Trading Psychology Part 1: Starting Out, Losing Out, Why?

Hey folks, Tim here from Amplify. I'm going to take a couple of sessions to go through trading psychology and how we should think about trading, and how trading psychology and indeed our own psychology really becomes the overriding factor when it comes to being consistent as a trader. And I'm talking about early stage consistency all the way through to, you know, high performance consistency. So really, trading psychology, I've seen, can affect— does affect, um, trainees all the way through to seasoned senior traders. You know, it's a huge topic, so we're going to do a couple of sessions on this. This is session 1. This is really, you know, labeled Starting Out, Losing Out, and Why. Okay, so, you know, we've all had that experience from when we started trading. So let me get into this. My name is Tim Duggan. I've been working with Amplify really from around 2017 till now. I'm a senior trader and mentor to the trainees, but more so the sort of more senior traders that are working with the firm. I used to work with Genesis Capital in Australia as a trader. Then before that, Geneva Trading, who have offices in Chicago and Dublin. And you can find me on Twitter, Tim Doug. So what I wanted to start this all off with, right, is a fantastic quote from Phil Hellmuth, who— this guy has won 15 World Series of Poker bracelets. He's an amazing poker player, and I came across This quote actually, I think I heard him say this in an interview, and then I actually went and read his book called Poker Brat. But it just rang true with me so much when it, when it came to understanding trading and my experience of trading and what I see with a lot of the traders that I work very closely with, from starting out traders to very senior and experienced traders. And the quote is, you know, 'Luck is getting dealt a good set of cards. Skill is knowing how and when— how and when to bet.' All right, that is really, really important. You know, getting the tools handed to you, getting, you know, capital, and getting to sit in the seat and getting just exposed to markets that's all the easy stuff, you know, but it— but doing it skillfully, but, you know, doing something with all those tools, well, you have to know how and when to apply them, right? So we're going to go through some— a lot of this, really. Okay, so in an introduction to trading psychology, okay, we all know about the Brett Steenbargers and, you know, uh, what was, uh, the other book, uh, Trading in the Zone, and you you know, really good books, fantastic stuff. You know, Seem Barger, amazing, amazing guy. I've read a lot of his stuff, but really I want to look at a few broad topics here, okay? What, you know, we like, we need to look at what we don't know, what, why we are scared, okay? And then really, how come the more we know, the more we seem to lose money, okay? And You know, this is a direct question from a starting out trader that I was doing a little bit of work with earlier this year. You know, they turned around to me and said, it seems like the more I know now and I'm educated, the more I just can't really make a decision, and this is really difficult. Whereas when I first started trading, I was just like, you know, they were just looking at the ladder and they were like, this is really easy, you know, it's just like a computer game. And I kind of really thought a lot about that, right? So, you know, why is psychology so important? Well, really, when it comes down to it, after you learn how to place orders, how to use the trading software, connect to the market what's support and resistance, how to find support and resistance, you know, economic data events, da da da da da. You then have this information that you've learned and you're now let loose to do something with it. Okay, so what the disconnect is, is that people sort of, you know, our minds are very busy spaces and then when we're confronted with the markets, information, news, breaking news, data coming out, everything. We find it so hard to consolidate everything in our mind and to sort of, in a way, out of reflex, categorize what we should be doing and what we shouldn't be doing. And instead, there's this raw, impulsive part of us that just kind of wants to click the button, right? You know, long short, long short, short long, short long, whatever, you know. So really making money in the markets is pretty easy, right? It's pretty easy. But you know, we've all had those early trades where you get in, goes on side like instantly, and you get out for, you know, some whatever tick amount of profit, and you think, wow, this is easy. And it can be easy, all right, it can be easy, but being consistent about that and compounding that, you know, trade on trade, day on day, week on week, month on month, is really, really hard. Really hard. So, you know, there's a great book called Thinking in Bets from Anthony Cheung an amazing woman, a professional poker player, won the World Series Poker once. I think her brother had won it before her. And she has this book, Thinking in Bets, and she kind of talks about the resulting process, that because you make a decision to do A and you get a result of X, well, if you get a negative result, does this mean that this the decision in itself was a bad decision in the first place. And so she learned to disconnect her good decisions, or well, decisions in themselves from the results in themselves, because a good decision can be completely blown out of the water by the randomness of poker, for example. And that does not really change when it comes to a lot of different things. And Annie talks a lot about a Super Bowl final a couple of years ago where there was, you know, there was a pretty bad