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September 30, 2010
Day Trading
If a trader is willing to give a large share of his time and energy to study of the markets and of technical considerations, and if he has the proper ability and proper personal makeup, then it seems quite certain that he will make greater profits on the shorter time frame as opposed to position trading. Certainly the possibility for such profit is much greater in short-term trading.
On the other hand, the individual who is unable or unwilling to give up a good portion of his time and energy to the study of technical considerations, who knows or finds himself erratic in his trading success or unfitted psychologically for short-term trading, will, of course, find greater profit, slower but more certain, by confining his operations to those for the long-swing.
The third and most likely possibility is that most individuals will lose either way. This is the real key:
… a study done by one of the major clearing firms analyzed what percentage of their retail accounts were profitable in the mid-’80s to mid-’90s, and that number came in around eight percent. The most profitable accounts were those with the highest activity levels [ed. pre-tax profits, of course]. But, overall, the floor traders and specialists have always been the most profitable group of traders in history.
It seems the secret to profitable short-term trading is to hold the order book, “proper personal makeup” and “the study of technical considerations” be damned
September 29, 2010
GAME PLAN
The Trading Plan comes first and should account for the following parameters:
1. Entering a trade.
2. Exiting a trade.
3. Stop Placement.
4. Position Sizing.
5. Money Management.
6. What to Trade.
7. Trading Time Frames.
8. Back Testing.
9. Performance Review.
10. Risk vs. Reward.
The Game Plan consists of putting the parameters of the Trading Plan to work in day to day trading with the following benefits:
1. It will force the trader to select a trading style.
2. It will encourage market study.
3. It will aide in helping pick the correct trades.
4. It will prepare the trader for what the market has to offer.
5. It will help in properly monitoring and exiting trades.
6. It will keep the trader from overtrading.
7. It will help with finances.
8. It will keep the trader focused.
9. It will take the gambling out of trading.
10. It will make a better trader out of you.
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September 26, 2010
Five mistakes everyone should make
(RealSimple.com) -- Five successful people, ranging from a noted psychologist to a legendary tastemaker, describe their most startling (and most revealing) blunders.
1. Totally embarrass yourself.
After the publication of my book "Reviving Ophelia" in 1994, I was invited to a prestigious party. I got all dressed up; I was so excited to make connections.
I had a wonderful time and was elated as I was walking back to my car. Well, that is, until I felt something on the back of my skirt.
While I had gotten dressed for the function, I had apparently sat on a stack of clean laundry, and a pair of underwear had affixed itself. I had spent the entire night that way!
I was mortified, but at the end of the day, it just didn't matter. I went to other similar events after that, and as far as I could tell, that incident didn't change people's impression of me one little bit.
I tend to think that we are all always one static-cling mishap away from looking like a total idiot -- and believing that helps me keep gaffes in perspective. And, of course, these grand embarrassments eventually loosen their grip anyway, leaving you with an ace-in-the-hole story to crack up your friends with for years to come.
-----Mary Pipher, Ph.D., has been a psychotherapist for more than 30 years. Her latest book is "Seeking Peace."
RealSimple.com: What to say in awkward social situations
2. Ruffle people's feathers.
Years ago, when I began working at a business school, I sat in meetings quietly, afraid I would say the wrong thing. Some people spoke up and were scoffed at. I didn't want that to happen to me, so I held my tongue.
I soon realized that my silence implied that I was on board with whatever was being said. I started voicing my opinion, even on controversial subjects, regardless of how my comments would be received.
Occasionally colleagues would roll their eyes, but I found that even those who disagreed with me came to respect me for not backing down. Sometimes my ideas will make me unpopular, sure, but that's better than being a blank slate.
---Mary C. Gentile, Ph.D., is a senior research scholar in business management at Babson College and the author of "Giving Voice to Values".
RealSimple.com: 18 phrases to avoid in conversation
3. Follow trends blindly
Looking back on my life, I find it hard to think of a fad I did not embrace. When glam rock glittered, I bleached my hair and wore a dangly earring. When punk rock raged, I donned black leather.
Not until my 50s did I find my look -- I call it Carnaby Street mod circa 1966 -- which allowed me to hop off the trend merry-go-round.
But I am grateful for this process: It took a fashion odyssey to help me find out who I really am.
---Simon Doonan has been the creative director of Barneys New York since 1986. He is the author of "Eccentric Glamour".
RealSimple.com: Fall's top trends -- and best bargains
4. Be willing to fail -- doing something you love.
In 1997 I had just graduated from law school (with tons of student-loan debt) and was interviewing for high-paying positions at big firms. The problem was, my heart wasn't in it. So I took myself out of the running in order to build a small Internet publishing company with a friend.
After a year of barely staying afloat, our venture went the way of a 404 ERROR message. I was broke and unemployed, and Sallie Mae was hot on my tail. I wondered what endeavor I should try next.
It sounds crazy, but once again I decided to throw caution to the wind and just do what I wanted. I began working as a trial attorney for the U.S. Department of Justice.
Over the next few years, I held a wide array of fascinating jobs that I took because they captured my imagination: serving in the military, reporting from Iraq for the Washington Post, and, most recently, becoming a full-time author.
Some might consider me flighty for changing careers so often, but I contend that the key to professional happiness is asking yourself two simple questions every single day: Are you passionate about what you do? And if not, what are you going to do instead?
--Bill Murphy Jr. is the author of "The Intelligent Entrepreneur".
September 23, 2010
QUESTION YOURSELF BEFORE ENTERING THE TRADE
Ask these questions:
* What annual rate of return do I want?
* Do I want to trade full time, part time, hardly any time?
* Can I handle the stress of day trading and short term trading?
* Do I have the patience for long term trading?
* What kind of personality am I? Do I need lots of action, Do I need
to make decisions all the time?
* What trading books have i read and which top traders do I most admire
and why? Could you easily copy their style of trading?
Existing-Home Sales Move Up in August
Washington, September 23, 2010
Existing-home sales rose in August following a big correction in July, according to the National Association of Realtors®.
Existing-home sales1, which are completed transactions that include single-family, townhomes, condominiums and co-ops, increased 7.6 percent to a seasonally adjusted annual rate of 4.13 million in August from an upwardly revised 3.84 million in July, but remain 19.0 percent below the 5.10 million-unit pace in August 2009
Existing-home sales rose in August following a big correction in July, according to the National Association of Realtors®.
