What Do You Know About the Market's Playbook Aimed at You?
Most people fall prey and maybe you do too?
But here's how you flip that around.
When you trade:
You're competing with world-leading market making and liquidity providers like Susquehanna International Group (SIG).
And guess what?
They possess a deep understanding of the science and medically backed research that helps them exploit vulnerabilities most people aren't aware of.
"We're aware of the biases and mistakes we and others have and make and express in the marketplace, so we can capitalise on those of others"
Todd Simkin: Associate Director and 20-year trader at Susquehanna International Group (SIG).
In what follows you'll discover:
Medical research that explains the common trading mistakes even experienced traders make.
The professional trading technique that turns these mistakes into unique trading opportunities.
The intriguing connection between the market's playbook and the principles of poker bet sizing for success.
Explore:
The most important insights from the August 31 presentation.
Condensed into a concise 15-minute read.
Does this sound familiar?
You enter a trade and feel your heart racing as you watch the price move underwater.
You've made a mistake and have no choice but to crystalise a loss. What happens next?
Suddenly price moves as you'd planned.
So you jump back in with a feeling of excitement and relief.
You'll make back that loss and some in a hot minute.
But then the price moves against you for a second time, and it's another loss.
And now you're feeling drained and frustrated. Right?
In a minute you’ll learn:
Why it happens and how you can avoid it.
But not only that - how to monetise it.
Because it happens to everyone- so that's a lot of opportunity.
Did you know:
There's a part of your brain that can overpower rational thinking, logic and even the will to live.
Psychologists James Olds and Peter Milner inserted an electrode into a region of a rat's brain, now called the pleasure centre.
The rat could self-administer an electrical current to its pleasure centre by pressing a lever.
The sensation was so pleasurable the rat endured the pain of running across an electrified grid just to get its charge.
The rat ignored food and drink and kept pressing the lever until it died of exhaustion.
The scientific name for the pleasure centre is nucleus accumbens.
When stimulated, it releases the feel-good chemical dopamine, which is responsible for your energy, your motivation and your drive. All that good stuff you want in your trading.
But it's in the timing of it's release that's going to help you understand a whole lot about what you do when you're trading AND what most other people are doing when trading.
Surprise anticipation of a reward triggers the release of dopamine.
In the early 90's, Wolfram Schultz, (Professor of Neuroscience at Cambridge University), and his team had a revelation.
To an unsuspecting monkey:
Revealing a piece of apple sent the monkey's neurons wild. The feel-good chemical dopamine was signalling to the brain - here comes a reward.
But the dopamine neurons stopped firing when the monkey realised the treat was coming. So, the key to dopamine release is surprise. Make a mental note – it's about surprise.
You know:
When you trade an internal conflict takes place.
You see:
It's your innate human tendency to find a pattern amongst the randomness of market behaviour. It's no different to people who swear they see patterns and repeating sequences when playing the pokies.
But it's a struggle to predict exactly when that pattern will appear for a reward to take place.
And it's this struggle amongst the chaos - whether at the pokies – or at the trading screens – that sends your dopamine neurons into overdrive – getting super active.
So if you've ever wondered why you took a trade for seemingly no reason? It turns out that stimulating your dopamine neurons is the root cause. It's medically proven. I'll show you.
Using MRI scans:
In their first experiment, Dr Hans Breiter of Northwestern University and his team administered cocaine to a cocaine addict.
Where you see red and a dot of yellow - that's right on the nucleus accumbens. And these colours represent the turning on of your reward system. You are firing up your dopamine.
But the next experiment involved subjects playing games of monetary reward. And Guess What?
None of Breiter's team predicted MRI scans of cocaine addicts anticipating a cocaine infusion looked exactly like the MRI scans of healthy control subjects anticipating a monetary win.
What does it mean?
Anticipation is fundamental to your experience - aka what you feel – about a future reward.
Pokie game designer Michael Shackleford also known as “The Wizard of Odds,” has made a fortune designing games guaranteed to lose.
