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Random Prize

  
  Education
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I have been reading Mark Douglas’s excellent book Trading in the Zone and he hits on the most amazing point regarding the effect of random rewards. In brief, it goes like this:

If you teach a monkey to do a certain task and reward him when he does it, he will learn how to keep doing the task to get the reward over and over.

Following this, if you cease to give him the reward he will quickly cotton on and stop doing the task.

However – if you give the monkey a RANDOM reward, he falls into a sort of mesmerized state of addiction where he will keep doing the task continuously, even if no more rewards come. This is exactly why people are addicted to gambling, and if you look at your trading life it might be the same: random rewards.

This got me to thinking about how a trading plan combats this effect and once again proves itself indispensable, because in a sense you move the whole pattern over to the first scenario where if you follow the plan you get the reward. The effect will still be there of course because not every trade is a winner, but it is the only realistic antidote to this obviously primal reaction to receiving random rewards.

I’ve heard this from other sources too – in Robert Greene’s 48 Laws of Power he talks about how random patterns of reward and punishment are actually a key factor in both manipulation and brainwashing. This is known to also drive animals of all kinds mad.

You see how deep and penetrating this effect could be if you are trading without a plan? No plan means basically random trading, which means random reward and punishment dished out from the market, creating an addicted state of anxiety crossed with eurphoria – you know what it feels like I’m sure.

Market Metaphors and Perception

  
  Education
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Day Trading* A trader views the market as an enemy to be conquered;

* A trader approaches the market as a puzzle to be solved;

* A trader sees the market as a paradise of potential riches;

* A trader regards the market as a mistress to be wooed;

* A trader views the market as a dangerous minefield;

* A trader looks at the market as a video game.

How do these metaphors affect our trading? Our emotional responses to trading?
How would being aware of our metaphors–and shifting them–change how we trade
and how we experience our trading?

This story is my favorite metaphor for the Stock Market.

monkey-with-glasses

I wonder what it says about my perception? Personally, I favor the puzzle to be  solved approach.

“Once upon a time, in a village, a man appeared and announced to the villagers that he would buy monkeys for $10 each.

The villagers, seeing that there were many monkeys around, went out to the forest and started catching them. The man bought thousands at $10 and, as supply started to diminish, the villagers stopped their effort. He further announced that he would now buy at $20 for a monkey.

This renewed the efforts of the villagers and they started catching monkeys again. Soon the supply diminished even further and people started going back to their farms. The offer increased to $25 each, and the supply of monkeys became so small that it was an effort to even find a monkey, let alone catch it!

The man now announced that he would buy monkeys at $50! However, since he had to go to the city on some business, his assistant would now buy on behalf of him.

In the absence of the man, the assistant told the villagers. ‘Look at all these monkeys in the big cage that the man has collected. I will sell them to you at $35, and when the man returns from the city, you can sell them to him for $50 each.’

The villagers rounded up all their savings and bought all the monkeys. They never saw the man nor his assistant again, only monkeys everywhere!

Now you have a better understanding of how Stock Market works!

5 Points for Traders

  
  Education
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  • Concentrate on what is important. The most important thing when I am trading is profit and education, to some extent.  You can get to profit many ways but your actions need to all bend towards that one objective.  Me talking about my position takes me away from analyzing the position.  Also, for me, it makes me less flexible. Now I am thinking about what the market is doing and how I look to other people.  Also, if you are going to talk your book the most effective way is to get out into it, albeit the most unethical.
  • Start with a logical thesis. For example, leave out the fact that you said the following about the company “offers a useful, attractively priced service to customers, is growing like wildfire, is very well managed, and has a strong balance sheet,” but still decided to short the company anyways.  I realize this statement does not always mean a stock price is going to rise but the next logical step does not mean the stock is going down.
  • Follow your plan. Do not make reference to your strategy as the following “outright frauds (our very favorite), industries in decline or facing major headwinds, weak or faddish business models, bad balance sheets, and incompetent,excessively promotional and/or crooked management”  and not follow it.  See above statement.
  • Do your research before you make a trade. Don’t use anything with the word “monkey” in it for research purposes and tell someone about it.  Also, 500 people is not a very big sample size.
  • And finally, don’t act like a loss is the end of the world or a win. If you are doing the right things, your best and worst days are always ahead of you. After the trade is over the next trade is the most important, once again assuming you are doing the right things.

Nothing is ever going to prevent you from losing but there are several things that can prevent you from winning over a long period of time.

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