decision made by the coach in the final seconds of the game that could have won the game for the team. Anyway, go on YouTube, have a look at it, and she's well worth having a listen to. So let's move on from here. In our journey to you know, be a better trader, to know what we need to know and then work on that, we need to kind of be aware of a couple of things. And, you know, the Johari window kind of highlights this a little bit. You know, you have sector 1 as it's, it's, you know, something and everyone else knows something. This is sort of public knowledge, right? And then in sector 2, it's like Well, everyone else knows something, but you don't know that thing, right? And this is called the blind spot or the blind self. These are things that, for example, you walk out of the house in the morning and your hair is sticking straight up off your head. And well, everyone else can see that, but you can't see that, right? So you got a blind spot that your hair is sticking right up. Very plain example. Then you have the hidden self. In that, you know, you know something but nobody else knows something, okay? And that's sort of like your private mind, if you like. And then it comes to Section 4, is the unconscious self. You know, you don't know it and nobody else knows it, okay? But as we go forward in this series of trading psychology sessions, we're going to be looking at what we discover in sections 2 and sections 4, okay? Because really, to me, you can fill in section 2 here by learning, education, okay? Being aware of things, you know, being aware of a technical aspect of your trading software, or being aware of micro— macro or microeconomic events and impacts and data on the markets. Okay, but when it comes to Section 4, this is where we, you know, it's a complete vacuum of knowledge. And so we have to kind of go into discovery mode here and push ourselves to find out things. Okay, and to ask questions of ourselves, you know, am I doing this because I'm scared? Am I stopping out of trades too quickly because I'm looking at my P&L all the time? You know, and you have to ask yourself these questions, and you can use software like TraderView or, you know, Edgewonk to kind of, you know, use the maths to help you figure these things out, right? But let's move on from here, right? Okay, so we have to kind of drop a lot of baggage that we have, okay, because You know, when we come to trading, okay, we have, you know, we're probably at a minimum 16 or 18 years old, okay, at a minimum. Maybe we're in our mid-20s, mid-30s, mid-40s, 50s, 60s, who knows, okay. But the point is, the baggage is, is that we have this faulty way of thinking. We kind of think about 'Okay, this is a job, so therefore I clock in, I clock out, and I make the money.' Okay, that's not really what it is. We have to think differently about ourselves and what we want to do and how long that might take and what we need to know in order to feel comfortable doing this job of being a trader. Um, you know, there's a huge amount that we don't know. I mean, and when we are aware of that as an early stage trader, that causes a huge amount of fear, okay? And that fear inhibits us from being able to be comfortable with the fact that we're putting money at work, we're putting risk on we're taking trades because really underneath that, their subconscious, we're sitting there thinking, okay, I actually don't really know what I'm doing. There are definitely, you know, hundreds of more people in this market right now who know tons more than I do. Okay, so as we want to get better as a trader and as we educate ourselves as a trader, we need to start to let go of that concept. Okay, you know, if you've educated yourself a lot about the markets and you have taken time to keep yourself in the markets and learn how markets move, why they move, where they move to, you know, you have to start letting go of that uncertain part of you that is fearful. Because, you know, I talked about this with my mentees only last week. I said, you know, at this point you don't, you should not be sitting in your trading seat feeling at a deficit of competent knowledge to do your job. I said, you know what to do. Your job now is to just do that, just to do what you know. Okay? So you need to start start to let go of that fear as you educate yourself about markets, how they move, why they move, you know, all the different markets there are and all the different edges there are to trade these markets. And then another thing is really to just be fluid as well. So we need to start to be open to that learning, right? And you know, what happens is when when people start to, you know, trade, uh, you know, maybe they've opened up account on their own. It's the blood, sweat, and tears phase, as I call it, where you, you're, you're just messing around and not putting too much capital at risk, but you are sort of trying to teach yourself something, right? And then when your eyes are open to actually— there's a lot to learn out there, there's a lot of books, there's a lot of gurus, if you like, And, you know, then you start to say, well, I actually want it all right now in my head, and then I can start to figure this all out, right? And that can be kind of a dangerous thing, okay? So yeah, the search is on. So what happens typically now is that there's an indicator frenzy. I was speaking with a brand new trader, so someone who had just started trading about a month ago, 2 weeks ago I was talking to them and they'd been trading for about a month at that point and, you know, they wanted to just have a quick chat in the trading room so we jumped on a quick video call and I said, 'Oh, can you share your screen?' because they were interested in how I would do simple support and