If I may just continue, with the psychology of trading. Which I feel is one of the most important. We always hear cut your losses, let your profits run. This " way of thing", can help with the former, I feel. As usual, I welcome any comments, discussion.
The Basics. Always. Always Assume That You Are Wrong
Or you can read the Karmasutra before you start your trading day
I come from a STEM background. I actually have a degree in mechanical engineering. I cannot write well, and coming from that background, to write about something as counter-intuitive, or at times as abstract as trading, I think it will be doubly hard. But I shall make an attempt anyway, because I think it is important.
Suppose I have put in my fair share in studying the markets. And then conditions X & Y present themselves. From my studies, when these occur, I will put on a long position at B. I define my cut-loss point at C, and my profit target at T. So far so good. But what is my assumption about the trade when I do this? More often than not, either subconsciously, or on an intuitive level, I must assume I am " RIGHT". Else why would I even be taking the position in the first place?
But that is the wrong way to think about trading or investing.
The RIGHT way, or rather, the RIGHT mindset. Is to assume that I am already WRONG when I initiate that position.
Now take a minute to reflect on that. If I have already assumed that I am WRONG, it makes it easier for me to cut my loss if price goes to my cut loss point. And if I have initiated the position and the price went nowhere, but really hasn't reached my cut loss point, I will have a tendency to cut it quicker. I now have made it easier for me to cut my losses, because I have assumed I am wrong in the first place. And because I know I am probably wrong, I am more alert and quicker to react when things do go wrong while I am holding the position.
Am I making any sense so far?
If you think I am alone in this "weird" way of thinking, consider this quote from George Soros from his "Soros on Soros":
“I recognize that I may be wrong. This makes me insecure. My sense of insecurity keeps me alert, always ready to correct my errors. "
There are numerous similar quotes about recognizing one's mistakes, or how he feels about mistakes:
" To others, being wrong is a source of shame; to me, recognizing my mistakes is a source of pride. Once we realize that imperfect understanding is the human condition, there is no shame in being wrong, only in failing to correct our mistakes.”
Or you can consider the famed Japanese private trader CIS, who has amassed more than USD 150m trading his own money. In his book, which unfortunately has not been translated into English, he gives his best advice to traders:
" Buy stocks that are being bought, and sell stocks that are being sold."
What is interesting is he then added, after a stock has been bought, no one will know where the stock will go after that. What is important is that he understands he may be wrong, and will cut his losses if it is so required. In fact, he seems proud of his skills in cutting losses.
Or take another example. The so-called Phantom of the Pits and his online "book". After many years of success, he has but two, only two, most important nuggets of wisdom, which he calls the 2 Rules. Rule One simply states:
"In a losing game such as trading, we shall start against the majority and assume we are wrong until proven correct! (We do not assume we are correct until proven wrong.) Positions established must be reduced and removed until or unless the market proves the position correct! (We allow the market to verify correct positions.) "
Trader Tom Hougaard has an interesting write-up on Phantom of the Pits, I urge you to spend some time on it:
https://tradertom.com/resource/the-phantom-of-the-pits/
So next time you put on a position, take a second to reflect on your frame of mind. Have you considered that you are most probably wrong to begin with? And things may literally go south with new developments. Are you prepared to follow your trading plan and cut your losses then? At which point would you consider the market has proven you right and you can keep your position? I hope with this mental exercise you will be better equipped to deal with these markets. Remember. The "mental aspects "of trading are more, if not equally as important as your methodology.
Will leave you with this tweet I remembered reading a while back. The author of the tweet said that everyday before he trades, he will read a page from Sun Tzu's Art of War, and another one from the Bhagavard Gita. A reader responded. His answer was, everyday before he trades, he will read the Karmasutra, so that he can understand the various ways he will get f#xked throughout the trading day.
Come to think of it. That may be the best way to start your day in this business. Til then.
