The Thin Line III

BarroMetrics Views:  The Thin Line III

The answer today. Let me first give credit to those in Ultimate who have diligently kept their journals (equity and psych, without which it would have been difficult, if not impossible, to track the reasons for the divergence).

Secondly, this is a long blog; so tomorrow, I’ll be answering the questions submitted in this forum and by email.


Today, we are looking to identify the reasons why there was a divergence in expectancy returns….divergence in situations where method and instruments were similar.

Note, we are not talking about the results, but expectancy. Clearly results will differ for a variety of reasons. However,  we should see positive expectancy converge – if the method and money tactics are robust, and the traders are executing consistently. 

The givens are: we have a group of trader who……

  • Have a discretionary rule method that is based on the same theories; as a result, the core setups are identical. 
  • Have a set of money management rules.
  • Have a process by which they record their trades which provides the means to make the corrections for constant improvement. 
  • Execute consistently.
  • For the most part, trade the same instruments at any given moment. 

To trace the answer, I found I needed to return to our brain’s hard wiring. One aspect of the hiring is we humans, move towards pleasure and away from pain (i.e. ‘towards life’ and ‘away from death’).  And, it’s more the physical pain we move away from: anything we perceive as ‘pain’ is likely to cause discomfort and anxiety.

When trading we are constantly assailed by:

  • Uncertainty
  • Possibility of loss
  • Possibility of being wrong
  • Possibility of Missing Out
  • Possibility of Failing to Maximise the results of a trade.

And, they all cause cause discomfort and anxiety. Dr. Andrew Menaker calls these Pressure Points.

When we encounter Pressure Points we usually behave in one of two ways: we become aware and accept the discomfort: despite the anxiety, our response is based on reason (left brain) and intuition (right brain). Or, our response is shanghaied by ‘fear, freeze or flight’ (3 Fs) – what I call ‘impulse trading’.

(BTW, an aside……It’ s important to draw a distinction between behaviour resulting from an intuitive response and impulse behaviour. Both are emotionally based. Damasio and others have shown that emotions are essential to good decision-making. Decisions based solely on reason are not possible; and, if even they were possible, the decisions arrived at would be far less than optimal. It’s not emotional trading we need to manage; we need to manage impulse trading).

In short, in the context I described above (i.e. the ‘givens’), it is our response to Pressure Points that determines our results. 


The studies show that one way to reduce  the incidence of impulse trading is to have a plan that suits our personality. There are two types of plans:

  1. “A”: one with few decision-making parameters where the resulting action is specific e.g. If X happens, I go long with stops at ‘price a’ and a target at ‘price b’. Let’s call this a mechanical method.
  2. “B”: one with numerous decision-making inputs where the resulting action is probabilistic and constant verification is required. 

There is a gulf of difference between the two.  What I found was, those with negative expectancy returns were ‘type A’ personalities using a discretionary rule-based system i.e. their plan and personality failed to mesh. As a result, they constantly made poor decisions, usually involving where to enter and where to exit.

To test the idea that they could alter their expectancy by altering the form of the plan – from ‘B’ to ‘A’, I engage in the first of two tests. In fact, I found that by changing the type of plan,  the trader was able to change the expectancy from negative to positive. I am currently engaged in the second series of tests. 


What does this mean for you?

If your trading is not bringing the results you want. First ensure you have a robust method (positive expectancy), you have a money set of rules (at the minimum  have a set governing position sizing), and you are keeping an equity and psych journal.

Then seek to execute this simple strategy: do all you can to reduce the impact of Pressure Points that lead to impulse trading.  Some ways of doing this……..

1) Assess your personality. Are you better suited to a mechanical system or to a discretionary rule based? If you need assistance for the personality assessment, there are a couple of sites you can go to:

2) make sure your plan and personality mesh. If not, change the format of the plan.

3) Finally do what you can to make your analysis and execution, habitual.

