Dr David Paul - The Psychology of Trading & Investing

I'd like to introduce someone who's been in the game for a very long time and international guest professional dr. David Paul it's a great great pleasure to be here guests like playing a home game I've been in London now for the last couple of years my background is checkered I've got a degree in engineering I've got an MSC and metallicky I've got a PhD in mathematics all of which I assure you is largely useless integrity money avid markets regularly and consistent what I want to try and get across in a few minutes it's hard to go about putting together the mental framework to be able to take money out of markets consistently and get this up to a point where you can rely on that income in the same way as you can rely on your salary or the income that you draw from your business that's the objective now when I do the seminar at the banks and I've done for all the local banks here and I've done it for most of the banks in London it takes three days and I'm going to try and do it in the next 40 minutes okay I've got a lot of slides and I probably won't get through all of the slides but I'm sure that the guys that fun port will send you the presentation if you wish okay so my association with the company is that the founder will see other than where he is but the founder of Mercy and I have been doing business together since he was 30 minutes old it doesn't seem that long since he was shouting at me when I was actually going to my office in Livonia I used to shout at me and said KitKat because he wanted me to bring a KitKat Oh naughty evening so any of the fun for people listening if you want to bribe the boss just behind my cat the thing that stood me in best standard markets is that then my gift I was an officer in the Royal Marines and that's giving me a level of confidence and discipline that I've drawn upon for a very long time I'm 42 years later I can still fit into the uniform there's anybody who feels like having a go I've only got one regret in life and that one regret is that I was thirty-five years younger I'd be a professional rugby player today because I came to South Africa to play rugby that's why I came here in the first place got an injury from it but I think if I was 35 years younger I'd be a professional rugby player so I'm not that good with contraption so I'll do my best to make the slides work yes so already talked about an edge I'm gonna try and talk about an edge my edge is very similar to what these gentlemen have just presented I like to put the fundamentals on the technicals together in the stock market my definition of fundamental analysis is the search with true value of a share my definition of technical analysis is the study of trends and turning points ladies and gentlemen I want to try and find a share that's undervalued the share this growing its earnings aggressively reasonably safe flight that's rising that's in the throes of a strong trend and ladies and gentlemen I want to buy that when the general market is rising okay and that's what I've been doing for a very long time I do my best to stick to that those of you a little bit training for a while will know that sticking to simple sentence training rules is enough a little easier to talk about them to do am I correct yeah okay I'm just if there's local Devils and you're sure they're shouting at you to do the wrong thing so to make some money and markets folks we need some form of a method yes we need to manage your money really well only to manage yourselves really well the three animals so I'm going to talk I've got a methodology so I'm going to ask you a question did they put that chart in there we go there's the Aussie forty I think I asked them to put in and my question to you that's a MACD I know the the guy who put the MACD together a good friend about a guy called Gerry Appel and he said that when he designed the MACD an axiom of investment education is the more complicated it sounds the more you can sell it for and he thought that MACD was suitably complicated that's why it's called the moving average converging-diverging Gerry upheld those two sons have got more money under management than a nest egg just the three of them a little room in a place called Derry Maine Stephen King rates and Rex's books just across the room is the JC Coonan whopper died on Monday my question to you what do you think done young man says done any other Bradley what do you think you're the expert up well folks in my pocket I have the secret but you find them - I have the secret it's a five round coin now one side there's a pretty little animal you see that and they were certain good a coat of arms clearly the coat of arms is going up and the pretty little animal is going down see if I can get this right you were right my head it's going up okay would you trade like that no okay but I assure you most of you are trading like that already there's a great deal of site where I assure you but I wouldn't like to trade like I'd either so my next question to you let's play and think about a special game so here's the game if you can successfully predict heads or tails and you're correct if you bet five runs and you're correct I'll give you ten back clearly if you're really correct in your prognosis I'm going to take the five now you've already said that you wouldn't trade with the coin but would you play that game ladies and gentlemen that's my question to you would you play that game yes or no well folks I have no one to play this out it's a creaky game