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Loss Aversion
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Loss Aversion

by The MoleDecember 28, 2015

The tendency to treat money that has already been committed or spent as more valuable than money that may be spent or acquired.

Imagine two traders trading the very same stock. One one side we have Mr. Toro who buys 1000 shares of Evil Corp. (ELVC) and on the other side there’s Mr. Grizzle who decides to go short 1000 shares (perhaps he sells it to him). A week later the owner of the company (let’s call him Mole) has a few drinks to many, tweets something politically incorrect, and as a result EVLC drops 10 handles overnight. Which means Mr. Toro just lost $5000 in the process while Mr. Grizzle earned $5000. So all things being equal one would assume that Mr. Toro would kick himself about as much as Mr. Grizzle would laugh all the way to the bank, right?

Actually, it doesn’t quite work out like that, thanks to a phenomenon known as loss aversion. First discovered by Daniel Kahneman and his associates, loss aversion is the human tendency to strongly prefer avoiding a loss to receiving a gain. This particular cognitive bias consistently explains why so many of us make the same irrational decisions over and over, in the process of trading the markets and elsewhere.

Loss aversion explains why despite deciding you’ll hate a movie ten minutes in, you’ll stick it out for the whole two hours in misery. You’ve already paid for the ticket, so you don’t want to waste money by not seeing the movie. But you won’t get that money back if you stay, so why do you feel like you have to? The reason we’re inclined to throw good money after bad (which economists call the sunk cost fallacy) is a perfect example of loss aversion in action. If we’ve spent resources on something—whether it’s as small as a ticket to a bad movie or as large as the billions of dollars spent in a war or social program that’s not working out—we’re inclined to stay the course so as not to waste what we’ve already spent. In other words, we want to avoid feeling the loss of what’s been spent, so we stick with our plan, hoping for a gain, even when sometimes that just leads to a bigger loss in the long run.

Why are we so averse to loss? Like many cognitive biases, it conferred a big evolutionary advantage. All organisms survive by maximizing opportunities and minimizing threats. Because a loss of precious resources reads as a threat to our very survival, we’re hardwired to try to hold on to what we have. In the terms of natural selection, it makes sense to try to avoid loss at all costs. But, of course, our ancestors didn’t have to contend with the many complicated economic problems we find ourselves with now, which is why the loss aversion that helped us in the past often hurts us today.


About The Author
The Mole
Mole created Evil Speculator amidst the chaos of the financial crisis in early August of 2008. His vision for Evil Speculator is a refuge of reason, hands-on trading knowledge, and inspiration for traders of all ages and stripes. You can follow him and his nefarious schemes at various social media waterholes below.
  • Scott Phillips

    Superb point – that loss aversion brings an evolutionary advantage.

    Similarly pattern matching brought an evolutionary advantage in searching for food and shelter, which is exactly why we think we see edges in most indicators which objectively do not exist.

  • http://evilspeculator.com Sir Mole III

    I’m putting this one up as I needed more than one examples. These posts have a special category which feeds into random quotes in the ‘cognitive bias carousel’ to your left and thus serve as constant reminders of our human cognitive fallacy. There are actually dozens of those CBs and I plan to put up a post each over the coming weeks. If you want a whack at one have at it. The format is basically a short summary followed by a description.

  • Round we go

    Yah I went against the rules and held past my stop, and I rationalized it with what I perceive to be manipulation that will get resolved. and I gambled. will see if I come out ok or take a bigger loss. either way I got sloppy and must be punished. no trading for the rest of year :) actually I need to stop trading intraday. I was messing around and gambling and justified it cus I am in vacation mode. I need to stick with my intermediate term trading. I blew pretty much all the intraday trade I made here. ha ha

  • http://evilspeculator.com Sir Mole III

    hehehe

  • Round we go

    awsome post mole. you have great insight in the market and in rat brain. you should have 100X the subs, if you can communicate what you know in consumable bites for us rat brains. thanks.

  • Billabong

    Your point is well taken and it’s the same problem in daily life. Another example is losing a ticket to something and having to pay the same price to replace it … most people won’t because they see it as a loss of 2X instead of the enjoyment of attending the event.

  • Kevin Mcdonald

    Anyone notice the CPCE reading today??

    http://stockcharts.com/h-sc/ui?s=%24cpce

    What the heck is that all about

  • Round we go

    I lost two burningman tickets and payed for another set, I think it was over four hundred bucks for the set. I also have no problem with walking out of a movie. but man taking a loss on trade is not so easy it seams :)

  • Round we go

    actually upon further investigation. pain of loss is not my main problem. I am like a honey badger and have high tolerance for pain. my problem is in my bias towards calling bullshit. I love to call bullshit even if I get hurt in the process. will need to investigate this bias and see how I can be more objective.

  • kudra

    A great post and sums up my problem in a nutshell. Loss aversion is at the crux of my ineptitude as a trader.

  • Kishore Kumar

    You don’t have an exclusive monopoly!