Existing-home sales1, which are completed transactions that include single-family, townhomes, condominiums and co-ops, increased 7.6 percent to a seasonally adjusted annual rate of 4.13 million in August from an upwardly revised 3.84 million in July, but remain 19.0 percent below the 5.10 million-unit pace in August 2009
Golden rules
Nine golden rules for developing a trading system
Perry Kaufman, author of New Trading Systems and Methods (4th Ed)
1. Know what you want to do before you start.
Base your trading on a sound premise. It could be an observation of how prices move in response to Government policy, a theory about how prices react to economic reports, or simply a pattern that shows up at the same time each day or each month. This is the underlying premise of your method. It cannot be discovered by testing everything on a computer. You need to know it in advance.
2. State your idea or question in its simplest form.
The more complex it is, the more difficult it will be to evaluate the answer. More complex methods do not usually work as well as simple ones.
3. Do not assume anything.
Many projects fail on basic assumptions that were incorrect. It takes practice to avoid making assumptions and to be critical of certain elements that you believe to be true.
Prove everything to your own satisfaction.
4. Try the simplest and most important parts first.
Some of the rules in your trading program will be more important than others. Try those first. It’s best to understand how each rule or technique contributes to the final system.
Then build slowly and carefully to prove the value of each element of the system.
5. Build one step at a time.
Go on to the next step only after the previous ones have been tested successfully. If you start with too many complex steps and fail, you will have to simplify to find out what went wrong. The ability to readily understand the
operation of each part of your system is called a transparent solution, rather than a fully integrated or complex one. Transparent solutions are very desirable.
6. Watch for errors of omission.
It may seem odd to look for items that are not there, but you must continually review your work, asking yourself if you have included all the necessary costs and accounted for all the risk. Simply because all the questions were answered correctly does not mean that all the right questions were asked. Important questions may be missing.
7. Question the good results.
There is a tendency to look for errors when results are extremely bad, but to accept the results that are very good. Exceptionally good results are just as likely to be caused by errors in rules, formulas, or data. They need to be checked as carefully as extremely bad results.
8. Do not take shortcuts.
It is sometimes convenient to use the work of others to speed up the research. Check their work carefully; do not use it if it cannot be verified. Check your spreadsheet calculations manually. One error can ruin all of your hard work.
9. Start at the end.
Define your goal and work backwards to find the required input. In this way, you only work with information relevant to the results; otherwise, you may expend a lot of unnecessary effort.
Observation
Investing is the most difficult of sports: nowhere else does one begin a career by opposing the world’s most accomplished professionals.
-Respect is the first casualty in lost love.
-Four industries dominate the economy: hope, escape, protection, and convenience.
-Success is the point at which talent and skill meet opportunity.
-The aim of all trading education: to encourage trading.
-The printing press democratized the acquisition of knowledge; the computer has democratized its dissemination.
-Date markets before deciding to marry them.
-Anatomy of a bad trade: Hope, then despair.
-Love, once present, never dies. It must be killed.
-Many a trader fears boredom more than loss, thereby experiencing the two in sequence.
-Work without talent is drudgery; talent without work is self-betrayal.
-Good traders master a market; great traders master markets.
-Goodness of character is measured in loyalty to others; greatness of character is measured in loyalty to principle.
-One encounters losing traders as often as one encounters losing golfers–and for much the same reason.
-Show me what a man loathes, and I will show you what he cannot accept in himself.
-Trading is the only sport in which the rules governing the players change constantly—and without notice.
-The essential message of Web 2.0: Knowledge resides in minds, not just mind.
-Two traders: one increases size after a loss; the other gets smaller. Both continue to lose.
-The absence of self-acceptance too often masquerades as the quest for self-improvement.
-Fidelity to purpose: the mark of good investments
and great investors.
-Talent is the better part of trading psychology.
-The foolhardy trade is the courageous trade held a few minutes longer.
-In all fields, performance belongs not just to the talented, but to the prepared.
-Self esteem is treating ourselves with justice, not kindness.
-Addiction: when the desire to trade exceeds the desire to make money
September 22, 2010
Wrongway
Without a plan. Get one already. It does not have to be good right now. I have been accused more than once of always thinking I am always right. I am just confident. The only reason I can be confident is because I am willing to change if the information changes. I have to admit I am wrong a lot. You will have to admit your plan is flawed too.
Without good notes. The market changes very fast. The brain is over stimulated, especially in the beginning. Your recall of events will be better if you write them down. The goal is to learn the most, the cheapest. At the end of the day when you review the charts you will not believe you took that trade. There will be something that you missed that could have helped you to act differently. It is your job to make sure it does not happen again, good notes help.
Not maintain trading environment equilibrium (TEE). Have you ever said or done something that you were not proud of because of emotion? What if you could stop time, take a few breathes, evaluate the situation and then act? You have that opportunity in trading, use it. They say that you regret not saying or doing something when you have a chance. That does not apply to trading. Those situations are a few in a lifetime type situations. No trade is more important than another unless it is your last. Let me say that again, no trade is more important than another unless it is your last. Yes you are going to miss the “winner” but it was hypothetical.
Losing more than you budgeted. Every Rupee counts, for every Rupee you lose you have to make another to get to even. This is not a normal transaction, you are not guaranteed anything other than experience. You should be a better trader tomorrow. There is nothing worse than having to have your “best day ever” to get back to even. Sometimes you are wrong, sometimes your system is broke, be able to trade tomorrow. Tomorrow may be next week.
Not having risk capital. If the market has to go your way a certain amount for you to pay your mortgage you are in trouble. The mind goes from reacting to what is there to hoping and praying. It may work from time to time but it is not a dependable strategy.
To summarize. There are no right ways to do anything, there are more efficient ways but that is based on experience. There is a path to failure, fight those battles. Call your father or those that have/ had a positive effect on you and thank them.
September 21, 2010
Wisdom
Burton Pugh, a well known trader, market commentator, and writer in the 1930s wrote numerous books, one of which discussed his trading methodology and the psychology behind it. Even after 80 years some things never change and most likely never will. Here is a list of some of the great nuggets of wisdom found in his book A Better Way to Make Money.
1. The secret to losing money in the market is to know why. “The losers “were ‘playing the market’, not using it intelligently. The fellow at the other end of the deal, who was using it intelligently, not ‘playing the market’, is the one who got the money.”
