Archives of “temptation” tag

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Consecutive Loses

  
  Education
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loser-1

You go long and the market immediately goes down – you go short and the market immediately goes up.  That’s 2 consecutive losses AND you are getting a little ‘anxious’ so you don’t take the ‘next’ trade and it of course works.  BUT to make the situation worse you then ‘chase’ the entry and it immediately reverses – another loss AND this is 3 in a row.  Ok 1 more try – this can’t happen on every trade can it – pray mode?   
This time though you will be real clever.  You have at least noticed that the market is in a range AND it’s the bounce from the low/retrace from the high that is causing all the problems.  So this time the next trade you take will be a range extreme fade AND the hell with your trading method.  The market is at the range low AND per your new ‘on the fly’ plan you go long AND the range immediately breaks out giving you consecutive loser #4 – trading against a method trade that is going far enough to pay for the previous 3 losers and make you net ahead.   
Now what are you supposed to do – QUIT?  AND to be sure that there is no more temptation – your throw your computer out the window and dive out right behind it.  You are in a trading psychology spiral.

The Chart Angle Delusion

  
  Education
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“The lack of intrinsic meaning of angles on a bar chart has significance even for chart-oriented traders who do not employ angles. How sharply a trend slopes on a chart is often a psychological consideration in making a trade. If you fall prey to this influence, you’re letting the chart maker’s practical and aesthetic considerations impinge on your trading. Any trend can be made to look either gentle or steep by adjusting the price scale. ”

– William Eckhardt, New Market Wizards

If you use price action as a filter — and visually interpret charts as part of your process — how do you guard against the chart angle delusion?

One potential remedy is focusing on hard inputs that are independent of chart aesthetics. High and low point successions, moving average crosses, and volatility expansion / contraction (changes in average trading range) are three examples.

Another helpful practice is deliberately viewing more horizontally extended (flattened) charts in tandem with the main view (as such mutes the ‘exciting angle’ temptation)…

Confidence, Discipline and Consistency

  
  Education
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Consistently profitable trading comes down to just three simple things. The three are the trading psychology, the system, and the risk and money management. Trading psychology means the big 3: discipline, confidence and consistency.

The trading psychology takes precedence because it is needed to make sure that the other two are followed. When they are not followed, a good system and sound risk and money management rules are of limited value. When you have trading psychology that is not achieved through sheer will, you can have the discipline, confidence and consistency that make the most of your rules and system.

Sticking to your system for any length of time is nearly impossible without having confidence in your system. A trader may be able to focus intently on their discipline, and may even be able to stick to it for a time, but often the first handful of losing trades will kill that confidence and with it goes the discipline.

When the sting of a string of losses comes along, especially for a trader that has not established a solid confidence in their system, the temptation to deviate from the system, to second-guess it, is very strong. The natural impulse to avoid the pain is great and only grows with each subsequent loss. Faith in the system drops each time another loss occurs, even if the loss came to be from the deviation from the system. In these circumstances, doubts, fear and anxiety usually run high.

So what is a trader to do to avoid this situation, or to remedy it if this situation has already been encountered?

A great deal of trading psychology comes from expectations and reality. Frustration comes when expectations aren’t met by reality. When a person doesn’t know what to expect, then anxiety set in. When a person knows what to expect and what to do, then confidence is there. Worst case is when the primary point of reference is the recent and painful losses, and only slightly less difficult to be confident when matters feel very uncertain.

Since trading is an activity where losing trades will occur, the best way to establish confidence is to have a way to know what to expect – from the trading system. What is the way to make this happen? The trader can see what can realistically be expected and what can’t through system analysis and looking at the system metrics. The metrics give one a realistic and measured look at the capabilities and limitations of a system, particularly how many losing trades might be encountered during an overall profitable period of time. The primary benefit regarding the trader’s trading psychology is in the way the numbers from the analysis put things in a perspective that fends off the anxiety and doubt and makes for much easier discipline.

