Examples of Greed

Posted in Traders' Delusions, Submitted by Trading Critic on Wed, 2006-08-30 12:09.
Trading Critic looks at an example of greed; Greed runs through the markets

Greed. The desire for more money. More money! Greed is one of the main drivers for our equity markets. The greed for more money. I'll have a look at a few examples of greed from the simplest - a case that we can all hopefully relate to, to something that may apply to some of us (forex traders and stock traders) and an example at a professional level.

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Market Rhythm

Submitted by Trading Critic on Wed, 2006-08-23 14:13.
The stock, forex markets all have a certain rhythm. The rhythm of the markets.

Music is based on rhythm. When you listen to music, the beats become repetitious to some extent which allows you to predict the rhythm in order to dance with the music. The market also has its own rhythm. I'm not saying the market rhythm is 100 percent predictable, but for those experienced in the market - I'm sure you can attest to this. I'm also not claiming that trading is about prediction either (more on that in another blog post). But from my experience, the market has a rhythm.

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Stock Trading Insurance Policy

Posted in Traders' Delusions, Submitted by Trading Critic on Wed, 2006-08-16 15:20.
Trading Stocks or Forex is a risky venture. Don't you wish there was an insurance policy for Stock Trading?

I recently went on a trip overseas, and as part of my preparation of going I bought travel insurance. Why did I buy travel insurance? Of course, to reduce my risk of financial loss as a result of any loss, sickness or misadventure. As a trader there are avenues to reducing your trading risk. There are many ways to reduce your risk when you trade. The simplest method is by limiting the amount of capital at stake. The next simplest is by utilising a stop loss, or better yet a guaranteed stop loss. If you want to hedge your position in some currency you can either use forwards or options. If you like to get your hands dirty, options can provide you with an advanced strategy to reduce your trading risk.

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Australian Share Market Game: What You Should Know

Posted in Traders' Delusions, Submitted by Trading Critic on Tue, 2006-08-08 14:18.
The truth behind the Australian Share Market Game: Virtual Stock Trading

The Australian Stock Exchange (ASX) often runs a virtual share market game for schools as well as for charity. Traders / Investors are often given $50,000 of virtual cash to invest on the ASX. The number of shares are often limited to the ASX100 or ASX200 companies. The time horizon is usually a few months, from two to six months.

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Can Mathematicians Beat the Markets?

Posted in Traders' Delusions, Submitted by Trading Critic on Mon, 2006-08-07 15:46.
If all it took to beat the markets was a Ph.D. in mathematics, there'd be a hell of a lot of rich mathematicians out there.

Does it take a genius to beat the markets? Can a mathematician act quickly in the fast moving forex markets or better yet, pick out the best stocks to invest in? The markets are all about numbers, percentages, mathematical valuation modelling and so on... So it should make perfect logical sense that if a mathematician tried their hand at trading the markets, they would find it easy to succeed in consistently beating the markets. But is it true?

Have you heard this quote?

If all it took to beat the markets was a Ph.D. in mathematics, there'd be a hell of a lot of rich mathematicians out there.

The quote is from Bill Dries a commodity trading advisor from "Futures" published on August 1995.

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I Robot, You Human: Mechanised Trading Systems

Posted in Traders' Delusions, Submitted by Trading Critic on Fri, 2006-08-04 22:56.
The Evolution of Man to Machine: I Robot, You Human: Mechanised Trading Systems

Have you ever wondered if a robot would beat you at your own trading game? Yes, you have a trading system. Yes, you trade your system. But you are human. You are open to temptations. These temptations lead you to open or close trades either prematurely or too late. But what if you simply programmed a robot, or traded automatically? (Programming some piece of software with your set of triggers, essentially creating your own black box system – the difference with your black box system and the other systems on the market is that you know what your system uses as triggers) Would your mechanised-robotised system beat your human implementation of your own trading rules?

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Nerves of Steel: Forex Markets

Posted in Forex Trading | Traders' Delusions, Submitted by Trading Critic on Wed, 2006-08-02 13:33.
A Chart of the Australian Dollar (AUD/USD) reaction to the 0.25 percent interest rate to 6 percent announced by the RBA 2-8-06

This morning I was looking at the reaction of the Aussie dollar as a result of the Reserve Bank of Australia (RBA) released the outcome of their deliberations yesterday. The interest rate was scheduled to be announced at 0930 Sydney time so I was in front of my laptop by 0920 watching the screen (And putting on a trade). As you can see from the minute chart above leading up to the announcement, trading was thin in the minutes leading up to the announcement. The gold star marks 0930 hours. Everyone was 99 percent sure that the Australian interest rates will rise by 0.25 percent to 6 percent. And the interest rate did rise. So what does a forex traders' mind run through in a trade like this one?

