The Logics

Discussion in 'Psychology' started by Lucias, Jun 4, 2011.

  1. Lucias


    This is the start of a thread which may turn out to be a book or e-book. It is pretty rough right now. But, in this thread I will reveal what I feel are the true elements of trading psychology -- namely what I call "the logics".


    There are many books and articles on trading psychology. However, I feel that my insight will be different then perhaps what has been presented by other popular authors. Many of those authors talk about discipline, having a plan, and other rather basic notions that I feel do not get to the real issues of trader psychology.
    The real issues are issues I claim that deal with rationality, logic, multiple pathways, and uncertainty. I feel that focusing on these issues will be instrumental in arriving at a successful acceptance, a model for success. I will deal with many specific examples. But, I hope that I foster a deeper appreciation for thinking and arriving at successful acceptances.
    I call the logics because everything is dealt with logically. I feel that traders are rational and logical. But, the market is not logical or rational and therefore the proper actions do not often seem rational or logical. But, they do turn out to be when considered in the greater context. Psychological trading issues arise from what I feel are logical beliefs that are not fully developed. The difficult psychological pretzels can be untwisted with thinking and logic. Let me be clear, that doesn’t mean that trading has to be a logical process. Yet, a logical foundation will bring clarity.
    What follows is a rough work-in-progress but one that I hope will bring a measure of peace and help to cultivate successful performance.
    Curtis White
  2. Lucias


    The Foundation

    The foundation of a discretionary or systematic trading program must be formed on belief. Without belief, nothing is possible. The nature of the belief will determine the trading system. The foundation is I feel the most important slab to the logic because if the foundation is weak then everything is weak. A truly weak foundation will not stand.
    It is a belief because it is unlikely to be proven. A belief requires some measure of faith. A faith that is true will ring true and will be true. Faith that is weak will be weak. Our individual logic will tell us what is true and what is not.
    When I started predicting the market, I used a very intuitive approach, and despite winning in paper trading it required an immense effort for me to move to real money trading. It was true that I didn’t have any capital at the time. But, more importantly and most importantly, I didn’t have the foundation. I didn’t have a belief system. I was a programmer by training and fairly intelligent and people said the market was random. People said you had to be good at math to do this or genius. I was neither. People claimed that past performance was not indicative of future performance. If you haven’t considered these issues and fought them, wrestled them, and come to a conclusion then they will come back to haunt you.
    How does one develop a foundation? First, it is not easy because it must be based on beliefs that are held to be true. If you believe, for example, that the market is a random walk then you become a trader. But, you won’t be the trader that I am. In other words, you won’t trade the way I do. You’ll trade another way. And, so if you don’t believe the market trends then you won’t be successful as a trend follower. If you don’t believe that there is a relative value between stocks then you won’t be a pair trader. The belief system will determine the outcome and the type of trader that one becomes. Every belief system has flaws. Every trading strategy has flaws.
    What was imperative for my belief system was namely the acceptance of a few, very important ideas:
    A. The market could be predicted at some times at a rate better then chance.
    B. Past performance could be indicative of future performance, at least in some cases.
    C. I had gained enough empirical evidence from my past performance to justify risking money on my trading ideas.
    You’ll notice that each of my core ideas goes against the grain. Yes, I believe past performance is indicative of future performance, although definitely not conclusive especially over relatively short time frames. Yes, the market could be predicted because I did extensively and no the market was not random. Without these beliefs, no amount of success could be taken as evidence. If past performance was not indicative of future performance then no past performance, no matter how great, could be submitted as evidence to trade. If the market was completely random then no amount of work, no amount of study, would be productive.
    Beliefs are central to successful trading. One can’t just read something and have a belief. Belief has to be developed, tested, and tried. If someone were just to read this and say bingo: I’ve a belief system now and a foundation then I’m sorry because it can’t work that way. My hope is that having the logic will help you to develop your belief system. But, it can’t come simply reading.
    And, I’ll stress your belief system will likely be different. Your belief may be that certain stocks have a relative value and that the movements are random. But, one can still profit by arbitrating the differences. Of course, one can develop multiple successful belief systems. Yet, one does need a core to start with. Your belief system may be that trends do exist in the market and provide great profit opportunity.
    The important aspect with any belief system is that it is not just based on what you read or want to believe. It has to be based on truth. Not someone else’s truth but on your truth. The way you get to the truth will depend partially on your personality. My truth came about as the result of my experiences. Others may get to the foundation by a rigorous mathematical or scientific approach. It really doesn’t matter provided that it feels true to you. Y
    Of course, the catch-22 is that if you don’t have experience then you can’t have the belief system and if you don’t have the belief system you won’t have experience. Belief systems are a work in progress. You can start to develop a foundation by taking a serious approach to paper trading. You will not get to a successful point by lying to yourself, by downloading a trading program, by following tips, or by buying an expensive trading course. Sure, you may get useful stuff from a trading program or a trading course. Yet, for it to become part of your belief system then you must make it your own. Most of all, you must be truthful to yourself and a solid belief must be developed over time.
  3. Lucias



