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The Racing Line of Trading -Trading Wisdom

  
Analysis, Education
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I was watching a formula one race the other evening and it reminded me of the racing line. The racing line is the direction, speed and angle in which a driver goes through a corner. Come in too far from the inside, your exit will be poor. Too far out, someone can pass you. Come out of the corner perfectly but be in the wrong gear, you’re toast.

I was thinking how many times traders hit a trade entry well but don’t have the right leverage (wrong gear). Or come in too far from the inside and spin out before they complete the corner (capitulate with too much leverage).

Effectiveness Is the Measure of Truth

  
  Education
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In trading as in life, effectiveness has to be the measure of truth. If something doesn’t work, there is no point in continuing to do it. Misperceptions, false unconscious or conscious beliefs, and unhelpful behaviors can contaminate and desecrate your most sought after results.

Imagine the frustration of a trader who perceives that a market is changing direction when in fact it is persisting in its original thrust. Or consider, for further example, an investor who bought into the belief that buy and hold is a valid investment strategy. That investor had to have experienced devastating losses over the past year. Or ponder the trader who repeatedly fails to utilize stop losses and experiences numerous outsize losses because he won’t accept a loss.

When you choose effectiveness as your measure of truth, you can learn from your mistakes. You can make plans, take action, receive feedback, and assess the results. You can revise your plans, take new actions, receive new feedback, on and on, until you find a viable strategy that will work most of the time.

When you fear loss, when greed overcomes you, when you get reckless, or when you hesitate, you become grossly ineffective. When you’re confused or ambivalent yet think you need to take action, you do yourself no good. In each case you need to sort through your thoughts, develop a clear focus, search for the high probabilities, and take prompt and calm action. (more…)

Greed and Fear Are Two Sides of the Same Coin

  
  Education
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Merriam-Webster’s dictionary defines greed as simply “… a selfish and excessive desire for more of something (as money) than is needed.” Greed is often referenced as one of the main contributors to trading loss. Greed mangles the mind by distracting the trader from what matters most in the trade, which is quite frankly to protect your capital by prudent planning and following rules. It also distorts your judgment regarding high probability strategies and effective follow-through.  Additionally, it is the other side of the fear coin; that is, greed can arguably be thought of as a fear of not having “enough.”  Of course, having enough is a purely subjective notion, but for the reasonable person, someone who wants more, more, more as in getting every cent in a move, or wanting more than one’s share, is considered “greedy.”  Whether we’re talking about the fear of loss or the fear of not having enough, either way it is a very difficult emotional challenge to getting the trading results that you want.  Now, the question is what do you do about those bouts with fear/greed that takes your trading effectiveness south?  The important thing of course, is to manage your fear/greed one trade and one incident at a time.

Managing errant emotions is one of the most important trading skills that you can develop. Emotions are an inextricable part of being human and cannot be totally taken out of the trading equation.   However, you wouldn’t “want” to take emotions out of your trading even if you could. Yes, negative emotions throw a monkey wrench into your process; for instance, anxiety, fear, greed, guilt, self-doubt, impatience, apathy, to name a few are what mangle your thinking.  (more…)

A great quote

  
  Education
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I’m sure every trader has run into some kind of negativity from know-it-all chodes who just don’t get what this subject is about – it goes something along the lines of “What good does it actually do? You are just stealing other peoples money?” blah blah *yawn* blah….

Here’s a great quote from a book I’m reading “Hedge Fund Edge” that demolishes their complaints:

“Principle 7: Develop a Love and Respect for Trading, Free Markets, and Individual Liberty and Initiative.

Profits are just the gravy. When they test a group of traders, one of the traits that almost all successful traders and investors share is a deep understanding of how trading and investing is part of the process that allows humankind to progress. Even day-traders provide critical liquidity that allows others to hedge, companies to raise capital, and investors to invest with limited risk. Stock selection allows investors to become second-level venture capital firms, with their demand helping provide access to financing in areas where the people need capital most. The more you understand the remarkable way in which freedom and free association work to produce economic gain and real progress for humankind from new innovations and technologies, the more likely you are to feel a strong sense of purpose at being a part of such an incredible system. And the stronger your sense that your efforts are creating something good that is bigger than yourself, the more committed, enriched, excited, and innovative you will become.”

