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Once You Own It, It Owns You

  
  Education
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Dr. Richard Peterson, in a recent post, provided an excellent example of the endowment effect: how we lose our objectivity once we take ownership of an asset. He brought pens to a seminar, but only had enough for half the audience. He then asked the group that received the pens to indicate how much they’d be willing to sell them to those who did not receive them. He also asked the group without pens how much they’d be willing to spend for one of the pens. The audience members without pens were willing to spend an average of $1.35 for a pen (which is close to the pen’s intrinsic value), but the members who received pens insisted on a selling price averaging $8.80.

Once the audience members owned the pens and considered them their own, they systematically overvalued the pens’ worth. Similarly, once we take a position in the market, it becomes *our* position and we value it simply because we have made it our own. That makes it extremely difficult to take a loss on our position, even when that is what our trading plans call for.

It’s a bit like houses in the current weak housing market: many owners are unwilling to reduce the selling prices of their properties because they value their homes too much. Once we own the asset, it can own us by coloring our perceptions and actions. (more…)

Traders , keep notes on the following

  
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*  How you prepared for the day/week:  What was your market preparation?  What research did you conduct or consume?  What did you read?  What conversations did you have, and with whom?  How did you eat?  Sleep?  Exercise?  Prepare yourself mentally?

*  How you generated your trading ideas:  Where did the ideas come from?  What was the process that led to the ideas?  What made them good ideas?  What gave you “edges” in your trades?
*  How you expressed your ideas:  What market(s) did you use to express your views?  What instruments?  How did your expressions provide you with superior risk/reward?  If you held multiple positions, how did you size them relative to each other and gauge their correlations?
*  How you managed your positions:  What kind of trade planning did you do?  How did you size positions and gauge your risk taking?  How did you manage your risk?  What led you to scale into or out of your positions?
*  How you managed your performance:  How did you review your performance?  What did you learn?  How did you use your learning to improve your future performance?   (more…)

Successful trading is about making money…not about being right

  
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According to Mark Douglas…

In any particular trade you never really know how far prices will travel from any given point. If you never really know where the market may stop, it is very easy to believe there are no limits to how much you can make on any given trade. From a psychological perspective this characteristic will allow you to indulge yourself in the illusion that each trade has the potential of fulfilling your wildest dream of financial independence. Based on the consistency of market participants and their potential to act as a force great enough to move prices in your direction, the possibility of having your dreams fulfilled may not even remotely exist. However, if you believe it does, then you will have the tendency to gather only the kind of market information that will confirm and reinforce your belief, all the while denying vital information that may be telling you the best opportunity may be in the opposite direction.

There are several psychological factors that go into being able to assess accurately the market’s potential for movement in any given direction. One of them is releasing yourself from the notion that each trade has the potential to fulfill all your dreams. At the very least this illusion will be a major obstacle keeping you from learning how to perceive market action from an objective perspective. Otherwise, if you continually filter market information in such a way as to confirm this belief, learning to be objective won’t be a concern because you probably won’t have any money left to trade with (italics mine).

From Chapter Four of THE DISCIPLINED TRADER

Explaining "Real" Money To Your Children

  
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Money is a very important part of all our lives. The understanding of money, how it works, and how we treat it can dramatically improve or diminish our quality of life.

Based on my writings and videos on YouTube, you might think my definition of money is gold and silver, but it’s not. Money is simply a medium of exchange. It can be represented by everything from gold to horse manure. Okay, maybe not horse manure, but it’s not a far stretch with the most popular form of money today being central bank notes loaned out into existence.

The state would love to have you believe that money can only originate from itself, yet people have organically started to use bitcoins and other crypto-currencies as a medium of exchange. Nevertheless, our culture continues to worship fiat currency as if it is the only type of money. I can’t change the fact that at this moment in time the U.S. dollar is the measuring stick for goods and services when it comes to prices. Trying to disprove and dispute this fact was something I struggled with early on when I used to teach my children that only gold and silver were money.

