The Timeless Abyss of Trading: The Greatest Trap Of All-time
I am here with a unique topic. It is about a psychological trading trap called the cycle of doom. What got me interested in this psychological topic? Well, there are very few articles about it. You can count them on one hand, and more than 90% of traders are losing money.
Most traders find their method of trading. What stops them from becoming profitable traders? Tradingview platform is one of the biggest charting platforms that provide an educational section and editorial peak for traders to sharpen their knowledge related to technical analysis, trading methodology, trading psychology, etc.
As a trader, we are making market memories by improving screen time, practicing technical analysis, analyzing option data(if applicable), and a lot more. Why do we still fall short in applying in real time? What stops us from becoming a profitable trader? Something looks missing out!
I would like to draw your attention to the psychological trap cycle of doom, a topic discussed by only a few traders. Let me be clear, I do believe that this topic is universally applicable!
The cycle of doom is made up of three phases:
In order to exit from the loop of the cycle, we have to understand the parts of the cycle.
1) The Search:
Probably, it's the first phase of the cycle. Just recall your initial stages of trading. You were finding a trading strategy to make money out of the money. You may have asked to friend, watched a YouTube video, read an article on Tradingview, bought a book or course or indicators, or purchased the strategy. At that time, you were entered into the cycle.
Additionally, we should never trade for enjoyment but treat it as a business. The statement does not apply to the initial stages. Trader explores new methods, theories, and systems.
Postulate, Trader A uses X theory to do their day trading for a living, and you were impressed and took it to put your money on it, or you found the method by yourself. The trader will switch his next position after finding a system that is convenient for his trading and trusts that he can take minimal risks to achieve expected returns.
2) The Action:
The Action phase is the second phase of the cycle. Now, you have a trading system that will make your money grow to expected returns. This phase can be super exciting for traders as they believe he has an edge and is most likely a key to opening a present of unrealistic returns.
Issues arise when a trader employs their strategy without supporting evidence, like backtesting results. Your heart may be pounding, and your fingers may be trembling like a child, but it doesn't mean you should directly trade the strategy without checking the results, failure, and performance of the system.
Just five percent of traders actually test a trading system before putting it into action. You might discover that the trading system performs well for a prolonged period. Suddenly, a drawdown appeared! At a certain point, everything may seem bleak. While profits might flow in initially, eventually, the losing trades start to accumulate.
It's a red signal for traders that their trading system is now on oxygen. I don't think traders can trust the system after a big streak of losing traders. You have entered into the blame phase.
3) The Blame:
The Blame is the final stage of the cycle. As we discussed, the trader has lost their trust in his trading system, which was a holy grail for him at the initial stage. The Red portfolio hurts more than a break-up. The trader is not happy with the system as it has wiped out the gain + trading capital, and the trading system is the only cause that affected the profit and wants to remove the system and search for a new strategy.
4) Loop of the cycle:
As can be seen, the trader again finds a new strategy and makes an effort and action on it, then blames the system. The cycle repeats and traps the trader in this way.
How to get out of the cycle?
1. Modification is the only way to survival & Trust the system:
Traders should modify their strategy according to market conditions, instruments, and trading style. Maybe not everything works for everyone. Therefore, traders should do this according to him. For example, I use Elliott wave theory as the first base and price action as a confirmation tool along with different indicators according to the situation. I do modify Elliott and price action as per my observation of price moves and wavelength.
2. Backtesting is the holy grail:
Choosing trading theory also depends on traders' mindset, risk-aptitude, and expected return. Scalpers will never check the PE, P/S, or EV/EBITDA ratio of the firm just because of their duration and risk-reward calculation.
After choosing an appropriate trading strategy, traders should backtest their trading strategy before doing real-market transaction. We have the advantage of backtesting tools, algo, and virtual account, which was not available for pit traders.
3. Risk management:
Already many ideas are available on this topic. The trading system should be giving proper returns as per the taken risk unless it is nothing more than Drilling a well in the desert.
I need more time to write a full idea on the escape of the cycle of doom.
