I found this article about young hedge-fund entrepreneur Merritt Graves at Timmay's site. Written by Imogen Rose-Smith, it chronicles the development of young Mr. Graves into a full-fledged hedge-fund player. I highly recommend reading it if only for inspiration.
From the article, I was impressed with a couple things:
1) His persistence, even after losing all his own money twice as well as someone else's money on his third try.
The old adage that Quitters Never Win is so true.
2) His presence of mind after his three set-backs to step back and "...monitor the market rather than trade it, teaching himself to sense where stocks were moving by watching the tape. He read about investing and behavioral finance..."
In the same vein, I give you this from Scott Farnham's Trading Manifesto:
"I started in 2002 and watched the market, learning my craft for 2 years before I actually traded. I thought it was important to see what happened in all types of markets, up, down and sideways before I committed myself into this business."
3) "... (He)...identifed a major weakness in his trading: a tendency to double down on declining positions in an attempt to make his money back quickly and end the pain of losses."
Anyone who has been reading this blog since its inception, knows my battle with this very problem. It is a horrible habit to fall into. Like most risky/dangerous behavior, it produces enough of a thrill (or, success) that it holds onto you, or should I say, you hold onto it; despite the agony it causes you, or should I say, you cause yourself.
Good trading to you all. Battle your demons with every bit of energy within you.
Hope you have a great week. The problem with most old habits is that they sometimes payoff....
ReplyDelete...a very PG example, when I take a week off from drinking caffeine. Holy cow, that first coffee or coke back, at least for me, it's like I'm on meth for a couple hours - BIG payoff! But eventually I end up in the same space with very high tolerance, not sleeping well, and having to drink 3 of the same amount of caffeine to get 1/2 the effect. So overall, not effective way to stay alert, at least for me.
Now, doubling down probably can't be equated to an addiction, though you think it may be part of like thrill seeking so maybe there is some parallel. Sometimes it works for you and a few others use (though I think many vetern traders reject the tactic) it as part of their strategy successfully - so I can see how it would be tough to get out of it.
Is there anyway you can put a limit on the number of shares you can buy in your paper account? If you always open a position with the max shares, you will never be able to double down. May be a way to technically help you change the practice as a start.
Hey Charlie. The thrill of the kill is what kept me coming back to "adding to losers" aka doubling-down. The nice ratio of winners to losers with this method was my high...but, it is a disaster in the making. Could it be gamed in a way which would reduce the risk? I think so. I tried just as you suggested... scaling in with partial positions coupled with more patience before the initial and subsequent buy-ins and it helped. But, what finally turned me away was that it is so much more profitable to be on the other side of a trade that would require you to average down. Imagine if you were adding to a winning position in the same spots you are adding more weight to the loser trade. When the losing trade finally goes positive, it more than likely is far less profitable and it is infinitely more stressful hoping the multi-part position goes positive.
ReplyDeleteI believe it is much harder to be on the side of the trend as one has to be sharp at reading "the tape." Adding to a loser gives you a "fudge factor" where trading with the trend with a firm stop means you are taking a loss right away. Psycologically, that can be hard to take. It really comes down to "hurt me a little now or destroy me later." Psycologically, the remedy is experiencing enough winning trades that exceed the stop-losses one takes in the pursuit of that winner. My four trades today were a great example. Two stop losses before I reversed in the direction of trend and got a winner. then, another trade which put me positive over my two losses with an opportunity for a big winner (had I stayed with it).