The reason I bring this up was to share with you two reactions I got when describing these recent trades and cash holdings. I had two separate conversations in July — one with a well known Trader, the other with a Fund Manager (known in the industry, but not a household name) — about our posture prior to yesterday’s drop.
The two responses were polar opposites, 180 degree apart.
The trader respected the discipline of honoring stop losses. Good traders know that opportunistic speculation is a process. Ignore any one single outcome, focus on the methodology that can consistently avoid catastrophic losses, manage risk, preserve capital. A good process can be replicated, a random spin of the wheel cannot.
The fund manager, who was having a decent year being long high vol names (at least before Wednesday), was having none of it. “Stops are for losers” is a quote I shall long remember (and email him after he blows up). Apparently, real men have the courage of their convictions.
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Rather than fight our foibles, people should admit this error stream is real, and repair the errors of our ways as soon as we discover them. I have noticed over the years the difficulty some people have in cutting losses, admitting an error, and moving on. Way back in 2005, I wrote a piece advising investors that they should Expect to Be Wrong (originally published 04/05/05). I noted that “I am rather frequently — and on occasion, quite spectacularly — wrong.” However, if we expect to be wrong, then there will be no ego tied up in admitting the error, honoring the stop loss, and selling out the loser — and preserving the capital.
This is a recipe for investing disaster. We humans make 6 billion errors per day, at the very least. The biggest one is not acknowledging this simple truism.
Archives of “January 20, 2019” day
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The reason I bring this up was to share with you two reactions I got when describing these recent trades and cash holdings. I had two separate conversations in July — one with a well known Trader, the other with a Fund Manager (known in the industry, but not a household name) — about our posture prior to yesterday’s drop.Lack of Patience
The fourth finger of the invisible hand that robs your trading account is Lack of Patience. I forget where, but I once read that markets trend only 20% of the time, and, from my experience, I would say that this is an accurate statement. So think about it, the other 80% of the time the markets are not trending in one clear direction.
That may explain why I believe that for any given time frame, there are only two or three really good trading opportunities. For example, if you’re a long-term trader, there are typically only two or three compelling tradable moves in a market during any given year. Similarly, if you are a short-term trader, there are only two or three high-quality trade setups in a given week.
All too often, because trading is inherently exciting (and anything involving money usually is exciting), it’s easy to feel like you’re missing the party if you don’t trade a lot. As a result, you start taking trade setups of lesser and lesser quality and begin to over-trade.
How do you overcome this lack of patience? The advice I have found to be most valuable is to remind yourself that every week, there is another trade-of-the-year. In other words, don’t worry about missing an opportunity today, because there will be another one tomorrow, next week and next month…I promise.
I remember a line from a movie (either Sergeant York with Gary Cooper or The Patriot with Mel Gibson) in which one character gives advice to another on how to shoot a rifle: “Aim small, miss small.” I offer the same advice in this new context. To aim small requires patience. So be patient, and you’ll miss small.
Do it Now….
The 14 Stages Of Trading Psychology…
1. OPTIMISM – It all starts with a hunch or a positive outlook leading us to buy a stock.
2. EXCITEMENT – Things start moving our way and we get giddy inside. We start to anticipate and hope that a possible success story is in the making.
3. THRILL – The market continues to be favorable and we just can’t help but start to feel a little “Smart.” At this point we have complete confidence in our trading system.
4. EUPHORIA – This marks the point of maximum financial risk but also maximum financial gain. Our investments turn into quick and easy profits, so we begin to ignore the basic concept of risk. We now start trading anything that we can get our hands on to make a buck.
5. ANXIETY – Oh no – it’s turning around! The markets start to show their first signs of taking your “hard earned” gains back. But having never seen this happen, we still remain ultra greedy and think the long-term trend is higher.
6. DENIAL – The markets don’t turn as quickly as we had hoped. There must be something wrong we think to ourselves. Our “long-term” view now shortens to a near-term hope of an improvement.
7. FEAR – Reality sets in that we are not as smart as we once thought. Instead of being confident in our trading we become confused. At this point we should get out with a small profit and move on but we don’t for some stupid reason.
8. DESPERATION – All gains have been lost at this point. We had our chance to profit and missed it. Not knowing how to act, we attempt to do anything that will bring our positions back into the black.
9. PANIC – The most emotional period by far. We are clueless and helpless. At this stage we feel like we are at the mercy of the market and have absolutely no control.
10. CAPITULATION – We have reached our breaking point and sell our positions at any price. So long as we can get out of the market to avoid bigger losses we are content.
