Trading Psychology | Why Normal Doesn’t Make Money | Part 1

I'm not going to attempt to show you how to trade, I'm going to attempt to show you how to think while you're trading. And this will become very clear in a second.

By way of introduction, my name is Tom Hugat and I come from a very unique vantage point in relation to you. You see, I started working in the city about 20 years ago and for the first decade of my career, I sat and I watched you trade. I must have watched 100 million trades go over the tape in the 10 years that I sat on a trading floor whilst I was managing and hedging positions. Depending on which direction you saw the market go up or down. And it does provide you with a rather unique insight. To watch 50,000 people trade over a decade, you get a feel for how it is people are thinking when they are sat in front of their monitors at home or wherever they are in the world.

And you notice that people tend to make the same mistakes over and over and over. And actually, very few people.

Are capable of making money consistently. So as I left in February 2009, in the throes of the bear market, I realized that actually trading had absolutely nothing to do with technical analysis, fundamental analysis, and.

It was difficult to begin with because no longer did you have a security blanket in the form of a monthly paycheck. Instead, you were there, mano mano, in front of the screen. The market was your best friend or your worst enemy, depending on the day. And here I am some 10 years later. This year has been a good year. I made more than a million pounds this year. Last year I managed to lose nearly 90,000 on Christmas Day. Would you believe that? It's one of the reasons why I am so grateful that CMC Market is stopping me from trading on a thin trading day. And it's actually, it's a bit of a challenge, would you believe it, to be at a Christmas lunch and dinner? This is, I think you call this Boxing Day.

See, we Europeans, we heathens, we celebrate Christmas on the 24th while you wait a day or so and then you have your Boxing Day. And there I was on Boxing Day in a celebratory moment, whilst at the meantime, I was. I don't know if you recall what Dow Jones did on the Boxing Day last year. It had its single biggest gain ever. It had fallen 500 points on Christmas Eve, the move that I had captured absolutely every single tick off. And on Boxing Day, I had been long. But as the dow had risen 5, 600 points, I thought, it's probably about Time to begin to short this. I took my profit and I reverted short and the Dow rallied another 600 points to make it an 1100 points point move day. And me walking out of there going, that was an expensive Christmas dinner.

Fear is what's stopping people from making money in the markets. Sure, people are good at making money at times, but the tendency is to make it, lose it, make it, lose it.

I believe that the only reason why I am good at what I do is because of my relationship with fear. I am what's called a high stake trader. Some would call it an extremely high stake trader. At institutional size, the average bet amongst CFD traders here in the United Kingdom is £7 a point. My position here equates to £750 a point in the DAX. It means that if DAX goes 20, 30 points against me, I am faced with a loss which would equate to the average annual salary of a worker here in the uk. Thus, you need to have a rather special relationship with losing and you need to have a rather special relationship with winning as well. And what I hope to do over the next two hours is, is to change the way that you look at trading. Now, I could have come in here and I could have thrown all sorts of techniques at you. Bollinger bands, Keltner channels, moving averages, crossovers, stochastics, macd, rsi. Oh, God. I've spent countless hours studying it, as I'm sure you have as well. But I am sure that you also realize that actually, no matter how good a grasp you get on technical analysis, there are still those days where you simply refuse to take your loss, where despite your best intentions, you simply cannot get yourself to do the right thing. So you may quite rightly ask, do I get scared when I trade and I trade the size that I do?

Of course I get scared. But the narrative here is not that I am a fearless traitor. I'm not even a fearless person. I am scared of losing loved ones. I'm scared of sending my children out in the traffic. I am in no shape or form any different than any other caring parent is.

If you put me out of the balcony over here and I stare over into the ground, do I get a flutter of nerves? Sure.

