When coming across the research of Dr. Itiel Dror, who teaches at the School of Psychology at the University of Southampton in England, one can find his work on decision making which is particularly relevant to trading.
The important take-away from this research is that many of the factors that influence performance, even among expert performers, are situational and not part of fixed personality traits. What we perceive and how we respond are greatly influenced by the environment. A full understanding of a trader’s performance requires an appreciation of the specific situation in which the performance was embedded.
– Time Pressure Affects Risk Taking – Under time pressure, individuals are more conservative when they face less risk, but more risk-taking at higher levels of risk.
– Emotions Affect Pattern Recognition – Increased negative emotionality led raters to identify more patterns in ambiguous situations.
– Contextual Information Affects the Judgments of Experts – When you provide leading information to experts, their subsequent judgments change to fit the prior information.
– Perception is Far From Perfection – What we perceive is greatly influenced by our mental states, the information we’ve already stored and organized, and the meanings we impose upon ambiguous situations.
– Primacy Effects – What we see first biases our perception and affects our subsequent performance.
To win consistently, you must have control over emotions. The game of negotiation becomes easier when played in the abstract, so we will benefit if we work for example in points or ticks and not in US dollars or Euros. It is convenient to segregate the “real world” finances from our trading account. We must maintain cash reserve to live and to continue to negotiate.
People feel most comfortable in a congestion or a consolidation area, but this may be the most dangerous place to be. So it would be logical to conclude that trading outside the comfort zone shall be the safest and correct one.
Most professional traders accumulate the “beans” the market gives them. It is good to add profitable trades quickly and consistently, accepting that what counts is the aggregate of the net results of the negotiations and that in the end is not the analysis that counts, but the daily equity curve of our trading account. Thus, we must realize that the initial analysis is only a starting point for moving in the right direction. From there, it’s really a matter of seeing what the market is willing to give. The truth is the price level at which negotiates an asset in the given moment, regardless of what we would like to see.
The pressure for quick profits leads to Over Leverage and this reduces the ability of the trader to align with the market, in that it eliminates the required presence of mind to keep our belief and raises the risk of unsustainable loss.
The Over Leverage leads to the shortening of the time to make gains, making it more difficult to ride winning trade ideas. An important virtue of the successful trader is precisely the ability to preserve winning positions.
If many are Over Leveraged, there is a potential advantage to increase the duration of the trade, as when others are shaken, we may negotiate the long-term movements more effectively.
We may start by setting concrete goals and steps toward reaching those (no more than three), and working on those intensively produces the best outcomes over time.
Here are some ideas that may help:
Generating better ideas: Looking back in time, most traders can find plenty of missed opportunities. Many times the opportunities are missed simply because we were not focusing on the right markets or the right stocks in the right time frames. Improving our data set, looking at more things in different ways, is an important step in feeding our pattern recognition. Reading fresh perspectives from knowledgeable writers and speaking with insightful traders similarly can fuel our creative thinking. I suggest choosing a good site as a source of readings and podcasts to keeping a daily Evernote journal of market-relevant ideas. Indexing those ideas over time should produce a valuable database for future reference.
Better risk management and opportunity management: It helps to look at the tails of your P/L distribution. Please Size positions appropriately, utilize reasonable stops, ensure that multiple positions are sufficiently uncorrelated, etc. Cutting opportunity short can significantly weigh upon overall returns. Plotting your P/L for each trade and looking at the shape of the distribution will tell you a great deal about your management of risk and opportunity.
Better entry and exit execution: It doesn’t show up in the P/L stats directly, but looking at how your trades performed after you entered and after you exited will give you some idea as to whether your execution is adding value. Too often traders will chase market moves and enter at bad levels and/or puke out of trades on noise and exit prematurely. A review of market paths following recent entries and exits can identify those problems. No one should hold themselves to buying the low tick and selling the high one. Overall, however, you should be aware of the heat you take on trades once you enter and the amount you leave on the table when you exit.
Traders are always looking for truly premium trading setups, the correct trading trigger and money management methods that work time and time again in any market. However, many traders often struggle to find the success that they are searching for.
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