“Trade what you see” is a common mantra among short-term traders who formulate their trade ideas from charts. But do we process information from charts in accurate and non-biased ways?
An interesting set of studies reported in the 2003 Journal of Behavioral Finance suggest that perceptual biases in what we see can skew our trading and investment decisions.
Specifically, when investors see a chart that has a salient high point, they are more likely to want to buy that stock. When the chart depicts a salient low point, they are more apt to sell. In the words of the authors, “expectations about future prices assimilated to extreme past prices.”
The authors found that, when a chart contained a highly noticeable high point, traders listed more favorable features of the stock; when the chart depicted a salient low, more negative aspects of the stock were emphasized. Their analyses suggest that charts affect investors by providing them with enhanced access to either positive or negative information about the stock. In other words, our processing of the chart creates a selective bias in retrieval, leading us to view shares in artificially positive or negative ways.
It isn’t too far from the authors’ finding to a broader psychological hypothesis that *any* highly salient feature of a trading situation may skew information retrieval, perception, and action. For instance, the salient information may be a recent large gain or loss; a dramatic market move; or a piece of news. Trading what we see might be dangerous for the same reason that it is dangerous to trade what we hear or what we feel.
When one facet of a situation becomes highly salient to us, we overweight it in our perception and information processing. Our ability to view the entire situation in perspective is compromised. What is most obvious in a chart–or in our minds–may not be an accurate reflection of underlying supply and demand in a marketplace.
Archives of “mantra” tag
rssDay Trading is like Monopoly
I know a lot of traders who are just eeking by or breaking even at the end of the month. Many of these traders ask what they could be doing better or what my “secret” is.Monopoly. You buy 4 houses and sell them to buy a hotel. In other words, you find a simple, routine, monotonous way of trading and you just do it over and over. Most of the guys I talk to have a trading strategy, most of them have tested it. What they don’t have is the confidence to just stick with it. Trading shouldn’t be a roller coaster, but rather it should be routine like filling out TPS reports.Mental Toughness by Daniel Teitelbaum. In his book he states that you need to break down the walls that are stopping you from reaching success. He has you work on several mental exercises to help you focus on what you need to do. After all, if you knew that you had to take that GOOG trade this morning or your family would die you’d be plenty motivated to take the trade and to do it right.
So what’s the secret? It’s painfully simple – Day Trading (or any type of trading) is like
I think the main reason that most traders can’t stick with it is that they haven’t got enough mental focus. They get tired and sleep in past market open, or they become unsure of themselves so they fail to initalize the first trade of the day when the setup is right in front of them, or they rationalize that some piece of news or the other will do such and such to the market. All of these rationalizations are subconscious disruptions coming to the surface.
If you’ve ever failed to stick with your trading plan and end up taking the one losing trade of the day, I strongly recommend you check out
Make a committment to yourself, to your family and to your trading by taking the next 30 signals without deviating from your trading plan and I guarantee that you will learn the secret to your trading success – you.
The Trader’s Mindset-ABC
ABC
In the classic play-adapted movie Glengarry Glenn Ross, the successful big shot from Mitch & Murray is called in to pep talk a group of sad-sack real estate salesmen. His immortal manta for sales success is “ABC.: Always Be Closing.”
The trader’s version of this mantra is slightly different. For us it’s not Always Be Closing, butAlways Be Climbing.
What does it mean to “ABC,” or Always Be Climbing?
It means you always want to be in shooting distance of new equity highs. Not just from a cumulative profits standpoint, but from a knowledge standpoint as well.
Half the reason risk management is so important is to keep you in the mix, with new equity highs either currently being exceeded or not a far distance away. And when market conditions are challenging or sluggish, there’s no better time to book new highs on the knowledge and research side. (Many traders say their best research — and their biggest breakthroughs — were achieved in adverse conditions.)
The Climbing Mindset (more…)
Leibovit, The Trader’s Book of Volume
Mark Leibovit believes that volume analysis is “the closest thing we have to a real working ‘crystal ball’” in the markets. (pp. 425-26) In The Trader’s Book of Volume: The Definitive Guide to Volume Trading (McGraw-Hill, 2011) he outlines the fundamentals of volume analysis and introduces the reader to a broad range of volume indicators and oscillators.
