Friday, August 10, 2007
Being Wrong Never Felt So Right
Being able to take losses without them damaging one's confidence is crucial to the success of traders. Hence, "Cut your losses quickly" is perhaps one of the best-known rules of Trading.
While most Traders understand that they must take small losses to avoid blowing up their accounts, I believe the same Traders typically do not realize the mental capital which is derived from cutting losers early. This may be because there tends to be a stigma attached to buying and selling the same stock in a short time frame (unless, of course, the trade is planned as a daytrade), especially if it is sold for a loss. So while the Trader knows that he has cut a loser quickly and preserved his capital (mental and $$$), he often still feels a lingering pang of doubt, disappointment about being "wrong," and even anger at himself (and sometimes at the mysterious They, the PPT, or an analyst). After being cut quickly, the stock will often reverse, and foment even more mental discord.
These feelings, like most, with practice can be overcome. They must be overcome.
See, the least understood benefit of always cutting losers quickly is that it puts the Trader in control of the trade, and dispenses with emotions. Sadly, many traders would rather blame the loss on the market maker, or the Fed Chairman, or a short-seller, rather than assume complete and total control of their trading.
"The correct way to control positions is to only hold them once they prove to be correct. Let the market tell you your position is proven correct, but never let the market tell you that your position is wrong. You, as a good trader, must always be in command of knowing and telling yourself when your position is bad."
"The market will tell you when your position is a good one to hold. Most traders do the opposite of what is correct by removing positions only when proven wrong. Think about that. Your exposure and risk is much higher if you let the market prove you wrong instead of your actions removing positions systematically unless or until the market proves your position correct."
The above two paragraphs, lifted from Phantom of the Pits, succinctly illustrates my point. An example of this mentality in action is not removing a trade before a stop is hit, even when a Trader knows or strongly suspects the stop will be hit. For most, it is easier to allow the stop to be hit and then blame the loss on their strategy or someone or something else. If this mentality can be avoided, Traders will doubly benefit from cutting losses before they balloon.
While most Traders understand that they must take small losses to avoid blowing up their accounts, I believe the same Traders typically do not realize the mental capital which is derived from cutting losers early. This may be because there tends to be a stigma attached to buying and selling the same stock in a short time frame (unless, of course, the trade is planned as a daytrade), especially if it is sold for a loss. So while the Trader knows that he has cut a loser quickly and preserved his capital (mental and $$$), he often still feels a lingering pang of doubt, disappointment about being "wrong," and even anger at himself (and sometimes at the mysterious They, the PPT, or an analyst). After being cut quickly, the stock will often reverse, and foment even more mental discord.
These feelings, like most, with practice can be overcome. They must be overcome.
See, the least understood benefit of always cutting losers quickly is that it puts the Trader in control of the trade, and dispenses with emotions. Sadly, many traders would rather blame the loss on the market maker, or the Fed Chairman, or a short-seller, rather than assume complete and total control of their trading.
"The correct way to control positions is to only hold them once they prove to be correct. Let the market tell you your position is proven correct, but never let the market tell you that your position is wrong. You, as a good trader, must always be in command of knowing and telling yourself when your position is bad."
"The market will tell you when your position is a good one to hold. Most traders do the opposite of what is correct by removing positions only when proven wrong. Think about that. Your exposure and risk is much higher if you let the market prove you wrong instead of your actions removing positions systematically unless or until the market proves your position correct."
The above two paragraphs, lifted from Phantom of the Pits, succinctly illustrates my point. An example of this mentality in action is not removing a trade before a stop is hit, even when a Trader knows or strongly suspects the stop will be hit. For most, it is easier to allow the stop to be hit and then blame the loss on their strategy or someone or something else. If this mentality can be avoided, Traders will doubly benefit from cutting losses before they balloon.
Gerald Loeb, in The Battle for Investment Survival writes, "Losses must always be 'cut.' They must be cut quickly, long before they become of any financial consequence. After the elimination of a stock in this manner, the transaction must be, in a sense, forgotten. It must be left out of future consideration so completely that there is no sentimental bar to reinstating the position at higher level, either very soon or any later date, if the purchase again seems strongly advisable."
Loeb describes the double-benefit of cutting losers quickly: it allows one to preserve capital, and is a natural mechanism by which a Trader can stay in control of the trade, and by extension, his emotions.
What Traders will discover upon mastery of this skill is the profound realization that controlling trades is much easier than controlling emotions. Attemping to bridle one's emotions while letting trades run free is the exact wrong way to approach losses.
The Phantom says "It's okay to be wrong small but never okay to be wrong big if you expect to trade in the long run. . . .Learn to be wrong, fast." I will add to those words of wisdom, "Take control of your trade before your emotions have to."