  • BKXtoZERO

    interesting…. maybe big guys in the know buying puts ahead of dumpola

  • BKXtoZERO

    Would you risk 165K to make 15K? Talk about bad risk reward decisions! “The high-roller at the Flamingo is back. He’s risking $165,000 to win $15,000 on the Seahawks beating the Rams straight-up.” http://www.cbssports.com/nfl/eye-on-football/25429380/man-loses-over-150k-after-betting-on-the-seahawks-to-beat-the-rams?FTAG=YHF7e3228e

  • Scott Phillips

    If we examine this closely it has two parts.

    Part 1) is the little burst of chemical satisfaction we get from being right. There are obvious evolutionary reasons for this, as a survival trait we bred for problem solving and selected for intelligence. There are no evolutionary cues for making money (it didn’t even exist way back when) so given the choice between being right and making money, most of us will choose being right because it just plain feels better.

    Part 2) Confirmation bias. It is extremely painful, emotionally, to have to revise your opinion, admit you were wrong, and do the opposite. To avoid the emotional pain of our bad trades we are skilled in interpreting every bit of new information through a lens that does not make us reasses our preexisting view. Gold bugs think every fresh low is a great buying opportunity. The morons at the slope are ready because “this time it’s different”.

    The takeaway from all this is that since most people lose, even though by and large they buy and sell the same stocks, it must be our THINKING that fucks us.

    Our pre-industrial society hunter gatherer DNA is extremely efficient at some things, but making investment decisions is not one of them. Under pressure, the amygdala/ limbic system gets involved and buying or selling a stock feels like a life and death battle with a sabre-tooth tiger.

    Human DNA is terrible at doing on-the-fly mathmatics. This is why lotteries are so popular, and casinos, it is nothing but an evolutionary quirk. Similar quirks, many of them, are standing in the way of your trading success.

    As Mole has correctly said many times, if you want to win, you must first identify, then correct these flaws in your brain software

  • Scott Phillips

    One question. You can exit the trade at any time. Why are you so “stuck”? You could exit right this minute.

  • TheRooster

    The point about these cognitive biases is that we all have them to some extent as they are evolutionary – I think the key is to find ways to independently observe when this is impacting your thinking/ actions and attempt corrective action. At least that is what I try to do.

  • http://www.ProfitFromPatterns.com/ Ivan K

    TR – From my side, without any shadow of a doubt, the greatest ‘thing’ to impact upon thinking / actions (ie to deviate from a robust, valid RBT) is … an attachment to the outcome … thereby placing disproportionate significance on the outcome of one of the next XYZ in our Journey.

    Whenever a student comments to me about being in a draw … my simple reply is … “Look at your Equity Curve … over the larger picture” … “when has the EqC of your RBT failed to make a new High Water Mark after a drawdown?”

    EDIT: My second response is to ask where is their EqC in relation to their pre-planned level for taking some action … such as decreasing size, the Equity Filter kicking in, tinkering with the RBT … etc.

  • CandleStickEmUpper

    Sold my NQ long from yesterday at 4644, for 54 points (entry was 4590, posted in previous post)

  • tradingmom

    thoughts on the unusual double gap?

  • CandleStickEmUpper

    I think both will be filled. I’m leaning short, but need to see how price plays out

  • http://evilspeculator.com Sir Mole III

    I feel a bit under the weather today plus I’m exhausted having worked on this site for the last week. Taking the day off…

  • ridingwaves

    still light volume, holiday week with the Junior traders gaming the show…
    vix is still elevated for this move….end of the year shenanigans

  • CandleStickEmUpper

    Yea relax before you start writing spaghetti code

  • Round we go

    actually I do not have any problem admitting that I am wrong. I am an open book, if you have not noticed :) The issue is that I am a bit of a whistle blower and it gets me into trouble going against those I believe to be lying. Did you watch “the big short”. those guys were not afraid to be wrong, they just could not justify to themselves to see the other way. nature creates whistle blowers for a reason. whistle blowers take the hit for the good of all, not cus they decide to, it is who they are. knowing that the question is how to best form your battle knowing the odds are against you. but just to pick the other side to make money is impossible for a true whistle blower. I am only partly a whistle blower so it seams I have more flexibility. anyhow I did stop out at 4650 on sqqq and my holiday gambling is over, I will stick to the timeframe that is more in line with my nature. it’s pretty retarded of me to know that the double bottom an rip on thin holiday trading was the highest probability, but I could not stick with it to make money. Funny, I know the turns in the road but wont take them. as I said scott, making money is not my true intent. you probably will not understand that until you have a mid-life crisis :)

  • Round we go

    you took my money, you evil bastard :)

  • Huey

    Ha!! Guy’s an idiot, first mistake is placing a bet at the Flamingo sports book, that place is terrible.

  • Round we go

    the mistake I made was in shorting nasdaq in the shorterm when it is still in a bull market, to call bull shit on it. I should only be taking shorterm bets on markets that are already bear market, as an absolute rule.

  • Round we go

    longterm bears talking about the usual gloom and doom but also in there talks about their draw downs.

    https://www.youtube.com/watch?v=9J3xqA2AxK0

  • Round we go

    will be looking to short nasdaq at 4700 longterm PSQ if it gets there.

  • ridingwaves

    just went short Spx here, could be early as 2080 has some resistance, it has dip after hitting that level last 2x

  • Round we go

    good looking out. I also notice that natgas lead this rally and has slowed today after yesterdays pop. so riding do you post your trades?

