Trading Wisdom 34: Not the Critic Who Counts "It is not the critic who counts, not the man who points out how the strong man stumbled, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena; whose face is marred by dust and sweat and blood; who strives valiantly; who errs and comes short again and again; who knows the great enthusiasms, the great devotions, and spends himself in a worthy cause; who, at the best, knows in the end the triumph of high achievement; and who, at worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who know neither victory nor defeat." - Teddy Roosevelt JS Comment: Do you ever feel held back by "cold and timid souls?" What does it mean to be the man in the arena... to know the great enthusiasms and strive valiantly? Think of friends, family, colleagues - the familiar acquaintances and day-to-day faces of your life. Do these people encourage you, support you, urge you on to victory? Or do they doubt, criticize, and subtly undermine you? If the latter, what can be done about that? Teddy Roosevelt was once shot while giving a speech. In response he continued the speech, saying, "I don't know whether you fully understand that I have just been shot; but it takes more than that to kill a Bull Moose." What would the Colonel think of your fighting spirit? Get Trading Wisdom via e-mail
Trading Wisdom 35: Observation, Experience, Memory and Mathematics "Observation, experience, memory and mathematics - these are what the successful trader must depend on. He must not only observe but remember at all times what he has observed. He cannot bet on the unreasonable or the unexpected, however strong his personal convictions may be about man's unreasonableness or however certain he may feel that the unexpected happens very frequently. He must bet always on probabilities - that is, try to anticipate them. Years of practice at the game, of constant study, of always remembering, enable the trader to act on the instant when the unexpected happens as well as when the expected comes to pass. "A man can have great mathematical ability and an unusual power of accurate observation and yet fail in speculation unless he also possesses the experience and the memory. And then, like the physician who keeps up with the advances of science, the wise trader never ceases to study general conditions, to keep track of developments everywhere that are likely to affect or influence the course of the various markets. After years of the game it becomes a habit to keep posted. He acts almost automatically. He acquires the invaluable professional attitude that enables him to beat the game - at times! This difference between the professional and the amateur or occasional trader cannot be overemphasized. I find, for instance, that memory and mathematics help me very much. Wall Street makes its money on a mathematical basis. I mean, it makes its money by dealing with facts and figures." - Reminiscences of a Stock Operator, Annotated Edition JS Comment: How well does the above describe your trading process? Have you made a bankable investment in 'observation, experience, memory and mathematics'? What is the practical interpretation of the instruction to 'always bet on probabilities'? Sometimes, a lower-probability-outcome bet nevertheless has high expected value (because of the payoff profile), thus making it attractive from a repeated trials perspective. How might a grounding in mathematics help a trader exploit this truth (along with other foundational math concepts)? Buy Reminiscences of a Stock Operator, Annotated Edition on Amazon Get Trading Wisdom via e-mail
They are the psychological equivalent of a head wind. If you pay too much attention to whatever form of passive resistance is opposing you, it will just piss you off, and you will waste perfectly good energy in dissipation. The solution: Spandex :eek:
Trading Wisdom 36: Breaking the Shell "Pain is the breaking of the shell that encloses your understanding." - Khalil Ghibran JS Comment: Were a Spock-like alien observer to take notes on the human race, he/she/it might conclude it is the human condition to be dumb. Not in terms of IQ, or educational level, or problem-solving capability, but rather the persistent tendency to do irrational and dumb things (as defined by clear internal conflict with professed desires and values). The alien observer might further note this dumbness is a universal affliction impacting all humans - from world leaders and particle physicists to janitors, ditch diggers and fry cooks. When it comes to human folly, station in life does not matter, talent does not matter, pedigree does not matter - and if anything ego born of status or accomplishment increases the propensity for dumbness of the sort discussed here. Worse still, we do not learn the most important lessons quickly. Our emotions routinely override our rational faculties (typically at the worst time), making us dense as lead bricks in critical situations. We must constantly guard against the threat of irrational self-destructive mistakes. We struggle with concepts that seem "easy" on the face of it, yet become incredibly hard to implement when running against the grain of our desires, instincts and biases. This may be because, while man is modern, man's brain is still "Savannah 1.0." Our factory installed settings were wired for the forests and the plains. Our physical system, the brain / body connection, was built more for evading tigers and chasing down wildebeests than handling the complex rational equations of 21st century life. Because of all this, when attempting to learn any abstract craft that involves nuance, subtlety, probability exploitation, and most of all emotional control, it is our tendency to feel "stupid" when conscious competence does not come as fast as one expects it to. We are used to "getting it" quickly with so many other things via the simple application of elbow grease - changing a tire, filling out a tax form, brute force adopting a new piece of software, acing a class or earning a degree - so why in the world should this prove so bloody f---g hard? After all, aren't markets simple? Are price movements not bound to up, down or sideways? The resistance we feel - the ego telling us "you are so stupid!", or alternatively shouting "stop trying!" so as to reject the pain of feeling stupid - is the pain that Khalil Gibran speaks of (at least in our expansive interpretation). It is like a wall of fire, or an invisible force field of intense discomfort, that must be walked through. The good news is "Savannah 1.0" is not a permanent condition... thanks to neuroplasticity and the brain's natural analytical capability, coupled with sufficient