Tharp's Thoughts Weekly Newsletter (View On-Line)
Trading and the Christmas Present Syndrome by D.R. Barton, Jr.
Important Information Regarding our Winter 2011 Workshops
Trading Tip Ready, Aim, Fire or Ready, Fire, Aim? by Ken Long
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Trading and the Christmas Present Syndrome:
"Shiny Objects" Edition
Seven years ago, I wrote an article called “Trading and Christmas Presents” that I think speaks to a key part of human nature that affects our trading and our everyday lives.
Since then, I have taught this basic concept in dozens of seminars and have dubbed it “The Christmas Present Syndrome.”
Because the subject is seasonally relevant and universally applicable, I’m going to share a large portion of the insights from my original article. Then I'll add some relevant thoughts on traders’ universal obsession and distraction with the latest “shiny objects.” I hope you find these observations useful!
Excerpts from the Original Trading and Christmas Presents Article
I learned some valuable lessons all over again this Christmas season. And whether you celebrate Jesus’ birthday with vigor (like the Barton family) or follow some other tradition during this season, you’ll be familiar with the psychology of gift getting.
During the Christmas message at our church, Pastor Bo (his real name) truly uncovered the mystery of gift getting for me. And almost simultaneously, his insights revealed the essence of one of the biggest trading problems that I believe traders face. But more on that later; for now, let’s focus on the gifts.
Everyone loves getting presents. (Sure, we all know some old curmudgeon who has become a jaded gift-getter—Dickens didn’t invent Scrooge out of thin air.) But deep down there’s a part of us that is still a little kid just drooling about getting a gift. Pastor Bo (I’m serious. That’s his real name.) unlocked the secret to the delight presents give us. He said that when we get a gift—the wrapped kind—it is pregnant with possibility. It could be ANYTHING. It puts us in that greatest of all mental states: HOPE. As Samuel Johnson said in the opening quote, “We love to expect.” While that present is still mysterious and wrapped we are full of hope—the hope that it’s just what we want; the hope that it will thrill us; the hope that unexpected joy (or greatly anticipated joy) is just around the corner.
And then we open the package. The thing that only an instant ago was filled with unlimited possibility turns into a finite reality. ANYTHING becomes something. HOPE becomes certainty. Expecting becomes knowing. The finest glass slipper, the most spectacular magic wand, or what was once our heart’s desire can’t help but degrade into a disappointment in that brutal transition. I have seen this in my children. I have witnessed it in adults. And I have felt it in my very soul. Perhaps Christmas is much less about gift getting and much more about an annual rekindling of hope. For me, it’s about a hope that lies in a manger. For you, it may be a hope for renewed ties with family and friends.
So what do we do with the recurring theme where our exciting “ANYTHINGS” keep getting turned into mundane “somethings” every time we take off the wrapping paper? Van has helped me understand that I am responsible for what I feel when I open up the present. I choose joy over disappointment and contentment rather than instant gratification.
Have you ever taken the proverbial wrapping paper off of a trading idea? That which seemed so exciting and full of possibility a little earlier suddenly becomes disappointing and fraught with shortcomings. This same dissolution of hope that we see in our gift getting forms one of the key psychological barriers for many traders.
Shiny Trading Objects
The Christmas Present Syndrome and our obsession with the newest or most recent discovery (a.k.a. a Shiny Object) are closely related. Technology geeks are notorious for their attraction to the latest shiny techno toy and I think traders and investors suffer a similar malady when it comes to any newly discovered indicator or system.
The attraction to something new and shiny can even override our ability to concentrate on important tasks. We are like the talking golden retriever named Dug in the excellent Pixar movie Up. Dug, and indeed all of the dogs in the movie, are obsessed with squirrels. Whenever they think they might see one, they drop anything they were doing, no matter how important, and concentrate on the possibility of seeing/chasing a squirrel.
It matters not if the newly discovered tool is unproven. The fact that it is new and untainted by any scrutiny or deeper understanding is exactly the reason why it is so shiny and fascinating. Like an unwrapped Christmas present, it is full of possibility, full of the hope that it is a better tool than the one we are using now. And like the dog Dug, we stop whatever we’re doing and chase the shiny object.
The more I have worked with seasoned traders, the more I’m convinced that longevity in this business is all about following a few basic fundamentals: Van’s Top Tasks of Trading, discipline in following your strategy, and having patience and persistence to stick with a process/strategy/system that has an edge in the markets. Mastering these fundamentals generates longevity in a trader’s career—not chasing new ideas.
Now, I don’t want to sound like a cynic about exploring new trading ideas and tools. More than most, I myself enjoy digging into a new indicator or strategy. And exploring new ideas has many benefits including the opportunity to expand our trading knowledge and tool kit. This is a good and necessary part of trading as the markets change and you need to grow and evolve your trading knowledge over time as well.
My experience working with a multitude of both inexperienced and seasoned traders, however, tells me that few have the problem of sticking too long with a particular system or favorite indicator. Rather, the bigger and more common pattern is that once most traders pull the wrapping paper off of some new trading idea and find the first blemish, they prefer to start the hunt for the next shiny object. You can imagine how repeating this process may create wide ranging awareness but it does not help someone build deep knowledge (expertise) in any area.
