Archives of “decision making” tag

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Is Trading All About Luck? – #AnirudhSethi

  
Analysis, Education
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Luck of the Draw? There's a Lot More to Trading and I... - Ticker TapeOne of the biggest misconceptions about trading is that it is all just luck. Is trading really just a game of chance? Is there any way to improve your odds? The answer is no, and yes. Trading isn’t all about luck because you can make intelligent decisions on what trades to take, but at the same time not every trade will be successful. You have to accept failure in order to succeed.

##The idea of luck is a misconception:

The idea of luck is a misconception. It’s not about who has the most money, or even who knows what they are doing…it’s all about how your brain handles risk and reward in our complex world.

Do you know that research shows we make more impulsive decisions when stressed out? Stress may be one cause for some people to have an increased vulnerability to gambling addiction. This doesn’t sound like much fun! Some other factors which can increase susceptibility to gambling addiction include poverty, social isolation, prior mental illness, access to addictive substances such as alcohol or drugs, and family history of addictions (including “dipsomania”).

A study published in the Journal of Gambling Studies found that gamblers with a family history of addiction were more likely to have worsened gambling symptoms than those without such a history.

People who are addicted might not be able to control their behaviors and they may experience cravings for the activity – even if it’s harmful or dangerous. This is where trading all about luck comes in! If you can take your emotions out, then this will give you an edge over other traders on Wall Street. Is Trading All About Luck?

It’s possible some people just aren’t wired right when it comes to making decisions under duress which would explain why these people seem “luckier” at times – but luckily doesn’t mean there isn’t skill involved as well!

##Trading is about managing risk and being disciplined: (more…)

With each new trade we must believe the following:

  
Analysis, Education
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1.  Consistent profitability has nothing to do with our predictive abilities.

2.  With each new trade we cannot place any undeserved significance (e.g. “this is the perfect setup”) on its outcome.

3.  We cannot expect the trade to do anything for us other than provide the information needed for us to either hold or exit.   The process by which we have determined our trade setup will also be our guide for exiting (win, lose, or draw).

4.  We accept that we have control over the process but absolutely no control over the outcome.

5. We accept that our current trade setup may look exactly like past opportunities, profitable or not, but may produce an entirely different result due to the collective beliefs and decisions of other market participants.

Most Common Advice is Ineffective

  
Analysis, Education
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“Plan the trade, and trade the plan!” is perhaps the most common advice given to traders. As far as advice goes, it’s well meaning, but unfortunately falls well short of addressing the problem most traders actually face. 

Looking at the advice, it has two parts. The first part says you need a plan. No argument there. But the second part, about executing the plan, that’s where the problems appear. Why?

The two parts to the advice ‘plan the trade’ and the ‘trade the plan’ require two very different skill sets. Without understanding the different skills required, it’s highly likely that you will continue to regularly veer from your plan.

Here’s the disconnect. Planning the trade depends on your intellect. And most of the time, the development of the plan does not occur in the heat of battle.  It’s relatively easily to let your intellect guide you, to be the primary driver when you’re not in the heat of battle. But in the heat of battle, when we have to decide right now whether to enter or exit, an entirely different situation occurs.

At the time of execution, no longer are we cool, calm, and collected. Now, a whole slew of things enters the picture – and many of these things are subconscious to a degree. Our feelings about our P&L, our feelings about our performance, or concerns about how we appear in the eyes of others, etc.

And no matter how smart you are, how much you believe you are not an ‘emotional person’, modern brain science is telling us emotions, including subconscious emotions, are very much a part of our decision making that leads to actions whether we realize it or not. Viewed this way, you can see why the typical advice to ‘plan the trade and trade the plan’ may be well intentioned, but ineffective.

Most Common Advice is Ineffective

  
  Education
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ADVICE FOR TRADERS“Plan the trade, and trade the plan!” is perhaps the most common advice given to traders. As far as advice goes, it’s well meaning, but unfortunately falls well short of addressing the problem most traders actually face. 

Looking at the advice, it has two parts. The first part says you need a plan. No argument there. But the second part, about executing the plan, that’s where the problems appear. Why?

The two parts to the advice ‘plan the trade’ and the ‘trade the plan’ require two very different skill sets. Without understanding the different skills required, it’s highly likely that you will continue to regularly veer from your plan.

Here’s the disconnect. Planning the trade depends on your intellect. And most of the time, the development of the plan does not occur in the heat of battle.  It’s relatively easily to let your intellect guide you, to be the primary driver when you’re not in the heat of battle. But in the heat of battle, when we have to decide right now whether to enter or exit, an entirely different situation occurs. (more…)

Ultimate Goal For All Traders

  
  Education
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In my opinion, this is the ultimate goal for all traders: Get to the point where you can make confident decisions on your own and trade with complete independence. While I tremendously respect the opinion of my colleagues, I DO NOT rely on them. I can turn off Blue Channels, and all communication to the outside world…and still be fine with making my own decisions and letting THE MARKET tell me if I’m right or wrong. I apologize if this sounds cocky, but it’s simply the truth.

