We often hear market veterans tell us an old saying. That is every human element is a friend of a loser and an enemy of a winner in the market. Do you agree with it? Or you think it is just some radical confusion that professionals try to get us brain washed. If you agree with it, let's assume you are given two colorful pills, say, yellow pill to make you totally human-oriented, cyan pill for you to become totally inhuman, which pill would you like to take? In other words, do you want to trade off your humanities for being profit in the market?
I completely agree and could probably write pages about this, but instead I'm going to focus on a particular example. Psychologists have shown that when it comes to risk and money, a normal human is subject to two factors: 1. law of diminishing returns, and 2. law of endowment 1. law of diminishing returns - the utility you place on gains decreases as your gains increase. So you gain more utility from winning your first $1,000,000 then you do from winning the next $1,000,000. 2. law of endowment - Your marginal loss in utility actually decreases as your losses increase. So its hurts to lose that first $100,000. But the marginal pain from losing that next $100,000 is less than from the first. As it relates to trading, this means that when a normal person has a very good trading day they tend to back off and protect those gains, since their expected utility from even more gains is less than what they would lose in utility should they give some of the money back. On the other hand, when a normal person has a losing day, they try and try to make it all back, taking increasingly larger risks. Why? Because each additional loss means less and less to them on a marginal level. Now ideally, a top trader should do the exact opposite. Place more utililty on ever increasingly large gains, and be very sensitive to additional losses. So on a day when you are doing well, increase your size and risk tolerance, since you obviously are in sync with the market, and push your day for all its worth. On the other hand, on days when you are suffering losses, decrease size and risk, and rather than focusing on making all your money back, just try to keep ADDITIONAL losses to a mininum. All of this is just one small example, but I find it very interesting.
I fully agree with HTrader. You want to be human. Computers are consistent traders, they are not great traders. Human begins can be better traders. However, by default, human beings are not wired to be traders. It goes against to many reflexes and conditioning. So it's not about being human or not. It's about being another self while trading (and maybe all the time... I noticed that good traders are often cynical. I think it's because you get to see things in a very different way after a while. you see what most make as mistakes go, etc..). You should know yourself very well before attempting to change. But you have to change. To succeed a senior trader is very different from a junior. Not only by experience. You really see things differently. So take the pill to know yourself. (such a pill does not exist, so you have to work hard at this. both internally and externally studying all your trades for instance. that gives you an objective perspective on how you look at things). once you know your real self, then maybe you can change, and at least you know what to change. HTrader pointed out very important issues, but I wish they were the only ones. Many more thoughts go throught the trader's mind. and all this internal dialog is what makes you win or lose, on top of a sound trading plan.
ahhh i c... so our natural tendancy is to cut our profits short and let our losses run. well said Andy
Htrader, if you could write pages about it, and you don't mind to, do it! I'd love to read them. Then again, I also believe that these detrimental "human" behaviors are not inherent to human beings, they are more inherent to a certain kind of human beings. For one, I learned that when I got more satisfied with myself and happier bad habits tended to disappear. Possibly due to the "ego effect". Far eastern martial arts masters find this very important..
There are two kinds of people in this world: those who think there are two kinds of people and those who don't Sounds funny, but it hides something deeper: the old fight between those who think that the world and our choices can be easily divided in two camps (e.g., good and evil, black and white, etc) and those who fundamentally believe in the power of three - the third element being the infinite shades of gray in between the absolute black and white. We CAN be very good traders (but not infallible) and at the same time very good human beings (but not perfect either.) The truth for each of us will be found in what we can negotiate, there, in between. In other words, in life, as in trading, try to split the spread
It's like every pundit: you have several levels of interpretation. One of the underlying reason is antropomorphic. Human like to sublimate their act like ancient astronomers like to place the earth at the Universe center. By saying so, they place human being in the center place. Now objectively automatic trading systems already account among professional firms for more than 30% of the volume on NYSE. By time rationality will conduct to increase mechanical and individual traders will have more and more difficult life against that. Until now this wasn't possible since it wasn't electronic. In France many pit traders have to give up their job when electronic came. As they were essentially scalpers and as electronic made things more illiquid at this scale of trading, they were washed out: they don't need them any more. I think this will be generalised in upper scale. They will change the rule so that more capital, more systematic trading will be needed to survive. I don't think many traders foresee that because it will take a few years. For now on, on the human level, I think it is true that the first ennemy in trading is self. But I don't think in the sense you have to dismiss your human part to be a good trader. It 's rather you have practiced by repeating thousand of times your trading method and arrive at a state where you do thing without thinking because you have reached the stage of being a master. And somewhere you behave like a robot but a concious one