Trader Mindset

Professional poker players know (as best they can) the expected values of every hand they play. The best of them know what hands to play from what position. Like traders, poker players have to make decisions under uncertain conditions with imperfect information. 

They know what the percentages are of their hands improving. For example, if they are dealt a pair of Kings, they know the probability of getting another King to make 3 of a kind (a set of Kings), or quads - four of a kind. 

They know what the probability of making a straight if they have two connectors or making a flush if they have two cards of the same suit. 

This allows them to the knowledge to know how to bet given the odds and the size of the pot. Yet it's still possible that they can do everything correctly and still lose the hand. That's going to happen quite a bit if you play a lot of poker. 

Like in trading, you can become emotionally invested in the outcome of a hand. If you have a pair of Aces, you can get beat from time to time despite Aces being a strong pair. 

Professional traders can learn a lot from this type of knowledge. If you trade long enough, you will get beat when everything looks to be in your favor. 

I've been long stock that beat earnings estimates, but was greeted with a down market because of some external factor that took everything down with it - including my stock. Not fair you say? No one cares what my definition of "fair" is when trading. Nothing is fair.

A good way to become mindful of what you could be in for is to study the winning and losing streaks from your backtested results. Most of them will tell you what you longest losing streak is (duration) and how bad it effected your equity (magnitude). 

I think this will help you learn to build your confidence and put things into perspective. 

The losing streaks that you'll have by trading a system will pale in comparison to those that you'll need to endure if you are day trading or trying to ready charts or "set-ups." Those are a thing of the past.

The modern trader - the trader who is going to set himself up to win for the rest of this decade and into the 2020s will have 100% of his trading rules backtested, know the expected values, and have rules to eliminate sub-optimal trades, and have rules built-in to trade for the marathon of the next 20 years. That does not now nor will include trading based upon charts nor intraday data. 

Firms are investing tens of millions of dollars to trade against the short term lovin' traders as they are easy to pick off and bully. Plus, in that space, there are a million suckers born every minute so you've been warned: don't be one of them. 

Trading simulation software will allow you to vary start dates, the instruments that you are trading at any given time, how to measure volatility, and how to cut risk during losing streaks. 

A great book on how to understand what a poker player learns to contend with is "Getting the Best of It" by David Sklansky. 

Go check out The Imitation Game on Netflix if you haven't seen it yet. It has many analogies to trading

Good trading is about being able to distinguish signals from noise. In the short term, everything is noise though - even potential signals.

When you don't have a plan, everything looks appealing. Any big move that you're not in gives you the emotional feedback that you've missed the move and that you should have.

The Enigma code breakers had great motivation to crack the code: save English lives and end the war. Our motivation is to limit risk and be in high expected value trades.

You can use price as your main signal, but admittedly, in the short run, it looks like noise. It's not until you look back to see the statistical significance of today's closing price to the past that you can begin to ascertain whether it's signal or noise.

Your trading system is what you can rely on to decipher the data and create trading signals that you can rely on. Without a system, much of what you see can be construed as disinformation - even the price. This is especially true for short-term, intraday traders.

This is why I think you're in for a life of frustration if you're trying to day trade: all the intraday data are random. If you're lucky enough that today's intraday data is aligned with significant weekly or monthly time frames, you might have a good trade. If that's the case, keep the trade though and let the momentum follow through overnight and over the weekend. That is the only way you can fight the manipulation that you'll otherwise suffer from the hands of the HFTs and their criminal counterparts - the exchanges.

Keep in mind that most indicators only confirm what you already know the price is telling you. You can probably simplify your trading by removing all the overlays and indicators from your charts.

Compare your daily data with weekly and monthly data levels to confirm your signals, not trading indicators, overlays, or lines that you feel compelled to draw on your charts. If you find yourself needing to do that emotionally, you're grasping for something that's not there.

You can also test your models and from the ones that I've done, the tests that I've run without the technical indicators versus the ones that included them, the results weren't improved by having the indicators included.

I wrote in The Inner Voice of Trading that I felt (and still do) that they are for the most part "emotional bandaids." Indicators won't help you "not" feel the feelings that are trying to teach you something. They will also add another layer of frustration to the mix and I've yet to see one that is foolproof.

