07 October 2010
Trading referee to improve your performance
a good article from investopedia.
One of the most talked about traits that traders need is discipline. Discipline is a quality that can be created by the individual internally, but can also be fostered by an external source. All traders will benefit from increased discipline, as being able to stick to a profitable strategy is what will allow them to be successful over the long term.
Also, being disciplined in following a particular method of trading will allow the trader to know when a method of trading is or isn't working. Every investor must follow their specific trading strategy rather than just speculating without a solid basis. If a trader lacks discipline and consistently flip-flops between methods, it is very hard to isolate which methods are successful and which aren't. This is where the "trading referee" comes in. The referee is an external entity that forces us to comply with our methods. This makes us more accountable to our own system, and does not require the hard internal work which may be needed in order to change our normal personality. (Do-it-yourself trading can be very rewarding - both psychologically and for your wallet. For more information, see Create Your Own Trading Strategy.)
What is a Trading Referee?It can be anyone in our life whom we trust and whom will hold us accountable for our actions. This person needs to be someone who will not accept excuses for us not following the determined approach. In other words, a referee cannot be someone who is a push over, will be biased or always agree with you, or someone who is not responsible enough to check on your trading. Essentially, the referee serves as system of checks and balances for our strategy.
The referee's aim is to make sure that you, the trader, are following your trading plan. Your trading plan should be a method of trading which is tested, consistent and proven to be profitable over the long run. Therefore, it is a referee's goal to make you follow that system, thus helping ensure your long-term profitability. It is a requirement that the person be able to see you trade (or have access to your trading records). Going through results should be done together; this again will require trust on the part of the trader.
A referee, whether it is a friend, a spouse, colleague or girlfriend/boyfriend, will make you answer for the decisions you are making. They will force to answer why you are taking certain actions, and how those actions relate to your trading plan. When you stop following your trading plan under your own will, this person is there to give you support and make sure that you do not deviate from the initial goal. After all, this is not about the trader proving he or she is right, it is about being profitable. (From picking the right type of stock to setting stop-losses, learn how to trade wisely. Read, Day Trading Strategies For Beginners.)
"Create" Your Trading RefereeIt is important that this individual understands capital markets and the basics of investing. As well, your trading referee will need to know about your methods for trading. Here are some steps to follow to make sure your referee will actually make you follow through with your trading plan. (A successful trading referee must be familiar with concepts such as risk. To learn more, refer to Matching Investing Risk Tolerance To Personality.)
ConclusionTrading is a tough game, especially when we go at it completely alone. It can be of benefit to invite someone else into our trading experience who will force us to comply with our own methods. The benefits are numerous, not the least of which is the proper execution of a profitable trading plan we took the time to research and develop. (This is a step-by-step approach to determining, achieving and maintaining optimal asset allocation. See 4 Steps To Building A Profitable Portfolio.)
One of the most talked about traits that traders need is discipline. Discipline is a quality that can be created by the individual internally, but can also be fostered by an external source. All traders will benefit from increased discipline, as being able to stick to a profitable strategy is what will allow them to be successful over the long term.
What is a Trading Referee?It can be anyone in our life whom we trust and whom will hold us accountable for our actions. This person needs to be someone who will not accept excuses for us not following the determined approach. In other words, a referee cannot be someone who is a push over, will be biased or always agree with you, or someone who is not responsible enough to check on your trading. Essentially, the referee serves as system of checks and balances for our strategy.
The referee's aim is to make sure that you, the trader, are following your trading plan. Your trading plan should be a method of trading which is tested, consistent and proven to be profitable over the long run. Therefore, it is a referee's goal to make you follow that system, thus helping ensure your long-term profitability. It is a requirement that the person be able to see you trade (or have access to your trading records). Going through results should be done together; this again will require trust on the part of the trader.
A referee, whether it is a friend, a spouse, colleague or girlfriend/boyfriend, will make you answer for the decisions you are making. They will force to answer why you are taking certain actions, and how those actions relate to your trading plan. When you stop following your trading plan under your own will, this person is there to give you support and make sure that you do not deviate from the initial goal. After all, this is not about the trader proving he or she is right, it is about being profitable. (From picking the right type of stock to setting stop-losses, learn how to trade wisely. Read, Day Trading Strategies For Beginners.)
"Create" Your Trading RefereeIt is important that this individual understands capital markets and the basics of investing. As well, your trading referee will need to know about your methods for trading. Here are some steps to follow to make sure your referee will actually make you follow through with your trading plan. (A successful trading referee must be familiar with concepts such as risk. To learn more, refer to Matching Investing Risk Tolerance To Personality.)
- Approach or ask someone you think will be a suitable candidate. This should be someone you see regularly, preferably while you are trading, or who you can sit down with on a regular basis to go over your trades. You can also serve as the referee for your overseer - such a method ensures constant interaction and proper process evaluation.
