So often I see people make decisions in the market on what makes sense to them. It makes sense to buy stocks when the company insiders are buying. It makes sense to buy stocks that are making positive announcements. It makes sense to listen to what the President has to say about the company’s prospects. However, all that matters is what the market thinks of the company and whether the buyers are more motivated than the sellers. So often, the market does things that do not make any sense until we later learn of what motivated the market to do what it did. Remember, the market is forward looking, most times, what makes sense is judged on what has happened in the past.
Archives of “decisions” tag
rssTen Key Principles in Economics
Everything has a cost. There is no free lunch. There is always a trade-off.Cost is what you give up to get something. In particular, opportunity cost is cost of the tradeoff.
One More. Rational people make decisions on the basis of the cost of one more unit (of consumption, of investment, of labor hour, etc.).
iNcentives work. People respond to incentives.
Open for trade. Trade can make all parties better off.
Markets Rock! Usually, markets are the best way to allocate scarce resources between producers and consumers.
Intervention in free markets is sometimes needed. (But watch out for the law of unintended effects!)
Concentrate on productivity. A country’s standard of living depends on how productive its economy is.
Sloshing in money leads to higher prices. Inflation is caused by excessive money supply.
When does trading become gambling?
When does trading become gambling? There is a very thin line. I maintain that most traders ARE gamblers. They use markets as a substitute for a casino. Here are some of the sign posts that you have crossed the line. I love Jeff Foxworthy so I will steal his “you just might be a redneck.”
1. IF you enter trades without a clear trading plan, you just might be a gambler.
2. IF you trade just to be trading, you just might be a gambler.
3. IF your bored and enter a trade, you just might be a gambler.
4. IF you look at potential profit before assessing potential loses, you just might be a gambler.
5. IF you have no impulse control, you just might be a gambler.
6. IF you have no methodology, you just might be a gambler.
7. IF you rely on others for your trading decisions, you just might be a gambler.
8. IF you do not take full responsibility for your trading outcomes, you just might be a gambler.
9. IF you increase your risk due to losses, you just might be a gambler.
10. IF you do not use stop losses or do not adhere to them, you just might be a gambler.
And my all time favorite
11. IF you get an adrenaline rush when your entering trades, you just might be a gambler.
Mental Toughness
The mental part of the game. Its an aspect of trading that can easily be ignored, we all choose how we approach this game. Some see failures as opportunities to learn and progress, while others see them as outright failures and road blocks which should be avoided at all costs. Its all about attitude.
I feel that trading should be ‘easy’ It should be effortless and without conflict. If we are going to be in this game for 20+ years. I feel its important to make the experience as easy as we can. We shouldn’t be ‘fighting’ with the market, in the boxing ring, hoping, fearing and stressing.
There is RISK management, but SELF management is equally as important. When we are actively trading the market, we are free to make buy and sell decisions whenever we want. The tough part is consistently making the correct buy/sell decisions. These decisions come with conflict!
Taking Profits
So this is the hardest part of trading. It can be made simple if we accept a few hard facts.
1. You will never sell at the top.
2. Your going to be wrong when you sell.
This is fact. As soon as you sell, the stock will probably keep going up. You may look at it 5 months later and its up 100% since you sold it. Point is, when you sell, your probably going to be wrong. This creates a conflict.
As humans, we do not want to be wrong. We seek perfection, we want to nail the top! It can help explain why people run up stocks 20% to watch them come all the way back down to break even. The reason why they did not sell is because they are afraid to be wrong. By selling you are forced to draw a line under your mistake. But being wrong in the stock market is inevitable. (more…)
Lifestyle & Improvement
How to add an hour to your day (Harvard Business Review)
The Bucket List lie (Jonathan Fields)
Why all happiness and success fades away (Peter Shallard)
Why what you believe gets you nowhere (Peter Shallard)
How to really shake things up (James Altucher)
There are real-life advantages to being a strategic deceiver (New York Times)
Don’t let email run your life (CNN)
Great idea – change your smoke alarm batteries with daylight savings time (Lifehacker)
Yet another reason to get off your duff and exercise (BBC)
We make risk/reward decisions every day, all day long (Tech Crunch)
Tips from Thomas Edison (Open)
It’s looks like it is a really good thing I feel happy while trading (Forbes)
Natural approaches to combating the winter blues (Dr. John Briffa)
Ray Dalio Principles
Afew gems taken from Ray Dalio’s Principles. Here’s the link to the ‘Principles’ Ray Dalio founder of Bridgewater Associates published:
- I remained wary about being overconfident, and I figured out how to effectively deal with my not knowing. I dealt with my not knowing by either continuing to gather information until I reached the point that I could be confident or by eliminating my exposure to the risks of not knowing.
- While most others seem to believe that learning what we are taught is the path to success, I believe that figuring out for yourself what you want and how to get it is a better path.
- How much do you let what you wish to be true stand in the way of seeing what is really true?
