The Perils of Prediction

[kriesau]

I am not seeking it. I have achieved it. Namely an ability (however imperfect) to trade on pure price action aided by both prior and real-time analysis of where the obvious decision points are likely to be - by that I mean knowing who I am trading against and where they are likely to place such decision points
I have spent a small fortune on software over the years, including a ridiculous amount of time focussed on just that; not to mention my own coding. I have come to regard technology simply as a tool. As for 'Nirvana', I am not a Bhuddist and therefore do not accept that it (or rather my understanding of it) has any validity wrt trading..

Don't see why that should be an exception.Watching for news related price action is already an integral (and pretty fundamental) part of my trading approach. As is being on top of all the historical news based factors that I judge likely to affect other traders

I am simply concurring that, to allow one's ego to influence the mechanics of trading is to invite a sharp and expensive lesson in just how insignificant you really are.

Well congratulations - are you now a multi - millionaire ?

You may well have evolved some highly mechanical trading system that has significantly improved your trading abilites - great.

However don't tell me that news related price action does not provoke some emotional response. The world reacts to major events in an emotional way and that affects markets too. To be able to interpret the consequences of a whole range of emotional responses you have to be in tune with them too and that constiutues emotional input into your own interpretation of what the outcome is likely to be.

 

[kriesau]

That's the trouble with conversations of this sort - we've got to use words and there are always some of those words that are like red rags to a bull

Personal experience:

1. Became interested in TA and analysed market.
2. Decided where it was going (prediction) and entered.
3. Watched in disbelief (ego) as it didn't.
4. Moved stop to "give it more room" (ego attachment to prediction)
5. Lost (dented ego)
6. Repeated, repeated, repeated.
7. Sought a more mechanical system and drew up specific rules.
8. Tested it to determine probabilities etc (statistical prediction).
9. Set entry trigger orders in advance (non-ego)
10. Set exit trigger entries in advance (non-ego)
11. Won (ego massage)
12. Started second guessing system rules (ego prediction)
13. ..........guess what
14. Saw sense.
15. Bounce between 12 and 14 repeatedly.

So yes, call it what you will - ego, pride, obdurateness, predictive silliness or whatever - "it" got in the way to my trading detriment. For me, I'm wedded to a fairly mechanical system to avoid being influenced by emotion of one sort or another and even then I need to work with advance orders because I can't trust myself to always pull the trigger in real time.

So if ego/emotional attachment is the peril of prediction then I must give myself a sharp gmca slap on the wrist if I succumb to it - but it is fun

good trading

jon

Great post - I can identify with that and have been through a similar experience myself as I suspect have many others too.

I think that this can be more effectively applied to swing trades that are planned in advance. However if someone also intraday trades too then it's not so easy to operate on this more detached and pre--planned level.
As with many things in life there will always be a horses for courses reality involved

 

[barjon]

However don't tell me that news related price action does not provoke some emotional response. The world reacts to major events in an emotional way and that affects markets too. To be able to interpret the consequences of a whole range of emotional responses you have to be in tune with them too and that constiutues emotional input into your own interpretation of what the outcome is likely to be.

kriesau

Are you not arguing that you remain detached enough to recognise (but not succumb to) your own emotions in the interests of making an objective assessment where the emotions of others is likely to lead the price?

good trading

jon

 

[kriesau]

kriesau

Are you not arguing that you remain detached enough to recognise (but not succumb to) your own emotions in the interests of making an objective assessment where the emotions of others is likely to lead the price?

good trading

jon

Exactly !

Anyone can debate the degree of detachment thats either desirable or achievable but it's the principle that is the salient point.

It's basically an issue of perspective and you can't divorce it completely from the human realities which also need to be satisfied, such as achievement , fulfilment and success.

I don't think that anyone could honestly have assessed, predicted or forecasted the huge emotional response to the recent Tsunami tragedy and the amount of public money that was subscribed and I don't think that one could assume that this would be exactly replicated if it was to recur again in the future.

We should endeavour to learn the lessons that enable us to excel in the different facets of our life and then live it ! There is almost always a better way but never a Holy Grail !

 

[peterpr]

Well congratulations - are you now a multi - millionaire ?

