Saturday, May 24, 2008

Changing Yourself As A Trader

A reader recently wrote to me of a dilemma: He is trying to change the way he trades, because he is no longer seeing an advantage in his old approach. His new way of trading involves taking moves on longer time frames, rather than very actively trading in and out of markets. He has created plans to guide his new trading mode, but finds that he is not following those plans and now is puzzled as to how to proceed.

The problem with changing yourself as a trader is not just the learning of new patterns; it's the unlearning of old ones. A trader calibrated to a particular market (say, S&P 500 eminis) will have difficulty reacting to the speed and extent of moves in other markets (say, crude oil). A trader calibrated to one time frame will have trouble putting that "feel" on hold while trying to trade another time frame.

Often traders have difficulty changing their approaches, because the old ones get in the way.

For that reason, I have almost always found that an extended period of observation and simulated trading/extremely small trading must precede any major transition of trading markets or styles. This period permits an immersion in new patterns, and it also facilitates the unlearning of old trading habits. It additionally enables traders to try out new approaches without losing significant money.

Much of trading boils down to pattern recognition and the ability to act promptly on patterns as they unfold. When traders change markets or time frames, they inevitably move to different patterns or similar patterns that unfold differently. I've seen traders make successful transitions in their careers, but the key has been their willingness to undergo a fresh learning curve. Impatience is the enemy of change.

RELATED POSTS:

Learning How to React to Changing Markets

How to Keep a Trading Journal

Three Steps to Take If You're a New Trader Losing Money
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8 comments:

Ryan said...

Great Post Brett,

That is the exact approach I took. After noticing I had a few unconscious beliefs that didn’t serve me and were resulting into undesired habits, I went back into practice mode. After three months of playing with my mindset through meditation, visualization, affirmations, and subliminal material in addition to tweaking my trading system I overcame the habits that weren’t serving me and I’m back on track. It did take some time to build the neural networks in my brain to create the unconscious habits I needed to have my body take action on. Keep in mind I’m 26 years young so my brain is still fairly neuro plastic so breaking the pattern wasn’t as bad as say someone who has had 50 years of conditioning.

But yeah, repetition is the mother of learning and applying your system properly day in and day through practice will surely begin to create the right habits you need as it relates to your system or methodology. Even if you do this mentally or physically, I believe there is no difference between and imagined or real experience

Thanks,
Ryan
www.evolvedtrader.com

LiggerPig said...

Like many aspects of trading, the solution to the dilemma can vary with each individual. For some the answer is to make a clean break but, since experience is such a major factor in our learning, we find old habits die hard.

Moving to longer timeframes invariably means a trader will look to take profits too quickly and freeze at the losses of typically larger drawdowns.
You don't mention what his old approach involved but my experience is the same patterns repeat on different timescales.

I agree with your approach, "I have almost always found that an extended period of observation and simulated trading/extremely small
trading must precede any major transition of trading markets or styles." We have to experience the new method and analyse our results to gain the confidence required to be able to act in the moment.

An important aspect of this you mentioned "... enables traders to try out new approaches without losing significant money." Again, we learn how to adapt our plans to suit our new trading style. For example, we may want to scale into positions on a longer timescale whereas we scaled out before. We need to know the new method is going to work with our risk/reward model. If we're trading old habits it will be beneficial to see what affect it has on profits.

Personally, I find unlearning old habits incredibly difficult and it's only by experiencing the effects can I assess the impact on my trading. Continually analysing my results and keeping a journal, I hope to illiminate my bad habits.

Brett, we differ in our view of patterns but at the end of the day, we as traders, have to be comfortable with our method and their timescales. It may be the trader was suited to the timescale but needed to his improve his edge.
Without knowing the details we don't know.
As a fellow ES trader I wholeheartedly agree with your view of QM. The nearest I get is stepping just inside the casino door, so the exit is never out of my sight LOL

D TradeIdeas said...

Excellent article. A trader transitioning from one style to another is an opportunity to re-evaluate many dimensions of the trading process. I would include the set of technology tools as well.

Find the new set of tools and technology that complement the new trading approach. Useful criteria include: tools that specialize in the same time periods as the new trading approach; tools that maintain and reinforce the new trading plan rules; and tools that ultimate eliminate unecessary steps in the trading process - do the tools help you make a decision faster, more efficiently?

Reevaluating all the steps in the trading process during a transition from one style to another, including simulated trades, will ensure that you are as prepared as possible.

dff said...

