Put Trading First, Be There Day In and Day Out

  • Consistency is your willingness to put trading first in your life so you’re online day in and day out, trading your system to maximize the odds that it will work for you when the market is moving.
  • When traders take a break for whatever reason — because they want to play, because they have experienced a series of losses, because of complications in their personal lives, or because the market is dead — they end up missing moves that could have resulted in hefty profits.
  • That doesn’t mean you always have to trade, but you should always be there to follow the markets.
  • It’s very easy once you’re self-employed and trading to excuse yourself for all kinds of reasons. This can prove to be a devastating mistake. You will find over time that those days you take off to play golf or go fishing or whatever will inevitably be the days when the two or three trades you’ve been waiting for are triggered. These trades would have made your month very profitable. Then you have to scramble for the rest of the month. When you trade this way, you tend to lose money. Inconsistency does not pay off.

"Unlearning" A Lifetime Of Lessons

unlearning-sign6When it comes to market timing, you’ve got to UNLEARN responses that you’ve spent your whole life learning. Market timing isn’t about you. It is just a strategy that works over time. In other fields, probability plays little if any role. You put in effort, make sure you meet the expectations of the people who pay you, and you’re a success. In the traditional workplace, it makes sense to put a little ego and pride into your work. Your effort and talent often have a direct payoff. But with market timing, the odds can go against you, no matter how much work you put in. The perfect trade can go wrong. That’s hard to accept for most people because it means that being a successful (profitable) market timer or trader, to some extent, is just a matter of the odds randomly working in your favor. But there is good logic behind this randomness. And a successful timing or trading strategy uses this logic to profit. A successful timing strategy will exit losses quickly. It will not stay with a bullish or bearish position to sooth the ego of the strategy’s designer. It will also stay with a successful trade and not exit quickly to lock in a profit. That may feel good for a day, but if the profitable trend lasts two, three, five times longer, you have lost out on a huge profit. Recognizing that odds are part of trading takes some of the glory out of it. But on the other hand, understanding odds helps you cope with inevitable drawdowns.

Nassim Taleb: Soros versus Buffett

If given a choice between investing with Buffett and billionaire investor George Soros, Taleb also said he would probably pick the latter.

 “I am not saying Buffett isn’t as good as Soros,” he said. “I am saying that the probability Soros’s returns come from randomness is much smaller because he did almost everything: he bought currencies, he sold currencies, he did arbitrages. He made a lot more decisions. Buffett followed a strategy to buy companies that had a certain earnings profile, and it worked for him. There is a lot more luck involved in this strategy.”


 I have high respect for your intelligence and thinking, and I believe that “Fooled by Randomness” and “The Black Swan” are must-read books for everyone. However, I believe your observation on Warren Buffett is wrong.

 You justified your pick on Soros because you have observed his thousands if not millions of trades; therefore, giving you comfort that he is making decisions and his success, to quote what you said, is “2 million times more statistically evidence that his results are not by chance than Buffett does”.

 You are implying that Soros is making thousands more decisions that Buffett. It seems to me that your understanding of Buffett is superficial, leading to your flawed conclusion.

 During a meeting with MBA students from the University of Georgia in early 2007, Buffett told the group of students that “There were four Moody’s manuals at the time. I went through them all, page by page, over 10,000 pages twice. On page 1433, I found Western Insurance Securities. Its earnings per share were as follows: 1949 – $21.66, 1950 – $29.09. In 1951, the low-high share price was $3 – $13. Ten pages later, on page 1443, I found National American Fire Insurance….”

 Again, in 2004, Buffett searched through the entire Korean stock market by reading Citigroup Investment Guide to Korean Stocks (that is over 1,700 companies). In 4 hours he found 20 companies that he liked and put $100 million to work.

 These two examples illustrated that Buffett did make thousands of decisions of not to invest. Those who study Buffett intensely know that he works extreme hard and study all companies available from A to Z, leaving no stone unturned. Deciding not to buy is just as important as deciding to buy. However, inactivity is commonly misunderstood for not making any decision.

 To quote Albert Einstein, “Not everything that counts can be counted, and not everything that can be counted, counts.”


Whether we choose to believe it or not we do not know the future, nor can we predict it with any consistency.  When the future does play out exactly as predicted luck must be credited.

We stock traders love to predict.  When we are right (which is not very often) we are quick to pat ourselves on the back, staking our claim on expert technical and/or fundamental analysis.  When we are wrong we are just as quick to deny responsibility, usually blaming the “market” for its ignorance.  All too often we justify our losses because we mistakenly believe the market is wrong.

But if the truth be known we are the ones who are ignorant and we choose to remain so.  Ignorance can only be used as an excuse until the truth is discovered.  The truth is we are wrong. The market is always right.

So, here is the truth.

We are ignorant of randomness and uncertainty.  We are ignorant of the many reasons others have for buying and selling, oftentimes diametrically opposed to our own.  We are ignorant of the hidden forces that move markets both intra-day and day to day.  We are ignorant of unforeseen news and how the “market” will interpret it.  We are ignorant of our many and varied biases, too numerous to mention here.  In a word, we are ignorant.

But in ignorance we find truth; in ignorance we find opportunity.  We traders can use our ignorance as a tool for profitability.  But can we handle it?

Can we accept that our expert analysis can be wrong?  Can we accept uncertainty?  Can we admit that our decision making processes are often flawed because of our psychological makeup? Can we accept that the market is always right? Can we handle the truth?