But with practice comes experience. Now, I'm actually a firm believer that practice does not make perfect. And I would like to elaborate on that point a little bit later on in the presentation. I'm also scared of making a complete twit of myself today. I'm scared that you don't get the Message. I'm scared that you think this is ridiculous. I came to hear about how he navigates the stock indices. And I promise you I'll give you my rather unique insight into how I trade stock indices. So if you are that way inclined, where you prefer to just stick to the technical analysis, I assure you you're not going to walk out of here empty handed either. But the truth is that my relationship with fear has come to the point where I have desensitivitized. No, that's not right. Desensitized. I tried so hard. Sometimes foreigners can struggle with these words. I have desensitized myself to certain levels of stimulus that you face when, for example, a car comes at you full speed.

I'm sure that if it was somehow possible to produce a brain scan while I was trading during particularly stressful situations such as Boxing Day last year, you will find that my amygdala doesn't light up like a Christmas tree. You will probably not even be able to discern that I'm losing £90,000 because I have blocked it out. I can't block out fear in many other aspects of my life. If you put me in front of the television screen, I watch Friday the 13th or I don't really watch much TV, so I don't know what's scary these days, but you know, Freddy Krueger kind of style. I'm sure I'm going to sit with a pillow like everyone else does. Well.

Probably you won't sit with a pillow, but I will because I don't take the horror movies very well. But when I'm faced with horror situations while I'm trading, I seem to have developed an immunity to fear which enables me to make the right decisions when they need to be made.

Whether that's because I've trained or whether I was born with it, I don't know. But the fact of the matter is that my father was a vacuum cleaner repairman and mother was a nurse. So I don't think that I come from a heritage of risk takers. So my argument is that if I can do this with a rather unique way of doing it, then I believe you can as well. But it boils down to that practice does not make perfect, practice makes permanent. And if you carry on practicing the wrong way, you will merely establish a behavior pattern that doesn't serve you.

So what can I accomplish in two hours? Well, look, not that I, in any shape or form will put myself in the league of these four gentlemen, but it only took Steve Jobs 415 minutes to galvanize a departing class from Stanford University in 2015 to go out and connect the dots and not so much work from the point of view of the head, but work with the heart and Martin Luther King. It took him 17 minutes to create the fortitude for a generation and a segment of the American public that was suppressed.

It paved the way for him winning the Nobel Prize. And I don't think I need to introduce neither JFK nor Winston Churchill, at least not when I'm in the United Kingdom. Since the establishment of the rules by ESMA last year. Or was it the year? No, it was last year, in August, September time last year, where all European Union brokers now had to curtail the amount of leverage that they gave to their clients. Because we used to enjoy 200 to 1. Now we only have 20 to 1. And another thing that then established was that every single broker had to put up on their website how many of their clients were losing clients. That was a little bit like the cigarette companies being forced to put warnings on their cigarette packages.

And show draconian photographs of people in hospital beds with emphysemia and lung cancer and anything in between. Yet it didn't stop people from smoking. And it certainly hasn't stopped the interest for trading either. But the fact of the matter is that ESMA has done us a favor. May not have done us a favor about margin.

Although there's many ways that we can get around that if we really want margin. You just think offshore and you'll get your 200 to 1 if you want it. No, they've done us a favor because they've actually highlighted the true nature of trading. You see, if there's 100 people in here and 75 of them are losing, as it shows here on the CMC market website, well, this is no longer a technical analysis issue. You're not a losing trader because you are deficient in macd and you're not running your losing positions because you don't understand stochastics or moving averages. This is not a technical analysis problem. This is a human problem. And the sooner that you accept that this is a human problem, the sooner you can actually do something about it.

I thought that it would be the end of the CFD industry when all the brokers had to put their.

The winning stat and the losing stat up on the website. But it hasn't, because people know it. People are aware of it, but people think, well, this stat doesn't apply to me any more than the warnings on the cigarette packages apply to me.

