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…)
Archives of “uptrend” tag
rssFEAR
No, not the fear you’re thinking of, the other kind of fear, the fear of missing out.
Many people believe there are two emotions that traders feel, fear and greed, I disagree, it’s only fear. The fear of loss and the fear of not having enough. There’s a difference between being greedy and being fearful of not having enough, and it’s important. Greed is defined by the excessive desire to possess wealth or goods. Synonyms include lust and gluttony. The fear of not having enough is very different, and I believe that is what drives market participants.
Trading is inherently a competitive exercise. We look across the desk at the guy next to us and see that he made X amount of dollars today and we made less. We look at the major averages as benchmarks, we listen to people taking profits on our StockTwits stream and feel both happy for them and wanting to punch them in the face for making a better trade on the same stock. It’s only natural. And when the market is moving well, not being involved while everyone else is, while your benchmark is climbing, traders can feel a considerable amount of fear.
I’ve felt this many times, the fear of not having enough. And I’ve become pretty good at gauging both my own emotions regarding this and the pulse of the market as a whole. Many times this emotion can be seen exhibited in the price action through a blow off top where price accelerates at the end of a big move and then reverses sharply. Intermediate term swing and position trading is about staying with the trend and not getting shaken out, while managing your risk well. (more…)
RBI hikes export credit refinance rate to 5 per cent
The Reserve Bank of India (RBI) today said the standing liquidity facilities provided to banks (export credit refinance) and primary dealers (PDs) under the collateralised liquidity support would be at the revised repo rate, ie, 5.0 per cent with effect from 20 March 2010.
The RBI had, in its monetary policy announcement on 19 March, had increased the fixed repo rate under the Liquidity Adjustment Facility (LAF) by 25 basis points from 4.75 per cent to 5.0 per cent with immediate effect.
The RBI, while announcing its monetary policy measures, had said that there had been significant macroeconomic developments since the third quarter review in January 2010.
Advance estimates by the CSO for 2009-10 and for Q3 of 2009-10 suggest that the recovery is consolidating, RBI noted. Data on industrial production currently available up to January 2010 show that the uptrend is being maintained.
MindTraps-Great Book
I read a great book on trading psychology, called MindTraps by Roland Barach. MindTraps focuses on how the average person tends to think, compared to how we need to think to make money over time in the markets.
Here’s a summary of points that can benefit you as a trader:
- 1.Before entering any trade, you should consider the other side of the trade and state the reasons you’d take the other side of the trade. This helps you objectively enter a trade with a full understanding of the major risks that involved.
- Analyze your behavior from the beginning to the end of the trading process (from idea generation to entry and finally to exit) – what are the areas you can improve to help your trading profitability the most?
- Keep a trading journal of your thoughts on open positions and new ideas – writing things down helps you objectively look back and see where you went right and wrong.
- Fear blinds us to opportunity; greed blinds us to danger – emotions cause “perceptual distortion” where we only see the part of the picture that our beliefs allow us to see.
- We are likely to continue doing things for which we are rewarded -this can cause us to get too bullish after the bulk of the uptrend has occurred, or get too bearish near the lows.
- Fear of regret slants stock market behavior toward inaction and conventional thinking – the person who is afraid of losing is usually defeated by the opponent who concentrates on winning (an analogy for sports fans is the Prevent defense in football – playing “not to lose” only prevents you from winning).
- Can’t have a personal agenda to prove your self-worth in the markets – the focus must be on following your plan to maximize the ability to make money.
- Don’t get overly attached to any one view on a stock or market – don’t talk to others about open positions; it just makes it that much harder to exit when your plan says it should.
- Our predictions are only as good as the information available to us – objectively look at the indicators and data you use, to get the best quality of information and focus available
- People prefer for gains to be taken in several pieces to maximize their feeling good about their ability, while they prefer to take all their losses in one big lump to minimize the pain they feel.
- People prefer a sure gain compared to a high probability of a bigger gain, so they can say they made a profit; in contrast, people will speculate on a high probability of a bigger loss over a sure smaller loss, because they don’t want to feel like a loser. In trading, we must flip around the conventional emotions to allow us to let profits run while cutting losses shorter.
Control Your Emotion or Other People Will Control You
Many people are controlled by fear. Fear of losing an opportunity causes you to act in haste. Fear of losing your paper profit causes you to sell out too early. And fear of losing everything causes you to sell right at the bottom. Although selling right at the bottom is caused more by frustration than anything else, fear also plays a part. How do we overcome these kind of fears? Knowledge is the best weapon. When you know, people cannot scare, frighten or intimidate you. They can’t con you in anyway. Knowledge is your first key to success.
Hope causes you to hold on to a falling stock. Sometimes your hope is rewarded; your stock turns around and you make a profit. Unfortunately, hope often becomes hopeless. Experience tells me that it is much better to keep an uptrend stock and let go a falling one. This strategy is vital, simply because a trend in motion is likely to continue. Hope also causes people to buy into excessively high PE stocks. I prefer what is good today and better tomorrow. (more…)
MARKET WISDOM
A list of golden sayings and rules I have gleaned from many sources:
- Plan your trades, trade your plan.
- Trade Quality, Not Quantity.
- Keep it simple.
- Don’t look for a reason to enter the market, look for a reason NOT to enter.
- Don’t act due to “Newbie Nerves”
- Don’t make up a trade. If you have to look, it isn’t there.
- Never play with scared money.
- You are not the market.
- Buy dips in an uptrend, sell rallies in a downtrend.
- Do not try to pick tops and bottoms.
- It is only divergence if it came off a retracement – not a sideways market.
- Indicators warn, price action confirms.
- Divergence is early, cross-overs are late.
- You cannot expect your positions to go immediately into the money.
- Divergence means a detour, but not necessarily a new trend.
- No-one knows what will happen in the markets.
- Standing aside is a position.
- Subordinate your will to the will of the market.
- Large ranges beget small ranges, small ranges beget large ranges.
- Once a thing is set in motion, it tends to stay in motion.
- Sniper-rifle, not a shotgun.
- Cut your losses short, let your profits run.
- Only move stops in the direction of your position.
- Do not let a winner turn into a loser.
- Never add to a losing position.
- Forget losses quickly. Forget profits even quicker.
- Consistent behavior equals consistent results.
There are probably more, send ’em in…
The Secret to Trading Success
The most important thing you must learn in every market cycle is where the money is flowing. It is flowing into the companies where the earnings are growing. As long as mutual funds have capital in flows instead of net out flows then they must put new money to work investing in stocks. If you want to make your job as a trader much easier then find where the flow is going. Mutual fund managers can not go to an all cash position they can only move money around. A bear market sinks most stocks because managers have to sell everything to raise money to redeem shares. In an uptrend they have to buy stocks with the incoming money flows. Where does this money go? It goes into the sectors and stocks that are in favor due to increased earnings in a sector and individual stocks that are dominating their sector and changing the world in the process. You want the leaders not the has been. You want the best the market has to offer. Where are consumers dollars flowing into? That is where the money is going. What companies have the best growth prospects? The stock can only grow in price if the underlying company does. Mutual fund managers are the biggest customers in the market when they start buying a stock that increases huge demand and price support.
Your job is to follow the big money, shorting in bear markets, going long in bull markets. Following the trend of what is in favor. Do not fight the action, flow with it.
Quit having opinions and start being a detective looking for the smart money, the fast money, the big money and where it is going now.
Jesse Livermore’s trading rules
Lesson Number One: Cut your losses quickly.
As soon as a trade is contemplated, a trader must know at what point in time he’ll be proven wrong and exit a position. If a trader doesn’t know his exit before he takes the entry, he might as well go to the racetrack or casino where at least the odds can be quantified.
Lesson Number Two: Confirm your judgment before going all in.
Livermore was famous for throwing out a small position and waiting for his thesis to be confirmed. Once the stock was traveling in the direction he desired, Livermore would pile on rapidly to maximize the returns.
There are several ways to buy more in a winning position — pyramiding up, buying in thirds at predetermined prices, being 100% in no more than 5% above the initial entry — but the take home is to buy in the direction of your winning trade – never when it goes against you.
Lesson Number Three: Watch leading stocks for the best action.
Livermore knew that trending issues were where the big money would be made, and to fight this reality was a loser’s game.
Lesson Number Four: Let profits ride until price action dictates otherwise.
“It never was my thinking that made the big money for me. It always was my sitting.”
One method that satisfies the desire for profit and subdues the fear of a losing trade is to take one half of your profit off at a predetermined level, put a stop at breakeven on the rest, and let it play out without micromanaging the position. (more…)
Jesse Livermore’s trading rules
Lesson Number One: Cut your losses quickly.
As soon as a trade is contemplated, a trader must know at what point in time he’ll be proven wrong and exit a position. If a trader doesn’t know his exit before he takes the entry, he might as well go to the racetrack or casino where at least the odds can be quantified.
Lesson Number Two: Confirm your judgment before going all in.
Livermore was famous for throwing out a small position and waiting for his thesis to be confirmed. Once the stock was traveling in the direction he desired, Livermore would pile on rapidly to maximize the returns.
There are several ways to buy more in a winning position — pyramiding up, buying in thirds at predetermined prices, being 100% in no more than 5% above the initial entry — but the take home is to buy in the direction of your winning trade – never when it goes against you.
Lesson Number Three: Watch leading stocks for the best action.
Livermore knew that trending issues were where the big money would be made, and to fight this reality was a loser’s game. (more…)
4 Valuable Trading Lessons
A). No matter how good you think you’re in the knowledge of the financial markets, your perception would change when your hard-earned money is at stake. No matter how much you’ve read about trading, you’ll realize that theory is different from practice when the market shows you its true color.
B). If you lose in the markets, don’t despair. It means you’re only paying tuition fees to the markets. Eventually, you’ll stop losing more than you gain and become a great trader and harvest profits from the markets on annual basis. It may take some time and perseverance to achieve this. Just make sure you learn from your mistakes and never repeat them.
C). The best strategies are trend-following strategies. One of the best trading methods is to buy pullbacks in an uptrend or sell rallies in a downtrend. Some indicators can be used to attain this aim (like moving averages). It pays to go with the overall trend. When a trend changes, it must be confirmed before one starts going with it.
D). It is very dangerous to trade without stop loss or to refuse to go out of the market that’s going against you. There are no other ways protect your account as a private trader. This is a way to deal with the permanent uncertainty in the markets. You mayn’t make profits sometimes, but you can make your losses to be as small as possible. By taking risk management serious, you’ll never lose a huge percentage of your portfolio. When you specialize on not losing, you’ll eventually make money and go ahead in the markets.