desire, it becomes possible to literally "rewire" the mind... to cognitively evolve from Savannah 1.0 to Enlightenment 2.0... but accomplishing this is not easy, not simple, and as such involves the pain Gibran speaks of... We submit that, to gain true understanding in the competitive areas that really matter, one MUST experience pain, just as one must experience the pain of shredding muscle fibers, coupled with healing rest and nutrition to build those fibers back up again, if one seeks to improve endurance, tone and strength... Furthermore, in terms of competitive angle - where extractable profits are to be had in a zero or minus sum game - pain is a necessary barrier to profitable competitor levels because, without the pain holding most players back, more would learn easily... and make fewer exploitable shortfalls and mistakes... and then there would be greatly diminished or nonexistent competitive opportunity, invalidating the game in the first place... this is why the things that come painlessly, like learning how to barbecue or play fantasy football league, do not offer opportunity to make an attractive living (or become a champion). When you understand this, you learn to seek out pain... the good kind of pain that is... just as an athlete seeks the good pain of a healthy burn, a series of repetitions to the point of muscle failure, in training and contouring the body for maximum outlier potential... So how is your tolerance, or even your hunger, for pain? Not bad or destructive pain, but the good kind spoken of here... the pain of putting ego aside, recognizing the human condition for what it is, and embracing temporary discomfort in the knowledge that true competitive capability is not bestowed upon anyone... it has to be earned, through the breaking of the shell [and the concomitant experience of pain] that encloses one's understanding... Get Trading Wisdom via e-mail
Trading Wisdom 37: The Startup Paradigm "If you want to understand startups, understand growth. Growth drives everything in this world. Growth is why startups usually work on technology--because ideas for fast growing companies are so rare that the best way to find new ones is to discover those recently made viable by change, and technology is the best source of rapid change. Growth is why it's a rational choice economically for so many founders to try starting a startup: growth makes the successful companies so valuable that the expected value is high even though the risk is too. Growth is why VCs want to invest in startups: not just because the returns are high but also because generating returns from capital gains is easier to manage than generating returns from dividends. Growth explains why the most successful startups take VC money even if they don't need to: it lets them choose their growth rate. And growth explains why successful startups almost invariably get acquisition offers. To acquirers a fast-growing company is not merely valuable but dangerous too. "It's not just that if you want to succeed in some domain, you have to understand the forces driving it. Understanding growth is what starting a startup consists of. What you're really doing (and to the dismay of some observers, all you're really doing) when you start a startup is committing to solve a harder type of problem than ordinary businesses do. You're committing to search for one of the rare ideas that generates rapid growth. Because these ideas are so valuable, finding one is hard. The startup is the embodiment of your discoveries so far. Starting a startup is thus very much like deciding to be a research scientist: you're not committing to solve any specific problem; you don't know for sure which problems are soluble; but you're committing to try to discover something no one knew before. A startup founder is in effect an economic research scientist. Most don't discover anything that remarkable, but some discover relativity." - Paul Graham, Startup = Growth JS Comment: Technology startups and hedge fund startups have a lot in common. What are some of the parallels? Get Trading Wisdom via e-mail
How to Win an $800 Pot With $5 Worth of Risk If you don't mind the occasional poker story - told with a logical point of course - then keep reading... I'd like to tell you about an $800 cash game pot I won the other day, while at no point taking on more than $5 worth of risk. Read more: http://www.mercenarytrader.com/2012/10/how-to-win-an-800-pot-with-5-worth-of-risk/
Trading Wisdom 38: Sperandeo On Trendlines "In analyzing a trend on the charts, the most useful tool is the trendline. One of the biggest mistakes made by amateurs and professionals alike is inconsistently defining and drawing the trendline. To be useful, the trendline must accurately reflect the definition of the trend. The method I have devised is very simple and very consistent. It fits both the definition of a trend and the inferences drawn from Dow Theory pertaining to the elements of a change in trend: "1. Select the period of consideration: the long term (months to years), the intermediate term (weeks to months), or short term (days to weeks). It can also be a smaller segment of any of these where a change of slope of the trendline is apparent. "2. For an uptrend within the period of consideration, draw a line from the lowest low, up and to the highest minor low point preceding the highest high so that the line does not pass through prices in between the two points. Extend the line upwards past the highest high point. It is possible that the line will go through prices past the highest minor high point. In fact, this is one indication of a change in trend, as will be demonstrated shortly. "3. For a downtrend within the period of consideration, draw a line from the highest high point to the lowest minor high point preceding the lowest low so that the line does not pass through prices in between the two high prices. Extend the line past the lowest high point downward. "While this method is very simple, it is extremely consistent and very accurate. The slope of this trendline is a close approximation to the slope you would get by doing a linear regression analysis on the price data over the same time period. Unlike other methods, it prevents you from drawing a trendline to suit your purposes -- it prevents you from imposing your wish onto the trendline. It also provides the tools to graphically determine when a change of trend has occurred." - Victor Sperandeo, Trader Vic: Methods of a Wall Street Master JS Comment: Do you use trendlines, or otherwise incorporate them into your thinking and analysis? Buy Trader Vic: Methods of a Wall Street Master on Amazon Get Trading Wisdom via e-mail