You may well have evolved some highly mechanical trading system that has significantly improved your trading abilites - great.

However don't tell me that news related price action does not provoke some emotional response. The world reacts to major events in an emotional way and that affects markets too. To be able to interpret the consequences of a whole range of emotional responses you have to be in tune with them too and that constiutues emotional input into your own interpretation of what the outcome is likely to be.

I never said anything about emotion. It's ego that's the problem - manifesting itself as an aggressive inability to admit it when you are wrong

Plenty of it on display in various threads around here I'd say.

As for your question. I have targets. I achieve them more often than not. I have no need or inclination to look for 'Nirvana' or the 'Holy Grail' of trading.

 

[kriesau]

I never said anything about emotion. It's ego that's the problem - manifesting itself as an aggressive inability to admit it when you are wrong

Plenty of it on display in various threads around here I'd say.

As for your question. I have targets. I achieve them more often than not. I have no need or inclination to look for 'Nirvana' or the 'Holy Grail' of trading.

Ego and emotion are intertwined - thats what makes us human. Emotion is not confined to an aggressive inability to admit when you are wrong. It also manifests itself in fear, despair, overconfidence and indecision.

 

[kriesau]

And what if one defines achievement, fulfillment and success as the ability to observe and evaluate behavior dispassionately?

I would say that if that were true (which I doubt) one had a pretty mundane and inert existence.

 

[Mr. Charts]

kriesau

Are you not arguing that you remain detached enough to recognise (but not succumb to) your own emotions in the interests of making an objective assessment where the emotions of others is likely to lead the price?

good trading

jon

To me these comments are really on the ball.
Amongst other things I trade the reaction to news stories, not the news itself, using specific patterns which contain the understanding of how people react to significant news events.
The reaction to news is normally emotionally driven and the key to making money from that is to understand and read the effects of the news. Human response to these events is frequently predictable but is only traded by me when the actualite confirms the probability of the response.
Obviously this is done unemotionally as the observer (the trader) is acting on understanding the emotions of others and his own don't even come into the equation.
Just as emotional reaction doesn't change much with time, so the way people buy and sell in response to emotion generating news doesn't either.
This provides excellent trading opportunities almost every day.
Richard

 

[SOCRATES]

We're not talking about existence but of trading. And being dispassionate doesn't mean being uninterested. Trader behavior fascinates me, but my heart doesn't beat any faster when I trade, my stomach doesn't do flip-flops, I don't sweat, I don't grind my teeth. Nor do I take trades I have no business taking or take profits too soon or hold onto losers.

The fact that it's business doesn't mean that one can't take pleasure in it.

Precisely ! And also....no, I will save it for later...

 

[Mr. Charts]

I understand what you are saying, dbp, and largely agree, but pre-market news stories and how to trade them is part of my living and I know from experience it is very successful.
One thing is for sure, all the talking heads generally come out with sheer drivel when they explain AFTER the event WHY it happened.
Being able to read the significance of news and trade the reaction to it enables one to focus on which stocks are likely to produce the appropriate patterns.
To illustrate my first point here is a news story and screen shots of a particular pattern I use.
The first was a shot of the entry and the second was the exit.
Hopefully the images come out ok here - they are taken from a Powerpoint presentation I gave at Bloomberg a while back.
The story is quite amusing. In the specific circumstances of its use, a delay of 24-36 hours for it to be effective is somewhat cramping I would have thought. At least it would require advance planning...........

This was a pre-market news item:

"ICOS announces favorable Cialis results (32.66) ICOS announces that an investigational oral treatment for erectile dysfunction reported a successful intercourse attempt at 24 or 36 hours after taking the pills. Cialis was statistically superior to a placebo, allowing men to have intercourse 24 to 36 hours later."

Richard

 

[Mr. Charts]

Here was my entry..........so to speak..........

 

[Mr. Charts]

And look what happened to my position within a few minutes..................
Judging by the strong upthrust, the drug probably works.......................

 

[peterpr]

Ego and emotion are intertwined - thats what makes us human. Emotion is not confined to an aggressive inability to admit when you are wrong. It also manifests itself in fear, despair, overconfidence and indecision.

Ego and emotion may indeed be 'intertwined', but they are not synonymous because ego is not an emotion.

