“To be a successful trader, you have to be able to admit mistakes. People who are very bright don’t make very many mistakes. In a sense, they generally are correct. In trading, however, the person who can easily admit to being wrong is the one who walks away a winner. Besides trading, there is probably no other profession where you have to admit you’re wrong. In trading, you can’t hide your failures. Your equity provides a daily reflection of your performance. The trader who tries to blame his losses on external events will never learn from his mistakes. For a trader, rationalization is a guaranteed road to ultimate failure.”
Archives of “rationalization” tag
rss12 Cognitive Biases that Prevent you From Being Rational
Confirmation Bias – The tendency for people to favor information that confirms their beliefs or ideas. Investors and economists often fail to fully appreciate other views due to a narrow minded view of the world often resulting from what they think they already know.
Ingroup bias – the tendency to favor one’s own group. In investing and economics we see this in ideologies and particular strategies. Austrians favor those who believe their own thinking. Chartists dislike value investors. Often times, the strongest economists and investors are the ones who are able to move beyond this ingroup bias and explore the potential that other groups have something positive to contribute.
Gambler’s Fallacy – When an individual erroneously believes that the onset of a certain random event is less likely to happen following an event or a series of events. We see this in trading all the time. This is the belief that just because something has occurred in the past that it is more likely to occur in the future. The “trend is your friend” and that sort of thing….
Post-Purchase Rationalization – When one rationalizes past purchases after the fact in an attempt to justify past actions. Investors often learn about how a bad trade turns into an investment when they rationalize their past purchases. If you’ve been in the business for a while you know how destructive this can be. (more…)
One Dam Metaphor For The 2012 Global Financial System
One Dam Metaphor for the 2012 Global Financial System
What do you do when flood waters threaten the dam? If you’re the Federal Reserve, you close the floodgates and let the water rise.
Metaphors have an uncanny ability to capture the essence of complex situations. Here is one dam metaphor that distills and explains the entire global financial system in 2012. The way to visualize the current situation is to imagine a dam holding back rising storm waters.
The dam is the regulatory system, the rule of law, trust in the transparency and fairness of the system and the machinery of perception management. All of these work to keep risk, fraud and excesses of speculation and leverage from unleashing a destructive wave of financial instability on the real economy below.
As legitimate regulation and transparency have been replaced with simulacra and manipulated data, the dam’s internal strength has been seriously weakened.
Depending on how you date various rivers of financialization, water has been piling up behind the dam since either 1982, 1992 or 2000. In this metaphor, the water is comprised of multiple sources of destabilization: rising money supply, debt, speculation, leverage, fraud, shadow banking and lax regulation.
Common sense suggests that water rising to dangerous levels would trigger an official response of opening the floodgates to relieve the pressure. Unfortunately for the real economy, common sense has nothing to do with the official response of central governments and banks. Their entire raison d’etre (reason to be) is self-preservation and the preservation of the financial Elites that set the context and policy of the State and central bank.
In effect, the State and central bank recognize that it is highly dangerous to let any water out, lest the toxic waste of fraud, speculative incentives, excessive leverage, etc. corrode the spillway and cause the entire dam to give way.
The official rationalization for keeping the gates closed even as the water is rising to the very lip of the dam is that the flood water released might harm the real economy downstream. (more…)
Why Most Trader Lose Money?
Because they would rather lose money than admit they’re wrong. What is the ultimate rationalization of a trader in a losing position? “I’ll get out when I’m even.” Why is getting out even so important? Because it protects the ego. I became a winning trader when I was able to say, “To hell with my ego, making money is more important.”
THE 7 DEADLY SINS OF STOCK TRADING
In their book, Tools and Tactics For the Master Day Trader, Oliver Velez and Greg Capra, outline the 7 deadly sins of stock trading. Are you guilty of commiting any of the following?
1. Failing to Cut Losses Short: The most frequently committed error among traders. “We are of the school of thought that believes that traders’ most precious commodity is their original capital, and that they are doomed to utter failure if they do not do everything in their power to prevent its erosion” (91).
2. Dollar Counting: Focusing on how much a trade is up or down at any given moment can rob traders of profitable opportunities. “Once a trade is taken, traders must work to forget their profits…and focus on the proper technique” (94).
3. Switching Time Frames: This is the error of buying in one time frame and selling in another. The trader may buy in a longer term time frame, say the daily, but see a reversal on a 60 minute chart and sell. This is “nothing more than a rationalization to ignore stops” (96).
4. Needing To Know More: Everyday traders must face the fear of pulling the trigger. One of the symptoms of this fear is the need to know more but “the fact of the matter is that the brass ring goes to those who can act intelligently without the need to know more” (98).
5. Becoming Too Complacent: It is easy to become complacent when there has been a string of winners. “When a winning streak has fattened your purse, you must do everything in your power to keep your hard-earned gains and maintain the same intelligent mind-set that helped to produce those gains” (100).
6. Winning the Wrong Way: Many novice traders make money the wrong way and will eventually pay for it. Traders make money the wrong way by not adhering to a rule or a stop loss and end up making money anyway. This sets up a “taste of false success, and the market will eventually ensure that they give back this unearned profit sooner or later” (103). The next time a rule or a stop is ignored the losses will far outweigh the previous gains.
7. Rationalizing: This is a form of denial when in a losing trade. Honesty, real honesty, no matter how ugly the truth, will put you above most market players unable to summon such strength from within, preferring instead to be comfortable, blaming their losses on something or someone other than themselves” (106).
No matter which one of the seven deadly sins we have committed, we should ask ourselves the question: have we learned from them, asked for forgiveness, and are we ready to turn over a new leaf? The market is a great teacher if we will only listen and obey.
Why do most traders lose money?
Because they would rather lose money than admit they’re wrong. What is the ultimate rationalization of a trader in a losing position? “I’ll get out when I’m even.” Why is getting out even so important? Because it protects the ego. I became a winning trader when I was able to say, “To hell with my ego, making money is more important.”
Truth
“Truth kills those that run from it “-Persian proverb
Traders must be able to face the truth.Great traders have learned these lessons early in their careers.Roy Longstreet in his classic book view points of a Commodity Trader started that “the first mistake teaches -then second mistake kills !”
Facing the truth in trading is necessary to prevant the consequences.Truth is necessary at all levels of trading.It is just as important to the novice as it is to the seasoned veteran.The main difference lies in the ability to face the truth.
Truth seems so somple !But the psyche can do amazing tricks through rationalization.Some of these tricks seen to have no other purpose then to prevent you from seeing the reality of the truth.The Bible states -“The truth shall set you free “Every religion has a saying echoing the same theme.Overcoming not facing the truth can be accomplished by writing down the pros and cons of telling the truth.Once it is committed to paper the decision should become self-evident.