We have all heard the mantra that volume precedes price. As Leibovit writes, “Market price trends do not happen in a vacuum; rather, it is the behavioral or programmed responses of traders and managers that result in the volume shifts that precede a price move. As the crowd mobilizes, as reflected in the volume numbers, its size and conviction will determine the direction and strength of the price movement. As the conviction of the crowd falters and the volume numbers pull back and diminish, so too will this impact the timing and direction of the trend.” (p. 24)
In analyzing the relationships between price and volume under various market regimes Leibovit pays particular attention to divergences where volume doesn’t confirm price action and signals a possible trend change. But he doesn’t rely solely on easy-to-spot divergences. He also introduces the reader to volume overlays, including moving averages, MACD, and linear regression. These overlays can help the trader see volume trends over a longer time frame.
And, of course, there is the plethora of indicators and oscillators, some 33 in all. Thirteen apply to the broad market; the rest can be used in the analysis of individual securities. In each case Leibovit explains the indicator’s or oscillator’s formulation, its use in trend confirmation, its potential divergence with price, and its use with other indicators. He also illustrates its practicality with a sample trade setup and entry. He closes each section with trader tips.
Throughout the book the author stresses that there is no “one size fits all” solution to selecting the appropriate volume indicators and oscillators. Volume analysis is an art, not a science. It depends on the instrument being traded as well as the trader’s time frame.
But The Trader’s Book of Volume goes a long way toward taking the mystery out of volume analysis. In roughly 450 pages, amply illustrated with MetaStock charts, it offers concrete ways to use volume to improve trading results.
If You Have to Be Right, Trouble Ahead
“I confess, I think about the future. So do my colleagues. If someone who’s spent decades investing doesn’t have an opinion about what lies ahead, there’s something wrong. I believe our clients want us to apply the benefit of our experience in gauging and reacting to the opportunities and risks that lie ahead.
But I have a mantra on this subject, too: “It’s one thing to have an opinion; it’s something very different to assume it’s right and act on that assumption.” We have views on the future. And they can cause us to “lean” toward offense or defense. Just never so much that for the results to be good, our views have to be right.”
–Howard Marks, Oaktree Capital Management January 10, 2012
Marks is not a technical trend follower, but wise words about not worrying about being right.
The Dead saw it too:
Drivin’ that train
High on cocaine
Casey Jones you better
watch your speed
Trouble ahead
Trouble behind
and you know that notion
just crossed my mind
Trouble with you is
The trouble with me
Got two good eyes
but we still don’t see
Come round the bend
You know it’s the end
The fireman screams and
The engine just gleams
Trading Against the Elephant
Once upon a time, there were six blind men. The blind men wished toknow what an elephant looked like. They took a trip to the forest and with the help of their guide found a tame elephant. The first blind man walked into the broadside of the elephant and bumped his head. He declared that the elephant was like a wall. The second one grabbed the elephant’s tusk and said it felt like a spear. The next blind man felt the trunk of the elephant and was sure that elephants were similar to snakes. The fourth blind man hugged the elephant’s leg and declared the elephant was like a tree. The next one caught the ear and said this is definitely like a fan. The last blind man felt the tail and said this sure feels like a rope. Thus the six blind men all perceived one aspect of the elephant and were each right in their own way, but none of them knew what the whole elephant really looked like.
Oftentimes, the market poses itself as the elephant. There are people who say that predicting the market is like predicting the weather, because you can do well in the short term, but where the market will be in the long run is anybody’s guess. (more…)
New Formula For Day Traders
Most people enter trading with the idea that they are going to make a lot of money. In other words, they have high expectations. There is nothing inherently wrong with that idea. In fact, we need motivation, and making a lot of money can be a great a motivator. Unfortunately, many traders also have low self-confidence. And are not profitable or not trading at the level they desire or are capable of.
This is a fairly common condition that can be expressed in the simple equation: High Expectations + Low Self-Confidence = Poor or Inconsistent Performance.
The new formula becomes: Focus on Process Goals + High Self-Confidence = Better and More Consistent Performance. (more…)
Words of Wisdom
These generally brief phrases often include such pearls of wisdom as:
“Buy low, sell high.”
This maxim describes profitable trading in a nutshell and represents what every successful trader aspires to do. Of course, this is much easier said than done.
“Let your profits run, but cut your losses short. “
Allowing a winning position to continue making profits while taking losses quickly can make up a solid trading strategy in itself, and it is a key element of just about any good money management plan.