Thank you!
@Money_Dictators
Most traders find their method of trading. What stops them from becoming profitable traders? Tradingview platform is one of the biggest charting platforms that provide an educational section and editorial peak for traders to sharpen their knowledge related to technical analysis, trading methodology, trading psychology, etc.
As a trader, we are making market memories by improving screen time, practicing technical analysis, analyzing option data(if applicable), and a lot more. Why do we still fall short in applying in real time? What stops us from becoming a profitable trader? Something looks missing out!
I would like to draw your attention to the psychological trap cycle of doom, a topic discussed by only a few traders. Let me be clear, I do believe that this topic is universally applicable!
The cycle of doom is made up of three phases:
- The search
- The Action
- The Blame
"Sun Tzu said Know the enemy and know yourself in a hundred battles you will never be in peril."
In order to exit from the loop of the cycle, we have to understand the parts of the cycle.
1) The Search:
Probably, it's the first phase of the cycle. Just recall your initial stages of trading. You were finding a trading strategy to make money out of the money. You may have asked to friend, watched a YouTube video, read an article on Tradingview, bought a book or course or indicators, or purchased the strategy. At that time, you were entered into the cycle.
Additionally, we should never trade for enjoyment but treat it as a business. The statement does not apply to the initial stages. Trader explores new methods, theories, and systems.
Postulate, Trader A uses X theory to do their day trading for a living, and you were impressed and took it to put your money on it, or you found the method by yourself. The trader will switch his next position after finding a system that is convenient for his trading and trusts that he can take minimal risks to achieve expected returns.
2) The Action:
The Action phase is the second phase of the cycle. Now, you have a trading system that will make your money grow to expected returns. This phase can be super exciting for traders as they believe he has an edge and is most likely a key to opening a present of unrealistic returns.
Issues arise when a trader employs their strategy without supporting evidence, like backtesting results. Your heart may be pounding, and your fingers may be trembling like a child, but it doesn't mean you should directly trade the strategy without checking the results, failure, and performance of the system.
Just five percent of traders actually test a trading system before putting it into action. You might discover that the trading system performs well for a prolonged period. Suddenly, a drawdown appeared! At a certain point, everything may seem bleak. While profits might flow in initially, eventually, the losing trades start to accumulate.
It's a red signal for traders that their trading system is now on oxygen. I don't think traders can trust the system after a big streak of losing traders. You have entered into the blame phase.
3) The Blame:
The Blame is the final stage of the cycle. As we discussed, the trader has lost their trust in his trading system, which was a holy grail for him at the initial stage. The Red portfolio hurts more than a break-up. The trader is not happy with the system as it has wiped out the gain + trading capital, and the trading system is the only cause that affected the profit and wants to remove the system and search for a new strategy.
4) Loop of the cycle:
As can be seen, the trader again finds a new strategy and makes an effort and action on it, then blames the system. The cycle repeats and traps the trader in this way.
How to get out of the cycle?
1. Modification is the only way to survival & Trust the system:
Traders should modify their strategy according to market conditions, instruments, and trading style. Maybe not everything works for everyone. Therefore, traders should do this according to him. For example, I use Elliott wave theory as the first base and price action as a confirmation tool along with different indicators according to the situation. I do modify Elliott and price action as per my observation of price moves and wavelength.
2. Backtesting is the holy grail:
Choosing trading theory also depends on traders' mindset, risk-aptitude, and expected return. Scalpers will never check the PE, P/S, or EV/EBITDA ratio of the firm just because of their duration and risk-reward calculation.
After choosing an appropriate trading strategy, traders should backtest their trading strategy before doing real-market transaction. We have the advantage of backtesting tools, algo, and virtual account, which was not available for pit traders.
3. Risk management:
Already many ideas are available on this topic. The trading system should be giving proper returns as per the taken risk unless it is nothing more than Drilling a well in the desert.
I need more time to write a full idea on the escape of the cycle of doom.
Thank you!
@Money_Dictators
Comment:
New Idea!!!
Comment:
