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Hi Ray and Mark and group:
I learned a great deal from your posts and other members as well. Here is
what I think;
1. Is a trading system necessary for a successful trading?
Yes. Here is why;
a. Humans are suboptimal judges- Every investment act involves psychology,
because every investment act is behavior influenced by both thoughts and
feelings. Investors and traders may not be used to thinking of themselves
and their behavior in this way. Many are likely to bulk at the suggestion
that their emotions affect their investment or trading decisions or that
their assessments of business risk and potentials may involve mental errors.
While most investors are aware of the conscious though processes that lead
to their investment decisions, many are not aware that those processes may
be influenced by unconscious emotions or cognitive strategies and that their
decisions thus may be less "optimal" than they seem.
Research has shown that decisions may be biased by cognitive errors
(Kahneman & Tversky, 1979), by the influence of emotion (Bower, 1981), or
both (Plous, 1993). This is as true of investment decisions as any other
kind of decision ( Kanhneman & Riepe, 1998). Whatever the cause is
direction of the decision bias, the result can be investment and trading
choices that are less optimal decisions can lead to less than optimal
trading performance. Therefore, the psychology of decision making is
rightly the concern of every trader and investor.
Behavioral finance or investment psychology may represent the key to
understanding the sub-optimal results obtained by many traders and
investors. Despite in-depth 'know-how' and technical knowledge, many
investors and traders are not able to generate a desirable or even a
positive return on their investments.
Yet few blame their own faulty decisions for such failures. Some will blame
fate, market, or their trading method or mechanical system. Others remain
perplexed and confused by the differences between the results that their
trading method should obtain and the results that they do obtain. rarely
will a trader or investor conclude without prompting that may be his or her
own reasoning is to blame. As Bernstien (1997) notes:
" All of us think of ourselves as rational beings even in times of crisis,
applying the laws of probability in cool and calculated fashion to the
choices that confront us. We like to believe we are above average in
skills, refinement, farsightedness, experience, refinement, and leadership.
Who admits to being an incompetent driver, a feckless debator, a stupid
investor, or a person with inferio taste in clothes? Yet how realistic are
such images? Not everyone can be above average. Furthermore, the most
importnat decisions we make usually occur under complex, confusing,
indistinct, or frightening conditions. Not much time to consult the laws of
probability" (p. 23).
Bernstein is probably correct. Psychological research has demonstrated
that, even in relaxed circumstances, peole fail to take adequate account of
the laws of probability when makning decisions ( Kahneman & Tversky, 1979).
Research ahs also demonstrated that emotions such as those experineced when
making rsiky decisons in stressful circumstances can impede rational
decision making ( Plous, 1993).
Such insights may help to explain why a majority of traders, despite
know-how knowldge, lose money, failing to break-even, fewer make a profit.
An understanding of the psychology of decision making in general and
decision pitfalls in particulr may help to explain the negative investement
outcomes achieved by so many investors and tarders. Such an understanding
may also aid traders in anticipating and correcting decision errors. This
might lead to more rational individual investement decisions for a better
trdaing or investemnt performance. ( If requested, I'll explore it in more
details in other postings.)
Does a trading system ( either mechnical or descrationary) increase the
trading performance?
I'll cover in my next posting. Let's just trade now.
Best, Ned
-----Original Message-----
From: ramon <rbarros@xxxxxxxxxxxxxxxxxx>
To: realtraders@xxxxxxxxxxxxxxx <realtraders@xxxxxxxxxxxxxxx>
Date: Wednesday, December 08, 1999 8:03 PM
Subject: [RT] Re: Is trading system necessary for a successful trading? {02}
Hi Ned
You'll probably get a million different answers
from a million different personalities.
For what it's worth here is my view. Before I get
into it, I'd like to define what I mean by a discretionary
and mechanical trader.
A discretionary trader is one who has a rule structure
but will be prepared to override the "rules' signals".
A mechanical trader is one who follows his rules
without deviations.
Your questions raise issues other than those pertaining
to a trading plan - they raise issues relating to
psychology and money management. I think it is worth
repeating that successful trading requires:
a trading plan with an edge, winning psychology and
effective money management.
To your questions......
----- Original Message -----
From: Ned Gandevani <Gandevani@xxxxxxxxxxxxxxxx>
To: <realtraders@xxxxxxxxxxxxxxx>
Sent: Thursday, December 09, 1999 1:02 AM
Subject: [RT] Is trading system necessary for a successful trading? {01}
Dear RT:
I enjoyed reading some of your insightful posts about trading systems. I
though, maybe it would be worthwhile to discuss whether a system ( either
mechanical or discretionary) is necessary for a successful trading. Do we
need to have a system as a decision support in our decision making process
for trading?
"RB: For most traders, I'd say yes. You do get some individuals, the
successful
pit traders come to mind, who are purely subjective. In other words there is
some sort of decision making process (i.e. a plan) but it is not full
articulated
to themselves."
If yes, do we follow our own self-made system or a carefully selected one?
"RB: It's my belief that whatever approach we use, the method has to
suit our personality. Otherwise, we will probably not follow it.
The contents of the plan are a function of our personality and experience.
But what it must have is a positive edge and we must believe we can
execute this edge."
If not, then what are some of the individual characteristics ( such as
experience, commitment and discipline) and/or contextual factors ( such as
time pressure, outcome feedback, and incentive schemes) that may influence
our reliance to a trading system? And how these aforementioned factors may
reduce ( or increase) our trading performance and accuracy?
"RB: All of the above factors are a necessary part of trading success
whether we are a mechanical or discretionary trader.
One of the major obstacles to trading successes is "abnormal" anxiety. Think
of
anxiety as bell curve. A certain amount is necessary to get us to the top of
the
curve - this is our optimal performance. Beyond that anxiety results in a
dimininshing return. All of the factors you mentioned above affect anxiety -
- to the extent they are on the positive side of the curve, they will
increase
performance, to the extent they are on the negative side, they will
reduce performance.
Taking the individual characteristics and contextual factors in isolation -
- all have an impact on our bottom line. The better and more varied the
quality of our experience, the firmer our commitment and discipline,
the more successful we are likely to be.
Among some of the mechanical traders I have met, there is a belief
that mechanical traders are less prone to breaches of commitment and
discipline. My onbservation and experience of mechanical traders
does not bear this out. A string of losses (what I call the
dreaded drawdown syndrome) will hit all of us at some stage -
how we respond to it - is a result of our psychology rather than
external factors like whether we are a mechanical or
discretionary trader.
The contextual factors you mention can be viewed as either
increasing or decreasing stress (time pressure) or
tools to help us achieve our trading goals (outcome feedback,
incentive schemes).
In summary, I do believe a plan with an edge is essential
to trading success and to that we must add pyschology
and money management.
regards
ray
R Barros
101/25 Market Street
Sydney NSW 2000
Australia
Voice: 61 2 92673470
Fax: 61 2 92673478
E-Mail: rbarros@xxxxxxxxxxxxxxxxxx
-----Original Message-----
From: John Hayden <sente@xxxxxxxxxxxxxx>
To: realtraders@xxxxxxxxxxxxxxx <realtraders@xxxxxxxxxxxxxxx>
Cc: realtraders@xxxxxxxxxxxxxxx <realtraders@xxxxxxxxxxxxxxx>
Date: Tuesday, December 07, 1999 7:04 PM
Subject: [RT] Re: question and CTA's {02}
Hi Gary;
Its easy, say you invest 100K with a CTA, at the end of the year after
all fees your account is worth $150K, your account increased 50%. The reason
this is so good is the amount of money that he actually used to create that
$50K increase. Most good CTA's will use on average about 20% of available
equity for margin money (margin/equity ratio), the balance goes into
T-Bills.
So, if you invested $100K, our hypothetical CTA would use $20K to trade
with, place the other $80K in T-Bills, and proceed to create a net profit of
$50K. This is a actual return of 250%. The trick question is ascertaining
the margin/equity ratio. Most CTA's in their disclosure documentation
specify that they will not exceed a 50% ratio. Assuming the worst ratio
possible this still translates to a 100% return.
The secret to successful trading is managing your risk exposure,
everything else is secondary.
Best regards,
At 04:28 PM 12/7/1999 -0700, you wrote:
>>>>
John, thanks for the very enlightening posts.
I have a really basic question: how is a CTA's return calculated? I
see all these CTA's reporting 10%, 50%, maybe even 100% in a year, and that
doesn't seem all that astounding to me. Certainly my system is returning a
lot more than that, and has for over a year. (Too bad I haven't been able to
trade it with real funds until recently. :-( ) But I wonder if maybe they're
reporting it differently than I am.
Does a CTA's return assume zero leverage? I.e. is a $100k return on
an account trading the S&P considered 100k/(1400*250) = 28.6%? What if the
system has low drawdowns, allowing high leverage, and the account started
the year with $50k? Is that still an (unleveraged) 28.6%, or is it 200%?
I'm just puzzled why people get excited about a 50% return, when I
would have done *way* more than that if I had been able to trade my system
for the past year. I'm certainly no market wizard. Am I comparing apples to
oranges?
Gary
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.oİş°¨¨°şİ[ John Hayden ]İş°¨¨°şİo.
¨¨°şİo.,.oİş°¨¨°şİ[ Have a bodaciously outrageous
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