Funky Psychology

Jun 30th, 2009 | By | Category: Gilbert Mendez's (Gman's) Blogs
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I traded HES on the short side yesterday and came in with an overnight short expecting a crack through the $54 level. It was looking pretty good in premarket as some small dopey prints went off around $52.57 and $53.01. I was hoping for a pop near the 54.60 dream short level where I wanted to lay into the position. I wasn’t expecting the stock to trade much higher than 65-70 cents at all so I offered heavy. I was okay risking $350 on that position and in fact I managed to close it out (near the highs of the day) for that $350 loss. Shortly after covering I realized what had just happened and got back in the trade and chopped up that short from 54.40s to 52.80. Chipper!

Later in the day I realized that the volume was light, volatility low and there was an abundance of algorithms ripping up the undisciplined and inpatient trader. Just the standard summer shenanigans. So I cut my tier size in half and was extra patient with my entries and somewhat tight with my stops. Yet I managed to get stopped out of about 10-15 really good positions for a total loss of $350-400 in all the trades combined. I was so tired of getting abused that by 3:58pm I had had enough. I left with 2 minutes of the market closing to go work off the frustration at the gym.

So here is where the funky psychology kicks in. Why wouldn’t a $350 loss in one trade affect me at all and why would a similar monetary loss on 10-15 trades aggravate me that much. At the end of the day aren’t the results the same whether I lose x amount on one trade or in 50 trades? Does this happen to you?

I know that I have never been the type of trader that puts heavy emphasis on the results of one day. In fact today wasn’t ready a bad day as I just managed to end up barely net positive. To me what is important is the process that yields those results. As I review my work I realize that my process today wasn’t faulty. I thought the trades were all perfectly sound and were mid to high probability trades. So is there a reason to get all worked up? You tell me.

I guess it is just human nature to be flustered with the constant abuse we experience as active traders by the dopey algorithms. Tomorrow should be a good day. Watch that DVN for follow through on the short side and HES to fail around $54.

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  • Jacky

    If you had to take the day back, would you still try to jump in and get chopped up.

    Would you consider this something close to overtrading?

  • Jacky

    If you had to take the day back, would you still try to jump in and get chopped up.

    Would you consider this something close to overtrading?

  • http://www.kingludic.blogspot.com Patrick

    I´ve experienced this trying to trade market on a margin account, for me its even worse because instead of scaling back I get into this frenzy, same kind of set-ups but more leverage. When I win I´m mentally still feeling shorted even if I´m even or at a net positive, when I lose it just makes me more ravenous.

    I´ve realized that the sense of “work” associated with monitoring trades and waiting for entries has to do with our dopamine levels and affects our decisions. If you can make 1% in a twenty minute trade but getting to 3% takes several hours and involves the price coming into the red a bit, psycholigically that extra 2% really feels like work. But if you run an automated system that uses the same criteria, it has no sense of job satisfaction, it just enters and exits when the conditions dictate. I´ve had far more success with limit orders than market orders, the most money I´ve ever made in my life has been while sleeping (I trade forex where movements are constant).

    My advice is to trend follow using a limit order system and the majority of your capital while using the remainder for range-bound trading using market orders, that way your sense of play doesn´t interfere with your P&L. Then again you sound like you have a much better temperment for taking liquidity and monitoring in real-time than I do.

  • http://www.kingludic.blogspot.com Patrick

    I´ve experienced this trying to trade market on a margin account, for me its even worse because instead of scaling back I get into this frenzy, same kind of set-ups but more leverage. When I win I´m mentally still feeling shorted even if I´m even or at a net positive, when I lose it just makes me more ravenous.

    I´ve realized that the sense of “work” associated with monitoring trades and waiting for entries has to do with our dopamine levels and affects our decisions. If you can make 1% in a twenty minute trade but getting to 3% takes several hours and involves the price coming into the red a bit, psycholigically that extra 2% really feels like work. But if you run an automated system that uses the same criteria, it has no sense of job satisfaction, it just enters and exits when the conditions dictate. I´ve had far more success with limit orders than market orders, the most money I´ve ever made in my life has been while sleeping (I trade forex where movements are constant).

    My advice is to trend follow using a limit order system and the majority of your capital while using the remainder for range-bound trading using market orders, that way your sense of play doesn´t interfere with your P&L. Then again you sound like you have a much better temperment for taking liquidity and monitoring in real-time than I do.