    From Wikipedia, the definition of discrimination is:
    Discrimination is the cognitive and sensory capacity or ability to see fine distinctions and perceive differences between objects, subjects, concepts and patterns, or possess exceptional development of the senses. Used in this way to identify exceptional discernment since the 17th century, the term began to be used as an expression of derogatory racial prejudice in the 1830s from Thomas D. Rice's performances as "Jim Crow".
    I reference discrimination in the first sense which is the ability to finely make distinctions and perceive differences. Great traders are finely discriminating. Fine discrimination leads one to clarity. As an example, I have a solid ability to call the market using my “market read”. I, also, have rather profitable trading systems. In many cases my experience with my trading system was that if I intervened or took profits too soon then the market invariable went higher. Last week, I actually lost a considerable sum of real money trading this system. I exited the trade when I observed that the trade wasn’t working and then when I thought about it I immediately re-entered because I didn’t want to go against the system. Much of my losses came after re-entering the trade.
    I was faced with the following set of logical conditions which led to the paradox:
    A. I have proven great market read I rely on.
    B. I have a very profitable that system.
    C. In the past, my interventions hurt my performance.
    Yet, in this case my intervention would have helped my performance. What was the problem? What was the difference? The difference was that in the prior cases, in which I had taken profits early, the market was doing what the system predicted. Yet, in this particular case the market wasn’t doing anything like what the system had predicted. If I had fully elucidated the logic then I could have prevented myself the loss, possibly.
    Ever finer discrimination reveals worthwhile ideas. For example, I could break down to intervening with the system to the time that the trade had left:
    A. Early in the trade
    B. Middle of the trade
    C. Late in the trade
    This process of classification is critical and useful for creating conditions under which we can consider various alternatives. Using the process of classification, I could also classify if the market was doing what was expected:
    A. Market is conforming to expectations
    B. Market is not conforming to expectations
    In this way, we’ve uncovered new rules. We’ve discovered that there could exist multiple states and some of those states we may should follow the system blindly and in other states we might be better suited not to follow the system.
    In essence, the stress I felt and the uncertainty that caused me to lose when my market read would have prevented it stemmed from a false, overly optimistic belief in my system. I had not finely enough discriminated my prior experiences to understand that they did not apply in this particular case. And, also the time left in the trade was very relevant in this case because there wasn’t a lot of time left for the trade to work out. Early in a trade then we may want to give a trade more room because there is more uncertainty. Perhaps, we would always want to take the trade initially. Yet, if the trade is in a late state and not working out then the system was wrong and reducing our risk could be very worthwhile.
    One might argue that these are all rules that should be coded into the system. Indeed, testing our ideas against reality is crucial. You could always code a rule into the system that if the trade doesn’t work out by afternoon then shut it off. Certainly, these types of rules should be explored to see if they help consistently. Of course, developing new rules requires development time and there is certainly no guarantee that one will discover all of the important rules. Just as importantly, thinking about the situation and exploring it and turning it over in the mind provides the stimulus for coming up with creative new ideas.
    The fact that my prior interventions hurt my performance whereas this intervention would have saved me money seemed like a paradox or just something that one couldn’t make sense of. Yet, by using a finer discrimination and classification, I was able to bring a new clarity to the situation. A clarity that I can crystallize into the trading rules in the future. True, there are probabilities involved and we may not get the same results twice. Yet, the goal is to place the odds in our favor.
    Be finely discriminating. Use classification to bring logic to simplify complex situations into understandable cases.
  4. Lucias