The best thing you can do is simulate your trading ideas over 10 to 20 years of data to see if they have any "rich" history.

Go check out The Imitation Game on Netflix if you haven't seen it yet. It has many analogies to trading

Good trading is about being able to distinguish signals from noise. In the short term, everything is noise though - even potential signals. 

When you don't have a plan, everything looks appealing. Any big move that you're not in gives you the emotional feedback that you've missed the move and that you should have. 

The Enigma code breakers had great motivation to crack the code: save English lives and end the war. Our motivation is to limit risk and be in high expected value trades. 

You can use price as your main signal, but admittedly, in the short run, it looks like noise. It's not until you look back to see the statistical significance of today's closing price to the past that you can begin to ascertain whether it's signal or noise.

Your trading system is what you can rely on to decipher the data and create trading signals that you can rely on. Without a system, much of what you see can be construed as disinformation - even the price. This is especially true for short-term, intraday traders. 

This is why I think you're in for a life of frustration if you're trying to day trade: all the intraday data are random. If you're lucky enough that today's intraday data is aligned with significant weekly or monthly time frames, you might have a good trade. If that's the case, keep the trade though and let the momentum follow through overnight and over the weekend. That is the only way you can fight the manipulation that you'll otherwise suffer from the hands of the HFTs and their criminal counterparts - the exchanges.

Keep in mind that most indicators only confirm what you already know the price is telling you. You can probably simplify your trading by removing all the overlays and indicators from your charts. 

Compare your daily data with weekly and monthly data levels to confirm your signals, not trading indicators, overlays, or lines that you feel compelled to draw on your charts. If you find yourself needing to do that emotionally, you're grasping for something that's not there. 

You can also test your models and from the ones that I've done, the tests that I've run without the technical indicators versus the ones that included them, the results weren't improved by having the indicators included. 

I wrote in The Inner Voice of Trading that I felt (and still do) that they are for the most part "emotional bandaids." Indicators won't help you "not" feel the feelings that are trying to teach you something. They will also add another layer of frustration to the mix and I've yet to see one that is foolproof. 

The best thing you can do is simulate your trading ideas over 10 to 20 years of data to see if they have any "rich" history. 

Calibrate the risk that's appropriate for your account and your emotional constitution.

Normalize risk across all instruments so that you can create risk units. This way, every instrument will be the same in terms of the risk that you'll represent in your portfolio.

Many commodity traders use the 20-Day ATR (Average True Range) in order to calculate the daily dollar-volatility per instrument. Then, they divide that into the percentage of capital that they are willing to lose per trade.

If the Gold ATR is $2.50 (it's not) then the daily dollar vol is $250 since the gold contract is 100 troy ounces. If you have a $100,000 account and you only want to risk 1% per trade, you can figure out the maximum number of contracts to trade.

$100,000 x 1% = $1,000

Daily Dollar Vol on Gold = $250 ($2.50 x 100 oz)

Therefore, you can only trade 4 Gold Contracts since $1,000 / $250 = 4 contracts

You can also trade only 2 contracts and give them $5 of risk between your entry and exit.

Then to manage the risk, if you enter the gold market long per your entries at X Price and place your protective sell stop $2.50 (the Gold ATR value) below the entry price.

Keep in mind that measuring ATR can be done with a computer and you can backtest all your entry and exit rules with the risk across all instruments normalized.

In doing so, you remove all the guesswork. You have the added benefit of not falling in love with any one instrument risk management wise since each trade will be the same percentage risk in your portfolio (at first, if you don't add to your winners).

More importantly, you won't want to jump off the bridge when you lose money on any one particular trade since they all represent the same risk and therefore you'll not be married to the outcome of any one trade.

It's hard to remain objective, especially if you are looking at the headlines of the day for your trades. Trading a system can remove all of that for you, but you'll still have to a) put on the trades and the protective stops; b) not over-ride the system and "not" take the signals; and c) not over-ride the system and put on trades that were not system generated.

If the volatility in the commodities markets are too great for outright trading, you can consider trading intra-commodity spreads. In a spread, you are simultaneously long and short two contracts of the same underlying but of different expiration months.

