Do we make trading mistakes?

[Wysiwyg]

I read many, many times that traders make mistakes but a mistake is purely retrospective because if the trade was profitable then the "mistake" would not be.

So, if traders are not making mistakes then what is happening? Yes that's right, price has moved against them and price movement is completely out of an individuals control because :-

1) Fund managers & large bankrolls do have the power to move price by weight
2) Masses of traders are manipulated through
a) fear with sharp price drops
b) confidence through persistent price rises
c) words from the mouth/pen of someone (consistent with a) & b) )

The answer is no. Price action is controlled by other forces. You didn't make a mistake.

 

[tothemax6]

I read many, many times that traders make mistakes but a mistake is purely retrospective because if the trade was profitable then the "mistake" would not be.

So, if traders are not making mistakes then what is happening? Yes that's right, price has moved against them and price movement is completely out of an individuals control because :-

1) Fund managers & large bankrolls do have the power to move price by weight
2) Masses of traders are manipulated through
a) fear with sharp price drops
b) confidence through persistent price rises
c) words from the mouth/pen of someone (consistent with a) & b) )

The answer is no. Price action is controlled by other forces. You didn't make a mistake.

Logically, if there is no such thing as trading 'mistakes' because the price action cannot be predicted (due to these outside forces), then all trading is just gambling. If this is the case, people should cease wasting time on tech/a, and either toss a coin, or change to long term investing based on fundamentals.

However I don't accept this is completely the case (although I do think most tech/a is 'reading tea leaves'). People can process the information they had incorrectly, or not do the research needed to gain the information. One recent example is the yen. Some people who sold the yen after the tsunami did not factor in what happened after Kobe. Those who continued to buy the yen on the way up did not factor in that the BOJ are Keynesians who will crank up the printing presses, and the authorities have a track record of intervening when the yen appreciates. Both of these constitute trading mistakes.
Another example is Jim Rogers' worst trade - selling oil prior to the Iraq/Iran conflict. Like he said, the fundamentals for the trade were all correct, but 'people don't just go to war at the drop of a hat, there are troop movements beforehand' etc.

 

[tech/a]

I make mistakes all the time.
Mine are incorrect---or more to the point less than optimum stop placements both initial and trailing.
One last night cost me dearly---French and English announced Possible bombing of Libya.
I was blissfully long with a wide stop in good profit I got hit in a 2 minute flurry.

Dumb and expensive.

 

[Wysiwyg]

Logically, if there is no such thing as trading 'mistakes' because the price action cannot be predicted (due to these outside forces), then all trading is just gambling. If this is the case, people should cease wasting time on tech/a, and either toss a coin, or change to long term investing based on fundamentals.

Yes we 'bet' on price movement using whatever tea leaf reading practice one chooses. If system testing shows a 60%/40% result in favor, it is only on that piece of tested price movement. Circumstances which created the price movement for that period are not the same again but 'similarities' can be observed after they happen. So we bet on the 'probable' move from similar patterns.

However I don't accept this is completely the case (although I do think most tech/a is 'reading tea leaves'). People can process the information they had incorrectly, or not do the research needed to gain the information.

Processing the information incorrectly is what I mean by retrospectively speaking. It is only incorrect to the processor if the price moves against them. Historically it may have moved one way but presently may move another. Once again I agree there are similarities.

A good example is the 2008 crash. Most knew it would end and turn up again but 'when' it ended is retrospective. We can look back and know the day but half were in fear of further drops while others took a bet and re-entered the market.

 

[Wysiwyg]

I make mistakes all the time.
Mine are incorrect---or more to the point less than optimum stop placements both initial and trailing.
One last night cost me dearly---French and English announced Possible bombing of Libya.
I was blissfully long with a wide stop in good profit I got hit in a 2 minute flurry.

Dumb and expensive.

But that is exactly what I mean. I don't see it as a mistake because your analysis was correct until the "circumstances" suddenly changed. A positive news announcement and your mistake disappears???

Position sizing keeps us in the game longer but unforeseen circumstances do have a negative impact.

 

[skc]

There are some more obvious mistakes that I've made.

- Bought something when I meant to sell... I know this sounds crazy but it happened probably 3 times over the last 3 years and a few thousand trades.

