Month: April 2016

Feeling stuck

Posted on by Anatoliy Schneider

Trading is probably one of the most difficult endeavors one can choose in life. The amount of knowledge to learn is overwhelming, the amount of information to read, process and understand in real time is pushing our limits as human beings. It can be really draining emotionally, exhausting physically. You do not get any reward from doing what you do other than monetary – and it can take much time before these monetary rewards are starting to come your way.

There is no one to support you either when you are trading privately. There is no value that you are generating for the society, unless you do so with the money you earn on the market.

Given all that, it is only normal that on many occasions you will be stuck. You will feel like quitting, depressed and frustrated. What do you do in these situations to help you move on?

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First let’s see why these black stripes happen in our trading career. Interestingly enough, they are not necessarily caused by big losses that one might experience. I think we are most vulnerable to such emotional drawdowns during our learning phase. It can take years of regular trading education, including practicing the concepts on a demo or a small real account before the trader starts seeing the light in the end of the tunnel. During this time there are many challenges that we must deal with.

  1. Income generation. The chances are that any starting traders will not be able to make money consistently for more than a year – and that is a very optimistic estimate, given that there is right learning information available. It is very difficult to work another job while studying and practicing the markets.
  2. The overwhelming amount of information. Depending on your goals, you might want to implement a simple trading system and do it consistently every single day, not bothering to learn much more about the markets. This approach never worked for me, and was actually preventing me from moving forward with my trading, as I was hoping to “make it” with very simple methods, refusing to learn more.
  3. Operating under complete uncertainty.
  4. Having to do the same steps every day consistently that can be difficult physically (our brain is just like a muscle, and will get tired from too much mental work).
  5. Not having a clear work process. This is a huge one. Even if you are ready to put in all the hours required, ready to show up consistently every single day to analyze the market and find the entries according to your trading system, you will be frustrated more often than not unless you have a clear Daily plan, Journaling method, Analysis and Entry rules.

My own approach to all these issues changed greatly over the years, and only very recently I was able to work positively with them.

Five years ago I would get excited about some new trading idea, work for a week or two like crazy on it, fail to get immediate results and proceed to become extremely frustrated, abandoning all trading for many weeks. It is obvious that such attitude was preventing me from reaching any consistent success.

Two years ago I would start trading a small live account or a demo daily. I would do all the necessary analysis, put on the trades and do some notes in the journal. I would not have a systematic approach in doing it however. More often then not I would finish 2-4 weeks period with reasonable profits, but would burn out completely in the process. The result was abandoning the trading again.

Just recently I started trading consistently, analyzing the market every single day, researching different trading opportunities and putting the trades on. Despite all the technical knowledge that I accumulated over the years I am still making many mistakes and moving forward only by analyzing and working through these mistakes. I record and analyze every single trade that I place, writing a journal entry when opening the trade and another one when closing it.

Only by working through one mistake after another, one failed trade after another, I am building a consistent trading system.

The main factor that gives me confidence moving on every single day, placing the trade, not quitting, is market psychology that I’ve been learning over the past two years. My technical understanding of the markets did not change much, but my attitude has changed dramatically. Every time I see a stop loss being hit I am completely calm and accepting. Every loss I get is just another lesson. Thanks to building a very rigid money management system I am completely comfortable with the price I am paying for these daily lessons. This is when real trading education happens – after all the theory and analyzing the markets on the history.

Following the Market

Posted on by Anatoliy Schneider

One of the most important concepts in trading is following the market. I was always looking at the market trying to predict its future: what is it going to do the next candle? What trade can I place right now? Often I would go back in history and watch some trading pair bar by bar and still make the same predictions. Not only that, but I would actually feel frustration when the market was not doing what I expected it to do.

A very good exercise is to watch the market unfold, mentally (or in writing) noting what it is doing right this moment (this candle), and go to the next candle with open mind. I call this market meditation, because it takes all our presence, all our ability to control the thought process in order to just watch what the market is doing instead of trying to tell it what to do.