Instead of trading for an up or down directional trade, you trade the relationship between the two contracts for them to narrow or widen.

You are afforded lower margin with spreads, so if your account is smaller, it might be a good fit for you to get going in commodities. The good news is that most professional traders know the spread markets very well so it's a good idea to learn them anyway at one time or another.

You typically have lower risk since you are long and short at the time time and the seasonality of physical commodities tends to be very reliable.

We have some free educational training videos for you on this topic.

Go to MartinKronicle and set up your Free Account to get access.

Calibrate the risk that's appropriate for your account and your emotional constitution. 

Normalize risk across all instruments so that you can create risk units. This way, every instrument will be the same in terms of the risk that you'll represent in your portfolio.

Many commodity traders use the 20-Day ATR (Average True Range) in order to calculate the daily dollar-volatility per instrument. Then, they divide that into the percentage of capital that they are willing to lose per trade.

If the Gold ATR is $2.50 (it's not) then the daily dollar vol is $250 since the gold contract is 100 troy ounces. If you have a $100,000 account and you only want to risk 1% per trade, you can figure out the maximum number of contracts to trade.

$100,000 x 1% = $1,000

Daily Dollar Vol on Gold = $250 ($2.50 x 100 oz)

Therefore, you can only trade 4 Gold Contracts since $1,000 / $250 = 4 contracts

You can also trade only 2 contracts and give them $5 of risk between your entry and exit. 

Then to manage the risk, if you enter the gold market long per your entries at X Price and place your protective sell stop $2.50 (the Gold ATR  value) below the entry price. 

Keep in mind that measuring ATR can be done with a computer and you can backtest all your entry and exit rules with the risk across all instruments normalized. 

In doing so, you remove all the guesswork. You have the added benefit of not falling in love with any one instrument risk management wise since each trade will be the same percentage risk in your portfolio (at first, if you don't add to your winners).

More importantly, you won't want to jump off the bridge when you lose money on any one particular trade since they all represent the same risk and therefore you'll not be married to the outcome of any one trade.

It's hard to remain objective, especially if you are looking at the headlines of the day for your trades. Trading a system can remove all of that for you, but you'll still have to a) put on the trades and the protective stops; b) not over-ride the system and "not" take the signals; and c) not over-ride the system and put on trades that were not system generated. 

If the volatility in the commodities markets are too great for outright trading, you can consider trading intra-commodity spreads. In a spread, you are simultaneously long and short two contracts of the same underlying but of different expiration months.

Instead of trading for an up or down directional trade, you trade the relationship between the two contracts for them to narrow or widen. 

You are afforded lower margin with spreads, so if your account is smaller, it might be a good fit for you to get going in commodities. The good news is that most professional traders know the spread markets very well so it's a good idea to learn them anyway at one time or another.

You typically have lower risk since you are long and short at the time time and the seasonality of physical commodities tends to be very reliable. 

We have some free educational training videos for you on this topic.

Go to MartinKronicle and set up your Free Account to get access. 

You have to plan for 10-baggers in your portfolio and position yourself tactically and psychologically.

Two things need to occur regularly:

1) big moves don't typically happen intraday

2) you have to believe that you are capable of doing it emotionally and psychologically

Tactically speaking, you need to let time and money work for you for best results. A 10-bagger has to have been a 4-bagger first. Don't cut the 4-baggers at the knees. Place a trailing sell stop order and let the trend continue (if long). Don't impose your will on the trend.

Sit on your hands and let the market forces work for you.

Think in terms of percentages and not dollars. If you risk 0.50% per trade and it's a 10-bagger, you'll add 5% to your overall portfolio. What will that do to your Incentive Fees?

If you're smartly abandoning day trading (smart move), you need to find a better way to deal with the discomfort that you feel when you don't take short-term winners at the end of the day or before the weekend.

What is the discomfort trying to teach you? For each of us it's different.

nwiUllingness to feel the discomfort in your trading is also denying the the feeling of what you'd feel by having a 10-bagger in your portfolio.

In other words, the feeling of having a 10-bagger is on THE OTHER SIDE of not taking short-term profits.

