Archives of “human nature” tag

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Booking Losses Before They Occur

  
  Education
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There is a meaningful difference between trading to win and trading to not lose. The average person feels more psychological pain over a loss than they feel pleasure over a gain–particularly once they have already “booked” that gain mentally.

When we enter a trade, we expect to be paid out. Mentally, we book a potential profit. When a loss materializes, it is the unexpected event–and we respond more strongly to the unexpected than to the familiar.

What is the solution to this dilemma? The answer, surprisingly, is to book losses before they occur.

It’s human nature to not want to think about such unpleasant things as losses. But by knowing our maximum possible loss in advance and by mentally rehearsing what we’ll do on those occasions when the loss occurs, we normalize the losing process. That divests it of its emotional grip.

We can never eliminate loss from life or trading; nor can we repeal the basic uncertainties of markets. What we *can* do is develop an edge in the marketplace and, over the course of many trades, let that edge accumulate in our favor.

Trend Following Lessons from Jesse Livermore

  
  Education
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Remember, you do not have to be in the market all the time.
Profits take care of themselves – losses never do.
The only time I really ever lost money was when I broke my own rules.
Throughout all my years of investing I’ve found that the big money was never made in the buying or the selling. The big money was made in the waiting. (more…)

Trading Wisdom From Jesse Livermore

  
  Education
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Don’t Avoid Exit Strategies

“It was the same with all. They would not take a small loss at first but had held on, in the hope of a recovery that would let them out even. And prices had sunk and sunk until the loss was so great that it seemed only proper to hold on, if need be a year, for sooner or later prices must come back. But the break shook them out, and prices just went so much lower because so many people had to sell, whether they would or not.”
Jesse Livermore

Hope, Fear and Greed

“The spectator’s chief enemies are always boring from within. It is inseparable from human nature to hope and to fear. In speculation when the market goes against you, you hope that every day will be the last day and you lose more than you should had you not listened to hope. And when the market goes your way you become fearful that the next day will take away your profit, and you get out too soon. Fear keeps you from making as much money as you ought to. The successful trader has to fight these two deep-seated instincts. He has to reverse what you might call his natural impulses. Instead of hoping he must fear; instead of fearing he must hope. He must fear that his loss may develop into a much bigger loss, and hope that his profit may become a big profit.”
Jesse Livermore

Quotes from Trading Legends :Paul Tudor Jones-Gary Bielfeldt-Richard Dennis

  
  Education
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Paul Tudor Jones:
“We have tested every system under the sun and, amazingly, we have found one that actually works very well. It is a very good system…(under the realm of) trend following. The basic premise of the system is that markets move sharply when they move. If there is a sudden range expansion in a market that has been trading narrowly, human nature is to try and fade that price move. When you get a range expansion, the market is sending you a very loud, clear signal that the market is getting ready to move in the direction of that expansion.”
“The most important rule of trading is to play great defense, not great offense.”
“I don’t really care about the mistakes I made three seconds ago in the market. What I care about is what I am going to do from the next moment on. I try to avoid any emotional attachment to a market.”
” I always believe that prices move first and fundamentals come second.”
Gary Bielfeldt:
“The best thing that anyone can do when starting out is to learn how a trend system works. Trading a trend system for a while will teach a new trader the principle of letting profits run and cutting losses short. If you can just learn discipline by using a trend-following system, even temporarily, it will increase your odds of being successful as a trader.”
Richard Dennis:
“You should expect the unexpected in this business; expect the extreme. Don’t think in terms of boundaries that limit what the market might do. If there is any lesson I have learned in the nearly twenty years that I’ve been in this business, it is that the unexpected and the impossible happen every now and then.”
“A good trend following system will keep you in the market until there is evidence that the trend has changed.”
“The correct approach is to say: ‘This structure is up, and this structure means no more, but never that this structure means up this much and no more’.”
“I could trade without knowing the name of the market.”
“The market being in a trend is the main thing that eventually gets us in a trade. That is a pretty simple idea. Being consistent and making sure you do that all the time is probably more important than the particular characteristics you use to define the trend. Whatever method you use to enter trades, the most critical thing is that if there is a major trend, your approach should assure that you get in that trend.”

Why System Trading Is Ultimately Discretionary

  
  Education
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Successful system trading, in spite of the financial rewards, can be frustrating.  A quantified mechanical model will take many decisions off the table.  Yet, various issues, particularly the psychological approach to the issues, will always be in play.

Ed Seykota in the book, “Market Wizards,” writes, “Systems trading is ultimately discretionary.  The manager still has to decide how much risk to accept, which markets to play, and how aggressively to increase the trading base as a function of equity change.  These decisions are quite important, often more important than trade timing.”

