Trading Psychology | Why Normal Doesn’t Make Money | Part 1
Summary
TLDRTom, a seasoned trader with 20 years of experience, emphasizes the importance of mindset over technical analysis in trading. He shares insights from observing thousands of trades and discusses the human element behind consistent losses in the market. Tom reveals his unique approach to managing fear and the significance of practice in shaping permanent trading behaviors. He challenges the notion of indicators as a 'Holy Grail' and stresses the need for traders to think differently to achieve success.
Takeaways
- 🧠 The speaker emphasizes the importance of mindset over technical skills in trading, suggesting that successful trading is more about how you think than what you know.
- 👀 Tom, the speaker, shares his unique perspective from years of observing traders, highlighting common mistakes and the difficulty of consistent profitability.
- 📈 He argues that trading success is not about technical or fundamental analysis but about one's relationship with fear and the ability to make decisions under pressure.
- 💡 Tom's experience suggests that practice does not necessarily make perfect; instead, it can reinforce bad habits if not approached correctly.
- 🤑 The speaker made over a million pounds one year but also experienced significant losses, illustrating the volatile nature of trading and the importance of managing risk.
- 🚫 With new regulations limiting leverage, the speaker sees a positive side, as it forces traders to confront the reality and risks of trading rather than relying on high leverage.
- 📊 Tom discusses the futility of trying to predict market movements, stating that even he, as a professional trader, does not know where the market is going and that opinions are often biased by one's position.
- 📉 He admits to having a random entry rate, suggesting that even professionals cannot consistently predict winning trades and that success lies in managing trades rather than predicting them.
- 🧐 The speaker warns against 'apophenia', or seeing patterns where none exist, which can lead to false confidence in trading strategies based on flawed interpretations of market data.
- 💭 Tom believes that the key to trading is not to be right, but to make money, and that this requires a different way of thinking from the majority of traders who are losing.
- 🌐 He concludes by stating that trading is a human problem, not a technical one, and that understanding this is crucial for any trader looking to improve their performance.
Q & A
Who is the speaker in the video script?
-The speaker is Tom, who has a unique vantage point from his experience working in the city and observing trading for over a decade.
What is Tom's perspective on the role of technical and fundamental analysis in trading?
-Tom believes that trading success has little to do with technical or fundamental analysis. Instead, he emphasizes the importance of mindset and emotional control in trading.
What significant event happened in Tom's trading career in 2009?
-In February 2009, amidst a bear market, Tom realized that trading was not about technical analysis or fundamental analysis, but about the trader's relationship with fear and market conditions.
What was the impact of the ESMA rules on trading in the European Union?
-The ESMA rules required brokers to limit the amount of leverage they provided to clients, reducing it from 200:1 to 20:1, and to disclose the percentage of losing clients, similar to warnings on cigarette packages.
How did Tom perform in trading in the last two years mentioned in the script?
-Tom made more than a million pounds in one year and lost nearly 90,000 pounds on Christmas Day in another year.
What is Tom's view on the common mistakes made by traders?
-Tom observes that traders tend to make the same mistakes repeatedly and very few are capable of making money consistently, which he attributes to a lack of proper mindset and emotional control.
What does Tom suggest is the main purpose of trading?
-Tom suggests that the main purpose of trading is to make as much money as possible, rather than being right or proving one's analysis.
How does Tom describe his relationship with fear in trading?
-Tom describes himself as having a high tolerance for fear and being desensitized to certain levels of stimulus, which allows him to make the right decisions under stress.
What is Tom's opinion on the effectiveness of practice in trading?
-Tom believes that practice does not make perfect but makes permanent. He suggests that practicing the wrong way can establish behavior patterns that do not serve the trader well.
What phenomenon does Tom mention that affects how people perceive patterns in trading?
-Tom refers to 'apophenia,' a phenomenon where people perceive patterns or connections in random data, which can lead to incorrect assumptions in trading.
How does Tom view the role of indicators like Fibonacci in trading?
-Tom questions the reliance on indicators like Fibonacci, suggesting that they may not be as effective as people believe and that their use should be critically evaluated.
Outlines
😀 Introduction to Trading Mindset
Tom, the speaker, introduces himself as a seasoned trader with 20 years of experience observing trading behaviors. He emphasizes the importance of the right mindset over technical or fundamental analysis. Tom shares his personal trading journey, including a significant loss on Christmas Day, to illustrate the emotional challenges traders face. He positions himself as a 'high state trader,' explaining that his success is due to his unique relationship with fear and the markets, rather than any specific trading technique.
😨 The Role of Fear in Trading
In this paragraph, Tom delves into the psychological aspect of trading, discussing how fear can impede decision-making. He admits to experiencing fear but has learned to manage it effectively. Tom explains that his fear is not eliminated but rather desensitized through practice and experience. He draws parallels between his fear response in trading and other aspects of life, suggesting that his ability to handle fear in trading is not innate but developed. He also hints at the idea that practice does not necessarily make perfect, implying that traders must practice the right habits to succeed.
📉 Trading Regulations and Market Perception
Tom addresses the impact of ESMA regulations on trading, which have reduced leverage and required brokers to disclose client loss rates. He suggests that these changes have clarified the nature of trading as a high-risk activity. Despite the increased transparency about the prevalence of losses, Tom notes that interest in trading remains undiminished. He argues that the high percentage of losing traders indicates a human, rather than a technical, issue in trading. Tom emphasizes the importance of recognizing and addressing the human elements of trading to improve one's success.