    Paradoxes and Riddles
    Most of the trading psychology literature gives the impression that there is primarily psychological or personality attributes associated with trading performance. While it is true that some personality traits or psychological issues may lead temporary performance issues, I maintain the main performance issues are actual rational and logical factors.
    A great example would be a trader who won’t cut his losses. The mainstream perspective would propose that the trader has a problem with discipline. No, I feel the trader has a problem with logic and that will be demonstrated. When a trader enters into a new trade then it is rational that he believes he has a possibility to win or lose but is more likely to win. It would only be rational that he believes that he is more likely to win or to win a larger amount then to lose. Indeed, he faces a possible loss or a possible gain. Yet, when the trade goes against the trader then his premise for entering into the trade is not invalid. To exit the losing trade, he must take a certain loss when he is most uncertain.
    I want you to think about this because it is very important to the psychology of trading. To exit a losing trade, the trader must take a certain loss even though he doesn’t have a clue what is going on. He doesn’t have a clue obviously because his premise for entering into the trade didn’t work. It is one thing to take an action when one holds a belief that may lead to a possible loss then to take a certain loss when one holds no belief. Indeed, if one thought about it as binomial then each move of the price is random then it is 50 at every given price to go in one’s favor or against one. Indeed, one would want to hold a loser forever until it became a winner. This is rational. If it is rational then why doesn’t it work? The trader who wants to hold a loser until becomes a winner is operating rationally or appears to be. Yet, it doesn’t work in most cases and it doesn’t work because one must put up more margin for the trade as it goes against them, and additionally most edges in the market are rather small thus one must usually leverage which again negates the possibility to hold the trade until it becomes a winner.
    This rational but wrong notion of holding onto losers can be resolved if one rethinks the problem. If a trader makes a verifiable statement then it must be able to be proven true or false. Therefore, if a trader enters into a trade based on a prediction then there must be an exit criteria defined with the entry. In other words, if one is using a trading system and expects to achieve the returns stated then one has chosen to accept the losses that go with the trading system. In fact, if you take a trading signal and hold it indefinitely then the equity curve from point T onward will be the same equity curve as a buy-and-hold provided one doesn’t use leverage. So, there was an implicit or hopefully explicit notion that when the trader into the trade that he would take a loss in order to achieve whatever probability of future wins that the trading system offered. If one hasn’t thought this through and if one hasn’t realized that taking losses is required to achieve whatever ability one has then he in some part of his mind, he will have a desire to do the wrong thing. Exploring the logic deep enough reveals that the naïve notion only appeared rational.
    One common theme, for a lack for a better word, is this theme of questioning which is more important either entries or exits. I’ve considered and tested it and what I found was that for dip buying systems the entries are definitely more important. The reason being is that the volatility is higher during bear markets therefore being slightly off on the timing can significantly impact profits whereas at market tops the volatility is lower and being off is less costly. At least in the case I tested, I was able to demonstrate that the entries were more important. But, this question is misguided anyway because if we take a reasonable trading entry then we believe it has a predictive value. If a trading entry has a predictive value then it must be testable which means that there is an exit defined, as well. In other words, a trading entry with an edge can’t exist in isolation. The trading entry and the exit form a union. They form a union which enables one to test them. This is important because it reveals that when the trade enters that for the entry to be meaningful there must be exit criteria. The conditions can be independent of the market does (exit in x days) or conditional on what the market does (i.e. exit on an up day).
    While sometimes personality traits and psychological issues may come into play, the deep trading problems often stem from conflict that comes from the inadequate but rational logic. This is especially true in a trade when there is pressure on. The thoughtful and considerate thinking on these issues will bear fruit. Deep thinking will render the notions that hurt trader performance bare and when laid bare, they will lose their power over the trader.
  5. Lucias