  • BobbyLow

    Hey RWG, I remember “Calling Bullshit” on the Markets all the time. But then I realized that calling bullshit on the markets is like calling the air we breathe a necessity of life. The truth is self evident.

    After shorting the building boom in 2006 and 2007, I eventually found that I was absolutely correct on how things would turn out. However, I lost my ass because I was waaaaay too early. In 2006 and 2007, there was no substantial “technical” evidence that the building sector was breaking down but I wanted to be right. I allowed common sense and logic to rule but found out too late that common sense and conventional logic does not apply to the markets. I was gallant back then and said I KNOW this can’t end well so I’m going to fight you bastards. Well the markets didn’t give a rats ass what I believed and kicked my ass. I actually had a great year in 2008 but all that did was make up for prior losses. It’s called “spinning my wheels.”

    I eventually changed my belief system to where it makes more sense for me to ride along with the Flow of Bullshit then fight it because when I go against Market Bullshit it gets all over me, stinks, and is not a pretty sight.

    The bottom line for me is that I would be a liar if I said that I get no personal satisfaction from winning trades. However, I try very hard to obtain the bulk of my satisfaction from trading my system correctly. By putting trading correctly in the forefront, my battles are with myself and I have a clear shot at who my enemy is. :)

  • BKXtoZERO

    So the old gap that commodity ETF players deal with strikes again. DGAZ was a 2$ gap down from my entry at 14.7. My stops are intra-day only when I enter. After a gap then I have to decide what to do. I have seen much discussion against “building positions” or adding to positions, or “averaging”. In the past that is how I have played these. I have used smaller positions and “1/2” positions. Today I put on the other 1/2 in DGAZ at 12.5, first was 14.7. I was right about UGAZ hitting my 1.9 buy target but for the wrong reasons which was a shame as it worked. I would be dumping that between here and 2.5 nat gas.

  • ridingwaves

    http://s28.postimg.org/fitntepd9/spx_daily_12_29_15.png

    sometimes but I play in equity symbols more so…the S risk reward is good here with stop at 2082, spx daily chart, apologize for crudeness..lots of things going on..

  • Round we go

    Awsome share bobby, yah no one knows how long the veils can be held up, I need to stick with my original position to follow markets that have already turned to the direction that is in line with my views. I am not a trader. I have said in the past my real intent is to hedge my townhouse that is paid off and I do not want to sell.

  • Round we go

    look at the divergence in rut and nasdaq

  • BKXtoZERO

    I like that…. like calling air we breathe bullshit. That was me too.

  • Round we go

    what the f, check out the 30yr

  • Round we go

    close enough, taking psq here.

  • Darkthirty

    Tune out the noise and work your system

  • ridingwaves

    rubber meets the road right here…which way will it be…

  • BKXtoZERO

    I should basically write rules to what I have been doing manually.

  • Scott Phillips

    Darkthirty is right. Fundamentally you are completely focused on this specific trade.

    Philosophically, this trade is irrelevant. If you make a heap on this trade, you will certainly give it all back and more if you trade poorly in the future. You are still thinking that good trading is making money, which is an unfortunate side effect of your good fortune in these early stages. You have convinced yourself that there are good reasons you are doing about 10x as well as most trained professionals.

    It is critical that you remove your focus from the specific trade you are in now (what your head tells you is most important) and put it on the long term edge of your trading.

    Do you even have an edge? Is your edge “I look at charts and see what I like”

    Almost certainly there are good aspects to what you are doing now. Build on those. Systematise them. Systematise the exits. Exclude the stuff that isn’t your “best work”.

    Lots of work for you to do. And trading, really just stands in the way of you doing that work.

  • Scott Phillips

    Bears had a good looking short opportunity and fucked it up. Simple as that, now they pay the price. No more shorting for at least another two days IMO

  • Scott Phillips

    Ed is fond of saying that “we all get what we want out of the markets”

    Be EXTREMELY wary of approaching the markets with any motivation other than wealth creation.

  • Scott Phillips

    Great comment :)

  • Scott Phillips

    I am the same. Left to my own devices and my own thinking those biases come back within a week.

    A guy like Buffet is wired differently to see a downturn in a share as “the share being on sale”, I’m not like that.

    The only solution for me has been imposing a strict series of rules around my process and thinking, to keep me in a box of relatively good trading. I give myself the freedom to bend the box a little bit, but not enough to make much difference

  • kudra

    Thnx for your opinion. What is the opinion based on? price movement over the past two days? It did look like the bears would take it prior to 11 AM EST yesterday, but the down move got reversed. unfortunately, i’ve been shorting the SPY since last tuesday. Will close it in next two days.

  • Scott Phillips

    “Once I see a gap I have to decide what to do” is a major mistake.

    How about “once I see a gap I respond in the same way every time”. You aren’t going to get it right every time, but what you save in emotional trauma by having a process to go it is very helpful

  • Scott Phillips

    See how your continuing to trade is becoming the biggest impediment to you moving to the next level?

    If you can’t stop it, it has the character of addiction, and that rarely ends well.

  • Scott Phillips

    Looked like the bears had a decent opportunity. Day before yesterday was a hammer candle (failed attempt to drive the market down). Indicating the possibility that if the high was breached shorts would be forced to cover.