Because he and the entire slot machine industry know people are vulnerable when anticipating a reward.
Let me explain:
If someone does get lucky and receives a huge reward on the pokies – why don't they walk away?
Why do people not walk away from the betting tables if they've had a win?
Let me show you something:
The image you're looking at is showing you the spike in dopamine you receive in anticipating a reward if you put on a trade.
It's so powerful - that the anticipation of reward spike in dopamine is what causes you to put on a trade that you immediately wonder. “Why the hell did I do that?”
Anticipation gets the better of you and you can't help but jump into a trade.
But look what happens once you enter the trade
Can you see how your dopamine immediately drops?
Someone keeps playing the pokies after a win because the feeling of a reward doesn't come from the win but from the anticipation of a win. Make sense?
This explains why someone jumps into a trade. And then, when dopamine drops - they come to their senses to escape the trade. But then - in the anticipation of reward - all of a sudden jumps back in again. And so on.
Can you see how the cycle works now?
When you trade, you repeat going through an experience of anticipation. Like the rat, each trade is like a jolt in electricity from your reward system.
But what makes this cycle so powerful?
You might think you’d never be one of those people who gets addicted to playing slot machines. But what about making unnecessary trades?
When you’re at the screens nudging you along to enter are feelings like:
I’m not making money if I’m not in a trade - so I’m itching to get into a trade.
I can’t call myself a trader if I’m not trading – I better get in.
I’ve set aside this time to trade so I better put on a trade.
This is what makes you vulnerable to putting on poorly timed trades. Or trades that you know are lousy choice trades. Right?
So, with all this vulnerability - what happens next?
Every day, the cocktail of looking for patterns, reward anticipation and the associated neurochemicals gets expressed by people buying and selling without knowing what's driving their actions. And skilled traders know this and profit from it.
Let me show you:
You’ll see the following trades that had planned to trade the long side. The blue arrows are buys, the pink are sells. And while you can see long trades taken - before the long trade is a short.
Now, the plan was for the long trade – based on an idea about why the price would increase. But the short trade – which isn’t the main focus - takes advantage of people who:
1. Were in a hurry to jump in and get 'long'
2. Spurred on by the anticipation-of-reward spike in dopamine.
But whether it was yesterday:
Or three months ago:
Or even three years ago:
It happens all the time.
And who does it happen to?
To answer:
Have you been shaken out of a trade - taken a loss – and then watched the market move without you from the sidelines?
Of course! Right? It happens to most people in the market. But because it happens to most people in the market - it begs the question...
Is there a connection between what most people do in markets and how markets function?
Look:
If you understand the market plays a role in passing money from one group of traders to another. Then you know why the market needs you to make poor trade choices. Correct?
And what better way to do it than to prey on vulnerabilities? Vulnerabilities most people are utterly oblivious to. Make sense?
Think of slot machines. They’re terrible bets.
Yet they successfully prey on people’s vulnerabilities by combining upbeat music with beautiful graphics and flashing lights.
They are even programmed in such a way to trick people into thinking specific patterns are occurring. It’s all geared towards getting people to act using the science of reward anticipation.
So what’s your best defence?
Your best defence against it starts with being aware that the market needs you to make poor trades and will prey on your surprise anticipation of a reward.
You see:
When you’re sitting at the screens and top of mind is:
“What’s the market doing to suck me in”
Suddenly you’re playing a different game than you’ve been playing before. Agree?
It’s like getting into the boxing ring – you know that once the fight starts – blows are coming your way so you’ve got your dukes up to protect yourself. Right?
This is the complete opposite of someone who is king hit from behind never knowing it’s coming and why often these king hits lead to fatalities.
Point is:
Knowing it's coming is a game changer.
I have a real fear of markets
When asked about his stellar performance in the Market Wizards interviews, Mark Weinstein said “I have a real fear of markets”.
He meant that he knows about the danger, so his process is developed to navigate the dangers safely. You don’t cross a busy intersection without first looking both ways. And why’s that? Because you know of the pending danger.
