Trading Phscology

[lou]

Those of us who were in cash just before recent drop were sitting there with smilies on our faces .

I thought I was one of those smug little bastards until a day ago.

I thought my order to sell VWO Vanguard emerging markets index had gone through (30% of my portfolio), but I didn't read the whole confirmation email that came through; the order was not completed .

When I thought i had exited the market it was a day before the big drop on the 4th of August. My plan was to sit in cash until an uptrend was confirmed and re-enter the market.

Now that I am still in the stock I have an urge to stay in the stock to see if it will recover. Nothing has change but my point view and I arrive at two different out comes. Trading phycology is messing with my brain.

I thought I would share it with you guys try clear my head and see if any body else has had similar situations.

Going forward I have three options, what should I do:

1. Exit the stock per original plan and sit in cash until uptrend is confirmed.
2. Stay in stock and set a 5% stop loss (where the stock bottom out on the 10th-Aug)
3. Average down and set a 5% stop loss (where the stock bottom out on the 10th-Aug)

[lou]

No other takers to admit there mistakes? I thought this had the potential to be an excellent thread.

I stayed in this stock for a couple more days and then exited per my original plan.

[wbosher]

People don't like admitting there mistakes

I think you'll find that plenty of others here have been in a similar situation, myself included. I've held onto a stock while it fell...and fell...and fell. Fortunately it recovered, and I exited with a profit, although the money would have been better spent elsewhere during the couple of months that I held on to it.

We live and learn...

[RazorX]

People don't like admitting there mistakes

I think you'll find that plenty of others here have been in a similar situation, myself included. I've held onto a stock while it fell...and fell...and fell. Fortunately it recovered, and I exited with a profit, although the money would have been better spent elsewhere during the couple of months that I held on to it.

We live and learn...

Just saw this thread. I have recently learned an important lesson, and thankfully it didn't cost me anything except potential gains had I sold at the right time.

I did hold NPX - it reached a high of 3.75 the dropped like a stone. I ignored my trading rules with state after the price goes through the 90day MA to sell... (Could have sold at 3.40) kept holding holding... all the way down to the last few weeks and sold at 2.52 as it was getting close to entry point. At that point I was hoping it would then continue lower and give me a chance to pick up again at a cheaper price. Unfortunately by the time my transaction cleared the price had gone back up! :P

So yeah we live and learn.... now watching NPX and some others as I have some cash and want to put it into stocks

[BIRMANBOY]

Yes agree its an interesting concept to explore. Of course what you see as a "mistake" is based on your concept of what the ideal trading strategy is. I would suggest that this could be and should be more flexible and recognise the fact that most buying, selling decisions are always made up of different components and all have different dynamics. So what well be a "mistake" in "x" situation may be perfectly reasonable in a "y" case. Whos to say if you had waited 5, 10 or 30 days it wont recover and you will save yourself brokerage fees both ways when you try and get back in. I'm not saying people shouldnt have a strategy but each situation should be looked at with fresh eyes to see if any aspects are deserving of a different approach outside of the "strategy". Automatic, knee jerk actions and re-actions triggered by charting "gurus" are in my opinion the cause of "panic selling". Personally I love it because it creates opportunities to buy good shares at low prices. All up to the individual when you get right down to it of course but recognition of the big picture cant be bad whatever your stategy.

No other takers to admit there mistakes? I thought this had the potential to be an excellent thread.

I stayed in this stock for a couple more days and then exited per my original plan.

[lou]

Just saw this thread. I have recently learned an important lesson, and thankfully it didn't cost me anything except potential gains had I sold at the right time.

I did hold NPX - it reached a high of 3.75 the dropped like a stone. I ignored my trading rules with state after the price goes through the 90day MA to sell... (Could have sold at 3.40) kept holding holding... all the way down to the last few weeks and sold at 2.52 as it was getting close to entry point. At that point I was hoping it would then continue lower and give me a chance to pick up again at a cheaper price. Unfortunately by the time my transaction cleared the price had gone back up! :P

So yeah we live and learn.... now watching NPX and some others as I have some cash and want to put it into stocks

How come you did not stick to your guns and sell at $3.40? What influenced you to keep holding?

[RazorX]

How come you did not stick to your guns and sell at $3.40? What influenced you to keep holding?

A very nasty combination of fear, greed, and hope.