Comments:
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if I may borrow from the chinese proverb; very apropos for todays tape
and you tell him morningwood ! you think Broker A wants to blog over weekends, with his family demanding equal time from his calculator brain with his desktop, laptop, crackleberry, iphone, cellphone, ipod, time machine & meeting with Tokman ?
and you tell him morningwood ! you think Broker A wants to blog over weekends, with his family demanding equal time from his calculator brain with his desktop, laptop, crackleberry, iphone, cellphone, ipod, time machine & meeting with Tokman ?
Timely post, Wood.
The IBD also has lots of good stuff on cutting your losses short. And you're right to point out that it's about preserving your mental state as it is about preserving your capital.
I wonder how robots feel about taking losses? Apparantly, they're taking lots of them!
-DT
The IBD also has lots of good stuff on cutting your losses short. And you're right to point out that it's about preserving your mental state as it is about preserving your capital.
I wonder how robots feel about taking losses? Apparantly, they're taking lots of them!
-DT
excellent and timely post - in these past few days a "win" should show its head in a matter of seconds. Likewise a "loss" with a tight - very tight stop - will allow you to focus on the next quick set-up for a "win"
no yawning here.....actually I'm only allowing 3 - 15min bars before I have to move on - even in a win...it has been good:
"And indeed there will be time
To wonder, "Do I dare?" and, "Do I dare?"
Time to turn back and descend the stair,...
...Do I dare
Disturb the universe?
In a minute there is time
For decisions and revisions which a minute will reverse."
-"The Love Song of J. Alfred Proofrock" by T. S. Eliot
no yawning here.....actually I'm only allowing 3 - 15min bars before I have to move on - even in a win...it has been good:
"And indeed there will be time
To wonder, "Do I dare?" and, "Do I dare?"
Time to turn back and descend the stair,...
...Do I dare
Disturb the universe?
In a minute there is time
For decisions and revisions which a minute will reverse."
-"The Love Song of J. Alfred Proofrock" by T. S. Eliot
Who is this guy Dikooti you fucking loser day traders all talk about? Is he your hero?
Imposter(s) of me spread rumors on the blogoland that I have sold SWC. That is not true, I did not sell any SWC equity. With such huge and powerful swings up and down last week, I guess you day traders just can not resist the temptation to take a position in SWC and make 20% in one day, if you do it right, or lose 20% if you take the wrong side.
I am holding, not buying and not selling, just holding.
Imposter(s) of me spread rumors on the blogoland that I have sold SWC. That is not true, I did not sell any SWC equity. With such huge and powerful swings up and down last week, I guess you day traders just can not resist the temptation to take a position in SWC and make 20% in one day, if you do it right, or lose 20% if you take the wrong side.
I am holding, not buying and not selling, just holding.
How many hours of your day are consumed by putting up those stupid fucking posts on Yahoo boards for SWC JJ? Do you have a job you fucker?
Isn't saying you want to be a day trader kind of like saying you want to be a rock star.
WS- tell me can one really get enough of an edge to bank coin for the mortgage and groceries-- flipping stocks everyday. What kind of stake do need? 10 mil 5 mil 1 mil-- whats a good day?
The new landscape of Wall Street and the markets seems to mirror the Sportsbook and the degenerate OTB guy.
CNBC = ESPN
CRAMER=Chris Berman--
Mix that in with Broadband and Scottrade probably not good.
Lets face it Beulah is one irrational bitch. Go fucking figure. The mortage mess story is going to soon move to Network News and Front Page news. We are going to learn a whole lot about a subject very few people including me can understand or comprehend.
Average pay for Hedge fund mangager in 2006 -363 Million.
WS- tell me can one really get enough of an edge to bank coin for the mortgage and groceries-- flipping stocks everyday. What kind of stake do need? 10 mil 5 mil 1 mil-- whats a good day?
The new landscape of Wall Street and the markets seems to mirror the Sportsbook and the degenerate OTB guy.
CNBC = ESPN
CRAMER=Chris Berman--
Mix that in with Broadband and Scottrade probably not good.
Lets face it Beulah is one irrational bitch. Go fucking figure. The mortage mess story is going to soon move to Network News and Front Page news. We are going to learn a whole lot about a subject very few people including me can understand or comprehend.
Average pay for Hedge fund mangager in 2006 -363 Million.
Nice to be reminded Shed....
And I know some good employment lawyers for this breach of contract here....
And I know some good employment lawyers for this breach of contract here....
I keep a watch list of all the stocks I have sold with the position size and price paid. Over 2/3 of the list is in red now and in some cases huge losses would have been incurred if I had sold later.
Thanks folks.
Kerouac? Eliott? You have certainly placed me in good company. All in jest, I'm sure. However, I'm partial to "A lot of sound and fury, signifying nothing."
