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
This is a story about the lessons learned as I began intra-day trading.
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.
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
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
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 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
provides a list of earnings reports and release times
so you can schedule your day around releases you
find of value.
finviz.com provides a screener
that's helpful for longer term value investing among other
financialjuice.com provides a list of daily macro news
items(e.g. CPI release, unemployment numbers, Fed speak, etc...) with release times.