Tag: Uncertainty

Fighting the Market

Posted on by Anatoliy Schneider

No matter how much I am trading the Market, it never fails to fascinate me, always providing new lessons. It can be a harsh teacher sometimes, but always fair. Unforgiving of any mistakes, it always keeps me in check.

Being a trader is a conscious choice I have made. Being a miserable, losing trader is a choice I was making for many years through unnecessarily fighting the Market. I have never won – not even once.

Every day I face the same choice over and over again – to follow the Market, being grateful for every lesson it patiently teaches me, or to fight against it, making it into a vicious enemy I can never win against.

Being a trader is not always easy, but it is only me who can turn this vocation into a miserable pursuit of psychological stress and financial pain. And it is easy to find myself struggling – all I have to do is start expecting something from the Market.

Expecting to be right. Expecting to know the future, predicting the price. Searching for certainty where there is none. Refusing to accept the contradiction. Trying to avoid discomfort.

Unacceptance of the way the Market is – the only cause of frustration, confusion and, ultimately, suffering that many traders experience daily.

Consistent Market

Posted on by Anatoliy Schneider

The work you invest into the Market must be consistent, day in day out. Each time you allow yourself a day off or a week of half-hearted effort, you are making a big step back. Until the state of consistency is firmly established in a trader’s mind, he is not a trader.

Being a trader means willingly, gladly, gratefully investing personal time into studying the Market. All the required work must become effortless, if one is to be called a trader.

To trade with conviction you have to first establish a conviction in your daily trading habits. You cannot afford losing momentum even for a day. You cannot afford failing to appreciate the valuable lessons the Market offers each and every day.

To profit consistently, you must work consistently. The Market is consistent – consistently uncertain, complex, yet open for everyone to learn. The Market is an open book – trading profitably is simply a matter of learning the language in which it’s written.

Uncertainty

Posted on by Anatoliy Schneider

When you look at the chart about to take a trade, you are still hesitating, still unsure whether this is the right one. You are still uncertain about pulling the trigger.

Remember – it will always be like this!

No matter how much you trade, this feeling of uncertainty for the outcome of any one trade is not only to be expected, but to be desired. This is the feeling that tells you – you perceive the Market correctly.

Recognize the uncertainty, accept it with a smile. The nature of trading lies in this everlasting uncertainty, never being sure about the outcome of any given trade. Having accepted the uncertainty – pull the trigger, take the trade.

If you already have a solid system, then over the next 20 trades you will turn a profit, of which you can be certain. If you are still in the process of fine-tuning your system, it is only possible to fine-tune through placing these trades amidst all the uncertainty the Market throws at you.

Be comfortable with ambiguity. Take the fear out of equation by accepting that losses are needed to turn a profit, by accepting the uncertainty as the core part of the game. You are only afraid of something you try to avoid. Fear dissipates as soon as you embrace that which you are afraid of.

“I should only take 100% certain signals”

Posted on by Anatoliy Schneider

I should only take 100% certain signals – the ones that I know will not fail me

This one is tricky. It seems that it makes good sense. Shouldn’t we all analyze the market properly and find the best possible trading opportunities? Why should we even bother taking the trades that we are not certain about?

So how do you feel, think and act when you believe this?

  1. Reluctant – “This signal does not look quite certain yet…”
  2. Frustrated – “I’ve been analyzing the market for hours now, but no trades look certain enough yet!”
  3. Reckless – “Now that I found this 100% certain signal, I can scale up my position and I don’t really need Stop Loss either – this trade can’t fail!”
  4. Worried – “Well, this trade does not behave quite as I expected, but I am sure it is just a temporal correction.”
  5. Hopeful – “I should just double my bet while Market gives me better price…”
  6. Afraid – “This does not look good so far, I don’t have much margin left…”
  7. Numb – [just stares at the screen…]
  8. Horrified – “It’s all #u?king gone! My whole account!”

The above example might be over-dramatized but it shows what can result from your inability to accept uncertainty.

You certainly get a lot of excitement trading that way, and I guess for some traders gamblers excitement is a goal in itself.

Let’s consider the opposite belief:

I should take any signal my trading system offers, knowing that none of them is certain

How do you feel when you believe in the above statement?

  1. Calm – “I am just doing my job, taking each opportunity I find”
  2. Quiet – “Every trade feels completely the same inside”
  3. Composed – “I know exactly what I am doing”
  4. Safe – “My account is always protected when I trade like this”
  5. Optimistic – “I am looking forward to positive long term results of my trading regimen”

Not much excitement, nor fun. Reminds me of one of my favorite quotes from “Market Wizards” in interview with Larry Hite:

“Larry, how can you trade the way you do; isn’t it boring?” I told him, “I don’t trade for excitement; I trade to win.” It may be very dull, but it is also very lucrative.

If you are excited about your trades, you are doing it wrong. If excitement is what you want, just go to Las Vegas – at least you get free drinks as you lose your money.

Thinking ahead of the crowd

Posted on by Anatoliy Schneider

 

When reading Price Action, one of the important concepts is to trade according to your bias before it is already obvious to everyone. You need to look for such price setups where you can already see some hints that the price is likely to move in the direction of your bias. At the same time, there is still no obvious entry setup. At this point we ask ourselves how other traders are likely to interpret the current situation.

