Archives of “judgment” tag

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Thoughts on Human Nature and Speculation – Humphrey B. Neil

  
  Education
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The chapter entitled, “More Thoughts on Human Nature and Speculation”, includes some classic thinking on aspects of human psychology which prevent us from operating profitably in the markets. A passage from Neil on the dangers of greed follows this line of thought:

“…I have watched traders in brokers’ offices with deep interest, and have tried to learn the traits that crippled their profits. The desire to “make a killing”—greed—has impressed me particularly.

Perhaps this desire to squeeze the last point out of a trade is the most difficult to fight against. It is also the most dangerous. How often has it happened in your own case that you have entered a commitment with a conservatively set goal, which your judgment has told you was reasonable, only to throw over your resolutions when your stock has reached that point, because you thought “there were four more points in the move?”

The irony of it is that seemingly nine times out of ten (I know, for it has happened with me) the stock does not reach your hoped-for objective; then—to add humiliation to lost profits—it goes against you for another number of points; and, like as not, you end up with no profit at all, or a loss.

Maybe it would help you if I told you what I have done to keep me in my traces: I have opened a simple set of books, just as if I were operating with money belonging to someone else. I have set down what would be considered a fair return on speculative capital, and have opened an account for losses as well as for gains, knowing that the real secret of speculative success lies in taking losses quickly when I think my judgment has been wrong.

When a commitment is earning fair profits, and is acting as I had judged it should act, I let my profits run. But, so soon as I think that my opinion has been erroneous, I endeavor to get out quickly and not to allow my greed to force me to hold for those ephemeral, hoped-for points. Nor do I allow my pride to prevent an admission of error. I had rather, by far, accept the fact that I have been wrong than accept large losses…”

This looks like worthwhile study material, so read on and don’t mind the fact that most of the references date back to 1930. Time honored wisdom is the best, and sound practices are applicable in any age.

Did You Know

  
  Education
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Know that the market never lies.I have met so many liars in the stock market business over the past 15 years. I think that many of them actually believe what they are saying but, the truth is, people’s judgment is clouded by greed.The stock market is a giant polling mechanism allowing people to cast their opinion with their money. If you think the stock market is going up, you buy. If you are right, you make money. It is a simple and powerful machine that determines value and, since no one wants to lose money, it is very efficient at telling the truth.The truth may change from one moment to the next but one thing will not change. Arguing against the market is a fast way to lose money.

7 rules for dealing with risk

  
  Education
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risk71. Overcome Fear. Fear clouds judgment.
2. Remain Flexible. Surprise outcomes may require a change of plan.
3. Take reasoned risks. Risk can be good if the odds are in your favour.
4. Prepare to be wrong. Plan in advance how to deal with unfavourable outcomes.
5. Actively seek reality. See the world as it is rather than as you want it to be.
6. Respond quickly to change. If your plan calls for some action in the face of unfavourable outcomes, don’t delay.
7. Focus on decisions, not outcomes. In the face of risk, good choices can have bad outcomes, and bad choices can have good outcomes.

From :Inside the Mind of the Turtles :Curtis M Faith

Are You A Subjective or Objective Trader?

  
  Education
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Subjective: Based on or influenced by personal feelings, tastes, or opinions.Proceeding from or taking place in a person’s mind rather than the external world.

Subjective traders they are intertwined with their trades.Their signals are generally entering out of greed and exiting based on their own internal fear. The believe in their opinions more than the actually price action. They base trades off of whether they are feeling good or bad about a particular trade. A subjective trade comes out of the imagination of the trader, from their own beliefs, opinions, and what “should” happen in their view. Many times reality is not even cross checked as a reference, and if it is the subjective traders sees what they want to see instead of what is really going on. Their compass is their emotions and they have internal goals other than making money.