2. “It is an undeniable fact that indiscriminate trading in a hectic market will send one to financial oblivion quicker than any other known process.”
3. “The most careful preparation-a systematic plan-is one of the essentials of success.”
4. “Market action is not complex but surprisingly simple. Yet it is often made to appear complex by newspaper forecasters and market letter writers.”
5. “Market action is human nature in action.”
6. All market movements are based on “two deep-seated and entirely natural emotions: the desire for gain and the fear of loss.”
7. “So anxious are people to find some talisman, some magic wand, that will help them secure the hidden riches of the market, that they will try anything from coin-flipping to crystal gazing to secure the desired assistance.”
8. “What marvelous results could be attained in the business of making money if those who buy stocks would take a little time to learn a few simple facts about the market in which they are blindly reposing their faith.”
9. “Market students are continually diverted from making true evaluations of securities and commodities because they study the statistics made by prices instead of the psychology of prices.”
10. “Adopt one system of trading and stick to it, just as you employ and stick to one physician in whom you learn to have confidence.”
11. “One of the most important points in your market education is to learn as early as possible that the customary and supposedly weighty market news is of very small importance. The news only looks important.”
12. “Don’t trade just because you can afford to lose.”
13. “Practice makes perfect is an old copybook adage that works well in the market place.”
14. “If a trade fails to come out right, the error will be found in the operator-not the market.”
15. “Trading is simple another form of business. Treat it as such.”
16. “Trend to the investor is like the vein of gold to the miner, who must follow the vein faithfully if he expects to get the yellow metal.”
17. “Stocks are made to buy and sell…not to be bought and held.”
18. No matter what a thing costs, stocks or otherwise, “it is worth only what you can somebody to pay for it.”
19. People will always be prone to be extravagantly optimistic or dolefully in the slumps and “in this action is unlimited wealth for the men who realize this fact and will use it with confidence and decision.”
20. “Success is the most desirable thing in the world, but it is an eliminating contest. It may trample the thoughtless trader into the dust, but it will pour large treasure into the laps of those who work in sincere harmony with its laws.”
September 20, 2010
September 19, 2010
September 17, 2010
Sugar stocks
Sugar stocks have fallen around 30% compared to highs in Jan 2010. A small analysis about why this sector has fallen over this period.
1. Overview of indian sugar market
* India is the world's top consumer of sugar and the biggest producer behind Brazil.
* Sugar, a politically sensitive commodity, is heavily regulated by the government.
* The government sets the price mills must pay farmers for cane. It also buys 10-20 percent of mills' output below market rates for subsidised sale to the poor and fixes the quantity each mill can sell in the open market.
* The governments of major producing states try to woo cane farmers, a sizeable chunk of their voters, by forcing mills to pay more than the floor price fixed by the federal government.
* India's sugar sector suffers from sharp cyclical swings. Lower output and higher prices trigger a rush to plant cane for the next season, leading to a glut every third year, forcing farmers to swith to other crops.
2. Current Scenario (Mar 2010)
* Sugar production for 2010 is more (17 mill tone) compared to estimated (14-15) due to higher sugarcane production.
* No plan from govt to impose import duty on sugar. Sugar from brasil can come in easily now.
* Global prices have gone down from $800 to $500.
* Brasil cane is more diverted to ethanol.
* Most mills have backup of cane (80%) bought at high prices. Realizations have droped from Rs.37 per kg to 32 per kg.
* Sugar production could increase in year starting Oct.2010.
India Industrial Production(WHATS NEXT)
Industrial Production in India expanded 13.8 percent in July of 2010. Industrial production measures changes in output for the industrial sector of the economy which includes manufacturing, mining, and utilities. Industrial Production is an important indicator for economic forecasting and is often used to measure inflation pressures as high levels of industrial production can lead to sudden changes in prices. From 1994 until 2010, India's industrial production averaged 7.49 percent reaching an historical high of 17.70 percent in December of 2009 and a record low of -0.20 percent in December of 2008. This page includes: India Industrial Production chart, historical data and news.
INFLATION(WHAT HAPPENS NEXT)
India’s Second Quarter GDP Rises To 8.8%
India's economy expanded 8.8% in the second quarter from a year earlier, compared to an 8.6% on-year expansion in the first, lifted by robust activity in manufacturing.
Agricultural output along with strong development in the Industrial and Mining sector has helped to boost the Indian economy. Agricultural output rose 2.8 per cent y-o-y thanks to improved harvests. Industrial production increased by 12% and in the mining sector by 9%.
However, in spite of strong supply data, private consumption slumped to 0.3% y-o-y in Q2 from 2.6% in Q1, fixed investment has dropped to 3.7% from 17.7%, government consumption growth was negative and both export and import growth contracted.
The Reserve Bank Of India has stated that it had seen an annual growth of 8.5% steadily. The main priority of the Reserve Bank is to curb the ongoing inflation, which peaked at 11% last month. Interest rates have been increased by the banks to contain the inflation, but it could slow down the growth of the Indian economy in the coming months. But even thought there has been a rise in the interest rates there hasn’t been much change in the distribution of loans, the Indian customer is hardly affected with the hiked interest rates.
September 16, 2010
Maintain Your Trading Confidence
Regardless of your current experience level in trading, everyone had to start at the beginning. I suspect that the emotions and anxieties were pretty much identical for all traders early in their development. And since then, each trade has gotten easier as your confidence has grown. That's what a learning curve is.
Today I'd like to share two related ideas that should move everybody a little bit further down their learning curve. This will be good for the new-comers as well as the experts, but the traders near the middle of the learning curve will benefit the most. In a nutshell, to become a great trader, you have to do to things. First, master the internal ego. And second, defend the external ego.
1. Master The Internal Ego, So You Can Learn
The idea is a simple one - you must precisely recognize what is keeping you from taking your trading success to the next level. The vast majority of the time, it's your ego getting in the way of your self-education. This isn't the arrogant or over-confident type of ego. Instead, it's more along the lines of a defensive, protective ego - the "I don't need any help" ego. The problem is, that kind of self-shielding ego is what prevents real learning.
Let's take a closer look.
