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Traditional trading psychology has tended to focus on the emotional side of human nature as a source of performance success: both controlling emotions and maintaining discipline and using our feelings as intuitive sources of information. Both are essential; indeed, it is only by becoming observers to our emotions that we can learn from them.
Still, the research I’ve undertaken to identify the characteristics of successful traders has consistently shown that cognitive traits, and not just emotional ones, are essential to superior performance.
The most basic of these cognitive strengths is focus. Indeed, the ability to sustain focused attention is seen (albeit in different ways) among both successful day traders and successful investors. In the day trader, we see the ability to sustain intense concentration on a number of variables simultaneously. It is this parallel processing skill that enables the day trader to act quickly on shifts in buying and selling flows. Conversely, the skilled investor maintains a depth of concentration over time that allows for a deeper understanding of fundamentals and the supply/demand changes that result from monetary and geopolitical sources.
The challenge faced by these market participants is distraction.
Distraction interferes with focus and thus reduces the quality of our information processing. Distractions can be emotional in nature, but can result from environmental sources as well. Indeed, I’ve consistently found that both home environments and trading floor environments are poorly suited for the optimization of focus. This is why many of the successful traders I’ve known have made it a practice to get away from their screens for periods of time during the day to both renew their concentration and to increase their focus on the bigger picture of what they are doing.
So what can we do to build our focus and reduce distraction? Several steps stand out in my experience:
1) Optimizing our physical environment – Surrounding ourselves with the people who contribute to our decision-making and tuning out others. Creating a trading station that is comfortable and well laid out, with the right lighting, temperature, and sound level.
2) Optimizing our cognitive environment – Making sure we have ready access to the information essential to our decision making, but not more than that. Laying out screens for ready comprehension and action and avoiding a cluttering of our information environment. Controlling when and how we access chat, email, and phone calls to minimize external noise.
3) Optimizing our capacity for focus – I’ve written extensively on the topic of biofeedback as a tool for improving focus. Indeed, biofeedback is a major treatment modality for children who suffer from attention deficits. In biofeedback, we learn to sustain frontal brain activation over time, literally training ourselves to build our attention muscles. This helps us filter out distractions and maintain focus for longer period of time.
4) Optimizing our personal lives – In addition to maintaining a high quality of sleep and exercise, many people find that how they eat and take in caffeine and sugar impacts their level of focus. Quite a few traders I’ve known have made use of coaching, not to work on their trading per sec, but to sort out challenges in their personal lives (relationship issues, family matters, financial challenges) that can be distracting to their trading. It is generally a mistake to try to put such issues out of your mind. Finding time and a proper forum for addressing the issues directly helps prevent them from intruding on trading time.
As the quote at the head of the post suggests, it is very difficult to achieve great things if we’re distracting by little things. Building our focus from day to day is helpful in sustaining a greater life focus, where we’re not only doing things right, but doing the right things.
#Knowledge : How Fraud companies establish and earn during bull market?
Bull markets are a great time for fraudster promoters to make money. If you are a fraudster and also want to benefit from this bull market, here’s a thread that explains how you can defraud shareholders and get rich.
1. Have a good story to catch investor’s attention. Something like “only listed XYZ company” will help. Has zero value in terms of improving long-term cash flows of the business but is excellent branding for a stock. Change the name of the company to what’s booming in the market
2. Draw analogies to D-Mart or other businesses that investors love (next Page Industries maybe?). Doesn’t matter if your business is nothing like the ones you are comparing it with.
3. Give aggressive guidance. 15% growth is pedestrian. Talk stuff like 1 lakh cr sales/loan book or 50% growth for next 10 years. Your stock should be a potential multi-multi-bagger. Claim that there is no limit to how large you can be.
4. Start making up the numbers. Only Revenue and PAT matters. So don’t worry if the Balance Sheet has all sorts of large unexplained scary stuff. No one looks at the BS in a bull market.
5. Raise large amounts of debt from PSU Banks to fund fictitious capex. Will be easy as they only focus on Revenue and PAT. If needed give a cut of the loan as “commission” to the bankers.
6. Have more than a 1000 subsidiaries, associates, joint ventures and related entities. The main auditor shouldn’t audit many of them and must rely on your estimates so you have room to make up stuff. No analyst should be able to make sense of the money trail.