How do you get to this point? Make decisions and learn from them! I openly admit that I have made TONS of mistakes in the market, and I still make mistakes EVERY DAY. The key is I’ve learned from them and now try my best to minimize those mistakes. As Tony Robbins says: “Good decisions come from experience, and experience comes from bad decisions.” The key is to MAKE a decision without worrying that you might be wrong. As long as you learn from it, you can correct it the next time. Again, just make the decision! Who knows, it might end up being a good one 

Perfection in Trading :Anirudh Sethi

  
Analysis, Education
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Image result for perfectionBeing perfect is certainly not easy. Perfection is debatable, and needless to say, as challenging as can be. Matters become increasingly difficult when this is attributed to a trading environment or situation. Many traders end up setting their trades by focusing on what they want the results to be. They focus on the outcome of the trade, and do not give a lot of attention to the actual execution of that trade. This is in fact one of the main reasons why trading is so difficult. A trader can never hope to be perfect in his or her decisions. And, one can never hope for a perfect scenario, where any decision that is made results in a favorable result. Therefore the general rule of thumb that traders need to appreciate and get used to is that they need to perfect the decision making process and the execution of the trade, rather than hoping to make the results perfect. The choices, research, knowledge and information discerned are the steps that need to be perfected in the hope of perfecting the results of the trade in question.

Perfection also revolves around another issue in trading. The vast majority of traders worry a great deal about the outcome of their trading decisions. They experience a fear of losing out, and they do not want to risk a lot of their money either. They realize that in trading it is practically impossible to be perfect, and no matter how many years pass, and how many trades they do, they are still going to end up being imperfect.

Moreover, especially in the case of novice traders, it is normal to think that being a trader is a somewhat simple way to make money. They see the future as being rewarding and profitable – typically, a perfect way to become rich. Yet, they tend to underestimate the risks involved in trading and the various issues that revolve around making sound trading decisions and choices. (more…)

The Illusion of Skill

  
  Education
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“The illusion of skill is not only an individual aberration; it is deeply ingrained in the culture of the [financial] industry. Facts that challenge such basic assumptions — and thereby threaten people’s livelihood and self-esteem — are simply not absorbed. The mind does not digest them. This is particularly true of statistical studies of performance, which provide general facts that people will ignore if they conflict with their personal experience.”

I find that, unfortunately, to be terribly true.

For those of you who may be unfamiliar with Kahneman, he is a professor at Princeton and Nobel laureate. He is notable for his work on the psychology of judgment and decision-making, and behavioral economics.

Blind and Calculated Risk

  
  Education
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An excerpt from Trend Commandments:

There are two kinds of risk: blind and calculated. The first one, blind risk, is always suspect. Blind risk is the calling card of laziness: the irrational hope, something for nothing, the cold twist of fate, winning the lottery, etc. Blind risk is the pointless gamble, the emotional decision, or the sucker play. The man who embraces blind risk never wins in the long run. However, calculated risk can build fortunes, nations, and empires. Calculated risk and bold vision go hand in hand. To see the possibilities, work things out logically, and to move forward in strength and confidence is how you win. Calculated risk lies at the heart of every great achievement and achiever since the dawn of time. Trend followers thrive on taking calculated risks. Like the original Karate Kid movie: Wax on, wax off. Risk on, risk off.

Should You Trust Your Trading Intuition?

  
Analysis, Education
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I’ve heard from many traders that they often take decisions based on instincts. Actually, all non-quants use intuition in some form or another. If you are not using a program that takes all signals that your system produces, how do you decide between several equally good looking trading setups with similar risk to reward? Do you take them all or do you concentrate on only a few? The odds are that you are doing the latter and your ultimate choice for capital allocation is subconscious.

Even though we are defined by our decisions, we are often completely unaware of what’s happening inside our heads during the decision-making process.
Feelings are often an accurate shortcut, a concise expression of decades’ worth of experience.
The process of thinking requires feeling, for feelings are what let us understand all the information that we can’t directly comprehend. Reason without emotion is impotent.
This is an essential aspect of decision-making. If we can’t incorporate the lessons of the past into our future decisions, then we’re destined to endlessly repeat our mistakes.

Nothing can replace personal experience: (more…)

Common Advice is Ineffective

  
  Education
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“Plan the trade, and trade the plan!” is perhaps the most common advice given to traders. As far as advice goes, it’s well meaning, but unfortunately falls well short of addressing the problem most traders actually face. 

Looking at the advice, it has two parts. The first part says you need a plan. No argument there. But the second part, about executing the plan, that’s where the problems appear. Why?

The two parts to the advice ‘plan the trade’ and the ‘trade the plan’ require two very different skill sets. Without understanding the different skills required, it’s highly likely that you will continue to regularly veer from your plan. (more…)

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