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Assessing individual trading preferences

March 26, 2009

There is something extremely interesting, I have noticed in atleast two instances. In February, I bought two lots of AMTEKAUTO as per triggerred by my system and stayed in it, for the better half of the entire month.

AMTEKAUTO in Feb month

Its a nice looking price on a macro level, but I was extremely uncomfortable while trading this scrip or for that matter observing this scrip.But nevertheless I took in the bait and bought it. I couldn’t make as much money as I intended to, although it went on to take out my mental targets one by one. Shocked? Stunned?

Just recently, I again made the same mistake. This time it was not AMTEKAUTO but it was ASHOKLEYLAND.Incidentally both auto/auto ancillaries went on to teach me a nice lesson. I was equally uncomfortable with the intraday price series, as well as, even my risk perception was too high.With a lot size of 19100 in the case of later, an opening minute breakout of 8x volatility swing[a so called black swan circumstance] could mount heavy losses.I squared up my position today, although as per my plans I wanted to roll over my position to next month but decided against it.

But sandwiched between these two trades, I took a TATAPOWER trade[SHORT] and the so called “emotional bonding” [for the lack of a better word] with the price series drastically improved. I not only made money, but made substantial money.Though it threw me out of the trade with a drastic counter trend move, I was nevertheless more comfortable,managing the trade.Right now, I am sitting on TATAPOWER[this time LONG] ,with a hefty profit.

A lot many important question comes into fore:

Primarily, what am I talking about? Or what exactly is “feeling uncomfortable” with the price series. I hope you didn’t blink when I wrote that ๐Ÿ˜€

Lets start with point 1. What exactly am I talking about?

I have a belief, and I believe that we don’t trade the markets, we trade our beliefs.[Essentially reflecting Van Tharp’s ideas].
Now the question is, how, exactly how, do we form our beliefs on the basis of which we make decisions? My answer would be pattern recognition.

Think of it, even in real life, we attribute a lot of importance to experience. But what exactly is experience? We say, failure leads to experience. Yes true, but so does success to a discerning eye. We, humans are amazing learning machines. We can internalise patterns really well, (given we want ourselves to).A curatorย  distinguishes in one glance, a clever fake from a stunning original.A musician [esp true in case of India] can indentify a particular raaga in a jiffy. How? Experience? No, but pattern recognition.

They subjected themselves to internalise the behaviours of patterns over a long period of time. And very very close to all this is the art of trading. You learn, you gain not by making money but subjecting yourself to the pattern of prices. By identifying, the samples when a particular scrip retraces to change trend, and retraces to simply err… “retrace”.

Essentially what changed my comfort factor moving from TATAPOWER to AMTEKAUTO or ASHOKLEYLAND is, its illiquidity. TATAPOWER is highly liquid. It hasn’t got any ‘no activity bars”[open=high=low=close] whereas AMTEAUTO /ASHOKLEY was filled with such no activity bars.

For the latter the tick of 0.05 is the most prevalent and in a lot many times in 10 minutes it just makes 5 paise move. This was atrocious and my mental wiring just hated it.

Is that why, I didn’t make as much money as I wanted to? Hell, no. I can come home with a bloody nose with any of the liquid stocks. But at least my decisions could have been much better in the case of liquid scrips.

It will be perhaps easily concluded that only traders need pattern recognition. One of the most well known fundamental analyst in this world spends his 80% of the waking time on weekends studying tons of balance sheets and drinking coke. What is he essentially doing? Training himself, day after day, week after week for patterns even in the slowest moving fundamental data.[On weekends, he still drinks coke, but spends most of the time playing poker with his friend, Bill Gates]

So what are your price preferences?

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2 Comments leave one →
  1. March 28, 2009 4:16 am

    You’ll go broke trying to trade on pattern recognition. The only pattern you’ll discern is: buying high and selling low. LOL

    If there were patterns, Goldman woulda fired all its traders long ago and replaced them with “black boxes” of AI algorithms.

    Don’t believe everything you read about Warren B.

  2. March 28, 2009 9:11 am

    It means you don’t daytrade. ๐Ÿ˜€
    Interesting comment actually and some wrongly held “beliefs”… ๐Ÿ˜€
    Pattern recognition not as in, using algorithms and complex DSP systems to process patterns/charts[it need not have “AI”even,as if “AI” ultimate answer to everything]

    I am a systems trader, ๐Ÿ˜‰ but setup is extremely important. A performance study of winning traders world over, showed price characteristics play an extremely important role in successful trading.

    The decision making can be discretional, but every other aspect of it should be mechanical
    Brother, don’t go along telling this to trading coaches worth some salt, they’ll have a laugh at your expense

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