Three things Mark Douglas taught me. (Pt1)

Jul 8, 2018

Psychology

Psychology, like anything in life, plays a big role on how humans function. It affects the way we think, act, talk, and so on but when it comes to trading it affects us, oddly enough, in only one way and that’s through our emotions. Any experienced (or shall I say inexperienced) trader knows and understands the waves of overwhelming emotions that resonates based off of a trade that’s a loser. These emotions range from sadness, depression, anger, and the list goes on. The reason for this, if I’m not mistaken, is because of the pure fact that the money we use to trade with is hard earned and even when it’s not it’s something that rightfully belongs to us. Human nature is something that’s extremely difficult to change because it's part of our genetic make-up that has allowed us to stay for so long by encouraging us to stay away from things that we don’t understand or that will hurt us. Trading psychology is definitely the hardest thing to master when it comes to trading because your psyche works against you when you're being hurt mentally (losing trades) and works for you when you're euphoric (winning trades). As if this couldn’t get any worse, a hurting mentality will tap you into a pool of past failures or misfortunes that have happened to you in life and convince you to think you're not any good as a trader and that your strategy is useless. This baffled me when I learned this from Mark Douglas because it wasn’t something that I realized. This fact is very important because it means you and only you alone are able to break this cycle of assuming a bad trade means a bad setup. A losing trade has absolutely no correlation to you as a person so you shouldn’t assume that you're the reason why you have a losing trade. According to Mark Douglas, it only takes one person around the world to negate your edge. This basically means that when you're buying, someone around the world is selling. When there are more bears (sellers) than buyers (bulls) you're long trade is no longer able to be profitable and stops you out depending on your risk. The markets are full of newcomers and unprofitable traders that agree on the wrong thing together and thus makes the impossible or improbable possible. This gets even more tricky because it makes you, the person on the other side of the trade, feel unsuccessful. This is not true! A losing trade does not represent a bad setup but because our phycology wants to protect us from losing money (what hurts us) it tricks us into thinking that we are unsuccessful as traders. The solution to this is to simply accept the risk of the trade by trading a strategy or setup that is profitable through backtesting. Mr Douglas implored that back testing should be done through 20 trade sample size to give accurate results. When I first started trading back in late 2016 I would always hear profitable traders talk about trading psychology and not trading strategies. I never knew why until I tool Mark Douglas’ principals into consideration and for that I am grateful.
(see pt2)