Mrkcbill, I do not day trade. However, I do know from experience that I will have about 60/40 losers to winners. Therefore, when I sell quickly, I know I have the odds that I am selling a loser. Traders have to keep track of such things.
Jake, I usually turn to Mdawsz for my legal services, but if he flakes out on me, I will be glad to take you up on your offer ;).
Finally, Loeb's book has been the recent inspiration for a lot of my thinking and writing. Its a great book...Highly recommended.
Kerouac? Eliott? You have certainly placed me in good company. All in jest, I'm sure. However, I'm partial to "A lot of sound and fury, signifying nothing."
Mrkcbill, I do not day trade. However, I do know from experience that I will have about 60/40 losers to winners. Therefore, when I sell quickly, I know I have the odds that I am selling a loser. Traders have to keep track of such things.
Jake, I usually turn to Mdawsz for my legal services, but if he flakes out on me, I will be glad to take you up on your offer ;).
Finally, Loeb's book has been the recent inspiration for a lot of my thinking and writing. Its a great book...Highly recommended.
Was Loeb the guy that inspired O'Neill's 7-8% losses directive?
I remember Jesse L. quoting B. Baruch and one of the Rothschilds with similar advice...
I remember Jesse L. quoting B. Baruch and one of the Rothschilds with similar advice...
How much do you need to make a living
$500 a day average profit = $100K
$2000 a day average profit = $400K
All can be done with $150K X 4xMargin
This is short term trading - about 6 trades a day (that's 3 in and 3 out)
That doesn't mean $150 is your entire liquid net worth. That should represent let's say at least $600K of entire liquid net worth. WTF do I know - It works for me but my short term trading account generally represents 10 to
20% and I never carry over margin
to the next day - meaning it costs nothing. (I'm sure you all know margin used during a day but closed out has no cost.)
Kerouac Huh? I think if he were still alive he would say
"volatility is comfort for the intensity of life"
Jake - where's the bottom? Who cares - there is always something
to work with "Technically!"
$500 a day average profit = $100K
$2000 a day average profit = $400K
All can be done with $150K X 4xMargin
This is short term trading - about 6 trades a day (that's 3 in and 3 out)
That doesn't mean $150 is your entire liquid net worth. That should represent let's say at least $600K of entire liquid net worth. WTF do I know - It works for me but my short term trading account generally represents 10 to
20% and I never carry over margin
to the next day - meaning it costs nothing. (I'm sure you all know margin used during a day but closed out has no cost.)
Kerouac Huh? I think if he were still alive he would say
"volatility is comfort for the intensity of life"
Jake - where's the bottom? Who cares - there is always something
to work with "Technically!"
On the Road and WS- Good comments. Daytrading is a dangerous and in most cases a losing game. The "tuition" one pays while starting out usually wipes out most traders accounts before they "graduate". One needs to be well capitalized with another spouse working to pay the bills and most aren't. I believe most daytraders don't take the losses quick enough and hope (and sometimes ego) doesn't allow them to do this.
One of the worse things a daytrader can do is think of the trades in terms of $$ (some turn off the P&L) and say I need to make X amount of dollars per day to be a success. Ones behavior is altered when trades are thought of as $$ instead of wins and losses.
Daytrading should come with a warning like on a pack of cigarettes. A substantial majority of daytraders should find a job (with a salary) or open their open business with the capital and dollar cost average the $$$ in mutual funds.
The above is especially true today as hedge funds and TradeBots are everywhere and they run the show on a day to day basis for the most part.
One of the worse things a daytrader can do is think of the trades in terms of $$ (some turn off the P&L) and say I need to make X amount of dollars per day to be a success. Ones behavior is altered when trades are thought of as $$ instead of wins and losses.
Daytrading should come with a warning like on a pack of cigarettes. A substantial majority of daytraders should find a job (with a salary) or open their open business with the capital and dollar cost average the $$$ in mutual funds.
The above is especially true today as hedge funds and TradeBots are everywhere and they run the show on a day to day basis for the most part.
If anyone wants to play the "kick the hedgies on the way down" game, look for the list of imploded and imploding funds at http://hf-implode.com/
Broker A- I smell something nasty happening on Monday. In addition to LEND I see in the After Hours BZH fell after it told the SEC it was delaying filing reports becaude its former accountant was "cooking" (my words) the books.
Also in the AH the Feds denied FNM and FRE their request to increase debt limits (so more cash can be put into the mortgage market).
Looks like a perfect storm brewing.
Also in the AH the Feds denied FNM and FRE their request to increase debt limits (so more cash can be put into the mortgage market).
Looks like a perfect storm brewing.
The Fed injecting money into the market, way to control inflation Big Ben. Hello, my dollar is now worth less, geez. I think we sell off Monday and then bounce at the end of Aug just in time for retail buying for football season and the market rebounds strong to finish out the year.
