Long & Wrong

I ended last week lazily regurgitating something (potentially!)  interesting that I had just read, and I start this new week doing exactly the same.

I think as traders we spend a lot of time seeing patterns that aren’t really there, we are after all desperate (and financially motivated) to find some exploitable order in the price-noise. Unfortunately for us, our brains may be predisposed to do exactly that,

A proximate cause is the priming effect, in which our brain and senses are prepared to interpret stimuli according to an expected model. UFOlogists see a face on Mars. Religionists see the Virgin Mary on the side of a building. Paranormalists hear dead people speaking to them through a radio receiver

… and traders see all kinds of weird and wonderful patterns.

To complete my trilogy of posts on the topic of how best to deal with runs of successive losses I offer the following interesting study (pdf file).

The Guardian summarises the key finding,

The brain-damaged gamblers pretty consistently ended up with more money than their healthier-brained competitors. The researchers speculate that when “normal” gamblers encounter a run of unhappy coin-toss results, they get discouraged and become cautious – perhaps too cautious. Not so the people with brain-lesion-induced emotional disfunction. Encountering a run of bad luck, they plough on, undaunted. And then enjoy a relatively handsome payoff.

So the trick is to trade as if you are emotionally dysfunctional. I have the suspicion that some of us are already doing that.

Footnote: I have spelt “dysfunction(al) with a “y” but the “Granuaid” (joke for older UK readers!) spells it with an “i” in that quote.  One of us may be wrong, or both of us may be right.  My PC is obsessed with “English(US)” and I can’t be bothered to find a paper dictionary of proper English, even if that may have taken less time than writing what is fast becoming a lengthy footnote.

Firstly for my American readership (both of you) “pants” are not trousers. An internet dictionary defines them…

This word can have two meanings if you are from the UK. It either means

1. The British word for panties, underpants, etc
2. Rubbish, bad

Now that potential confusion is out of the way, I can begin.

The market loves doctors and dentists. These professions are made up of intelligent (even dentists are quite smart!), high-achieving, high-earners.  They are though often poor traders who donate large sums to the market because being smart isn’t enough.

There are plenty of smart unprofitable traders.  They are so smart that they can accurately asses where they are going wrong.  They have a long list of lessons learned, have all the necessary knowledge and a logical plan to make a lot of money from trading.  But where they (and the much less intelligent L&W ) often fall down is in applying what they know at that tricky right-hand-side of the chart where things happen relatively quickly.

Apart from House, doctors aren’t free to do whatever they want at work. But trading offers plenty of flexibility and this seems detrimental to performance.  I would argue that this is because a large degree of freedom allows us to make late decisions, we don’t have to plan in advance.  In the heat of the moment we make bad short-term decisions at the expense of the greater long-term good, even if we  understand exactly what that greater good requires.

I’ve never met any, but apparently some women sleep with men on the first date even when they promise themselves earlier in the day that they won’t. They make ‘bad’ short-term decisions and forget about the greater long-term good. So perhaps traders can learn something from these women!  I haven’t just mentioned them because I have an unhealthy fascination with the subject but because they are discussed in  a book I have recently read on the conflict between short-term and long-term goals.

The solution chosen by these women is when getting dressed for the date they put on their grubbiest granny-pants as they know that they will be too embarrassed to (how do I put it?) reveal them later in the evening.

So that is what we must do. If we can’t trust ourselves to make the right decision in the heat of the moment (as EUR/USD falls 40 pips in 18 seconds) then we must find a way before it happens to prevent that bad decision. If we keep taking large losses because we are ever hopeful that “it’s about to turn back my way” then we have to enter a stop when we open every trade.  Fixed stops can be our granny-pants.

There are many other pre-prepared solutions to combat poor short-term decisions when trading.  If you can’t trust yourself, you must force yourself, although grubby underwear remains optional.

I am having a ‘crisis of faith’ so I am only going to make a low-key, lazy post this week whilst I allow my thoughts on the blog’s future to ferment/foment a little longer.

Some Recent Reading

1. Finally some indicators that I can believe in, including ‘The Crane Index‘.

2. If you keep getting stopped out by the crazy post-NFP swings then the last thing that you need to know is that investors may be misreading the data anyway.

A Recent Innovation

I have the week’s economic calendar printed out and pinned to the wall within easy sight and I still get surprised by announcements, sometimes because I have become so engrossed in the minutiae of price action and sometimes with the latest viral you-tube video. Either way you can now import the calendar into the diary/organiser of your choice using the file found here,

http://www.fxstreet.com/fundamental/economic-calendar/calendar.ics

and then set it to alert you a few minutes ahead of each release.

Back to pondering,

Now what should I do with this blog?