15 Rules for Stock Market Traders-Investors

1. Reward is ALWAYS relative to Risk: If any product or investment sounds like it has lots of upside, it also has lots of risk. (If you can disprove this, there is a Nobel waiting for you).

2. Overly Optimistic Assumptions: Imagine the worst case scenario. How bad is it? Now multiply it by 3X, 5X 10X, 100X. Due to your own flawed wetware, cognitive preferences, and inherent biases, you have a strong disinclination – even an inability — to consider the true, Armageddon-like worst case scenario.

3. Legal Docs protect the preparer (and its firm), not you: Ask yourself this question: How often in the history of modern finance has any huge legal document gone against its drafters? PPMs, Sales agreement, arbitration clauses — firms put these in to protect themselves, not your organization. An investment that requires a 50-100 page legal document means that legal rights accrue to the firms that underwrote the offering, and not you, the investor. Hard stop, next subject.

4. Asymmetrical Information: In all negotiated sales, one party has far more information, knowledge and data about the product being bought and sold. One party knows its undisclosed warts and risks better than the other. Which person are you?

5. Motivation: What is the motivation of the person selling you any product? Is it the long term stability and financial health of your organization — or their own fees and commissions?

6. Performance: Speaking of long term health: How significantly do the fees, taxes, commissions, etc., impact the performance of this investment vehicle over time?

7. Shareholder obligation: All publicly traded firms (including iBanks) have a fiduciary obligation to their shareholders to maximize profits. This is far greater than any duty owed to you, the client. Ask yourself: Does this  product benefit the S/Hs, or my organization? (This is acutely important for untested products).

8. Other People’s Money (OPM): When handing money over to someone to manage, understand the difference between self-directed management and OPM. What hidden incentives are there to take more risk than would otherwise exist if you were managing your own assets? (more…)

Life Lessons from Trading


In trading, we can all agree that fewer conditions or filters results in better conclusions, better understanding, and less curve fitting. Conditions or filters block information. Too filters can result in less new insight and fewer opportunities.

Here is where trading is a good lesson for life. As we grow older our tendency is to filter out information, people, paths. It’s partly a necessity to avoid the bad or overload, but good things can be missed. Our experience tends to specialize our knowledge and narrow our focus. Though this has some benefit in expertise what opportunities or knowledge or growth may be missed. Ignoring, filtering or refusing to hear or listen to ideas we disagree with or that are different than our own may lead to narrow mindedness, missed opportunity to change and important information. For younger people it might be seen as closing doors. Meeting new people, hearing new ideas, going to new places. Nobel laureates advise not to tighten parameters too tightly as the surprise result may reveal itself. I recommend opening up parameters, let the fresh air in. Let’s not become grumpy old men. We’ve seen closed small minded people and don’t look on them with respect. Broad vision is necessary to see above and beyond the noise. You really need to force yourself against the tendency to close the mind.

Conviction, Anxiety and Belief

In 1952 Harry Markowitz effectively founded modern finance with his seminal paper “Portfolio Selection“. The famous (or infamous) CAPM and Efficient Markets Hypothesis, for all practical purposes, evolved from the Nobel winning ideas in this paper. (Note to self: resist urge to make Nobel joke). Ironically however virtually no one knows that Markowitz himself said his paper began with step 2! Step one was deciding what you believe.

We hear a lot from the well known trading coaches about conviction and it strikes me as funny because conventional risk wisdom says “don’t get married to an idea”, “let the market tell you”, “take what the market gives” and other such axioms all based on the idea of maintaining objectivity and essentially not becoming full of conviction.

Well which is it?

I mean we also hear “believe in yourself” but where do these advisories leave you when a trading idea is going wrong? How do you handle the teeter totter that holds belief and conviction on one side and price and risk management on the other? What fulcrum can you depend on?

We of course have our answer…but before we talk any more about it, we would REALLY like hear yours!


When you feel confident, presuming you do sometimes feel confident, where do you feel it? Can you feel it in your brain or is it in your thorax (i.e. middle part of your body)? Better yet, why do I ask?

Well if you think about it, part of our mission here at Trader Psyches is to teach traders of all stripes how to use the message in Gladwell’s blink to assist in the d/m (that is decision making) process. The zillion copies it has sold prove the interest in it but the practical parts about what I read – sort of the “just do it” related to using your instantaneous impressions seem frankly impossible.

And I honestly still feel that most traders are for good reason, stuck in their heads. So, I ask this simple question – when you feel confident where does it hurt?

Go to top