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The Agoraphobic Trader

  
  Education
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http://en.wikipedia.org/wiki/Agoraphobia

The market is risky.  There is nothing about it that isn’t risky.  Risk never changes, your understanding and ability to make decisions based on what you are likely to achieve does change.  

One of the most important things about risk is liquidity. Agoraphobia is a “Panic disorder with agoraphobia is an anxiety disorder in which a person has attacks of intense fear and anxiety. There is also a fear of being in places where it is hard to escape, or where help might not be available.” –A.D.A.M Medical Encyclopedia

This plays out in two ways:

  • Physical limitations: The ability to get out of a position because there are ample orders on the other side of your trade.   We have seen many positions get too big to win.  Amaranth Nat Gas trade, CDS, and most recently the London Whale Trade.  For most of us we will never have the ability to get into a position that size but if you trade penny stocks you might find yourself in trouble and with some serious momentum trades.
  • Mental limitations:  As it is often said “second trade first”, meaning have your exit in mind before you get into a position. We have all been there before.  Not getting out of a trade where we should have.  Now we are down money or gave back open profits.  We are essentially trapped.  The trade begins to own us.  We have created an extra branch on the decision tree that does not need to be there.  

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Risk Control -Discipline

  
  Education

My Chat Session with Trader :

In your opinion what is it that causes traders to lose most?

That’s easy. The answer ties in exactly to what we were just talking about, namely insufficient risk control. It is one of the most common reasons why traders get into trouble. One way or the other, the cause for large losses and traders blowing up is insufficient risk control.

Any other errors that traders often make that end up in losses?

 All the errors I can think of really come back to inadequate risk control. If someone overtrades a position, it’s an example of insufficient risk control. If a person gets married to a position and just stays with it, giving it more and more time, it is insufficient risk control. A lot of the trading mistakes that people make when you go down one level deeper are due to insufficient risk control. Of course, people can make analytical mistakes, they can call the market wrong, and so on, but then again for that to do real damage, it’s going to have to come down again to some inadequacy in risk control.

So it basically boils down to one word — discipline.

 

 Yes. It’s not sufficient to have an effective risk control strategy, you also need the discipline to apply it. Discipline also comes into play in other ways. If you have a strategy that signals a trade that looks very scary but fulfills all the requirements of your methodology, you need the discipline to take the trade. In other words, discipline applies not only trade to getting out of a trade but also getting in. Another aspect of discipline is avoiding trades that aren’t part of your methodology. To summarize, discipline applies to many aspects of trading, risk control being just one.

Traders Make Decisions based on Probabilities

  
  Education
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Most traders take price swings personally. They feel very proud when they make money and love to talk about their profits. When a trade goes against them they feel like punished children and try to keep their losses secret. You can read traders’ emotions on their faces.

Many traders believe that the aim of a market analyst is to forecast future prices. The amateurs in most fields ask for forecasts, while professionals simply manage information and make decisions based on probabilities. Take medicine, for example. A patient is brought to an emergency room with a knife sticking out of his chest – and the anxious family members have only two questions: “Will he survive?” and “when can he go home?” They ask the doctor for a forecast.

But the doctor is not forecasting – he is taking care of problems as they emerge. His first job is to prevent the patient from dying from shock, and so he gives him pain-killers and starts an intravenous drip to replace lost blood. Then he removes the knife and sutures damaged organs. After that, he has to watch against infection. He monitors the trend of a patient’s health and takes measures to prevent complications. He is managing – not forecasting. When a family begs for a forecast, he may give it to them, but its practical value is low. (more…)

Believe you can win

  
  Education
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If other traders can do well in the market, so can you. However, if you don’t have enough courage and confidence in yourself, you will never achieve success. The events over the past year have tested many people in this regard and some now think the game is rigged against them. Nothing could be farther from the truth as opportunities remain. Those who will win in the markets first start by believing they can do it. Then they back up that strong belief with serious hard-work and determination to find their trading edge. However, it starts with you first having faith in yourself.

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