- Set my bracket orders wrong... say I wanted to buy at $1 and set limit sell at $1.1 and stop at $0.9. But instead I entered $1.1 as my stop. So I sold the same instant after I bought... costing me 2x commission + brokage. Done that only once thankfully.

- Research error... working out valuations using the wrong number of shares on issues, forgeting about options/convertible notes, taking EBIT as NPAT etc etc. Happens all the time, and a few times after I hit buy

- Wrong position size... not so much calculation error, but greed made me buy a position larger than what the volatility of the stock warranted.

So plenty of mistakes, but the important thing is always learning...

As to the original intention of the question... I don't disagree. Price movement against your position is not necessary a mistake. But trade management certainly can be imperfect.

 

[Lone Wolf]

There are also differing opinions about what is a mistake. Trying to catch a falling knife is a mistake according to many. Averaging down is a mistake according to many. Having too many open positions at any one time or too many positions in the same sector. Trading on "gut feeling". Using leverage. Using CFD's. Using commsec...

How you made the decision is important. Did you follow your plan? Did you buy because it met your criteria, or because you saw someone talking about how much potential it has? Did you sell because your plan said to or because fear got the best of you?

If you could have avoided the loss with the information you had at the time then there's a chance you made a mistake. But if you followed your plan and made the best decision you could based on the information you had at the time then you can't say it was a mistake.

You can make mistakes that turn out to be profitable. Betting your entire account on a singe trade is a mistake isn't it? But it could pay off quite nicely. The quality of a decision shouldn't be determined by the result.

 

[tothemax6]

Processing the information incorrectly is what I mean by retrospectively speaking. It is only incorrect to the processor if the price moves against them. Historically it may have moved one way but presently may move another. Once again I agree there are similarities.

Well then no one ever makes mistakes in anything.

Picture it this way:
A ball is struck on a pool table full of balls. An observer is asked as the ball is struck 'which balls will be potted'. Your claim is that his response can only be wrong once the balls have come to rest. That is to say, 'the whole event was random and the future indeterminable'. But this is clearly not so. When ball is struck the future positions of the balls on the table is set. When the observer states 'blue will be potted', whether he is wrong or not is set then. When the ball does not end up potted, he then discovers that he is wrong.
That is to say, 'his mistake occurred at the point of action, not at the future point of determination'.
Even if the observer is replaced by a blind-folded man, who then calls out which balls he guesses will be potted, the mistake will still be made when he calls out. The only difference being that he could not decrease or increase his chance of making that mistake.

 

[skc]

Well then no one ever makes mistakes in anything.

Picture it this way:
A ball is struck on a pool table full of balls. An observer is asked as the ball is struck 'which balls will be potted'. Your claim is that his response can only be wrong once the balls have come to rest. That is to say, 'the whole event was random and the future indeterminable'. But this is clearly not so. When ball is struck the future positions of the balls on the table is set. When the observer states 'blue will be potted', whether he is wrong or not is set then. When the ball does not end up potted, he then discovers that he is wrong.
That is to say, 'his mistake occurred at the point of action, not at the future point of determination'.
Even if the observer is replaced by a blind-folded man, who then calls out which balls he guesses will be potted, the mistake will still be made when he calls out. The only difference being that he could not decrease or increase his chance of making that mistake.

Not so sure this example is at all valid. You picked a non-random event to illustrate that the event is not random... The 'point of determination' for a pool table is the time when the cue ball is struck. So basically the mistake is revealed after point of determination.

To use an example you need a random or probabilistic event.

Say we roll a die, and the question is whether the roll will be <5 (i.e. 1 to 4) or >=5 (i.e. 5 or 6). Anyone who guesses >=5 made a mistake by taking a lower probability outcome, regardless of what the actual roll is. In this example, a mistake is made before the point of determination.

 

[pixel]

I read many, many times that traders make mistakes but a mistake is purely retrospective because if the trade was profitable then the "mistake" would not be.

So, if traders are not making mistakes then what is happening? Yes that's right, price has moved against them and price movement is completely out of an individuals control because :-

1) Fund managers & large bankrolls do have the power to move price by weight
2) Masses of traders are manipulated through
a) fear with sharp price drops
b) confidence through persistent price rises
c) words from the mouth/pen of someone (consistent with a) & b) )

The answer is no. Price action is controlled by other forces. You didn't make a mistake.

