Archives of “Education” category

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Vantage Point teaches trading

  
Analysis, Education

vantage-point-film-poster.jpg

I saw this poster for Vantage Point and immediately thought of trading the markets, of how there are so many traders with so many points of view. There is also the question of the the truth: is  it the price, or is it where the price ‘should’ be? Does the truth even exist? One thing is for sure and that is, like the characters in this film, no individual has the complete picture.

A million traders, a million points of view, no truth.

Risk & Chance

  
Analysis, Education

Here are some interesting quotes from ‘Risk & Chance’ (Dowie and Lefrere) that have a relevance to trading and speculation more generally:

Henslin (1967) notes …dice players behave as if they are controlling the outcome of the toss.  One of the ways they exert this is to toss the dice softly if they want a low number, or hard for a high number.  Another is to concentrate and exert effort when tossing.  These behaviours are quite rational if one believes that the game is a game of skill. 

As a trader I wish I could figure out what portion of my trading results can be attributed to luck, and what portion to skill. The problem is that trading seems to be a game of both skill and luck, so we spend half our time figuring out just how hard we should be throwing the dice. Splitting skill from luck is a problem for all speculators, but high frequency traders can find out much sooner than low frequency macro traders, who only take a few positions each year. In the latter case, it may be close to impossible to look back to a macro trader’s career and make this determination with any reasonable level of certainty.

De Charms(1968) stated that “Man’s primary propensity is to  be effective in producing changes in his environment.  Man strives to be a causal agent, to be the primary locus of causation for, or the origin of, his behaviour; he strives for personal causation.

The polar opposite of mastery is helplessness. (more…)

Cutting Winners Short

  
Analysis, Education
  • Reasons
    • Pre-occupied by losses, especially losses accumulated in the day.
    • Want to turn the running losses to break-even or positive first, before doing trades to make money, which is illogical.
    • Afraid that whatever small profits will go away.
  • Solutions
    • Don’t look at the running P&L during the day.
    • Exit only when stopped out.
    • When you feel like getting out, ask yourself, if your original reason for taking the trade still valid? is the trend still valid? If yes, stay in the trade.

Selling Out at a Good Price and Re-Entering at a Worse Price

  
Analysis, Education
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  • Reasons
    • You think that the price is going down, so you sell at $X. Price drops below $X, you feel good that you sold out earlier, then you shift your attention to other things. Now and then you check the price again, and saw that it kept going lower, so you still feel good. Then after a while you start to notice that the price is inching back to $X, so you start to think ‘hmm.. look’s like it’s going back up, maybe I shouldn’t have sold. Let’s monitor this for a while, see what happens’. Your ‘Fear of Missing Out’ and your ‘Fear of Future Regret’ is starting to grow.
    • All the while, you had no concrete action plan on how you would handle this, you have not decided at what price or point you would go back in, or would you cut this position out entirely. Without a trading plan decided beforehand, you are bound to react to your emotions.
    • Soon, the price moves above $X, and keeps moving up. Finally, you can’t take it anymore, you re-enter your position at a price higher than $X. That helped to ‘quieten’ your ‘Fear of Missing Out’.
    • Then as it usually happens, price goes back down again, drops below $X and goes down further. Either your fear of taking a loss kicks in and you stick with a losing position, or you sell out at a loss.
  • Solutions
    • You have to decide beforehand, even before you exit the position, how you would handle the position.  To do that,  you need to be clear on the reason why you are selling in the first place.
    • If you are selling because you think that the uptrend has changed to a downtrend, or the uptrend is broken, you would need to have specific criteria that you look for to know whether the uptrend has resumed. If the criteria has not been met, even if the price goes above $X, you will not re-enter your position.
    • If you are selling because you think the uptrend is still intact but there will be a short momentum reversal, you need to get out and get back in very quickly, usually just catching 1-2 ticks more. This type of play where you react to momentum is highly discouraged. The risk-reward is bad, the skill level, reaction speed, concentration required are extremely high, and it makes you susceptible to falling into the trap of ignoring the bigger market structure.
    • You have to realize that you are playing into the hands of the usual fighting that goes between bulls and bears when you keep reacting to the swings, which will naturally make you buy high and sell low.
    • In conclusion, you need to be very clear of reason that you are selling. In that way, you would be clear of when, if ever, you would re-enter the position.

Hesitating on Entry and Ending Up Chasing the Market

  
Analysis, Education
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  • Reasons
    • You just had a string of losses and you don’t dare to enter the next trade.
    • You are not sure whether to take the entry signal, you do not trust your system completely.
    • You were not paying full attention to the market, so your mind was not prepared to play, so you got stuck in indecision.
    • You take too long to weigh all the arguments for the bull and bear sides.
    • Chased market for fear of missing out. End up entering trades with stops being too far away.
    • Might be the case where you detected hesitation, and you know hesitation is bad, and you simply brush hesitation aside without thinking and just enter the position.
  • Solutions
    • If you hesitated and missed the proper entry, wait for a retracement.
    • If no retracement occurs, no choice but to miss the trade.
    • It is better to take trades with limited risk rather than trades with bad risk:reward ratios.
    • If the bull / bear case is 50-50, stay out.
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