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4 signs of out of control trading

  
  Education
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1) Overtrading:  This is a very common problem for an out of control trader.  If you find that your size is much bigger than normal or you are trading at times that you don’t usually traffic, then make sure you slow down and write down a plan and stick to it.

2) Comfort in bigger losses:  When I hear a trader feeling comfortable about larger than usual losses that scares me.  This comfort tells me that the trader is not thinking rationally as losses should never be tolerated and especially outsized losses.

3) Trading new securities:  If a trader deviates at all from the strategy that made him successful, especially when he is a down streak, this concerns me.  

4) One sided trading:  This sign is correlated to having an opinion on the market.  If I see a trader constatnly focused on one side, regardless of what the broad market is doing, this person is so focused on being right that nothing else matters.  It is so important to be right that even if they make up 20% of what they lost it will seem like a victory to them.

Evidence Based Trading: Why Philosophy Matters

  
  Education
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A beautiful example of this is David Aronson’s new book, “Evidence-Based Technical Analysis”. It’s a well-written, thought-provoking text, with many practical examples of how to conduct data analysis in an objective way.

Starting with the premise that knowledge consists of statements that are found to be true, Aronson, writing in the positivist tradition of philosophy, excludes subjectivity as knowledge. He explains:

“The most important consequence of TA adopting the scientific method would be the elimination of subjective approaches. Because they are not testable, subjective methods are shielded from empirical challenge. This makes them worse than wrong. They are meaningless propositions devoid of information. Their elimination would make TA an entirely objective practice.” p. 148

This is bound to rub many traders the wrong way, but it’s an important challenge. What is knowledge? How do we know what we know in the markets? How can we demonstrate that knowledge is such, and not illusion?

Once we start with the premise that all knowledge consists of explicit propositions that can be tested for truth, we necessarily are led toward trading that is rule-based and rigorously backtested.

Is there another, *valid* form of knowledge and trading? Can we prove that?The late Ayn Rand emphasized that philosophy was the most practical of disciplines: it governs the ideas that lie behind all we do and think. The philosophical premises we assume affect how we approach trading.

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