Started a thread to discuss some of objective edges available to retail traders.
Started a thread to discuss some of objective edges available to retail traders.
Here is a very demonstrative table:
Notice the highlighted cells. Average return of S&P 500 vs. 10-year T-bond and compounded value of $100 if held from 1928. What does it prove?
First, the power of compounded interest.
Second, that difference of “just” 6% yearly on average basically changes EVERYTHING. Speaking of real edges, available to everyone…
Full table is available HERE.
Read “A Random Walk Down Wall Street” by Burton Malkiel recently. Made me think about what amount of professional asset management relies on the concept of randomness?
And more important: could we, the retail traders and investors shift odds in our favor if we treated markets as more random and less predictable, if we stopped trying to time every tick?
Could it be that combined with “Black Swan” concept such an approach can provide a real edge in financial markets, so full of unpredictability by any logical standards and huge spikes (I bet you too are thinking of recent Swiss Franc run as you read these words)?
Please comment here: http://www.cornixtrading.com/forum/viewtopic.php?f=3&t=217
As it’s weekend, I analyze and compare edges available in different sectors of “real” (let’s name it such for the sake of simplicity) economics and financial markets.
Take my business: we buy auto parts large wholesale knowing there’s market to sell them for smaller wholesale parties in our store or retail in our shop. What is this? MARKET MAKING. Buy bid, sell ask. It’s a bet on existing liquidity/demand, NOT on price changes in the future. Edge depends on efficiency available according to liquidity and is different for different products. Some wholesale parties of largely available (and high competition) products are sold with just 5% margin, while other products, especially retail, being sold with 100% profit margin are not uncommon.
Take production of goods or services: they produce something using certain amount of human or tangible resources and sell it for more than it took to produce. Again, basically it’s making the market through spread available depending on market efficiency. The more efficient the market is, the smaller profit margin is (see Samsung’s plummeting profits in smartphones niche where it once was a leader).
How many businesses exist in the “real” sector, which make a living trying to PREDICT the FUTURE PRICES? Probably there are some, but most likely those have access to some “insider” information, such as coming shortages in supplies etc. In other words, FUNDAMENTALS.
All these thoughts lead to conclusion that everything be it real economics or trading comes down to the same principles.
Is technical analysis using chart patterns largely used in “real” businesses? Why not? There should be a reason, right?
Discuss the post on the forum: http://www.cornixtrading.com/forum/viewtopic.php?f=3&t=216
I want to clarify a few points about when psychology is applicable for traders and when it is not, because realized I never mentioned it before.
Psychology will NOT help if a trader doesn’t have solid, well developed and tested “edge” (a trading system, methodology). No way attitude and mindset can substitute the statistical advantage. It can even be dangerous if one relies on psychology without having a profitable system in place first.
So any trader who thinks s(he) needs psychological advice must first ask oneself: “do I really have a profitable method at my hands?” The answer must be absolute “yes”, which includes every detail of the tactics described in the form of rules applicable for any situation happening in the market, thorough back- and forward tests on simulated and live account with sample size, which is statistically significant and covers wide range of market conditions.
If you can objectively answer “yes” to the question above, but still are unable to consistently extract profits out of markets, then indeed you need professional advice, because the reasons for your problem might be the following:
a) past trauma of losing experience. Before finding a profitable method people often experience many defeats. I personally experienced dozens of defeats when newly developed or adopted system showed it’s flaws in real trading and had to be dismissed. This creates strong negative associations in our subconsciousness, which may paralyze our ability to make decisions and execute them properly. Psychologist may change that negative attitude in subconscious mind and correct the process of applying a trading method.
b) Discipline problems. People may have emotional traits, which are not very compatible with successful trading. Here we have the following possibilities:
1) train oneself so that emotional discipline and attitude changes towards which suits the successful trading routine well, or…
2) accept the fact one’s emotional constitution is incompatible with trading or investment activity and altogether drop this business. Which is perfectly fine, too. If one person is a great football player and another is talented artist it doesn’t make one of them better than the other despite the fast artist unlikely could compete for a ball or athlete could write divine poem.
c) Self-sabotage. Some people lose money in the markets, because subconsciously they think they don’t deserve winning. It is more common than many think (especially considering typical public image of Wall St. and it’s “sharks”) and is almost always very subliminal, far from “the surface” of our mind. We find those cases of self-sabotage due to one or another reason, correct them, which usually leads to dramatic changes in one’s professional growth (be it trading or any other activity).
Those are not the only, but the most popular areas where psychology is highly applicable and very useful to traders and investors.
Discuss on the forum: http://www.cornixtrading.com/forum/viewtopic.php?f=8&t=215
On one traders resource I read the following material was posted:
At the Singularity Summit a few days ago, both Ray Kurzweil and Eliezer Yudkowsky made the point that progress measured by exponential advances may actually seem very slow for a long time. The early years of the graph will show a nearly flat line, and then all of a sudden — boom!