  • http://www.hilotrader.blogspot.com Gangineni Dhananjhay

    Definitely X amount of loss on more trades irritates me.I think it is being wrong more often which hurts than the dollar amount. The negative feedback may be disappointing to the trader.The mind is not suited for trading , it has to be trained for trading. If I am comfortable to be wrong more often and not lose perspective that helps me in active short term trading. The frequency of trading has a direct psychological impact on traders wellness.
    Our beloved Dr Brett has good articles on this at http://traderfeed.blogspot.com/2009/05/reflections-on-frequency-of-trading-and.html

  • http://www.hilotrader.blogspot.com Gangineni Dhananjhay

    Definitely X amount of loss on more trades irritates me.I think it is being wrong more often which hurts than the dollar amount. The negative feedback may be disappointing to the trader.The mind is not suited for trading , it has to be trained for trading. If I am comfortable to be wrong more often and not lose perspective that helps me in active short term trading. The frequency of trading has a direct psychological impact on traders wellness.
    Our beloved Dr Brett has good articles on this at http://traderfeed.blogspot.com/2009/05/reflections-on-frequency-of-trading-and.html

  • http://www.chartshark.com Jason

    Perhaps the reason for this is that as traders we become disconnected from normal feelings for the quantity of money lost. It’s all probabilities to us.

    But each loss, no matter the size, chips away at the ego about the same.

    So a series of small losses builds up these little bits of frustration until you just have to step away and reset your brain.

    Though it’s not good that you lost, it’s a bit comforting to hear that the pros sitting at a desk suffer from these same psychological effects as the independent traders. Know what I mean?

  • http://www.chartshark.com Jason

    Perhaps the reason for this is that as traders we become disconnected from normal feelings for the quantity of money lost. It’s all probabilities to us.

    But each loss, no matter the size, chips away at the ego about the same.

    So a series of small losses builds up these little bits of frustration until you just have to step away and reset your brain.

    Though it’s not good that you lost, it’s a bit comforting to hear that the pros sitting at a desk suffer from these same psychological effects as the independent traders. Know what I mean?

  • http://www.chartshark.com Jason

    Sorry about this second post, but I just thought of an analogy. It’s a bit morbid, but it makes sense… to me at least.

    Imagine someone gives you a choice:

    You may either be jabbed with a needle really hard at the beginning of the day.

    Or someone is going to to repeatedly jam you with a needle for the next 8 hours.

    Which do you choose? Give me the jab in the morning. I may be a bit sore but I can get over it and with my day.

    The repeated poking would absolutely drive me insane though. Think Chinese Watter Torture, only stabbier. No, thank you.

  • http://www.chartshark.com Jason

    Sorry about this second post, but I just thought of an analogy. It’s a bit morbid, but it makes sense… to me at least.

    Imagine someone gives you a choice:

    You may either be jabbed with a needle really hard at the beginning of the day.

    Or someone is going to to repeatedly jam you with a needle for the next 8 hours.

    Which do you choose? Give me the jab in the morning. I may be a bit sore but I can get over it and with my day.

    The repeated poking would absolutely drive me insane though. Think Chinese Watter Torture, only stabbier. No, thank you.

  • http://www.smbtraining.com gman

    Thank you all for your comments.
    Jacky, if I had to take the day back I would have made the same trades. It was just a bad case of luck. I am very conscious of over trading specially mid day.

    Patrick, I can’t agree more with you on your theory of that extra 2%. Boy does that feel like having a real job.

    Gangineni, Thank you for the link to Dr. Brett’s posts. I recently read Fooled by Randomness by Nassim Taleb. He talks a lot about the correlation of our emotions/mood swings based on how often we trade. Definitely a good read as well.

    Jason, I loved your analogy. It is very true. I will rather take the pain once than having to deal with it all day.

    Happy Trading!

  • http://www.smbtraining.com gman

    Thank you all for your comments.
    Jacky, if I had to take the day back I would have made the same trades. It was just a bad case of luck. I am very conscious of over trading specially mid day.

    Patrick, I can’t agree more with you on your theory of that extra 2%. Boy does that feel like having a real job.

    Gangineni, Thank you for the link to Dr. Brett’s posts. I recently read Fooled by Randomness by Nassim Taleb. He talks a lot about the correlation of our emotions/mood swings based on how often we trade. Definitely a good read as well.

    Jason, I loved your analogy. It is very true. I will rather take the pain once than having to deal with it all day.

    Happy Trading!

  • http://www.henshawconsulting.com.au/online-therapy.html Therapy online

    I like simply like how you deliver the message. Great post and thanks for sharing!

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