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.


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