Wednesday, May 06, 2015

Market Lessons From The Rodeo

Now that's some good cowboy wisdom.  No cowboy ever said, "Ride the horse that fits your personality."  Hell, no.  If you want to win at the rodeo and rope that steer, you ride your best horse.

But every rodeo needs its clowns to distract the bulls; it's only markets that have the clowns that distract the bulls and the bears.  Once in a while the clowns say something that gets on my nerves, kind of like that guy in the square dance who doesn't know allemande left from allemande right and messes things up.  But then I realize that if I'm distracted by the clowns, then I'm the bull, not the bull roper.  

The single thing I've done this year that has helped my trading performance is ride my best horse and forget everything else.  I examined my winning trades, backtested the most robust patterns over multiple time frames, and now I'm only trading those.  If there's no robust pattern, I don't trade.  And that's most the time.

It turns out that those patterns occur when the bulls and bears are most distracted by clowns.  Very strong markets continue their strength, but people want to fade them.  Very weak markets continue their weakness and people stop out in panic.  Underreaction and overreaction--those are solid behavioral foundations of market edges.

When I traded patterns that fit my personality, it was like running a clothing store and stocking it only with merchandise that fit my tastes.  A successful store figures out the tastes of customers and even anticipates shifts in those tastes.  Success is about figuring out the market's personality, not indulging your own.  And that personality has a distinct set of behavioral biases if you can just focus on the cowboys and not the clowns.

Further Reading:  Discipline and Devotion