“I spend my day trying to make myself as happy and relaxed as I can be. If I have positions going against me, I get right out; if they are going for me, I keep them.”
Paul Tudor Jones
A loss never bothers me after I take it. I forget it overnight. But being wrong – not taking the loss – that is what does damage to the pocketbook and to the soul.”
Jesse Livermore
Aswath Damodaran writes:
If one extreme of the numbers/narrative spectrum is inhabited by those who are slaves to the numbers, at the other extreme are those who not only don’t trust numbers but don’t use them. Instead, they rely entirely on narrative to justify investments and valuations. Their motivations for doing so are simple.
1. Story telling is a powerful attention getter/keeper: Research in both psychology and business point to an undeniable fact. Human beings respond better to stories than to abstractions or numbers, and remember them for longer. After all, the Harvard Business School has taken story telling almost to an art form with its cases, tightly wound narratives that are supposed to convey larger lessons.
2. Unrestrained creativity: “Creative” people through the ages have always fought back against any restraints on their creativity, especially those imposed by those that they view as less imaginative than they are.
3. The Creative Superiority Complex: Just as numbers people intimidate with mounds of numbers, good narrators can browbeat “bean counters” with superior story telling, especially if they can back their stories up with personal experience.
Don’t trade off storytelling. Just don’t do it.
I was reading this article and started thinking about the ten scariest things in trading: The Top Ten Things That Make Horror Movies Scary.
1. Fear of Death. This is the ultimate fear, both existentially and psychologically. It isn’t really a horror movie if people don’t get killed.
In Trading: fear of depletion of assets.
2. The Dark. From our earliest childhood we are afraid of the dark – not the dark itself, but what it hides. It makes horror movies even scarier to watch them in a darkened theater, or a dark living room, right?
In Trading: not knowing enough news
3. Creepy, Crawly Things. Snakes, spiders, rats, and other crawling things are scary in and of themselves, but when they touch the skin, in the dark, it amplifies this common phobia.
In Trading: monthly expenses
4. Scary Places. Horror movies are full of scary places – graveyards, old houses, overgrown forests, dungeons, attics, basements. These are dark places, where evil things can hide.
In Trading: instruments or markets that one had very bad experiences with.
5. Disfigurement. Many horror movies feature grotesquely disfigured antagonists (think Frankenstein’s monster, the Phantom of the Opera, zombies). Studies in early development have found that young infants will react with fear to asymmetrical or disordered faces. (more…)
Nassim Nicholas Taleb, the former trader and well known author of The Black Swan and Fooled By Randomness, has put together a new book of aphorisms, entitled The Bed of Procrustes. The Procrustes of Greek mythology was a cruel fellow who stretched or shortened people to make them fit his inflexible bed. Mr. Taleb’s new book addresses the modern day ways in which “we humans, facing limits of knowledge, and things we do not observe, the unseen and the unknown, resolve the tension by squeezing life and the world into crisp commoditized ideas, reductive categories, specific vocabularies, and prepackaged narratives, which, on the occasion, has explosive consequences.” In other words, we live under self-imposed delusions. Here are a few of the aphorisms that expose our delusionary thinking, many of which can be applied to trading. But, in order to understand their application, we must first step out of our delusional state.
The stock market, in brief: participants are calmly waiting in line to be slaughtered while thinking it is for a Broadway show.
You are rich if and only if money you refuse tastes better than money you accept.
The best test of whether someone is extremely stupid (or extremely wise) is whether financial and political news makes sense to him.
You can be certain that the head of a corporation has a lot to worry about when he announces publicly that “there is nothing to worry about.”
The main difference between government bailouts and smoking is that in some rare cases the statement “this is my last cigarette” holds true. (more…)
Not being a hero means less glory, but ultimate far more profit, because if you have the patience to wait for the (non-heroic) optimal moment — which is almost never the initial turning point, which heroes love to call out — you can more effectively scale up and put leverage to work in your favor.
Not being a hero in respect to adverse price action — dumping positions quickly that aren’t working out as planned — also lets you safely deploy more size in general, which in turn allows for more effective pyramiding and greater profits from the very same move the hero took with less size (because he got chewed up so many times trying to catch the damn turn).
And of course, there are the invaluable merits of pure survival and never going down with the ship (as heroes all too often do)…
A stop loss
A trailing stop
A price target
A time stop
Fear
Ego
There is an old parable known as “the blind men and the elephant.” In this story, there are four blind men who are asked to determine what an elephant looks like. The first blind man feels the leg of the elephant and says, “The elephant is like a tree because it is large and round like a pillar.” The second man feels the tail and says, “The elephant is like a rope because it is small and coarse.” The third man feels the ear and says, “The elephant is like a fan because it is flat and thin.” The fourth man feels the trunk and says, “The elephant is like a snake because it is long and curves.”
A king comes to the four blind men and says, “all of you are correct.” The king goes on to explain that each one had drastically different descriptions of the elephant because they are all feeling different parts. So, they are all correct. The elephant has all the features described by the four blind men.
This parable is a good analogy describing different types of profitable traders. Many of the arguments that erupt between traders on social media are due to not understanding the others time frames or not understanding the other trader’s position sizing, stop loss level, or expected winning percentage. Also too many cult members of Elliot Wave, Trend Following, Market Profile, Day Traders, and option traders etc. think their way of trading price action is the only way when their way is only one of many paths to profitability. There are as many ways to trade price action to be profitable as there are profitable traders.
The elephant in the room is that profitable traders do a few things in common: (more…)
