Separate trading and life

Separate trading and life 20^th

     The markets don't care how your day has been. Moreover I'm sure everyone doesn't care much how the markets have been, except your trading buddies.
     Like I explained in my previous post people make up the market and humans are instinctively selfish animals. So if you are angry because you lost money on a trade or because your boss gave you a hard time at work, the person on the other end of the market isn't going to lose their own money to make you happy. If somebody on the other side of the market begged you to close your position at a loss because they are having a bad day, would you do it?
     On the entirely opposite side of the spectrum people outside of the trading world probably don’t care what has been going on. It’s essentially like any other hobby or niche. If a car guy was talking to you about his ’66 vette or that Formula 1 race that went the previous week you would probably give little concern unless you are into that sort of thing. Trading is a very boring business the only interesting thing is the money making possibility. Basic morals and etiquette say one should not flaunt one’s wealth. Therefore, speaking about trading without the impact of money is a contradiction. The two ideas exist hand in hand and therefore talking about trading is unmoral and goes against basic etiquette.

     Moral of the post, keep work issues at work and home issues at home, it will clear your head and improve your trading performance and it will make your personal and home life much more enjoyable. Thanks for reading and happy trading.

Changes and a new trade

Hey everyone, just wanted to write a short post. Posts will be uploaded every Tuesday instead of Thursday because getting the newsletter, these posts and school work done is pretty hectic so Tuesdays work much better for me. Also, I've realised that I've been right on the direction of the market but not the timing. Those who follow would've seen my bullishness, and the fx market has rallied pretty strongly over the past weeks however my conservativeness has kept me out for all of it. So now I'm just gonna bite the possibility of losses and start buying some 'risky' currencies. It's better to be early and lose  some money than late and not have made any at all. I'll do a proper write up for the trades later because I have TOK essays to write due tomorrow. Hello coffee!

People Make the World Go 'Round and Move the Markets

Why psychology? Why not?

   Why don't I just develop some crazy god like indicator that predicts the market 100%? Well, not only is that impossible but it’s a waste of time simply because the market cannot be predicted. Let’s examine that statement. 

   The assumption made by technical market gurus is that they can predict market movements 100% of the time or whatever bogus claims they make. But they are predicting markets based on price, or a derivative of price (indicators). But then price moves because of buyers buying at a certain time and sellers selling at a certain time. But buyers and sellers make their trades for various in-explainable reasons. So they really are trying to predict the most illogical element in the market... people.

   Fact is it doesn't matter if god himself came down on earth and every indicator in the world said buy shares in Company A. If no one buys any shares the stock won't move. So my assumption is, “Wouldn’t it be better to trade the source rather than the derivative?” Why trade indicators if you profit or lose based on price, why analyze price if you can analyze the people.

So my logic is trade based on what you expect the masses to do. Perfect example, I had some shares of Google in a demo account going into earnings. I knew I’d get a pop and I sold it all. Mark my words Google will hit $580-575 over the next two weeks and I still haven’t read the report or the conference call. That’s how all these growth stocks trade.

   The only problem is it’s not like I can go to every trader and investor and ask what their positions are. So until I get that small glitch out the way I’ll share my system with you all. Until then thanks for reading and happy trading.

The Psychology behind my Methodology

I stated in one my previous posts some of my rules in my trading methodology. They go as follows:

First: The trend is your friend. Find where is price going in the long term and never trade against it.

Second: Trade within your means: Never over trade or risk more than your account can handle.

Third: Never get into a trade you don't understand.

Now what I wanted to do here is explain the psychological reasoning behind each of the rules. The reason for each of these rules is to eliminate the human emotions or cognitive bias in our own trading but to also predict and profit from other person's emotions and cognitive biases. 

The main biases we want to avoid are:

Confirmation Bias & Semmelweis Reflex

Focusing 

Irrational Escalation

Post Purchase Rationalization

Wishful Thinking

The Trend is your Friend

Trading the trend doesn't have a significant effect on individual psychology. However, it is very useful in order to profit off of the band wagon effect. "Hey, that gold just keeps going up we should get in." Common example where being in a position ahead of the band wagon is an easy way to make money in the markets. 

Trade Within Your Means

This rule deals with wishful thinking. Many times traders, new and old, enter a position with insane amounts of leverage. In other words this rule deals with money management. If you can't handle the loss financially or emotionally don't put it on. You might as well burn the cash.

Never Get into a Trade You Don't Understand

This rules deals with all the other biases. Let me explain with an example. Some analyst writes an article on Apple (AAPL)and you like what he has to say. So you go and buy some Apple shares not understanding why. First thing that you do is reassure yourself that you've made the right decision, you are going through "Post Purchase Rationalization". So now you want some hard evidence supporting your position "Confirmation Bias" and your reject all the negative information "Semmelweis Reflex". So you now only focus on the good news "Focusing" until a terrible report is released that Apple is failing but you ignore it even though it is clearly is against your position "Irrational Escalation". Morale of the story don't enter if you don't have a plan or any background knowledge on the position. You may miss an opportunity maybe you may see a sell off as a buying opportunity if you did your homework. 

Thanks for reading and stay tuned for more trading advice, info and explanations and don't forget to visit my other website.