    Shorts WERE forced to cover, driving the market higher. The overwhelming probability is now for an attempt at the old highs, success or failure unknown. You should be well out of that trade at the earliest opportunity.

  • Scott Phillips

    Maybe the crowd at extremes is always wrong, and rushing to buy puts is a sign they are about to get clown raped

  • BKXtoZERO

    Hey Scott, My biggest room to improve is the “be right and sit tight” part of Livermore’s quote.
    What hinders me from achieving that is perhaps a larger accepted position size. So far this site has me taking far smaller positions which is good. The suggested 1-2% will not do much for me as I don’t trade futures. I’ve have been breaking my account into smaller positions of between 10-20% max. I will cut that down more and when right let things go without fear. It was a bit of a rub to have seen energy bottoming and been in both UWTI and UGAZ only to cut both early (one paid for the other) only to see energy as the centerpiece of the year end rally. No BFD but small rub…. (not you either, ME) This site taught me that trade management is more important than entry. That has helped a lot. I often see things and get in but don’t let them run.

    Also, No love of this symbol whatsoever other than it is a mover. Same with Oil. I have no bias whatsoever I just like the way they move as tools both ways. No major regret selling. My account was near all time highs and that is what I focus on. Metals and I have a bias which I largely overcame. Stocks and I am more biased so stocks are harder for me. I only like some symbols strictly because I don’t care about them at all and they move and that is all I want.

  • BKXtoZERO

    I am 50% cash. Year end looks like a kid in a candy store to me so hard to resist. I have reduced trading anyway. Difference now is that when I don’t see anything I like I will certainly stop and do nothing. Years prior I forced things when there was nothing there. Credit for high cash levels?

  • Round we go

    what i want is for you and I to high five each other as this craps table explodes in cheer. if go as planned you;ll get your subrate increase you been wanting. like mole says September you get your raise and i get to high five you. or i loose half my hedge. i prefer to high five you :)

  • Round we go

    he is playing a range, rather than just trend following. is that so wrong? it is a range bound market with downward bias no?

  • Round we go

    context

  • Scott Phillips

    I didn’t even look at the chart, so I wouldn’t know.

    What I am commenting on is he has NO PLAN for what to do when there is an opening gap. His plan is literally to “decide what to do”

    Obviously an opening gap happens a LOT with those ETF’s. Also, obviously, once in a trade you turn into a moron (we all do). The only thing you can control is having a plan.

  • Scott Phillips

    This does not end well :) Objectively you are trading badly right now

  • Scott Phillips

    Livermore was talking about something entirely different, he is talking about riding a bull market until signs that bull market is over, and selling out to suckers before the shit hits the fan.

    You aren’t doing that here. You WON’T be right that much, also.

    Don’t forget what Livermore did, method wise, was radically different to what will work today. He didn’t use charts (it was before that) and the only way to see how a stock behaved was to sell a block of it to see how quickly it got snapped up. He was essentially involved in market manipulation on an epic scale, and was extraordinarily good at it. You can take a LOT from his psychological lessons, but his actual trading methods are long defunct (and would be mostly illegal now)

    Also I think you misunderstand position sizing. When we say RISK 1% of account, we mean that when your trade loses, hits your stop loss, it should cost you roughly 1% of your account balance. Depending on the cost of the stock this could be 50% or MORE of your account balance.

    It is highly likely your position sizing is all fucked up, and you need urgently to understand how to do it right.

    Again, you don’t understand the basics of what you are doing, and you are making big moves. This does not end well for anyone, anywhere :-)

    Stop. Build a system. Practice trading. Do it for real for small size. Evaluate and iterate.

  • BKXtoZERO

    This is unreal but I calculated what my basic stop pain tolerance on trades has been and it is frigging exactly 1-2% of my account. I knew what you guys meant but I admit to not thinking in those terms most of the time. This is stops within my control which is 90% of the time or better. There is the monster gap that would take more but no one trade will EVER come close to damaging me ever again.
    So it turns out my position sizing is actually pretty good but I was just doing what felt right to me all along.

    Can you please tell me what you see as my 3 most destructive behaviors? My guesses are trading for turns is #1 (DGAZ was not my typical style) I am not “fixated” with that. I have 2 trades on Nat Gas in my life. All posted here. and………….. Thank you :-)

  • BKXtoZERO

    I may very well take some of the simple systems you have mentioned like hammers, tops,bottoms of ranges etc. These are all things that don’t come up every day and require watching which is fine for me. I don’t trade every day nor do I want to. Thanks!

  • BKXtoZERO

    Isn’t it OK to evaluate at that point? It may well be an exhaustion gap, it may reverse that day, it may be a smaller gap compared to others in the trend on declining momentum. Having a blanket sell it now seems harmful to me. In some cases yes. It may smell of break away and momo volume. I like the ability for some judgement. Perhaps a sell half then evaluate rule? This is 3rd reply in one day so I do SINCERELY appreciate your time and feedback. Thanks!

  • http://www.ProfitFromPatterns.com/ Ivan K

    KM – does it matter about the ‘heck is that all about’ … rather what does your RBT dictate YOU should DO with said ‘reading’ !

  • TheRooster

    mate, where is your stop? what timeframe did you enter on?