to play and it's the basis of how you can become consistent and take money from somebody else because that's what you're doing because and ten Chuck's of the coin would you agree that you should be right 50% of the time yeah no when you're right I'm going to pay you twice as much as when you're wrong so in ten throws of the coin when you're right I'm gonna pay you 5 times 2 which is 10 yes and when you're wrong I'm gonna remove 5 times 1 which is 5 less you make 10 you make 5 profit if you bet around on every time you chuck the coin in the air on average you're gonna make 50 cents you have no signed a positive expectancy system so if you can find somebody to underwrite that then bury that your edge okay and that is the objective folks now with the Finn port guys with GT you should be able to get your hit rate above 50% but if you can be right 50 percent of the time and you can make twice as much when you're right as you lose when you're wrong then you've got a method of making money for the rest of your days and that is the challenge to learn how to play the game over and over and over again without fear or hesitation okay so it's a cracking game to play would you play the game now in trading the number of times that you write is called the hit rate and Lord only knows we're all paranoid about the hit rate we want to be right at all costs there are four trading fears one is being wrong twos losing money three is missing art and forest leaving money on the table those of you that are under fifty are probably in a safe place because I know for a fact that most man over 50 are more scared of being wrong and losing money than they are of death okay am I correct we've got the death thing I saw the doctor well it must be handled okay but to be wrong or lose money it's an issue so that other thing that's important in trading is the risk to reward ratio so the money that you make is a function of both the hip break and the risk to reward and most of us just think about the hit rate so three things know if you do a search on the internet and that's a margin call don't take it okay don't take it just ignore it completely the margin goes what happens folks when you run out of loot from GTR gonna phone you here and say more money or we close the whole bloody lot okay so if you get a call just don't take it so if you do a search in the internet you're gonna find lots and lots of systems where the vendor says that he you're right 92% of the time and they all sound wonderful but the problem in those systems is if they've got open up their stock losses so wide in relation to their targets that they don't make any money and this was brought home to me a few weeks ago and this is a chap in London who was advertising a Forex system somebody spoke about Forex and he said he's right 90% of the time so I was wonderful business but when he was writing his own literature he said this when it was right he makes 10 ticks and when he's wrong in losses 90 what's the expectancy of that system 9 times 10 when he's right minus 1 times 91 is wrong and that means the system actually loses money signs wonderful 90% of the time but he loses money so folks just remember that that edge that edge is a mixture of three things it's a mixture of one the hit rate it's a mixture of the risk to reward and the Commission's and there's no doubt that if you're trying to scalp a 1-minute chart you need to be really really good because those Commission's mind up every time you press the read button those three or four texts to be paid soap and that's hit write rest reward and commissions so that suddenly mentioned the forex market if you by the pound against the dog with a 50 point stop and the targets a hundred points if you can get that right fifty percent of the time you've got it made and the only thing remaining is to learn how to play the game and it is a game that we play with ourselves and playing the game is a tough bet no I want you to use your wonderful imagination because in this vessel we have 101 round coins yeah see them right now on every decision on every trade those two decisions one it's the damn thing going to go upwards the darn thing gonna go down I've already alluded to the concept of going short which might be new to some of you but you can take a bet that the markets gonna fall and if it does fall you're gonna make some money so what's the first decision so the man in the green heads or tails tails markets gonna fall the bear and the green we've got a hundred coins the second decision ladies and gentlemen is how much do you wanna bet you can bet one coin you can bet five coins or in the parlance of the commodity futures market you can bet the farm the whole bloody lot farmers love betting the farm okay so the man in the green says the mom it's going to fall tails how many would you like to bet madam one five twenty 75 20 okay so let's trade what we're doing this is we're simulating a trading system that's right fifty percent of the time that makes us twice as much when it's right as it loses when it's wrong I assure you that if you are a day trader in the forex market you would sell your granny for that system okay your granny because most intraday systems will risk 30 to make 50 and if the vendor is honest does not write that much more than 50 percent of the time so come on the green are you feeling lucky like okay don't take it to persuader that's not a great throw pong coined is much easier sorry mate it's going up you lost sorry the only bhakti to Debbie that was going good I'm so 20 