The fallacy of "right and wrong"

[barjon]

The two words that irritate me on these boards are "right" and "wrong". We have people parading that they were "right" when a call they made moves in the desired direction; others who bemoan that they were "wrong" when it doesn't; others who bemoan that they were "wrong" only to be proved "right" later on (usually when their stop has been taken out); and still others who claim to have been "right" when a trade results in a relatively miniscule profit after it's been severely out of the money.

In my experience most good traders do not think in such terms. They trade what they see not what they think and merely react to unfolding price action, both in taking a trade and in managing that trade thereafter. They know that the market is uncertain, as is the future, so it's simply not a question of "right or wrong" - it's a question of maximising advantage and minimising disadvantage.

mmm, got that out of my system

good trading

jon

 

[Vrothdar]

I'd not really thought about that much before. I think the right/wrong thing works for fundamentalists so long as people are honest with themselves when faced with the situation you outlined as "others who claim to have been "right" when a trade results in a relatively miniscule profit after it's been severely out of the money." They weren't right, they were just fortunate not to be punished for being wrong.

When it comes to technical analysis though the right/wrong aspect of trading isn't really the trade itself. It's why you took the trade, how you managed it, how you decided to trade using the setup you did etc. etc.

 

[barjon]

yeah, true vrothdar - the fundamentalists are exercising a judgement call on value. I didn't really think about them!!

good trading

jon

 

[Charlton]

The two words that irritate me on these boards are "right" and "wrong". We have people parading that they were "right" when a call they made moves in the desired direction; others who bemoan that they were "wrong" when it doesn't; others who bemoan that they were "wrong" only to be proved "right" later on (usually when their stop has been taken out); and still others who claim to have been "right" when a trade results in a relatively miniscule profit after it's been severely out of the money.

In my experience most good traders do not think in such terms. They trade what they see not what they think and merely react to unfolding price action, both in taking a trade and in managing that trade thereafter. They know that the market is uncertain, as is the future, so it's simply not a question of "right or wrong" - it's a question of maximising advantage and minimising disadvantage.

mmm, got that out of my system

good trading

jon

Jon

Very good points and I agree with Vrothdar, in that, you are "right" if you have created and followed a well-defined, researched and well-thought out strategy, that includes judicious study of price action, risk and probability, money and trade-management as well as incorporating study of market and personal psychology.

In this case you are right even if you make a loss in an individual trade, as long as overall the strategy and its perfect operation leads to an increasing equity curve.

Charlton

 

[0007]

The two words that irritate me on these boards are "right" and "wrong". We have people parading that they were "right" when a call they made moves in the desired direction; others who bemoan that they were "wrong" when it doesn't; others who bemoan that they were "wrong" only to be proved "right" later on (usually when their stop has been taken out); and still others who claim to have been "right" when a trade results in a relatively miniscule profit after it's been severely out of the money.

In my experience most good traders do not think in such terms. They trade what they see not what they think and merely react to unfolding price action, both in taking a trade and in managing that trade thereafter. They know that the market is uncertain, as is the future, so it's simply not a question of "right or wrong" - it's a question of maximising advantage and minimising disadvantage.

mmm, got that out of my system

good trading

jon

Barjon - you've got it right. My take is: Is the bottom line increasing consistently over a decent period of time? This will have involved being "right & wrong" before, during and after trading but so what?

To me, the whole sequence of trading is just like a military combat mission (where "the market" is the enemy) - you plan for all foreseeable eventualities, you take every care during execution but still the unexpected crops up - you then fall back on tried and trusted principles - occaisonally using all your wits and gut feeling to recover the situation. Most times it goes ok, sometimes it goes so perfectly you can't believe it and rarely, it becomes a disaster. ........ But that's life and so is trading.

It's results that count.

 

[Crap Buddist]

The two words that irritate me on these boards are "right" and "wrong". We have people parading that they were "right" when a call they made moves in the desired direction; others who bemoan that they were "wrong" when it doesn't; others who bemoan that they were "wrong" only to be proved "right" later on (usually when their stop has been taken out); and still others who claim to have been "right" when a trade results in a relatively miniscule profit after it's been severely out of the money.