In this context, read Marcus Padley's trilogy on investor types. Today's contribution http://www.smh.com.au/business/inve...nonsense-realistic-trader-20110318-1c0rt.html deals with traders. IMHO a must-read for everyone involved with Financial Markets.

Investor type 3: the vigilant, no-nonsense, realistic trader

Marcus Padley

March 19, 2011

WE HAVE had a look at income investors and value investors. This week we look at another potentially adoptable self-managed super trustee identity, the "trader".
Most of you have already stopped reading this article because the expression ''trader'' conjures an image of someone who spends a ridiculous amount of time in front of an online trading screen kidding themselves that they can cut a living out of short-term price movements. It's gambling, isn't it? And we're smarter than that aren't we? Or are we?
The truth is that traders are almost certainly the better investors, because they have structure, a plan, market knowledge, discipline and vigilance. All the things the average happy-go-unlucky investor doesn't have.
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Trading is one of the few approaches in the market that is honest, in that it does not presume to predict the future. Its mantra is simply to enter trades that have a high probability of succeeding and, when the trade goes wrong, there is no faffing about - no debate, no questioning, no analysis and no blame - just a closed trade.
And trading is realistic. It negates pride and denial because getting it wrong is expected when trading, and getting it right is not a matter of "pride", it is a matter of probability. Trading success is based on the hope that a trend will extend on the understanding that the trend could change at any moment and in the knowledge that if it does change and go against you, you act, you don't wallow in a debate about whether you are still right.
And it may interest you to know that, contrary to popular belief, trading is not necessarily short term. You can establish trading systems for any time frame of investor. Whether you are trading daily or investing for the long term, the methods are the same, it's just the settings that narrow or lengthen. In fact the mindset between a trader and an investor is a lot closer than you might think because both set out to buy a stock that goes up forever. Traders would love nothing more than to buy a "portfolio" of blue-chip stocks that they never had to sell again. The difference is that when they do eventually fall over, the trader sells while the investor ignores it, sticks his head in the sand and, encouraged by most financial advisers, holds and hopes.
Those are some of the good bits, but it's not all roses. There are a few major problems with trading. For instance:
■Before you gain an "edge" you will need a time-consuming education. There are some great educators in Australia and I'm not talking free seminars from product sellers.
■To do it properly is almost a full-time job. This will catch most of you. Most of us don't have the time to trade. You have to make it your hobby and love it. It's not something you want to do out of necessity.
■There are a lot of charlatans selling education as a hook to sell you product. To survive you will have to navigate a minefield of free product pitches (trading seminars) designed to convince you that you can fly (trade). Enough to get you to jump off a cliff, anyway. Trading is harder than farming, but when did you last see a free two-hour seminar on farming?
■And finally, before you can embark on the crusade let me tell you, without time and interest you will not stay the course and more likely you'll have to be put down at the third hurdle.
But the best news is that the techniques of trading are now a well-documented commodity and very accessible, and a $35 book is all you need to invest in to find out whether you are interested. Beyond that, for those of you interested, the rest of the education is relentlessly stimulating, ever evolving and your results are oh so easily measured.
A trading culture should be a goal for any and every type of investor and it is a wonder that anyone that hasn't had the education ever attempts to make money in equity markets at all.
Marcus Padley is a stockbroker with Patersons Securities and author of sharemarket newsletter Marcus Today. For a free trial, go to marcustoday.com.au. His views do not necessarily reflect the views of Patersons.

 

[tothemax6]

Not so sure this example is at all valid. You picked a non-random event to illustrate that the event is not random... The 'point of determination' for a pool table is the time when the cue ball is struck. So basically the mistake is revealed after point of determination.

By 'point of determination', I meant 'when the outcome has been determined'. Only if the observer is omnipotent and can determine to 100% accuracy the resting positions of all of the balls on the table by observing the initial positions of the balls and the movement of the struck ball, would this be the time when the first ball is struck. Otherwise the point of determination, i.e. '100% certainty', is when all the balls have stopped moving.