We're all human, and being human, we don't want to admit that we are wrong about anything, including trades. The ego wants to uphold an ideal version of ourselves that allows for only successes and not failures. Many traders collectively lose millions of dollars trying to protect the ego's version of reality. Your goal should be to trade without ego, or without personal judgment of your self worth. Trading is a business, and the businessmen who do the best at it are the ones who treat as such. It's not a reflection of them personally.
In fact it's usually just a reflection of a mostly-mechanized trading system. In order to make money trading, your goal is to keep losses small while letting winners run. Your ego is not equipped to do that naturally, but a mechanical trading system is. That's why we're such big fans of proven trading systems.
But aren't you up against traders with a ton of experience and great trading systems? Absolutely. But remember, everyone follows the same learning curve, and nothing is free. You'll have to spend time and effort to get good at this. How do you do that? Learn! The reality is that you chose to enter each and every trade.
Examine why the losing trades failed, and why the winners were successful. This can be painful, at least initially, since the ego is built to deflect blame yet accept praise (this is why we said the ego can create problems). That's a trap. If you find yourself saying "that was a good trade entry but..." then stop yourself immediately. Either everything before 'but' or after 'but' is inaccurate. If you rationalize or justify poor trades, then you'll never learn from them.
This is an important reality - the ego can prevent real learning. If you can learn to accept some failure without being emotionally devastated, then you'll be a good trader. In fact it's been said that the world's top traders aren't necessarily geniuses - they're survivors. They lasted longer because a rough trade (or a string of them) didn't spook them out of the game. In other words, they didn't take losses personally since they realized perfection is impossible. In so doing, they learned a great deal just by being able to stay in the game longer.
2. Keep Your Trading Private, So Others Can't Crack Your Confidence
So how much can other people affect your trading? There's not enough space here to even really begin. However, there is one characteristic that seems to separate the great traders from the average ones. The great ones realize what kind of problems that a lack of confidence can present, so they don't even risk a shattered ego. How? They keep their trading activities to themselves. While the amateur trader will often tell friends, neighbors, and total strangers about trades he may have entered, it's all too often a setup for disaster.
Call it Murphy's Law if you want, but one of the 'sure-fire' trades you just entered and told your neighbor about will turn against you soon. And like clockwork, the neighbor will ask how it panned out. You have one of two options at that point: tell the truth, or lie. You could lie to the neighbor and say the trade went fine. However, even though the neighbor may not know any better, the damage to our own ego is still a reality.
How? Being forced to deceive also forces us to acknowledge that we may have inferior skills. Instead of just accepting a losing position, we're forced to conceal the trade to protect other's perception of us. The irony is that the lie can cause even more damage to our confidence than just accepting the loss. Speaking psychologically, our subconscious minds can rationalize some incredible stuff that doesn't necessarily have to be true, so don't give it an opportunity to rationalize your decision to stop trading. You're better off not saying anything than saying something you know to be untrue.
On the other hand, you could tell the truth to your neighbor and own up to a bad trade, but that would also negatively impact your confidence. You see, our perception of how others see us has a far greater impact (for better and worse) than our perception of ourselves. It may not be fair or logical, but it's a fact nonetheless. And when we fail publicly - even at our own hands - we start to internalize and misinterpret external data, whether or not it's accurate. In other words, our damaged ego affects our judgment.
For instance, the neighbor may ask "How much did you lose?", while the trader may hear "Why didn't you use tighter stops?"
The neighbor may ask "Why did you buy it in the first place?", while the trader may hear "Can't you do adequate research?"
The neighbor may say "Better luck next time.", while the trader may hear "You have no business being in the market."
You get the idea - enough of those innocent questions and the trader is no longer trading. Or worse, the trader has changed his or her trading patterns in an effort to regain some confidence. And all because he opened the door to his ego!
The only real defense against such an attack is to simply not share the details of your trading with others. There's nothing wrong with telling others you trade, but in no way will detailing your trading activity enhance your return. In fact, it may potentially do the opposite. If you profess a trade position to someone else, you have made a subconscious commitment to it - maybe one you shouldn't have. If you know someone may ask you about that position later, you're more apt to hold it, even if it's a loser you'd normally get rid of.
By not sharing your trades with friends and colleagues, you allow yourself to make mistakes free of criticism. You allow yourself to fail. You allow yourself to focus on finding better trades rather than proving someone else wrong. When you don't have to worry about protecting your psyche, you can shift the focus from defense to offense - a necessary trait for all traders.
MOVE FORWARD
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The steps below are based on the developmental maturity of any trader. Each of us are at different levels in this process. This process can be applied to our overall progress as traders or in the learning of a new strategy. It is important for us to be realistic about where we are personally to become the best trader possible.
HEAR
To HEAR you have to listen and listen intentionally. You will not HEAR properly if you are focused on other things. This situation is especially true on a webinar or during the trading day when the markets are open. It is essential to set distractions aside and HEAR what is being stated.
RECEIVE
To RECEIVE something you have to HEAR it and come into agreement with it. To RECEIVE is to take it unto yourself and personally grab hold of what you have heard and make it your own.
BELIEVE
To be successful you have to believe that what you HEAR and RECEIVE can add value to your current situation. You have to BELIEVE that a specific strategy repeated and correctly executed, regards of any specific outcome, will provide successful results over time. You will act on what you believe In all areas of life. Please make sure you really do BELIEVE it and are not allowing any contradictory mindset to compete with your belief because it is possible to hold two opposing beliefs at once. This is being double minded and leads to instability. Being firm and unswayed in what you BELIEVE can lead to becoming a successful trader.
APPLY
APPLY Is taking action on what you BELIEVE. You will not fully apply something until you fully believe it. Application requires action. You must be willing to pull the trigger on a trade when all of your rules are meet or when all the T’s have been crossed. You must also without reservation pull the trigger to exit at your predetermined stop loss. Regardless of what we think or BELIEVE we will also act out of core or dominant belief. To properly apply ourselves we have to revise our core beliefs. If I APPLY all of my predefined rules for entry and exit even when the trades go against me, my core belief will keep me confident that I did the right thing in making this trade and over time I will accomplish my goals. In addition my loss will not stress me because based on following my predefined rules it was a small loss based on a predetermined, well thought out process.
As we move forward we should focus on hearing , receiving, believing and applying.
The Secret of Brain Wave Vibration
“Damage control can prevent failure, but it will never elevate you to excellence.”