Your best defence starts with knowing about the danger.
And so far today we’ve discussed a danger you’re aware of. A danger that hurts most people when they trade.
But because it’s so prevalent – why limit trading to only avoiding getting hurt?
When you think about just how many people are caught out…
It’s a massive opportunity for genuine competitive advantage if you can be the minority taking the other side of the majority when they’re making bad trades. Agree?
But the bars on the charts don't tell you who the traders buying or selling are or what's motivating them to do so. Correct?
So how can you tell?
You're probably familiar with the term playbook trade.
But if not - when you have an idea about why price will move...
For example:
Hong Kong just reduced stamp duty on stock trading to reinvigorate the market. It's considered bullish for the market.
But buying into the Hong Kong market is too obvious, so we’ll express that idea by looking for a long trade in the Australian Dollar futures instead.
Yes – it’s a unique idea – and uncovering unique trade ideas is outside the scope of this article – but it’s our trade idea.
But the question is: How do you trade it?
How do you go from an idea about what a market might do to trading it?
This is where your playbook comes in.
It provides a framework to execute your idea using a known low-risk high payout strategy. You’ll see an example in a minute.
But first:
The market can move from A to B in any number of ways. Correct?
And to use a favourite quote by Dr Brett Steenbarger – "not all movement is opportunity."
You first need to see the market behave in a way that matches one of your strategies – so you can enter with low risk – because maybe the idea will take several goes.
As well as keeping your risk to a paper cut – your playbook trade also tells you when to take profits. Make sense?
You're about to see a real example:
Tell me:
Have you ever Missed a Market Move?
Of course, you have! Right?
But what happens when that missed opportunity is a major one?
How do you feel?
Experiencing disappointment in missing a large move many people strive to capitalise on a reversal. The underlying principle lies in people trading to regulate their emotional state.
Hold onto that thought…
The chart you’re looking at shows a sharp move to the upside. And we know people are wanting to put on a trade because that’s what a trader does…
So you’ve already got people disappointed they didn’t get this move - the move that’s been and gone. So the option is to go short. And they won’t need much of a nudge to get them into a short. Right?
And remember:
People will try to make sense of the uncertainty and randomness and chaos by trying to see some sort of pattern because that’s innate human behaviour.
And in seeing what they think is a pattern saying “the market is a short trade opportunity” - the anticipation of reward will lead to jumping into a short trade. And the trap is set.
So our idea is we want to take the opposite side of the traders going short.
We want to take advantage of a short covering rally. But when do we get long??
We don’t know if our idea will work.
We don’t know if it does work – when it will happen.
And between now and then price can move around A LOT. Right?
Tell me:
How often have you heard someone say "I knew it would do that?" Yet in the lead-up, they entered into a trade - took a tonne of heat - possibly even a massive loss (or two) - and only then does the market 'do that'.
Maybe you've experienced this yourself. And to rub salt into your wounds you're on the sidelines NOT participating in the move if and when it finally happens. Sound familiar?
Moving along and you can see that after our huge move up. Price did indeed roll over. And we’re going to assume plenty of new short sellers are now in the move.
We plan to buy. But look at all the possible areas to buy each time the price started moving up – only to roll back over.
That’s the very real danger of your trade idea – not knowing when it’s going to occur.
So if all the arrows point to where price turned back up, we can see that simply buying when the price starts going back up isn’t going to work.
So how do you know when to buy?
This is where your playbook comes in.
When you have an idea about the market moving because of XYZ - your playbook provides you with a framework to execute on your idea.
It uses a known low-risk but high-odds of a payout strategy. You can see the execution of the playbook trade below:
Can you see:
Where the entry to go long as per our idea was made where the first buy is?
And where there’s a second buy – where we added to the trade?
And where the exit to take profits is?
And also, where is the exit to say our idea is not working right now - so we need to get out for little cost?
There are 3 key points here:
One: The cost of the idea not working is cheap.