If we dare confront our ignorance we can then proceed to admit to and accept our flawed biases.   We can admit that luck plays a major role in our success.

We can actually exit losing trades.  We can take profits without getting greedy. We can cease to fear the future.  We can accept, and even learn to embrace, uncertainty.  We can then use technical and fundamental analysis as tools to manage our emotionally based biases, not confirm them.   We can become consistent in our decisions.  We can become profitable.

We can discover the truth by our ignorance.

Make Your Own Luck With Consistency

  • Don’t make decisions based on the outcome of 1, 2 or 3 trades. Start thinking in big sample sizes.
  • Accept randomness. The outcome of a trade is completely random and independent of the one you took before.
  • You are never suddenly a better trader. Therefore, always apply the same tactics to your money and risk-management.
  • Love your trading journal and start analyzing as much of your own data as possible.
  • Streaks are normal. Next time you are about to change your trading strategy think twice and stick to it a little longer

Analogy Between Markets and Gambling.

We attempt to apply Statistics to markets because we see an analogy between markets and gambling. You bet when the deck is rich; count the cards and you will know.

But what if the dealer of the markets:

1. Shuffles under the table or may not shuffle – you cannot know (without inside info)

2. Might be using more than one deck

3. Sometimes uses a deck which favors your opponents

4. Usually favors you but occasionally ruins you

5. Knows that you need the action and abuses this knowledge

6. Knows that you will exploit your knowledge of him to others, especially the weak, ignorant, and women

Survival of the fittest

When he hear the term ‘survival of the fittest’ bandied about, people are usually referring to contests of absolute strength and think of the Darwinian struggle for life. Trading is often thought of in a similar light.

It’s interesting to note that while Darwin came up the idea of natural selection, the term ‘survival of the fittest’ was coined by economist philosopher Herbert Spencer. What is more, both Darwin and Spencer were not referring to competitions of brute strength, but of best fit. That is, the survivors were those who best fit in to the environment around them. Brute strength is an aspect of this, but it is only half the story. Adaptation to the environment is also required.
Chance and randomness plays a big role in natural selection, as it does with trading success, but we can be sure that regardless of how strong we are with respect to risk management, discipline etc, if we don’t have an edge then we will likely die out. Likewise, an edge and no strength could prove equally fatal. Because the environment of the active investor is dynamic and forever changing, it may be useful to think of the circles below as constantly moving around about other, only rarely intersecting.

Effects of the Full Moon

The full moon was discussed many years ago on this site by Mr. McDonnell with respect to markets with results “consistent with randomness”. It would seem though that the day(s) after a full moon and particularly near the end of a difficult week might cause some sleep deficit effects to show in sensitive individuals–but perhaps extra coffee is used to counter such things.

Blame Bad night’s Sleep on the Moon“:

Malcom von Schantz, a sleep and circadian researcher at the University of Surrey in the U.K., called the new findings “fascinating” because they run counter to the results of several other studies that failed to find a link between the moon and human behavior.

“Essentially, every report published to date has failed to show significant associations between the phase of the moon and any number of behavioral and physiological parameters,” von Schantz, who was not involved in the study, said in an email.”This is the very first report that suggests an association with one behavior, sleep, and of course it’s a behavior that in our species normally occurs at night.”

Evidence That the Lunar Cycle Influences Human Sleep”:

We found that around full moon, electroencephalogram (EEG) delta activity during NREM sleep, an indicator of deep sleep, decreased by 30%, time to fall asleep increased by 5 min, and EEG-assessed total sleep duration was reduced by 20 min. These changes were associated with a decrease in subjective sleep quality and diminished endogenous melatonin levels. This is the first reliable evidence that a lunar rhythm can modulate sleep structure in humans when measured under the highly controlled conditions of a circadian laboratory study protocol without time cues.

Role of Luck and Skill

There is still an element of luck or randomness in the markets. You can research a trade extensively and be absolutely convinced that it will work—but still end up losing money on it. No matter what you do, you won’t be right on 100% of your trades. What does this mean for traders?

As Michael Mauboussin writes in a white paper for Credit Suisse, “Where there is luck, focus on the process”. You can’t control the outcome, because it is subject to some randomness—but you can control the input, which is the process. You want to have a process that allows for the element of randomness but which is still robust and which you can adhere to.

If it’s helpful, think about the distinction between a well thought-out trade that happens to lose money versus one that makes money. The first is a losing trade, while the second position is a winner, because it makes money.  That is just talking about the outcome. But they are both good trades, in the sense that they were put on with careful consideration. Contrast that with a trade that is a winner—i.e. it made money– but was basically an impulsive decision and thus a bad trade. By focusing on the process over the outcome, we should be trying to make a series of good trades and avoiding bad trades like the plague. Over time, the results will take care of themselves.

Trading – a game of probability

A big part of trading is a probability game. The market can move any directions and many times against all logic and fundamentals for a period of time. 
An edge in trading is the ability to have winning probabilities on your side.
Most people cannot distinguish between luck and skill when it comes to forecasting the market. At the best, I am right 70% of the time on fundamentals, 50% on the timing of the trade but I am making money on >80% of the trades.
I acknowledge I do not know how to predict the market timing with certainty. The process of trading is replete with errors and thus one has to cater for it.
Apparent randomness in the market is so complex that it cannot be managed with my finite mind. 
So here are some ways that help me to handle the random behaviour of the market: (more…)

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