gone and we've good 80 left the man in the red heads or tails you sir never wear that red pull of hurt again your tails pardon heads we've got 80 coins left the man with a cold head with a capital one remember John Wayne's last movie he says a guy coming any set as your head cold we'll get 80 coins left how many would you like to bet pardon would 40 says okay this trade is totally independent of any other trade that you're ever going to take in your life this is the first of the 10,000 trades that you're gonna take between nine and death you said head Taemin let's see if I can get this right after awful through pond is much easier that's better heads is correct we get 18 18 and 80 s 160 we're ahead of the game hi folks the man in the red was lucky unfortunate what's the probability of a bad one aha No what's the probability of two bad ones in a row a quarter 1/2 times 1/2 which is 1/4 now in a 50% system unfortunately you get two bad ones every four trends ladies and gentlemen if you were to bet 50 percent of your coins on any one trade you go bankrupt every four do you understand that gets worse what's the probability of three bad losses in a row and a 50% gain 1/2 times 1/2 times 1/2 would you want to rate that means through a few cones when you get home that means that 1/8 throws of the coin or 8 trades and a 50% system you have a cluster of 3 bad ones in a row that means ladies and gentlemen that if you were to bet 1/3 of your coins on any one trade you go bankrupt every eight okay and most people go bankrupt because they bet far too much on any one single trade not the bet size is the difference between your entry point and your stop loss right so if you buy a share a 10-round and you've got a stop loss at 850 if it falls from 10 to 850 that's the bet sighs okay am I correct duty gentlemen I think I'm so unfortunately there's massive paradox here because you do the fundamental analysis you do the technical analysis and you're sure the damn thing is going to go up yet that's why you're putting the trailer in the first place so if you're sure it's going to go up why not have a big bet let's accelerate the process of wealth accumulation so you decide to trade far far too baby and then all of a sudden you're gonna run of these bad ones now if you don't believe me here's what I want you to do tonight go to Monte Cassino who goes to Monte kissing up anybody all right you get to the casino tonight glance you go to the roulette wheel it's a 50% game equal number of blacks and reds and there's a little white ball which is gt's cut that's the whole thing okay and you look at the scoreboard down at the end and you're gonna see long runs of red and long runs of black those custer's are real and it's this clustering effect that makes playing the game so difficult because you get long runs of good trades where you think you're God and wrong runs unfortunately a bad ones where you feel like something that's under your shoe okay now the first objective ladies and gentlemen is to live through the clusters arithmetic that you don't go broke in them okay because you can quite easily have a Custer of five bad trades am I correct sure five by trades happen on 50 percent system every 32 all right so have you ready bet 20 percent with your looked on any one particular trade you go bankrupt every five and there is a big problem here so there's a chap called Ralph Vince and he's written a long series of books called effective portfolio manager for traders thick thick thick thick books they've got them in and they stick they've got them at Absa but not bedtime reading I assure you the gist of all of this is that you should not risk any more than one to two percent of your kitty on any one trade so if you've got a hundred thousand rand in your account and you're you to us you should not bet you should not risk any more than one to two percent of our in any one trade so the maximum loss ladies and gentlemen that you ever have on any one trade should never be more than 2,000 grams and that will keep you alive okay that will keep your life but there's a big problem because we have runs of good ones and runs of bad ones not between your ears there's a thing called the pituitary gland and that patoot you can pumps out muti when I'm in England I have to fill them with multi means that pumps out all sorts of hormones into your bloodstream and there those hormones are actually responsible for every emotional state that you have so when you fail in love without young lady of yours those hormones were just pumping around your system all right when I leave the gym Fox I'm no longer 63 I'm 17 again and back in the raw bearings and as I say can be quite strong when I leave the gym okay now similarly when you have one good trade - good trades 30 good trades that pituitary gland is hard at work okay and it's pumping this muti into your bloodstream and you change completely I know people but after one good trade they're a different person okay certainly after turning after 3 willing trades there in the bar flying drinks and the souls of narrow boat rowing to their life what happens is that after a series of winning trades we become euphoric and if you look in the oxford dictionary the definition of euphoria is invincible so what happens is that you say so little at position sizing let's have a big bet and risk managers in the City of London are actually taught these days by the FCA - in fact that's the equivalent of the FSB here to actually look at the traders under control and assess their susceptibility