Becoming your own worst trading enemy

Hey everyone! Here's a (slightly less) fun Friday post after the market close that talks a bit about what I've been going through lately. I've been on an expedition to improve my trading by getting a better understanding of myself.

Before we get into the details:

Okay, let's go. 🏃‍♂️

Fear

I read Best Loser Wins by Tom Hougaard a while back and the biggest thing that resonated with me was how fear can drive so many emotions that hinder your ability to trade. Fear manifests itself in different ways with different people.

Sometimes people get angry because of fear. Some people get greedy. Some back away from trading for a period of time only to return with the same amount of fear.

I was cutting winners too early. I was letting losers run. I was forcing trades that didn't have profitable setups. I was afraid of missing out on a move.

Pair all of that along with some personal things that weren't going well and you land in a pretty rough spot. I gave back all my profits for the year (plus a little extra). I wasn't dealing with the fear and no amount of market preparation could fix it.

I started consuming more and more new products, indicators, and reports, but the fear was still there. I thought that if only I had the right set of indicators or a certain view of the market that I could avoid the pain of losing.

What I didn't realize is that my market knowledge was fine. My mindset was not.

Learning about myself

I read Best Loser Wins on a Kindle, but on a recent long car trip, I decided to listen to it once more as an audio book. The book was even better than before. I followed that one with the highly recommended Trading in the Zone by Mark Douglas on audio book. My previous attempt to read Trading in the Zone on a Kindle failed because I felt like it was too mushy and psychological. It was exactly what I needed.

Then I remembered several recommendations for Stan Weinstein's Secrets For Profiting in Bull and Bear Markets, so I listened to that one, too. It had plenty of information in it around simplifying technical analysis but it had a significant portion that covered trading psychology, too. I loved this book. The narrator on the audio book version is fantastic. (Side note: Do not buy the Kindle or Kobo versions of the Weinstein book. They are OCR copies of a physical book and they're awful. Go for a physical copy!)

I read Reminiscences of a Stock Operator a long time ago and loved it, but I hadn't read Jesse Livermore's How to Trade in Stocks. After finishing that one, I moved to Nicholas Darvas' How I made $2,000,000 in the Stock Market next. All of these were fantastic. Darvas' book blew my mind because he was receiving delayed quotes via telegram in the late 1940's and 1950's while making decent money in the market. He also made plenty of mistakes that hurt traders in 2024.

Next up, I decided to get a little more technical with Momentum Masters: A Roundtable Interview with Super Traders, but I found myself a bit frustrated. Many of the things that traders mentioned in the book go against so much of the market psychology from other books.

William O'Neil's How to Make Money in Stocks: A Winning System in Good Times and Bad was decent, but it felt like an advertisement for Investor's Business Daily at times. Some of the setups make a lot of sense but then the examples are picked from a perfect list of stocks.

Alexander Elder's Trading for a Living is pretty slow paced, but the audio book narrator makes you feel like you're in the middle of a stage play. The audio book is really good.

What am I reading now? I'm listening to The Mental Game of Trading on Audible and reading Pit Bull: Lessons from Wall Street's Champion Trader. Both of these are really good so far.

What I learned

Everyone seems to take a different approach to emotion:

• Livermore and Darvas seemed to work hard to suppress emotion while William O'Neil tried to make trade entries and exits as mechanical as possible to avoid leaving room for emotion to set in.
• Elder drives the point home that technical analysis is applied social psychology. Using technical analysis for anything other than that will lead to failure. He urges readers to use price and volume in the same ways that pit traders used to listen to the volume and pitch of the traders in the exchange to know the overall sentiment.
• Hougaard leans heavily into visualizing success and failure, experiencing the emotions that come with each, and then recognizing those moments. I really like his strategy of plotting trades on charts to see where you went in and where you exited. He puts a real priority on forcing yourself to experience the emotions in depth and work through them. Hougaard also delivers the truth that 90% fail and gives you the choice of being part of the majority or part of the 10% that does something other than fail.
• Although I'm not done with Jared Tendler's book (Mental Game of Trading), he takes a totally different approach. He believes that fighting or suppressing emotion is exhausting and takes your focus away from what you should be doing: following your trading process. When your brain is fighting emotions, it gets distracted and tired. He suggests using emotions as signals just like you would use a moving average on a chart.
• Weinstein takes a similar approach to O'Neil by using a more technical approach, especially on handling profit taking or stop losses. He also leaves room for discretionary trading. O'Neil is pretty strict about waiting for basing patterns, but Weinstein advocates getting into a trend as long as it's strong and meets your criteria. Getting in late still means getting in on the profits.

Douglas' book is something else entirely. I don't even want to put it in bulleted form with the others. His book is difficult to get through because he approaches the problems from several directions to find a way for you to relate to the problem and the solution.

Douglas strongly advocates for trading the market with your edge while knowing that anything can happen. Nobody can predict the future, so stop trying. Use your edge to make trades knowing that sometimes it won't work. Have a plan for that.

He also advocates about how important consistency is. This isn't about consistency of profits; it's about consistency of the process. When you deviate from the process, you lose consistency and uncertainty sneaks in. That led into his last point about managing uncertainty: it's your edge in trading. The people who can't manage the uncertainty are doomed to fail. If you can manage to avoid that, you're doing better than most.

Caveats

Will reading these books or sitting through the audio books magically turn you into a winner? Definitely not.

Can you start to build a list of things that are stopping you from being consistent? Absolutely.

I forget which book it was, but one of them said something like: "Focus on the process and the money will take care of itself. Don't focus on the money." That's really good advice. If you build a consistent process and decide on a strategy to use your emotions to your advantage, you have a great chance of consistent returns.

Conclusion

I recommend all of these books for everyone who is trying to invest for the long haul or trade stocks and options on shorter terms.

If you feel pretty confident about your technical analysis or edge, go for Best Loser Wins first. It's like getting thrown into the deep end of a cold pool.

If you feel like you're just getting started, read Stan Weinstein's book to pick up some basic psychology advice along with a pretty simple technical analysis strategy that holds up well for investors and traders. It has some excellent elements in it for those people who feel like their timing is terrible on entries and exits.

If you're a seasoned trader and you're finding yourself in a rut, then go directly for Trading in the Zone by Mark Douglas. It's the deepest dive into trading psychology of all of the books mentioned.

Good luck to all of you! 🍀