… so put that in your pipe and smoke it.

5 Trading quotes for Weekend

  
  Education
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-If you are hesitating to take a position, that indicates a lack of confidence that is not necessary. Just get into the position and PLACE A STOP. Day Traders lose money in positions everyday. Keep them small. The confidence you need is not in whether or not you are right, the confidence you need is in knowing you will stick to your stop no matter what. Therefore you can actually alleviate this hesitancy to pull the trigger by continually sticking to your stops and reinforcing this behavior.

-You want to own the stock before it breaks out, then sell it to the momentum players after it breaks out. If you buy breakouts, realize that professional day traders are handing off their positions to you in order to test the strength of the trend. They will typically buy it back below the breakout point which is typically where you will set your stop when you buy a breakout. (In case you ever wondered why you get stopped out on a lot of failed breakouts).

-Embracing your opinion leads to financial ruin. When you find yourself rationalizing or justifying a decline by saying things like, “They are just shaking out weak hands here,” or “The market makers are just dropping the bid here,” then you are embracing your opinion. Don’t hang onto a loser. You can always get back in.

-Professional day traders focus on limiting risk and protecting capital. Amateur traders focus on how much money they can make on each trade. Professionals day traders always take money away from amateurs traders.

-In the stock market, heroes get crushed. Averaging down on a losing position is a “heroic move” that is akin to Superman taking a spoonful of Kryptonite. The stock market is not about blind courage. It is about finesse. Don’t be a hero.

LEARNING FROM OUR STUPID MISTAKES

  
Analysis, Education

We were born to screw up, make stupid decisions, rationalize the irrational, form biased opinions even though standard economics assumes otherwise.  However, there is good news for us flawed humans and our castles in the sand decision making processes.  The good news comes from the science of behavioral economics and more specifically from Dan Ariely in his book Predictably Irrational.

Standard Economics vs Behavioral Economics

Standard economics assumes that we are rational—that we know all the pertinent information about out decisions, that we can calculate the value of the different options we face, that we are cognitively unhindered in weighing the ramifications of each potential choice. We are presumed to be making logical and sensible decisions. If we make a mistake, the supposition is that we will learn from those mistakes and behave differently in the future.
However, we are far less rational in our decision making than standard economic theory assumes. Our irrational behaviors are neither random nor senseless—they are systematic and predictable. We make the same types of mistakes repeatedly because of how our brains are wired. Behavioral economists believe that people are susceptible to irrelevant influences from their immediate environment, irrelevant emotions, shortsightedness, and other forms of irrationality.
What good news can accompany this realization? The good news is that these mistakes also provide opportunities for improvement. If we all make systematic mistakes in our decisions, then why not develop new strategies, tools, and methods to help us make better decisions and improve our overall well-being? [Behavioral economists believe] that there are tools, methods, and policies that can help all of us make better decisions and as a consequence achieve what we desire.

When it comes to the markets and our quest to understand them, we would all benefit from first learning about ourselves.  Then, and only then, may we have a fighting chance to “trade another day”.

Just a thought.

Confidence

  
  Education
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When you feel confident, presuming you do sometimes feel confident, where do you feel it? Can you feel it in your brain or is it in your thorax (i.e. middle part of your body)? Better yet, why do I ask?

Well if you think about it, part of our mission here at Trader Psyches is to teach traders of all stripes how to use the message in Gladwell’s blink to assist in the d/m (that is decision making) process. The zillion copies it has sold prove the interest in it but the practical parts about what I read – sort of the “just do it” related to using your instantaneous impressions seem frankly impossible.

And I honestly still feel that most traders are for good reason, stuck in their heads. So, I ask this simple question – when you feel confident where does it hurt?

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