First you have to identify an edge
Once you have an edge, fear is what prevents you from realizing your system's edge
3 development stages
- Mechanical - moving stops at this stage will cause you to perform worse.
- Subjective - understand nuances of your strategy, you can move stops based on your gauge of high / probability once in the trade and gain more edge
- Intuitive - in the zone and you can sense the flow but can't really explain it - generally only lasts for a couple hours a day.
Euphoric trading generally leads to bad draw downs
Learning to trade without fear is believing you don't have to know what is going to happen on a trade by trade basis to win or make consistent money.
- The edge will only appear over a series of trades.
- Trying to only enter trades that are 100% winners leads to not placing stops because you think the trade will work no matter what so a stop is not needed.
- Prices moves because other traders buy / sell after you. You need other people to move price. If they don't appear there is nothing you can do about that.
The information displayed on the screen is not inherently threatening. Markets become threatening when your expectations define information as:
- being wrong
- losing
- missing out
- leaving money on the table
3 types of traders
- Consistent winner w/ small draw downs that are a normal part of any system
- Semi-consistent trader w/ extremely large draw downs that are the result of trading errors
- don't define risk in advance
- define risk but don't take the loss where system's edge is likely to work
- hesitate - getting in too late
- jump the gun - get in too soon when signal never develops
- get out of winning trade too soon - leaving money on the table.
- let winning trade turn to loser w/o taking profits
- move stop closer to entry point, get stopped and market trades back in your favor
- Consistent loser w/ large wins
Large Institutions create reverse auctions where they drive price one way, collect stops and then drive it back. Most technical analysis has no relationship to why these large institutions drive price. Technical indicators quantify the collective information
Change your expectations of the outcome from a winner to that just something random will happen.
Your state of mind is always the absolute truth. Nobody can tell you that you're not feeling fearful or confident. How you interpreted market events to get you into that state of mind can be dysfunctional.
- dysfunctional belief - the reason for putting on the trade has almost no correlation with why the market actually went for or against you.
- analysis just puts you in a position to recognize when the likelihood of a trade has a particular outcome
- anything that you're thinking, saying - negative thoughts, wasting time, unnecessary chatting
- doing - moving stops, trading where you shouldn't or marginal trades, feeling bored.
- deliberately refocus your attention on your goal - always go 1 step further.
Stop analyzing - technical analysis does not improve 'in the moment'. If you get a signal, take your trade with your plan. Stop thinking and trying see why the trade will work or not
- An identical setup has a random outcome. The same people involved with that last trade are no longer here
- Disconnect the mechanism in your brain that any similarity in the past has any bearing on the future. That is the difference in thinking in probabilities that separate good traders from everyone else.
Trade for a new reason - acquisition of new skills not the outcome of the trade.
- Take 20 trades in a row and set up the risk to take it assuming 20 losses in a row.
- You have to be completely comfortable losing the $ amount of 20 losses in a row.
- Rarely has he met a trader that doesn't have a problem after taking 3 losses in a row.
- Once you have the skills you'll make all the money you want but you have to be comfortable potentially losing every time.
Professional Mindset
- Anything can happen
- Every moment is unique
- Edge is an indication of a higher probability of one thing happening over another
- There is a random distribution between wins and losses on any given set of variables that defined an edge
- You don't need to know what will happen next.