Objective: (Of a person or their judgment) not influenced by personal feelings or opinions in considering and representing facts. Having actual existence or reality. (more…)

Learn to trust yourself

  
  Education
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Trust your plan and trust your powers of judgment. Furthermore, keep this sense of confidence in yourself throughout the duration of your position in the market. Loosing confidence in yourself and your trading plan while holding a market position most often results in losses. If doubt is haunting you and you cannot control, it is best to simply offset your position and be clear of the market. Reversing or altering your trading plan in mid-trade is the last thing you should do.

The most important thing to remember about trading with confidence is this: No matter how diligent or thorough your research into a particular trade, you may still end up wrong about the direction of the market. This is true for everyone, nobody is right every time. You might be wrong this time, but your trading plan (with clearly defined loss thresholds) will save you. So, in the final analysis, it isn’t always being right about the direction of the market that will make you a success. Instead, it is having the discipline to stick to your trading plan that will.

Eternal Truths About Trading Success

  
  Education
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truthToday afternoon  once again  read  small book from the late 1800s written by Dickson G. Watts and reprinted by Traders Press. Entitled “Speculation as a Fine Art and Thoughts on Life”, the book begins with a description of the “qualities essential to the equipment of a speculator” (p. 8). Here is the author’s perspective, written well over a century ago:

* Self-Reliance – “A man must think for himself, must follow his own convictions…Self-trust is the foundation of successful effort.”

* Judgment – “…equipoise, that nice adjustment of the faculties one to the other…is an essential to the speculator.”

* Courage – “…confidence to act on the decisions of the mind…be bold, still be bold; always be bold.”

* Prudence – “The power of measuring the danger, together with a certain alertness and watchfulness, is very important.”

* Pliability – “The ability to change an opinion, the power of revision.” (more…)

Battle of Waterloo and Trading

  
  Education
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I often talk about the Battle Of Waterloo and how it relates to trading in general and specifically strategy development. If you don’t know the battle (which I recommend reading about if you have time), just listen to this once popular country song and you’ll get a sense to why I think this is so important.

While I’m no historian, I do think traders can learn a lot about trading through learning about important battles in history. The Battle Of Waterloo offers a great example as it offers many lessons for us to consider:

  1. Make your planning and risk analysis commensurate with the size of your project. For major endeavors, contingency plans are critical.

  2. Know when to cut your losses if necessary. Don’t let your desire to succeed be the enemy of good judgment.

  3. Be sure that the justification is clear for your project, and that your entire team is sold.

  4. Don’t become over-confident, especially after many successes. Remember the basic principles.

  5. Never attempt an unpopular endeavor in isolation.

  6. Don’t make enemies. You are only as good as your allies.

  7. Adopt leader style politics, not the Machiavellian style. Look for the win-win.

Many of these lessons apply to good trading, especially the ones about the importance of having contingency plans, knowing when to cut losses, having clear justifications for your trades, the importance of avoiding overconfidence and finally how important it is to attack from a strong position like having plenty of capital and cash reserves.

Needless to say, every trading strategy has their own weaknesses. So, what the most common weakness I’ve found? That’s easy – human error. That’s right, usually most strategies that have been backtested and proven to work continue to work well unless we do things to either deviate from the plan and/or we apply leverage to it rendering it extremely vulnerable. It is fairly often that I see traders come forward with a hot strategy they’ve used and are in the process of levering it up, creating havoc and exposing themselves to great risk. There is good reason for the expression – leverage always kills. In my experience, that has been true. Beyond that, many strategies are based on things that don’t account for the constantly evolving nature of the market. (more…)

Jesse Livermore’s Money Management Rules

  
  Education
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If you haven’t read this book “Reminiscences of a Stock Operator” written in 1923, read it! It is purpordetly the unofficial biography of one of the greates traders ever; Jesse Livermore.  The rules Jesse followed back at the turn of the last century are still very much applicable today.

