Flaw in my logic.

Discussion in 'Psychology' started by walterjennings, Feb 17, 2007.

  1. Hey.

    I was wondering if anyone has dealt with this dilemma. How come it seems trading and risking newly gained profit is a better idea than risking initial capital? I get these ideas that in a profitable position it would be smart sometimes to unhedge, set a trailing stop at to protect against any loss beyond the profit and let it ride the trend for as much as it can, instead of being limited to the initial profit.

    It seems like a possibility one second then I realize there isn't much difference between risking the profit and taking a new directional bet (except paying the spread), and I try to stay away from betting. Similar to the idea of 'free rolling' or 'rolling the dice for free'. Where gamblers only risk their winnings after some point.


    Any thoughts?
     
  2. doli

    doli

    It might come from thinking, "it's the market's money."
     
  3. generally, no imo.

    once a profit has been booked it is no longer the "house's money," it is my money, and strict money management immediately applies.
     
  4. you first must win! (said in Rocky's wifey's voice...Adrian)

    [​IMG]
     
  5. Behavioral finance calls it mental accounting. It's bad. Think of the guy who starts and puts $5 in a slot machine, gets $1000, puts that on roulette, gets 1 million then loses it all. "Meh lost $5 today"
     
  6. say I make 100$ on a position. i could close it and secure that 100$ or I could set my trailing stop 100$ away and let it go with the trend. the exp profit of securing is obviously 100$. the exp profit of trying to go with the trend might be 50%*0$ + 50%*500$ (or maybe more) = 250$. someday i'll have to get into directional bets.
     
  7. In that case if the EV is positive for holding on the stock then it would be called cutting winners too early if you cut when it was a $100 gain no?
     
  8. You are making a completely artificial distinction.

    You are making directional bets with YOUR money ALWAYS...
    And whether you are up or down... has no relevance in terms of any future bet.

    This is really not debatable.
    Your points only make sense as applied to "gamblers" in the short term.

    But professional traders are not "gamblers"...
    They are "risk arbitrageurs" and very comparable to the casinos...
    In that they have a very specific edge that can be explained in detail...
    And many, like myself, make money even MORE consistently than a casino.