- Make sure that person knows that it is imperative for him to question you on your trades and to ask why certain actions are being taken. This makes another person feel responsible, therefore it does help if this person has an interest in your success.
- Fill in the referee on your trading method and why it works. Simplify your methods for them so that they can see how the method works, the logic behind it and the sequence of events that must unfold for you to enter, set stops, take profit and then exit.
- Take a proactive approach and share your trading time with your referee. Having the person review your trades with you afterwards is more reactive and, while effective, does not prevent the deviations from the trading plan at the time they are occurring.
- Set up a rewards and punishment. Having someone look over your shoulder may be motivation enough to follow your own trading rules, but sometimes a little extra incentive may do the trick. Often, the incentive for following a plan is the money made; therefore, we need to be creative in finding ways to punish ourselves for not following the plan. One idea is that you need to give the money you make on winning trades, which were not based on your plan, to your referee. This works because you should have never been in the trade in the first place, and it takes away the incentive for making trades which are not included in your desired strategy. Be creative and come up with a structure for dealing with all contingencies.
ConclusionTrading is a tough game, especially when we go at it completely alone. It can be of benefit to invite someone else into our trading experience who will force us to comply with our own methods. The benefits are numerous, not the least of which is the proper execution of a profitable trading plan we took the time to research and develop. (This is a step-by-step approach to determining, achieving and maintaining optimal asset allocation. See 4 Steps To Building A Profitable Portfolio.)
Young chaps must read
http://www.bwater.com/Uploads/FileManager/Principles/Bridgewater-Associates-Ray-Dalio-Principles.pdf
this is a very good ebook for young chaps.
this is a very good ebook for young chaps.
Why Investors Stick With Failing Stocks
this is one good article about sticking with failing stocks.
For many investors, nothing is stronger than the stubbornness that emerges when making a new decision means admitting that an earlier one was a mistake. Such an admission comes at a high psychological cost in terms of self-image. As a result, many people avoid disappointment and regret by clinging to the wrong decision.
Of course, this only makes things worse financially, but the investor gets to delude himself that the disaster is not really so bad or will come right over time. Such behavior is referred to as "negative perseverance" or "regret avoidance", and is also likened to "effort justification". Whatever the name, this behavior needs to be avoided. The concept of cognitive dissonance will be familiar to those who have studied marketing. Buyers often rationalize that they bought the right product after all, even when, deep down, they know it was a mistake. For instance, a buyer may seriously regret buying a manual car, but kid himself that it was great idea because of the lower gas bill.
The field of investment is particularly prone to this kind of mind game. (To learn more, check out our Behavioral Finance Tutorial.)
Why Do People Behave This Way?
Basically, the investor unwittingly has a greater fear of admitting to himself and perhaps to others, that he made a mistake, than of the consequences of keeping a bad investment. This very dysfunctional form of behavior, caused largely by pride or stubbornness, leads either to total passivity or to selling too late.
Individuals strive for harmony and consistency, hence the notion "if I just leave it alone, it’ll be ok". The problem is that when investments go wrong, particularly horribly wrong, radical and above all rapid action is generally essential. Taking losses or a major portfolio restructuring often causes the mental conflict of cognitive dissonance. This is a singularly unpleasant state of mind and can be resolved very unsatisfactorily, by collecting arguments to justify the original mistake that has now manifested itself in the form of big losses. (For more, see Words From The Wise On Active Management.)
With respect to investment, this means, for instance, clinging to an all-equity portfolio which is in the process of plummeting, rather than selling out in order to minimize losses and putting the money into something else that is likely to go up right now. Or at least, something that is likely to rise a lot sooner than the bear market turning bullish.
The Nature of Cognitive Dissonance
On the buyer side, what makes the process particularly problematic in the investment field, is that there is a lot one can regret. You can fret and sweat over losses caused by taking excessive risk, or lost opportunities caused by not buying a great asset in time. You can also torture yourself about selling too late or not buying enough, or listening to your advisor or friends, or indeed not listening to them. In short, you can be sorry about so many things in so many ways.
On the selling side, people who do not treat their customers well still generally want to believe that they are honest. But at the same time, they want to make the sale. So they solve the contradiction with self delusion along the lines of "I have no choice, I will lose my job if I don’t make the sales quota" or "if he agrees to it, it's his decision and his problem". Or "it’s a perfectly standard portfolio", even when it is totally unsuitable for the investor in question and/or the timing is inappropriate.
In extreme cases, the Bernie Madoffs of this world get accused of suppressing their emotions and ethics altogether. Indeed, this is how many intrinsically honest people cope with dishonest environments. (Learn more in How To Avoid Falling Prey To The Next Madoff Scam.)