  • TheRooster

    Sure, i wouldnt disagree at all. Personally, position sizing is still a ‘thing’ for me and it is surely connected to fear of a larger drawdown

    visualisation has been helpful in my case but will always take suggestions from the floor…..

  • http://www.ProfitFromPatterns.com/ Ivan K

    BKX – does your comment reflect yourself-involved bias … or is it a heads up for your researched RBT .. ie a setup awaiting … many of my setups require BOTH a setup AND a chart configuration … aka one of my 5 timing tools BEFORE engaging in active risk-taking.

  • http://www.ProfitFromPatterns.com/ Ivan K

    TR – position sizing a la R factor is best served plain vanilla … ie the same R value for all engagements.

  • TheRooster

    For sure. I have had trouble increasing size in the past as i have been running small and trying to get larger. As it happens I am in DD at the moment so it has helped me but that wont always be the case

  • Billabong

    Lots of good “nuggets” on the discussions below….

  • http://www.ProfitFromPatterns.com/ Ivan K

    TR – Increasing or decreasing size is simply a function of a bias skewing the same setup / event … whilst it may be arguably true that some setups have a greater probability of outcome … as I stress with my students … back apps / tests have a very small bearing on future outcomes … and hence comments such as a 40% probability of a XYZ win has little connection with a future outcome.

  • Round we go

    your super smart and disciplined, but you may want to work on your perception skills through openness. let me catch you up on this story line.

    BKKtozero is playing natgas. He caught the pop at the breakout from the bottom that Ridingwaves called out, and now he is play the top by holding the long and adding the short. Remember you and I was scoffing at Riding for knife catching. I threw up a finviz chart of spot natgas. you seams to view finviz as not accurate and also assumed that the finviz was futures prices but on that chart finviz is tracking spot price. instead of starting an argument. I try to be sly by putting up a spot chart with traders markings and ask with humility why does finviz chart match spot price and if trader use spot price vs future contract price. by the way the chart was from boone pickins. I was hoping you would catch these cues and realize something you did not see earlier. truth is you can not force people to see things they are unwilling to see, if they are ready to see something they only need pointers. trying to ram something down someones throat can lead to a defensive reaction that pushes them away from the point you want to make to help them.

    There is an awful lot you can teach retards at trading. The question is have you considered what retards can teach you to improve yourself in life.

  • http://evilspeculator.com Sir Mole III

    Hey guys – I’m still laboring on the site and will be pretty quiet here until next week. I hope everyone is doing well!

  • ridingwaves

    remember the guy whom started gofundme over 100K loss shorting a biotech stock…
    He was right after all as company just went BK he was shorting, if the rich biotech idiot now in custody didn’t make bid for that company KBIO they would have filed bk when he was short….Moral of the story, you can be right in this game and still be the sucker at the table….

  • Round we go

    yes a lesson to be learned but also note if he was not greedy and did not use margin. he could have held it and won.

  • ridingwaves

    Maybe a new saying for the blog, Greed makes you a sucker on wall street

  • Round we go

    greed makes you a sucker in life :)

  • ridingwaves

    that is much better, so true…

  • ridingwaves

    I have an inkling the first 2 weeks of the year will be bear time…nothing written in stone but this move north on vapor holiday volume is starting to stink internally…going to add shorts with tight frog ass stops….the other side of story is first of the year ETF and fund re-balancing that could push it higher…..of course inklings are fodder for the street or a name for baby squid

  • BKXtoZERO

    up 1$ on DGAZ, (avg. 13.50 on 14.75, 12.5 entries) put on trailing stop 1$ down (break even) see if she’s not back at 30 in a week

  • BKXtoZERO

    I sold the long early and took a loss. I have no problems with someone trying to share knowledge and enforce discipline.

  • BKXtoZERO

    neither. I don’t use put/call to judge tops in SPY but I do factor in high readings during sell offs. It just had me scratching my head is all.

  • OzarkHillBilly

    Doing great, boss. Not much to say about the holiday action anyway.

  • http://evilspeculator.com Sir Mole III

    Did you read ‘The Big Short’? If not I strongly recommend it.

  • Scott Phillips

    He was definitely the sucker at the table, he got what he deserved

  • Round we go

    went surfing this morning at PV cove. nice 3-4ft surf with nice easy corners, no wind, sunny and a few hot chicks on long boards. life is great :) you ever want to come down and surf it let me know.

  • http://greenlander1.blogspot.com/ Greenlander

    Is this Haggertys? I used to surf a lot but havent gone in ages.

  • http://evilspeculator.com Sir Mole III

    Hey guys – as you can see I’m still working on the site. Plenty of content left to add. Coming along well, though.

  • http://evilspeculator.com Sir Mole III

    Is that Palos Verdes? Looks very familiar…

  • Scott Phillips

    The problem is that at the point you are in a trade, your evaluation is retarded. A process I call the “dumbening” happens, where you look and relook at the charts and decide to stick with your original trade.

    Don’t take my word for it – let’s objectively evaluate your past record. I’m willing to bet that 10 times out of 10 you evaluated carefully once your trade went past your stop and decided to stick with it.

    In the real world YES a gap may reverse that day or exhaust, but those are not things you can control. They are also minority probabilities.