to euphoria now you're going to find that once you get the one or two percent into your head it's in fact not the runs of bad trades that cause you to go broke it's a run of good trends because in a run of good trends you actually trade far far too big so just be careful about you for it none our job is to find an edge in markets burries analysis of all he leaves one pattern that's all you just need one pattern to be successful they haven't shoulders pattern could be your pattern he couldn't chart up of lots and lots and lots of patterns I love my wages falling wages and rising wages those of you who are trading Forex there's a textbook falling wedge in the Europe one daily chart the moment I also I'm very fond of my third levels and harmonic patterns which are my own personal edge in both the stock market and the forex market but you need one level pattern you need to practice really really good money management and that just means not losing any more than 1% of your looked or at the very most 2 percent of your look and anyone trade and then the third thing is to build the discipline to just do it over and over and over again many of you will see those ghastly adverts of Alan gray put up you know slow and boring adverts Alan gray are great they've got a process that Alan gray was taught by oak Templeton a lifetime ago and they do the same thing over and over and over and over again I went to one of their lectures the other night in London where it's all of us across there where they actually put on the case very simple similar to your case where they justified fundamentally based on value that Honda was a much better buy than Tesla okay wonderful presently but they've got a process and they stick to that over and over and over and over again and your process doesn't your trailing edge does not have to be complicated at all finding a share that's undervalued that's growing growing earnings aggressively and safely that's in the throes of a good trend I like always for a share to be above an 80 90 day moving average really nine works for me and then you need some little pattern to finesse the end there could be a triangle it could be an ascending triangle there's a heap of and that simple book of charting will get you most of the way and then don't lose any more than 1 or 2 percent of any one trade and then you need to build the discipline that ladies and gentlemen can discipline the belt or is it god-given course you can why does it little man like me in the gym this morning at half past six why twice a day okay did it take any discipline to get me to the gym this morning none none whatsoever the paradox isn't when you've got it you don't need it okay alright that's the paradox so to build discipline folks you're going to have to grit your teeth and stick to the process so the first step would be to sit down with one of these guys sit down or put together your training plan a simple mechanical plan the more mechanical the better and then my challenge to you folks is to follow that plan without deviation for a batch of somewhere between 20 and 30 trades that's going to take quite a bit of doing it is a rite of passage no I'm not a psychologist I've had psychologists in my classes and they still don't know why this happens but to build a habit okay any habit you've got to grit your teeth and do it and then all of a sudden you actually build this neural pathway between your years by doing it you will find that sticking to the rules for the first few threads is difficult but I've done this with many many people over the years when I used to do one another one-on-one mentoring I don't do it anymore somewhere between 5 and 13 trades you build the pathway and you'll find that the discipline to stick to the rules it's no longer required because that's what you do so my challenge to you is all of this get busy making nuisance of yourself get yourself to a point where you've got a written plan that suit suit you did not be more than one page think about position sizing there's a good book on it by a guy called van thought it's called trade your way to financial freedom on position sizing and then the real exercise is to focus on perfect execution of that plan for somewhere between 5 and 20 trades now I personally build a habit very easily and many of you will say that's great but it also means that you can call the bad habit very easily so the one thing that I can say what were just possible that everybody in this room is 8 to 13 trades away from the trainer you want to be that's all but very few people get there because they don't adhere to the one system until that neural pathway is built so that's the process and you want to be successful folks sit down put together a fairly simple system adhere to one to two percent position sizing and then the real work starts being able to follow that system through thick and thin and you're only about 8 to 13 trades away from being able to do that that's all thank you very much any questions in that process of my home after time I still have 15 okay any questions on that process yeah you certainly can have more than one running I would suggest in the stop comment that we don't have any more than two from the one sector of the market okay I'm trying to spread yourself across the market a little bit I think that another thing which is quite useful is this probability matrix because this these are the runs of bad trades that I talked about there's a 50/50 system now if you're a pure trend follower with no fundamentals at all just a pure