Also I did say the mistake is revealed at the point of determination, but made at the initial action.

To use an example you need a random or probabilistic event.

Say we roll a die, and the question is whether the roll will be <5 (i.e. 1 to 4) or >=5 (i.e. 5 or 6). Anyone who guesses >=5 made a mistake by taking a lower probability outcome, regardless of what the actual roll is. In this example, a mistake is made before the point of determination.

Hmm, yes perhaps 'mistake' in terms of prediction means both 'made an incorrect prediction' and 'reduced ones chance of making a correct prediction'. Either way, like I say, its made at the point of action (saying 'I think it will be X').

 

[Wysiwyg]

IMHO a must-read for everyone involved with Financial Markets.

Type 3 is the one. Seeing the financial markets for what they are and respecting the fact that anything can happen. Position size, risk control | position size, risk control | position size, risk control.

 

[Wysiwyg]

Well then no one ever makes mistakes in anything.

Picture it this way:
A ball is struck on a pool table full of balls. An observer is asked as the ball is struck 'which balls will be potted'. Your claim is that his response can only be wrong once the balls have come to rest. That is to say, 'the whole event was random and the future indeterminable'. But this is clearly not so. When ball is struck the future positions of the balls on the table is set. When the observer states 'blue will be potted', whether he is wrong or not is set then. When the ball does not end up potted, he then discovers that he is wrong.
That is to say, 'his mistake occurred at the point of action, not at the future point of determination'.

Yes you are right. The resting place of the balls "when" being struck are determined by the air temperature, gravitational pull, air density, felt age and condition, ball sphericity, impact of cue on ball, cue tip chalk, position & angle cue strikes ball, levelness of table, cushion rubber density and other things. Most of these determinants could be known with research before the ball is struck except for the strikers (market movers) intentions. That being how hard he is going to hit the ball, what part of the ball he is going to hit, chalked cue etc.

If the observer had research the above determinants, the information would be useless at any time because it is the striker (market mover) that makes the defining move.

Anyway here is a good stock pick for Monday. The code will be revealed after a few minutes of observation.

 

[motorway]

Taleb's Fooled By Randomness is a good read ...

A guy who has influenced Taleb is Arthur De Vany

Interesting Books .. Hollywood Economics & His recent book on Diet and Life.

IN a probabilistic reality where the generator that creates the distribution changes as choices are made..

There maybe are no real Mistakes ... Only unreal ones

IE If we keep digging the same Hole..

Quote from Art De Vany..

"You make each choice in life based on your understanding of the possibility that it will take you where you want to be. But you don’t determine the outcome, only the probabilities. Each path leads to more choices: a cascade to echo all the other cascades that rule our lives. Choosing the path is the extent of your control–beyond that, it’s out of your hands. You choose, and then life rolls the dice."

"There is no failure, only feedback."

So you make a decision ..To participate or not . To be available or not..
You get feedback .. No "real' Mistakes ( failure ).. But then what do you do ?

What you do Then is key and determines whether there is a mistake

IE We can make Mistakes if we choose too..



Motorway

 

[ColB]

I make mistakes all the time.
Mine are incorrect---or more to the point less than optimum stop placements both initial and trailing.
One last night cost me dearly---French and English announced Possible bombing of Libya.
I was blissfully long with a wide stop in good profit I got hit in a 2 minute flurry.

Dumb and expensive.

But you made it all back on PEN today Tech?

 

[tech/a]

A bit---not all.

 

[Bolton]

The person who has never made a mistake has never made anything.
Kerry Packer once told an inquirer that the secret of his success was the frequency of his mistakes and the knowledge gained from them.
Emotion brings the greatest mistakes in this game. Hard to accept....even harder to overcome.

 

[LiL_JaSoN]

... learn from your mistakes.

 

[Wysiwyg]

Quote from Art De Vany..

"You make each choice in life based on your understanding of the possibility that it will take you where you want to be. But you don’t determine the outcome, only the probabilities. Each path leads to more choices: a cascade to echo all the other cascades that rule our lives. Choosing the path is the extent of your control–beyond that, it’s out of your hands. You choose, and then life rolls the dice."

"There is no failure, only feedback."
Motorway

Only the probabilities, more or less.