My Trading Journey

Why trading

• Direct immediate market feedback

  I've worked jobs where your work is not judged by the market, but instead a bureaucracy. It's hard to know if what you're doing is of value and to what degree. The public markets on the other hand give immediate feedback in the form of trading gains/losses.

• Closer to the truth

  Markets can be irrational, but a well run market tends toward the truth over time. I'd like to help push the markets toward the truth, with the best information I can find and best analysis I can make. My first foray into markets was learning a principled value investing approach as a touchstone to the true value of an asset. I want to delve deeper now and learn about short term market mania.

Lessons learned

This is a story about the lessons learned as I began intra-day trading.

• Emotions

  
  Trading to support a person's livelihood involves the gain and loss of meaningful amounts of money. When a trade is placed and meaningful amounts of money can be gained or lost, traders can be susceptible to swings in emotion. Swings in emotions tend to create biases unrelated to the underlying information in the market.
  The risk with gains is an emotional bias of over confidence with the implied assumption that good market conditions will continue. This can result in over-betting just when good conditions are plateauing and starting to recede.
  The risk with losses is an emotional bias of lack of confidence with the implied assumption that bad conditions will continue. This can result in under-betting just when good conditions are arising. It's important to learn to keep a loose grip, or have some detachment while recognizing emotions as they occur. It's import to be watchful and vigilant in the face of large gains or losses.

• Greed

  
  When a trader starts out profitable enough on the day to stop trading, emotions like greed tempt traders to continue trading. Greed also crops up when a trader starts out with a loss and will not accept the pain of taking a loss on the day and continues to trade no matter the conditions. The naive idea being that the trading is profitable and so the more trading, the more profits will be made. This is incorrect due to decision fatigue explained below and market conditions. Quality trading decisions are finite and low quality decisions made later in the day tend to result in less profit.

• Decision fatigue

  
  Humans lose their ability to make good decisions as the number of decisions increases throughout a day due to mental fatigue. Trading involves making decisions such as whether a good setup to buy or sell is present. As the number of trading decisions made per day increases, fatigue sets in, trades tend to become more inconsistent and sloppy.

• Learning the setups

  
  Traders have a lingua franca regarding common states of the market that are referred to as setups, plays or market events. Some common setups are symmetric triangles, gap-n-go, bull flag, bear flag, etc... It's worth learning these to get an idea of stereotypical concluding moves or outcomes (i.e. resolutions).

• The necessity of volatility

  
  Market setups don't work without volatility(price change). A market event might occur (e.g. a gap-down), but if there isn't any subsequent price movement, neither a short or a long position will profit. So volatility is necessary. If nothing is changing in the market, neither your balance sheet nor any other participants balance sheet can change. The constant need, greed and fear of market participants (e.g. stock buyers, home buyers, car purchasers, etc...) tends to keep markets moving with some degree of volatility.

• Avoiding the big loss

  
  

  Beginner traders may have periods of consistent profits, but due to a hole in their trading plan, give up profits with a big loss. The big losses tend to stem from emotional decision making, rather than sticking to a planned exit. Occasionally fat fingering (mistakenly placing or leaving an order) is the cause, though these are perhaps 1 in 50 events vs. emotional trades. The emotion tends to be a fear of being wrong, fear of taking a loss, or clinging to a bias.

  A common lead up to a big loss is when you start with a larger loss than normal (e.g. 1 to 2 std deviations from normal), and your risk increases to make up for the loss. If the trade fails, you have an even larger loss, which can further increase risk taking, and potentially further the losses much more.
  Having three losses in a row is not terrible or too surprising, but if they are magnified 2x, 5x or 10x, it's unlikely that normal size trades will be impactful (if profitable) for 2x, 5x or 10x or longer. In other words, it takes much more wall time trading at normal size to make up for the loss.

• Trading the news

  
  Markets move on material news. Part of the job of a human trader is to be present when news is scheduled and interpret it along with the market reaction. This might include corporate earnings reports, inflation data, jobs reports, FED announcements, etc. If you're unaware of scheduled news, you might be in the middle of a trade and get blown out of it due to important news moving the market. You'd add to your risk unnecessarily if you're not following the news.

Forms of Fear

• Taking a loss

  
  A symptom of not wanting to be wrong is a fear of and refusal to take a loss. Taking a loss is painful, and new traders tend to desperately avoid pain. As long as the trader is still in the trade, they might think to themselves that they haven't lost yet even while the chances of not losing anything is slipping further and further away. New traders might hold the position open so long that when they finally do sell, it's a catastrophic loss. It's better to learn to lose and figure out how to lose less often and lose smaller amounts. If a new trader loses small, they have a chance to debug the trade(s) and try again, vs spending all your chances gripped in fear of taking a loss.

• Being wrong

  Being wrong challenges the ego, which can be difficult to overcome. How will I think of myself, and how will others think of me if I lose on this trade. So by holding a losing (odds against) trade, hoping for a turnaround, a trader hopes to avoid the embarrassment of feeling wrong.

• Missing out (FOMO)

  
  FOMO appears when it looks as though an opportunity will be missed, so you act out of emotion to reduce the stress/tension of missing out rather than considering the risks/rewards of the action. FOMO plays off a sense of scarcity. You'll find the phenomena exploited by 'once in a lifetime offers' and 'special deals' in stores, which tend to get people to act now. With stocks, it tends to occur around large moves up or down in price. If buying on the way up, often the reward of an even higher price is in sight, but the underlying risk of liquidity at the current prices drying up may be dimly in view.

• Leaving money on the table

Tools of the trade

• Earnings whispers

  earningswhispers.com provides a list of earnings reports and release times so you can schedule your day around releases you find of value.

• Finviz

  finviz.com provides a screener that's helpful for longer term value investing among other uses.

• FinancialJuice

  financialjuice.com provides a list of daily macro news items(e.g. CPI release, unemployment numbers, Fed speak, etc...) with release times.

Tags: trading