For example, use a checklist for your analysis. Before executing, take a moment to visualise:

  • the trade being stopped out and 
  • exiting the trade at your profit target. 

The aim here is to make the loss and profit a reality in the mind – in this way you seek to exit as a matter of course – when the stop price is hit or the exit conditions occur. 

18 thoughts on “The Thin Line III”

  1. Hi Ray, very interesting and absorbing. In my mind I had always thought that a Plan A was a Plan B with all the rules sorted out from research/experience, evolving into a Plan A, so as to avoid impulse trading mistakes. I was wondering, with the advances and new discoveries in your methods, where does this leave Nature of Trends book as it is aimed at Plan B (?)
    cheers Baz

  2. Hi Baz

    For me, and some of the other grads of Ultimate, Pan B is still the way to go. I could no more trade a mechanical system than fly.

    Nevertheless, this experience has taught me that Ultimate needs to provide for ‘A” type traders. So, I developed an ‘A’ type plan now to be included in Ultimate.

    I used to think that armed with the necessary theory, traders could create their own ‘A’ plans. This has proven not to be the case.

    So far as NOT is concerned, no change there in that Barros Swings still provides the foundation for anything I do in trading. That said much has changes since I wrote NOT. A re-write is due.

  3. Hi Ray,

    Rgarding personality tests, not sure is very clear to me, what are the basic personality traits that make a person suitable for Plan B trading?

    Second, I assume the main issue is a type A person trying to trade a plan B. Your solution as far as I understand is to try to systemize the process as much as possible? However, doing this it gets a B plan closer to an A plan. Is this always possible to do and still keep the system profitable? In my thinking the more mechanical a you try to trade a discretionary system the less profitable becomes.

    Cheers and thanks for this, good stuff!

    P.S. Di you plan to release a re-write of your book?

  4. Hi Sorin

    Thanks for your kind words.

    1) Best you read Williams’ book for a thorough exposition on traits for Type ‘B’. I’d describe him as a creative person with a penchant for logical thinking.

    2) I am not suggesting that you take a B plan and convert it to an A plan. Far from it.

    Actually the two plans are different.

    Type A has few parameters (the one we are using has 5) and is relatively certain – a trade is either qualifies or it does not.

    For example We cherry picked the Ultimate tools and melded them in a way that does the job; we didn’t just rehash the Ultimate plan.

    3) Re-write NOT? No immediate plans at the moment.

    Looking to develop the Trading Academy into a successful concern

  5. This month, during a presentation by 4-Times World Futures & Forex Trading Champion Andra Ungur, he showed us his championship competion equity curves.
    He traded discretionally, making positive progress. When it was too taxing, and he switched to system trading.

    So, he could traded discretionally and systemetically.

    Ray can disretionally break his trading rules while trading.

    A successful trader should have the good discretion abilty to decide
    1. what type of trading system suit him/her – system vs. discretion

    (a. Do Ultimate students/graduates know that before they use the system taught???)

    b. Are they aware of and tackle successfully all the mental/emotional issues related to trading as discussed by Brett Steenbarger in his books and blog???

    2. when to trade mechanically – if possible

    3. whether to continue his/her current trading system when his equity curve moves downward

  6. We have IQ, then EQ, other Qs …

    All potential Ultimate students should sit for the TQ – Trading Quotient test, to see if they are suitable to do trading,

    in addition to the Personality Test. 🙂

  7. I took the “Trader Personality Test” on Market Psych LLC. Man I can’t believe what I see, some of the weaknesses was already aware.

    Conscientiousness : Above Average
    Emotionality : Above Average
    Extraversion : Low
    Openness : Low
    Agreeableness : Above Average

    Risk-taking Biases
    Risk Aversion : High
    Emotional Vulnerability : Above Average
    Holding Losers too Long : Above Average
    Cutting winners short : Above Average

    So my Risk aversion is High. I wonder how this matches with my overtrading habit. My Main weakness is overtrading.

    Oh well, will dig deeper in this. Thanks Ray for the links.

