Psychology

To Think or not to Think: The Trader?s Dilemma

In 1969, when I made my first futures trade, thinking was fashionable.  The 1960?s and 1970?s were good times for thinkers, free thinkers, thought-provoking issues, civil disobedience, and analytical traders.  Thinkers thought great thoughts about the future of our nation, about our presence and purpose (if any) in Viet Nam, about domestic and international racial issues, about freedom and equality, about the poor and the homeless.  Thinking prompted radical action by various political interest groups.  There violent numerous anti-war protests, a variety civil disobedience events, draft card burnings, sit-ins and student protests.  The stock and futures markets were studied closely.  They were analyzed, scrutinized and theorized.  Computer analysis of the markets was a new and promising science.

The ?Zeitgeist?

Against the backdrop of this intellectual Zeitgeist, we were taught that if success was to be attainable to us as futures traders we would need to consider each trade carefully; all potential outcomes were to be critically evaluated in terms of risk and reward.  Trading decisions, we were told, which were the result of intensive analysis were likely to be more correct than those which were the product of less intensive scrutiny.  In fact, thinking about trades was so much in vogue that traders would frequently seek out numerous sources of information in order to validate each of their trades.  There was no such thing as ?too much information?.  After all, how could there be too much information in the so-called Information Age?

Edsel Trading

Do you remember the story of the Edsel?  In what seemed to be a reasonable approach, Ford Motor designed the Edsel to please the consumer.  They did so by attempting to include everything that the buyer wanted to see in a car.  The end result was a car that failed miserably.  The simple truth is that ?too many cooks spoil the pie?.  Consider the following questions:

  • How much information is enough? 
  • How can you decide when you have given a decision enough thought? 
  • Are there any objective measures for knowing when you have thought about something enough, or does the process end when things "feel right"? 
  • Is there a correlation between the amount of thought devoted to a trade and its end result? 
  • Can intensive analysis and thought really lead to success in trading?

The questions are totally absurd.  What is deep thought to one trader is either a mere pittance to another trader or totally worthless activity to another.  There are no set standards, no guarantees, and no insurance policies.  There is no firm correlation between the amount of thought and deliberation that gores into a trade and the outcome of that trade.  In fact, there IS a correlation then it?s likely an inverse one. 

Decisions made seemingly off the cuff by some traders are often more successful than decisions made by committees.  And, of course, computers have totally revolutionized the decision making process by doing our "thinking" for us.  Once the computer has done the hard work there’s really nothing left to do but to take the prescribed action.  Any hesitation subsequent to the acquisition of knowledge is hesitation bound to lead to confusion, indecision, insecurity, ambivalence, and equivocation – none of which are constructive inputs in the formula for success.

Why Bother?

The purpose of my commentary here is to make a case for "simpler"  and ?less intelligent? trading.  Once the facts are known and once the computer has decided the best course of action, there’s no choice but to act.  Failure to do so constitutes a breach of contract between you and the computer, but more importantly between you and yourself.  I suggest that the failure to act on your system is the first indication that you have taken a wrong turn, which will eventually lead you down the road to ruin.

The only way in which learning can develop is through action.  Non-behavior, however, means that there will be no learning regardless of whether the action would have produced positive or negative results.

Have you ever noticed the relationship between the success of a trader and his or her ability to take action, right or wrong?  Traders who make decisions promptly and without fear most often come out ahead in the long run.  Furthermore, it’s been my observation that there’s an inverse correlation between intellectual ability and market success – the smarter you are (or think you are), the more you’ll think, and the less money you’ll make.  

I’m not saying that you have to be stupid in order to trade well.  What I am saying, however, is that you can’t over analyze a trade or you will either be too late to make it or you’ll talk yourself out of it.  Traders who can act quickly, evaluating information and reacting to it on a gut level, are often traders who succeed.  While I am not advocating irrational or impulsive behavior with your money, I am saying that ONCE THE FACTS ARE IN, THEY’RE IN. 

It is the fear of being wrong that inhibits action.  But if this is the fear which keeps you from making decisions then you had better give up the game – there’s no way you can play the game without taking some heat.  You never know ahead of time whether your decision will be profitable or not.  If you did, then there would be no game.  There would be no losers to help sustain the winners.

Feelings aren’t Facts!

Have you observed a relationship between your feelings about a given trade and its eventual success or failure?  Consider this: the more a trade scares you, the more likely it is to be successful.  The one’s you’re scared out of are often the one’s that work.  WHY?  The human brain cannot think without being affected by external interference and influences.

Any intellectual process designed to making a trading decision is subject to a thousand and one fears before the thought becomes translated into action.  To give into those fears is to circumvent the system.

Trade — Don’t Think

Consider the following list of blunders, which are ordinarily, considered the by-product of informed thought.

Consider how much money you’ve lost or failed to make as a result of these "crimes of thinking".

