Trading Psychology Has Become Irrelevant

In the past trading psychology played an important role in controlling the emotional factors that affected profitability. Nowadays, anyone talking about a need for proper trading psychology has fallen behind in the era of algo trading and machine learning. If a trader has to make any decisions at all, the end result will probably not be good.

The past

In the 80s and 90s, most traders analyzed charts for picking entry and exit points. A few of these traders survived, some joined the wizard list, only to lose everything later. The main cause of failures were due to market makers fading untested discretionary trading methods based on chart patterns and simplistic indicators, the diminishing serial correlation in daily returns and undercapitalization. I have talked about some of these issues in this interview for Forbes. Apparently, some traders benefited from improving their trading psychology by taking related courses and receiving help from gurus but that was not enough to slow the high rate or ruin that was a natural outcome from making random trading decisions. In other words, trading psychology was not merely enough to transform a negative expectation to positive. Exercising discipline, controlling fear, greed and other mental states do not constitute a trading method but just a supportive framework. If the method is bad to start with, nothing can help.

The present

Anyone who feels that there is a need to improve trading psychology is probably still trying to apply methods of a past era to this new era where algos dominate and human traders cannot compete. The typical trader nowadays is an individual with quant background that knows how to code strategies and test them properly. The proper mental states arise from the confidence in the methods used to develop and test the strategies. Anyone who claims of being able to teach individuals the proper psychology to become better traders is not in touch with this new reality. The required skills for profitability are knowledge of programming, statistics and trade execution. Discretionary traders using the old methods of trying to identify trades on charts are doomed to fail in an environment controlled by algos and quants. Of course, there will always be exceptions but it is hard to differentiate luck from skill.

Frankly speaking, anyone claiming to posses some knowledge that will improve traders’ ability to profit is either naive or tries to capitalize on ignorance and often on unwillingness of people to do the hard work while believing that some knowledge will be served on a silver platter.

Obviously, even systematic algo trading cannot guard against erratic decisions to shut down a system because of fear of losing or against an increase in risk due to greed. But no one needs a trading psychology guru to say that. The very idea that a proper mental state can turn a losing trader into a profitable one is ludicrous. If a trader cannot execute properly a strategy, then a simpler route is investing the money with a competent fund manager. Trying to improve psychology won’t help in an environment where edges come and go and the trader needs to constantly improve them.

The trading psychology of the past is the proper application of statistical analysis in this new era. Anyone not understanding this but thinking that by becoming more confident and by learning to take losses this will change anything for the better is naive because nothing of this sort will change the dynamics of the current environment and especially the fact that humans are now trading against sophisticated robots. If you want to be as robust as a robot, then use one yourself and let it make all decisions while you concentrate on improving it. This is now the right trading psychology.

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