Fear: The thought that if I sold at $3:40 the price would recover... which leads to a two-part in...
Greed: If I sold at $3.40 the price would recover and I would have lost money, AND I didn't want to sell as the price kept getting lower because of WHAT could have been made. (At one stage I was up 60% on this share)
Hope: I believe it has been said "At once mans greatest strength and weakness" I hoped the market would "see" that NPX was a good stock and start raising the price.

As I analyze what went wrong now I realize it wasn't just one of these that stopped me selling when I should have, but a nasty mix of all emotions. I broke a rule I already knew - don't let emotion rule your decisions.

Finally I obeyed my last rule which was to sell when the SP got within 10 cents of my entry price. The irony of it is that I ended up with a 2% gain, instead of 45% if I had sold at $3.40... and the SP is back up lol

Kinda funny, I sit here chuckling to myself about it. No real harm done, just a bit of bruised pride and confidence.

Has any one else ever analyzed why something went wrong and their feelings etc?

[Hoop]

An Example.....When the market is throwing some nervousness at you..what do you do?..All this talk of the market ready to crash atm...tempts you to partially cash up..unfortunately most of the times in the past after you have heard this same scenario, nothing comes of it, and you've ended up having to buy back in at a higher price than you sold...

So.... is there something wrong with your personal investing system or do you dismiss it as a Market place that is irrational atm....

You have a good system you say.....You may think you have a good system but do you actually abide by it??????

I hear you say... I work with much more complicated systems and I have moved on above the basic simple stuff...no need to read any further

When I get a period of inefficient returns for no apparent reason that I can see, I always find it a good leveler to go back to the basic simple stuff and see how many golden rules you are busting......

Thanks to Todd Harrison & Minyanville for these articles

The Ten Trading Commandments

By Todd Harrison AUG 10, 2011 12:00 PM

In the end, a disciplined approach pays the bills.

"Fight? No, not yet. Not until me and Harvey get the rules straightened out.”
--Butch Cassidy

I remember why I wanted to be a trader. I figured that the easiest way to make money was to stand near the cash register.

Of course, as I discovered throughout my career, there's a reason consistent producers get paid the big bucks. Flashy bets and big swings sometimes connect but in the end, a disciplined approach pays the bills.

I've tripped plenty through the years, missteps that almost cost me my livelihood, but persevered, climbed the ladder and morphed those mistakes into valuable lessons.

I matured as a vice-president at Morgan Stanley (MS), a Managing Director at the Galleon Group and as the President of Cramer Berkowitz, a $400 million hedge fund. My approach wasn't always constant but in the end, certain rules allowed me to stay in the game.

These are those rules.

Respect the price action but never defer to it.
Our eyes are valuable tools when trading but if we deferred to the flickering ticks, stocks would be "better" up and "worse" down and that's a losing proposition.

Discipline trumps conviction.
No matter how strongly you feel on a given position, you must defer to the principles of discipline when trading. Always attempt to define your risk and never believe that you're smarter than the market.

Opportunities are made up easier than losses.
It's not necessary to play every day; it's only necessary to have a high winning percentage on the trades you choose to make. Sometimes the ability not to trade is as important as trading ability.

Emotion is the enemy when trading.
Emotional decisions have a way of coming back to haunt you. If you're personally attached to a position, your decision making process will be flawed. Take a deep breath before risking your hard earned coin.

Zig when others Zag.
Sell hope, buy despair and take the other side of emotional disconnects (in the context of controlled risk). If you can't find the sheep in the herd, chances are that you're it.

Adapt your style to the market.
Different investment approaches are warranted at different junctures and applying the right methodology is half the battle. Identify your time horizon and employ a risk profile that allows the market to work for you.

Maximize your reward relative to your risk.
If you're patient and pick your spots, edges will emerge that provide an advantageous risk/reward profile. Proactive patience is a virtue.

Perception is reality in the marketplace.
Identifying the prevalent psychology is a necessary process when trading. It's not "what is," it's what's perceived to be that dictates supply and demand.

When unsure, trade "in between."
Your risk profile should always be an extension of your thought process. If you're unsure, trade smaller until you identify your comfort zone.

Don't let your bad trades turn into investments.
Rationalization has no place in trading. If you put a position on for a catalyst and it passes, take the risk off—win, lose or draw.

There are obviously many more rules but I've found these to be my common threads through the years. Each of you has a unique risk profile and time horizon, so some of these commandments may not apply.

