Category: Trading Psychology

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My Journey to Fully Automate My Trading: The Commitment

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I talked about fully automating my trading for many years yet I could not stop myself from staying in front of the screen most of the time. This year, my new year resolution is to commit to the process of converting whatever I am doing in trading to a fully automated process. I know it is going to be a challenge for a discretionary trader who has been trading for better half of my life. I also know that the process itself can be a very rewarding experience. After all, I have not taken on a challenge this big for a long time.

A Bit About Myself and My Trading

In case you are not my long term readers or members of my website daytradingbias.com, it can be very confusing of what I am talking about. Here is a proper introduction of myself.

I have been trading for more than two decades (getting close to three now) professionally. I started out trading as a floor trader in a stock exchange trading stocks and stock options. I moved on to trading commodities and index futures. I manage other people’s money and also act as advisor to very affluent families on their high-risk portion of their funds. There were good times and bad times with my trading over my long trading career. Overall I manage to do pretty well and it has been a life enriching experience.

Over the years, my trading style has changed a lot. Although I started out trading 100% discretionarily, my current trading is a mix of mechanical trading on certain markets while engaging the other markets I have very specific routines and rules I follow strictly. Hence I am no newbie in mechanical trading. I just do not want to automate my main markets, the index futures, probably because of psychological reasons.

What Pushed Me to Take on this Challenge

I have a tough ride in my personal life over the past few years. Time became a very precious resource as I have to strike a balance between taking care of my loved one and my professional obligations of managing my clients’ money. During that time, I researched and refined my trading style so that it is more streamline and robust such that my emotion component would play a much lesser row in affecting my performance.

It turns out, my effort in reducing my time in front of the screen did not reduce my trading performance. It actually improved my trading performance significantly. I would not say the outcome is a result of those clichés like “less is more” bullshit. I think it was the process of objective reflection and evaluation of what I did that gave me clarity in reducing the clutters in both the actual rules of engagement in my trading plan and the beliefs I held for years about the markets which I never questioned until then.

So here I am, equipped with everything I have got, including time to spare at this point. I have no excuse not to complete the journey. The experience and knowledge gained from the process alone worth giving this a shot with everything I got. If the goal of fully automating my trading is partially successful, I gain even more time to take on even more important tasks in the future. There is really no downside to this challenge.

In other words, I have no excuse not to make it happen, now.

What’s Next

There are many things to get done in preparation phase for this project. It takes time to get these tasks completed before I can move onto the next phase of the project. Since I am not in a rush to make this happens overnight, I will take my time to complete these tasks carefully.

Throughout this project, I will document what I do so that all of you will learn something about the process of converting a discretionary trading method into fully automated trading. I am documenting my journey also for the purpose of holding myself accountable. This is my way to push myself to commit to the project no matter what the outcome is.

Life is worth living if it is a meaningful one. Finding new challenges to overcome is one way to make life more fulfilling. I find a serious challenge this time and I am very excited.

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Mental and Emotional Maturity

taking_selfieI was talking to several beginner traders at my friend’s trading firm the other day. The topic of high probability trades came up several times as these young traders like to get some trading tips from their boss and me. We both told them high probability setups are overrated. You can guess that our point of view confuses these traders a lot. I promised to write about it this week and here is the explanation why one should not obsess with high probability trading setups.

The Psychological Need of High Probability Trades

The reason why traders and in particular, day traders, having the psychological dependency on high probability trades is that it feels good naturally after winning and feels bad after losing. It is normal to have such feelings. But many people do not realize that the accumulation of such emotions are not in equal weighting.

I have posted a video by Shawn Achor earlier this year on exactly this topic. In short, we need about 5 times of happy or feel good events a day to offset one upsetting event in the same day to keep us in a balanced mood. Now think about the number of trades a day trader may make on a single trading day. Just 3 losses, no matter how small they are, as long as upsetting feeling were triggered, the trader will need 15 feel good events to offset the emotional imbalance.

Hence traders tend to look for high probability setups so that they can feel good with their trading. After reading what I wrote above, it should be clear that usual high probability setups at 70 to 80 percent are just not good enough for anyone to really feel good with their trading. Winning rate above 90% is needed to make a normal person to feel comfortable with their trading.

Mental and Emotional Maturity Matters

Even if you have a very high probability trading setup, it is not going to stay at such high level all the time. What if the winning rate dipped down to 70% for several days a month? The emotional upset resulted from the dip can be disastrous as the trader will easily be lured to trade madly. As we all know, one mismanaged trade can wipe out all the gains and more if the trader fails to exercise proper money management. Higher the dependency on high probability trading setups, the more likely the trader will have these very bad trading days from time to time.

Thus depending on high probability trading setups is not as good as learning to deal with the emotional imbalance caused directly by trading. Having the mental maturity to understand that trading is psychologically challenging in nature, a trader can focus on improving their own emotional maturity so that they are not affected as much by their trading activities. In other words, learning to forget about high probability trading setups all together and focus on the better execution of the complete trading plan only.

Same Principle Is Applicable In Life

Not surprisingly, mental maturity and emotional maturity are strong indicators for people who are successful in life and in fields outside of trading. I choose to use the term mental maturity over mental toughness because it is not just toughness one need to do better. Mental toughness can carry you through difficult times but you also need mental maturity to find solutions to solve various kinds of problems with work and in life.

Emotional maturity gives us the ability to better handle relationships in our social circle. It also entails better mental health in general, allowing us to live relatively stress free. But most important of all, it allows us to maximize our ability to utilize our knowledge and skills. If there is something called destiny, emotional maturity is the key to get a better one.