Question: If this is true and I was profitable on a simulator, to take emotions and psychology out, I should automate my trading algorithm and should then be profitable with real money?
There's a thread discussion specifically about that. Basically, some don't know how to automate, some don't want to automate, some have tried to automate but couldn't get it like how they applied it in simulation, some currently still trying to automate, some blew up so bad that they'll never return to trading, some stop using the method in real trading and decided to move to a new method... I think that basically covers the reasons I saw posted.
Thanks. For me, I see only two possibilities: 1. Psychology, emotions are not factors affecting the outcome. 2. The simulator does not work. I tried a lot of simulators, all of them worked when backtested but not when going live, even when followed strictly.
There is a lot of wisdom that can be learned from a market wizards - wizard, into his 5th decade trading.
I've listed over the years people that I've personally met although I don't know them well and some I do know well that were profitable retail traders (trading their own accounts) or profitable professional traders (worked for a firm) that suddenly became "losing traders" after a dramatic change in their life. Real examples below: 1) Trader's wife cheats on him, then divorces him and gains custody of the kids for about 1 year until the dust settles and the courts concludes he gets the kids. Worst drawdown of his professional career occurred during the divorce. He was almost fired from his job for his poor performance. 2) Trader's son commits suicide via taking the gun from trader's house and shoots himself in the trader's house. Worst drawdown for the trader for two years after that. Requiring him to get psychological help and psychiatric help. The guy was only sleeping about 2 hours per night. 3) Trader outperforms others on simulator and then joins the prop firm. Debts in his personal life are mounting and he starts a losing streak. Job bosses recommends he gets psychiatric help because they notices other behaviour problems (e.g. threats to co-workers, arguing consistent about small topics)...he refuses to get help and convinces his boss its just an "unlucky streak". He then cracks (breaks down into tears after a day full of consecutive losses) and kills a few at the prop firm than goes home...kills his family...then he commits suicide. 4) Trader (retail) triples his paper account in 6 months of simulator trading with only a few losing trading days. Family and friends are impressed and "loans" him the money to trade. He loses it all (real money) in a few days of trading...most of it revenge trading. 5) Trader video tapes his live trading sessions and post videos of such on Youtube...consistently profitable for about a year...most days 1k to 3k profits. Some labeling him as the "best trader they've ever seen". He thinks he's ready now for the big time after a year of profitable trading that only had a few losing trading days...goes out and buys a condo. A million dollar condo. One particular video session...he loads up but the trade is sitting at a loss...a small loss. He breaks his rules (lack of discipline = psychology) and decides to hold the position overnight. Maybe he was too cocky because he had a live audience and he didn't want to ruin his great reputation as a top trader ? Breaking news in the overnight trading session...he wakes up to a nice surprise in the morning. His entire trading account is wiped out in a single trade. The amazing part is his broker window is view able and you can see the loss getting bigger, more big and then ridiculously big. Many times in the video...he's just frozen like dear in front of headlights late at night. His mouth open...just staring at the screen. Video becomes one of the most popular trading videos on Youtube. Suddenly he erupts....he's on the video swearing, hitting his keyboard, kicking his chair and then eventually throws the chair out the window (thru the window). All live as it was occurring and recorded for anyone to view. I watched it live as it happen. I saw a calm nice guy turn into Mr. Hyde like the fictional story Dr. Jekyll (science doctor) and Mr Hyde (crazy murderer). 6) Visit ET's journal section and read the ones involving a profitable day trader on simulator that then traverses into real money trading. You'll get it or see the commonalities...psychology. Simply, you listed only two outcomes. Reality there are more than two outcomes. For example, some folks for psychological reasons can not handle the pressure of day trading. Another outcome, an outside force derailed them (e.g. someone that becomes an alcoholic or drug addict after traversing into real money trading)...the pressure got to them...its as simple as that. Seriously, you don't need to be a day trader to one day snap after losing all your money or snap from one single bad trading day or snap for one single trading loss. It happens almost every day to people that are not even "traders". People just snap about "losing their money" or about feeling as if "someone stole their money" or snap after feeling a if "someone cheated and took their money"...its psychological. Money is the root of most people's problem. We live in a society that values money. Suddenly take that away from someone and you have someone that could just "snap". The strong ones or ones that remain calm...they get over it and eventually recover. That too is psychological although some may praise their faith, experience, well capitalization or whatever...its still psychological...that mental game.
Very nice post. The one thing that your post brought to my mind was, in trading, you have to go slowly, cautiously, don't rush, don't get greedy or be impatient. Yesterday I attempted entry on a trade by setting a limit price of 71.5c but the stock opened at 72c. Unfortunately price went up during the day another 6.3%. I was kicking myself on missing the trade but I felt that restraint was also good for me. There is always another day. Controlling emotions is critical, it's critical in many other areas of our lives too.
Attempt to control emotions lead to behavior described by Emotions is protection mechanism inside us - build in by nature. They are making us the humans. Not understanding this - is primary reason for traders failure - day trader, swing trader, investor doesn't matter.
"The market behaves much like an opponent who is trying to teach you to trade poorly." -William Eckhardt
I agree at 100%. We are told that emotions are bad in trading and it is why we see a lot of auto or robot style traders (not talking about HFT which is a different story). High volatility and high emotions. Short term trading = More leverage and more volatility. Day trading is usually associated with gambling and high emotions. Learning how to work with our emotions is much clever than trying to control or to hide them.