Why don't you want to feel the feelings around getting a 10-bagger? Aren't you worth it? I think you are...you are willing to do the work - you might as well get paid as much as you can for it.

You can release that discomfort in yoga class or in your Trading Tribe - and replace the satisfaction you get and not sabotage your trading and still get to feel the feeling that you seem to want to have (because you're seeking it everyday - you must love it, unless you're a masochist.)

You have to plan for 10-baggers in your portfolio and position yourself tactically and psychologically. 

Two things need to occur regularly:

1) big moves don't typically happen intraday

2) you have to believe that you are capable of doing it emotionally and psychologically

Tactically speaking, you need to let time and money work for you for best results. A 10-bagger has to have been a 4-bagger first. Don't cut the 4-baggers at the knees. Place a trailing sell stop order and let the trend continue (if long). Don't impose your will on the trend. 

Sit on your hands and let the market forces work for you.

Think in terms of percentages and not dollars. If you risk 0.50% per trade and it's a 10-bagger, you'll add 5% to your overall portfolio. What will that do to your Incentive Fees? 

If you're smartly abandoning day trading (smart move), you need to find a better way to deal with the discomfort that you feel when you don't take short-term winners at the end of the day or before the weekend.

What is the discomfort trying to teach you? For each of us it's different. 

nwiUllingness to feel the discomfort in your trading is also denying the the feeling of what you'd feel by having a 10-bagger in your portfolio. 

In other words, the feeling of having a 10-bagger is on THE OTHER SIDE of not taking short-term profits. 

Why don't you want to feel the feelings around getting a 10-bagger? Aren't you worth it? I think you are...you are willing to do the work - you might as well get paid as much as you can for it.

You can release that discomfort in yoga class or in your Trading Tribe - and replace the satisfaction you get and not sabotage your trading and still get to feel the feeling that you seem to want to have (because you're seeking it everyday - you must love it, unless you're a masochist.)

Here is chapter 2 of the Audiobook version of Inner Voice of Trading.

Here is chapter 2 of the Audiobook version of Inner Voice of Trading.

What are your personal Mission Statement and Strategic Plan for your trading? If you have them, my guess is you have tasks and goals with specific dates.

Professional traders also have Emotional Plans to take into account the Relative Strength Indicator (RSI) of their feelings about what they do during the day. Our psychology and emotional makeup dictate how we act and behave during the day.

How do you plan to feel good? If "I feel good when I make money and I feel bad when I lose money" is the ethos, we need to rework this a little. All you can do is follow your backtested rules. If you have the discipline to do so, define "happy" as "I followed my rules today which was the best I could do, therefore my thoughts, feelings, and behavior are in alignment and that alignment will lead to superior performance over the next year."

We can't predict when the profits will show up, so having a monthly goal of 5%, for example, might provide you with the goal of frustration because that is the result. [Intentions equal results.]

Rely on "Best Practices"

Best Practices in trading does not include day trading, intraday trading, or anything short term. Behavior predicts where we end up in life. What we do today provides us with the trajectory to where we want to go. We need to be mindful of the quantity and quality of the work we do.

Go through your activity with a fine-tooth comb. How do each of the points add up to profitability? Or, what 2 or 3 items in combination add up to to a positive slope on your trajectory.

What do you want trading to do for you in your life? What does it fulfill?

What do you want your money to do for you?

Making money is the end result of a big technical and emotional system.

"Discipline Equals Freedom" - from the book Extreme Ownership

We need to work hard, but also work smartly. If we focus on bad habits, we will be working hard, but not smartly. That's what day trading is to me: hard work for no money and a great expense of time.

Notice where your behavior breaks down and diverges from what your Mission Statement delineates.

If it's technical, take a class and read up. If it's emotional, take a yoga class, learn to meditate, or join a Trading Tribe.

We are all students over the entire duration of our trading. The best traders are mindful of everything they do and don't do. Everything they want to feel and not want to feel.

Keep in mind that the feelings that you don't want to feel have as much power over your behavior as the feelings that you actively seek out.

Don't judge your feelings, seek the wisdom that they are trying to teach you. If the feeling of public Pride is the "heads" side of the coin, realize that "tails" is public, abject humility. Use this rule to help target the feelings you want in your emotional system.