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Psychology of Trading, Leverage and Volatility


Hi All,
I thought that we should have a new thread on Psychology of Trading, issues surrounding the use of Leverage in futures trading and how traders utilize Volatility and various forms of volatility to help them trade better.

I would love to hear from other traders on these subjects so we can all collectively grow and learn from one another in the process.

Happy Trading.

Best Regards,

  • P11


Our conversation with @AltT regarding Metrics for Futures Trading Performance which slowly morphed into a chat about trading psychology.
I really enjoy it.
Thanks @AltT


  • P11


@Project11, I like the title! Leverage makes this game much different than any other market.

I hope that my thoughts here would be thought-provoking, and “irritate” some new traders to the point of admitting or disputing my belief systems when it comes to the psychology of trading. In my opinion, three significant factors determine your psychology and success in trading:

  1. Why do you trade? What made you enter the markets for trading?
  2. Who influenced you the most when you began?
  3. Are you just fascinated with the markets but do not have the tolerance to trade? Or to be more specific, the tolerance to trade leveraged products.

If someone decided to trade because they need additional fund, extra income, or anything financial for that matter, that is a weak spot. Psychologically, it would be a burden to overcome losses or the inability even to absorb them. The typical “double-down” and “it must correct” will likely prevail for the longest time until such time they recognize that something must be wrong with that pattern of behavior.

On the other hand, those who get into trading because they like to work in complex multivariable, risk-driven and high reward have an advantage over those who just in to make money. I love trading because its a business where you can have good decisions with a lousy outcome, and bad choices with incredible payoffs — finding the balance of making the right decisions with a balanced result is where the challenge of trading is fundamentally rooted(IMHO).

The second point is the mentoring part. If you took a course with a guru, and he has no clue about trading, you would need to unlearn what you were taught, and that is even harder than learning from scratch. No student will ever admit he took a course that is bad because they paid for it (but that is a different story). The same goes for the people who bought all the “proprietary” indicators. They all trying to fit the market to a bunch of random numbers struggling with the fact that they “invested in their indicators,” a term I keep reading on some of the trading forums. This is just absurd. These traders must free themselves of all these random lines and focus on the better and more straightforward methods that they can create on their own by simple backtesting.

The third psychological burden is the ability actually to trade. Some of the traders are just perpetual paper traders who are busy with computer setups, and busy getting ready for the “perfect” method to pull the trigger. They do not recognize that trading is always work-in-progress, and the real work only starts from there.

Those of us who trade real $$ day in and day out, we must work on our analytical, and disciplinary behavior. I always try to recognize my blindspot and weak points. I am my own most prominent critic because we rarely want to admit to ourselves where we lack a skill necessary to succeed in a specific area. Trading out of everything I have ever done keeps poking in areas where it helps me across the board to be a better decision maker.



I think we are to support one another, not necessarily dispute one another or “irritate”. I do not necessarily disagree with many of your points, especially the mentors you had along the way. However, I think that those who enter the game of trading come to make money first, later they may bring a specific skill set that they have acquired in their profession or on their own (or not).

For example, programmers may create automated trading; if you have a stats/math background, you may build a mathematical model if you are an analyst you may use Excel to trade your futures trading method or merely create a simple process for point and click. Disciplines can come from many areas of life and professions, and we have to have an open mind accepting it. Think of someone with an army background; they would most likely have more discipline that most of us from us.

Lastly, when we are addressing topics such as the psychology of trading, we are merely guessing how we think and how others make their decisions, and the same goes for the experts who still come up with theories how we make decisions related to risk.

Thank you for starting this thread, and I do want to hear other ideas related to this topic.

Thank you,
Matt Z
Optimus Futures


Great point @Mod-MattZ. I also noticed that different backgrounds create different traders and even through two traders may ultimately trade a “similar” approach, their outcomes are usually vastly different depending on the risk management they apply and many other (mostly) human-based variables and conditions.

Also, while mentoring some traders and after speaking with many others in the past, it seems that IQ and education alone does not prerequisite one to become a successful trader. As it is mastering of one’s emotions and being able to manage multiple and long streaks of loses and plain “being wrong” while still maintaining the course (this is again providing the risk was put first and one trades with less risk per trade/position) as to withstand longer potential draw down periods, seems to be to the master trait and part of the craft in pro trading.
Many successful non-trading career people are used to being right a lot or else impose on others with their knowledge, skill or training and as in any profession, it really pays off to understand that just because a newer trader opened an account, and started making money in the beginning, they are in for many unpleasant surprises as the markets they trade;
-could stretch in opposite direction,
-could move much more and with greater velocity they anticipated, etc…
These surprises happen to disappoint market participants and eventually make them trade with fear, or revenge because money changes hands quick and it is very tempting to get the recently lost money fast and usually by increasing the size (deadly sin in this game).