“Now Discover Your Strengths”, by Buckingham and Clifton
When I ran across this quote, I was stunned. “Is that true?” I pondered. Then almost immediately I said, “Of course.”
As traders we need to do both. We need to pursue excellence even as we maintain damage control. We must protect against undue loss even as we seek opportunities for maximum gain.
It’s an emotional, artistic, and technological balancing act summed up by the trading cliché, “Cut your losses, and let your profits run.”
It’s easier said than done. How many times have you skipped a promising trade because you sought to avoid loss? How many times have you jumped out of a winning trade to secure your current profits only to despair as the trade soars into the stratosphere without you?
Computers have been programmed to play checkers not to lose, but the set up turned out not to be sufficient. In order to succeed, the computer had to be trained to play to win.
Many traders have failed because they abhorred loss and feared consequent failure. Other traders have failed because they ignored the possibility of loss in their reckless hunt for gain.
Risk management is necessary, but if it is your primary focus, you’ll have a hard time getting to the pot of gold at the end of the rainbow. On the other hand, if all you think about is the possibility of gain and overlook the potential for loss, you could find yourself falling off a financial cliff.
Trading is a delicate balancing game where optimism requires a seasoning of caution, but the primary goal still needs to be excellence and profit.
September 13, 2010
It’s not the trade, it’s the battle.
Too many traders believe that their last trade is a reflection of just how good of a trader they are (but they are the only ones who feel that way about themselves). This boils down to one word – expectation. If you expect to win all the time, or even the vast majority of the time, you’re setting yourself up for a lot of heartache. That frustration, though, is the very same force that will truly make your negative perception of yourself a reality. And even a good trade can be damaging if you let it warp your disciplined approach. The fact of the matter is that this is a game of odds, and should be played over a long period of time. Focus on the war – not the battle.
Illusion
Trading can be an expression of self esteem; it cannot substitute for a self. To change yourself is noble, but only shattered dreams come from efforts to change your self. You will succeed by becoming more of the person you are at your best, not by overreaching in vain hopes of transformation.
September 9, 2010
September 8, 2010
September 7, 2010
September 6, 2010
NIFTY VIEW
NIFTY CLOSED NOW AT 5576 GO LONG FOR THE TGT OF 5660,5750 WITH THE STOPLOSS OF 5475(SHORT TERM)
INTRADAY VIEW NIFTY CLOSED NOW AT 5576 DESECION MAKING AREA WILL BE AROUND 5598 EXPECTING VOLATITALITY AT THIS LEVEL IF SUBSTAINS AT THIS LEVEL MAY EXPECT A FRESH BUY
CATCH IT IF U CAN
BUY NATIONALIUM AROUND 410 TGT 418,420 SL 404
BUY PRAJ INDUSTRIES ONLY ABOVE 79 TGT 82,83 SL 77
BUY PUNJLOYD ABOVE 112 TGT 115,118 SL 109
September 5, 2010
MONDAYS HOT
HAPPY TRADING
BUY WIPRO @401 WITH THE STOPLOSS OF 395 FOR THE TGT OF 420
BUY TCS @ 840WITH THE STOPLOSS OF 825 FOR THE TGT OF 870
BUY MANAKSIA @102 WITH THE STOPLOSS OF97FOR THE TGT OF 110
BUY WIPRO @401 WITH THE STOPLOSS OF 395 FOR THE TGT OF 420
BUY TCS @ 840WITH THE STOPLOSS OF 825 FOR THE TGT OF 870
BUY MANAKSIA @102 WITH THE STOPLOSS OF97FOR THE TGT OF 110
September 4, 2010
What Are the Limits of Sapient Judgment?
George Mobus teaches computer science to undergraduate and graduate students at the Institute of Technology, Computing & Software Systems at the University of Washington, Tacoma.
His background is quite broad: He has a PhD in Computer Science, an MBA in Decision Science, and a baccalaureate in Zoology (with substantial coursework in math, chemistry, and oceanography) from UW Seattle. His academic focus has been Biology: Specifically, evolutionary, cognitive, neuro-psychology — how the brain works to produce the mind and how did it come about through evolution.
He blogs at Question Everything, where this piece was originally published.
Enjoy:
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Sapient Judgment Has Weaknesses
In my working papers on sapience I describe one of the components of sapience as judgment and provide a brief overview of what role it plays in wisdom. I briefly mentioned some weakness or limitations to ordinary human judgment in that work, but left it a little vague. In this paper I want to go into more detail about how judgment works in the making of decisions and especially what some of the remaining problems with it are with respect to the current state of sapience in Homo sapiens.
Sapient vs. Pre-sapient Judgment
Sapience involves the capacity to influence good decisions (and give good advice) by applying judgment to complex situations. Decision making processing is the main job of intelligence as indicated in the working papers. Decisions need to be made regarding what action or behavior to take given the situation in the immediate environment. While the actual decision processing looks more continuous in nature, this discretized version will hopefully help to illustrate what happens in the brain*. The central circle in the below diagram can be considered a decision node in a decision tree structure (actually more of a web structure than a tree). The job that the intelligence processor has is, given the situation in which the animal finds itself, the “state of the environment”, to make a decision on which of many actions to take.
Figure 1. Sapient decision making depends on tacit memory models that influence intelligent decision making. See text for description.
Immediately surrounding the current decision point is additional information stored in working memory forming the context of the situation, how it came to be, factors that relate directly with the decision to be made. This context along with the current state that activated this particular decision point are fed into the intelligence processor’s causal model of the world. This model has been learned from past experience and represents the best estimate of what cause (from a selected action) and effect (on the future state of the environment as a result) to expect. The model actually contains the decision web along with several background influences such as affective valence marking that helps weight decisions when emotional considerations are operative (curved green arrow).
The learning component of intelligence is responsible for monitoring the actual outcomes of decisions vis-à-vis and building or refining the model over time. Then it uses the model to make selections for actions. The selections are always provisional or heuristic in nature. Intelligence processing is prone to several kinds of errors that might cause a misstep. Also, though not shown here, the creative function of the brain might intercede to suggest a different selection just in case it might lead to a better outcome and that could be the basis for modifying the model.
Some situations have strong survival aspects that are best handled by innate behaviors selected by the limbic system. For example, our innate reaction to a sudden loud noise (freezing, generally in a crouched position) is mediated by a limbic signal that overrides any learned behavior selection in favor of the innate reaction. It depends on the strength of the innate response selection criteria. Some forms of innate behavior can be subsequently overridden by learned behavior if the action selection of intelligence can overcome it**.