    Focus On Strengths

    This section could have been titled any of the following:
    Focus On Strengths
    Know Thy Self
    Know Your Business
    Know What Affects Your Business
    Actually, success requires understanding each of those factors and it should label every one of those titles. You must know your strengths and stick to them. You must know your business. You must know yourself and what you are capable of. You must know what affects your business. If you’re building houses then you know need to know the cost of lumber, right? As a trader do you know what affects your business?
    We’ll return to that question momentarily. But, first I want to really think about this issue of focusing on strengths because this is the really the key to consistency. You can be consistent at what you are great at. Right, if you’re great at anything then you can be consistent at it. Dr. Steenbarger wrote some very useful blog entries on the importance of traders of focusing on what they’re doing well instead of trying to focus on what they do poorly. He called this solution focused change. If you can just do more of what you’re doing well then you can make more money, and if you do enough of what you do well then you won’t have time to do anything else. Focusing on your strengths is really is the key to consistency and consistency is a requirement for consistently making money. Of course, if you don’t know your strengths then that is a problem. One solution to that problem, solution centric versus problem centric (right?), is to track where you make the most money. What trades are you doing really well? What times of day are you trading well? What markets do trade well? Find your bread and butter trade.
    Paul Tudor Jones in a NYMEX video talked about knowing your business and stated that since he had been in this business that all the ways he had seen to make money could be classified into a few groups of strategies: proprietary research or edge, momentum traders (or trend), reversion traders, or arbitrage (i.e. spread trading). He talked about the importance of knowing your business. Where and what is your edge? This is very similar to knowing your strengths but it recognizes that your strength can more or less be classified as a trading strategy. Maybe your strength is buying the open on a trend day and over that period you are a momentum trader. Once you make that connection then you can start to think about the factors that influence your business. Right, one must the business if one is to know the factors that influence the business. Star Bucks is concerned with the cost of coffee beans and other businesses in that sector whereas a carpenter is concerned with the demand for housing.
    If you like, like me, like to buy (or sell) the open with the intention of holding until the close of the day then the number of such trend days is a factor that influences your business. It could be said your profitability is correlated with the tendency for a day to open at the low and trend until the close. It makes sense to start tracking those trend days to see how good you’re doing. It makes sense to start to look at the markets or instruments that offer the best momentum setups. Most traders need a certain level of volatility to profit. But, a few strategies actually do well with lower volatility such as trend following. It might make sense to focus on strategies that are at polar opposites in terms of performance factors so that one can profit in under diverse market conditions.
    Trading systems often fail when the implicit assumptions cease to be true. Wouldn’t be great to know when those assumptions cease to be true? And, I’m going to give you one of my most powerful trading system concepts I’ve came up with which is the concept of the control system. It is basically a check on the assumptions that one considers to be true. In other words, we accept that any trading strategy has some degree of curve fitting and it is okay if we do curve fit provided that we select the data that fits our curve fit! This goes directly back to knowing the factors that influence your business. How does your strategy perform in a bull market, bear market, or a sideways market? How does your strategy perform in a market with lower volatility?
    Knowing the factors that affect your business will help you to fine tune your business into a more profitable machine.
  6. Lucias