- How much do you worry about looking good relative to actually being good?
- The most important qualities for successfully diagnosing problems are logic, the ability to see multiple possibilities, and the willingness to touch people’s nerves to overcome the ego barriers that stand in the way of truth.
- Know what you want and stick to it if you believe it’s right, even if others want to take you in another direction.
- In a nutshell, this is the whole approach that I believe will work best for you—the best summary of what I want the people who are working with me to do in order to accomplish great things. I want you to work for yourself, to come up with independent opinions, to stress-test them, to be wary about being overconfident, and to reflect on the consequences of your decisions and constantly improve.
Few more Seconds
Many of us have made trades after a quick look at our charts and later we look back and say “I wish I would have taken a little more time before I did that”.
In the world around us, everyone is always rushing to do everything especially in making a decision. I understand that sometimes you are forced to make quick decisions, however as a trader, you will regret quick decisions more times that you will congratulate yourself.
If we have committed to our risk management, money management, trading strategy along with our overall plan for our session, then I recommend that if you truly want your sessions to be more successful, take a few more seconds in every step.
Take a few more seconds to not just look at the charts, but to truly see and understand what you see. Take a few more seconds to determine where you entry point and exit point is and not just wing it.
Take a few more seconds to prepare and instead of just looking and deciding, clearly see and understand what you see and you will enhance your trading performance.
Six Rules of Michael Steinhardt
Michael Steinhardt was one of the most successful hedge fund managers of all time. A dollar invested with Steinhardt Partners LP in 1967 was worth $481 when Steinhardt retired in 1995.
The following six rules were pulled out from a speech he gave:
1. Make all your mistakes early in life: The more tough lessons you learn early on, the fewer (bigger) errors you make later. A common mistake of all young investors is to be too trusting with brokers, analysts, and newsletters who are trying to sell you something.
2. Always make your living doing something you enjoy: Devote your full intensity for success over the long-term.
3. Be intellectually competitive: Do constant research on subjects that make you money. Plow through the data so as to be able to sense a major change coming in the macro situation.
4. Make good decisions even with incomplete information: Investors never have all the data they need before they put their money at risk. Investing is all about decision-making with imperfect information. You will never have all the info you need. What matters is what you do with the information you have. Do your homework and focus on the facts that matter most in any investing situation. (more…)
Trading Wisdom Via Linda Raschke
It’s important as a trader to always be studying and sharpening your skills. Here is a short video jammed packed with concepts from Linda Raschke that all traders can use in their trading plan.
Key concepts from the video:
- The fewer decisions that you can make during the trading day, the better off you will be.
- All exit strategies should be based of your initial entry.
- 75% of trades test out best by taking your profits quickly.
- Shorter the time frame, the less justification for trailing stops.
- Trend followers often pay up to ensure they get a position.
Conscientiousness and Trading
Self-Efficacy. Self-Efficacy describes confidence in one’s ability to accomplish things. High scorers believe they have the intelligence (common sense), drive, and self-control necessary for achieving success in trading. Low scorers do not feel effective, and may have a sense that they are not in control of their trading. However, consideration needs to be given to motivation for success as complacency with the way things are may be the reason for a low score. - Orderliness. Traders with high scores on orderliness are well-organized and stick to routines and schedules. They tend to make trading plans and use them. Low scorers tend to be disorganized and scattered. Trading plans are viewed as not being important as rules are too confining.
- Dutifulness. This scale reflects the strength of a person’s ability to stick to a trading plan. Those who score high on this scale have a strong sense of moral obligation. Low scorers find trading plans overly confining and thus less likely to follow or even create one. Perhaps trading is seen as more of a “hobby” or just for “fun.”
- Achievement-Striving. Individuals who score high on this scale strive hard to achieve excellence. Their drive to be recognized as successful keeps them on track toward their goals. Low scorers are content to get by with a minimal amount of work, and might be seen by others as lazy.
- Self-Discipline. One of the largest contributors to success as a trader is self-discipline. High scorers are able to strictly adhere to a trading plan and stay on track despite distractions. Low scorers procrastinate, are easily discouraged and show poor follow-through. The lack of self-discipline will make your trading career rather short lived.
- Cautiousness. Cautiousness describes the disposition to think through possibilities before acting. High scorers on the Cautiousness scale take their time when making trading decisions and manage risk well. Low scorers often trade without deliberating alternatives and the probable consequences of those alternatives. Scoring too high on this scale can have its downside as trading opportunities may be missed for the discretionary trader. The more mechanical systems trader will account for this through their strategy.
Self-Efficacy. Self-Efficacy describes confidence in one’s ability to accomplish things. High scorers believe they have the intelligence (common sense), drive, and self-control necessary for achieving success in trading. Low scorers do not feel effective, and may have a sense that they are not in control of their trading. However, consideration needs to be given to motivation for success as complacency with the way things are may be the reason for a low score.