Once this is achieved, then the trader should track their metrics to ensure consistency and continuous improvement. It happens quite commonly for traders to experience major breakthroughs once they put in place the habit of analyzing their system and tracking the metrics. Confidence, discipline and consistency are the natural result of this activity, and frequently initiating this practice marks the turning point in the careers of many traders. It is vital as part of trading psychology that one properly analyze the metrics and track their numbers, as backtesting alone will only help to a limited degree.

Quotes from -Walter Isaacson’s biography on Steve Jobs

  
Education, Life
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For those of you who have never followed or read about Steve, this book may be a shocker. He was not a nice man, but he did get things done and was very successful. CEOs view him as a visionary business leader. I found some really great quotes that I like to highlight and share.

On motivation:

(Y)ou should never start a company with the goal of getting rich. Your goal should be making something you believe in and making a company that will last.

On impressions:

People DO judge a book by its cover. We may have the best product, the highest quality, the most useful software etc.; if we present them in a slipshod manner, they will be perceived as slipshod; if we present them in a creative, professional manner, we will impute the desired qualities.

A great Jonny Ive quote:

Steve and I care about things like that, which ruin the purity and detract from the essence of something like a utensil, and we think alike about how products should be made to look pure and seamless.

On Apple stores:

Jobs decided that Apple stores should have only one entrance, which would make it easier to control the experience.

On problems:

If something isn’t right, you can’t just ignore it and say you’ll fix it later,” he said. “That’s what other companies do.

On how ruthlessly focused he was:

“What are the ten things we should be doing next?” People would fight to get their suggestions on the list. Jobs would write them down, and then cross off the ones he decreed dumb. After much jockeying, the group would come up with a list of ten. Then Jobs would slash the bottom seven and announce, “We can only do three.” (more…)

My personal trading rules

  
  Education
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MYTRADINGRULES
There’s really just two rules:
1) If I have an edge – take a position.
2) When the edge is no longer there – get out.

It doesn’t matter what my entry point was and it doesn’t matter how much I’ve gained or lost on the trade. When the edge is no longer there, I shouldn’t be either. And when it is there – I should stay in the trade. This actually requires some discipline because there’s always a temptation to bail when it begins to go against you and there’s also always a temptation to try for too much when things are going your way.

Papillon teaches trading

  
  Education
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I watched the film ‘Papillon’ a few days ago and enjoyed it very much. From memory, the film captures the sense of place, feeling of utter desperation, and cruelty of both the people and environment, found in the book on which it is based. It doesn’t follow the story to the letter – few films do – but this becomes a non-issue considering that many people question whether the author truly experienced all these adventures and hardships, or whether he ‘borrowed’ stories from other prisoners. Whatever the truth may be, I highly recommend reading the book and then watching the film.

In one scene, fellow inmate Louis Dega (played by Dustin Hoffman) is talking to Papillon (a role superbly executed by Steve McQueen) and makes a statement of the ‘somebody once said’ variety, that really struck home:

“A temptation resisted is a true measure of character.”

The Psychology of Trading

  
  Education
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There is an old saying that the market is driven by fear and greed. Anyone that has placed more than a couple of trades will surely have experienced these two emotions. All traders experience emotion. The distinction between a successful trader and an unsuccessful trader comes down to how they deal with that emotion. Let’s look at how these emotions affect a successful trader and an unsuccessful trader in various scenarios.

You go long and the market immediately goes down – you go short and the market immediately goes up. That’s 2 consecutive losses, and you are getting a little ‘anxious’ so you don’t take the ‘next’ trade. Of course, this trade is a winner. Now to make the situation worse, you then ‘chase’ the move, and as soon as you enter the trade it immediately reverses, thus giving you another loss – this is now 3 in a row. Ok, one more ‘try’ – this can’t happen on every trade can it? (more…)

Bill Lipschutz Quotes

  
  Education
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 Sultan of Currencies in the New Market Wizards and at the time Salomon Brothers largest and most successful forex trader for 8 years. 

 

”Missing an opportunity is as bad as being on the wrong side of a trade. Some people say (after they have the opportunity to realize a profit) ‘I was only playing with the market’s money’. That’s the most ridiculous thing I ever heard.”