A Quick Forex Overview

If you aren't aware of foreign currency movements and the reasons why they move here is a quick overview. I was looking at the Australian (Aussie) dollar price with respect to the US dollar price: i.e. the AUD/USD currency pair. Now, last week, the RBA announced 4 percent inflation, which is way above the Bank's target rate. The market saw this a sure bet that the interest rate would rise the following week (the event today). So the market priced in the interest rate move and the dollar spiked from around the 0.7500 level all the way to just above 0.7670. Some 170 pips. Which is a huge spike in the dollar if you look at the weekly charts. Anyway, fast forward to today. Yesterday during American trade, the dollar actually hit 0.7600, but by the time the Aussie market opened this morning the dollar recovered from the "profit taking" (the reason the media always gives when the market spikes and then falls the following day/week) to open at around 0.7650. When I previously stated "thin trade" this is shown by the sideways movement of the dollar together with the lack of coloured candles. Finally, a country's currency usually reacts positively to any prospect or actual interest rate increase. And that's what some traders call "trading the news."

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Your Money or Your Health

Posted in Traders' Delusions, Submitted by Trading Critic on Mon, 2006-07-17 14:07.
Be wise: Choose your health over money when you trade the markets.

Traders, stock brokers and investors sometimes fall into the temptation of getting too attached to money. Common sense tells us that money is nothing more than a tool to get from A to B. There are a few far-reaching consequences of getting too attached to money, the most important being your own health.

I was reminded of this when I was watching "Inside Business", Marcus Padley, an Australian market commentator ended his remarks about the market with this:

Meanwhile, I have spent the last four days in a cardiac ward in a Melbourne hospital. Two bits of advice from that experience. Firstly your health is vastly more important than your money. And the second is, don't buy too many small resource stocks.

I'm not going to lie and say I've never have been a victim of this same infirmity. I have and I still do. I've experienced something similar and I expect other traders to have felt the same emotions from their own trading. Sweaty palms. Obsessed with watching your charts. Breaking your trading rules. Dizziness. Fear. Greed. Loss of concentration. Heart beating fast. Headaches. Loss of confidence.

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Loser's Mindset in Trading

Posted in Traders' Delusions, Submitted by Trading Critic on Sun, 2006-07-09 11:45.
A loser's mindset almost always leads to further trading losses. Don't be frustrated - always trade with a clear mind.

A loser's mindset leads to further trading losses. How does one get into a losing mindset? There are a few ways:

  • A losing streak: effectively wiping out your confidence
  • A negative attitude: do you believe in self-fulfilling prophecies coming true

As a trader it is inevitable that your account would be hit by losses. And when it does happen, you risk being succumbed by a loser's mindset. Especially when you hit a string of losses.

A negative attitude in anything almost always results in failure. A negative attitude is no excuse in the trading game.

The only solution is to step back. Take a breath. Wait until the nerves and the adrenalin rush flushes from your body (if you were in a losing streak). Reflect on the reason why you are trading (if you have a negative attitude). Review and reflect on the trade. And simply start over again taking on board anything you conceived from your reflections.

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Is your Trading FINE?

Posted in Traders' Delusions, Submitted by Trading Critic on Sat, 2006-07-08 00:42.
My Trading is FINE (Freaked out, Insecure, Neurotic and Emotional)

In the 2003 remake of the movie "Italian Job," one of the characters responded that they were "FINE". But in their world of underworld dealings FINE is an abbreviation of Freaked out, Insecure, Neurotic and Emotional. So is your trading fine? (In the original version 'F' actually stood for F**ked up) If it is, then you've got a problem.

If you're fine, your trading is likely to be inconsistent and finicky. I can see you ripping your hair out, every time you look at your charts trying to decide whether or not to enter into a trade or exit. I can see you sweating it out, when your accounts are deep in the red, when you failed to exercise your stop loss (that is, if you had a stop loss in the first place).

If you're trading stocks – at least you have 16 to 18 hours of rest until the next trading period. But if you're trading forex and if you're feeling fine, you must be a stressed SOB.

You're feeling…
... freaked out because you aren't confident about your trading.
... insecure because you don't know your risk in each trade you execute.
... neurotic because you don’t have a plan to follow and stressing out from all the uncertainty
…emotional because you are gambler, feeling the highs and lows of your newfound addiction.

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