I never said or implied that either ego or emotion were confined to "an aggressive inability to admit when you are wrong".

Ego can manifest itself in all manner of ways - some laudable, others not so - but one of the most formidable obstacles to trading success (IMHO), is the particular manifestation I described - or something close to it.

To repeat the Charles Dow quote: "Pride of opinion" (that's 'ego' per my useage) "has been responsible for the downfall of more men on Wall Street than anything else." I have found that to be well worth pondering - may even honour it with a plug on the sig. tag-line

 

[kriesau]

Trader behavior fascinates me, but my heart doesn't beat any faster when I trade, my stomach doesn't do flip-flops, I don't sweat, I don't grind my teeth. Nor do I take trades I have no business taking or take profits too soon or hold onto losers.

The fact that it's business doesn't mean that one can't take pleasure in it.

So it's a pedestrian process for you and you consistently optimize your profits and minimze your losses in an utterly calm and detached fashion !

Then you must be a really cool guy who is very rich and successful !!

 

[kriesau]

Ego and emotion may indeed be 'intertwined', but they are not synonymous because ego is not an emotion.

I never said or implied that either ego or emotion were confined to "an aggressive inability to admit when you are wrong".

Ego can manifest itself in all manner of ways - some laudable, others not so - but one of the most formidable obstacles to trading success (IMHO), is the particular manifestation I described - or something close to it.

To repeat the Charles Dow quote: "Pride of opinion" (that's 'ego' per my useage) "has been responsible for the downfall of more men on Wall Street than anything else." I have found that to be well worth pondering - may even honour it with a plug on the sig. tag-line

Well I think that this dialogue is getting too intense and very anal.

Wouldn't disagree with Dow's quote - pride cometh before the fall and all that - but it is a long way away from robotics.

 

[kriesau]

To me these comments are really on the ball.
Amongst other things I trade the reaction to news stories, not the news itself, using specific patterns which contain the understanding of how people react to significant news events.
The reaction to news is normally emotionally driven and the key to making money from that is to understand and read the effects of the news. Human response to these events is frequently predictable but is only traded by me when the actualite confirms the probability of the response.
Obviously this is done unemotionally as the observer (the trader) is acting on understanding the emotions of others and his own don't even come into the equation.
Just as emotional reaction doesn't change much with time, so the way people buy and sell in response to emotion generating news doesn't either.
This provides excellent trading opportunities almost every day.
Richard

Great post and IMHO very true. You have to apply understanding of human nature and its emotional tiggers to take advantage of that - haven'y come accross a software program yet that is able to do this

 

[kriesau]

You seem to think I'm attacking you in some way. There are many ways to trade and many ways to make money. I've found that investing my ego in a "contest" is not productive. If it's productive for you, more power to you.

I don't think you're attacking me - why should you think that ? I'm not espousing any great theory that I find necessary to defend. I agree with the notion of detaching the ego from the trading environment and decision making process.

To me the principle is simple. Be emotionally detached and disciplined when your trading and work your trades according to the objective information and signals that you have found to be most effective.

Thats it ! The rest is flim flam, intense and rather anal.

 

[SOCRATES]

This thread without doubt is developing into potentially the most interesting one this year. I am so rivetted by all this, that I have had my dinner served on a tray here in front of my PC, so as not to miss any of it.

 

[SOCRATES]

Now that, now that question of psychology is right up my street, DB.
DB, has the possibility occurred to you that it is derived from "analyst" ?
There may be other derivations such as for example, to analyse, analysis, analysist, and so on.
May I topically interject to suggest it is studied further in this context to see where it can lead.

 

[kriesau]

"Anal" is generally not thought of as a compliment. But then it's a big, wide world with many cultures.

BTW, barjon, this really ought to go in Psychology.

In any event, one doesn't learn how to trade without ego in a message board post. The Dao of Trading thread is interesting and will probably provide resources. If I knew how to ignite those Aha moments, I'd probably be on the circuit instead of sitting in front of my computer.

For clarification, my use of the term anal relates to nit picking in relation to both style and substance. It seems to me that everyone on this thread embraces the principle and that this dialogue is becoming too concerned with elevating this into some kind of pseudo theological mantra.