Weekly Perspectives: Is trading psychology a waste of time? 6/8-6/12

Hi Traders,

Thanks again to all the traders who made it out to last Wednesday’s meetup!
Each meetup continues to draw a diverse group of traders and it’s good to see that we’re organically building out a community of traders so willing to share ideas and perspectives.

Hope to see many more of you at our next Meetup in July. Keep your eyes open for the next dates and times.

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Weekly Commentary –

This week we saw slightly bearish action to start the week on the major indices, however after all was said and done we ended up near where we began.

Another week, and another 5 trading sessions stuck in the same range that we’ve been trading in since December.

Although this type of range bound trading can be frustrating and may seem outside of the norm for the uninitiated, this type of price action has actually occurred numerous times in the past with most of the instances resolving to the upside.

Continue to keep your eyes on how sector rotation is playing out. Right now there are no signs of a rush to the exits.
Guidance for intermediate or longer timeframe traders – continue to overweight your longs.

The major sectors are posted here on Finviz for your viewing pleasure –
http://finviz.com/screener.ashx?v=211&ft=4&t=XLF,XLY,XLK,XLB,XLI,XLE,XLU,XLV,XLP

Finally this is a great market for options writers who can take advantage of these ranging markets and collect some premium.

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Discussion of the Week – Is trading psychology a waste of time?

This week I thought I’d highlight a great discussion started on our Meetup’s message boards.

What message boards you might ask?
Don’t worry you’re not the only one who can’t find it. 🙂
Click hereMessage board.

We all have heard about the necessity of maintaining a strong trading psychology but is all this talk and focus on trading psychology really necessary?

Personally I appreciate this discussion as it’s great to challenge assumptions. I don’t believe in holy cows and as traders I don’t think you should either. Iron sharpens iron.

So here’s my perspective on the matter.

First and foremost you need a system that has a positive expectancy in order to be consistently profitable.
I don’t think there’s any debate there.

It’s unfortunate that most traders fail to do the rigorous but necessary work to either manually backtest (or automate the backtesting of) their trading systems.

This commonly results in having the misplaced belief that it’s their psychology which is causing their lack of consistency. The reality is that if you’re trading a system without an edge you won’t be successful in the long run.

My recommendation for all new traders is to take a systematic approach to trading in the beginning vs. trying to be a discretionary trader off the bat.

Now the process you describe of developing, backtesting, testing, and finally going live on a system is in fact an exercise (FRAMEWORK) geared towards creating strong trading psychology.

So as a trader, whether or not you are consciously aware of what you are doing, going through that tried and true framework you described is one that has shown to help traders psychologically adapt to trading.

Let’s get deeper now.
As it pertains to emotions, most psychologists accept that when we are confronted with strong emotional situations we tend to respond with an ingrained, learned reaction that is rooted in our past.

These patterns of adaptation help us cope with overwhelming situations and with our reactions to them.
These patterns of adaptation are called defences, and they shape how we experience our internal world and who we cope with the external world.

We could go deeper here but I think what we can now recognize is that the framework of developing a system with a positive expectancy and slowly taking live is in fact a defensive method that is structured to help regulate emotions, down-regulate anxiety/fears, and manage stressful scenarios.

Let’s recall now the story of Richard Dennis and his Turtle traders.
Back in 1983 Dennis handpicked about 20 traders and literally handed them a winning system.

Yet, after his experiment ended most of those handpicked traders had failed while a small few achieved amazing results.

So what is it that differentiated these traders – in my opinion it all comes back to trading psychology and mindset.

Interestingly you yourself say that if you’re unable to follow rules then maybe trading is not meant for you.

Richard Dennis himself found this out the hard way as there are numerous stories out there how Dennis deviated from his own rules and discipline, and blew out various accounts, finally retiring from managing people’s money in 1988.

So I’ll end here with one last thought.

Have a winning system but following that winning system requires discipline which in turn is regulated by your emotions and mindset.

In my opinion that’s why trading psychology and the continued development of self awareness and our emotional selves matters.

Love to hear your thoughts, let’s keep the discussion going!
Click here.

Happy trading,
Houston

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Weekly Perspectives: Is trading psychology a waste of time? 6/8-6/12

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