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The Psychology Of Speculation – The Disconcerting Effect Of Sudden Losses And Gains

Time for another classic trading book excerpt.   It is about limiting losses and ultimately becoming a better trader if you are willing to embark on that never ending journey to better understand yourself. James L. Fraser from Fraser Publishing clearly understood that. The introduction he wrote clearly shows his deep understanding of human psychology, trading and speculation. Human behavior never changes. That’s why I am a huge fan of old classics. Buy those books. Read them. Apply the wisdom imparted.

Henry Howard Harper: ‘The Psychology of Speculation – The Human Element in Stock Market Transactions’

Introduction
First privately printed by the author in 1926 and only found in secondhand stores at rare intervals this classic deserves a more wide spread audience. Harper’s human behavior material gives us insights into the handicapping prejudices that ruin our stock market theories and sound resolutions. Especially in our computer oriented age does the average investor seem incapable of calm reasoning , with the result that he often does precisely the opposite of what he had intended doing.

Moreover, Harper’s easy writing style clearly shows you how the correct ideas of theory are turned into the wrong formulas of practice, and how tickeritis, though mentally intoxicating, leads on to poverty. In a contrary way, we seldom see the favorite caprice of the stock market which is to violate precedent, and do the thing least expected of it. You had better believe it for there are no certainties in this investment world, and where you have no certainties, you should begin by understanding yourself.

James L. Fraser
Wells,Vermont

The Disconcerting Effect of Sudden Losses and Gains, page 17 – 19

There are but few things more unbalancing to the mind than the act of suddenly winning or losing large sums of money. A few years ago at Monte Carlo I was in company with a friend, a well known man of affairs who while there played at roulette nearly every day, merely as pastime. He was of mature age, naturally methodical, conservative, temperate and cool-headed. He made it an unalterable rule to limit his losses to $200 at any one sitting, and on losing his amount he always stopped playing. His bets were usually limited to two dollars on the numbers, and never doubled except for one turn of the wheel when his number won. He generally played three numbers at a time; never more than four. For ten consecutive sittings luck was against him and each time he had lost his stake of $200. I saw him get up and leave the room, apparently in a state of disgust. An hour or so later I discovered him at a roulette table in another room stacking his chips in piles on a dozen or more numbers. Now and again when he exceeded the limit the watchful croupier reduced his bets and pushed a few disks back to him. In addition to betting on the numbers he was staking a thousand franc note on one of the three columns, another thousand on the colors, and a like amount on the center dozen. In one run he lost seventeen consecutive bets on red, of a thousand franc each. His eyes were bloodshot, his fingers twitched, and plainly he was under the strain of great agitation. He continued to play for three hours or so, when all of a sudden he got up, stood for a moment looking dazedly about, then left the table. He afterwards told me that he lost twenty thousand dollars; and that he hadn’t the slightest recollection of anything that happened during the play, nor did he realize the amount he was betting. In this connection, it is a fact not generally known, that many rich men sing printed cards of instructions to the proprietor of a certain well known gambling club in the South, directing him to stop their play and refuse them further credit beyond a certain specified sum on any one day or evening of play, and refusing to become responsible beyond that amount. If men who trade in the stock market were to impose like restrictions upon their transactions the losses would in many cases be greatly minimized.

Thoughts on Human Nature and Speculation – Humphrey B. Neil

The chapter entitled, “More Thoughts on Human Nature and Speculation”, includes some classic thinking on aspects of human psychology which prevent us from operating profitably in the markets. A passage from Neil on the dangers of greed follows this line of thought:

“…I have watched traders in brokers’ offices with deep interest, and have tried to learn the traits that crippled their profits. The desire to “make a killing”—greed—has impressed me particularly.

Perhaps this desire to squeeze the last point out of a trade is the most difficult to fight against. It is also the most dangerous. How often has it happened in your own case that you have entered a commitment with a conservatively set goal, which your judgment has told you was reasonable, only to throw over your resolutions when your stock has reached that point, because you thought “there were four more points in the move?”

The irony of it is that seemingly nine times out of ten (I know, for it has happened with me) the stock does not reach your hoped-for objective; then—to add humiliation to lost profits—it goes against you for another number of points; and, like as not, you end up with no profit at all, or a loss.

Maybe it would help you if I told you what I have done to keep me in my traces: I have opened a simple set of books, just as if I were operating with money belonging to someone else. I have set down what would be considered a fair return on speculative capital, and have opened an account for losses as well as for gains, knowing that the real secret of speculative success lies in taking losses quickly when I think my judgment has been wrong.

When a commitment is earning fair profits, and is acting as I had judged it should act, I let my profits run. But, so soon as I think that my opinion has been erroneous, I endeavor to get out quickly and not to allow my greed to force me to hold for those ephemeral, hoped-for points. Nor do I allow my pride to prevent an admission of error. I had rather, by far, accept the fact that I have been wrong than accept large losses…”

This looks like worthwhile study material, so read on and don’t mind the fact that most of the references date back to 1930. Time honored wisdom is the best, and sound practices are applicable in any age.

