Thought For A Day Magic of Numbers Ways to Recognise and Defeat Your Evil Trader

Thought For A Day

 

 

Magic of Numbers

Ways to Recognise and Defeat Your Evil Trader

 

• Have a plan.  If you don’t have a plan, your Evil Trader has zero boundaries and will take over entirely.  When you have a plan, you’ll start to notice him telling you not to follow it.  You’ll hear him whisper seductive anti-plan ideas that sound and look perfectly reasonable – except they aren’t in the plan.
   
• Have an Evil Trader Journal.   The thing with ET is that often his ideas sound great and are really hard to ignore.  So as not to discard potentially good ideas, keep a log and after each trade is closed make a note of whether the idea would have been positive or detrimental to the outcome of your trade.  After a period of listing these ideas you’ll be able to notice that a) ET is wrong and he needs to shut it, or b) his idea deserves some further testing as it’s possible it has merit.
   
• Try to make your method as water-tight as possible.  A signal needs to be a signal without a shadow of a doubt.  An exit needs to be a definite exit, no two ways about it.  The more black and white the better, as your Evil Trader loves to second guess your judgement.  Planting seeds of doubt is just the way he rolls.
   
• Make a check-list for those times when you’re just not sure.   There will always be times when things just don’t seem so clear-cut.  This is your evil trader’s very favourite moment to strike.  You need to be armed with your weapons of ET destruction – aka, your check-list – to guide you through.  Having a checklist on hand allows you to objectively determine whether what you think you’re seeing is in fact what the market is presenting.

 

Ignore Your Guts

 

In my studies I have often found something that is rather interesting and maybe different than most would suspect. The most successful traders I have studied don’t rely on gut calls or feels, but rather adhere to a disciplined set of rules or guidelines and are humbled enough to admit that their emotional decisions aren’t consistent enough to hold up during the heat of the moment.

Ironically, most would think just the opposite that the more successful a trader is, the more ‘feel’ he or she has or the more ‘instinct.’ Sure, it looks macho to make calls or predictions and when proven correct a person is often praised and viewed as having some superior knowledge, but in reality these people are one step below those that have already moved through this stage and left it behind.

As an individual trader it is simply impossible to remain emotionless, making the proper trading decisions at all times, when the action is heated. Even when there is a lull, our emotions kick in and we feel a change is needed or something should be done, when in reality our rules may say to stay put or do nothing.

Loss – It can’t happen to me

Ever seen an Ostrich with its head buried deep in the sand? There is a popular belief that the Ostrich buries its head in the sand, when in danger. It thinks that if it cannot see others, others can’t see it either.

That Ostrich is an example of Normalcy Bias. It happens to people who are facing a disaster. It causes people to underestimate the chances of the occurrence of the disaster. They think “it has not happened before, it will not happen again”, and live in denial. The result? People end up with less-than-adequate preparations for the disaster. And they cannot cope with the changed reality either.

Disaster planning and normalcy bias

Whenever a natural calamity warning hits, the first reaction of most people is to deny the impact of such a thing. Most people refuse to evacuate, and prefer staying indoors. The experiences of the Federal Emergency Management Authority (FEMA), in the United States, suggest so. The cyclone Katrina, and the more recent cyclone Isaac didn’t seem to move the people out of their homes.

The holocaust

In Germany, during 1930s, the warnings were all too clear after Hitler came into power. Discriminatory laws were getting passed, Jewish businesses were getting boycotted and the Jewish houses were getting marked with a yellow star. History says that even when there was mob violence happening against many Jewish businesses, the community chose to stay in Germany – even the ones who could easily afford to get out of Germany. Finally people were getting rounded up, and being taken away to concentration camps, yet the paralysis induced by this effect made sure that the masses did not actively try to run away.

In stock markets, this is manifested in such last minute desperate justifications like “No country has ever defaulted before, how can this happen?” (heard just before Russia went bankrupt in 1998), or “Real estate prices never fall down, this is an anomaly” (United States, before the crisis thanks to which you and I are in our sad jobs right now). Minor forms include, “this cannot be true, this stock cannot fall from 400 to 40”. When faced with the extreme crashes, almost everyone fails to react. This leads to greater losses than they had already incurred.

The Idea is Simple. It could Happen to You. So save yourselves at the first sign of disaster.

Get out of that stock which has lost 10%

“This cannot happen” does not hold true for Stock Markets. Anything can, and will happen.