When doing this exercise, I often catch myself surprised after the next candle is revealed. I am surprised because I did not expect the candle to be that way, and yet the whole purpose of the exercise is to stop all my expectations. Why is it so difficult to just let the market be?

This exercise also proves yet again that the market can do absolutely anything. It can go in any direction by any amount at any given moment. When we catch ourselves surprised, not expecting the current move that has just been revealed, it is very important to listen inside – to the thoughts that float in our brain and the emotions that we feel. Is there anger, frustration, disappointment? Is our brain trying to judge us because we were not able to “predict” this move? Try to stop this incessant thinking – if there is anything to judge, it is our inability to let the market go, and follow the flow.

And yet, there is another side to this. Sometimes we see the market close just as we wanted, and we feel a rush of adrenaline, a pleasurable sensation that tells us we were “right”. In this exercise the excitement is no better than the frustration we’ve just experienced when the marked defied our expectations. Any emotion about the market implies a conscious or subconscious judgement on our part.

Remember, the purpose is to watch what the market is doing – without trying to predict, understand or judge. The market is supplying us with an endless flow of information. I believe that we can never deal with this flow constructively, unless we first learn to let it be just the way it is.

So give it a try:

  1. Open any trading pair on any timeframe
  2. Go back in history a couple thousand candles and start revealing one candle after another, pausing at least for a couple seconds on each
  3. Make a mental note how the current candle has closed
  4. Note any emotions, feelings or thoughts that you might have, accept them and let them go
  5. Go to the next candle whenever you feel like it

You can also add any indicators you usually watch – but avoid any indicators that give you a signal to buy or sell. For example, you can add a moving average and then note its position relative to the price chart on each candle. At the same time, do not say that it is a sell signal because the price has crossed the moving average. Remember that any trading signals are not generated by the market, but by our brain – one way or another, for better or worse, our brain has learned to recognize a particular pattern as a buy or sell signal. In this exercise we want to avoid such patterns, because they are nothing more than our subjective judgement. An indicator simply gives us another variable, another source of information for us to note. This is the real purpose of any indicator – to help up clarify what the market is doing right now, not what it is going to do in the future.

 

The most important belief

Posted on by Anatoliy Schneider

By far the most important belief on the Market is in myself.

Throughout the years I’ve been always trying to perfect my trading system, analyzing each losing trade and trying to figure out what went wrong. I always assumed that any loss means that I didn’t recognize some obvious hint the Market was giving me. I assumed I made a mistake that must be fixed before I take the next trade. That kept me going in circles for many years.

The problem with that attitude is that I was believing that it is possible to be always right. I wanted to be always right. In essence, I didn’t have any belief in myself so I was trying to build an ideal trading system that I could believe in.

A breakthrough was the realization that some trades are simply not working out. There is nothing wrong with them whatsoever. They were taken at the right time and at the right price in the right direction. And yet, the Market did not go in that direction.

When I define “the right trade” or “the right direction” in terms whether the trade made profit I am in for trouble. Basically, I am making sure that any loss will make me “wrong”. A different attitude is to define “the right trade” as the trade that has been taken according to my trading system, without any anxiety or hesitation. The trade might still lose me money, but it is “right” because it wins in the long term. Even when the trading system is not good enough to give me a winning edge, the trade is still “right”, because by following my rules I will soon find out the problems in my system and improve it.

On the other hand, when I judge every losing trade as “wrong”, I will experience emotional pain. If a trade is capable of causing me pain, disturbing my emotional balance, I will soon develop a fear of taking a trade. When I start hesitating pulling the trigger, my belief in myself is further diminished. Before I know it, I am trying to improve my trading system again, trying to make sure it will never lose and become the Holy Grail I can believe in.

Until we can fully believe in what we are doing we can never become consistent in trading. If there are no rules in your trading, you are going nowhere. If there are rules in your trading, which you constantly adjust to make sure the Market does not cause you emotional pain, you are going in circles still. We have to change what’s inside before we can start seeing what’s outside clearly.