    Also, if you are trading commodity ETF’s a gap in them most times isn’t a gap at all. A gap caused by the difference in trading hours between GC on the CME and GLD on NYSE is not a gap, just an anomaly of ETF bullshit. Those are never exhaustion gaps.

    All I’m hearing is the truth which is “so it’s hit my stop but I don’t want to exit the trade, because what if it reverses”. This is day 1 trading skill. When it hits your stop you are OUT, no matter what. If you don’t like where your stop is, place it somewhere else, but when it hits it – GTFO.

    There are two options for you which may suit better

    1) Run your stops on the equivalent on the real futures contract. When it hits that level on GC, get out of GLD, gap or no gap.

    2) Run your stops on a closing basis. If it gaps past your stop intraday, exit on close if it is still past it.

  • http://greenlander1.blogspot.com/ Greenlander

    I just went short today also SPY, stop 208 target to sell 50% at 200 or a buy signal on hrly – whatever comes sooner. If I get stopped out and I get another sell signal on the hrly I’ll step back in assuming we don’t clear 210

  • Round we go

    it just south of Haggertys. see the long walk way down the northside, that how you get down.

    http://www.surfline.com/surf-report/pv-cove-southern-california_4936/satellite-view/

  • Round we go

    yup. little heaven just south of LA.

  • http://greenlander1.blogspot.com/ Greenlander

    Looks nice. How are crowds there vs Haggertys? I used to go to Zeroes a lot up north

  • http://evilspeculator.com Sir Mole III

    Been there many times. Is Trump’s golf club still up there?

  • BKXtoZERO

    The site feels super natural to me already and looks good too so great job and Thanks for all you do! It’s been a good year.

  • http://greenlander1.blogspot.com/ Greenlander

    Thanks Mole. This is the best site I have seen for trading psychology and method. Much appreciated

  • Round we go

    it does not get that bad even on weekends, the long walk down keeps many away and not many people know about this spot. the crowd is chill. old dudes are funny and the chicks are hot.

  • http://greenlander1.blogspot.com/ Greenlander

    Nice. I might have to hit this! Long walk is all good to thin out crowds.

  • Scott Phillips

    We covered this at length. The finviz charts are completely wrong. Period. End of story. Black and white. If you didn’t or couldn’t understand it at the time just don’t trade ETF’s.

    I’m here to teach people good trading, and save them, if possible, the many mistakes that I payed in blood for. I’m not here to catch bottoms or tops or crow about it when I do, because that is not good trading. I’m not personally right all that much, only 50% of the time, so objectively crowing when I’m right is stupid because I’m wrong about half the time.

    Let that sink in. Mole and myself are wrong mostly about half the time. Mole is wrong a little more on Scalpius and a little less on his discretionary trades, but not that much. Being right is completely irrelevant to long term trading success.

    I’m happy that BKX got a bounce, but buying something in free fall is bad trading. Over time that will send you broke. Getting it right in this instance does not invalidate this. I’ve been around a long time, and so has Mole. Name ONE of the hundreds of top/bottom callers that are still here? They ALL go the way of Skynard, broke in the end.

    Also I’d point out that NONE of the people who “caught the bounce” in NG actually trade NG. They trade ETF’s of NG which is NOT the same thing, and still affected strongly by the negative term structure. The bounce in UNG is not the same as the bounce in the spot price of NG.

    It is impossible to trade the spot price of NG, you simply CANNOT do it without owning a giant tank, boats and storage facility. All you can do is trade the front month futures contract, paying the piper in terms of contango. This is extremely costly.

  • Round we go

    yah, the gold coarse is about 3miles south of this area. I think of it as las vegas build quality. I love the landscape of PV. I am not a fan of the gold course nor the housing development on it.

  • Scott Phillips

    Those patterns don’t work on stocks except on a weekly basis, because of the overly gappy nature of stocks.

    If you need any help let me know :)

  • Scott Phillips

    Fantastic to your position sizing, and no doubt it accounts for your “beginners luck”.

    3 most destructive behaviours

    1) Trading without a system – especially for exits
    2) Trying to be right – win rate is the least important part of trading success
    3) Not keeping good enough records.

    Fix all 3 and you are 80% of the way there

  • Scott Phillips

    That was good trading, because you bought on incorrect information. That was actually one of your best trading decisions to date.

    Not every win is good trading and not every loss is bad trading. For you to stay around you have to reframe your idea of a win from “I want to make money” to “I want to trade like a professional”

    Professionals last and amateurs blow out eventually. There is an extremely clear distinction. Which side are YOU on?

  • Round we go

    my intent of the above message and most of my posts to is not really about trading scott. I have nothing to teach you in regard to trading. the message is for your heart. humans have three ways of understanding mind, heart and gut. You seams to focus on understanding from mind and I think you get the issue of knowing something in your gut. so I am trying to have you see if your understand of something from your heart is missing or not.

  • http://greenlander1.blogspot.com/ Greenlander

    “I’m here to teach people good trading, and save them, if possible, the many mistakes that I payed in blood for.” Scott, you def have saved me money. The big thing this yr was making more thorough audits of previous trades and keeping a log.

  • Scott Phillips

    “making more thorough audits of previous trades and keeping a log” – the BIGGEST indicator of trading success. If I see a trader’s logs I can basically guess whether he will survive or not.