📈 The Randomness of Trading and the Human Brain's Bias
The speaker discusses the randomness inherent in trading and challenges the idea that technical analysis can predict market movements with certainty. He admits that even as a professional, his entry points into trades are essentially random and that his hit rate is not significantly better than chance. Tom also touches on the concept of apophenia, the human tendency to perceive patterns where none exist, which can lead traders to misinterpret market signals. He stresses that the purpose of trading is to make money, not to be right, and suggests that changing one's thinking is key to success in trading.
Mindmap
Keywords
💡Trading
💡Technical Analysis
💡Fear
💡Position
💡Risk Management
💡Market Psychology
💡Leverage
💡Gap
💡MACD
💡Apophenia
💡Profitability
Highlights
Introduction of Tom who got, a trader with 20 years of experience observing trading behaviors.
Tom's unique insight from managing and hedging positions on a trading floor.
Observation that traders often make the same mistakes repeatedly.
Realization that successful trading is not about technical or fundamental analysis.
Tom's personal trading experience, including a significant loss on Christmas Day.
The importance of having a special relationship with both losing and winning in trading.
Tom's approach to trading as a high stakes trader.
The impact of fear on trading and how Tom manages it.
Tom's belief that practice does not make perfect, but rather makes permanent.
The idea that trading success is more about mindset than technical skills.
Tom's view on the limitations of technical analysis and indicators.
The phenomenon of apophenia and its relevance to trading.
Tom's perspective on the purpose of trading being solely to make money, not to be right.
The role of human psychology in the high percentage of traders losing money.
Tom's comparison of trading to other influential speeches to inspire change in trading mindset.
The impact of ESMA regulations on trading leverage and its implications for traders.
Tom's emphasis on the need for traders to think differently to achieve success.
Transcripts
[Music]
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 who got 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 a hundred
million trades go over the tape in the
ten 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 there was it was 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 man oh man oh in
front of the screen the markets 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 a more than a million pounds
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 on a thin
train day and sadly 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 yes 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 mean
time I was I don't know if you recall
what Dow Jones did on the Boxing Day
last year it had its single biggest game
ever it had fallen 500 points on
Christmas Eve the move that I captured
absolutely every single tick off and on
Boxing Day I had been long but as the MA
as the Dow had risen five six hundred
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 point move day and me walking out
of there going that was an expensive
Christmas dinner fear is what 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 state
trader some would call it an extremely
high state trader at institutional size
the average bet amongst CFD traders here
in the United Kingdom is 7 pounds a
point my position here equates to 750
pounds a point in attacks it means that
if - 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 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 crossover 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 realized
that actually no matter how good a grasp
you get on technical analysis they 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 trader
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 gun do I
get a flutter or nerve 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 Twitter 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 gonna walk out of here empty-handed
either but the truth is that my
relationship with fear has come to the
point where I have the sensitivities no
that's not right
descends it's I tried so hard sometimes
foreigners can struggle it 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 am losing 90,000 pounds
because I have blocked it out
I can't block out fear in in many other
aspects of my life if he put me 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 a kind of style
I'm sure I'm gonna sit with a pillow
like everyone else does well probably
you won't sit with a pillow but I will
because I don't I take I don't take be
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've 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 15 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 hey one day it paved the way
for him winning the Nobel Prize and I
don't think I need to introduce another
JFK no 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 yep no it was last
year in August September time last year
we're all European Union brokers now had
to curtail the amount of leverage that
they gave to their clients we used to
enjoy 200 to 1 now we only have 20 to 1
and another thing that then establish
was that every single broker had to put
up on their way upside 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 and and and show
draconian photographs or people in
hospital beds with emphysema 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 asthma has done as a
favor may not have done us a favor about
margin although this many ways we can
get around that if we really want margin
you just think offshore and you'll get
your two hundred to one 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 a hundred 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 your you're
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 see of
the industry when all the brokers had to
put their this the winning stats 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 anymore than
the warnings on the cigarette packages
applied to me so when we're confronted
with charts beed something the point
here where I write here at that point
you can buy by the market so to 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 this was such a strong
market it wouldn't have taken the bias
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 all free trading days
but it's really not so interesting to
know whether this is a winning trade or
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
buyers 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 go
is going where do you think so and so on
going and saying do 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 but 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 gonna
go up and you think it's going to go up
you wouldn't say I think bitcoins going
down and then your long Bitcoin so it's
not that I am not forgiving towards
people when they state that they think
the market or is going to go up or down
or Tesla is hit it 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% and 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 flip the
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
Joss is the Holy Grail
I like charts I could devour 1012 hours
every single day a bit more in the
weekend if you allow me to you know if
there's no lawn to bemoan or windows to
be polished you know I am quite happy to
sit in devouring endless reams of stock
charts that I analyze purely to train my
mind but I'm also fully aware of the way
my mind works and my mind is not my best
friend when it comes to highly
profitable trading so I don't believe
from one second
that chart 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 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 pattern isset e 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 not that I really stick to the
notes anyway when a market makes a 61
percent 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 he'll why
not throw the eighty eight point six and
94.5% ratios 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
percent retracement surely if you sell
short at seventy eight point six 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 a moment
available to the majority of people yet
considering that 75 to 80 percent 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
reading 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 seventy five
eighty ninety percent of all people are
losing traders we also have to assume
that those seventy eighty ninety percent
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
[Music]
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