    Uncertainty, Knowledge, and Discipline

    I happen to currently host some of the top long term tracked futures systems at Collective2, and I’ve seen a lot of high flying vendors come, soar, and blow up. One vendor, whom I’ll not name, lost all of his system’s prior profits on holding onto a single losing trade which apparently did bounce back shortly after he sold out. He wrote something to this affect to this subscribers’:
    I knew it would bounce back. But, I received so much criticism that I went ahead and sold them.
    If he knew it would bounce back then there it is absolutely not credible that he would have dumped his contracts which meant ruining his system. If he had held onto the contracts it would have looked terrible and no serious trader would have subscribed. But, he might go onto to new equity highs and attract the less realistic and informed subscribers. Obviously, if we believe the statement then we are left with an individual who isn’t rational, an individual who could have easily and surely made money who decided not to. I think the correct statement has to factor in uncertainty, and I imagine a more truthful statement would have been:
    I thought the market should bounce back. However, I have already lost most of my system’s profits waiting for it and it might go lower.
    The real underlying issue was not the trader’s discipline but the uncertainty of not knowing what the market would do. If you can’t embrace uncertainty then you’re always left second guessing yourself and focusing energies on matters that can’t resolved. There is always going to be uncertainty in trading. I think that most traders try to eliminate the uncertainty which is always a losing proposition because with no uncertainty then there can’t be any profit opportunity.
    Developing the ability to make sound decisions under uncertainty is the critical skill of elite trader development. Most problems that deal with discipline aren’t discipline problems so much as uncertainty problems or even one might think of it as discipline under uncertainty. In Gary Smith’s book “How I Trade for a Living” he wrote about how one trader needed all of his indicators to line up before he placed a trade. Some of the best traders don’t even use indicators. See an indicator is a crutch. An indicator is something that tries to take the uncertainty out of the market and if it worked then it would be great but they don’t. They don’t take the uncertainty out of placing a trade. So, the trader who thinks the problem is to remove the uncertainty will direct all of his energies into a futile task. The trader who instead works on making his best decisions even while uncertain will be well served. To work on this, reduce the number of indicators you use, reduce your size, simplify your stop usage, and then work on taking every trade idea you have and on making quick decisions about the market and acting on them. Trade very small, trade as often as worthwhile, and trade decisively.
    Of course, you may agree that the problem with selling at the bottom was due to uncertainty. But, would not his oversized position be indicative of a disciplinary problem? Perhaps, yet I would want to consider if he had the knowledge to know that he was oversized. For example, I happen to overweight and that means that I eat more then I burn. Yet, if I knew precisely how many calories that I was taking in and how many calories that I was burning then I would always keep a neutral or negative total. In this way, the trader’s problem would only be a discipline problem if he knew the maximize size that he could trade without going over the edge. But, he if didn’t know that then it could be a problem with knowledge or for a better term: the lack of knowledge. In his case, I do recall his position sizing was crazy stupid. But, even if one isn’t taking crazy stupid actions there are a wide range of reasonable leverage amounts based on different estimates. For example, one of my mechanical trading strategies probably could have been traded the last 3 years with only 2-4k. Some years before then one would probably need 5-7k. The level of leverage one could use has varied considerably based on the market conditions.
    One has to somehow develop knowledge. If I recorded precisely what I would eat over a day then I would start to have better knowledge, not a perfect knowledge, but a better knowledge. In the same, we can never have perfect knowledge in the market. But, we can develop a better knowledge by reviewing, comparing, and contrasting the current market to historical markets. One of my bread and butter trades is the ability to call 2 to 3 day market swings whether thrusts or reversals. This is a discretionary trade so I didn’t have a good estimate on the type of risk involved in holding overnight. I created a “perfect trader” in order to look at historical performance. Basically, I created a script to look into the future and pick out perfect trades according to my criteria (i.e. only wining trades, only 2 to 1 risk reward) and then I went back and made trader only win 60% or 70% of the time. In this way, I was able to get more knowledge about how that worked. I was surprised at the extent of the drawdowns of the perfect trader. The real purpose of this exercise was to gain some additional knowledge. Yes, a hypothetical and rather fuzzy knowledge but at least I could know something.
    There are a lot of ways to gain knowledge about the market. Most people claim to be students of the market. But, they are really students of false prophets: that is students of books, snake oil gurus, movies, and media. Below I list some ways to help one develop knowledge:
    Build the “perfect trader” that trades your style (that is use a script to look into the future to pick out winning trades) use this perfect trader to generate useful ideas about maximum performance, risk, and other metrics. Review your indicators and see how often the perfect trader uses your indicators and how he uses them.
    Build a fully 100% mechanical trading strategy. Use the performance metrics to gain an estimate of future probability. Warning: It takes extensive experience to build working mechanical strategies.
    Measure the average range of your market over various time periods.
    Check to see how your market is correlated to other markets.
    Review professional trading disclosures for ideas and to see how others using similar strategies have performed.
    Use options pricing or random pricing models to get an estimate of the probability of a stop hit.
    Find the factors that influence your performance and start to measure them. Some ideas: measure volatility, the number of large trend days over recent x period or versus a historical average, numbers of days without a significant pullback, etc.
  7. Lucias


