaling some oxygen.
 
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