It seems that usually the best position in the market is a “No Position”. No immediate risk of loss.

Also, after a rough patch, psychologically it is probably best to cool off and rapidly switch to DEMO trading in order to balance one’s emotions and hopefully stabilize the situation. Think of it as TIME OUT in any game of sports out there. If pro athletes need it so that their coaches can stabilize the game and think through a strategy, why should it be different for a trader risking their hard earned cash?!

The markets are always going to be here and the idea of trying to make the losses back quickly are one of the most devastating wishes I can think of for a trader.

As @AltT was pointing out, it really pays off to watch and observe other consistent traders’ or systems’ P&Ls in order to understand that trading is about:

  1. Defending your capital - First and foremost.
  2. Getting ready to be in a draw down (hopefully small and controlled) all the time. It’s the reality.
  3. Hope to breakeven on most weeks. Yup, put on the patience cap on. One will need it.
  4. And be prepared to trade well when the markets “happened” to trade in a pattern that a trader and his/her system recognizes and hopefully pull more money from the marketplace then during the typical losing periods. 2:1, 3:1 or higher if possible. Clearly you must be trading and not miss those bigger days so get used to sitting in the ocean and wait for those swells like a pro surfer. Patience is key.

This way the realistic equity curve (after fees) should look like a gently sloping zigzag, witch gradual and controlled down stepping, loss-after-loss sessions (trade or day) and less frequent occasional upward positive multiples-of-losses-ratios in profitable trades, which should turn your equity into a net positive outcome at the end of the month.

Again, my experience has been that its so much easier to project the positive outcomes during backtesting and/or optimizing periods but the very same trading day usually causes so much more of an emotional roller coaster while trading it live - even with the very same rules and presumably a trader who executes like a machine. Of course fully automated strategies are all another animal (probably for another thread).

So to summarize, the emotional degree of stress and proneness to making mistakes increases in the following order from low to high (imho);

  1. Backtesting and heavy optimization using machines (no stress, press a few buttons and Voila!)
    It seems that backtesting and machine optimization creates many paper millionaires but in reality
    the market changes and flips those strategies upside down.
    Potential Solution: Use periodic optimization and backtesting periods and then apply those results in the
    forward testing, so that one can simulate a more realistic environment to real time trading.

  2. Demo trading. Use the same amount of money one would realistically use for live trading.
    Set all stops and profit targets as the trader’s strategy dictates.
    Never reset the demo account value until one reaches the predetermined portfolio cut off value say
    25-35% (which is more then most Pro money managers ever expect to lose - although many of them lose
    this or more anyways, sadly).
    Once your demo hits the cut off point. Stop trading the demo. Experience the pain as if it was real money
    and for 1-2 weeks evaluate the results, study your Trader’s Journal (if one doesn’t keep one, its very hard
    to get back to those “bad” trader or days and remember what happened, what was the trader thinking
    and those valuable losses/learning experiences are lost. I suggest to keep the journal-log like a pilot.

  3. And only after 2-3 months of live data demo trading has been achieved and the results are positive,
    one should start trading a live account on smallest possible size while still keeping the demo side by
    side. This way, one can train to trade on live account just like demo and hopefully lower the emotional
    impact by willingly switching to demo when things are rough. Instead of changing the system or adding
    more leverage. Change the system only after you truly see with hard data that it needs adjusting.

Final thoughts:
Lowering one’s expectations and being able to understand that trading is actually boring, mundane and takes a lot of slow (no trades) and multiple losses periods, is a great way to adjust hope-based attitudes and it would appear that actually winning for the month happens semi automatically after a dreadful day-in-day-out execution of boring rules.

I wrote a quote once:
“Winning in trading feels surreal yet loses are very real.
Striking a balance between those two is the trading nirvana.”