  8. Hi Paul

    Thanks for the comments

    “A successful trader should have the good discretion abilty to decide

    1. what type of trading system suit him/her – system vs. discretion

    RB: I’d call it awareness rather than discretion ability. Apart from that, I agree. A trader needs to know himself, strengths and weaknesses.

    (a. Do Ultimate students/graduates know that before they use the system taught???)

    RB: I make them aware that self-knowledge is essential. But, as I said to Sorin, my mistake has been to leave the student to create their own mechanical system, if that’s what they wanted. Ultimate will know provide the mechanical system we have been testing.

    b. Are they aware of and tackle successfully all the mental/emotional issues related to trading as discussed by Brett Steenbarger in his books and blog???

    All (??) mental and emotional issues?

    ‘All’ is a big ask. They are certainly made aware of the four major emotional hurdles, the cognitive heuristics, and a decision-making process for trading.

    2. when to trade mechanically – if possible

    You and I may disagree here. From your comments below, you seem to take a view that trading mechanically, or discretionary, is like changing shirts – anyone can do it.

    I take the view that most traders can do one or the other well but not both.

    3. whether to continue his/her current trading system when his equity curve moves downward

    They are taught a process first to reduce position size, review, reduce position, review etc until the slump (ebb stage) is over; then we need to increase position size back to normal.

    The same process for increasing position size when in flow stage.

    BTW managing the position sizing is not as simple as reducing position size each time there is a loss because of axiomatic risk.

    But that, perhaps, is a subject for another blog.

  9. Hi Sorin

    Thanks for dropping in.

    Yes the test can provide some great insights. You now have the knowledge why you tend to overtrade (and other insights?)

    Next question is what to do about the weaknesses…..all the best

  10. “… the personality traits relevant to success among early career traders are different from those that generate success for experienced ones …”

    “… What makes a trader successful is discipline: doing the right thing with fidelity. What keeps a trader successful is innovation: doing new things and turning them into disciplines …”


    “… In other words, the traits that make a beginning trader achieve profitability are different from those that make a profitable trader a world-class talent. It is possible to have the skills and traits needed to learn trading and become competent, yet other abilities and qualities may be needed to turn competence into proficiency …”

  11. hi Ray,
    My point is:
    It is possible that the ultimate course graduates (2nd batch) to have the skills and traits needed to learn trading and become competent with positive expectancy, yet other abilities and qualities may be needed to turn competence into proficiency and maintain the proficiency to be master trader like you.

  12. Hi Paul

    Agreed that competency and mastery may involve different levels of commitment and perhaps different skills.

    But since the purpose of Ultimate is raise the student’s expectancy return to a positive one, the first step is to give the student the skills to attain competency.

  13. hi Ray,
    I agree.

    Are the skills and traits of master trader “learned” or “born”?

    If the latter is true, then Ultimate graduates must be realistic in their expectation of their returns/expectancy.

  14. Hi Ray,
    I disagreed with the conclusion of the Turtles “experiment”.
    – the traders are selected, and not taken at random!

    The selection filtered out likely failures.

  15. Hi Paul

    Thanks for the comment.

    Then we’ll have to agree to disagree.

    It’s clear from the stories around Turtle selection that the candidates were taken for their ability to learn and in Dennis’ opinion to be disciplined in their application of the rules.

    Both learning and discipline are within the domain of any newbie. Indeed both are essential to our success as traders.

    There is enough recent evidence (Anders Ericsson et al) to show that ‘application’ (made) ahead of ‘talent’ (born) is the responsible for success.

    Talent expressed through application are responsible for the differing degrees of success; but application alone is responsible for attaining success in the first place.

  16. “Discretionary trading is a great example of an activity that requires fluid intelligence…

    Pattern recognition is an important aspect of fluid intelligence: the ability to understand new situations based upon patterns experienced in similar situations…

    What will boost their trading performance is cultivating their fluid intelligence. This has important implications for the education and training of traders and portfolio managers.”

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