Excerpt from "Trading For A Living" (Dr Alexander Elder):
"Dr. Shapiro describes a test that shows how people conduct business involving a chance. First, a group of people are given a choice: a 75 percent chance to win $1000 with a 25 percent chance of getting nothing-or a sure $700. Four out of five subjects take the second choice, even after it is explained to them that the first choice leads to a $750 gain over time", (!?!...lol), "The majority makes the emotional decision and settles for a smaller gain."
My knee-jerk reaction was to go with option 2...I made the same choice as the 80% majority! Of course, after I actually used my brain, it was obvious to me that option 1 would be most profitable over time (not made clear in the text, but I'm assuming that's what was meant).
So how do we avoid these edge-blunting, emotional decisions?? My answer is Positive Affirmations, specifically related to the ideas of edge, probabilities and trading in general.
Some of the leading questions I've been asking myself in the 2nd person (...all a bit weird!):
"Is the fear of allowing this profit to become a loss greater than the fear of skewing the risk to reward ratio by not staying in the trade until target?" (When considering emotion-based exits).
"Can you risk losing money when correct about the market direction if that puts the probabilities more firmly on your side over the long haul?" (When thinking it's safer to keep a wider stop, despite actually losing money by doing so)
"Do you have a statistically proven edge? If so, why would you get angry/upset about any influence luck has had on any series of trades??" (When getting stressed out over missed trades, being stopped to the tick etc)
One of my favourite general affirmations is:
"Fear of pulling the trigger is warranted when you don't have an edge...fear of NOT pulling the trigger is necessary when you have one"
These are examples of the crazy things I've been telling myself any time I consider deviating from the plan. They are tailor-made for my particular difficulties.
It's had an enormous affect on my results :D
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3 comments:
I get my positive affirmations from my spreadsheets, so I am a geek and you are indeed weird ;-)
I was wondering why you hadn't commented on my profound (still lol@Head & Shoulders) comments left on your last two posts!
I'm sensitive like that ;)
Which leads me on to my personal need for the PA's...
The spreadsheets, much like the explanation of the probabilities in that experiment, should be enough to make the right choice. But it appears it's difficult to do for the majority when heightened emotion is involved.
The PA's align my feelings with what I already know to be fact (from the record-keeping).
You have feelings? I'm sure there is some pill to prevent that nasty condition.
(See, if you are going to talk so much sense I am forced to resort to cheap humour) :-)
L&W (away from normal PC)
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