[great1one]

Floor traders method

[DbPhoenix]

If P, Then Q

If asked to evaluate the truth of this statement, "If you traded MSFT during the month of May, you made a profit," most people would start the process of evaluation by trying to think of people they know who traded MSFT during May and made a profit. Then, on coming up with one or more examples, they would evaluate the statement as being true. In other words, they would first look for confirming evidence. If there were even one person who traded MSFT during May and did not make a profit (even if the evaluator didn't know of this person), the results of the evaluation would be false.

The logically correct way to evaluate the statement above would be to look for cases where MSFT was traded in May and profits were not made. If you can think of even one example, you've disconfirmed it and know it's false.

The process of assessing statement validity by looking for confirming evidence often leads people to false conclusions. This can be an especially serious impediment to trading success, because you're constantly evaluating your trading plans, technical signals and indicators, news, etc. The views you form as a result of your evaluations are ultimately what you base your decisions on. If your views are made up of fallacies, your decisions will inevitably be wrong, resulting in losses.

Suppose you've developed a technical analysis method that you believe will give you excellent indicators. If you evaluate the effectiveness of this method by only looking for cases where it works, it's possible that you'll identify 10 instances where it works just as you expected. But there might be 40 instances where your method doesn't work, and you'll be ignoring these. Through your biased evaluation, you'll come to the conclusion that your method is very effective, and in fact, will set yourself up to be overconfident about it.

Traders tend to be particularly vulnerable to this difficulty in evaluation because they're usually evaluating trading plans or methods they think might yield them great profits. They naturally want to see perfect results, thus pushing them even further to look for confirming evidence.

When evaluating a theory or statement, it helps to play devil's advocate - try to come up with a proof for why the theory or statement is false. Remember to always be objective, and evaluate from the various sides before coming to any conclusion.

--Innerworth

[firewalker]

Originally Posted by DbPhoenix »

Possibility Mapping

I thought this post from Steenbarger's blog is a nice addendum to the above:
http://traderfeed.blogspot.com/2009/...open-mind.html

[DbPhoenix]

Mixing Perspectives

At the end of May, the QQQ was at $30, which was around the low September-October levels. You reasoned that this was a fantastic opportunity to go long, because the price was bound to move up after hitting such lows. And so you bought, risking the maximum capital you were willing to lose on any one trade. It's mid-June now. The price is $27.53. You were planning on investing for the long-term to meet your profit objectives, right?

Many traders face the problem of what's known as mixing perspectives. Suppose you're planning on building a long-term portfolio and are preparing to make some investment entry decisions. Would you limit your analysis by only looking at this week's price patterns? Of course you wouldn't. You'd want to look at the long-term patterns and perhaps use this week's price patterns as supporting information to enter the trade with maximum precision, if you use them at all. The issues that can be caused by mixing perspectives are fairly clear in this case, but they aren't always.

Novice traders often make the mistake of entering a trade with a strategic methodology that conflicts with the original perspective used to analyze the trade. For instance, they'll analyze a potential decision in terms of a long-term strategy but act as if they're executing a short-term strategy. The trader who mixes perspectives will inevitably set inappropriate stop losses and profit objectives, and therefore will be likely to stop out and take losses, only to see that his original analysis turned out to be correct (in our example, over a longer term). And that's when the trader will start thinking, "I should have waited. I got out too soon."

Mixing perspectives can cause a series of problems for the trader. As the trader takes losses, he develops an aversion to sticking to stop losses and minding profit objectives. He'll try to unjustifiably stay in a trade for more or less time than he's planned, because he feels he needs to make some sort of an adjustment. Additionally, immediate losses due to stop outs can indirectly cause a breakdown in the trader's confidence in his analysis, and therefore in his trading ability.

The key is to make sure that the perspective you take when you're analyzing a trade is the same perspective you use when you set stop losses and profit objectives to act on that analysis.

--Innerworth

[DbPhoenix]

I wasted about four years trying to decipher the intent behind every move and disappeared down a number of fruitless though mildly interesting bunny tunnels. It's a natural thing to do, as the basic mechanics of trading ultimately become tedious and unfulfilling, at the very least in an intellectual sense, so of course one tries to go deeper and deeper to squeeze more meaning from the motion, indeed the profession as a whole. Or hole.

Now I'm down to one free web-based chart and have let it all go, it's such a relief. Four monitors, 85 charts with various pointless divisions of time, range and volume, bid/ask order book overlaid with pit noise, TICK, VIX, put/call open interest, A/D and TRIN. WTF? Muddies the waters innit. Anything to avoid seeing the simplicity that was always there. I suppose it's kinda hard to accept that an innocent child with the proverbial crayon would probably do the job better, especially for the inquisitive male ego "But... but ... you mean that's all I have to do? Can't be right. So let's misovercomplexify it" as Bush might say.

Notwithstanding I think basics still need to be grasped: the formations and background levels of commitment and emotion that manifest as, for instance, an even-handed fierce fight; a non-commital can't be bothered to fight; whoa that hurt and I grimly held on but now it really hurts capitulation; directional grind, whippy uncertainty etc. ... vague levels of view (or lack of it) and positioning. but beyond that I no longer care why anything is happening outside of the nebulous bigger picture. Perhaps it gets more exciting when you can see the less obvious coming, but you don't need to. Pursue another (parallel) career if you want creative rewards, enlightening explanations or a sense of having produced something whether physically or in the mysterious carapace at the top of our bodies.

Accept that for the market to work it needs to occasionally misdirect -- savagely -- often during a dull moment (biggest moves often come out of these) but that it is, yes, generally quite obvious. Draw a few simple lines, exercise patience and hit those small areas of high probability again and again. That's all we can do. Thus it must follow that battles will indeed be fought in these obvious areas, as that's where the seasoned money will always be. It cannot be any other way. Our money, playing the waiting selective game. Not their money, cause they're impulsive, impatient, clueless, adrenaline diet disciples, or so rumour has it.

--frugi