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

Summary

Tom, 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

00:00

😀 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.

05:02

😨 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.

10:04

📉 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.

15:05

📈 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.

Keywords

💡Trading

Trading refers to the act of buying and selling financial instruments such as stocks, bonds, commodities, or currencies. In the context of the video, trading is the central theme as the speaker discusses his experience and insights on trading, emphasizing the importance of the right mindset over technical skills.

💡Technical Analysis

Technical analysis is a method used by traders to analyze and predict the future price movements of financial instruments based on historical price data and patterns. The speaker mentions that he spent time studying technical analysis but ultimately found it less important than managing emotions and behavior in trading.

💡Fear

Fear, in the context of the video, is the apprehension or anxiety traders may feel when facing potential losses in the market. The speaker discusses his relationship with fear and how he has managed to desensitize himself to the fear of losing money in trading situations.

💡Position

A position in trading refers to the quantity of a financial instrument that a trader holds, either long (bought) or short (sold). The speaker talks about managing and hedging positions, and how the size of his positions can equate to significant monetary values.

💡Risk Management

Risk management is the process of identifying, evaluating, and controlling risks involved in trading. The speaker mentions that he does not have a high hit rate, implying the importance of risk management in his trading strategy to protect against significant losses.

💡Market Psychology

Market psychology refers to the emotional and cognitive factors that influence the behavior of traders and the market as a whole. The speaker suggests that understanding and managing one's own psychology is more critical to successful trading than technical analysis.

💡Leverage

Leverage is the use of borrowed capital to increase the potential return of an investment. The speaker discusses the reduction in leverage offered by brokers due to ESMA regulations, highlighting the increased focus on risk and the true nature of trading.

💡Gap

In trading, a gap refers to a price discontinuity between the closing price of a security and its opening price in the next trading period. The speaker uses the concept of a gap to illustrate how technical analysis can be interpreted differently by traders.

💡MACD

MACD, or Moving Average Convergence Divergence, is a popular technical indicator used to identify trends and potential changes in momentum. The speaker mentions MACD as an example of one of the many technical tools he has studied, but implies that these tools are not the key to consistent profitability.

💡Apophenia

Apophenia is the human tendency to perceive patterns or connections in random or unrelated data. The speaker uses the term to describe a cognitive bias that can lead traders to misinterpret market data and make poor trading decisions.

💡Profitability

Profitability in trading refers to the ability to consistently make money from trading activities. The speaker emphasizes that the goal of trading is to maximize profits, not to be right or to follow a specific trading method.

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]