Trading To Win February 16, 2010

An interesting post from Brett Steenbarger on “Trading to Win Vs. Trading to Not Lose”:

Suppose I offer you a sure $500 or the choice of flipping a coin. If the coin lands on heads, you’ll get $1000. If the coin lands on tails, you’ll receive nothing. Would you take the guaranteed $500, or would you flip the coin?

Most people, given the opportunity for a sure thing, will take it.

Now, however, suppose I confront you with a certain *loss* of $500. The alternative is that you can flip a coin. If it lands on heads, you lose nothing. If it lands on tails, however, you lose $1000. Would you take the guaranteed loss of $500, or would you flip the coin?

Interestingly, in that scenario, a significant number of people will flip the coin. We tend to be more risk-seeking when we deal with losses than when we are faced with gains.

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There is a meaningful difference between trading to win and trading to not lose. The average person feels more psychological pain over a loss than they feel pleasure over a gain–particularly once they have already “booked” that gain mentally. If I’m expecting a bonus from my employer, I’ll be happy when I receive the paycheck–but I’ll be much more upset if I find out the bonus has been rescinded.

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We can never eliminate loss from life or trading; nor can we repeal the basic uncertainties of markets. What we *can* do is develop an edge in the marketplace and, over the course of many trades, let that edge accumulate in our favor.

And, if you’re trading well, maybe that losing trade will offer you a fresh perspective about how the market is trading: an insight that can make you money the next time around. Then it’s not a loss. It’s information that you’ve paid for.

And sometimes I think I’m being overcharged for that information…

Top Ten February 11, 2010

From Brett Steenbarger: “Top Ten Reasons Traders Lose Their Discipline”

Losing discipline is not a trading problem; it is the common result of a number of trading-related problems. Here are the most common sources of loss of discipline, culled from my work with traders:

10) Environmental distractions and boredom cause a lack of focus;

9) Fatigue and mental overload create a loss of concentration;

8) Overconfidence follows a string of successes;

7) Unwillingness to accept losses, leading to alterations of trade plans after the trade has gone into the red;

6) Loss of confidence in one’s trading plan/strategy because it has not been adequately tested and battle-tested;

5) Personality traits that lead to impulsivity and low frustration tolerance in stressful situations;

4) Situational performance pressures, such as trading slumps and increased personal expenses, that change how traders trade (putting P/L ahead of making good trades);

3) Trading positions that are excessive for the account size, created exaggerated P/L swings and emotional reactions;

2) Not having a clearly defined trading plan/strategy in the first place;

1) Trading a time frame, style, or market that does not match your talents, skills, risk tolerance, and personality.