Two: The payout (due to adding) is much larger than that cost - leading to:
Three: So even if the idea only worked after several false starts - overall, you're a winner.
But there’s something you can’t see…
You can’t see all 12 reasons to enter this trade.
That’s right. This playbook trade has 12 unique points of evidence that, when combined give you a high odds outcome. But a high-odds outcome is not the same as a guaranteed outcome. Right? So vital to a playbook trade is the tiny cost when the ideas isn’t working right now.
It’s this last point that is so important.
As you know, it's not uncommon for trades to take several goes before the timing is right. Agree? Remember the person who says “I’ knew it do that”. But that’s after they’ve already experienced several losses, entering into the move too early. Right?
Another way to think of playbook trades is like this:
Have you ever been to an art gallery? And you see someone staring at the same painting for 20 minutes.
What are they looking at?
They’re looking at what you can only see if you are an expert. Right? Expert to tell if the painting is genuine or a forgery. Expert to notice who the artist is without being told – just by looking at the work.
What you’re looking at below is the trading station of an independent trader who once traded at a professional firm.
Guess what?
Almost every window shows data for the same instrument. They’re looking at many layers of the same onion. They can see what others can’t - just like the expert at the art gallery. Make sense?
And that’s how they can see the people who jump in and trade in reaction to the anticipation of a reward dopamine spike:
•The people in a hurry to put on a trade.
•The people who get out at a loss only to jump back in and take another loss
•The people who suddenly have a trade on they didn’t plan to enter and are now underwater, stuck like a deer in headlights
•The people who feed the other professional traders who understand how people are making trades based on regulating an emotional state.
Specifically – by incorporating the time and sales and a range of footprint charts:
The trader can see if people are aggressively entering into long or short positions
And based on their size and the quality of their entry price, they can make some educated guesses as to who’s sophisticated and skilful and who’s likely to get stopped out due to making a bad trade.
And let me show you why knowing who’s buying and selling is essential. And it involves a trade taken today.
First:
You’re looking at another strong move to the upside.
But what about our idea – same as last time?
Let me explain:
Remember the layers of the onion?
Typically, that’s an hour’s problem/puzzle-solving before trading. I call this phase game planning – you’ll see why in a minute. And it’s accumulative.
What I mean is it joins up with the hour from yesterday and the day before that – and so on. It’s like reading a book.
You don’t start in the middle because you’re missing the important preceding chapters that are all connected. The same goes for your trading. So even though there has been a large move to the upside - based on the accumulated evidence from all those onion layers...
If price moves into a specific area as marked on the chart then we have a game plan to go short.
Because when the market is moving –trying to work out what to do while simultaneously seeing stuff light up like the slot machines – you’re now vulnerable to taking trades due to the anticipation of reward spike in your dopamine.
And you know what?
Some people are unprepared to trade. And it makes them very vulnerable to making trades that will hurt them.
Because in the absence of all the stuff that deals with the danger – they are now sitting ducks to their spike in dopamine in anticipation of a reward.
What happens next?
Once you’ve done all that game-planning:
Now, it becomes a case of waiting for behaviours to align with one of the playbook trades. And that’s what you’re looking at on this chart – the execution of two different playbook trades:
If you remember from the game planning…
The first short you see occurs in the spot that’s okay for short trades – but it’s not the preferred spot. So very defensive here – hence getting out not prepared to take heat.
And then what happens – the market drops. Remember the saying – not all movement is opportunity? So we’re sitting on the sidelines through that move down.
But then a different playbook trade sets up – and it does so in the preferred area to be short. So this warrants being more aggressive – so you see an add to the position. And so on.
This reminds me:
Some people can’t seem to get their trading past one step forward - one step back - one step forward - and so on. And if you look at their stats – often you’ll see even bet sizing.
Well, did you know in professional trading firms, no one sticks to even-bet-sizing?
Think of it like poker.
There isn’t a single professional poker player who bets the same amount every bet. Right?