 

Subjective vs Objective

Posted on by Anatoliy Schneider

Despite of all the common advice in trading psychology books I’ve been reading I was never quite able to develop an extremely rigid trading rules in my system. Mark Douglas suggests to “have rigid rules and flexible expectations”. However, due to my belief of how the Market works, I find it difficult to explain my analysis or trading patterns in simple “if… then” terms. If I would ever teach anyone to trade, the best instructions I could offer would be something like:

  1. Make absolutely sure your Money Management will never allow you to lose
  2. Learn trading psychology (accept the risks and responsibility)
  3. Watch the Market daily
  4. Build an opinion
  5. Embrace uncertainty and test your opinion with your money
  6. Learn from the feedback Market is providing to you

In my mind, most of the trading setups have always been relatively subjective. The Market would just “look like” going down. At some point I just “feel like” getting out. However, the more I trade the more I recognize that there is certainly a place for fair amount of objectivity in trading as well. I just do not believe that objective concepts can be applied just about anywhere in my trading.

Cutting right to the chase, here is where I would try to define my trading objectively:

  1. Money Management rules
  2. Business organization (trading diary, trade analysis routines, preparation for trading routines, etc.)
  3. When NOT to trade
  4. When I pay myself – take my first profit and put the remainder of the trade in BE (e.g. close 30% at clear Reward:Risk target like 3:1)
  5. Checking minimum conditions any trading setup must have

And here is where I would trust my feelings and intuition (apply subjectivity) in my trading:

  1. Most of my market analysis, i.e. building an opinion or a bias for certain trading instrument
  2. Final decision whether to take an entry

Basically, what I am doing, is building a strict, rigid framework that protects me from making big mistakes and provides some structure for my trading. Next, I allow myself certain amount of freedom inside of that framework where I can trust my intuition (experience) about the Market.

For example, I am making sure that no matter what happens, any trading day, week or even month CANNOT result in a significant loss (1).  I also know what kind of work I must do every single day in order to manage my trading properly (2). I am making sure that under certain conditions (Market environment, life situation, etc) I am not going to trade because I do not believe that my intuition/emotions will provide appropriate judgement under such conditions (3). Next, I am making sure that I pay myself automatically, without even evaluating the current situation on the Market, as soon as certain amount of profit is reached (4). Additionally, before executing any trade I will make sure that it has some necessary parameters that I have defined – this gives me confidence to pull the trigger without hesitation (5).

However, I have to leave most of the Market analysis up to my intuition. Even though I have certain rules and checklists for Market analysis, in the end they only help me to clarify how I am feeling about the current Market situation (1). Additionally, even when I have a bullish bias on a certain currency and all minimum conditions are met to establish a position in that direction, I will still choose to miss that opportunity if I do not feel good about it (2).

The implementation of subjectivity in our trading is extremely difficult unless we are self-aware of what is going inside. It is still important to analyze our emotions and opinions, making sure that they are not caused by anxiety or some psychological issue that we were not able to resolve completely. Obviously, I am nowhere near perfection reading myself or the Market. However, I find it impossible to trade unless I listen to my intuition. I cannot build strict logical boundaries around my life and so I do not expect to put any part of my life (e.g. my trading) in a box either.

 

Recommended reading: Intuitive Investor by Jason Apollo Voss

Pattern Addiction

Posted on by Anatoliy Schneider

Developing a Trading Style

Someone who is watching the markets for considerable amount of time learns to see certain patterns almost automatically. Oftentimes we do not even have to name what’s going on in the market, we just know that the current Price Action looks like something we would want to Sell or Buy. There is nothing bad with learning to recognize certain patterns and use such recognition to read the Market. The issue lies in closing our eyes to everything else the Market is showing us, as long as our favorite, easily recognizable pattern is present.

