Never Revenge On The Market..........

Tgs: irect correlation, perspective, relationship, revenge

There is a direct correlation between your ability to let the market tell you what it is likely to do next and the degree to which you have released yourself from the negative effects of any beliefs about losing, being wrong, and revenge on the markets. Not being aware of this relationship, most traders will continue to observe the market from a contaminated perspective.

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“One common adage on this subject that is completely wrongheaded is: you can’t go broke taking profits. That’s precisely how many traders do go broke. While amateurs go broke by taking large losses, professionals go broke by taking small profits.

The problem in a nutshell is that human nature does not operate to maximize gain but rather to maximize the chance of gain. The desire to maximize the number of winning trades (or minimize the number of losing trades) works against the trader. The success rate of trades is the least important performance statistic and may even be inversely related to performance.”

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One thing we should have learned in the financial crisis was how interconnected the world is and despite the pain and strain of the last few years, there has been little, if any, progress in reducing systemic risk. When the regulators developed the Basel rules they used historical data which suggested that country defaults were rare and largely uncorrelated, and so the result was preferential capital rules.

But those factors also drove the preferential capital rules for mortgages, and we know how that turned out. What we are witnessing is a highly correlated deterioration in developed economies at a time when there is untenable debt and an incredibly tangled, and still largely unregulated, derivative machination tying the world together. Through this lens, Japan is Ireland is Greece is Portugal… and eventually, it will be the United States as well.

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Three Common Emotional Pitfalls

Fear of missing out occurs when a trader is more afraid of missing an opportunity than they are of losing money. As a result, traders tend to overtrade in a desperate effort to ensure that they do not miss out on money making situations. This over trading can then potentially trigger an under trading response if the traders experiences a “trading injury” such as a big loss, along the way. They way to solve this is first to accept the reality that you are always going to miss out on something, somewhere. The second step is to establish game plans on paper and be held accountable to executing those plans.

Focusing on the money and not the trade limits performance because the trader quantifies their success based on their profit and loss data. As a result, when he or she is up or down a certain amount of money that they view as significant, then they alter their trading behaviors regardless of what the actual, real trading opportunity is that is presented to them. The way to solve this is to quantify your success based on HOW you traded not HOW much you made on the trade. Did you have edge? Was it your pitch? Did you make a high quality trade?

Losing objectivity in a trade occurs because traders develop emotional ties to their previous entry levels. The trader is no longer making trading decisions based on the trade but rather based on how much they are up or down in the trade. The key to overcoming this is for the trader to continually ask him/herself, “Why am I in this trade?” and “If I was not in this trade right now, would I enter this trade long, short or do nothing?”