  • ridingwaves

    unless you go to Trestles….no thinning and a lot longer walk….

  • ridingwaves

    If I come down I might but will have to borrow board from friends down there…

    I’m riding a 7’10” Pierson Arrow right now for OB waves….speed to burn and you need it there..

    example

    https://www.youtube.com/watch?v=atqjHX9bs0U

  • BobbyLow

    “There are two options for you which may suit better

    1) Run your stops on the equivalent on the real futures contract. When it hits that level on GC, get out of GLD, gap or no gap.

    2) Run your stops on a closing basis. If it gaps past your stop intraday, exit on close if it is still past it.”

    FWIW, this is pretty much what I do. I Run my ETF Stops based on the Price of Futures Contracts. Gaps are part of the game with ETF’s and I do not exit an ETF on a stop unless and until price is past my stop at the close. The only exception to not waiting for the close is if price is a runaway freight train. (There’s a diiference between an overnight gap and a gap that keeps on going after the NYSE open.) This takes most if not all of my thinking out of the equation. I use a function of ATR for my Intial Stops and subsequent Stop Adjustments when price moves in my favor.

  • http://greenlander1.blogspot.com/ Greenlander

    Yeh man I totally can see it now. I was totally fcked and didn’t even know it before I did it. It was like I had been missing an arm for years and always thought it was there.

  • Round we go

    that’s rippin. When I lived in SF I used to drive to santa cruz to surf Steamers mostly. I also used to surf Linmar in pacifica. Ocean Beach always looked blown out or too ruff, I never surfed it even tho it was closer.

    I have a 9′ board that I can patch up for you to use.

    http://www.surfline.com/surf-report/pacifica-lindamar-northern-california_5013/

  • Scott Phillips

    I am extremely harsh on bad trading here, this is on purpose. I have no time for bad trading here, and I will call it out every time. IMO this is one of the reasons why we continually produce professional level traders here, because we have a culture of trading properly.

    Look at the slope for example. There are 1000 comments a day, and maybe 5 of them are from the handful of guys who know what they are doing. Everyone seems to think that everyone’s opinion is valid. It’s not, trading doesn’t work like that.

    We are doing something here which is extremely difficult. Becoming a professional trader is roughly like becoming a professional athlete, many like the idea of it, but the reality doesn’t work for them.

    I’m not here to be nice or make friends. I’m here to give you the best odds of surviving as a trader that I can.

  • ridingwaves

    So far it’s the most powerful beach break I’ve ever surfed….hollow and mean over 6 ft….the rip tides can pull you out a 1/4 mile in a second…and your pretty much shark bait at that point….it can be perfect at 15ft but the paddle will kill ya….literally…

  • kudra

    EOY selloff? selling accelerating here in last 10 mins.

  • Scott Phillips

    Me too mate, me too. For example one of the exits on my system is 3 consecutive closes outside the bollinger and I exit (in profit). Objectively this has not been a good exit. If I didn’t do regular reviews I wouldn’t have noticed. Also I used to use an expanded definition of shooting stars/hammers. In good times it works great but in drawdown periods it sucked. Overall it was a wash, so I took it out. There is always incremental iterative improvement to be made, and so much more satisfying than “making a call”

  • Scott Phillips

    Perfect thinking Bobby. This is what I would do also

  • Round we go

    i dont post on slope as it is zoo as you say. I like this craps table cus it is more intimate. I like that you are a drill sargent for us rat brains. I just think you may enjoy life better if you open your heart and your lady or boy friend (I actually dont know how you orient) would benefit too. I may be totally of base here but what I trying to communicate to you is something that may benefit your quality of life and connecting with others.

    I used to spend 10K a month parting in the sodom and gamoura world of hollywood and SF and feeding my ego in video game industry then as a designer. but after I got what I thought I wanted, I was still empty as my understand of life from the heart level was ignored with success in career and lustful relationships. Then I crashed and went on the road in a minivan I converted for a year traveling to national parks and studying Zen Buddhism. We all have our path.

  • Round we go

    livin on the edge. got to love it.

  • ridingwaves

    I agree, with that strategy you could trade while working 9-5..thru your smart phone for low profile sake…

  • ridingwaves

    more like
    everyone dies but not everyone lives…

    everyone has hobbies here and my inkling is they are probably much more dangerous than mine….surfing is like trading in some ways…

    I know my limit, only taking on bigger waves by practicing in smaller waves, building endurance for the hold downs, studying the sea whatever the means, relying on instinct – weary of fear but if odds are good, taking the drop believing in yourself/your strategy and being rewarded with a nice long wall or a glassy point break with hollow sections…

    Happy New Years to all

  • CandleStickEmUpper

    Interesting market shenanigans today. Scalped about 8 NQ points but not holding anything overnight in this holiday tape bang

  • Round we go

    awsome share. yah I see lot of links between surfing and trading as well.

    when I first learned to surf I used to go to Linmar in winter when it got big and get pounded, cus I did not know any better. but on occasion by god givin luck I would nail it and rip on waves I had no business riding. but would i do it different, knowing what i do now? hell no, I need these lessons thats why they show up in my life, i need to go through them. to get the lesson on gut level not just the brain :)

  • Round we go

    your making money on a bad trade. stop it right now :)

  • ridingwaves

    being humbled pushes respect thru the door…

  • http://evilspeculator.com Sir Mole III

    Well done!