”When you’re in a losing streak, your ability to properly assimilate and analyze information starts to become distorted because of the impairment of the confidence factor, which is a by-product of a losing streak. You have to work very hard to restore that confidence, and cutting back trading size helps achieve that goal.”
”I don’t have a problem letting my profits run, which many traders do. You have to be able to let your profits run. I don’t think you can consistently be a winner trading if you’re banking on being right more than 50 percent of the time. You have to figure out how to make money by being right only 20 to 30 percent of the time.”
”Successful traders constantly ask themselves: What am I doing right? What am I doing wrong? How can I do what I am doing better? How can I get more information? Courage is a quality important to excel as a trader. It’s not enough to simply have the insight to see something apart from the rest of the crowd, you also need to have the courage to act on it and stay with it.”
”It’s very difficult to be different from the rest of the crowd the majority of the time, which by definition is what you’re doing if you’re a successful trader.”
”So many people want the positive rewards of being a successful trader without being willing to go through the commitment and pain. And there’s a lot of pain.”
”Avoid the temptation of wanting to be completely right.”  

Zero is Bottom

  
  Education
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The markets have a clearly defined Zero-value. This has several important implications. First, traders often discount the possibility of something becoming absolutely worthless (i.e. going to zero), so the more the price goes down, the greater the traders’ tendency is to believe that it has a higher probability of going up again; therefore the temptation to catch the bottom and go long becomes compelling (despite its irrationality). Traders must realize that how they are hardwired to think as people is not necessarily the way they should think as a trader. There is a reason why 90% of people who attempt to make a living as a trader end up failing and it is not because of intelligence, information, technology or effort. In a nutshell, I believe failure in trading is because of a lack of self-awareness. The solution is to compartmentalize your thinking. When you are interacting in society or at home, let yourself think like a person; but when you sit down to trade, you need to think objectively by evaluating risk/reward as a trader should.

Parsons’ Rules

  
Analysis, Education
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Bob Parsons is the founder of GoDaddy.com. GoDaddy is the domain name site with those obnoxious Superbowl ads — and the company that made Parsons a billionaire.
(I guess when you’re a billionaire you can get away with an awful looking earring.)
Many years ago, I came across “Parsons’ Rules” — a list of 16 rules for success in business and life. They struck me as pretty damn good.
I was reminded of Parsons’ Rules while tinkering with another project this weekend, and realized they also apply to trading.
 
So here they are (original list here):
1. Get and stay out of your comfort zone. I believe that not much happens of any significance when we’re in our comfort zone. I hear people say, “But I’m concerned about security.” My response to that is simple: “Security is for cadavers.”
2. Never give up. Almost nothing works the first time it’s attempted. Just because what you’re doing does not seem to be working, doesn’t mean it won’t work. It just means that it might not work the way you’re doing it. If it was easy, everyone would be doing it, and you wouldn’t have an opportunity.
3. When you’re ready to quit, you’re closer than you think. There’s an old Chinese saying that I just love, and I believe it is so true. It goes like this: “The temptation to quit will be greatest just before you are about to succeed.”
4. With regard to whatever worries you, not only accept the worst thing that could happen, but make it a point to quantify what the worst thing could be. Very seldom will the worst consequence be anywhere near as bad as a cloud of “undefined consequences.” My father would tell me early on, when I was struggling and losing my shirt trying to get Parsons Technology going, “Well, Robert, if it doesn’t work, they can’t eat you.”
5. Focus on what you want to have happen. Remember that old saying, “As you think, so shall you be.”
6. Take things a day at a time. No matter how difficult your situation is, you can get through it if you don’t look too far into the future, and focus on the present moment. You can get through anything one day at a time.
7. Always be moving forward. Never stop investing. Never stop improving. Never stop doing something new. The moment you stop improving your organization, it starts to die. Make it your goal to be better each and every day, in some small way. Remember the Japanese concept of Kaizen. Small daily improvements eventually result in huge advantages. (more…)

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