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psychology | Portfolio Yoga

Tag: psychology

Inactive Intraday Trading

In the book, Trading in the Footsteps of Sherlock Holmes: Balancing Probabilities for Successful Investing, Dr. Anthony Trongone defines Inactive Intraday Trading as some one who is not actively following the market but trades when it works best according to the system or fits within one’s specified trading schedule.

When I tell people that I am a full time trader, most of them assume that I am a guy who is stuck to the monitor for the duration of the market as I try to decipher the dark secrets of the market and pull wool over my competitors (other traders who take the position opposite to mine). Of course, that is far from the truth as I spend more time away from the monitor than in front of it.

Even though I do trade on the Intra-day time frame, my average holding period for a trade is around 5 days and that means that more often that not, I have not much to do other than twiddling my thumbs so as to speak. And then again, since at the current juncture I do not trade shorts (most trend following systems haven’t rewarded shorts for a long time now), the holding becomes even longer.

For instance, I got out of my long on Monday & have not placed a trade till date. The thought that immediately pops up will be, WTF! aren’t there a lot of other opportunities present in the market and would not it make sense to try and maximize the capital that is otherwise being left underutilized?

In most business, more the time you spend, greater the possibility of a higher income. If a Taxi driver decides to drive for 12 hours instead of 8, he has a very high probability that his Income will be higher (even after accounting for the Expenses). The same applies to a whole lot of other business / professions as well.

But when it comes to trading, more time or more trades does not have to mean a better result. Trading is asymmetric by nature which means that some one who places just a single trade may actually be able to beat you even though you are trading ten trades every hour.

Markets provide opportunities for a trader every day, every hour, every second. But be as it may, the fact remains that we can identify, execute and capture only a very small number of such opportunities. Only in hindsight do we realize whether we were truly successful or not.

But there is also the bigger issue of position sizing. If you put in a large number of trades, the risk per trade needs to be pretty low. But if you were to risk a small amount of capital, the rewards too will be small when measured against the total capital available.

On the other hand, if you were to start risking bigger chunks of capital, you could either start blowing up through you account way faster than what is sustainable or end up moving the markets every time you take a trade since the quantity you trade is higher than the liquidity that is present in the market. Either of them is dangerous to the health of your capital and since the impact of losses are much higher than the happiness of wins, the damage to the traders health can be pretty dastardly.

Since 1st January 1996 till date, CNX Nifty has moved up by 7211 points over a period of 4929 days giving us a average gain of 1.46 points per day. But if you were to have a crystal ball which could predict before close of today the closing price of tomorrow, you could have gained those 7211 points by being in the market for just 32 days (0.65%). Yes, just 32 days of rise accounts for the total gains made by Nifty over the last 19 years.

My point in providing the above static is not to say that one needs to search for a Crystal Ball (Holy Grail) that can identify such days. Rather, my thought out here is that the above numbers showcases the fact that with the right tools and strategies, no investor / trader needs to be distraught at missing small opportunities. On the other hand, its important that not only we have a system that can be rightly positioned when the big moves happen (here is a clue: most big moves have happened in line with the trend that was in effect) and more importantly we have the know how and ability to bet big.

Trading can be a enjoyable and profitable venture. Do not make it into something that eats into your life day in and day out. No amount of money / profits that you earn by taking that kind of stress can ever repair long term damage to the health and psychology that occurs due to such continuous strain.

Eliminating Mistakes

Mistakes are the hubris of most investors / traders and its no wonder they generally are doomed to fail regardless of what superior qualities they may possess elsewhere. But many investors and traders who aren’t affected by that characteristic still fail and the reason for the vast majority of them comes down to avoidable errors, some that they knew about and did not implement and some they did not even know about (the Unknown Unknown).

Right from Warren Buffett to the ordinary investor, mistakes happen by everyone. But while the professional investor understands and rectifies his mistake, the amateur investor believes that the mistake is not his but his bad luck.

The biggest mistakes happen due to the fact that we ignore the Heuristic Biases that affect our way of thought, way we understand things and how we go about implementing them. I come across investors who choose to ignore such biases rather than learn how to avoid the traps laid out by such biases.

I am generally a skeptic of strategies which cannot be tested using a software and while patterns can be tested, ability to code and test is not something I have the ability and hence will rather ignore such strategies than do a manual test which shall suffer from all kinds of biases (Selection of only those that have succeeded being the major bias here). Again, I am not suggesting that patterns aren’t a way to make money in the markets. After all, one of the top Hedge Funds with incredible returns is rumored to use patterns (though they aren’t the general ones we find in every TA text book).

The other day I met this friend of mine who believes in patterns and he was saying about how high a success rate this particular pattern had. The only catch being that you need to recognize it correctly. Wanted to inform my friend that this is a circular logic that leads to one over-estimating the predictive nature of the pattern, but then again, have burnt too many bridges trying to correct the logical errors of others and hence kept quiet.

The same error affects Elliot as well. If the move is not as per what Elliot logic predicts, the way out one is told is to go back and change the wave counts till the current action matches the one that was supposed to happen. If only the broker allowed me to change my trades after they failed 🙂

Every mistake in markets costs not only in terms of money but also can wear us down to the extent that after X number of losses (many of which could have been avoided), we feel that the mistake lies in us coming to the markets in the first place. The churn ratio at any big brokerage firm shows how a large set of investors and traders bow out every year just to be replaced with new sheep most of whom too will bow out in time.

Elimination of mistake requires two things. One, the ability to understand that you are wrong (and not the market) and Secondly, the openness to accept that my chosen method / path / logic is wrong and try to see where and how one can make amends to that.

Checklist is now seen as a proven way to reduce and eliminate mistakes that we have either made earlier or know about it. If you are yet to read The Checklist Manifesto by Atul Gawande, I urge you strongly to do as soon as possible. A checklist before you commit a trade is one of the easiest way to eliminate simple mistakes.

Once known mistakes are reduced, the next step comes in trying and reducing mistakes that we do not know we are making in the first place. Compared to the ability to reduce mistakes that we know is happening, this is quite difficult but not impossible.

To me, eliminating the unknown unknown mistake requires constant effort on part of the investor / trader. Profits occur due to combination of Luck and Skill. There are quite a few ways to separate the two – Bootstrap and Monte Carlo testing being the ones I prefer and use.

Every trade / investment has a expected return and a real return. One needs to constantly check for divergence between them and then focus on whether the divergence is due to something that can be avoided / acted upon or something that we just have no control upon.

Eliminating mistakes is a process and it has no ending since our aim always has to be becoming a better investor today than one we were yesterday. But that requires quite a bit of effort and that can come only if you are passionate enough as well as have the ability to understand, accept and rectify mistakes. If you cannot do that, its always better to invest in MF’s / ETF’s and spend the time in activities that bring pleasure to your mind.

Investing / Trading has no shortcuts to success. You either are the hunter or you are hunted. The choice is yours as to what you want to become 🙂