Happy Trading,


  • P11


@AltT, I love trading for the reason of the challenge as the game is really between the Trader and the Trader’s alter ego > the Trader we would like to become.
It is a fascinating field where we all measure against ourselves on a daily basis and when things “are working” as we designed it during the preparation periods, it feels very good (even if the day is a loss - most of the time). There is a sense of inner control when we preserve and act upon the self-designed and self-imposed rules.
I also noticed that traders who have survived over the years seem to have a higher tolerance and understanding for human error and seem to handle emotional distress in a more down to earth fashion.
I would bet that a balanced trader could resolve a human conflict or act as a more objective arb between two conflicted parties for example. It would be interesting to run a case study on traders and their balance at home and during other activities.
Also traders probably have an easier way flipping biases without much remorse and therefore probably don’t hold grudges for a long time.
As they say, there is always another trade coming along. So, providing the trading approach is statistically sounds to begin with, why waste time dwelling in the last trade too much, one shall move on.

Just some thoughts.

  • P11


Great quote. The “surreal” part is because the win is never equivalent emotionally to a loss. Losses are hard, painful and deep. Gains are exhilarating for a few minutes.

Your approach to trading is healthy, and I concur that what we bring to the market place are the sum total of our life and career experience. In individuals dynamics, where we are one on one, we can be right through intuition, persuasion, or other means. Statistically, I think we can operate with guesses as well.

In the market place (against a large smart group) we cannot apply individualistic principles. We must learn to live with a multitude of errors, never rely on intuition, and never show anger.

I tried this week to capture some of my screen time with a demo, and I can’t do it. It seems that the more I paper trade, the more I disconnect myself from my method. I know you must be going through a different mental process that helps you. I just prefer to not trade or for that matter even look at the screen. Then I come back and refocus again.

Thank you again for all your thoughts. I often read your posts twice because of their depth.


Both Project 11 and Mod-MattZ brought up a number of salient points, many of which lead to deeper questions on trading psychology as a practical domain.

If you scan the vast horizon of trading psychology literature that’s been published over the last four decades or so, you’ll notice that trading psychology has virtually morphed into two versions:

  • "Popular" trading psychology: a practical and heuristically-driven approach. Unfortunately, this is often and too easily abused by so-called trading “experts” who point to bad trading psychology as a reason for failure rather than encouraging traders to investigate the weakness of a system/methodology, or the true source of trading anxieties (commonly, a lack in sufficient trading capital, knowledge; not evaluating a system properly, or not knowing whether one is even capable of evaluating a system in the first place).

  • Critical approaches to trading psychology that intersect with behavioral finance: Perhaps, this version is not as immediately applicable, but it is nevertheless effective toward unearthing the systemic biases that may hinder a trader’s capacity…biases that exist well below the substratum of a trader’s knowledge, motivations, and actions.

Point 11 commented on how new traders who “started making money in the beginning” may be in for a big surprise. I agree.

It’s easy for new traders to fall into the trap of recency bias; or to forecast the future on a badly-interpreted statistic (a backtesting or performance result, hypothetical or real).

Essentially markets are dynamic, and the effect of time on markets is never static. An effective approach to trading psychology would be one that is as flexible and adaptable as the situations to which it applies itself.

Or perhaps, there are situations where trading psychology shouldn’t be necessary: dealing with uncertainty via hard risk management versus handling “emotions” to compensate for lack of preparation, research, resources, knowledge. etc.

Here’s another common assumption that stems from a similar bias: the notion that there is roughly a 1% group of traders who make money consistently.

Who wouldn’t want to be part of that 1%? Sadly, what many new traders fail to grasp is that the people in that 1% are always changing. People fall in and out of that 1%.

Now, there are people who have made a fortune trading. But there’s a possibility that 1) they may not be trading all of the time, 2) they may be holding longer-term positions as part of a larger portfolio growth strategy, 3) they may be diversifying into other assets that are less speculative, and 4) some may even have started with much larger capital resources than the average retail trader (so a massive loss to a retail trader may be a small loss to the larger investor).

Mod-MattZ brought up the issue of “domain transference,” meaning that you take what you know from one discipline and transfer it to another–in this case, the realm of trading.

We’ve all heard stories of “smart” people–doctors, lawyers, coders, engineers, and other professionals–entering the market only to fail utterly.

We all know of a coder who programmed a trading system that executes brilliantly, but whose brilliance in execution systematically generates trading losses.

How’s that possible?

Ask yourself this: is the randomness and risk profile of the markets comparable to the randomness and risk profile of your current profession?

If it is, then you might be ahead of the game.