What is interesting here (in addition to the possibility of artificial intellect becoming more powerful than human intellect) is that similar progress curve seems to take place in almost every area of activity, where exponential growth is expected to take place.
This is good news for struggling traders, cause the absence of visible and immediate effect doesn’t mean there’s no progress and may actually mean just the opposite: base being formed for the exponential “boom” once a trader or investor “gets there”…
The difference between trading not to lose and trading to win was recently discussed on our forum. I decided to write a bit on this matter here from NLP point of view.
When we set the goal for whatever activity starting with “not” and then followed by something we’d like to avoid, our brain tends to quickly “forget” the “not” bit of the phrase and almost automatically focus on the “keyword”. When we try not to do something, end result is exactly the opposite to what we desire to achieve: we again and again put our main focus on the negative experience, thus reinforcing it’s role in our life. Say when you try “not to gain weight” you basically meditate and put focus on the “gain weight” idea. Outcome is usually corresponding, cause we basically program ourselves for what’s included in the key phrase, while that little “not” part remains almost completely ignored by our subconsciousness.
That’s why I always recommend my patients with any problems, not necessarily just trading or investing psychological barriers, to always focus on “WHAT I WANT” vs. “WHAT I DON’T WANT”.
If you want to trade well, TRADE TO MAKE MONEY. Losses should be controlled of course, but that should be done automatically via setting appropriate stop-losses or applying any other loss limit technique and not much time should be spent on thinking over the idea of keeping losses small. Stop-losses should be set and forgotten, period.
But all your mental and emotional energy should be as much as possible put towards looking for WINNERS. Being a WINNING trader, making good, winning trades.
Try that and you’ll likely be surprised with the results after some practice.
In this short post I just want to remind everyone the following simple mathematical truth:
if each of your trades has positive expectancy and you execute statistically significant series of such trades, then despite outcome of each individual trade is uncertain, there is 100% probability you will be overall profitable.
Think about it: if you develop a positive expectancy system and trade it without mistakes then you are GUARANTEED to make money.
So there IS certainty in this tough trading business. It’s just not in the area of single individual trades, but in the area of long-term result of profitable strategy application.
Have a good trading week!
Recently I read on some site, that psychology is not too important for trader’s success, because what matters is having a positive expectancy system.
I’d like to elaborate what I think about it. Indeed, having a positive expectancy system is a must prerequisite for successful trading or investing. But let’s imagine newbie trader, who has developed and successfully tested new system, it shows solid profitability, fine.
She starts to trade it live. Takes a signal, oops a loser. Second one… a loser too. Market “looks bad” so she passes on the 3rd trade which turns out to be a great winner… if only it was actually taken! Sounds familiar doesn’t it?
How often traders drop even good systems only because they get emotional trauma when first go live and it starts with a series of losers? How often lapses in discipline turn the process of trading even a profitable system in consistent losing or at least much worse actual result than theoretically it should be? All those issues are purely psychological.
And even having a profitable system trader must learn to operate in the “grey zone” of uncertainty, deal with probabilities, treat his trading as a long-term business and not pay too much attention to outcome of individual trades etc. Otherwise it simply won’t work!
That’s why having a positive expectancy system is #1 goal for a new trader to reach. But #2 is always the skill, mind you, psychological skill to trade your system exactly the same way it should be traded!
Yesterday we talked about overconfidence. Today I’d like to talk about how to achieve the state of confidence.
As you probably remember from my previous post, people are most confident and accurate in their decisions when they deal with tasks they are familiar with. What exactly does it mean? That recipe of confident trading is very simple: make yourself truly familiar with your trading.
Most people start live trading too soon. Much sooner than they should. Result is usually sad. Not only newborn trader is unprofitable, she also gets negative experience of consistent losing and psychological condition similar to post-traumatic syndrome, which causes fear when placing new trades and serious problems with confidence, discipline etc.
Sometimes this condition is so severe that one is unlikely able to ever trade at all, let alone successful trading!
That’s why I always say: don’t hurry! If you slowly learn to invest or trade, watch the markets long enough to understand what’s going on there, thoroughly develop strategy and tactics, carefully test it in a simulated environment then trade it live with the smallest risk possible until you are truly sure it works (some day we’ll talk about statistically significant samples of data), don’t feel the slightest stress pulling the trigger and managing trades and result of your trades is consistent profitability… act this way and chances are you will be successful and it will happen much sooner than if you try and trade since day one, going through endless painful experience of losing, failing again and again.
Trying to force natural processes usually leads to slower progress. Wish to make good things happen sooner can be understood, but result is often irrational behavior (which is not optimal of course, we have evolved into logically thinking creatures for a reason).
Number one cause why business start-ups fail is lack of necessary skills. Don’t make it happen with you! Money lost is not the worst thing in this case, psyche damage can be much more difficult to cope with.
Let’s remember wise Japanese saying: “fast is slow, but without pauses”.
Make your learning to trade logically, reasonably, truly fast!