It is common for traders to complain of a lack of confidence in their trading, but very often it is overconfidence that does them in. Overconfidence results from a lack of appreciation of the complexity of markets and an underestimation of the challenges of trading them successfully. In a sense, overconfident traders lack respect for the markets. They think that reading about a few setups or buying the newest software will prepare them to make money. Overconfident traders don’t want to work their way up the trading ladder: they resist the idea that screen time is the best teacher. They also chafe at the idea of growing their account. Rather than start with one contract and wait until they’re profitable before trading larger size, they want big positions—and profits—right away. Because they’re so eager to make money—and so sure they can make it—overconfident traders generally trade impulsively. They won’t wait for the setup to form; they’ll jump the gun—and get whipsawed in the process. Instead of being patient and waiting for short-term patterns to align with longer-term patterns, they will take every trade, enriching their brokers in the process. (more…)
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The idea of IF-THEN scenarios in trading is often misconstrued one. I often see it being interpreted in a sense of predicting stock’s action. A trader trying to apply it in this sense tries to think in terms ‘If a stock does this, it’s going to do that“. This approach is more acceptable if a trader thinks in terms of probability instead of certainty in which case the above sentence becomes “If a stock does this, it’s likely to do that“. Nothing’s wrong with that as long as a trader realizes that probability is just that – a probability that is going to work in a statistically valid number of samples but will not predict the outcome of each given case.
I, however, apply IF-THENs in a slightly different manner. For me it’s about defining my own action in response to market fluctuations. My IF-THEN is a scenario where IF is what market does and THEN is what I do in response. My intepretation thus becomes ‘If a stock does this, I do that”.
Certainly, it’s a derivation of the version above – you can arrive to it from “if a stock does this then it’s likely to do that, so I am going to react in such and such way”. My version is just more cut and dry.
What are the advantages of this aproach and why do we need to build a set of such scenarios? (more…)