  • There’s too much risk.  This is basically an excuse for fear.  It’s been said that "you don’t know how deep a hole is until you stand in it".  This applies to the risk of trading as well.  If it’s the degree of dollar risk that’s bothering you then there are many ways in which this problem may be resolved.  Risk can be decreased by the use of futures options and/or options strategies.  Risk evaluation is an intangible.  If intangibles scare you then don’t drive a car.  If you really think about what could happen to you on an expressway then you’ll not want to drive.  If you think about the risk of trading then you won’t trade.
  • I don’t feel good about this trade- it scares me.  Here’s a favorite cop out on the list of excuses.  Assuming that your signal to trade came from a computer or from a mechanical trading system then your excuse is without merit.  Your computer had no idea that you don?t like the trade.  Nor does the computer care about your feelings. Following feelings or ?the force? may have been good for Luke Sykwalker, but it’s totally bogus approach when signals come from a mechanical system or a computer.
  • The trade looks good but. . .  Here’s a worthless bit of reasoning.  The signal looks good but. . .  BUT WHAT?  You want to get in cheaper. . .  you want to wait for a pullback . . .  you want more confirmation. . .  you want to wait for a report. . .  you want to wait for the next signal. . . .  you want to talk to your broker first. . .  EXCUSES. . .  all poor excuses, which are the bastard child, of what you think is good thinking!  You might as well wait to ask your dead grandfather if the trade’s good.
  • Let’s see how the market opens before I enter my order. . . let’s check it after the first hour of trading. . . let’s put in an order below the market…above the market . Here?s an excuse I?ve used hundreds of times.  IT?S ALL B.S. I TELL YOU!  These are also fatherless children of the crime, which comes from too much thinking.  Futures trading is very much a game of stimulus and response.  The signal is your stimulus and you must make the proper response.
  • Perhaps I’ll trade a spread or an option instead.  This bit of thinking is certainly a more creative one, possibly even an intellectual thought.  But it’s totally wrong!  Entering a spread as an alternative to a flat position is like entering a spread to avoid taking a loss.  One action has nothing to do with the other.  It’s like giving peanut butter to a man dying of thirst.
  • And last, but by no means less absurd is the "it just doesn’t look right" excuse.  This one comes from truly deep thought.  It comes from an analysis of the economy, trends, possibly even volume and open interest, and of course, from the input of too many traders and advisors.  It you want to get totally confused and frozen into inaction think about -all the facts and opinions, evaluate them all, throw them into the hopper and decide that you can’t decide because something doesn’t seem right.  Here’s the real thinking traders excuse.  And it’s another totally worthless one.

I?m Far From Perfect

Don’t think for even one second that I?m preaching to you from a position of perfection.  I’ve made more than my share of mistakes.  And I’ll continue to make mistakes as long as I live.  My hope, however, is that I’ll make fewer mistakes and less serious one’s.  And that’s my hope for you as well. 

Try a little experiment.  Make a commitment to take the next ten trades without thinking about them.  After you’ve done so evaluate your results.  See how you’ve done.  See how you feel.  Here’s what I think you’ll find: you’ve spent less valuable time on meaningless thought; you’ve made the trades you were supposed to make; you?ll feel better about yourself-more confident and more secure; and you’ve probably made money as well.

Best of trading

Jake (Jacob) Bernstein is President of MBH Commodity Advisors Inc. and Bernstein Investments Inc.  Born in Europe in 1946, Bernstein moved to Canada and then to the United States. He is publisher of Bernstein on Stocks, The Letter of Long Term Trends, Short Term Stock Trader's Hotline,  MBH Weekly Commodity Trading Letter,  Monthly Key Date Trader, and Short Term T-Bond Hotline.  His newsletters and advisory services are read internationally by traders, investors, brokers, financial institutions and money managers.   His Internet presence includes:   Jake Bernstein on Futures (http://www.trade-futures.com) and  his stock market advisory 2Chimps.com  (http://www.2chimps.com), www.Seasonaltrader.com, and www.Patterns4Profit.com.   Bernstein’s areas of expertise include stock and commodity trend analysis, long term trend and price forecasting, seasonal price patterns, cyclical economic analysis and timing, trading system and timing indicator development, computerized stock and futures trading, trader and investor psychology, short term and day-trading, economic forecasting, and historical price pattern analysis.  Bernstein has been a featured speaker at investment conferences and trading seminars the world over.  He has held over 500 of his own seminars since the 1970’s, and is considered a leading educator, market analyst and researcher in the field of stocks and futures. Clients to his advisory and consulting services include some of the world’s largest banks and brokerage firms as well as professional traders and money managers.  He has developed and popularized a number of innovative market indicators and concepts.Many of the long term social , political and economic forecasts Bernstein has published in the last two decades have come to pass.  These include the interest rate top of the early 1980’s; the deflation of the 1980’s and early 1990’s; the Japanese economic Peak; the explosion in genetic engineering technology; the Interest Rate lows of the mid to late 1990’s; the Gulf War; and many more.  Among his more than 30 + published books are the following:The Investor’s Quotient (Wiley and Sons)The Investor’s Quotient 2nd Edition(Wiley and Sons) - Also in ChineseBeyond the Investor’s Quotient (Wiley and Sons)How the Futures Markets Work (New York Inst of finance)The Compleat-Day Trader (McGraw-Hill) Also in ChineseThe Compleat Day-Trader II (McGraw-Hill)Strategic Futures Trading (Dearborn Publishing)The New Prosperity (New York Inst. Of Finance)How to Analyze and Forecast Long Term TrendsCycles of Profit (Harper-Collins)Short Term Trading in Futures (Dow-Irwin)Investing in Metals (Wiley and Sons)Seasonality (Wiley and Sons)Seasonal Trader’s Bible (MBH Publishing)Timing Signals (Probus)Why Traders Lose  How Traders Win (Probus)Facts on Futures (Probus)Market Masters (Probus) - Also in GermanBeat the Millennium Crash (New York Inst of Finance)How to Trade the International Futures Markets (New York Inst of Finance)Momentum Stock Selection (Mc-Graw Hill)The Compleat Guide to Day Trading Stocks (McGraw-Hill)Stock Market Strategies that Work (with Elliott Bernstein) - McGraw-HillHow to Trade the Single Stock Futures Market (Sep 2002) - DearbornNo Bull Investing (Mar 2003) - Dearborn5 Winning Stock Market Strategies (Mar 2005) - Entrepreneur PressThe Investors First Aid Kit  (2005) TBAArticles by Bernstein have appeared in Futures Magazine, Money Maker, Stocks and Commodities, Barron’s Financial Weekly, FarmFutures, and other leading financial publications.  He is a guest commentator on business radio, Internet, and television in Chicago and Los Angeles.  He has appeared on numerous radio and television business shows, including Financial News Network, Jag.FN, Web.fn, CNBC, CNN (London), WBBM Radio Chicago and Wall Street Week, and numerous other radio and television shows.  He has been a keynote speaker, workshop leader, or organizer of numerous investment and trading conferences throughout the world.