I’ve been watching the markets for more than 11 years now and all this time I’ve been mostly contrarian trader. I would look for opportunities to Sell at exact highs and Buy at exact lows to get great Reward/Risk ratio in these trades. Of course, I realized that the chances of such trades following through are not very high and that such trading opportunities are not provided by the Market often (especially on Daily charts). However, I kept reminding myself of the great return such trades could offer and kept concentrating on them nevertheless.

For many years my main problem was giving up too early. When you start fading a move you have to be ready for a couple failed entries. There is nothing more frustrating than giving up on a trading idea after 2-3 losses and seeing the Market follow through according to your exact scenario – without you. As I studied Price Action and, much more importantly, psychology, I was able to stick with my trading ideas longer and started generating profits out of them, riding some really nice trends. I accepted the reality of the Market – that it can do anything at any given moment – and would be contempt when my idea did not work out.

As I kept on trading and analyzing my successes and failures I started noticing how rarely valid contrarian opportunities (supported by Price Action weakness) were available. Additionally, I noticed how often I would fade the trend, get my small loss (compared to potential profit) and see the trend continue without me for another couple days or even weeks.

For a while I did not even see any problem with that – I just thought of myself as a Contrarian Trader, and was pretty happy with overall results of my trading. However, through constant analysis I could not help but notice how much potential I left on the table by not even considering going with the trend. To me, any time the price is coming to Support or Resistance is a trigger to consider fading such move. Naturally, there are many filters that I developed over the years not to get into obvious traps, but the point is that fading the move is the only possibility I would consider. If I saw that a breakout is likely I would just forget about that setup and move on.

Adjusting Trading Style

Finally, I started reworking my trading system and adding new setups into my arsenal – with-the-trend setups. After spending a couple weeks going through history I identified valid patterns that I wanted to include into my method. I then proceeded with my trading, now looking for these trend setups as well. I thought that because I defined what good with-the-trend entries look like I should be able to jump on a couple soon enough. However, what happened next was quite surprising.

Because of constant work on my mindset and psychology I was not afraid of losses. I also realized that my Trend Setups may not be of very high quality, so I was ready to rework them as necessary, after analyzing a couple live Trend entries. I simply did not see where the problem might come from as I was ready for anything, except… In the next couple weeks of trading I did not find a SINGLE trading opportunity with the Trend! I kept taking my contrarian entries pretty actively, with about the usual degree of success, so I still saw patterns and took trades. But for some reason I just could not find any Trend entries whatsoever – at least not live.

Naturally, I kept analyzing my performance, taking notes about each live entry. I then saw that almost every time I was analyzing a failed contrarian entry where the price was breaking through and continuing with the prior trend, it looked exactly like one of my Trend setup pictures that I prepared. After seeing quite a couple of these extremely clear (in hindsight) Trend setups I started wondering, why the heck didn’t I see a single one of them live? I’ve been watching the Price Action on that exact trading pair very actively, trying to find an entry to fade the trend, but I just did not see the opportunity to follow the Trend, even though it was right in front of me and looked exactly like one of the setups I have prepared.

I finally realized that after all the years of trading the markets in my particular style I became completely blind to any other information the Market was trying to tell me. I would see only what I wanted to see and ignore everything else completely.

Psychological Blindness

Mark Douglas is sharing a very interesting example in “Trading in the Zone”, Chapter 10 (p. 179), where he decided that he wanted to start running. Initially he met extreme resistance just getting out of his apartment and starting running until finally, after great effort and struggle, he “became a runner”. He started thinking of himself as a runner, seeing himself as the runner. Running was something he was not just doing now, it was something that was very natural for him to do. There was no more mental resistance whenever we wanted to run.

Just like Mark Douglas has become a runner, I have become a “Contrarian Trader”. It was not easy, and I struggled for years to be able to fade the trend comfortably, but at some point most of the resistance just went away – fading the trend was something that was very natural for me to do as a Contrarian Trader. Trading with the Trend on the other hand, wasn’t.

Through many years of hard work I have developed a trading style that was easy for me to follow. However, now that I realized the limitations of trading in only this style, I wanted adjust it. I did not want to become purely Trend Trader, but I wanted to develop a more universal approach, allowing me to look for opportunities during the rejection of Support/Resistance but also when the price is already trending from one S/R zone to another.