If it isn’t, and if your professional domain is more controllable, predictable, and much less prone to Risk of Ruin (RoR), then your trading psychology bias–one that assumes domain transference–is way off the mark. As Project 11 states, you may be in for a “big surprise” indeed.

Project 11 also talked about the poor ways in which traders respond to losses–e.g. revenge trading, doubling down, etc. This reminds me of a series of studies conducted as early back as the 1970s.

According to a study involving a sample group of U.S. investors (conducted in 1979 by economists Daniel Kahneman and Amos Tversky), its findings estimated that the pain of loss felt by investors was approximately two and a half times greater than positive responses to equivalent gains. Behavioral finance has a name for this bias: myopic loss aversion.

You can imagine how loss can warp your perception of a given trade, method, or trading environment. And there are plenty more salient conclusions generated by this study–all of which are highly applicable.

But what if the trading method also happened to be faulty, to begin with? Sadly, I knew of many clients and trading students who would find shelter in maxims stemming from pop trading psychology. Sorry…none of it helped.

Trading psychology is important, but too often traders misapply its use…a dangerous prospect.

So to add to Project 11’s rules of thumb (I like P11’s first rule the most), here are mine:

1. Trading with the necessary amount of risk capital can help alleviate the anxiety and/or fear that can hinder your trading. If you ain’t got risk capital, simply don’t trade. Because if you do trade what you can’t afford to lose, your “trading psychology” should encourage you to pay attention to how you should have a necessary dose of fear…it shouldn’t be used to get rid of it (fear is often good when it is necessary).

2. Risk management, when done right, should make trading a “boring” activity. I think Project 11 mentioned something along these lines. If you know you are risking only 0.5% per trade, and you can take up to, say, 10 trades per week, after which you can generate extra cash infusions should you have a losing month, then you’re not going to sweat as hard a someone who doesn’t manage his/her risk. No trading psychology here…just responsible trading and common sense.

3. Cultivating an agile and adaptive trading method vs. a “static” system prevents you from being vulnerable to “system death.” System death is where a system that has performed well for an extended period of time suddenly stops working due to changes in market dynamics or the wider economic environment.

You may be using a methodology that is destined to stop working for months or years. The kicker is that you won’t know until it’s been months or years! If your approach is designed to be inflexible, then the old trading psychology adage “stick to your system” can mean not only system death, but also the death of your trading account.

Trading psychology, when applied correctly, can have tremendous benefits. But when misapplied, or when used in a non-critical fashion, it can hurt you.

Though all trading is partly psychological, it doesn’t always help to “psychologize” all trading.


Thank you @8Moons for your great contribution. Much appreciated.

Matt Z
Optimus Futures


Great thread @AltT, @8Moons and @Mod-MattZ,

Through mutual knowledge we shall excel further.

One or Us vs Them
I like your distinction between the one-on-one vs. one-against-a-group situation.
As in with any situation whether big size against big size (one-on-one) or normal size against a group, we - the traders shall utilize any available tools and variables at our disposal including the sum of all of our life and trading experiences we derive from our thousands of hours in the markets in order to hopefully create a “winning outcome”.

But, I came to a realization that although we are all in this business to pull money from the marketplace, it’s very clear that while trading, we are not driven by the same logic as while calculating and back testing on “dry land”. The fear, greed, hope … weaken our perception of whats really going on on our screens.

It is far more easy to pull 1000’s of outcomes into a spreadsheet and with a simple calculator equation create a logical, statistically sound risk management method that would actually withstand most market situations. The problem is the emotions, the FOMO (fear of missing out) and the extremely fast changing market scenarios that literally step all over our math based algos and keep pushing us to make simple but critical errors; fail to place stops, load up in revenge to get back the money we just lost, make “unauthorized” trades, add old/new ideas and strategies we are not supposed to use, over leverage etc…

I often find myself thinking through many market scenarios before I fall asleep to only find out that the scenario of the next morning was not accounted for. I rarely think of “them” anymore but rather think of risk and worse-case, best-case scenarios - those are my buddies and or counter parties.

But,… that’s these days… I will never forget the days when I was trading on the prop desk where me and many of my colleagues would literally curse the heck (soft version) of the market makers we would trade against. Those were the days of glory and lots of pain. Daily. Calling the Nasdaq four-lettered market market IDs names and creating the most elaborate curse combo words known to men only because we used to believe that “THEY” are the reason we lost money on the trade and not “US”. Gosh I don’t miss those days. Oh, maybe the free lox lol

This is why I put my faith in hard stops, smart trail stops and as @8Moons mentioned and sort of agreed with me in his wonderful and insightful post (which I can’t wait to elaborate on next), that “responsible” risk management is boring but shall keep you in the game long enough so that hopefully one can keep improving on the strategy(ies) while working with a live account(s) and not only a demo.