1) Don’t lose money. Don’t lose your stake. A speculator without cash is like a store-owner with no inventory. Cash is your inventory, your lifeline, and your best friend. Without cash, you are out of business. Don’t lose your line. There is no place in speculating for hoping, for guessing, for fear, for greed, for emotions. The tape tells the truth.

2) Always establish a stop. A successful speculator must set a firm stop before making a trade and must never sustain a loss of more than 10 percent of invested capital. I have also learned that when your broker calls you and tells you he needs more money for a margin requirement on a stock that is declining; tell him to sell out the position. When you buy a stock at 50 and it goes to 45, do not buy more in order to average out your price. The stock has not done what you predicted; that is enough of an indication that your judgment was wrong. Take sour losses quickly and get out. Remember, never meet a margin call, and never average losses. Many times I would close out a position before suffering a 10 percent loss. I did this simply because the stock was not acting right from the start. Often my instincts would whisper to me: “J.L., this stock has a malaise, it is a lagging dullard. It just does not feel right,” and I would sell out of my position in the blink of an eye. I absolutely believe that price movement patterns are repeated and appear over and over with slight variations. This is because humans drive the stocks, and human nature never changes. Take your losses quickly. Easy to say, but hard to do. (more…)

10 Great Quotes of Jesse Livermore

  
  Education
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“Do not anticipate and move without market confirmation—being a little late in your trade is your insurance that you are right or wrong.” -Jesse LivermoreJL-ASR

“The good speculators always wait and have patience, waiting for the market to confirm their judgment.” -Jesse Livermore

“{Limit} interest in too many stocks at one time.  It is much easier to watch a few than many.” -Jesse Livermore

“Experience has proved to me that the real money made in speculating has been: “IN COMMITMENTS IN A STOCK OR COMMODITY SHOWING A PROFIT RIGHT FROM THE START. ” -Jesse Livermore

“As long as a stock is acting right, and the market is right, do not be in a hurry to take a profit. You know you are right, because if you were not, you would have no profit at all. Let it ride and ride along with it. It may grow into a very large profit, and as long as the “action of the market does not give you any cause to worry,” have the courage of your convictions and stay with it.” -Jesse Livermore

“It is foolhardy to make a second trade, if your first trade shows you a loss. ” “Never average losses. ” Let that thought be written indelibly upon your mind.” -Jesse Livermore

“One should never sell a stock, because it seems high-priced.” -Jesse Livermore

“Profits always take care of themselves but losses never do. ” The speculator has to insure himself against considerable losses by taking the first small loss. In so doing, he keeps his account in order so that at some future time, when he has a constructive idea, he will be in a position to go into another deal, taking on the same amount of stock as he had when he was wrong.” -Jesse Livermore
“It is significant that a large part of a market movement occurs in the last forty-eight hours of a play, and that is the most important time to be in it.” -Jesse Livermore

“A speculator should make it a rule each time he closes out a successful deal to take one-half of his profits and lock this sum up in a safe deposit box. The only money that is ever taken out of Wall Street by speculators is the money they draw out of their accounts after closing a successful deal.” -Jesse Livermore

Self awareness for Traders

  
  Education
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1) the recognition that our thinking and our emotions are intertwined and both influence our perception and judgment that leads to our decisions and actions (this view also happens to be consistent what the leading brain scientists are now saying)

2) much of our motivation – the intertwined thinking/emotion that drives our behavior – is actually subconscious, e.g. we assume we are trading the market but on other levels we are also trading our P&L and our feelings about our P&L  (and what our P&L represents to us) is just one example.

3) when we understand (self-awareness) the underlying/subconscious motivation for our behavior we are in a better position to choose an alternative.

Obviously, nothing can guarantee change or improvement (contrary to many claims made by pseudo “experts”), but at least an approach that emphasizes expansion of awareness puts the odds in your favor.

And I have to play the probabilities here. Because more people tend to respond to a change process that includes an emphasis on self-awareness, I choose to use this  approach in my own trading and in my coaching….it simply has the highest probability
of actually helping.

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