resistance analysis on any market and then they shared their screen with me and I could just see about 10 different moving averages 4-hour bar chart, 10 different moving averages. There were pivot points for every single day going back for like 80 days. And it's just like, okay, what— how do you trade? What's— how do you find signals? What is your edge? And they said, well, I just, I just kind of monitor the market. So the point is, is that you go on this indicator frenzy, right? You, you go look, you're like, what Wow, stochastics, MACDs, moving average, 20-day moving average, 100-day moving average, you know, death crosses, all this sort of stuff, right? And the positive thing is, you know, this will start you reading a lot of books, okay? And there are a lot of fantastic books out there on trading. I mean, One Good Trade is fantastic, Mike Bellafiore and the guys. In SMB Capital are cool guys. There's Japanese Candlestick Charting Techniques is a fantastic book. I highly recommend that. That is definitely one of the books that I would read, you know, probably try and read once a year. You know, Reminiscences of a Stock Operator, not a technical book but an interesting sort of anecdotal story about one of the greatest traders of the 20th century. You know, you can get in contact with me if you want, you know, to have a recommendation for a couple of books. Let's not get sidetracked there. You then start looking on YouTube, there's multiple gurus, there's guys, you know, creaming it, making, you know, $200 grand a day, and, you know, they just, it just seems to be so easy, and then you want to learn how they trade, and, you know, and you're getting scatterbombed with information from multiple sources. And what you don't realize is that you actually are ignorant to Edge and ignorant to, you know, not in a bad way. Ignorant is a hard word, but you're sort of sitting there just exposing your brain and learning lots and lots and lots. Right. And this is good. You know, you're getting some form of information in there, but it's not focused. Okay, and the attention is not directional. Okay, um, but you are thirsty for edge. You're thirsty really for the holy grail. You think, wow, there's— I got the— I got this charting package, there's 2,000 different indicators in here. You know, I just downloaded Thinkorswim. I think that does have about 2,000 indicators in it. And you think, wow, okay, in here there's got to be some combination of indicators, or maybe just one whereby, you know, I can find the Holy Grail and just like kill markets all day, every day, 5 days a week. Well, hey, what the news is, there is no Holy Grail. There isn't one. Sorry, guys and girls, but there isn't one. I don't know what to tell you. There is no Holy Grail. There is just clean, concise, thinking and a calm mind. And, and, you know, nothing beats educating yourself about how the markets work, how they move, why they move. And then we're gonna really come to, to what I would call the holy grail at the end of this video. Okay, so stay tuned. Okay. So here we'll go through the journey, right, of learning and starting to trade, right? So it's— I call this the Valley of Loss, okay? So, you know, here's where you put on trades, right? You take loads of trades. Maybe you start off as a, you know, a close card poker player where you, you know, you like picking trades quite well, okay? And you seem to pick them quite well. Okay, and then you get exposed to some other information or ways of trading in the markets, and, uh, you know, either which way, your confidence level against your trades is actually paper thin. Okay, if you were in a trade and I was to come along and say, I'm, uh, I'm actually on the other side of that, I think this market's going down. Whereas you're like, oh, I'm long this market and I know it's 10 ticks outside, and I'll go, okay, and then I could just walk away. I'd say 80 to 90% of the time you're gonna close out that trade, or at least half of the position. And that's because you might feel that like, you know, someone beside you or someone talking on a YouTube video knows more than you do. Right? Well, we need to trust in ourselves and we need to build ourselves up in that trust, as I was saying earlier in this session. And we frantically are using these indicators. I mean, when I started trading and found edge, I was trading a MACD histogram edge. And I don't think I was using any stochastics for the momentum on it, but I probably wasn't. But it was just MACD histograms. And looking for a 2-bar degradation. I can talk to you further about that if you want, but it's a very, very simple edge and it's very inconsistent. So, but the point is we're frantically looking and then we start to overtrade and then we start to, you know, trade into a rundown, into a deficit, you know, and we're thinking, well, why isn't this working? My first couple of trades that I took were fantastic and I like doubled my account, okay, or tripled my account. But you know, what's, what's going wrong now? Well, that's fine, I'll just keep trading, it's bound to come back, I'm bound to make money, I got this. And the fact of the matter is you've got, you've got no risk management and no edge, right? And, and what happens is you probably move a stop or take up too big a loss, your stop is just too far away from your entry, and what happens is you get a huge emotional reaction to that, right? You take a loss of X amount of dollars on one of these trades, and then you enter into this valley of loss in your mind, and, and, you know, you're so down on yourself, right? So let's move on here, because what happens is you beat yourself up, you talk negatively about yourself, you know, and what happens is you need to be aware of this