This concept of process versus outcome was first introduced to me when I read the book, “More Than You Know”, by Michael Mauboussin. It was also discussed in the books written by the brilliant authors Michael Covel and Mark Douglas.
The best way to explain the concept is using the following examples, which involves the game black jack (the only card game I know).
1) Good Process/Good Outcome
The cards you are dealt add up to 12. You have the choice to stay or hit. You chose to hit and receive a 9-blackjack.
The equivalent scenario, in my view, in the stock market is that you see a stock in a downtrend, so, following your rules, you short it. The stock ends up falling another 40% before turning around.
2) Good Process/Bad Outcome
The cards you are dealt add up to 12. You have the choice to stay or hit. You chose to hit and you get a 10 -bust.
In the stock market this is comparable to buying a stock that is in an uptrend, (more…)
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rss7 Ways to Become an Unsuccessful Trader
If you’d prefer to become an unsuccessful trader, you can start by making the following common trading mistakes.
-The first big mistake is the flawed logic of extrapolation. Many traders and investors assume that a trend will remain in force until an “event” comes along to change it. But market trends are not like billiard balls on a pool table. This false assumption will put you on the wrong side of the market more times than not, especially at major turning points.
-The second big mistake is to suppose that news events drive market trends. In fact, the opposite is true: economic, political and social events lag market trends.
-One common mistake is to buy puts or calls that are way “out of the money,” with no other transactions to compliment them. Unless your timing is absolutely perfect — and who has perfect timing? — your chance of success is low. It’s like buying a lottery ticket.
-Another common mistake is to buy options with too little time left to expiration. With less than one month to expiration, the time decay begins to accelerate and the chances of success diminish.
-In the middle of a corrective pattern, it’s common to run out of patience while waiting for confirmation of a trend change. You have to give corrective patterns time to unfold before you jump in. This requires discipline, and a solid understanding of the many ways corrective patterns can unfold.
-Too many traders think Elliott wave is a trading system that tells you exactly where to enter and exit a particular market. That’s the biggest misconception. The reality is that it’s an analytical and forecasting tool, which helps you develop and use your own trading system, based on your own personal risk tolerance.
-Traders tend to over-rely on momentum indicators such as RSI, Stochastics and MACD to precisely spot turning points. But to paraphrase Mark Twain, markets can stay overbought or oversold a lot longer than either you or I can remain solvent.