    Principles over Rules

    When I first started tracking my performance at Collective2, I made a series of rules that I thought would be help me. One of the rules was that I wasn’t going to trade the futures market overnight because I had found that when I made my standard 1 to 2 day market call then I would almost always win. I knew I had an edge and was strong in that. And, I didn’t want to be tempted to take very short term trades or scalps where I might not have fully developed my abilities.
    And, over the weekend I had predicted the market to drop to a significant level. I checked the futures that weekend and they had already dropped to the level I predicted. I felt this was an opportunity because it was such a significant drop in such short period of time. I went long. And, I had of conflicting thoughts:
    1. I predicted the market to drop but I’m buying. This doesn’t make any sense.
    2. I have a rule not to buy overnight and I’m long. I’m breaking my rules
    As I thought about it and about being disciplined, I decided to close out the trade with small loss. I went and emailed a friend about how a terrible I had did to break my rules. The market soared the next day. I would have had a significant win. I started to question my beliefs about rules about discipline. It certainly had cost me performance.
    My logic was faulty. What I didn’t fully understand was that:
    A. Yes, I had predicted the market to drop to the XYZ level. But, I had also did my homework and recognized that level might lead to a reversal.
    B. Yes, I had a ‘rule’ not to trade overnight. But, this was an unusual opportunity. I made the rule to prevent over trading. Not to prevent capitalizing on rare opportunities.
    This whole experience led to questioning of rules and it led to my preference of principles over rules. Principles are ideas that we hold to be true but are not overly specific. Principles provide for flexibility. They provide for not knowing everything and that is important because the market has a tendency to exceed our best estimates. And, it also led to my evaluating every rule to see if it works. If you have a rule then the rule is only as worth as much as it makes.
    Principles recognize that there are worthwhile ideas and that one needs a framework to keep one out of trouble. But, principles are more flexible and don’t specify exactly how one is to meet the goals. One of my principles is that I don’t believe in martingale strategies or strategies that double down as a method for boosting profits or trading successfully. Principally I don’t believe and I won’t use that unless I have strong evidence to the contrary. However, it differs from a rule because a rule would be, “Never open position in the same direction as an already open position.” The principle of not using martingale strategies provides for the possibility of opening a position against an already open position in a rare or exceptional case. One of my principles is to always take the optimal action. I don’t know what the rules are in advance for the optimal action. But, I know that I want to take the optimal action.
    Rules are not necessarily bad. But, they must always be evaluated. If we accept that rules are guidelines designed to enhance profit then it makes to evaluate them. Imagine you own a business and you make a new rule that your employees must complete a report at the end of every day with what they accomplished with the goal of increasing productivity. If that rule impacted the time that your employees had to work on real problems to the extent that productivity actually dropped then your rule didn’t work. Your objectives and your goals were not met. It doesn’t make sense to keep that rule. In the same way, your trading rules should be always be evaluated to see how they are working.
    Discover your principles. Evaluate the rules that govern your trading, and monitor how well they are working. Make changes when necessary.
  8. NoDoji


    The foundation of a successful trading system must be formed on probability in your favor over time. Once you’ve performed enough research and testing to demonstrate a statistical edge over time through varying market conditions, belief in the system will likely follow. Even at that point, though, unwavering faith in the system is required for success.

    The reason interventions hurt performance is because when you intervene in your system, then you’re no longer trading your system; you’re trading randomly based on feelings, opinions, news, whatever.

    If you have a profitable system, then you have to follow the system to be profitable. Normally a system defines an entry price (or entry price zone), a stop loss and a profit target zone. How can a trade be “not working” before you’re stopped out of it? A trade can present a new signal, meaning you would stop out early and reverse positions; but if there’s no reversal signal that fits the criteria of your plan, then the trade is working just fine until you’re stopped out of it.