So when we're confronted with charts, be it something, the point here where I write here, at that point, you can buy buy the market. So let's say I buy the market here. Well, I'm buying it because we have a gap up and now we've traded sideways in what I consider to be an ABCD correction. Yeah, I know my technical analysis. The flip side is I could also say, no, actually, I'm going to sell because if there was such a strong market, it wouldn't have taken the buyers an hour. And we also know that 48% of all gaps gets filled within the first three hours of trading and 78.6% of all gaps in the Dow Jones Index gets filled within 72 hours or free trad days. But it's really not so interesting to know whether this is a winning trade or a losing trade. Maybe I'm right, maybe I am wrong. It really does depend on how many traders out there agrees with me. And they back up my trade as well by being a buyer when I'm buying or being sellers as I am selling. So since I have no knowledge of the future, whenever people ask me, where do you think gold is going? Where do you think so and so and going and saying, you know what, come back to me next week, my crystal ball is out for repair. It's a facetious way of telling people to stop bugging me about where I think the market is going, because I am not Nostradamus. I have absolutely no idea. And anyone who says they think, they think that the market is going this way, that way is because they have a vested interest or a bias towards a direction or another. And that's quite fair. If you're long bitcoin, of course you're going to say that the bitcoin is going to go up and you think it's going to go up. You wouldn't say, I think bitcoin's going down and then you're long bitcoin. So it's not that I am not forgiving towards people when they state that they think the market is going up or down or Tesla is hit this way or that way. It's just that the opinion is biased from their own position. So if my entries are purely random and I'm a professional trader, and you may think, oh, as a professional trader, you may have a hit rate around the 80%, the 90%. Oh, no, I most certainly do not have a hit rate in the 80s or in the 90s. In fact, you could even argue that I would have A better hit rate if I simply flipped a coin and then I applied money management.

So either way, the sooner I accept that the nature of what I am doing is basically random, the sooner I can begin to trade as trading should be done.

I hadn't seen that one coming, and I certainly hadn't seen that one coming either. But that's the nature of the game that we are playing now. Do I think that Charts is the Holy Grail? I like charts. I could devour 10, 12 hours every single day. A bit more in the weekend if you allow me to. You know, if there's no lawn to be mown or windows to be polished, you know, I am quite happy just sitting, devouring endless reams of stock charts that I analyze purely to train my mind. But I'm also fully aware of the way that my mind works. And my mind is not my best friend, friend when it comes to highly profitable trading. So I don't believe for one second that Charts is a Holy Grail any more than I think fundamental analysis is the holy Grail. See, the problem here is, ladies and gentlemen, that we have a brain which is at best chaotic and at worst just our worst enemy. And one of the little intricacies of our brains is, is that it has a tendency to see things that aren't there. This is a phenomenon that in Latin is called apophenia. Now, if I was going to translate apophenia into a common language, it would be something along the lines of paternicity. So when you think about the nature, for example, of indicators, take some common known indicators like Fibonacci. Let's say that we look at some of the ratios of Fibonacci. I'm going a little bit off track here, a little bit without any notes that. Not that I really stick to the notes anyway. When a market makes a 61% retracement, some would argue that this is the ideal time to either buy or sell short, depending on the direction. And if that fails, then there's also the 78.6% retracement. And hell, why not throw the 88.6 and the 94.5% ratio? So there's also. There's always a ratio for the particular season. However, my argument is that if the market has already traded up to a 78% retracement, surely if you sell short at 78.6, you're actually betting against the prevailing trend. Some would argue against me. I'm not really so interested in what other people are thinking. I am more interested in trying to explain to you that the majority of indicators are available to the majority of people. Yet considering that 75 to 80% maybe 90% of all people engaged in trading are losing, maybe it's a time we have a real long hard look at what it is that we're actually doing when we are trading. See the purpose of trading is for us to make money. Purpose is not to be right, it's not to derive glorification through our efforts. There is one single raw purpose to trading and it is to make as much money as possible and the way you do that is simply to begin to think differently. And I stated earlier that if 75, 80 90% of all people are losing traders we also have to assume that those 7080 90% are normal perfectly well functioning people within society who hold down jobs as well as everyone else does, are intelligent, well spoken, pay their taxes, look after their children, etc. Etc. But they can't trade for shoot because they simply think like everyone else does.