Sunday, September 9, 2012

Trading Without A Compass- Revisiting Past Posts.

As I suspected in my last post, the winning streak has been followed by a losing streak.

If we define "draw down" as the peak-to-trough decline in equity after the peak has been surpassed by new equity highs, then this incomplete draw down is currently the second smallest of the six that stand out on the chart (because there is a very large number of DDs if you look at every decline followed by new highs compared to the previous peak...intra-day, intra-trade etc etc). So nothing to become alarmed about there.

It is, however, joint 1st place for steepest DD among the 6 on record. It was preceded by the largest winning streak on record. Emotionally-driven variance.

Luckily, I think I have the solution :)

"Borrowing & Lending VS Ownership."

"Fear Of The Future?"

The key paragraphs are the 1st and 2nd in the first post and the 1st in the second post. I've used these concepts before whenever the need arose. Eventually, I'd like to grow out of them but I'm more than happy to use it if it betters the bottom line!

The "glass ceiling of profit" comes at an arbitrary point whereby you're no longer trading to trade well, you're trading not to lose. This inevitably blunts your edge due to the cognitive bias "loss aversion" and, well, you lose!

The above idea ties in with the fear of reversing success obtained or gains accrued. The solution is simple: start at the beginning. Beginning of the next day, week....beginning of the account.... As long as it's a new chapter in your mind. Of course, this assumes you know yourself well enough- and you are honest enough with yourself- to be able to identify, in real time, when you switch from plain trading to trading not to lose recently acquired gains.

Logically, we should just be able to trade without these arbitrary points of reference as a loss is a loss regardless of when/where it occurs. But, for most, that isn't the case. So why not just work solutions around our biases rather than try to eliminate them?


1Lot said...

"So why not just work solutions around our biases rather than try to eliminate them?" - couldn't agree more.

Regards giving back previous gains, I am the same, a loss is a loss is a loss, giving back previous gains is very much more difficult for me personally. The fear of giving back previous gains also as you say leads to a defensive mindset that becomes a self fulfilling prophecy.

Enjoying the introspective posts.

James Edwards-Marche said...

Thanks for the feedback 1Lot :)