It seems most sophisticated traders are aware of the fact that a system needs to be properly quantified and tested before trading. The sample size of the trades needs to be large. These traders are familiar with the terms of curve fitting and optimization. I wonder, however, how many traders continue to study the model as they trade their equity. How many understand the logic behind the entries, stops, exits, and money management techniques. How many are adjusting position size to meet expanding and contracting volatility and changes in market correlation. (more…)

On Trading Psychology

  
  Education
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The speculator’s chief enemies are always boring from within. It is inseparable from human nature to hope and to fear. In speculation when the market goes against you you hope that every day will be the last day — and you lose more than you should had you not listened to hope — to the same ally that is so potent a success-bringer to empire builders and pioneers, big and little. And when the market goes your way you become fearful that the next day will take away your profit, and get out — too soon. Fear keeps you from making as much money as you ought to. The successful trader has to fight these two deep-seated instincts. He has to reverse what you might call his natural impulses. Instead of hoping he must fear; instead of fearing he must hope. He must fear that his loss may develop into a much bigger loss, and hope that his profit may become a big profit. It is absolutely wrong to gamble in stocks the way the average man does.

5 Major Trading Pitfalls

  
  Education
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2dl87puPitfall #1. Betting the farm. Let’s be realistic. Not every trade is going to be a winner. Here is a simple rule for you to remember. Never commit more than 10% to any one position. When I was trading in the pits in Chicago I heard for the first time about the “RIOTRADE”. Simply put, you take a huge position in the market. If it works out, you are a hero. If you lose, you leave home and head for Brazil. Again, NEVER BET THE FARM ON ANY POSITION.

Pitfall #2. Planting too few seeds. This one goes hand in hand with the first pitfall. The key here is diversification and following several markets. Ken watches 30 markets and looks for profit opportunities in each one as they occur. PLANT MORE SEEDS AND YOU CAN ENJOY MORE WINNERS.

Pitfall #3. Jumping the gun. Patience, patience, patience. This is perhaps one of the toughest things for traders to remember, particularly after they have taken some good money out of the market. JUMPING INTO A MARKET BEFORE ALL INDICATORS ARE POSITIVE CAN CAUSE UNNECESSARY LOSSES.

Pitfall #4. The hope trap. This is one of those pitfalls that goes completely against human nature and it is the biggest account killer. What I am talking about is hanging onto a losing position in the desperate hope that it will turn around. A SIMPLE SOLUTION IS TO ALWAYS PLACE A STOP ON EVERY MARKET POSITION AND DO NOT CANCEL IT! (more…)

Magical thinking

  
  Education
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Magical thinking describes subjective speculation about how markets will act. It is difficult to know for sure how significant a role intuition about the likelihood that investments will do well or poorly plays in peoples? decisions to invest. We are trying to assess innermost thoughts about money and self worth which most people feel they do not have to explain or justify to anyone. However, we can label these patterns of thought as magical thinking. Most investors have occasional feelings or intuitions that certain trading actions will bring them luck even if they know logically the actions can have no effect on their fortunes. Playing a hunch just because it feels right seldom makes traders rich. Yet proof that it’s human nature to indulge in magical thinking abounds:

  1. It has been shown that people will place larger bets on a coin that has not yet been tossed than on a coin that has already been tossed, but the outcome of the toss has yet to be revealed.
  2. If asked how much money they would demand to part with a lottery ticket they already hold, most ticket holders give a figure over four times greater than if they themselves chose the lottery number on the ticket. Apparently, at some magical level people think that they can influence a coin that has not yet been tossed and influence the likelihood of winning the lottery by choosing the number.
  3. People are capable of thinking, at least on some intuitive level, If I buy a stock, then it will go up afterwards or If I buy a stock, then others will probably want to buy the stock, too, because they are like me or I have a hot hand lately; my luck is with me. Such magical thinking is likely, in a subtle way, to contribute to the overconfidence that may help the propagation of speculative bubbles.

Trading Wisdom – Trend Following

  
  Education
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For most people, trend following is extremely counter-intuitive. Why? Because it’s human nature to look for bargains before buying. People tend to buy when it’s low and sell when it’s high. But, how many are bold enough to do the opposite by buying high and selling even higher? My guess is; not many. And what about risk management? Yeah, what about it? Remember the dot com bubble era? Out of all the people that got caught up in that frenzy, how many do you think even had a risk management plan in place? Hmmm…
Back in those days, I’ve never even heard of a stop loss. We all just jumped in blindly with dreams of making it big. And a lot of us got burned. Really bad. All the warning signs where there and yet we chose to ignore it. We foolishly rode our stocks all the way down and in the process, destroying every little glimmer of hope that we had for a turn-around. A lot of us lost 80-90% of our so-called “long term investment.” It’s tragic. But we can all learn from this valuable lesson.
Trend following is a life philosophy. It works in trading and it also works in daily life. It’s simply a matter of sticking with what works and getting rid of what’s not. That’s it! It’s a deceptively simple little system that can be applied into all aspects of your life. And if you follow this line of thought, I guarantee that you will see dramatic improvements. You just can’t help but to get better because ultimately, what are you left with in the end? That’s right, WINNERS!

How to Trade in Stocks by Jesse Livermore

  
  Education
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howtotrade
I will just write what  the market is going to do tomorow, for that just have some patience  for time being till then  few quotes from Jesse Livermore’s book How to Trade in Stocks (one of my favorites, originally written in 1940). Pay particular attention to the first quote!

  • “Successful traders always follow the line of least resistance – follow the trend – the trend is your friend”
  • “Wall Street never changes, the pockets change, the stocks change, but Wall Street never changes, because human nature never changes”
  • “Just because a stock is selling at a high price does not mean it won’t go higher” (more…)
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