I have just landed in one of the greatest Monuments to Mankind - NYC
To that end I have decided to share more of my bullshit than in the past.
If you believe the next few lines
you'll believe anything.
Monday is the New Moon. The New Moon represents an acceleration of its immediate preceding days. If things have been going well - things will be getting better - likewise if things have not been going well - the "Not" will increase. (the Full Moon - 14 days from now - represents change)
Although the Full Moon will be around August 27th - the change will begin on or about august 23.
Talk about Volatility! I didn't say Down - I said change and Volatility. August 27th is also
the beginning of Labor Day week - which should be lower than normal volume (remember the last holiday week - Memorial Day week - the market took off and never looked back - at least not until this past full moon.)
What a site to post a message from the "dark side" Thanks Fly for allowing me to present - the "nearnotnatural" occurrences of heavenly bodies on bodies of water and man. What Bullshit - Huh?
I was bored this morning - so I decided to write something - this is one of the only sites where the obtuse makes sense.
To that end I have decided to share more of my bullshit than in the past.
If you believe the next few lines
you'll believe anything.
Monday is the New Moon. The New Moon represents an acceleration of its immediate preceding days. If things have been going well - things will be getting better - likewise if things have not been going well - the "Not" will increase. (the Full Moon - 14 days from now - represents change)
Although the Full Moon will be around August 27th - the change will begin on or about august 23.
Talk about Volatility! I didn't say Down - I said change and Volatility. August 27th is also
the beginning of Labor Day week - which should be lower than normal volume (remember the last holiday week - Memorial Day week - the market took off and never looked back - at least not until this past full moon.)
What a site to post a message from the "dark side" Thanks Fly for allowing me to present - the "nearnotnatural" occurrences of heavenly bodies on bodies of water and man. What Bullshit - Huh?
I was bored this morning - so I decided to write something - this is one of the only sites where the obtuse makes sense.
I dunno why farking blogger keeps farking up my link (it does that every now and then), but the above should say "This is good news, I think, for the markets on Monday."
Great post, Woodshedder.
I'm starting to think that literally the only thing that matters in trading is dumping losers quickly. We've all revenge traded by buying back a stock we lost money on to try to "get even" and it can get really ugly if you let it. My goal in this case is to try to hold that stock I lost money on to the exact same standards to which I hold every other stock in the universe before buying it again. If it exhibits something I like- crossover, breakout, BOB, etc- I might buy it again. Otherwise it remains in the huge category of stocks I don't own. This mindset generally works for me but I'd be totally unrealistic to say that I'll never revenge trade again. It's a totally human impulse and hard to resist sometimes.
I'm starting to think that literally the only thing that matters in trading is dumping losers quickly. We've all revenge traded by buying back a stock we lost money on to try to "get even" and it can get really ugly if you let it. My goal in this case is to try to hold that stock I lost money on to the exact same standards to which I hold every other stock in the universe before buying it again. If it exhibits something I like- crossover, breakout, BOB, etc- I might buy it again. Otherwise it remains in the huge category of stocks I don't own. This mindset generally works for me but I'd be totally unrealistic to say that I'll never revenge trade again. It's a totally human impulse and hard to resist sometimes.
Thanks Jim.
For traders with short time horizons, it is crucial to cut losers quickly. This is important not only from a capital preservation perspective, but also due to opportunity cost. If there are 50 stocks breaking out everyday, it doesn't make sense to hold onto one that didn't break out as planned. Although, during a strong bull run, most stocks will eventually turn back around, allowing a trader to break even, at least. How long til that happens is anybody's guess. I think it makes more sense to get out and find another, taking the small loss, and staying in control of the trade.
What concerns me, in a market like we currently have, is that some of the stocks will not reverse back to the upside, for many, many, months.
The other part that you mention is learning how to stay detached enough from a trade to re-purchase it, even it you sold it 5 minutes prior, assuming the stock again meets some criteria for purchase. I find that hard to do.
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For traders with short time horizons, it is crucial to cut losers quickly. This is important not only from a capital preservation perspective, but also due to opportunity cost. If there are 50 stocks breaking out everyday, it doesn't make sense to hold onto one that didn't break out as planned. Although, during a strong bull run, most stocks will eventually turn back around, allowing a trader to break even, at least. How long til that happens is anybody's guess. I think it makes more sense to get out and find another, taking the small loss, and staying in control of the trade.
What concerns me, in a market like we currently have, is that some of the stocks will not reverse back to the upside, for many, many, months.
The other part that you mention is learning how to stay detached enough from a trade to re-purchase it, even it you sold it 5 minutes prior, assuming the stock again meets some criteria for purchase. I find that hard to do.
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