if, if, if you have taken bear glasses and we'll then use this sort of session to reflect on this, right? It colors your entire worldview, okay, when you take these big losses because you immediately are bewildered and you lose all faith in yourself. You feel incredibly stupid. You feel almost frightened to tell anyone or your significant other, for example, and I don't recommend that you hide these things. In fact, you should celebrate these things. Because when you do that, you will only at that point start to grow. So with the traders that I mentor, um, you know, I say to them, I was like, listen, we're going to be on sim. You've been trading cash for a whole while now, but you're going to be on sim for 4 weeks while we go through this process. And essentially, I don't want them to be subjected to more of these big emotional experiences when they should actually be learning something from, from what I'm teaching them about the markets, technical stuff and setups and whatnot. And we want to avoid that. But I say to them, never please lie to me or hide a bad trade from me, whether on the sim or when we're on cash. I cannot help you if you take a loss and you hide it from me, or if you have a string of really shit bad trades, I don't want you to hide it from me because we then can't get better. You can't get better and I can't help you, okay? So we need to put these warts and all out in the cold light of day, and that's when we can start to fix it, okay? And for you at home, this is what you should do as well. As soon as you air these things, you can start to grow from that point as a trader. And what happens is, is when you take these losses, you're no longer objective about the markets, risk and reward. You know, you might be getting into, you know, 1-to-1 risk-reward trades, and what— and then you might be actually losing like 1.5 or 2 on your risk units, and then you're just banking things too early. Well, actually, that's a, that's a fast way to the poorhouse. So what's the solution? Well, we've got to think differently. And to think differently, we gotta look at ourselves and how we are programmed to think, right? We got the ego, we got the instinctual, right? This is just how I refer to them, okay? So I have a background of competitive skiing, you know, slalom, Grand Slalom, Super-G, okay, when I was younger, okay? So For me, the flow state, I'm very familiar with flow state thinking, what it feels like, what it smells like. It doesn't smell of anything, but what it feels like and what my mind is doing, you know, all the visceral senses of that. Okay. And this is really interesting for me to see then in other high performance people. And there are so many commonalities all the time. So we have the ego on one side, right? And this is the part of you that wants to get things right. Closed mindset. You only play games that you know you can win or you're pretty sure you're going to win. You're not really open to growth because that's a risky part, right? You just like to keep things safe, right? I mean, nothing's going to go wrong if you keep things safe and within your circle of influence, right? Stubborn, always needs to be right. And this is the part of you that thinks, hold on, I'm losing money as a trader. Well, if I work harder, I know I'm doing 8 hours a day on the desk. If I do 12 hours a day on the desk, maybe I'll stop losing money. That is just an even faster way to the poorhouse, okay? And you got to understand that's part of your ego making those sort of calls and that sort of talk in your brain, right? And you're ultimately— the ego is always scared of being wrong, okay? And this is kind of what people talk about when they talk about traders, you know, having to be right and not willing to let go of the trade and, you know, moving their stops, averaging into losers, things like that. But as we look at these, as we look at these, that the psychology over these sessions we're going to be doing We're going to be leaning more into the instinctual part, right? You know, when I, when I was looking at the Johari principle, those, that, that sector 2 and 4, really, this is where we need to engage the instinctual, okay, of what, what we don't know but we, we can find out, and then what we absolutely don't know and we're not aware of, okay? So this is where the inner search becomes real, if you like. So this is the part of you that takes reflex actions, you know, I always use the analogy of throwing a ball, right? If I'm in a room with you and you're on the other side of the room looking down at a piece of paper or something and I say, "Hey," and you turn around and I instantly throw a ball, not very fast, over at you, you're instinctively going to lift your arm, put your hand up and try and catch that ball. There's no thinking, there's no instructions, there's no practice, you just instinctively go to catch the ball. That is the instinctual part of your brain. And I think a lot of traders when they get into like an overtrading scenario, we'll get into this further in the next session actually, they get stuck thinking that every time they see the market move, they have to have an instinctual reaction to sort of catch a catch the ball in a way. This is the part of you that guarantees your physiological survival. Fight or flight, catch the ball. It's where you say to yourself, this just feels right. It's the hunter-gatherer nesting part of your brain. So really, we're going to be doing a lot more as we go into the next session on flow state. But really, what we are going to be looking at is OODA Loop thinking, right? And this, you know, this will be interesting. And we had a really great session in Amplify. We did a masterclass in this about 2 months ago, actually. It was really