For most traders, understanding at a very deep level handful of indicators and strategies will serve them much better than gaining superficial knowledge of many, many tools. Consider that my Christmas gift to you if you needed to hear that advice from someone who has worked with many highly successful career traders.
I’d love to hear your thoughts and feedback on this article or about trading and investing in general at drbarton “at” iitm.com. Until next week…
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Ready, Aim, Fire or Ready, Fire, Aim?
In my military experience, there have been times when my unit was sufficiently able to plan an operation and then execute that plan. There have been other times, however, when planning was not really possible; readiness and rapid reaction were the only viable options. I think traders can find and exploit market opportunities in the same two ways.
Ready, Aim, Fire
If you have confidence in your understanding of the market and have a specific strategy with a definable set of rules for scanning, filtering, stalking, entering, managing, and exiting your trade, you might think in terms of “Ready-Aim-Fire.”
By getting this sequence right, and performing the required tasks properly, you should be able to increase your bottom line through the disciplined application of your rules, whether they be mechanical, discretionary or a mixture of both.
Being “Ready” includes several things:
- identifying appropriate markets and time frames for your strategy,
- conducting sufficient back-testing and prototyping to allow for confidence on applying the rules,
- performing the necessary screening and monitoring to identify potential trades,
carefully defining an optimized entry rule set, creating a manageable system for monitoring open risk to stay within your risk profile,
- and defining exit rules according to a strategy that is consistent and productive in the context of your overall strategy.
“Aim” consists of two steps. First, select the appropriate strategy based on environmental cues from your market sensors. Second, ensure you have met your criteria fully and completely before triggering. This should also include a rehearsal of the trade itself, time permitting, to ensure you have your aim point firmly in mind.
“Fire” consists of the actions we take when we execute our trade based on our rule set that represents our strategy.
In the Ready-Aim-Fire model, I believe that your trading system will perform as well as your least effective domain. This trading process allows you to examine the main phases of your strategy: planning, preparation, and execution. By examining your performance in each of these three areas, you may be able to focus on the topics that most need your attention. Try this idea on by asking yourself this question: What happens to your performance when you are good at two but terrible at the third? (Note: The same thinking applies to evaluating any process.)
Ready, Fire, Aim
Let’s address a different set of conditions than above. What if you lack confidence in your understanding of the market you are trading, and have a specific strategy that has a definable set of rules for scanning, filtering, stalking, entering, managing, and exiting your trade? You might think of these opportunities in terms of “Ready-Fire-Aim.”
Performing these three tasks in a sequence different than the typical "Ready-Aim-Fire” is counterintuitive and, at times, seems risky. There are some market opportunities that are so fleeting and explosive, however, that if you wait for everything to fall into place by the numbers, you may find you are too late to profit from them.
For these instances, being “Ready” means identifying appropriate markets and time frames for strategies that you have already mastered. You still must validate your strategies through back-testing, prototyping and analysis of results, and you must have an adaptable, agile risk management system that allows you to quickly determine your position sizing method once a strategy is selected based on environmental cues. You must internalize the strategy to an instinctive level to ensure you are not fumbling around in the moment of decision. Heuristics can help a lot here as long as you make your tradeoffs in the direction of lower risk. Risk control is paramount for this trading approach and you initially address this component in the Ready stage.
“Fire” consists of quickly entering positions at appropriate risk levels given our heightened sense of uncertainty, as we prepare to let the trade unfold along one of several possible paths.
“Aim” now consists of morphing your trade idea towards the more likely patterns, and adjusting your decision-making and risk management towards the parameters of the more likely patterns. Rehearsing your decision tools and management indicators is essential in this phase.
Trading in this sequence creates a significant conceptual change for those used to a more programmatic or planned approach. Perhaps somewhat obviously, this kind of trading is neither for the faint of heart nor for those who need a bit of control and certainty to guide their trading.
Ready-Fire-Aim is only for traders who can act on a minimum amount of information, are focused on a small but effective set of short term systems that are adaptive to a dynamic market, and who are able to reframe trades while they are open. For example, this approach might require a trader to convert a successful intraday trade into an overnight holding, en route to a swing trade of two weeks all while managing the position size to maintain the appropriate level of risk for each time frame.
Traders don’t have to choose necessarily one of these approaches and exclude the other. Depending on what fits them, traders can succeed using Ready-Aim-Fire, or Ready-Fire-Aim, or both. The market goes through phases in which Ready-Aim-Fire is appropriate and successful. It will also offer opportunities for adaptive traders who can use Ready-Fire-Aim effectively at extreme conditions, when price changes are frequent and trends are hard to detect.
Learn More About Tharp Think via YouTube®
We've recently posted a number of videos of Dr. Tharp speaking on different trading topics (see the titles below) to help get an overview of what you need to know to be a successful trader.
- Personality Type
- Money Management with R-multiples
- How to Become a Trader
- Is This a Good Time to Invest? Learn to Recognize Market Type
- Position Sizing and Money Management
- Trading Mistakes
Click here to view them all.
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