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The Confessions of a Human Trader

Updated: May 30

Am I My Worst Enemy?

Emotion: /əˈmōSH(ə)n/ (noun)That ‘original (trading) sin' that comes between a sound strategy and a losing P&L.

Controlling our emotions is perhaps the toughest aspect of trading. It’s why Marc Andreesen the highly successful internet pioneer and venture capitalist said of traders: “They have my utmost respect due to their ability to make sound business decisions while in the midst of high degrees of uncertainty”.

Fear of loss is a powerful motivator. It can cause one to make poor decisions. It can cause one to take losses prematurely. Fear can also cause us to revenge trade – Take larger risks than warranted to make up for prior losses. Additionally, there is always the fear of the unknown which makes us vulnerable to the cadre of stock market pundits, conflicted information sources, trading gurus and advisory services that fill the trading landscape with easy answers that many are too willing to grab onto.

Greed on the other hand can cause us to act impulsively. We can act on a feeling or hunch without a clear understanding of the facts. We may see opportunities because we want to and not because they really exist. When a trade is going our way, we may toss out the laws of probability and over allocate risk. We may be too willing to accept the poorly devised strategies of others.

Additionally, there is the false sense of confidence that comes with believing in a non-quantitative strategy. After a few trading wins that were probably the result of quantifiable price movement conditions but otherwise unknown to the Trader, we can erroneously think that we have “finally figured out the formula” and double down on a strategy for the wrong reasons. If the strategy was based only on opinions and not real data & analytics than our hubris may cause us to over allocate and incur subsequent losses that are greater than the gains, we realized prior.

A frequent refrain we hear from Traders is I cut my losses only to see the trade recover. I wish I stayed in it longer. Or I wish I could have cut my losses earlier. Do we ultimately allow our emotions to dictate when we exit, or do we base our decisions on facts?

If we have the discipline to make fact-based decisions based on real data, we can gain the confidence to put our emotions to the side and let our reason govern our trading decisions. With proper risk allocation we can afford to take the losses and let our trades play out. Similarly, by knowing our risk/reward profile we can have the conviction we need to know that waiting for the right exit will be worth the risk. This ultimately improves the traders ability to manage trading risk.

Only from good information, clear analysis and sound execution can you maintain the confidence you will need to be successful over the long term. Quantitative Directional Analysis can provide good quantitative trading strategies based on historical price performance information. Fact based high probability trade information provides the investor/trader the confidence needed to keep one's emotions in check.


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