In my experience most good traders do not think in such terms. They trade what they see not what they think and merely react to unfolding price action, both in taking a trade and in managing that trade thereafter. They know that the market is uncertain, as is the future, so it's simply not a question of "right or wrong" - it's a question of maximising advantage and minimising disadvantage.

mmm, got that out of my system

good trading

jon

Yeah your left! But how many people on this planet have been conditioned to be "tolerated" or even blessed, when making errors?

Life on earth just aint like that.......

 

[Crap Buddist]

Shouldn't we add true & flase to the list of intolerance ? and what about Yes or No ? where does one draw the line regarding judgement buzzwords ?

And who's words are they anyway and what difference does it make to the recepient? perhaps the use of the word is correct but its understanding not so..... ?

what do we want ,all to be the same? , who would we point out as the oddball then ?

 

[Jaydee]

...it's a question of maximising advantage and minimising disadvantage.

I agree entirely - I couldn't put it a better way myself.

To extend this topic slightly there is also the confused concept of a 'good' and 'bad' trade. A lot of people believe that good trades make money and bad trades don't. This simply isn't true:

A bad trade can make a fortune because a trader over leveraged, wore his stop too far, prayed to the gods for it to come back onside, finally it did and he took 8 ticks but the market continued to move another 30. The end result, they made a decent profit but it was an awful trade. Yet the inexperienced will think it's good because they made money.

Conversly, a trader may spot an entry point which is consistent with his methods/system/experience, execute well and gain a great postion, unfortunately the market reverses and he is stopped out at his carefully placed stop loss. This is a good trade but it lost money.

 

[timsk]

A bad trade can make a fortune because a trader over leveraged, wore his stop too far, prayed to the gods for it to come back onside, finally it did and he took 8 ticks but the market continued to move another 30. The end result, they made a decent profit but it was an awful trade. Yet the inexperienced will think it's good because they made money.

Now, I wonder if our spanish friend is reading this thread . . .
:cheesy:

 

[0007]

Conversly, a trader may spot an entry point which is consistent with his methods/system/experience, execute well and gain a great postion, unfortunately the market reverses and he is stopped out at his carefully placed stop loss. This is a good trade but it lost money.

I don't disagree with you in principle but.........

Aren't we in this business to make money? Therefore to me, a good trade is one that makes a profit. I agree with the above that you should always aim for a well-executed trade but this may not turn out to be profitable. Perhaps if we execute badly then it's not sensible to call it a "good" trade when it turns out profitable? - how about a "successful" trade ?

 

[luckyd1976]

I learned along time ago. Traders can be right and Still LOSE money!

 

[nine]

I don't disagree with you in principle but.........

Aren't we in this business to make money? Therefore to me, a good trade is one that makes a profit. I agree with the above that you should always aim for a well-executed trade but this may not turn out to be profitable. Perhaps if we execute badly then it's not sensible to call it a "good" trade when it turns out profitable? - how about a "successful" trade ?

If one goes to the trouble of developing a strategy and testing it then part of it is knowing that X% of trades are going to lose money. Part of the testing is also seeing whether micromanaging the trades will improve things. At the end of that development you know that if you do 20 trades by your rules you'll do better than if you do 20 trades with modification x.

When one has decided how to manage trades (in my case I have a set of rules) then any alteration beyond that tested decision tree is bad. So, altering my behaviour on one trade to make money is bad - and thus, win or lose, its a bad trade. Similarly if I behave in the tested optimum way and the trade loses money it's good. Why because if I keep behaving in that manner then I should get the results I got when I tested the system - and if I don't then I'm not trading the system any more.

As Mark Douglas would suggest: random actions beget random results (and bvggered if I want that ).

