Trading Psychology: The 16 Truths about Great Trading

Dr. Doug at drdoug.com posted the following on his blog. He makes some good points – some I agree with, some I don’t. My comments are in blue.

Trading Psychology: The 16 Truths about Great Trading
By Dr. Doug Hirschhorn

1) 45-55% (Average winning % of any given trader)
I don’t know what “any given trader” is. Someone who scalps the ES will need a higher % while a stock swing trader who nails biggers moves can survive on a lower %.
2) Traders do not mind losing money, they mind losing money doing stupid things
Absolutely true. Doing everything correctly and losing money doesn’t bother me. It’s like a baseball player hitting the ball hard but right at someone. He knows if he keeps hitting the ball hard, he’ll get his share of hits. I only get really pissed if I do something I shouldn’t or don’t do something I should, and I don’t judge myself based on whether I win or lose money. I judge myself based on whether I did right.
3) You can lose money on a Great trade
Yep, just like the baseball player I mentioned above can hit the ball hard but right at someone. That’s the way it goes. Be happy you recognized a good set up and executed it correctly because if you keep doing this, the money will come.
4) Focus on the Trade, Not the Money
I only partly agree with this. We have this thing called emotional capital which must be protected. If you lose money or do something stupid, you make withdrawls from your emotional bank account. If you make money or execute properly, you make deposits. If you’ve had a couple losing trades in a row and you find yourself in a good trade, I could argue for taking half profits even though the chart says to stay in with a full position. The reason I say to take some off is because of the need to make a deposit in your emotional bank account so you can feel good. Simple as that. I try to trade the chart but sometimes I do trade the money to build my confidence.
5) Trading is a game of Probabilities, not Perfection
I wish he would have said: “trading is a game of probabilities, not certainty” because then he would have been talking about equal and opposite ideas. In any case I of course agree with this. It’s something I’ve talked about many times. Trading is not an exact science. Unlike an engineer who can tell you a right answer or an accountant who can correctly do your taxes or a lawyer who can properly file paperwork for you (all situations where the correct answer is clear, definite and relatively easy to achieve), there’s lots of gray area with trading. You can be right and lose. You can be right and win. You can also be right and win a lot. And there are always unknowns which means you can’t operate from a position of knowing what the answer is. A 2-point winner under some conditions may be considered a fantastically successful trade, but in other conditions may be a horrible failure because so many more points were possible.
6) Trade to make money, not to be right
Don’t let your ego get in the way. The ultimate goal is to properly execute trades and make money, not enter a negotiation with an entity that always gets the final say.
7) Nicht Spielen Zum Spass (if it doesn’t make sense, don’t do it)
There are way too many opportunities to force the issue when things don’t makes sense or you don’t have a good feel for a situation.
8) The market does not know how much you are up or down, so don’t trade that way (Think: “If I had no trade on right now, what would I do”)
I agree with this when day trading because things happen fast and you have an “expiration date” (the closing bell) to deal with. But for swing trading stocks, I don’t entirely agree. There are many times I would not buy a stock at its current level, but that doesn’t mean I would exit my exiting long. In my opinion, if you want to nail the bigger moves, you can’t sit so close and micromanage positions by constantly asking: “what would I do if I was flat.”
9) Learn to endure the pain of your gains
I’m going to take his words literally and disagree. If holding a position is painful, get out. You’ve heard the Jesse Livermore quote: “I sell down to the sleeping level.” There’s nothing wrong with sitting in a loss or even adding to a loss as long as it’s part of your overall game plan. This isn’t pain. It’s part of your overall plan. But if it’s painful, you either didn’t have a plan or you aren’t following it.
10) There is no ideal trader personality type
This is true, but not everyone can trade every market and every style. There is an ideal personality type for day trading the ES. There’s a different ideal personality type for swing trading stocks. This is why I say you gotta take inventory of who you are and what you’re able to do and then devise a strategy that allows you to use your strengths and stay in your comfort zone.
11) Fear and Fear drive the markets, not fear and greed
I disagree. I still think it’s fear and greed. When I buy a stock at 20 and consider taking profits at 24 but I don’t even though I obviously should, it’s because I’m greedy. Plain and simple I want more (not that this is a good thing).
12) Keep it simple: Up-Down-Sideways
Of course.
13) Make sure the size of your bet matches the level conviction you have in it (No Edge, No Trade; Small Edge, Small Trade; Big Edge, Big Trade)
This is extremely important. Everyone talks about win/loss ratios, stops, making more on your winners than you lose on your losers etc. Nobody talks about varying position size. It’s more important in my opinion.
14) Making money is easy, keeping it is hard
I don’t differentiate between making money and keep it (which is another way of saying not losing it). But I will say making money and keeping it is easy in some environments and hard in others. Know what kind of animal you’re against.
15) H + W + P = E (Hoping + Wishing + Praying = Exit the Trade!)
If you feel yourself going “on tilt” it’s probably time to take a walk.
16) Trading is NOT like sports
I may have to do an entire post about how trading is like sports. I don’t agree with the author’s analogies/examples here. Perhaps he can be a little more specific because while some sports aren’t like trading at all, others are very similar.
a. Before an athlete takes a shot, he or she is NOT supposed to think, “What if I mess up this shot?” ; In trading that is called “risk management”
I disagree. In sports you can mess things up because you are the one performing the act (think: basketball player taking a shot), but in trading, you take a position and then the market does the work, and you have no control other than to remain in the position or get out. If you get in a position and it goes against you, you didn’t mess anything up because you can’t control the market. In trading, as long as you have a sound plan and you stick with it, losing money isn’t considered messing up.
b. In sports, when you miss a shot, you don’t lose points
A baseball player’s batting average goes down when he doesn’t get a hit…so does a golfer’s score etc 🙂
c. In sports, the opponent adjusts to what YOU do; In trading, the market does not know or care about YOU
Trading is you against yourself, so the author should pick a sport with a similar dynamic…such as golf. The course doesn’t care about you. It is what it is, so the battle is between the golfer and himself.
d. In sports, you focus on improving weaknesses; In trading, your strengths are your weaknesses and vice-versa
I don’t know what the author means when he says “your strengths are your weaknesses and vice-versa,” and I don’t think athletes need to improve their weaknesses. There are many professional athletes who specialize in doing one thing well even though they play a team sport that requires many skills. Think: Dennis Rodman (great rebounder, terrible shooter) or Steve Kerr (great shooter, useless defensively). In trading you don’t have to work on your weaknesses. You can find something you are very good at and committ to only doing that one thing.
e. In sports if you get poor results, you need to practice harder, put in more effort; In trading, effort is not positively correlated to improved performance
Yes and no here. A golfer who has talent but isn’t performing well in tournaments probably doesn’t need to work on his physical game; it’s his mental game that’s most likely lacking. In trading, there’s a limit to what can be learned at 10 o’clock at night looking at charts. There is no substitute for seat time while the market is open. In my opinion, most traders spend too much time studying the market (when it’s closed) and not enough time experiencing the market (when it’s open).