Finally we come to the role of judgment in affecting the decision processing of intelligence. In one way we might consider tacit knowledge as providing an extended context, in time and space, background that has been developed and stored in unconscious memory. This is a much larger and more generalized model of situations similar to the current situation plus a generalized history of outcomes learned from past experiences. This tacit memory model gets refined over time and multiple similar situations. It provides a richer set of influences on the intelligent decision making without explicitly entering into the consciousness. These are what we call judgments. Even more primitive mammals can make some small scale kinds of judgments as the cortical areas of the brain where these are made arose relatively early in mammalian evolution.
Pre-sapient mammals through primates, prior to the genus Homo, in general, have levels of judgment that increases with their position in the phylogenetic tree. If we think of more intelligent animals as higher on that tree, then we will find that their capacity to process judgments to augment intelligence is correspondingly greater as well.
When we get to Homo we see a great expansion of judgment capacity commensurate with their increased intelligence (reflected in brain size and expansion of the prefrontal cortex). This expansion involves having greater capacity for much more complex tacit memory models and especially models of social systems, moral considerations, and systems perspective. Then when we get to Homo sapiens we see the development of a full-blown capacity for strategic thinking, which, added to the capacity for judgment is what gives us that which I have labeled as sapience. The expansion here is not just quantitative but qualitative as well. It was a leap in capacity, and an integration of the four components of sapience (see working papers) that produced our much more advanced ability to make judgments covering a far greater range of time and space. In that expanded range of time and space our tacit memories could incorporate far more situation experiences along with molding of the models according to many outcomes. In terms of the above figure, think of the extended tacit knowledge block as being many times larger and its contents many times more complex.
As I have written before regarding the special role of human consciousness and its relation to sapience (see Human Consciousness and Sapience) another aspect of mentation that makes humans much different from prior hominids is the aspect of reflective consciousness, or what I called second and a half-order consciousness. This is where we are not only aware of the world and ourselves, but aware of our awareness. This kind of consciousness results in a form of self-observation of our capacity to make judgments, or reflective judgment. We can ask ourselves, mentally, if our judgments were good, bad, or indifferent. We can think consciously about doing better in the future. But most people do not go quite that far (it is the realm of philosophy that few venture into). Instead they are content with the notion that judgments come from some unconscious part of their brain they call intuition.
Intuition
Most human beings do not really think about where their judgments come from. They just pop up and influence decisions in complex, usually social, contexts. Some people pay attention to these mysterious (gut) feelings and some even rely on them to make decisions because they have come to trust them.
The reference to ‘gut’ feelings as intuition refers to the limbic or affective influence on decision processing shown in the above figure. All of us have some kind of emotional marker on our past decisions (stored in the models) based on how good or bad the outcomes were. These emotional markers actually do activate the emotional state (not shown in the diagram) which sometimes does have an impact on our visceral state (our gut feeling).
For others, but I suspect in the minority, the intuitions influencing our decisions comes more from our tacit (learned) memory models than from our emotional responses. When they do, we have a special opportunity to reflect on our intuitive side. When we detect that our decision is being influenced by a tacit memory model, it is possible, in some circumstances, to reflect on where such influence is coming from and even examine the source consciously. Such reflection may help focus our intelligent learning on issues that are important to our tacit models such that these models are improved over time. One straightforward approach to this is that our conscious decision to explore ideas related to our judgments helps encode relevant information for subsequent further subconscious processing into tacit memory. Thus the philosophical musings of Socrates, “The unexamined life is not worth living.” It is people who do actively reflect on their own judgments that obtain some measure of wisdom in their lives. Alas, the rest do not.
But that isn’t the only problem with the sapience of or species. Sapient judgment evolved, after all, from more primitive kinds of judgment. And those were more strongly influenced by lower level (e.g. limbic) brain functions than we would like to admit. These low level influences are revealed, however, by the presence of many decision biases and prejudices that can be detected and even measured in some cases. The continued influence of these seriously impedes the ability for sapience to have a stronger role in guiding decision processing for most human beings. Let’s examine a few to show what I mean.
Biases and Prejudices
There has been an explosion of psychology research in the past few decades regarding innate human biases and the tendency of learned prejudices to strongly affect our decisions and behaviors. I will list a few of these here and attempt to explain how the get in the way of good judgment, and how the development of stronger sapience might do more to disenfranchise their influence. They are major blockages to the acquisition of wisdom and because they are so operative in the majority of humans, one of the main pieces of evidence I submit for why the sapience of Homo sapiens is not enough to be adaptive to the modern complex world we have created from our inventive cleverness.
Causal Modeling BiasOur brains are wired to find causal explanations for everything. Even when no actual causality may be operative. We are pattern seekers to the extent that we will even see patterns in completely random distributions of things in time and space.
This actually makes sense in a relatively stationary world where actual causal patterns could be relied upon to allow an animal to make predictions about what would happen (effect) given a particular kind of event (cause). In fact, our propensity to find causal relations is built right into the very neurons that make up our brains. Most of our learning comes from the fact that engrams (memory traces) are encoded based on cue stimulus, reinforcement (physiologically meaningful) subsequent stimuli, and good or bad outcomes (see my research paper: Learning and Representing Causal Inferences in Neural Networks). When reinforcement comes after a cue stimulus on a regular basis, the neural network (brain) will encode the cue as meaningfully causing the state that is relevant to the reinforcement. For example, when the sight of a particular fruit is followed by a savory taste/smell, and then followed much later by a satiation signal, that fruit is encoded as being food and something to be sought in the future. Eating it will make you less hungry.
But the world that we live in is so complex and causal relations so nonstationary, or even nonexistent, between multiple stimuli, that this tendency to encode any seeming temporal correlation (where event A precedes event B, usually), even from the most rudimentary experience, gets in our way badly. We have a tendency to imbue causal relations where none necessarily exist.
Stronger sapience involves having a stronger capacity to think systemically. In doing so it is natural to ask whether some phenomenon contains non-linear, hidden, relations (e.g. circular causality) and to observe more carefully when it seems that one thing occurring is related to another thing occurring. Weak systems thinking stops at asserting that things are connected (i.e. in some kind of network of relations) whereas strong systems thinking seeks to verify those connections and grasps the nature of strong versus weak interactions. Thus greater sapience will not be stuck looking for the simplest causal explanation and accept the weakest evidence (correlation) to form a model.