The latter, although critical to learn the new trading interface, test auto strategies or keep the trading muscle warmed up, is never the same as a live account (no matter how small it may be).

$1 at risk feels the same as risking $100, at the time of the experience, IMHO. The reality sets in long after the trade outcome settles.
I realize that until I am out of the market, all positions are closed and all outstanding orders canceled, there is a degree of attentiveness and awareness that can not be experienced solely on demo environment. Hence I always suggest to trade on both for as long as possible to mechanically minimize the difference between live and demo. @AltT, it also depends on the strategy/methodology one trades. I tend to trade DEMO side by side my real accounts when I add a new strategy and don’t want to risk real money on it just yet. It also keeps adjusting my attitude if I think it’s better then my conservative strategies. Most of the time the demo will save me money by not losing actual cash. But trading live is crucial.

10,000 Hours - Mastering the Craft
It’s been said that to become proficient in any craft one shall devote at least 10,000 hours to it.
That’s not to say that making money can’t be done by simply guessing right on the next trade outcome.
To my best understanding it’s the little things we get to “know” intuitively that work or don’t while trading live. Those little “hints” make the massive difference at the end of the day/week/month/year.

Can’t find a better quote then Edison’s: “I have not failed. I’ve just found 10,000 ways that won’t work.”

I often find equal joy and passion to analyze the markets by diving into the countless spreadsheets with thousands of outcomes and past result where I seem to uncover many scenarios I am testing for.
The past P&L or strategy results serve me well as my “place to go” to keep validating the “WHAT-IF” scenarios and schemes.
This way instead of changing and creating ever-new strategies it would be wise to seriously consider
analyzing one’s already existing results and start with fixing what needs fixing instead of searching what one didn’t know he/she already had but needed some minor adjustments.
If many years ago, someone told me the essence of my methodologies and the way I trade today, I WOULD NOT listen as I would think the “SECRET” lies in the indicator, strategy or other worth pursuing endeavor but the risk management, the trailing stops and all that “boring” stuff, nah… it can’t be it.
Boy, was I wrong.

I believe that the tools and patterns of our own trading trajectories to success in this business of trading are probably already embodied in our track records (profitable or not) and if studied carefully could potentially uncover and UNLOCK one’s potential.
I keep studying my own results as much if not more then charts and market data these data, looking for
small improvements.

Drawdown - the Necessary Evil
It is very unlikely one will keep a clear head after a severe drawdown and keep aggressively pursuing the research at hand. There is a down time in the cards and drawdowns, even though a very important part of the business, slow us down in achieving the trading equilibrium.
No matter how brilliant one can be in other life pursuits, losing money due to poor risk management and difficult psychological conditions challenging us and aimed constantly at us in this business, always feel painful at first, then followed by a degree of denial to finally arrive at the realization of how “stupid” was the action or series of thereof one took in order to achieve the blow to the account and the morale. The odds are stuck against us - the humanoids. But luckily, we seem to love to challenge ourselves.

On the other hand, however, to truly understand the power of “predictable” and “anticipated” drawdowns is to foresee the near term future and this can actually arm us with a semi-visionary tool and the “I knew this will happen and expected this” can then replace the OMG or “What a @#$%” moments.
See @AltT’s quote:

Throwing Darts At One’s Trading P&L Shall Set One Free
One of my own favorite exercises to keep me calm when measuring the performance that I do on a weekly basis is to take/delete my top 3 or top 5 biggest winners OUT of the performance sheet and see if the P&L is still positive or whether I rely to much on a few big trades.

