Let's make trading safer for all
Most behavior is habitual, and they say that the chains of habit are too light to be felt until they are too heavy to be broken.
And there is no question about it. I see people with these self destructive behavior patterns, at my age or even ten or twenty years younger, and they really are entrapped by them.
~ Warren Buffett
I’ve said it before, and I’m going to say it again, because it cannot be overemphasized: the most important change in my trading career occurred when I learned to DIVORCE MY EGO FROM THE TRADE. Trading is a psychological game. Most people think that they’re playing against the market, but the market doesn’t care. You’re really playing against yourself. You have to stop trying to will things to happen in order to prove that you’re right. Listen only to what the market is telling you now. Forget what you thought it was telling you five minutes ago. The sole objective of trading is not to prove you’re right, but to hear the cash register ring.
~ Martin Schwartz
One of the basic problems that most traders face is dealing with risk. For example, two primary rules to successful speculative trading are: Cut your losses short and let your profits run. Most people cannot deal with those two rules. For example, if making money is important to you — as it is to most people who play investment games — then you will probably have trouble taking small losses. As a result, small losses turn into moderate losses, which are even harder to take. Finally, the moderate losses turn into big losses, which you are forced to take — all because it was so hard to take a small loss. Similarly, when people have a profit, they want to take it right away. They think, “I’d better take this now before it gets away.” The bigger the profit becomes, the harder it is to resist the temptation to take it now.
The simple truth is that most people are risk-aversive in the realm of profits — they prefer a sure, smaller gain to a wise gamble for a larger gain — and risk-seeking in the realm of losses — they prefer an unwise gamble to a sure loss. As a result, most people tend to do the opposite of what is required for success. They cut their profits short and let their losses run.
If you think of trading as a game and that a mistake is not following the rules of the game, then it becomes much easier to follow these two rules. You should review your rules at the beginning of the day and review your trading at the end of the day. If you followed your rules, even if you lost money, pat yourself on the back. If you didn’t follow your rules, then mentally rehearse what you did and give yourself more appropriate choices in the future.
~ Dr. Van K. Tharp
Note that market inefficiency depends on the observer’s knowledge. Most market participants have no demonstrable advantage. For them, just as the cards in blackjack or the numbers at roulette seem to appear at random, the market appears to be completely efficient.
To beat the market, focus on investments well within your knowledge and ability to evaluate, your “circle of competence”. Be sure your information is current, accurate, and essentially complete. Be aware that information flows down a “food chain”, with those who get it first “eating” and those who get it late being eaten. Finally, don’t bet on an investment unless you can demonstrate by logic, and if appropriate by track record, that you have an edge.
~ Edward Thorp
Averaging losses and over-leveraging are the two common pitfalls in financial trading. Averaging losses, in essence, transforms and degrades a principle-based trading endeavor into an emotion-based gambling thing. Over-leveraging manifests itself in traders taking unduly excessive risk by heavy borrowing and hence a rising likelihood of going under.
Both are dangerous, unsound and they are often inextricably intertwined. Traders who average losses tend to over-leverage when losses pile up, while traders who over-leverage are prone to averaging losses when markets move against them. A perfect storm is in the making when the two are working in tandem — losses rapidly snowball. That’s precisely why a wise trader will never average losses, never over-leverage.
The most important rule of trading is to play great defense, not great offense. Every day I assume every position I have is wrong. I know where my stop risk points are going to be. I do that so I can define my maximum possible drawdown. Hopefully, I spend the rest of the day enjoying positions that are going in my direction. If they are going against me, then I have a game plan for getting out.
~ Paul Tudor Jones
First, I would say that risk management is the most important thing to be well understood. Undertrade, undertrade, undertrade is my second piece of advice. Whatever you think your position ought to be, cut it at least in half. My experience with novice traders is that they trade three to five times too big. They are taking 5 to 10 percent risks on a trade when they should be taking 1 to 2 percent risks.
~ Bruce Kovner
There are just four kinds of bets. There are good bets, bad bets, bets that you win, and bets that you lose. Winning a bad bet can be the most dangerous outcome of all, because a success of that kind can encourage you to take more bad bets in the future, when the odds will be running against you. You can also lose a good bet, no matter how sound the underlying proposition, but if you keep placing good bets, over time, the law of averages will be working for you.
~ Larry Hite
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