Likelihood Estimation BiasWe do not do statistics very well. Our ability to estimate probabilities of events or outcomes is pretty poor. This is related to our tendency to believe in our causal explanations (see confidence bias below); we do not think in terms of correlations but in terms of cause and effect. As a result we tend to make many mistakes in estimating probabilities given preceding information. We tend to ignore or filter out information that might improve our abilities. Sometimes we are simply ignorant of what is truly relevant information in making a prediction or assessment. Without reflective judgment this blockage to wise decision making gets worse rather than better with age.
With reflective judgment (stronger sapience) we do not ignore evidence that suggests that our likelihood estimates may have been wrong in the current circumstances. One of the key aspects found to be present in the wise (in the research) is an ability to live in an uncertain world, with ambiguity. This comes from an ability to not be committed to whatever estimates we have made, and to be open to learning more through experience in the hope (but not guarantee) of improving over time.
Over Confidence BiasThe part of our mind that Freud called the ‘ego’ seems to place greater confidence in our estimates than is warranted by the actual case. The mere personal possession of an idea or assessment boosts the mind’s confidence that it is right or true. Again, without self-reflection and self-honesty this tendency will get in the way of having good models — that is models that more closely correspond with reality — from which to intuit. When we ‘firmly believe’ our own version of reality regardless of what the evidence suggests, we can make pretty foolish judgments.
Religious or ideological beliefs fall under this bias. Holding a specific doctrine as an article of faith (without actual evidence, or very weak evidence) is bolstered by our seeming inability to reflect on our own confidence without prodding. And sometimes with prodding to become defensive about holding those beliefs. With higher sapience I suspect that an individual is comfortable with the notion that whatever they believe at the present time, might be wrong. They are open to reviewing their reasons for holding said beliefs rather than being so certain that what they believe is the truth. And this openness comes naturally rather than being learned.
Inability to Imagine Counterfactuals BiasRelated to over confidence is another weakness of the brain’s ability to generate counterfactual models in the first place. Numerous studies have shown that we humans are loathe to even consider alternatives to what we already believe. In fact, in order to more diligently assess possible (likely) outcomes we have to consider alternative models of what may happen. This is a function of imagination (creativity) that seems very weak in the majority of humans. Yet without the ability to generate and analyze counterfactual models, we have no ability to learn from actual experience. This is most evident in many peoples’ inability to learn from mistakes. What they are good at is generating excuses or rationalizations that let them off the hook for responsibility for errors of judgment.
Higher sapience would allow a person to let the imagination go with respect to generating alternative scenarios and find counterfactual conditions for evaluation.
Imagined Agency BiasAnother bias that is related to our causal modeling bias is the way in which we tend to see some intentional act behind many events even when they are completely stochastic. Indeed the beginnings of self-awareness have left humans believing that there is some kind of autonomous agency involved with all events. We have ourselves as a model. To us, to our consciousness, it seems as if we have intentions that our bodies then carry out. We have, in our view, free will. We also observe other humans doing what they seem to want to do (sometimes regardless of our wishes). This leads us to suspect that there are other agents behind all phenomena. Before the age of science, the belief in spirits animating not just living things but the dynamics of the whole world was common. Today many of our kind still hold out that there is an unseen world and one or more invisible and super powerful agents manipulating the world for their own purposes.
The combination of strategic and systems thinking in sapience, if strong enough, can lead to a better understanding of motivation of phenomena in the world and thus diminish the need to see agency behind dynamic phenomena. For example, I suspect Charles Darwin was a super sapient (not the only one, of course) who was able to grasp the essential nature of evolution. He saw the world through systemic eyes and had a sense of the hierarchical nature of control through competition and coordination. He could see that natural selection provided a strategic “plan” for the living world without the need for a designing and animating agent.
Illusion of Control BiasThe last bias I will discuss is related to the agency bias. It is an illusion that persists in the minds of most people that they (or someone) is in control of the situation. This is strongest in ourselves where our consciousness gives us the sense of free will and willing our selves to act in the world. But research has shown that our actions are often initiated from subconscious decisions and our conscious mind only becomes aware retrospectively, yet maintains the illusion of being the decider.
It is the models of the world that we have built up over time that are ‘in control’. We are our models. One can argue that it is a matter of semantics that if so, then we are still in control. But unfortunately the ‘I’ that seems to be in control, the model of the self, is the result of the interplay of inherited personality propensities and cleverness, and the social milieu that we grow up in. The ‘I’ is not some native spirit (the ghost in the machine) that pushes the buttons and pulls the levers. It is a subconscious model of the self resulting from many complex factors that develops in the course of a lifetime. It is true that this model is the strategic arbiter in our lives. It may be a good model, corresponding well with reality (knowing ones self) or it may be a faulty one in which we delude ourselves about ourselves.
Higher sapience would help here in the sense that it would provide an individual with a better capacity to build a more veridical model of the self as she ages and experiences life. That model, in turn, will have a better grasp of what needs to be decided for themselves and others. They would be better able to deal with uncertainty and ambiguity (as is reported in the literature on wisdom). They would be able to offer good advice without asserting that they were right or should control the situation and others.
Prejudice TemplatesHumans, like all social mammals (and birds) have a built in model of the world of conspecifics based on we (my tribe) and them (other tribes). This dichotomous mental model actually serves a purpose in strengthening the social bonds among the we and decreases the likelihood of fraternization (except to exchange genes) with the them. In a social animal, having a cooperating group that is competing with other groups for resources this has a strong selective advantage. And so we humans have inherited this template and it forms the basis of learning prejudices.
With all of the biases just mentioned (and more not mentioned), it is easy to acquire models of attributes of we and them that are not, in fact, reality. In a late Pleistocene world this probably was to our evolutionary advantage. But in the modern globalized world it leads to some pretty pathetic situations and a great deal of misery for too many people.
Given stronger sapience would reduce the effects of the aforementioned biases by constantly and consistently engaging in self-reflection it should also lead to a great reduction in the effects of prejudices. This can happen in two ways. The individual may simply never suffer from building a prejudicial model based on her socialization (learning prejudices from her society) and/or she may be successful at overcoming what prejudices she has by examining the basis of them and either quelling or unlearning them.