With Igor dominating the markets yet again after getting crushed in 06, things will be like this for a while. but fear not, our boys at kingstree shooting the streams of 400's and 75's, and occasional streams of 1000's will take care of him soon enough. then, your old trades will be back, working as great as ever. So, it's really not a matter of unlearning the old habits, but having different weapons in your arsenal and knowing when to pull out what. So, what makes this difficult is the fact that it's true what Dr. B has been teaching us for some time now, about how the trades should get to the point of being almost automatic. you see the same patterns, and look for the same things over and over again, to the point where you pull the trigger faster than you can think about why. So now it's a bit tricky, since the trades that are best and normally very high EV are now going to be horrible trades, since Igor is targeting those areas since us day traders are providing him liquidity...that's his style. It's almost automatic for him, since he runs a tally of orders he knows are day traders, as well as the size they are fighting with, classifying them as orders less than 50, and those greater than 50. So for us as day traders, we have to fight the automatic feel to take the "best trades" since those no longer are so great while igor is in the market. but while he's gone, whether it be intraday, or a day of the week, or a week at a time, or more, we must be fully aware of that as well and then get in the zone of automatic trades. so we need two types of automatic trades, those while he is in the market. and those while he's not. for those from the old days, igor is from gelber, with clearing number 990.

I guess my comments are more directed towards very short term scalpers. those swing trading wont be as affected by this, other than possibly wanting to widen up the stops a bit, since he will run through them.

CharlesTrader said...

One could make the argument that to be a successful trader, one has to be a different type of trader everyday, and prehaps every moment of every day. This stems from the fact that the market presents unique opportunities each day and each moment of the day.

Just when you think that you have identified a consistent pattern, the pattern changes.

Two things are consistent about market behavior:

1. When supply and demand are in equilibrium, prices change very little.
2.When demand is greater than supply, price will move in the direction of demand.

The study of demand and supply should be the focus of every trader in any time frame. Being able to notice supply/demand inbalances, or to be able to anticipate these inbalances is the real trick to trading successfully.

Charles

CharlesTrader said...

Replace the word(s) "inbalance" with "imblalance" in my previous comment.

Sorry about the misspelling.

Charles

Globetrader said...

Brett,

In my development I noticed, that changing an old habit often works fine for a while, only to have it reappear at the most inopportune time sometime in the future.

As this happened a few times to me, I tried a different approach:
Instead of trying to undo an old habit, which often has very deep founded roots and which actually might serve a valid purpose, I try to live with it and give it its proper place in my trading system.

Take the fear/panic to lose all of my account in a sharp spike against my position. That fear is unfounded usually, but trading highly volatile futures means that my stops often are farther away than I feel comfortable with.
Still it was a conscious decision to trade that way, because I like to have a high percentage number of winners, which pay for the few losers, which from time to time hit my stop.
In the past, when something like this was about to happen I moved my stop, I added to the losing trade at the dumbest possible times, I did everything not to acknowledge the losing trade.

My first approach to solve the issue was to trade with small stops.
But I hadn't changed the way I took profits then and as I tended to take profits early, my overall breakeven trading system, which allowed me to continue learning suddenly turned very red and negative.
The profits I made did no longer pay for the higher number of smaller stops I had to take.
So giving in to the fear of losing a too big chunk of my account actually led to higher losses.

That approach did not work, but ignoring the fear wouldn't work either, because I knew, that would led to panic in case something unexpected happened.

So I returned to using wide stops, but nowadays these wide stops are above or below clear support or resistance levels on higher timeframes, meaning if they are hit, it's very unlikely price will come back.
Because one of the reasons I was unwilling to take the stop in the past was the 'hope' (and fear) that I would (again) prove myself the real dumb trader being stopped at the bottom or top of the move against me.

At the same time I started working on myself to increase the holding time on my profitable trades. Something easier to accomplish as doing this 'just' means, that I have to overcome my urge to take immediate gratification. I still exit profitable trades early, especially when the trade was first sometime in the red, but overall I'm quite content with my performance going from an average of 5% - 10% to 20% - 50% of the available range.

I still question myself after I take a big loss, even if the statistics now clearly show, that my profits pay for these losses. But now it's no longer panic overcoming me. I review the loss, I look for the reasons why I was not able to exit the trade at a profit and what I should have done instead. Sometimes there is no way, but often I get a better market understanding, I am able to formulate a plan, where in the past was just a feeling, you should do such and such. I also analyze myself and look for reasons why I took the losing trade in the first place. Was there outside influence, was I bored, was I distracted. If I find something it actually puts me at ease, because once I found a reason or a pattern not seen before, I can work with it, I can integrate it. The trade which just did not work, the trade which just is one of the losing trades of the system is an excuse for the mechanical system trader, but if you are a discretionary trader, you always have to pass the filter: 'Go ahead, take the trade', which makes it my responsible alone. No one to blame but me for not reading the market correctly.

And all discretionary traders know that feeling when you override your inner voice which tells you: BEWARE, it looks better than it is.

It's when these trades turn sour, I look for reasons, because I know my subconscious mind saw something I consciously haven't identified yet.
Best regards,

Chris

JP Highland said...

I like the idea of being calibrated to a certain speed, I consider myself to be a good fastball hitter, that's why I have found my niche in certain type of markets. But breaking balls, curves and off-speed stuff give me a hard time. That's the reason why I don't trade the SNP futures much.

Another good post from Dr. Steen!