As always, I share these thoughts with hopes that they add value to your process. Find a style that works for you and always allow for a margin of error. Any trader worth his or her salt has endured periods of pain but if we learn from mistakes, they morph into lessons.

Good traders know how to make money but great traders know how to take a loss. For if there wasn't risk in this profession, it would be called "winning" rather than "trading."

Good luck today.

R.P.

Twitter: @todd_harrison
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12 Cognitive Biases That Endanger Investors

By Todd Harrison JAN 17, 2013 7:50 AM

What you don't know can impact performance.

Editor's Note: Todd posts his vibes in real time each day on our Buzz & Banter.

I recently came across a terrific article that addressed 12 cognitive biases that prevent human beings from behaving rationally. As perception is reality in the financial markets, I thought it might be useful to address those issues through the lens of a trader.

1. Confirmation Bias

This is a fatal flaw of trading; we tend to surround ourselves with information that validates our own point of view and dismiss input that conflicts with our reasoning (also known as cognitive dissonance). This is the primary reason why we always strive to see “both sides of every trade” as the residual grist between variant views is where education—and profitability—resides.

2. In-Group Bias

This is a manifestation of confirmation bias, or the tendency to surround ourselves with those who share similar takes on the tape. This could pertain to our physical environment or a virtual experience, such as Twitter. Not only does this provide a false sense of security in our individual viewpoints, it makes us suspicious—or angry—with outsiders who dare to question how we feel. (See also: The Gold Scold.)

3. Gambler’s Fallacy

One of the most famous disclaimers in finance is that past performance is no guarantee of future results. This bias is often referred to as a “glitch” in our thinking in that it extrapolates what happened in the past to construct an idea of what will happen the future. How many of you have played roulette at a casino under the premise that a string of red increases the likelihood of a black outcome? That’s flawed thinking; the odds of red (or black, for that matter) or 48% on each independent spin.

4. Post-Purchase Rationalization

One of our Ten Trading Commandments is that the definition of an investment should never be a trade gone awry. Nobody initiates market exposure expecting to lose money, but we should never post-rationalize our risk (such as ignoring stop-losses or throwing good money after bad). We would be wise to remember that good traders know how to make money but great traders know how to take a loss.

5. Neglecting Probability

History is littered with stretches where in hindsight we’re reminded not to confuse brains with a bull market. This bias limits our ability to properly assess risk, whether it’s overstating an unlikely event (such as buying a stock for a takeover) or understating an unlikely event (such as Y2K, the fiscal cliff, or a terrorist attack). Tail events do happen, of course, but betting on an outlier is a long shot by its very definition.

6. Observational Selection Bias

This is when we suddenly notice something we haven’t noticed before, and wrongly assume the frequency has increased (when it hasn’t). Let’s say I bought cannabis stocks as a way to play (what I perceive to be) the legalization of marijuana. All of a sudden, everywhere I look, there are more and more signs that support my thesis; the topic is featured on 60 Minutes, it’s a hot-button issue during the election, it gained momentum in the mainstream media. While some of that may prove true, I am on the lookout for news, whether it’s conscious or not. 7. Status-Quo Bias

Most of us are creatures of habit in our own way; we use the same toothpaste or align with a particular smartphone device. That routine often extends to our investments in the marketplace; we’re comfortable with the stocks (or indices) we often trade and often miss opportunities outside of that comfort zone for fear of the unknown. Change isn’t only positive, it’s inevitable.

8. Negativity Bias

Let’s face it: We live in a sensationalist society where scare tactics and negative headlines garner the most attention. If you doubt this for a minute, turn on your local news tonight. Scientists theorize that we perceive negative news to be more important than positive news. The risk—for the bears and for humans as a whole—is the tendency to dwell on bad news rather than embrace good news, and there’s the added twist that the stock market is widely considered to be a leading indicator.

9. Bandwagon Effect

How prevalent is this when it comes to the financial markets? They teach it in college as a stylistic approach (momentum investing)! Nobody in our business—or in the media—wants to miss a move in the stock market, and history is littered with bubbles and busts that demonstrate this bias in kind. In life, this is driven by our innate desire to “fit in and conform"; in the markets, it’s driven by two factors: fear and greed.