Unfortunately, recognizing the need for a change, even recognizing what exact change we want to achieve, is not enough to achieve it. Now that I defined a new mental picture of how I wanted to trade I knew what kind of mindset I wanted to develop in order to become proficient trading the new Trend setups in addition to my Contrarian setups. Implementing such a change of mindset turned out to be a pretty complex task.

After some additional mental work I started seeing Trend setups, but the resistance to act upon them was still great. My brain would quickly find one hundred reasons why I should NOT take a particular Trend setup, no matter how good it looked originally. After recognizing the hesitation problem I started pulling the trigger on more and more Trend setups (almost forcing the decision sometimes).

Next issue was holding the Trend trades. While I would be able to fade a trend and ride the trade in the new direction for weeks, comfortably sitting through heavy draw downs in my floating profit, I did not have any confidence in riding the trend if the trade was initiated with one of my Trend setups. Any time the trend would show some kind of correction, I would see a Contrarian entry possibility. Even though many of such possibilities would be filtered out and I would not establish a position to fade the trend, just seeing one contrarian pattern was enough for me to close my with-the-trend entry.

Trading Mindset

The experience I went through showed once again that having a good Trading Method is not even 50% of our success. In addition to having the edge in Market Analysis and finding good Entry Setups, one needs to develop a proper Mindset that will allow him to trade such method without any resistance. Most traders consider that Trading Psychology is about hesitating pulling the trigger, or worrying too much about an open position. My experience shows that sometimes our brain can simply block out all information that it is not comfortable with. If our Mindset is not developed to work with our Trading Method, we can be assured that the brain will find most elaborate tricks to ruin all chances of our success.

We may believe that trading as about Market Analysis. We may believe it is about being right and knowing what the Market will do next. Some believe it is about statistics (and there is some truth to that, in my opinion). But in the end, trading the Market is about people.

People make decisions and these decisions move the price. People are extremely susceptible to mistakes. People, in general, have huge ego that is telling them what to do. Studying Human Psychology can help us to understand people better. We don’t need to have a masters degree in psychology to trade, but we need to be self-aware and willing to analyze our every thought, decision, action. We also need to be willing to empathize with other traders – be it small speculators (like most of us), large commercial traders, non-commercial businesses that just want to hedge their risks or huge multinational banks that really have the capacity to move the market. They all have their own goals, desires, biases, emotions. They all make mistakes. Understanding this, not only we can be more open to searching for our own mistakes but also we will understand the psychology of other traders and will be able to profit from the mistakes they make as well.

Recommended reading: Emotionally Intelligent Investor by Ravee Mehta

Accepting Uncertainty

Posted on by Anatoliy Schneider

As I am doing historical Price Action and Strength analysis I am seeing a lot of great opportunities that I was watching live and missed nevertheless. I can see clearly that the Market is providing me with a couple great entries every single week, and yet I am not acting on many of those.

Naturally, when I look back, I make pictures only of great trades that I missed and so I fail to realize that there are many signals that look just as great in real time but would lose money if acted upon. This goes to show that picking out trading signals is a losing proposition on the whole. We must act upon anything that looks like an entry trigger in the potential long term direction.

Really, when we come thinking about it, how else can it be?

Any entry trigger is uncertain. It can never be a 100% indication of a profitable trade ahead. It is just an indication of a familiar pattern that is utilize in our trading system.

Any future trend is only potential. It can never be certain, we can never know how the Market will behave in the next couple days.

So the trading process is very simple:

  1. Accept the uncertainty
  2. Recognize an uncertain, potential future long term trend
  3. Recognize a pattern that simply looks like an entry trigger
  4. Accept the uncertainty
  5. Pull the trigger

This simple procedures assumes that all Money and Risk management is taken care off, and one should never even approach the markets without it. After all, this is the only area of our business where we can achieve some certainty.