 

[new_trader]

2¢

The two words that irritate me on these boards are "right" and "wrong". We have people parading that they were "right" when a call they made moves in the desired direction; others who bemoan that they were "wrong" when it doesn't; others who bemoan that they were "wrong" only to be proved "right" later on (usually when their stop has been taken out); and still others who claim to have been "right" when a trade results in a relatively miniscule profit after it's been severely out of the money.

In my experience most good traders do not think in such terms. They trade what they see not what they think and merely react to unfolding price action, both in taking a trade and in managing that trade thereafter. They know that the market is uncertain, as is the future, so it's simply not a question of "right or wrong" - it's a question of maximising advantage and minimising disadvantage.

mmm, got that out of my system

good trading

jon

I sort of think in terms of right and wrong and try to keep the parading and bemoaning under control. I actually prefer to use terms like judged correctly or misjudged because I aim for absolute precision with my entries and like to see a position move immediately into profit.

 

[Jaydee]

I believe that this thread is increadibly important to those starting out because it really highlights what trading is and the the bad thinking and misconceptions behind it. It's certainly stuck a chord with me and, for that reason, I wish to push it further and provide an analogy of trading and, going back to the original point by Barjon, how being right/wrong is meaningless.

Before I do, just to address 0007's point of successful and unsuccessful. I quite agree making a profit, regardless of how you did it, means that the trade was successful but it doesn't mean it was a good trade for all of the reasons I mentioned in my earlier post. What Nine describes above, is what I was referring to - a good trade is one you execute consistently with your method/system/plan/whateveryouwanttocallit. In fact not executing the trade, regardless of whether it is profitable or not, is actually the wrong thing to do.

Anyway, lets play a pretend game. In our hypothetical game, money can be made or lost on a single throw of a fair, six-sided die (Numbered in the conventional way of 1-6). The people who play this game are called Dice Thowers (DTs) and betting on the roll of the die is called a trade. You can bet any amount of money on a number (or more than one if you wish). If the die lands on this number, you receive a certain amount of money back (you never know how much for sure - only objective, statistical analysis will show a DT what the average yield is for each number).

Our first DT is a disciplined player who has been in the game a while and has worked out that over time betting on a 6 will yield, on average, £8 for every £1 risked. So his strategy is to bet every time on the number 6. He must never bet on another number and never miss a bet (opportunity) as doing so is not in line with his system. Consequently, he doesn't care if he is right or wrong or if his trade is successful. He only cares that he makes a good trade by never missing a bet and always betting on 6. This dude makes money in the long run by consistently sticking to his strategy - six comes up 1:6 times and returns 8:1.

Our second DT is a fairly experienced player who has been in the game for a while. He has also worked out that betting on a 6 yields £8 for every £1 risked and that's his plan. However, he doesn't stick to it - he misses bets on occasion and sometimes takes a punt on other numbers on which he has no idea what the yield is. This guy worries about being wrong, making unsuccessful trades and thinks a good trade is a bet on any number that makes him money. He barely breaks even - his analysis is correct but his thinking is all wrong.

We are all DTs at the end of the day (hence, my Avatar).

I'm worried this may not be a good enough analogy but I tried...

 

[0007]

I believe that this thread is increadibly important to those starting out because it really highlights what trading is and the the bad thinking and misconceptions behind it. It's certainly stuck a chord with me and, for that reason, I wish to push it further and provide an analogy of trading and, going back to the original point by Barjon, how being right/wrong is meaningless.

Before I do, just to address 0007's point of successful and unsuccessful. I quite agree making a profit, regardless of how you did it, means that the trade was successful but it doesn't mean it was a good trade for all of the reasons I mentioned in my earlier post. What Nine describes above, is what I was referring to - a good trade is one you execute consistently with your method/system/plan/whateveryouwanttocallit. In fact not executing the trade, regardless of whether it is profitable or not, is actually the wrong thing to do.