10. Projection Bias

This is predicated on projecting our thoughts and beliefs onto others and assuming that others are wired the same way (they’re not). This can lead to "false consensus bias," which not only assumes that other people think like we do, but that they reach the same conclusions. In short, this creates a false consensus, or sense of confidence when in fact one doesn’t, or shouldn’t, exist.

11. The Current Moment Bias

This is a direct descendent of the immediate gratification mindset that dominated society for many years—and some will argue that the government is currently operating in this mode, mortgaging our children’s standard of living to achieve short-term fixes. In short, we want to live as well as possible and pay for it at a later date (as evidenced by the level of debt and our growing deficit). The housing crisis was rooted in this bias, as is the basic concept of leverage.

12. Anchoring Effect

This tendency, also known as the relativity trap, compares a situation to a limited sub-set of information; it’s when we focus on a number or value and extrapolate it to a current situation. This often manifests in the marketplace through the fundamental metric, when we observe that a stock is “cheap” relative to its peers or a historical precedent (also known as a “value trap”).

R.P.

Twitter: @todd_harrison

[Hoop]

An interesting piece in my E=mail box this morning from TraderPlanet.com




Simplicity: Why Don't We Appreciate It?

by Vadym Graifer

There is one curious phenomenon that I observe for a long while. You see, my trading approach is fairly simple (let's make a distinction at once -simple doesn't always mean easy). It's a few chart formations, reading the volume, assigning a transparent and logical structure to the setup and following the standard procedure once a trade is triggered. I admire the simplicity,
I enjoy it, and I am a fan of an old phrase by Leonardo: Simplicity is the ultimate form of sophistication.

Yet time and again I encounter people disappointed by how simple my trading approach is. Yes, disappointed and skeptical - even though they see for themselves that it works. Imagine my amazement when I hear something to the effect: "Yeah, I observed you in action, followed some of trades, made money... read trading logs, see that you are fairly consistent... But come on, market is much more complicated than this! There is macroeconomics, there is stochastic, there is this, that, oh and that - and you ignore all this stuff. It makes no sense. Hundreds of pundits devote their life to all the analysis, and you are telling me you can do without any of that? It makes no sense. It makes no sense."

- "Okay... but hey, you do see that it works, right?"

Awkward silence. Pause. Blank stare. Then life returns to my counterpart's eyes as the needle finds the familiar groove: "See all these blogs? magazines? TV channels?..." Etc. You get the idea.

So, why do we do this? Why is simplicity not enough? Worse yet, why is it not enough even though it's proven as an effective approach to trading?

I have my answer to that. See if it's something you can relate to. It goes to the root of the very reason for our trading. Why do we trade? Sure, everyone immediately answers "to make profits" - but is it really so? Or rather, is it true for all of us all the time? In my experience, no. For many of us, it's an intellectual challenge that we are after - we enjoy analysis, arguing points, proving our views to others... and all this stuff may or may not be relevant to trading in its purest form (which is Enter, Exit, add to your Profit or Loss column). If one's motivation is such intellectual exercise, my approach won't satisfy that person. More than that, to some it feels almost as insult!

Traders know how such analysis can and often do lead to entrenched opinion which triggers Ego and leads to a stubborn defense of one's losing position. It's also a point emphasized in A Taoist Trader course. Let me cite a quote from that course:


Much overcomplicated thinking obfuscates the simplicity and clarity of the real
world. Knowledge must be useful and practical.
...................

In comprehending all knowledge,
Can you renounce the mind?
In Taoist philosophy, there are two types of knowledge: useable knowledge that
contributes to the achievement of a goal (daily contentment), and knowledge that does not. The only knowledge worth pursuing is the knowledge that serves the purpose. Our ability to adapt to changes in an environment is a double-edgedsword. Our mind sometimes accepts external values without skepticism.


The amount of information surrounding the markets is mind-boggling. Some of it is useful in the process of decision-making and some serves no useful purpose at all. A trader carefully observes which information helps him navigate the markets and which wastes his time and adds to confusion. Practical usefulness measured by actual performance is a trader's criterion to evaluate which sources should be taken into account and which should be dismissed. A trader must avoid paralysis caused by endless and contradictive information flows.
If you ever catch yourself questioning simple trading approach merely because of its simplicity, ask yourself: Why are you trading...

[winner69]

“If we have data, let’s look at data. If all we have are opinions, let’s go with mine.” – Jim Barksdale