Friday, March 13, 2009

Trading With an Independent and Open Mind


Well, once again a shout out to the source of all Despair for a worthwhile market lesson. It's true that minds, like parachutes, only function when they're open. I find that trading is most successful when I'm entertaining multiple hypotheses and scenarios at any one time. For instance, as we near the top of the prior day's range, I'm mentally rehearsing what I would do if I see expanded buying on increased volume, but I'm also preparing for what I would do if I see the buying interest drying up.

One of the hardest lessons for traders to learn is to not fight markets. Once you become attached to a particular idea or scenario, your ego wants to be right. Instead of focusing on making money, you're caught up in proving yourself to be correct. That makes it impossible to quickly exit a wrong position and flip it into a winning one.

By entertaining multiple scenarios at any one time, we don't allow ourselves to become too attached to any one. Our thinking takes on an "if-then" planning that is focused on process, rather than P/L. This keeps us grounded in the reality that there is always a measure of uncertainty in markets; we always need to be prepared for markets to disconfirm our preferred scenarios.

But what if, as the poster above suggests, we lose our minds altogether? We become filled with frustration, overconfidence, or fear, and now we don't really have a planned scenario at all. Many times, out of loss of confidence, we'll stop thinking about markets altogether and lean entirely on the analyses of others. We forget about our parachutes and try to borrow the chute of a selected guru. Well intentioned as some readers of this blog are, they sometimes ask me for answers in lieu of taking the steps to find their own. Even if my ideas are sound, substituting those for one's own independent judgment cannot breed self-confidence. No one's parachute can take the place of one's own.

In my last post, I made a mistake out of haste and referred to a "bear trap" when I meant a "bull trap". A couple of readers quickly pointed out my error. I decided, however, to keep the mistake intact as a reminder of fallibility--my own most of all. Learn from others, but ultimately make the learning your own. You'll sail to earth successfully only with your own chute, fully open.

RELATED POST:

Trade Like a Scientist (see links in this post as well)
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5 comments:

Matthew C. said...

Well intentioned as some readers of this blog are, they sometimes ask me for answers in lieu of taking the steps to find their own. Even if my ideas are sound, substituting those for one's own independent judgment cannot breed self-confidence. No one's parachute can take the place of one's own.


I really believe this is essential for any discretionary trader.

If you can evaluate how the market is trading on your own, it is a very different feel from trying to apply concepts and frameworks that you read about in a book but don't "see" in the market naturally and easily. Like a skilled and well-practiced athlete, you can swing into and out of trades with ease, dexterity, and confidence gaining the best entry and exit points (which is half of your profitability!) instead of constantly hesitating, missing moves, or (even worse!) chasing the trends late, catching a reversal that whips you out at a loss, only to see the trend move back into (what would have been) profit.

zircon-212 said...

The Master and legend Ed Seykota is happy to share his holy grail and offer The Essentials

Ride Your Winners
Cut Your Losses
Manage Your Risk
Use Stops
Stick to the System
File the News

the rest he leaves up to the individual to figure out

Curtis said...

I'm often expecting the markets correctly. The markets have been recently contrary and then yesterday we had a confluence of agreement among everyone. We had strong momentum which I have a rule against shorting but my contrary indicator pegged extreme. The more I tried to make a right expectation, the more I become concerned with my ego. I finally came to my senses and realized I don't know any more then anyone else most of the time.

Everything is a chance, a probability, sometimes we are more likely to have our expectations met, but in the end nothing is for sure.

It is common to read about traders expressing problems in knowing when to take a profit or non maximal loss. If the traders understands everything is a probability, there is no right or wrong. Only at the moment can we know the price with any accuracy with a precision of +- ticks thus at point time T we know 100%, as time expands beyond this we know less and less.

What some people probably don't think about is that the probabilities are always changing thus a trader can not afford to think about their ego or be fixed on a set course of action. It's like in poker at each stage we have new probabilities. Some traders only play their hole cards instead of adapting to the situation.

I don't per say agree with you but I agree with your cognitive processes.

By thinking in terms of probabilities, the significance of being right diminishes as the range of possibilities taken into account increases freeing the trader to take into account the ever new situation.

Brett Steenbarger, Ph.D. said...

Thanks, all, for the excellent perspectives and reflections.

Brett

RooS said...

An amazing read.... this is something that has helped my trading tremendously. After yesterday's action (6/24), I thought for sure we were headed back down to test the 875 area on the /ES today. I kept 2 scenarios on my mind, and I was fortunate enough to hop on the right trade this morning. It was a complete reversal of what I originally thought, but at least I became aware of more possibilities.

Thanks for everything you share on here; do you mind if I share your article on my blog?

- Ross