Preventing Cognitive Dissonance
A sensible, diversified portfolio is a great way to prevent this problem. If you do not have too much or too little of anything, the odds are you will feel all right about your investments. Of course, if you take big gamble and it pays off, you will feel wonderful, but if it goes sour on you, there will be a lot of misery and rationalizing, which is just not worth it for most people. Balance, prudence and a good mix is the only sensible approach for the average investor. And as always, shop around and inform yourself fully before you buy. Do not rely more on other people than you have to. (For more on this topic, see Diversification: Protecting Portfolios From Mass Destruction.)
Be sure that you understand what you are doing and why. No self-delusion up front will help prevent the "need" for it later on. Never try to fool yourself or anyone else. We all make mistakes and the only thing to do is get them right. The worst thing you can do is pursue a lost cause, to continue flogging the proverbial dead horse. It is important to take a step back and consider the whole process objectively.
On the selling side, the same basic principles apply. Resist the temptation to sell things that should not be sold. It may be a good idea to offer a fee-only service, which yields no commission at all. Your customers will be grateful and there will be no nasty comebacks and complaints. Everyone will sleep better, the world will be a better place and over time, this will surely pay off financially as well. (For more, see Paying Your Investment Advisor – Fees Or Commissions?)
by Brian Bloch
For many investors, nothing is stronger than the stubbornness that emerges when making a new decision means admitting that an earlier one was a mistake. Such an admission comes at a high psychological cost in terms of self-image. As a result, many people avoid disappointment and regret by clinging to the wrong decision.
The field of investment is particularly prone to this kind of mind game. (To learn more, check out our Behavioral Finance Tutorial.)
Why Do People Behave This Way?
Basically, the investor unwittingly has a greater fear of admitting to himself and perhaps to others, that he made a mistake, than of the consequences of keeping a bad investment. This very dysfunctional form of behavior, caused largely by pride or stubbornness, leads either to total passivity or to selling too late.
Individuals strive for harmony and consistency, hence the notion "if I just leave it alone, it’ll be ok". The problem is that when investments go wrong, particularly horribly wrong, radical and above all rapid action is generally essential. Taking losses or a major portfolio restructuring often causes the mental conflict of cognitive dissonance. This is a singularly unpleasant state of mind and can be resolved very unsatisfactorily, by collecting arguments to justify the original mistake that has now manifested itself in the form of big losses. (For more, see Words From The Wise On Active Management.)
With respect to investment, this means, for instance, clinging to an all-equity portfolio which is in the process of plummeting, rather than selling out in order to minimize losses and putting the money into something else that is likely to go up right now. Or at least, something that is likely to rise a lot sooner than the bear market turning bullish.
The Nature of Cognitive Dissonance
On the buyer side, what makes the process particularly problematic in the investment field, is that there is a lot one can regret. You can fret and sweat over losses caused by taking excessive risk, or lost opportunities caused by not buying a great asset in time. You can also torture yourself about selling too late or not buying enough, or listening to your advisor or friends, or indeed not listening to them. In short, you can be sorry about so many things in so many ways.
On the selling side, people who do not treat their customers well still generally want to believe that they are honest. But at the same time, they want to make the sale. So they solve the contradiction with self delusion along the lines of "I have no choice, I will lose my job if I don’t make the sales quota" or "if he agrees to it, it's his decision and his problem". Or "it’s a perfectly standard portfolio", even when it is totally unsuitable for the investor in question and/or the timing is inappropriate.
In extreme cases, the Bernie Madoffs of this world get accused of suppressing their emotions and ethics altogether. Indeed, this is how many intrinsically honest people cope with dishonest environments. (Learn more in How To Avoid Falling Prey To The Next Madoff Scam.)
Preventing Cognitive Dissonance
A sensible, diversified portfolio is a great way to prevent this problem. If you do not have too much or too little of anything, the odds are you will feel all right about your investments. Of course, if you take big gamble and it pays off, you will feel wonderful, but if it goes sour on you, there will be a lot of misery and rationalizing, which is just not worth it for most people. Balance, prudence and a good mix is the only sensible approach for the average investor. And as always, shop around and inform yourself fully before you buy. Do not rely more on other people than you have to. (For more on this topic, see Diversification: Protecting Portfolios From Mass Destruction.)
Be sure that you understand what you are doing and why. No self-delusion up front will help prevent the "need" for it later on. Never try to fool yourself or anyone else. We all make mistakes and the only thing to do is get them right. The worst thing you can do is pursue a lost cause, to continue flogging the proverbial dead horse. It is important to take a step back and consider the whole process objectively.
On the selling side, the same basic principles apply. Resist the temptation to sell things that should not be sold. It may be a good idea to offer a fee-only service, which yields no commission at all. Your customers will be grateful and there will be no nasty comebacks and complaints. Everyone will sleep better, the world will be a better place and over time, this will surely pay off financially as well. (For more, see Paying Your Investment Advisor – Fees Or Commissions?)
by Brian Bloch
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