Resolutions For 2012

Resolutions On Trading & Investing:

  • Define my trading plan and stay with it.
  • Take no trades without establishing a complete and precise trading plan before the initial trigger.
  • Keep an open mind for new market scenarios based on what the price action and pattern setups provide.
  • Always trade with the trend.
  • The less trading I do, the better my results so for 2012 I’m adoping weekly/monthly time frames
  • Once I am in a trade, stick with the original plan for target and stop-loss – Don’t panic!
  • Make every trade meet the strategy requirements and what happens from there is up to the market.
  • I need to exercise greater patience in both buying and selling.
  • Be more willing to take a position, even if it is very small. It is tough though to gain the confidence to do so as the market has been tough.
  • I am NOT going to overtrade. I will only make “A” trades.
  • Don’t ever force a trade, stay in cash when unsure.
  • I resolve not to violate my stops.
  • Wait for opportunities instead of looking for trades.
  • Do not make a move until your indicators say so.
  • Follow this important Gartman rule: “Do more of what is working and less of what is not.”
  • To clarify my trading approach in my mind and in writing.
  • Be dispassionate and thoroughly objective when evaluating positions.
  • Do not be afraid to cut a loss, even if the trade is later re-entered at a higher price / better set-up
  • Never trade on impulse.
  • To memorize and practice the cardinal rules of trading.
  • Only trade when you can pay very close attention or exclusive attention to the market.
  • Dedicate more time during non-market hours to prepare for trading.
  • Take emotion out of my trading. Follow price action.
  • I need to overcome my unreasonable fear of the market.
  • Try to avoid personal bias in making decisions.
  • Wait for pattern to work out – do not jump the gun.
  • Don’t be in such a damn hurry. Wait out the times when the setup is just not there.
  • Avoid buy and hold in times of high market volatility.
  • Actually ignore the news and trade the charts! It’s harder than it sounds.
  • Don’t force the trade. The market will open again tomorrow and there will be new opportunities.
  • Don’t turn a trade into an investment. Continue to focus on price action.
  • Approach each trading day well-rested, of clear mind, and with a positive, opportunistic attitude just like Kirk

 
Resolutions On Learning:

  • Learn to do 1-2 things very well and focus.
  • Write the plan for the year ahead. Specify initial position, goals, entrance and exit strategies for action, identify risks to take and manage.
  • Study more on the weekends to prepare for the upcoming week.
  • I will be more diligent in keeping a journal of EVERY trade made in the year.
  • Quit searching for the holy grail of trading – there is none.
  • Turn off CNBC and all other distractions in the way of my success
  • I will keep good records and document all of my research, trades, and outcomes.
  • Use the right side of my brain and be careful of the left.
  • Do not blindly follow anyone else.
  • Accept failure and move on.
  • Methodically analyze what went right and wrong on each trade.
  • Spend more time nightly looking at charts.
  • Learn 10 new chart patterns this year and trade only setups identified by those patterns.
  • Apply a consistent decision tree toward every single trade.
  • Tune out the noise. No calls during the day. No more “experts”, no more TV and definitely, absolutely and without a smidge of doubt no more twitter.
  • Transition from paper trading to live trading.
  • Need to read more charts and read less newspapers.
  • Assess my strengths and what is working well for me and determine how I can improve. Also, assess what does not add value and eliminate it.
  • Stay with low risk, probability based methods.
  • Every trade I take requires a one page description of why, how, and at what levels I intend to take action.
  • Paper trade new ideas before putting real money at risk.
  • Study and read more, establish a trading plan, follow the plan, experiment, re-evaluate and keep learning.
  • I resolve to improve myself by: managing my emotions better, become more patient and understanding, define my goals more completely, and constantly review my efforts to these accords.
  • My resolution would be to trade/invest during all market conditions. Emotion still has some control over my investments.
  • Work on consistency!! (more…)

The Psychology Of Speculation – The Disconcerting Effect Of Sudden Losses And Gains

Time for another classic trading book excerpt.  The subject is similar to the one in yesterday’s post. It is about limiting losses and ultimately becoming a better trader if you are willing to embark on that never ending journey to better understand yourself. James L. Fraser from Fraser Publishing clearly understood that. The introduction he wrote clearly shows his deep understanding of human psychology, trading and speculation. Human behavior never changes. That’s why I am a huge fan of old classics. Buy those books. Read them. Apply the wisdom imparted.

Henry Howard Harper: ‘The Psychology of Speculation – The Human Element in Stock Market Transactions’

Introduction
First privately printed by the author in 1926 and only found in secondhand stores at rare intervals this classic deserves a more wide spread audience. Harper’s human behavior material gives us insights into the handicapping prejudices that ruin our stock market theories and sound resolutions. Especially in our computer oriented age does the average investor seem incapable of calm reasoning , with the result that he often does precisely the opposite of what he had intended doing.

Moreover, Harper’s easy writing style clearly shows you how the correct ideas of theory are turned into the wrong formulas of practice, and how tickeritis, though mentally intoxicating, leads on to poverty. In a contrary way, we seldom see the favorite caprice of the stock market which is to violate precedent, and do the thing least expected of it. You had better believe it for there are no certainties in this investment world, and where you have no certainties, you should begin by understanding yourself. (more…)

Traders' Resolutions for the New Year-2013

What are our top trading resolutions for 2013?

D  iscipline
R  esults
I  ntegrity
V  ictory (Over Emotions)
E  ducation

Discipline

Most traders could benefit from being more disciplined with their trading. Discipline in trading takes many forms. But it can be summarized as just doing what we know needs to be done.
For example, a common New Year’s resolution is to lose weight. Losing weight is simple in theory—we just need to eat healthy foods and exercise more. Just say no to the doughnut and yes to the salad—simple! Of course, sticking to your plan is anything but easy, which is where discipline comes into play. Just do what we know needs to be done.
If I could target only two things to be more disciplined in next year’s trading they would be:

  1. Cut losing trades: Do everything to keep losses small.
  2. Let profits run: Don’t fall prey to the fear of a small profit slipping away. (more…)
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