Many successful traders apply this as a trading rule in their trading plans in one form or another, perhaps by having a minimum risk reward ratio where the anticipated reward on a trade is always greater than the risk taken.
“Sit on your hands when you don’t have a clue.”
Knowing when you do not know where the market is going and discerning when to stay out of the market because of difficult trading conditions or because of your individual portfolio situation can save a trader considerable money and frustration.
Remember, good trading opportunities eventually arise for those who wait for them patiently.
“No one ever went broke taking a profit.”
This seems a wise and yet somewhat limiting expression perhaps. Famous trader Jesse Livermore used to say this and then finish with “but no one ever got rich taking three or four points out of bull market”. Taking profits will always add to your account, but by “letting profits run”, a substantially higher profit can often be had.
“It’s never too low to sell or too high to buy.”
Typically, markets will continue moving in the direction of the general trend. When a high or low is made, often a sufficient amount of momentum will propel the price to an ever higher high or lower low.
“Price discounts all.”
The mantra of technical analysts, the saying refers to the belief that news about any event related to the trading instrument – whether it is related to current events or supply and demand – will already be included in the price of a currency.
“All news is old news.”
A variation on “Price discounts all”, this saying refers to the idea that the market has already moved to factor information into the currency pair’s exchange rate regardless of what the news that came out was.
“Buy the rumor, sell the fact.”
Buying the rumor means going long before a bullish news item ever makes it to the news wires for fundamental analysts to mull over. Trading activity then ensues based on this rumor indicating that an item of importance will soon be released. The trader wise to the rumor can take advantage of the release of this news by selling out their position once it becomes public.
“Plan your trade and trade your plan.”
Trading does not favor the scatterbrained over the long term, so having a comprehensive and objective trading plan which can be easily followed and implemented makes up a key component of any successful trader’s methods.
“The trend is your friend.”
Keeping abreast of the major trend in the market and following it by positioning according to its overall direction will tend to give a trader an edge.
“Markets go up the stairs and down the elevator.”
This saying refers to the slow and plodding nature with which markets often go up, whereas when prices decline, they tend to do it in a much faster and abrupt way. While less of a factor in the forex market, this is especially true of stock markets.
Basically, all of the above sayings contain valuable advice and trading wisdom that can be useful for just about anyone involved or thinking about getting involved in trading forex or any other market.
We Dare to Challenge
Always Remember –The principles of successful stock speculation are based on the supposition that people will continue in the future to make the mistakes that they have made in the past.
Yes. Its confidence in our work than any aberration. None else in 100 crore Indians have told u about the bear onslaught, not only on Indian Exchanges but across the Globe. Check our web-site, with normal eyes or with magnifiers too. We are cautioning since Last Week about the emerging Bear-spell.
Yesterday under the caption “Dil Se” this was our adverbatim: Time Theory Indicates freefall could start tomorrow and heavy selling across the globe in next 4-5 sessions. On Rise SELL-SELL-SELL is my Mantra.
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I don’t know if the readers have at least spent 5-10 minutes to read and act upon. But all our subscribers have minted money by following shorting-calls. The newly enrolled members must have earned back their entire fee paid to me in single session.
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Others are singing:
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Anirudh Sethi/Baroda
Winners Trade to Win
As you already know, I am not a slave to conventional wisdom. It is my belief that most popular beliefs held by the masses are not wise at all. This applies to all walks of life, not just the stock market.
The latest bit of unwise conventional wisdom is the idea that one must “focus on not losing money in order to make money”. Play it safe and protect your capital has been a popular mantra over the past month. What a load of crap.
You know what happens when you focus on not losing money? You lose it. Either that or you make meager gains (all hail consistency, as in consistently average!). It’s akin to an athlete playing not to get injured. That is when you get hurt. The team that plays not to lose rarely wins.
In trading, playing not to lose will cause you to pass up on good trades and scare you out of trading volatile, yet lucrative markets. If you have put in the blood, sweat and tears that accompany hard work and dedication, know what you are doing, and have a sound methodology and edge, don’t ever play not to lose.
Note that this doesn’t mean you throw caution to the wind. On the contrary, a trader must be vigilant about managing risk, position size and ones emotions. These three factors, along with having an edge, allow one to play to win, rather than lose, and put on winning trades.