  • http://evilspeculator.com Sir Mole III

    Thanks!

  • Scott Phillips

    Bad trading is bad trading mate. You guys want to put all kinds of complicated analogies and philosophies over the top of it.

    Trade with an edge, and trade that edge well, you WILL make money. Here at evilspeculator we cover extensively what trading “well” is. I freely admit that trading properly is not for everyone. In my posts I’m pitching towards the 2% of traders who will end up profitable. If that’s not you, feel free to ignore me and carry on as you were :)

    Skill at reading charts is way overrated as a skill.

  • BKXtoZERO

    Not a pro yet in any way shape or form but less of a chump. I just read all of your new posts and understand, just need to progress and do.

  • BKXtoZERO

    Hey Mole, One thing you SHOULD add is a donation button payable through paypal. I have seen these on other sites. I’d like to buy you dinner as a small token of my appreciation somehow and that would make it easy. Perhaps you may get a fair amount in donations as I am SURE you have many grateful followers.

  • BKXtoZERO

    I like 1 and 2 and have seen posts about this. TD Amer doesn’t have conditional orders based on another symbol at least in my retirement set up which is NOT for active traders. I will still have to do it manually.

  • BKXtoZERO

    thanks. I have seen your posts on this, guessum I shoulda listened then.

  • Scott Phillips

    Yes you have to do it manually. What you do is set an alert on your mobile phone for the futures symbol hitting a price, then hear the alarm and manually exit. Slippage shouldn’t be too bad

  • Scott Phillips

    For me, what works best is dumbing down the process until I have to really try to fuck it up.

    Like literally checklist and tickbox level of idiocy

  • Scott Phillips

    I have also had trouble increasing size in the past, and this is WAY more difficult the more discretion is involved in your system. When I traded Gabriel’s systems (rule based discretionary) increasing size made things dramatically more difficult. Now I trade Thor which is > 95% mechanical increasing size is no big deal.

    The best trader I know is Ken Long, who has > 90% profitable days, and trades .3 expectancy long term on 30 trades a day average. He sticks to $400 R values because his performance is so good at that level.

    It is PURE psychological issue, and very very difficult to overcome with discretionary trading. Don’t believe anyone who tells you it is just a matter of changing the numbers in a spreadsheet. That is certainly true for manual systems, but once a human is involved with discretion the subconscious will be doing everything to fuck with you.

    My approach for discretionary systems is to incrementally increase size each 20 trades with 1 mistake or less, and decrease size with more than one mistake. That way the reward for good trading is increased size, and size is decreased when you are trading badly. Of course “errors” are more difficult to define the more discretion is in your system.

  • BKXtoZERO

    Can I buy you lunch? If you send me a link to a near by restaurant (where are you? Thailand?) I can get a gift card for a lunch for you.

  • Round we go

    biggest take away for me was, counter party risk. how many got hit by mfglobal here.

  • TheRooster

    I am 100% rule based and still struggling…………jyst trying to go 0.1% at a time on R

  • TheRooster

    I am exactly the same – every task on a spreadsheet categorised by time and day + what other tools i need to calculate position size etc and i just tick them as i do them

    It reduces my stress level and frees up time for higher value activities such as research as i dont need to do much forethought on a daily basis

  • Scott Phillips

    You want to buy me a gift, the gift I want is for you to straighten up and build yourself a trading system :)

  • Scott Phillips

    Exactly so. This is how WINNING is done.

  • Scott Phillips

    Do you have a trading tribe group near you? There is an excellent one in Sydney and another one in Melbourne. They are extremely helpful in figuring out this stuff

  • TheRooster

    i am on gold coast so it might be less sophisticated up here – will take a look though as conversations with knowledgeable traders really helps me figure things out – its why i have started spending so much time on here……

  • Billabong

    ES is at the same point it was on 21 Oct … sideways. In fact, ES is at the same point it was 17 Nov 14 … a year of sideways travel.

  • Scott Phillips

    I’m in Brisbane for another two weeks if you want to catch up while I’m here

  • Scott Phillips

    Crazy! The obvious conclusion is that odds favor 2016 being a rip roaring year, direction unknown.

  • BobbyLow

    :) BTW, I have TD Ameritrade’s Think or Swim Platform Platform on my phone. I can do just about anything on my phone that I can do on my computer. The watchlist on my phone is also the same as it is on my computer. The only thing that sucks on my phone is charts. But if I’m going to be out, I’ll know where my stops need to be so before hand. So all I need to do is check my phone once in awhile while I’m out – especially just before the COB.

  • http://evilspeculator.com Sir Mole III

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    ((_) ) ((_)() )
    _((_)((_) _(())_)()
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    | .` || _| // /
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  • Round we go

    unknown? bofa seams to think they know.

  • BKXtoZERO

    It’s an East Coast thing…. get someone some beer, a lunch….. thanks for caring and taking time here. My bedrooms are getting closer to being done then I will have my nights and weekends back to apply myself.

  • TheRooster

    dude, you get around, it’s impossible to keep up. Think I am coming up to Brissie mid next week – are you staying near CBD?