Mark Douglas, an author of trading psychology books is shown in lengthy video interviews describing the many trading psychology and mindset problems many traders face and how to fix them.
I will post one of the videos every day and offer my analysis and nuggets of value once per day until all seven parts have been posted.
Mind Over Market Part 1 of 7
The video talks about how many traders believe that since they can find themselves in a winning trade, that they can have consistent results. Having a winning trade and being a consistent winner are two completely different things.
They are absolutely right!
The key thing is to figure out why you are in winning trades and what causes them to happen. If you are in a winning trade and are in such a trade due to a breakout, or explosion in volatility, then it is extremely important to figure out why the market moved.
Sometimes it can be as simple as the market tripping a nice concentration of stop losses changing the psychology of the market, even though there wasn’t any particular fundamental driver. There just wasn’t any huge limit orders to soak up the stops, and no one was willing to stand in front of the freight train in big enough size to thwart the market move.
Other times it can be news based. Other times the markets movements can be stop hunting based, or option barrier based. Other times the market can be moving and being attuned to various global macro drivers. Other times the market moves due to unfulfilled expectations and needs to reprice itself as the macro traders need to get out of their positions and establish fresh ones in the opposite direction.
If you can realize the true reasons – rooted in order flow and liquidity for the market making it’s movements, then you can go from just placing a few winning trades to being a consistently profitable trader. A consistently profitable order flow trader.
Unfortunately most people do not find those reasons, and instead believe that the markets movements were due to some moving average crossover or divergence signal.
Mark Douglas said:
Winning requires absolutely no skill at all.
That is true, especially if you do not know why the market moved.
Those huge profits from a few lucky winning trades can cause people to think about how they can always continue to make those types of profits. This has manifested itself many times throughout the decades. Traders during the tech boom were riding the glorious trends. Mouse clicks and some easy momentum led to glorious profits. People were quitting their jobs to become traders. They had a few nice winners and thought that it would lead to consistent profits.
Eventually it came to an end as the bubble burst and the traders did not know how to trade the other side of the market. They only knew how to trade the bullish side, the easy bullish momentum. That lack of flexibility led to the bursting of the bubble. Which is why you need to learn to evolve in trading or suffer big trading losses.
It is happening again with the current gold bull market. Mouse clicks and momentum. People blindly buying gold. they are buying the breakouts and buying the pullbacks and many of them are making a lot of money.
And you should milk the easy trends for all they are worth. That is where a lot of trading profits can be generated from. But also be aware of the bullish and bearish order flow generators and scenarios at all times. You need to know when the trend is ending so you do not take massive losses when it reverses. If you are really good you can make a killing in the other direction as well.
Mark Douglas gets asked: What makes consistency so challenging?
Mark Douglas responds:
At the most general level, it requires learning the types of skills that people just simply are not used to learning. Mental skills.
I would take it a step further beyond mental skills. I would say that it requires learning the types of skills about order flow, liquidity, and global macro, that most people are not used to learning. They are not used to learning because there is just so much trading B.S. that has been accumulating on the internet, in forums, and various trading books over the years. I go over some of the reasons in my article about why new traders fail.
Mark Douglas then proceeds to talk about how practicing trading during easy going times is effortless, but how when the going gets tough and there is pressure to perform and the markets are volatile, and you are attempting to recover from some losses, then that is when the traders mental skills are tested to the maximum.
Douglas then talks about how the mental errors traders fall for are a result of the belief that the technical methods are telling the trader what is going to happen next on a trade by trade basis. He says that is not what technical methods were designed to do.
I agree with him. Technical methods, and technical analysis methods were not designed to tell the trader what is going to happen next on a trade by trade basis. This is the standard trading thinking of putting the probabilities in your favor, cutting your losses and letting your profits run.
But I would take it a step further and say the technical methods, aka technical analysis methods were not designed to do that because they cannot generate order flow and move the market. Order flow based methods actually can tell you what can happen next on a trade by trade basis, for they deal with and analyze the very foundations of every marker – transaction flow and liquidity. That doesn’t mean that they can escape statistical measurement – they can’t. What order flow can do is offer drastically better and more accurate explains for why price has moved in the past and why it will move in the future. It can actually tell you what is going to happen next on a trade by trade basis, instead of just hoping that a trading edge develops over the long run.