How do you know that these early signs of reversal are not obvious to everyone else? Simple – the Market is not reacting to that setup just yet – the price is not breaking through support or resistance levels with enough conviction to show that the majority of market participants are trading in this direction.

If these signs are not obvious to everyone else, how do you know that these are correct signs? You don’t. That’s the main trick in trading – to act under uncertain circumstances. You want other traders to push the price in your direction, BUT after you are already in the market. We are seeking such a situation where not only there are enough traders who will see similar opportunity and start trading with us, but also there are enough traders who are holding the opposite position at this moment and who are ready to take a loss if the price goes against them.

If expecting a bearish move, start trading on a correction, on a bullish failure, on double top, on a bounce, etc. If you wait for the price to break a significant level, you are already too late.

The problem with waiting for too many confirmations is that we really can never be sure enough. Looking for confirmations only strengthens your desire to be right, to find a perfect opportunity. There is no perfect opportunity on the market, there is no situation when you can take a trade with absolute confidence that it is going to be a winner. But, there can be confidence that the Market is already providing a great selling/buying price and refusing it is foolish.

You see, there is nothing we can do on the market without our fellow traders. On the one hand, you need them to create liquidity and take the other side of your bias. On the other, you need them to move the price to your target after the entry – you want enough volume that will agree with your analysis as well. Whether this volume is generated through new entries aiming for profit, or taking old losses, is irrelevant.

 

“I cannot accept uncertainty”

Posted on by Anatoliy Schneider

I cannot accept uncertainty

Imagine how difficult it must be trading with such belief. In our daily lives we constantly strive for certainty, we want the outcome to always be expected, and yet there is just too much we can’t account for.

How do you behave and feel when you try trading with this belief?

  1. Afraid – The Market can take my money at any given moment!
  2. Helpless – Anything can happen and I have no control!
  3. Restless – How can I be at peace when I have no control over my trading even a minute from now?
  4. Frustrated – All my work is for nothing, because no matter what I do, I am not certain of any single trade!
  5. Miserable – I try so hard, but all I get is more frustration each day!
  6. Lost – There are no trading opportunities I can see! Any trade I consider might lose!
  7. Panicking – I just placed a trade and the Market already behaves not the way I expected!
  8. Embarrassed – All I do is making a fool of myself, I always buy at tops and sell at bottoms!
  9. Withdrawn/Apathetic – I don’t even want to look at the Market, there is no doubt it will just go against me yet again…
  10. Tired – The more I analyze, the worse results I get, my efforts – all for nothing…

Well, I don’t want to go to “Suicidal”, but it is true that our beliefs can push us into dark corners of our minds indeed.

Why are we doing this to ourselves? Why do we need to be certain of the future, when we know for a fact that it’s impossible? If you need to be certain, be certain of this:

I have no idea how the Market will look a second, a minute, an hour, a day or a year from now!

So how do you trade, when nothing is certain? Just like Bruce Kovner said in “Market Wizards”:

…making your best judgment, being wrong, making your next best judgment, being wrong, making your third best judgment, and then doubling your money.

Let’s see if your thinking changes when you consider just the opposite of the belief we started with:

I completely accept uncertainty on the market. I have no idea where the price will go.

How do you feel now?

  1. Liberated – How great it is not having to know!
  2. Concentrated – Now that I know what I don’t know, I can concentrate on my analysis better, without having to be right.
  3. Confident – Actually, now I know exactly what the outcome of my trade will be – uncertain!
  4. Relaxed – My job is to explore the opportunities, Market’s job is to show me if they work or not. I simply concentrate on my business and let the Market do its own.
  5. Amused – Each single step the Market makes is always a pleasant surprise for me – it simply teaches me and shows me where it goes.
  6. Fascinated – It is amazing how balanced, harmonious the Market is, if I but let it go!

You can have the best trading system in the world, only to be ruined by your own thinking.

True, you might not become profitable even when your beliefs are in harmony with the nature of the Market, but you will become the greatest learner, watching and following the greatest teacher there is in trading.

 

Relax

Posted on by Anatoliy Schneider

The Market can do nothing to hurt you, nothing can cause any damage to your reality, so why is it that we find it hard to just relax? How much easier our job would be if we would follow the Market, instead of following our thoughts about the Market?

The reality of the Market can never do anything that would cause you stress. Only your interpretation of the Market – your thoughts about it – cause emotions and prevent you from being detached.

Yes, it is important to have a trading system – a framework inside of which you view the Market. A trading system will cause you to interpret Market’s actions, so it must be constructed in a way that avoids all inner conflict. However, if you are unaware of your thinking, even the best trading system will fail because you will not be able to follow it precisely. You will never notice when faulty thinking enters your mind and causes you to choose incorrect interpretation of the information Market puts in front of you.

Until we learn to just relax and listen to what’s going on inside, there is no point to try building a trading system. The conflict our unconscious mind tries to hide will be projected into our trading and ensure our failure.

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