    If you try to prevent losses, you will intervene in your system, which means you’re not trading your profitable system. No trading system can avoid losses.

    Trying to prevent losses has cost me more than any possible losses I prevented by micromanaging trades. I’ve skipped valid trades because of a feeling or belief; I’ve moved stops to break even too quickly and been taken out of awesome trades; I’ve taken less than minimum profit because price suddenly "looked" weak or strong and watched price run 3 times my minimum profit; I’ve moved stops further away to give the trade room to work and taken larger losses; I’ve cheated and put on a trade before price triggers a valid entry signal to obtain a better entry price and a smaller potential loss, and taken a full stop because the entry trigger never occurred. None of these actions is part of a solid trading plan and they’ve cost me a great deal of money.

    You are over thinking, IMHO.

    Define your setups.

    Define your max loss and expected minimum target for each type of setup.

    Trade the setups, leaving the trade on until a) stop is hit, b) target is hit, or c) reversal setup appears.

    What else is there?

    If you follow your plan and then have a stretch of days/weeks where the results are less than expected, re-evaluate your plan.
  9. Lucias


    Develop Agility

    The elite trader is one who cannot be shaken out of a position when right but who gives like water when he is wrong, quickly, easily, and effortlessly. The question is though, how does one develop agility? Honestly, I don’t think agility has been my strong point, ever really. But, I’ve gotten better primarily by being quick to take a loss or get out of a trade that isn’t working. And, that is one way to develop agility is simply to trade more and to hold for shorter periods. Yet, that is not the whole of agility because agility is so much more than that.
    Agility is the ability to focus on potential profit while not losing of risk. It is the ability to have one eye on the reward and the other eye firmly on the risk. Agility provides balance in this respect. Agility is the ability to pursue multiple goals at the same time.
    Let’s imagine you believe the market is going to go higher. But, you feel that going to market would be risky. So, you have to make a choice between a limit and a market order. Only considering one pathway is not agile. Let’s imagine 2 traders, one who is not agile and one who is agile and let us consider their actions and what the market might do. They both have the same outlook.
    Step 1
    Trader A: Not agile
    Market looks to go higher but looks risky. He places a limit order 4 points below the market.
    Trader B: Agile
    Market looks to go higher but looks risky. He places a limit order 4 points below the market.
    Step 2
    Trader A: Not Agile
    The market blasts higher and keeps going. He cancels his limit and leaves the trading screen deeply frustrated that he missed out on the move. Of course, it goes even higher.
    Trader B: Agile
    He goes to market. He recognizes the market is stronger than he anticipated and may go higher.

    You see the agile trader didn’t get overly frustrated. He just recognized that he was wrong and that the market was much stronger than he anticipated. The agile trader was able to hold 2 things in mind at once. He was able to hold the market doing what he anticipated or doing something else. And, experience certainly helps develop agility. But, wouldn’t it be great if one could develop agility in its own right? It is possible if the trader considers multiple pathways in advance. We can use finer discrimination and classification to create distinct scenarios under which we may consider different actions.
    We’ll stay with the same scenario of a trader who wants to get long but feels the market is not offering a good price at the current time. What can the market do?
    Market can
    A. Blast higher
    B. Grind higher slowly
    C. Pullback to just above the entry
    D. Pullback to the entry and reverse
    E. Blast right through the limit and plummet
    F. Go nowhere
    The trader who defines cases for what the market will do and considers his action in advance will be better prepared to deal with whatever the market throws at him. For example, one of my systems buys at the open expecting a trend day. So, why not set some limit orders below the market if I know I’m going to buy at the open anyway. If they don’t fill then I’ll just cancel them and go to market. I haven’t fully developed this logic into the system. But, I’m working on it. The discretionary trade could use a similar methodology on any time frame.
    Agility can be basically developed in two ways, simply by gaining more experience and placing more frequent trades and, also, by purposefully planning out multiple scenarios in advance. The trader who uses his past experience with purposeful planning will develop his agility at the maximum rate.
  10. If you ever develop a simple system that has the minimum edge of 53% winning, and if you follow it, there is 100% chance that you will make money in the long run.
    #10     Jun 6, 2011