Psychologically unfit to trade?
BPA trading room Q&A: April 5, 2016
Question: Do you think some people are psychologically incapable of trading successfully? Later on this year, I’ve been trading for a decade, and no matter how small I trade, the account just gets smaller every month.
Audio duration: 5min 16sec
Trading psychology help in abundance
There are a lot of people, if you look on the internet, type in, do a search “I need psychological help as a day trader” or something. There are tons of people out there who claim that they can help you.
I once 20 years ago paid somebody for some trading psychologist. I listened to all the audiotapes, and at the end I thought it was a bunch of nonsense. I say that with a sister who’s a PhD psychologist and a brother who does sociology, so he’s really into psychology.
Takes time to figure it out
Do I think some people are psychologically incapable of trading successfully? Totally. I think there are some people who are psychologically incapable driving a car, or doing anything, working a cash register at Walmart. I’m not trying to make fun of your question. I understand what you’re asking, but the way you asked it, the reality is of course there are going to be some people, no matter how hard they try, that they’re just never going to do it. It took me 10 years to figure it out.
Scalping with tight stops
So when you say that you’ve been doing it for a decade, even trading small, my guess is you’re probably scalping too much and you’re not using proper stops. On a day like this, you’re probably buying the top of everything and selling the bottom of everything, even though I’ve been saying all day “trading range day, trading range day, trading range day.” To me, it’s not a question of psychologically incapable as if there’s some emotional block. It’s probably that you know what the right things to do are, and you’re just not doing them. You’re waiting for higher probability, so you buy the close of 8 or you buy the close of 65, thinking “Okay, bull bar breaking out, we’re finally starting to trend.”
Trading range day
But it’s a trading range day, and you know Al’s 80% rule: 80% of the time if you’re in a trading range day and the market’s trying to break out, the breakout is going to fail and reverse. You have to assume disappointment will be taking place all the time on a trading range day.
Trading successfully, or not?
I would rephrase the question, do I think some people are psychologically incapable of trading successfully – I think some people are just really stubborn. I’m really stubborn, and it took me a long time to get over a whole bunch of bad habits that I was just repeating year after year after year. I knew what the right things to do were, and I would always have a reason why this was an exception, this is why I should not do the right thing, I have to do something else. It was just all nonsense and lying to myself all the time.
Trade small, trade Forex
Trading small I think is very important. You might also, as an alternative, trade Forex markets and trade higher timeframes like 1, 2, 3 hour charts in Forex markets and trade really small, like 10,000 units. You know where the stops are; just put the stop there. One of the nice things about Forex is you’re not going to watch it 24 hours a day because you have to sleep. So you just put your orders in and sleep, and trust that if you win, you make $20, $30, $50; if you lose, you lose $20, $30, $50. But that would be an alternative for you, to trade really wide timeframes.
Another alternative is to do the equivalent with the E-mini. You put up a 60-minute chart and say “Wait a minute, Al. Some of those 60-minute bars are 8 points, 10 points tall. I don’t want to risk $500 on a trade.” That’s right. So you don’t trade the E-mini; you trade options. You trade a call, an at-the-money call or something. If you buy it 1 month out, for example, it might cost you $250, or you can buy it at slightly out-of-the-money and maybe it’ll cost you $200. The worst you can lose is $200. But in general, most option traders don’t want to give back half their premium, so theoretically if you paid $200, $300 for a call, the most you’re going to lose is $150 because you’re going to get out once half the premium is gone. That would be another way to do it.
Anyone really can trade
But as far as the idea that some people are wired in a way so that they cannot trade successfully, I don’t really think so. I think anyone can do that, and I think trading small is a good, important component of that. But I’m sure if you look at your trades, on a day like this you’re buying at the top, you’re selling at the bottom. Early on I keep saying “trading range day, trading range day.” I said that so many times today. In general, if it’s a trading range day, if it’s in the bottom half of the day, only look to buy. If it’s in the top half of the day, only look to sell.
Rely on logical stop
It’s also better if you can use limit orders and risk 3, 4, 5 points. If you pick any of the trades that you took today, if you sold in the top half and risked 3, 4, or 5 points, or if you bought in the bottom half of the day’s range and risked 3, 4, or 5 points, I bet you’ll be shocked at how many good trades you actually took today. So I suspect that trade selection is a problem – you’re buying high on a trading range day, you’re selling low – and management is a problem. You’re probably getting out too early and not relying on what is a logical stop.
All right, hope everybody has a good night.