trend follower you're going to be right about 50 percent of the time that's all in fact probably less and there is the run of for bad trades in a row every 16 now by incorporating the fundamentals folks and pushing your head rate up so that your right two times I have a three but trust you'll have to handle for every 81 trades and if you can get to a point where you're right 80% of the time you've only going to handle a cluster of for every 625 trades so my advice to you is that when you're formulating your system is that you do your best not to be training all the time but to be waiting to get three or four good trades in a month so that you eliminate the clusters and you can do that with these gentlemen safe by putting together the fundamentals and the technicals I think that training technically alone is very difficult indeed not because you can't make another lot of money but because these clusters are really difficult to handle emotionally okay after you've been wrong five times in a row how good do you think you're going to be putting your trading systems into practice without fear or hesitation it's going to be difficult so by adding the technicals and the fundamentals together you can certainly push your hit right up to this area where the clusters go away and largely that's going to mean that you trade less and for me as I say I want to share to be undervalued I want to share to be growing earnings and going running strongly and safely just rising and I don't like to buy into share that's in fact under an 89 day moving average okay when I'm looking for a little pattern triangles are great ascending triangles and great falling wages are great to finesse a good entry and I look to be buying in when the general market is positive that normally means that I like the general market to be above a 21 day moving average okay but it's rising that's a very simple little edge that I've been using for a very very very very long time that gets my hips right up to around this area I think that there's a book out there that you could be interested as a dealer new it's a book by no friend of mine called William O'Neal William James O'Neill it's called how to make money in stocks the book is 20 20 25 years old when your needle is gonna has to be very similar to here in that he started in the stock market as a junior and New York stock market and he then started his own brokerage company and he's not gonna some newspaper called investors business daily you can buy at any newsstand in the US so I think that you would find that book very useful for formulating your range in markets it's cool how to make money and stocks by William James O'Neill will lead you on a meal right closer he's about 90 no don't don't complicate it really good fundamentals and a trend lots and lots of people in my do the Alan gray methodology of deep value is wonderful if you're Alan gray and you're buying a massive amount of shares you've got no choice but to be buying in when the old football stadium full of small people running away that generates the quiddity for you to get in but for most of us we can get in just by pressing the button okay so great fundamentals but the share must be going away and then a simple one technical pattern such as some of the ones that Barry presented in that slide to try and get you in and place so the pockets going to go your way fairly quickly and I also want the general market to be positive indeed certainly for the last month it's now time to divide stocks when the general market is falling unless you want to short stocks it's not a time to be buying stocks when the general market is born so try and get those good fundamentals a trend little pattern to finish your entry and then you want the general market to be going or where the most important thing folks is don't rest don't lose any more than 2% of your kitty on any one trade that will keep you alive long enough to get good at this focus on perfect execution of the system if you focus on the process of trading that cash will take care of itself you know I think you know that rich dentist that lives at the corner of your suburb he's got a nest 500 and the wife's got a Porsche Cayenne right he's successful because he focuses on perfect execution of each and every red canal each procedure if he focuses on perfect execution of each procedure his waiting room will be full and the cash will take care of itself and similarly your job folks is to have a plan and focus on the process of executing that plan over and over and over again and if you focus on the process the look will take care of itself the big biggest hurdle that you have is to get over the first eight trades if you can grit your teeth and stick to the process for eight trades something mystical happens between your ears I don't understand it but you build that neural pathway and all of a sudden one that you required is no longer required because that's just what you do the same as I assure you that when I get back to Long Hill this afternoon the first thing I'm going to do is to dust off the suit and go back to the gym I have no idea why I hope that you enjoyed the talk folks it's as close I want everybody to be successful I wish Fairport all the very best of luck [Applause] [Music]

Channel: FinPort

Views: 819,359

Rating: 4.9181795 out of 5

Keywords: FinPort, Trading, Psychology, Risk, Forex, Stocks, Financial Markets, JSE

Id: MGglyvc8d58

Length: 40min 33sec (2433 seconds)

Published: Wed Apr 03 2019

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