3/20/2010

One Result, Three Outcomes

Just for fun let us consider 3 different trading days, days that we have all lived through if we are in this business of trading. These days could happen any time in no particular order. So let's just call them all Mondays, Mondays that start off 3 different and random weeks in the year.

Monday #1) We start off our day with a winning trade, let's say net $300. We followed our system, we took the signal, and we were rewarded with a winning trade. The next signal comes along and we enter again, result, losing trade net -$100. Signal again, loser again net -$100. Signal again, loser again net -$100.

Day ends with the net result of, ZERO.

Monday #2) We sit in front of our computer for the entire day, we see no signals and we do nothing all day.

Day ends with the net result of, ZERO.

Monday #3) We start off the day with a valid signal and a losing trade, net -$100. Next signal, net -$100. Next signal, net -$100. Next signal, aha, a winner for $300.

Day ends with the net result of, ZERO.

Now you may say, Solfest those results and outcomes are all the same, all ZERO. True the results are all ZERO but the outcome I'm talking about is what happens the Tuesday after one of those random Mondays.

Let's start with Monday #1, our first trade was a winner, we have started the week demonstrating the genius we know we are. We then proceed to see all that genius disappear throughout the rest of the day. We end the day feeling defeated and angry.

Now comes Tuesday, first trade is again a winner, ya baby, the next signal comes along and.... we don't want to push the button, we remember Monday, we don't want to lose those profits again, we don't want to lose this feeling of genius again. We don't push the button. In fact we don't push the button again all day, we have our little genius in the bank and we're not letting go. What happens that day? You know, it's a given, all the signals work and you would have made thousands not hundreds.

Ok now Monday #2, we have sat for an entire day, that's right one whole day, and done nothing, nothing. It's terrible, we are a trader we should trade. People ask what you did today, answer, I did nothing.

Now comes Tuesday, again no signals, no signals, no signals, almost a signal, ah close enough, I've seen this work before, let's go, nothing ventured nothing gained. Result, loser.

Is there a worse result then a non signal loser? Yes, a non signal winner. That leads to more non signal trades as I am now smarter than the market, smarter than my system, I am a genius discretionary trader. I have read about these people, they can feel the market.

Right?

Wrong, the result ultimately is a string of losers with no rational thought behind any of the trades.

Lastly, Monday #3. We followed our plan and we were rewarded. We took our losers and we stayed focused and "traded our way out of this mess". Surely this means I have arrived as a trader.

Now Tuesday. First trade loser, second trade, loser, third trade, loser, fourth trade, loser, fifth trade, loser, BLOODY STUPID MOTHER OF ALL &!&@%$&!%. Solfest smashes new 24 inch monitor with coffee cup and quits trading for a month, or changes the trading plan for a month because it obviously doesn’t work, or does any number of other juvenile things.

Of course the next month would have been the most profitable month his system has ever seen.

So, our 3 Mondays all had the same result, ZERO, but our 3 Tuesdays all take different turns based on the different ways we got to ZERO on the previous Monday.

Sound familiar?

What do we do?

Hire LW to trade our plan for us? Yes he has had his emotion chip removed so that would work. However I asked him and he said no as his gardening keeps him very busy.

So now what?

I have often thought that I could hire a 12 year old, train him to follow the blue bars, pay him minimum wage to sit there for the 5.5 hours, offer him a $20 bonus for every valid signal he takes, and deduct $20 from his pay for every non valid trade he takes.

I think the 12 year old's trading results might be better than mine. (gasp)

So maybe what we need to do is frame our trading success or failure outside monetary results. Not a new idea I know. The question is how? I have tried to grade the day based on how well I followed the system. But soon I stopped the grading and just looked at the money.

Maybe it has to be tangible, remember humans are stupid. We like shiny things, but they cost alot of money. Hmmmm, what else do humans like?

Sex and food.

That's it, no sex on days with non valid entries. (Freudian slip)

Ah but that would be punishing your innocent spouse, hehe, only a man would say that.

Ok then, food.
Every day I follow all signals perfectly I go out and buy myself an ice cream treat of some kind. That starts the anticipation chip in our brain, we want the ice cream at the end of the trading day. The kicker is we must deny ourselves the ice cream if we fail to follow the plan.

So that’s my new reward system. Like a dog, do a trick, get a treat.

Its "stupid" enough it just might work.

12 comments:

Jules said...

This post is so good I forced D to read it. He is still staring at the 24-screen setup...ok, he's moved on to the ice-cream...

Solfest said...

:)

Good luck with the new job Jules, be good for you to talk to some humans during the day.

Syed Omar (Hilmy) said...

the BEST post ever! what this demonstrates is 'recency bias' effect. We take into account recent outcome and do not focus on the whole picture which is the long term results of the method.

daytrader233 said...

Sol, you should really get your mustache trimmed.

Solfest said...

Syed,

Exactly.

Solfest said...

DT this way if I don't follow the plan one day I can still find some ice cream from the previous day.

FX said...

Maybe you should tell yourself "I'm not genius discretionary trader and don't want to fall into that miserable bunch. I'm proud system trader and it doesn't even cross my mind to fail in taking all my signals. I would rather rot than deviate to discretionary path. I shouldn't call myself a man an especially not a trader if I do such monstrosity."
:p

Solfest said...

Ok but I'll have to read it each time because I can't remember that much dialogue. :)

longandwrong said...

Very interesting post (although mention of "sex" and "hire a 12 year old" will probably get you deleted by Blogger :-)

The outcome of every trade is exactly the same,

=Expectancy * Risk

so your days only differ in the number of valid trades the market offers.

If Expectancy is >0 then you will be able to buy the ice-cream factory. Eventually. That should be motivation enough.

Come on, what else did you expect me to say?

Solfest said...

LOL

Exactly that.

Attitude Trader said...

OMG. One of those rare gems where not only is the post high quality, but the comments are just as good. A magical mix of education and entertainment.

Of course being the monkey that I am, it's all about the apple juice. ;)

-AT

Solfest said...

http://tradingcrude.blogspot.com/2010/03/how-we-decide.html