I noticed that some traders who are preparing themselves for live trading and focus solely on trading via intraday automated trading systems (ATS) tend to underestimate the psychological aspects of this style of trading. This underestimation has its logic – these traders learned from other experienced traders how to eliminate mistakes through automated execution of trading orders and emotions that do not belong to trading. Of course, this can be largely true, on the other hand, I know from my own experience that every trader will experience difficult moments in trading, sooner or later.
My style of trading are automated intraday trend-following trading systems. Anyone who is familiar with the concept of Trend-Following systems clearly knows which psychological “traps” should be expected. If you are trading via intraday ATS, there is nothing easier than to let your automated trading systems run and in the evening, after the end of the main trading session check the trading result for the day. Do not be foolish and do not forget that even ATS have their limits in terms of their reliability. There may be situations where, for example, you will have problems with your connection to your virtual or dedicated server, or your broker will have a problem with the Data-Feed. Although these are relatively rare situations, they can occur now and then. Thus I rather check my automated live trading at least 2 times a day – at the time of opening and closing of the main trading session in the futures market. Of course, it would be ideal for me if I needed to check my trading results once a month. In this case I would be able to partially avoid negative emotions connected with, for example, series of losing trades. Yet this does not mean that a losing month cannot come now and then. On the contrary, it is a natural phenomenon. However, you can save a lot of unnecessary frustration when your trading system gets into such a losing period. If I learned something during my live trading, it is without doubt patience and self-discipline. In my opinion, it is reasonable to make conclusions regarding the trading results within a one year period. On the other hand, even the best hedge funds ever have sometimes a losing year. Trading is like any other business, there may be poor years. It’s about being profitable in the long run so you can fulfil your dreams of financial independence. I have met many traders who could not bear the psychological pressure and stopped trading after what they got to their first significant drawdown. And this was despite the fact that their trading systems suffered much higher drawdowns within the historical backtesting. How depressing it must be then for these traders when they see that they could sharply appreciate their trading accounts a few months later if they persevered with trading. These traders then often get into a vicious circle and make another unplanned impulsive decisions, for example in the form of an aggressive increasing of position sizing. They think: “I lost my profits because I stopped trading, so I will raise my position sizing now because now I know that my trading system is able to generate profits on live data.” Of course, this is the moment when another natural drawdown period usually comes. And this time it brings a fatal loss because the trader did not have a large enough trading account for so aggressive position sizing. I hear about such mistakes every day. Yet they still appear in less psychologically resilient traders. It seems that that setting yourself free from your own ego and greed is perhaps the hardest task in trading. Always keep in mind that there is no “me versus the market” in exchange trading. If your trading system is properly validated by robustness testing on historical data and also generates profits on live data within the simulated trading, you have the most powerful instrument in trading – the profitability probability is on your side.
In this chapter we focused on the pitfalls of negative psychological aspects that appear ATS-based trading. Do not think that by trading via ATS you completely eliminate the pitfalls related to the psychology of trading and the inevitable losing periods! If you fully understand and accept that in trading:
- a losing trade, if it is in line with your trading system, is a good trade,
- a winning trade, which we exited prematurely, is a bad trade,
- one profitable or losing trade does not mean anything but a hundred trades already have some informative value,
- everything is about robustness of the trading system and probability,
then you have a good chance of a long-term and well-deserved financial success. Good luck!
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