In my experience, these would be the days, you are not trading, traveling, have a fight with your partner or had internet or technology-related issues. So, I propose to mechanically delete the top winners and this way you basically stress tested your strategy. It’s now closer to reality. Did you lose more then you wanted if you missed a few trades? If so, expect this to happen next week, because the chances are it will.
Also it will allow one to adjust the size and mitigate the risk per trade/ per day/ per week.
Then if one happens to get those big trades in the bag - it’s a bonus! Enjoy it.
(Have an extra lox lol Btw, if the prop firm paid me just the commissions I paid back in the days, I would probably get an olympic size pool worth of lox. Unfortunately, those days were about who moved the most amount of shares instead of focusing on best trades )

Another exercise I keep doing with my past P&Ls (both actual and back tested strategies) is to keep summing up all bad trades from the entire trading period in question and realizing how much in total was lost, then coupled with 60% of losing ratio (my typical average, yes I can do better but not across the board) yet a positive outcome at the end of the period (today) one can adjust its attitude towards the losses and embrace them. Losses are here to stay and the faster one learns to love them equally to winners, the faster one can normalize its day-to-day business of trading.

I read in one of the books (probably the Market Wizards or VanTharp’) that each loss is getting you closer to the win. So keep on loosing but small amounts at the time. It’s like sport.

So the point is that it may be wise to always ASSUME one will lose or miss the big trades.
Another favorite exercise I do is what I call: P&L randomizing.

I basically delete every other trade, or every other day, or every other week for the entire period I am testing and I want to see if my equity curve is completely upside down or is my approach steady.
This way one disconnects from the believe that one has a magic touch on certain days or that one trades better because of the ability to capture the magic pattern etc… it will prove beyond doubt that one’s risk management is sound or out the window.

I especially recommend charting one’s P&L, so that one can see the instant equity curve change after the P&L Randomizing is done. During drawdowns or long flat periods I literally randomize my P&L instead of playing tetris to keep busy. It shows that one is on track and to stay put. These little tricks save me from forcing trades and to keep things in perspective as much as possible.

Finally, optimization is a form of fetish. I would stay away from over optimizing and rather take small back test samples and apply the rules in the forward testing mode. Those are so much more valuable, IMHO.

Making Money vs. Self-Control
In trading, at least in my own career I realized and keep on realizing that the desire for monetary gains is almost equally important as mastering of the inner-self and exalt a sense of certainty in the markets by “imposing” what one would like to achieve (be it trading well, fearlessly apply the risk management rules or calmly expect a certain pre-determined trade outcome, daily/weekly/monthly goal… etc).

Finally, the psychological need to survive and an ability to adapt in the markets seem equally important to my psyche as making money. The latter shall come as a by product of the self-control and sound risk management. Good market timing won’t hurt either :slight_smile:

Happy Trading


  • P11


Sir @Project11 This one goes on the Optimus wall :joy:
Thank you for your ongoing contributions. It’s golden!

Matt Z
Optimus Futures


It is my pleasure to share my experiences but it is equally interesting to hear other trader’s perceptions and experiences. This forum is a great tool @Mod-MattZ, and I hope it slowly grows.


  • P11


I agree that different angles and perspectives are essential because we can borrow great ideas from each other. The growth of a community, especially the way I want to it may not grow very fast. My goal is to create a community of traders who traded, experienced trading and want to share. Those who have been in the “line of fire” could bring practical ideas to the table.

For example, You could find ideas like “cut your losses short” and “let your profits run” and “trade with the trend,” yet their meaning for a real trader who has skin in the game with funds as opposed to one who just starting to paper trade are different. Again, the idea of creating practical issues and topics that people could really implement in their trading. Real traders can potentially prepare other new traders to handle trading better. Practical ideas are priceless, and since we are on the topic of trading psychology, having the right frame of mind, strength of character and mental endurance is where it starts.

Thank you again for all the digital ink that all of you have contributed.

Matt Z
Optimus Futures


I really enjoyed @8Moons’ post on this thread. It brought me to some realizations of my own trading behavior especially the “myopic loss aversion” reference.

Myopic Loss Aversion
All else being equal such as the trade complexity, the amount of time it takes to build a position and other aspects, It feels very real when one loses on a trade yet it never feels equally pleasant to win on a trade even with a similar loss to win amount.

Thank you @8Moons for pointing out the study and the works of Daniel Kahneman and Amos Tversky. The fear of loss vs. reward is very real and is able to create a quite vivid risk/reward distortion inside trader’s head if one is not aware of it before hand. Hence my array of exercises and P&L stress testing by randomizing actual outcomes, shuffle and/or group the outcomes to create various scenarios so that one can imagine “What-If” one losses 10x in a row or if one takes out top 3-5 best trades etc…

It has been my near obsession to defeat that “myopic loss aversion” fear by applying my own exercises to manipulate my past P&Ls as well as my hypothetical strategy results in order to address the very issue @8Moons so masterfully pinpointed out.