Anyway, lets play a pretend game. In our hypothetical game, money can be made or lost on a single throw of a fair, six-sided die (Numbered in the conventional way of 1-6). The people who play this game are called Dice Thowers (DTs) and betting on the roll of the die is called a trade. You can bet any amount of money on a number (or more than one if you wish). If the die lands on this number, you receive a certain amount of money back (you never know how much for sure - only objective, statistical analysis will show a DT what the average yield is for each number).

Our first DT is a disciplined player who has been in the game a while and has worked out that over time betting on a 6 will yield, on average, £8 for every £1 risked. So his strategy is to bet every time on the number 6. He must never bet on another number and never miss a bet (opportunity) as doing so is not in line with his system. Consequently, he doesn't care if he is right or wrong or if his trade is successful. He only cares that he makes a good trade by never missing a bet and always betting on 6. This dude makes money in the long run by consistently sticking to his strategy - six comes up 1:6 times and returns 8:1.

Our second DT is a fairly experienced player who has been in the game for a while. He has also worked out that betting on a 6 yields £8 for every £1 risked and that's his plan. However, he doesn't stick to it - he misses bets on occasion and sometimes takes a punt on other numbers on which he has no idea what the yield is. This guy worries about being wrong, making unsuccessful trades and thinks a good trade is a bet on any number that makes him money. He barely breaks even - his analysis is correct but his thinking is all wrong.

We are all DTs at the end of the day (hence, my Avatar).

I'm worried this may not be a good enough analogy but I tried...

Jaydee,

A worthwhile and well-explained analogy IMHO. DT should work well with a completely mechanical system where there is no scope for judgement and good results are proven. A problem I have (my system being partly based on cycles, does require some subjective judgement at the end of all the mathematical processing etc) is that you cannot make it entirely Mr Spock-like though that is what I aim for wherever I can.

I think this has some relevance to Trader_Dante's post where he passess on the tips of some successful traders: http://www.trade2win.com/boards/first-steps/34457-lessons-successful-traders.html
Eg "3. Act on intuition
Intuition comes from studying the market and watching it over a long period of time. If you get a strong feeling about a market - even if you are not sure completely why - act on it. But know that feelings can be wrong and be quick to act if the market does not confirm your intuition."

I find it is the areas of personal interpretation that can have an effect on a trade's profitability (degree of or otherwise) and I suppose that is where all the psychology comes in. I've not got a truly mechanical completely automated system - it would be interesting to hear from anyone who has. Being but a small-time (although successful in my micro-universe) trader I have little idea of how the professionals work with so-called automated systems. But from my limited knowledge of AI (artificial intelligence) computer systems I suspect we still have some distance to go.

And isn't the market after all going to be irrational when human beings are involved - even if they're only minding the computer systems? So what's right & what's wrong - it's a good philosophical debate !

 

[Jaydee]

Intuition comes from studying the market and watching it over a long period of time. If you get a strong feeling about a market - even if you are not sure completely why - act on it. But know that feelings can be wrong and be quick to act if the market does not confirm your intuition."

0007, I see your point but...

Isn't a discretionary trader working to a system? Sure, he may not have backtested it or even worked out the average yield on the trades he does, he may not even consciously regard it as a system, but I think his intuition (once he gains enough market experience) gets him into the market at similar high probability times. Consequently, as he recognises the same pattern again and again, he executes his trades and he couldn't care less about whether an individual trade is a winner or loser. He just cares about doing the right thing at every opportunity he gets because he knows that, over time, it will yield profit.

As Barjon said, ...'it's a question of maximising advantage and minimising disadvantage'. It's my belief that the best discretionary traders are subconsciously systematic in their approach when trying to achieve this.

What do you think?

 

[barjon]

Loads of interesting stuff, guys

Just picking up on the last couple of posts (jaydee's and 007's), I am not just talking about mechanical systems but discretionary trading as well. That includes intuition which, in my book, stems from the sub-conscious filtering of knowledge (if you see what I mean).