well attended, great feedback. And so we're going to bring a bit of that into the next session. A book to read is The Inner Game of Tennis. It's a really small book, and I guarantee you're going to be able to read it within a week, absolutely. Okay, by a chap called Timothy Galloway or Tim Galloway. You get it on Amazon, very cheap. Go down to your local library. You could probably read it in one sitting if you're a fast reader. But this is really the book. Actually, Will DeLucy put me onto this book. Thanks, Will. Really great book. So really small, pick it up and it will help in the references that I have coming forward about self one, which is the ego. And self 2, which is the instinctual for me, right? So we need to evolve our thinking about losing and make it not so horrible a thing, okay? You know, people who don't trade or don't take risk in a professional sense, you know, think traditionally about loss You know, and for a good reason they do. But traders and risk-takers think about loss in a totally different way, in a more matter-of-fact way, and loss and discomfort. Okay, and essentially we have to evolve our thinking about being wrong. Thinking differently, we naturally have to avoid— we naturally— sorry, we naturally do avoid discomfort and loss. Okay, but we need to sort of tame that, right? And naturally it's tempting to work harder, but we think that if we punch in the hours, that will yield more money. Actually, the longer you sit in front of the trading software and the ladder, the more you are exposed to the casino, and you may as well be just sitting in a casino. Okay, you know, if I'm not in a trade, I'm not working. Think about that. That is wrong. If I'm not in a trade, I'm not working. That is not true. That is simply not true, okay? And this is going to be relevant now when we come to my holy grail at the end of this video. The 9-to-5 mindset doesn't belong here. Now, you can, you can trade, uh, you know, whatever hours you want, okay? 9 to 5, fine. But the mindset of I go into work at 9 and I make money per hour until 5 o'clock and then I go home. Okay, well, with the world upended now over COVID, people are working from home and all, but I think everyone knows what I mean when I talk about this traditional mindset. Okay, you got to think like it's okay to think differently. Just allow yourself to say that it's okay to think differently, to, you know, essentially become limitless in, in what can happen. And really, this is it for me, okay? Willpower is not the solution. You can't will yourself to trade better. It does not work like that. Does not work like that. You've got to accept uncertainty and, and just shrug it off. In the next session, we're really going to be looking at knowing your job, knowing the job of a trader. I don't think too many people address that. We're going to look at calming the self 1 and 2, talk a lot about that. And we're going to, you know, need to wait. We essentially need to think like this. We need to wait until we see a good moment to put our tools to work. Our tools in this sense as a trader are capital, our software, and our screens, and our connection. Okay. And we need to continue absolutely with the right education. I've mentored traders who've been trading for 5 years, 6 years, uh, uh, traders from 2 weeks to all the way through, you know. So, um, you need to educate yourself about how, you know, especially on the fundamentals. I have never in my life met or talked to anybody who learned how to trade in a month or 2 months and they were successful and consistent. Never. Um, you know, we need to know why and how markets move, and then we can see how we can interact with that and make money. Okay, so we're coming back, you know, to round off here on where we started. You know, luck is about getting dealt a good set of cards. Skill is knowing how and when to place the bets. Okay, now coming to my, uh, you know, holy grail, if you like, is this. It's this. This is the holy grail right there. Okay, trading is waiting Waiting is trading. That is really what it comes down to. You need to be patient. People think, you know, oh, I've opened my ladder, right, the market seems to be kind of moving up, okay, boom, I'm long the market. And then boom, they get stopped out, 10, 26 stops, whatever. And they think, what? Okay. And so then they try to use smaller stops or wait a little bit and then they get into the market and then it messes around on them. And then, you know, they think, okay. And then as the day goes forward from a morning session, then they start to see, oh my God, here's an amazing trade, but I've reached my daily loss, so I have to leave it alone. And they watch as that trade works out incredibly. And then it comes to the middle of or just before the end of the day and think, "If only I'd have waited for the afternoon session, I would have not taken those losses and I would have made all that money on the perfect looking trade that I saw." I mean, hands up, how many of you lose money in the morning and make it back, or make it back to flat, or make profit in the afternoon then on those losses? So I'm gonna leave it there, and I really look forward to the next session. I hope some of this has rung true for people, it's connected to people. That would be fantastic. I'd love to get your comments on the video below, and reach out to me, um, on YouTube or in the trading room in Amplify, and I'd be really happy to engage with you and have a chat. And yeah, please click subscribe if you like what you've been hearing and seeing. And yeah, have a great month in these crazy markets coming up for the general election. So, sorry, not the general, the presidential election. All right, I'll leave you there. Thanks very much. Bye-bye.