And in the business of trading:
A significant contributor to success in trading is varied bet sizing, and I think people intuitively know this.
But you can’t just keep raising every hand. So the issue is – when to raise – and when not to.
In the trade we just looked at – the sizing varied between the two trades because the conditions of the trades were very different.
When you have a game plan consisting of individually ranked playing fields - and individually ranked playbook trades. Combined they tell you how much to vary your bet – what the volume of your trade should be.
The flip side of this of course, is:
When you’re even bet sizing – you can’t make progress. And the emotional toll of working hard but only seeing every forward step followed by a step in reverse - you're primed to make emotional-based trading decisions. Right?
You've likely heard or read the following quote by Ed Seykota.
"Win or lose, everybody gets what they want out of the market".
What does he mean?
In the calmness of planning to trade - everybody shares the same desire not to lose money. So, you could say most people's wants are aligned.
But once trading starts - for many people the actions taken are to regulate an emotional state - and that's how they're getting what they want - even when that means they're likely losing money. Makes sense right?
Look:
A quick recap on who I am and my experience might help you.
I placed my first trade over 25 years ago as a retail trader. It didn’t end well. The many trades I placed afterwards resulted in losing money overall. Sure I had some wins – but overall, I lost money.
It took me a long time to realise that those wins didn't indicate that I’d turned the corner. It took me a long time to realise that a loser doesn’t have 100% losers. Right?
We have a betting ad in Australia which says it perfectly:
“You win some , you lose more.”
And having your account value either blow out or slowly but surely bleed out is horrible. Correct?
The problem is that the reward you get from some wins is why you return to the tables, the slot machine and the market. You think everything has changed. But ultimately, you end up losing more. Right?
To stop the bleeding:
I wanted to know what I couldn’t get from books and courses. So, the path I ended up taking was stock broking. It lead to actively trading for what is termed wholesale investors otherwise known as sophisticated investors.
Now:
Imagine sitting on a desk with 60 other people all trading.
You learn plenty when surrounded by your peers doing similar across numerous asset classes. These roles require various accreditations, so your knowledge is sound.
But when I moved to trading at a proprietary trading firm - Holy Moley - did the expertise over the last 12 years pale compared to the skills and knowledge gained at a specialised futures trading firm.
Imagine sitting at a trading desk and 3 meters from you is a trader doing such huge size he receives over 60,000 dollars per month just in commission rebates? And working with people who once traded on the floor of a futures exchange.
But not only that – when you trade at a firm - you must sign an NDA – so all the really-good stuff on trading successfully is not on YouTube.
So, for people who believe a mentor can be helpful:
A mentor who can offer similar to a professional firm accelerates the learning curve. But it will come at a premium — the reality, therefore, is that it's not within reach of everyone. Conversely, it's wasteful and likely to set you back if you outlay money on poor mentoring.
How can you differentiate poor mentoring from premium mentoring?
Professional firm training is second to none – and that’s what you want – so you want someone with unique skills and expertise from a professional trading firm.
Not limited to show and tell – many videos on how to trade won’t help you. It takes individual attention, assessment and feedback, much like how you imagine having lessons with a golf instructor.
And sufficient time – a couple of one-on-one sessions won’t move the needle. It takes time to develop expertise.
In the mentoring work I do with people - we don't focus on your 'gains':
Instead, we focus on coming up with unique ideas that have an edge. That’s one essential skill in itself. And then there’s the execution of your ideas using a low-cost high-odds framework. Learning to identify specific behaviours matching a certain playbook trade and executing trades flawlessly.
Good trading is stuff you can pin up on the wall – where you see all your buys and sells of your trades – it’s something to look at and be proud of.
When everything focuses on getting good at things you can control - there's not the emotional reactive stuff. Specifics you can see to improve upon is how you can make progress. And your account performance is a byproduct.
When you’re doing the right things well – accounts make money. P and L is not a focus.
You know what?
When you trade at a professional firm - you can’t see your P and L. And it’s something you should hide also to shift your focus to what you can control.