The Consequences of Weak Sapience
Here we sit today in a world that is overly complex and overly dynamic relative to the average person’s capacity to deal with information overload. As a result most people never develop much in the way of wisdom about that complex, dynamic world. One has to incorporate the information one receives into the structure of their tacit memory models in order to build veridical models of the world. But if one’s native processing capacity is limited then the information will truly overload the circuits and be lost. What aggravates this is the remaining built-in bias tendencies and the propensity to learn prejudices that further prevent any meaningful learning.
We have to muster all of our cleverness to try and understand our own failings in the present environment. This is not an indictment of humanity as if we did something wrong by being only weakly sapient on average. We are what we are. But fortunately we do have sufficient cleverness to be able to comprehend what we are and try to do something about it. We invented science through cleverness and minimal sapience. Science and math have helped us overcome many of the biases and prejudices that have been noted here. As individuals each of us still suffers to some degree the bane of these biases. We can’t change that. But collectively in an endeavor like science we can mitigate the effects of those biases and learn to understand better models of how the world works than would be possible through individual learning. So we have to call upon that capability here. We need to use science to better understand our failings in judgment and sapience in general. Then with the help of what science tells us, we might yet find a way to become collectively more sapient, even if individually still somewhat foolish.
* The issue of continuous vs. discrete has always been a problem. Computer scientists (my day job) insist that everything is discrete at some level of analysis. Biologists, on the other hand, insist that physiology and brain functions are continuous. Having played in both arenas I am of the opinion that they are both right to some degree. While to our perceptions brain functions might appear continuous and flowing from one state to another, if we look closely enough and with a fine enough temporal resolution I believe we will see that there are not an infinite number of transition states as would be required by continuum theory. Rather there are discrete, finite transition states between any two metastable states. The latter are the ones that maintain long enough for perceptual observation.
** One aspect of sapience is the capacity for the prefrontal cortex to dampen the signals from the fear and negative emotion response areas of the limbic system.
Top 10 Biggest Mistakes in Trading
It was October of 2007 and the bull market in Asia was rip snorting mad. I was having a spectacular year sitting on 25%+ gains and probably letting my hubris get the best of me. I had begun to dabble in overseas trading that year as I expanded my strategies and tried to add another weapon to the arsenal. The 6 1/2 hour trading day in New York wasn’t cutting it any longer. In essence, I had become a market junky. What resulted was one of the worst months of my life.
I have always been a bit of a contrarian investor, but like Warren Buffett, I have also always waited for fat pitches – grape fruit size pitches. China’s bull market in 2007 was the contrarian fat pitch that just kept getting fatter. In the middle of October 2007 I took a cut – a pretty big cut for me. I shorted a number of Hong Kong traded equities. Primarily large cap stocks traded in Hong Kong and Shanghai. It just so happened that I had shorted the market to the very day of the peak in Shanghai. I had nailed it. Almost to the minute. But a funny thing was going on in Hong Kong. Regulators were talking about a way to reduce the price discrepancy between the Hong Kong market and the Shanghai market.
In case you don’t know, China has three large stock exchanges – Shanghai, Hong Kong and Shenzhen. Many of the same Chinese companies trade on multiple exchanges. But the exchanges have different rules. For instance, only citizens of mainland China can own the Shanghai A shares. In Hong Kong, however, foreigners can purchase stocks (as I was doing). The problem with this format is that you can have the same company trading on two exchanges at very different prices. Many experts say that the rules in Shanghai create liquidity restraints and make for a less efficient market. They say this is why the Hong Kong shares often trade at more reasonable valuations. It’s long, detailed and complex, but you get the basics. There was an arbitrage to be had and I wasn’t familiar with it.
The Shanghai market began to immediately tank after I sold the HK shares short. I had top ticked the market – I was going to make a fortune, right? No. See, traders in Hong Kong were buying shares while shorting shares in Shanghai. It was a gimme arbitrage opportunity for those who understood it. Being right had never felt so wrong. Being someone who had never traded HK stocks before – I didn’t understand what was going on. Over the course of the next 3 weeks the HK shares I was short rallied 20% on average. I spent 3 sleepless weeks staring at the computer screens trying to understand the mistake I made. I was too smart and too good at trading to make such an error, right? Wrong. Those three weeks were spent endlessly learning and stressing over the mounting losses as the stupidity of my error became evident….
I knew I was right. My analysis was not wrong by 20%. I knew the market was about to roll over hard, but I hadn’t understood the intricacies of the market before I placed the trade. In a stress induced frenzy I added to the position. Mind you it was a fairly small portion of my portfolio (less than 25%), but for me that was too much volatility in one position. I had broken one of my cardinal rules of letting 20% of my portfolio dictate 80% of my daily performance. Even worse, I had let my emotions get the best of me. I was unraveling. I experienced a 10%+ total draw-down that month. For a supreme hedger like myself, this was a huge move. I was floating in the market’s wind like a feather as opposed to hedging and controlling price as I had grown accustomed to. I felt as though all of my years of hard work were suddenly flawed. Then it all reversed.
The first 15 days of November 2007 were nothing short of spectacular. The Hang Seng folded like a lawn chair. I made another classic psychological error and cut out at break-even. The stress had been too much. This was not exactly what I had in mind when I placed the trades just a few weeks earlier. My thesis at the time was about an enormous global housing and stock bubble that was similar to the Nasdaq and on the verge of leading the global economy into a spectacular recession. You know, kind of like what happened over the following 18 months. But I made not one penny on the trade. The next two weeks were spent revamping a clearly flawed investment approach.
In retrospect it turned out to be the best learning experience of my entire career. I’ve had bigger losses. Much bigger, but none was so educational. The result is much of what you read here at TPC on a daily basis. I learned that psychology is the most important driver of price. Never let prices control your psychology and never let your psychology dictate your trading. I learned not to over trade. 6 1/2 hours is plenty of stress for one day. I learned never to trade something you don’t completely understand. I learned to follow rules systematically. And perhaps most importantly, I learned that trading is not the most important thing in life. When I was stressed to the max the people around me were the supporters I needed most. I learned that you trade to live, not live to trade. It sounds cheesy I know, but it’s true. Mistakes are valuable in life. As long as you learn from them. We all make them. Own them and learn from them….Trading is no different.
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