Trading Strategy or Psychology? Which is More Important? // Ep. 10

In This Episode

• The stages that traders go through
• How thinking about the extremes helps you trade better
• What would happen if you are successful with a system, but your psychology went downhill later?

Is Psychology or Strategy More Important? Here's What We Think…

When most traders get into trading, they look for the most profitable system they can find.

We even talk about a lot about developing a trading strategy that fits your personality and how to get your metrics.

But is a trading strategy more important than your trading psychology? Or are they equally important?

Find out what we both think in this episode.

Read the Transcript:

Hugh: Hi, Walter. How is it going?

Walter: Pretty good. How are you doing, Hugh?

Hugh: Good. Good to see you again.

Walter: Yeah, exactly.

Hugh: Alright, new podcast. Slightly different topic. I guess we can get started with the first one.

Walter: Let’s do it.

Hugh: Is Psychology or your trading strategy more important?

Walter: That is an interesting question. I guess it's like in Science or in Psychology, they're always nurture versus nature. For me personally, I did my PhD in Developmental Psychology. So we're looking at different stages and so the way I look at trading is kind of the same way where, as traders we go through different stages.

You may have a different experience to me in terms of what trading journey's been like but I think that there tends to be an overarching commonality among traders. Which is essentially that in the beginning, it's all about the system, the system, system and the entry especially.

Later on, you start to learn about the importance of exits and then maybe you start to get into the importance of your risk rules. I kind of look at them as two sides of the same coin. Risk and Psychology is sort of the same thing.

In a sense that if you really mess with your risk and really ramp it up that will affect your psychology. We all know that as traders, the sleepless nights, worrying about the trades and things like that.

Hugh: You get your alarm set and everything.

Hugh: Hey there! I hope you find this episode useful. I just want to let you know that Walter and I give away something valuable every month that helps traders improve their skills. You can enter to win by simply leaving an iTunes review and leaving a comment on our YouTube videos.

At the end of each month, we'll look at the comments and reviews from the month and we'll pick a winner at random. Each comment and each review counts for one entry during the month that it's pitted.

So, if you're interested in that, be sure to enter after this podcast is over. Alright, back to the episode.

Walter: I think Psychology is very important. Probably if I had pressed, I'd say it's the most important but I think it's only important to you once you've already gone through those first stages. That's my point of view. What's your experience been like?

Hugh: I kind of think that if I had to put a percentage on it, maybe about ninety percent is Psychology because a lot of people think, “Oh the system, the system” but Psychology is going to help you stick with the system, number one. Number two, keep searching for systems until you find something that works. So I think Psychology is a really big part compared to the system overall.

Walter: If you think about it, I always like to think about the extremes and then that kind of highlights things like the importance of things. So for example like what you just said. What if Hugh traded a totally different system? Would Hugh still be able to make consistent profits?

My answer would be yes. Let's face it. There are free systems available right now in the dark corners of the internet that will work. You’ve just got to find the one that makes sense to you. Yet, we still spend all this money on systems and indicators and all this stuff.

It's the reality. We want someone to put a stamp on it that we believe in and say, “This works” and then “Okay, I'll use it then” that sort of thing. But what about the reverse? What if you swap out your system? Can you still make it work? The answer is yes.

What if you have a pretty good handle on your psychology today and that's all going well but then in the future you don’t. You lose that part. Would you still be able to make money even though you're trading the same system you've always been trading and the answer is probably, no. So I think you're right. I think you nailed it.

Hugh: What do you think about this thought of like there's just some basic concepts in trading regardless of the system? It's always there. So even if you switch systems, you're still looking at a similar type of structure, price structure or whatever. Is that part of that or do you think it's more of the system?

Walter: I guess. Can you expand a little bit more on that because I want to know exactly what you are talking about.

Hugh: If you're focusing on, if you did like a moving average crossover so that's just basically a turning point. You could do the moving average crossover. You can do the bollinger band. You can do the head and shoulders at that point, that's kind of a system but if you have the right psychology, you could probably spot, “Oh, that's just a turning point because of this and not necessarily the indicator”.

Walter: That's right. I definitely agree with that. I think that you can see divergence on the charts without indicators on the charts. If you look at charts long enough and I'll never forget. I had a friend who'd been trading longer than I had and he was really good at what he did but he had all these really I think he paid.

I want to say he paid about, I don't know, a thousand bucks a month or 800 bucks a month. It was something like that every month to rent these indicators that he used and then he came out to visit me in Australia.

He was looking at the chart on his phone. He goes, “Oh, I got a signal now.” I'm like, “What do you mean you have a signal? That's a naked chart. You don't have all your fancy indicators on there”. He had an app, the Tradestation. I don't know if Tradestation is mobile now but back then it definitely wasn't.

He was looking at his naked chart and he goes, “No. I have a signal” I'm like, “Dude that's the five minute chart you're looking at. You trade the three minute chart with a bunch of indicators. How do you know that you have a signal?”

The reality is that he had looked at the market so much through that one filter that he knew exactly where the indicators would be placed. Do you know what I mean? Because he's just so used to it.

I think there's something to that. I really do. I think that if you get someone who's been around trading for a long time, particularly with one filter, one point of view, one system I think, they will be able to tell you whether or not they have a trade. Even if their crutch isn't on the chart. I do believe that. I really do believe that.

Hugh: That's a good point. It's kind of a crutch at me sometimes. Alright, cool. Great. Thanks Walter.

Hugh: All the information in this podcast is for educational and informational purposes only and is not trading or investment advice.

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