It is interesting that after many years of trading I finally developed more of a callus rather then a muscle to numb the aftermath feelings from any one trade outcome (as long as it was based on the strategy).
Though, I still find it difficult to accept the trades (both winning and losing) if those were not based on my approach because it feels like my inner centering pivot gets pushed out of balance.

Machine vs. Discretionary
Although the machine can replace most of the common issues of placing the trade on time, managing the trade or exit/reverse etc., it feels equally challenging to run a machine because actual funds are at risk. I can’t imagine leaving the machines for a lengthy period of time unattended. Anymore professional pilot crew would not leave the cockpit of a jumbo jet unattended for a few hours during flight, even though 85% of the flight is on auto pilot.

It is interesting to note that although trading fully mechanically is within my reach and I am running multiple auto strategies, I still believe in human supervision as I have seen the ugly head of fully automated strategies that broke some very large accounts. This is not to imply one is to “tweak” and second guess the model, as that is super critical not to and very anti-productive but to rather monitor the risk levels should the machine go haywire (usually due to some simple internal errors).

It is only if the machine did not exit at max loss per position/sector/max loss per day etc… would a human interaction be needed. It is very rare but it happens. It would be as if the pilot is supposed to let the plane land itself with 400 live passengers onboard. The weather conditions can cause so many little but deadly obstacles. This is why I always monitor my auto trading. I may be away but I always have 2 devices fully monitoring with an ability to interact.

I love this one @8moons! I couldn’t agree more. Although I would like to address the effect of time from a live trading vs. back testing perspective rather then from a purely psychological one.

The effect of time on markets is never static and this may also be one of the reasons it is so much different to analyze and even get one’s hopes up after generating a decent strategy during even most rigorous back testing session.

It will never feel the same, time-wise in real market environment, even if the market data came to chart the same price/volume/velocity path. Why? Because the same trader/researcher who came up with the strategy is able to see the full trade by trade, beginning-to-end results and is content with its equity curves and how the strategy performed but if the very same system is watched live, the time that must pass and continue passing will feel very different from the time it took for the optimizer / back testing engine to spit out the strategy outcomes.

Another words the time spent to watch the market tick by tick while the strategy is working, the orders will be subject to variety of distortions and the trader’s perceptions.
It will ultimately cause it to either stop the system in the drawdown due to pain or fear of no recovery hope, or because of the sudden lack of funds in the trading account (due to larger then anticipated losses) because of over leveraging of the system which was backed by the euphoria of near term retirement vision from the envisioned trading profits. Aren’t we all guilty of this one, phew…

Now if one adds the non-static time on markets and that the market will be affected by different forces than in backtest, the strategy will start “spitting” out trades and groupings of trades the trader did not accounted for and it may collapse the strategy or at the very least render the attempt unsuccessful.

This one is particularly true as evidenced by the tendencies of the survivorship bias and the representative comprehensive sample bias of hedge funds, CTAs and traders performance.
The databases only report the current manager’s performances while the bad ones (the players who striked-out) will be dropped and hence their past negative performance do not affect the current benchmark or a performance index. It is almost a self-fulfilling prophecy of sorts to drop the bad performers in its entirety so it appears that the current top 1-5% managers are great and keep on performing or outperforming their peers.
It is not to say long term successful trading does not exist but it is to demonstrate that it is even harder then the current benchmarks suggest.

The Risk of Ruin (RoR) is not present in most professions outside of trading, gambling, extreme sports etc… We are so addicted to the monthly paychecks, vast availability of credit and inexpensive money (low interest rates) that most people are used to charting their near term life with a large degree of certainty. Maybe short of unexpected health emergencies or a shopping spree, one seem to be able to somehow curb the spending habits and make it through to the next check.

Well try to curb your losses after they happen in trading. Let’s say its possible to reduce your risk but, if the trading account was very small to begin with and one can not afford to trade with the same size one started out with it shrinks the ability to return the losses even further.

The discount broker margins, even though those can be very useful with proper management (for example trading multiple instruments across different sectors to increase the diversification of the portfolio), that would be more likely to render a smaller risk then loading up on the ES on one trade alone etc…

My absolute favorite from @8Moons’s post above is regarding the ability to keep one’s trading systems/models agile and adaptive. I fully believe that aside from proper capitalization, risk controls and a decent trading model, one shouldn’t place all the hopes on one hard-coded strategy for it may deviate from its past performance curves with market’s changes of volatility, trading patterns, liquidity and many other systemic and outside geo-political variables.

This is not to discourage from fine tuning strategies but to rather keep open minded and to strive to build some self adaptive models to hopefully keep up with the certainty of market changes ahead.

I like to use Volatility as a measurement of current price oscillations, contractions and expansions.
One could measure and adjust the underlying risk via measuring and studying all forms of Volatility in the markets.

Happy Trading,

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Thanks, @Project11 for your elaborations! Well thought-out and well-written, your responses are (I think I just phrased my sentence like Yoda…though I can assure you, I am not Yoda).

Joke aside, your comments on tweaking vs not tweaking (as it can often lead one to curve fitting, if not just drastically changing the performance metrics–as small changes can completely throw a performance stat out the window) deserve lots and lots of thought. It’s almost an aporia to find the fine line between adjusting and adjusting too much. Perhaps this is where skill and experience comes in.

And I certainly appreciate you sharing your high-level thinking and experience to further elevate this entire thread.


I take your compliment as a highest honor @8Moons :pray:.

I truly enjoy the process as much, if not more then the actual trading which can be surprisingly “boring” and repetitive at times (if done correctly as we both seem to agree).

It’s as if the entire field can be reduced to a few dozen of do’s and don’t’s.
Now, whether one follows and at times is able to observe the market’s action by sitting on the sidelines is an entire different movie.

Best Regards,

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P.S. I do believe that your Yoda analogy could stick to this thread :slight_smile:.


Very Nice, I appreciate this information. Have a great day!


Thank you again @8Moons and @project11 for touching on such important subjects. If I had to take it one step further, I would say that there are those who can afford to play the game and those who are not. There are those who are not are in a contact state if fear, FOMO, and impatient. The Pros who are on the “other side” can afford and want to be strategic, thoughtful and extremely patient. Well, you can only guess what side most want to be associated.

Maybe that is the way to play this game psychologically, trying to pick up habits that are those who are on the professional side. For example, I had a signal Thursday to but the ES, and to be honest, my first reaction was, should we not correct after two weeks of daily highs?" that was my gut, intuition, and mind. The method was long, and I want long. ES up 30 plus point. It was “painful” to place the trade. Glad I did, but I can’t say that it is always the case where method over mind works.

Are those on the other side, always “cool”? I doubt it. But, I bet algorithmic traders who practice HFT futures, have no such luxury of the second-guessing.

My question to myself is when does this stop being a struggle? When do you finally work with just the method and not the brain?


Hi @AltT and thanks for the shout out. Many HFT traders (it may be different now than before as its getting more competitive), particularly in equities more so than futures often have a technological advantage that cannot be matched by retail traders. I don’t know if you ever tracked, say, a far-month E6 or A6 contract against the actual spot FX price. If you have, and if you have seen the inefficiency in pricing, usually lasting a second or less, you can imagine that if you have a) a super fast computer with b) interbank and direct exchange/co-location access, and c) loads of capital to arbitrage a few ticks of price inefficiency, that the stress has more to do with the managing of the accuracy of the technology or the competition of your arbitrage technology against another firm’s arb technology than it has to do with the psychology of the trade itself. This is just one example. It’s funny, because this reminds me of a historical account that I had read about trading during the 18th century: while many traders in Philadelphia and New York were anxious about their speculations, the wealthier traders were more concerned about the speed of their horses riding from one exchange to the other with local market news that would eventually affect the same stock traded on the other exchange, That was 18th century-style HFT.

To extend your idea a bit, those who can “afford” to play the game are usually those who have enough capital to trade positions that may be small to them but large for the average retail trader. Think about this, if a trader were to win or lose $1,000 on a 100 tick E6 position, think of how underwhelmed they would feel about a $10 loss on a 100-pip EUR/USD micro-lot trade. In this case, size does matter, particularly when trading psychology is often directly correlated with one’s trading capital. Thanks again for your comments!


Great point @8Moons ,
Although general lack or scacity of capital could lead to a more certain Risk of Ruin, I have seen boatloads of capital getting “sacrificed” by well funded (at least at the time) professionals (doctors and attorneys) whom so eagerly defended their biases …
It was painful and blissful to realize that risk management would take the first price in the race of “whats the most critical factor in trading competition”, for I have also seen very modest accounts turned into 6 figures (although very hard and rare).

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