11. DESPONDENCY – After exiting the markets we do not want to buy stocks ever again. The markets are not for us and should be avoided like the plague. However, this rare point marks the point of maximum financial opportunity.
12. DEPRESSION – We drink, cry and/or pray. How could we have been so dumb we think to ourselves. Some start to correctly look back and analyze what went wrong. Real traders are born here, learning from past mistakes.
13. HOPE – We can still do this! Eventually we return come to the realization the market actually does have cycles (shocking). We begin to start analyzing new opportunities.
14. RELIEF – The markets are turning positive again and we see our prior investment come back around. We regain our faith (although small) in our ability to invest our money. The cycle start all over again!
Deep Thought
Bullshit Baffles Brains
Bullshit baffles brains. It’s that simple. …When you talk bullshit, it’s like you’ve thrown a baseball at someone – it is up to them to consider what you’ve said, ie. to catch the ball. It is up to them to understand or respond what you’ve said. If your words are made up of some big meaningless words which take your audience time to understand, then you’ve achieved your goal. Most people, who do not want to appear foolish, will happily nod and agree with you just to be seen that they’ve understood to avoid embarrassment. A bit of practice of talking crap and train yourself to reinforce people’s agreement by your own body language (like holding eye contact and gently nodding) will grant you a even more positive response. Of course, the voice level and everything will all come into play. Basically – sound convincing. Like so many other researches have found, actual words are a small part of communication. The body language, appearance, way of talking, etc all form a part of the overall communication process. The paced, non repetitive, confusing but yet convincing words are simply window dressing.
An excerpt I love:
THE TWELVE HABITUDES
A successful trader:
- Has a commitment to trading and comes prepared to trade.
- Is detached from the results. He thinks in terms of process and believes in the validity of the process.
- Is willing to accept loss.
- Is at ease with controlled risk.
- Thinks in terms of probabilities.
- Is comfortable with uncertainty.
- Takes the long term view.
- Has an attitude of abundance.
- Is optimistic.
- Has an attitude of open-mindedness and clarity of thought and perception.
- Has an attitude of courage. She is willing to act in the face of uncertainty and possible loss.
- Is disciplined. Discipline is putting into action those behaviors which need to be done to get you to your goals.
Habitude 1: Preparedness
- A successful trader trains his mind for high power trading. If he needs a coach or mentor, he gets one. He takes the time for meditation, self-suggestion and positive visualization. He learns helpful questions to ask himself. He does whatever it takes to prepare himself mentally to trade.
- Set goals
- Put your goal into words. Form a sentence that is specific, simple, short, positive, in the present tense, and achievable.
- Make a mental movie of yourself with the goal achieved.
- Step into the movie and live it and feel it as if it is already true.
- Design the steps necessary to take to get to the goal.
- Commit yourself to doing the steps and make a timetable to do them. (more…)
What is a ‘Zero-Sum Game’?
Zero-sum games are the total opposite of win-win situations – such as an agreement that creates value between two counter-parties – or lose-lose situations, like war and mutually destructive relationships for instance. In real life, however, things are not always so clear-cut, and winners and losers are often difficult to quantify. New traders get confused and do not understand that in trading, profits come from the people on the other side of your trade that are making the wrong decision. The reason that trading is difficult is because you have to out smart someone to get their money, how you do this is what gives you your edge if you are profitable. In all financial markets buyers and sellers are always equal and the time frame in which they are trading determines if their decision was the right or wrong one at the time of their trade. Your entry is someone else’s exit and your losses are in some one else’s account as profits.
A zero-sum game is a situation where one person’s gain is always equivalent to another person’s loss, so the total wealth for the players and participants in the game is always a net change of zero as a whole. The financial contract markets of futures and options are a zero-sum game with several million players. Zero-sum games are found in game theory, but are less common than non-zero sum games. Poker and gambling are popular examples of what a zero-sum game is since the sum of the amounts won by some players equals the combined losses of the others. The money at a poker table at the start of the game does not grow it is just redistributed to the winners from the losers by the end of the game. All of the casino’s profits come from the gambler’s losses and all the gamblers profits are taken from the casino. Games like chess and tennis also fit this model becasue there is one winner and one loser they are always equal. In the financial markets, option contracts and future contracts are examples of zero-sum games, excluding transaction costs, for every long contract their is someone short the same contract. Some one has to sell a contract to create open interest and someone has to buy it, there has to be a winner and a loser at all times, one long and one short. Brokers and market makers disrupt the perfect balance of winners and losers by taking commissions or profiting from the bid/ask spreads. But, for every person who profits on a contract’s value going in their direction, there is a counter-party who loses who is on the other side. (more…)
Time Cover : Thirsty Woman
Thought For A Day