Jake (Jacob) Bernstein is President of MBH Commodity Advisors Inc. and Bernstein Investments Inc.  Born in Europe in 1946, Bernstein moved to Canada ...

SOCRATES

Veteren member
4,966 134
It gets worse by the day, the next thing we will hear is that drunk or comatose people have the best judgement and reflexes.

If it were not so dire, it would be funny !
 

Anonymous

Established member
604 3
After all the thinking is done it is better to get drunk before placing any trade, or blindfold onself and throw the dart. Out of 365 throws there is one likely to get stuck on the wall. It takes less effort and less time-consuming.
 

nine

Senior member
2,038 506
A good article.

Socrates, I suspect that you were too tired to read anything other than the heading.
And Anonymous, too drunk :)
 

trendie

Legendary member
6,218 1,000
Nice invigorating article to start the week.
( would be good to post all new articles on a Monday morning, may help to give a new context to the weeks trades )

I enjoyed it; can relate to it as something I have grown out of, thankfully.
 

charliechan

Experienced member
1,008 119
SOCRATES said:
It gets worse by the day, the next thing we will hear is that drunk or comatose people have the best judgement and reflexes.

If it were not so dire, it would be funny !

lol - its the people who dont think that like his stuff so much.

carry on jake - please keep pumping your trash into the markets - the more people who believe you, the more money for the rest of us!!!

KKKKERCHING!!!
 

fxmarkets

Established member
834 50
"Once the facts are known and once the computer has decided the best course of action, there's no choice but to act. "


oh dear, oh dear, oh dear ,oh dear...... thinking like this does not bode well for traders or mankind. they have the same software installed in the whitehouse and pentagon no doubt...

Initiated optimum long based on account pound cost average buy program sequenced , voorrrupp, voorruupp NEED MORE MARGIN, NEED MORE MARGIN, vooorrruuup, voooorruuppp, What are those human free thinkers doing.... ,laughing, scanning source of laughter....... initiate tactical strike program,access codes verified, countdown sequence,begin.. 5,4,3,2,1.... launch.

"And, of course, computers have totally revolutionized the decision making process by doing our "thinking" for us"

KKADDDACHING KKADDABOOM
 

nine

Senior member
2,038 506
LOL. As always a wide divergence of thought. Good to see that there will always be profit for some in the markets.
 

chump

Senior member
2,212 274
It all depends on how rational the mind was that programmed that computer. The computer is neither right nor wrong. It is the mind behind it that will determine the outcome. In that sense I have no doubts that a style of trading based on computer auto trading can work . I have not yet seen that though ,but I don't exactly circulate to do so which simply means ...not known.

Cutting past the stylistic differences which seem to have awoken disparate views I still see merit in the core issue he is addressing. That is , when your experience based on rational outcomes says act ,then act ,don't sit around waiting for a wooly comfort blanket which from time to time I would suspect is something we can all do.
 

westernforce

Active member
246 44
It looks like the article was aimed at persons who have trouble pulling the trigger after having done their analysis, and all things lining up, they then decide to rethink too much and miss the trade.
 

RUDEBOY

Experienced member
1,157 6
I can see the point of this article. Once a person has come to terms with the market(s), there should not be much thinking to be done over any trade i.e. if it doesn't stand out.....don't take it.