Today, I simply teach them about money as a medium of exchange. (more…)

Getting Results While Ignoring the Noise

  
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  1. I am more concerned with keeping profits than making them. Anyone can get lucky and make money trading but only the skilled can hold onto that money over the long term.

  2. I am more concerned with how good a trader I will be a year from now than I am today. While I know what my skills are currently the upside of my futures skills is open ended based on my focus and work in this field.
  3. I am more concerned with my draw downs than my equity peaks. I know how to make capital grow and it is a much more pleasant task when I do not have to play catch up after a losing streak or trading too big.
  4. I am more concerned about what the chart is saying than what some talking head is saying on television or social media. The more they believe they have a crystal ball the more I try to avoid them.

  5. I am more concerned about whether my trailing stop or stop loss is triggered in a trade than about my own personal opinion about what may happen next. While the market is open I trade the plan I made when the market was closed regardless of what my emotions, opinions, and ego want me to do after entering a trade.

What are these elements of planning? 6 Questions

  
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1) What you’re trading – Why are you selecting one instrument to trade (one stock, one index) versus others? Which instruments maximize reward relative to risk?

2) How much you’re trading – How much of your capital are you going to allocate to the trade idea versus other ideas?
3) Why you’re trading – What is the rationale for the trade? Why does the trade idea provide you with an “edge”?
4) What will take you out of the trade – What would lead you to determine that your trade idea is wrong? What would tell you that the trade has reached its profit potential?
5) Where you will enter the trade – Given the criteria that would take you out of the trade, where will you execute your idea to maximize the reward you’ll obtain relative to the risk you’ll be taking?
6) How you will manage the trade – What would have to happen to convince you to add to the trade, scale out of it, and/or tighten your stop loss?

Alpha & Beta: Two Competing Investment Philosophies

  
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“Where’s the Dow going to be in a year?”

That’s often asked of financial TV guests. From their responses, you’ll detect two distinct investment philosophies emerge. Which answer resonates with you most strongly probably determines the sort of investor you are. It also affects the odds of how well your portfolio is likely to do.

Imagine it is a random Wednesday, and despite my past warnings about noise, you have a television tuned to a financial news station. That very question is posed to two television guests; let’s call them “Alpha” and “Beta.” Their answers — which are quite different — reflect their competing investment schools of thought.

Guest Alpha’s response is very specific. Yet it incorporates so many factors, it’s hard to keep up with. Rather than fill this in with the news of the moment — Fed raising rates! China devaluation! Greek bailouts! Gold collapse! — I have left the details blank so this remains “evergreen.” This not only shows how many variables are involved, but it avoids the emotional response you may have to any of these specific issues.

So Alpha is asked where the Dow will be in a year, and he responds:

“Our view is that the economy in the U.S. continues to _______, and we foresee _______ problems overseas ______. China is _______, and that has ramifications for the Pacific Rim’s ______. Greece is ______ in Europe. The commodity complex is causing _____ for emerging markets. But many sectors of the U.S. economy remain _______, and some sectors overseas are still _______. The valuation issue continues to be _____, and that means _____ for investors. That has ramifications for corporate profits that will be ______. We think the economy is going to do ______, and you know that means inflation will be _____, which will force interest rates to ______. Under these conditions, the sectors most likely to benefit from this are ______, ______ and ______. The companies best positioned to take advantage of this are ____, ____ and ____. Based on all that, we especially recommend an overweight allocation to ____, ____ and ____. Thus, we believe the Dow will be at ______ next year.”

You can turn on FinTV any day of the week and hear some variation of that discussion. (more…)

A modern French Karl Marx Jr

  
Analysis, Education
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Thomas Piketty’s new book Capital in the Twenty-First Century named to seem similar to Das Kapital supposedly proves that capital is bad for everyone, and some people owning a lot of it is REALLY bad.

The solution? Tax the heck out of their wealth, and globally because destroying wealth will create more of it. All data-driven, because in France economists are not respected and need to prove their case. Since Marx Sr. had such a pleasant impact, who knows what this book destined to be “something big” and much appreciated in a thorough Harvard Business Review review will bring?

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