To explain. What I was getting at in starting the thread was the mindset of successful traders, but there would have been all round if I'd called it that. It's true that a discretionary or intuitive trader is exercising judgement and quite clearly, in common parlance, that judgement can be right or wrong. It's also true, however, that being right or wrong is only of passing interest to good traders and nothing that gets their emotional juices flowing one way or the other.

good trading

jon

 

[0007]

0007, I see your point but...

Isn't a discretionary trader working to a system? Sure, he may not have backtested it or even worked out the average yield on the trades he does, he may not even consciously regard it as a system, but I think his intuition (once he gains enough market experience) gets him into the market at similar high probability times. Consequently, as he recognises the same pattern again and again, he executes his trades and he couldn't care less about whether an individual trade is a winner or loser. He just cares about doing the right thing at every opportunity he gets because he knows that, over time, it will yield profit.

As Barjon said, ...'it's a question of maximising advantage and minimising disadvantage'. It's my belief that the best discretionary traders are subconsciously systematic in their approach when trying to achieve this.

What do you think?

Yes - i agree. Was playing Devil's advocate a bit. My own take is that I "do" my system knowing that it will make me rich beyond my wildest dreams , and just take the losers & mishandled trades as a bit of flak on the way to the target.

He's a thought-provoking fellow that Barjon !!

 

[MrGecko]

Interesting comments do far...

I will add two points for discussion:

1) with the exception of Mechanical systems and pure arbitrage, each and every trade involves an element of discretion - it is practically impossible to draw a line between "right" and "wrong", "true"or "false", etc...As such, one must consider the motives of each particular trader - Trader A might consider the "right" thing to do is take a trade if conditions XXX and YYY are met. Trader B, on the other hand, might consider only taking the trades where XXX or YYY is met and his "intuitiuon" tells him the market is moving his way - it is possible for both traders to be "right" or "wrong" simultaneously, and exclusively, irrespective of their actions; the yardstick of "right" and "wrong" is unique to each individual.

2) It is possible to have been right in the past, but wrong eventually. As time passes, conditions change (even the passing of time counts as a change in conditions!). This is an extention of the first point I made; let us consider a trader who's objective is; "maximise profits, minimise losses, within these risk boundaries". Pretty standard stuff - now at 9am, the trader sees an opportunity that he believes will fulfill his objective. He takes the trade. Come 1pm, conditions have changed; he may review the decision he made at 9am, and decide that the action that most fulfilled his objective is to close the trade for a loss, prior to the original conditions being broken (e.g. hitting his stop loss, or whatever... he closes earlier than he said he would, thats the point). Is the trader "right" or "wrong" to do this???

The fact of the matter is that, as soon as one makes a trade, conditions change. Some may argue that, in the example above, the only "right" thing to do is to let the trade run with one's original conditions. Others will argue that to ignore the new conditions is "wrong". Occaisionally, being "right" in the past is being "wrong" in the present.

'Tis the nature of the beast.

 

[new_trader]

0007, I see your point but...

Isn't a discretionary trader working to a system? Sure, he may not have backtested it or even worked out the average yield on the trades he does, he may not even consciously regard it as a system, but I think his intuition (once he gains enough market experience) gets him into the market at similar high probability times. Consequently, as he recognises the same pattern again and again, he executes his trades and he couldn't care less about whether an individual trade is a winner or loser. He just cares about doing the right thing at every opportunity he gets because he knows that, over time, it will yield profit.

As Barjon said, ...'it's a question of maximising advantage and minimising disadvantage'. It's my belief that the best discretionary traders are subconsciously systematic in their approach when trying to achieve this.

What do you think?

I would say methodology rather than system, the reason being that system implies having a mechanical set of rules. You are wrong about not caring if an individual trade is a winner or loser because caring about doing the right thing at every opportunity means s/he cares a great deal about individual trades. The discretionary trader would study each loss to find out why it was a loss and find out if something different could have/should have been done. Perhaps it was a lapse in judgement, a momentary loss of concentration or something completely unforeseen. By saying 'it' will yield profit again implies a 'mechanical' style. A discretionary trader strives to improve, to increase winning trades and reduce losses, so 'it' doesn't really exist.