7. When asked about lack of real-world presence, say analysts (a) don’t understand our biz (b) are not looking at right place (c) are jealous of our success (d) want our stock to fall so they can buy (e) are shorting our stock and spreading misinformation
8. Start advertising on CNBC and Economic Times. Why? Because your audience is the investor community. Doesn’t matter if actual consumers have never heard of your products, the investors should hear about it every week.
9. Raise large rounds of equity to fund your 50% growth rate. This will be taken as a huge positive. Now you are again cheap on a post-money P/B basis! It’s a bull market so everyone has forgotten that good businesses don’t really require a lot of capital.
10. Publish fancy quarterly investor presentations, glossy annual reports with language that would wow even Shashi Tharoor, hold con-calls after every good quarter reiterating aggressive guidance.
11. Participate in every investor conference out there. Tell investors how undervalued your stock is and how you will continue to “surprise” positively.
12. Buy few shares of your own company. Investors will take your buying as a sure sign of a booming business. Doesn’t matter if other related parties are selling.
13. “Reward” shareholders with stuff like bonuses and stock split. Occasionally also announce a dividend or buyback. The biz doesn’t generate any cash flow so use debt and equity raised to fund the dividends.
14. Announce de-merger of a part of the biz. Nothing creates as much value as a de-merger even if it makes no logical sense. Promise other value-unlocking measures.
15. Once stock has hit the roof, start selling your shares (directly or indirectly). Say the selling is for charity purposes or buying property or starting another venture about which you are passionate (like airlines or organic farming).
16. Pledges will be invoked, stock will crash. Announce that you are facing temporary cash flow problems which will be quickly resolved. Of course, they will never be resolved. After few weeks of panic, yelling, and abuse, investors will forget your company ever existed.
17. Wait for the next bull market. Repeat from 1.
VOLUMES ARE JUST PICKING ONE . MONTHLY CHART IS GIVING MORE CLEAR PICTURE.
Nifty Future Daily : ABCD PATTERN IN MAKING. IF 10250 – 300 IS PROTECTED ON CLOSING, POTENTIAL REVERSAL ZONE COMES AT 10933 (AB = CD) BY THE EOD 25 DEC 2017
#actionableideas : Power of crowd polling!
See power of crowd polling ! Market almost go against majority views ! 33 people bullish and 8 bearish ! Market turned bearish ! This effective only when one side is large enough like 33 vs 8 !
Be fearful when others are greedy, and greedy when others are fearful
#Knowledge: Risk and Success
Sometimes you hear people debate whether trading success is attributable more to trading techniques vs. psychology. The answer, of course, is both—but the point where the two intersect is risk management. A huge percentage of trading success or failure can be laid at the doorstep of risk management.
Observed that, across different traders and trading firms, 90% of all profits were attributable to 10% of all trades. While traders would like to think of themselves as making money on a majority of their trades, the reality for frequent traders is that a minority of trades are winners—and it is the few large winners that produce a favorable profit/loss statement (P/L).
If 10% of trades account for a majority of profits, it follows that a large percentage of trades have to be “scratched”. A cardinal skill in trading is recognizing that a trade is wrong before it hurts the P/L. Time and again, I have seen
Good traders exit trades when the trades fail to move in their direction; bad traders exit only after the trade has moved against them.
And yet it is equally true that, if 10% of trades are going to account for the lion’s share of profits, traders must be willing to milk very good trades. This not only means finding the sweet spot where you can “cut your losses and let your profits run”; it also means being willing to trade sufficient size to maximize returns from a good trade. The worst traders I know put on their maximum size when they’re trading at their worst. Typically, they have just lost on one or more trades and now are trying to get the money back. The best traders are able to identify superior trading opportunities—and are patient in waiting for those—and will put size on to take advantage of these. This is how 10 good trades more than make up for 90 scratches and losers.
A favorite trading story that I tell concerns a very successful trader. he will tell me the secret of trading success. Of course, my curiosity was piqued and I asked, “What is that?” He responded with a question: “What the ratio of your largest position size to your normal size?” “Three-to-one”, I told him. He smiled. “Consider 20-to-1,” was his advice and his success formula.
I completely believed him. The reason he was successful had nothing to do with finding a better oscillator, regression analysis, or chart formation. He was successful because he had the ability to identify—and wait for—particularly profitable opportunities and then take maximum advantage of those. While 20:1 position sizing is—and will always be—rich for my blood, I think the principle is valid: success is partly a function of putting size on for the logical, not psychological, reasons.
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