Trading to Win review by Price Headley
One of the easiest mistakes any trader can make is not a 'trading' mistake at all. Rather, the mistake is complacency with his or her trading skills and knowledge. Unfortunately, trading is not like riding a bike - you can (and will) forget how. Obviously you'll always know how to enter orders, but the efficiency and accuracy of your trading will diminish without constant renewal of your trading mindset.Read the article
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Financial Advisor, May 28, 2009
After the stock market's shocking collapse, investors understandably are looking for alternative avenues. But it's only a matter of time before the wreckage clears and many people again point the wheel down Wall Street.
The real challenge then will be steering clear of investing mistakes that previously caused a spinout. Read the article here
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By Jonathan Burton, MarketWatch
SAN FRANCISCO (MarketWatch) -- After the stock market's shocking collapse, investors understandably are looking for alternative avenues. But it's only a matter of time before the wreckage clears and many people again point the wheel down Wall Street.
The real challenge then will be steering clear of investing mistakes that previously caused a spinout. Read the article
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At Infovest21’s “Psychology of the Investor and Psychology of the Manager” seminar, two psychiatrists explained the role of emotions in making financial decisions and how to achieve peak performance as a manager.
“Because most hedge funds are compensated for annual performance, it rewards managers for taking risks that are based on an annual horizon,” says Dr Richard Peterson of MarketPsych Partners. This pressures managers to meet performance benchmarks by a deadline in order to receive their reward. The potential for outsized rewards activates the rewards center in the brain, and can chemically shut down the brain’s risk aversion center and lead to managers making riskier trades.
Conversely, managers sometimes hold on to losing trades for too long because “the pain of loss is higher than the pleasure of a gain,” says Peterson. In “loss” frame of mind, managers often double own, and cut winners to fund losers; in extreme cases rogue traders such as Jerome Kerviel (Societe Generale) do not immediately confess to their losses for fear of losing their jobs, but instead20go to great lengths to hide their losses from others, and take excess risk in hopes of making it back.
“Most often rogue traders fail [to make their losses back]. If they get bailed out it reinforces their dishonest behavior. Hence any ethical breach in the record is alarming,” says Dr Peterson.
Peterson observes that hedge fund traders who take excessive risk, operate with an ethical dilemma in mind. “They are working with an implied put option which means that they are extremely well compensated if they take large risks that payoff but a catastrophe loss is unlikely to affect them beyond the current year…The worst that can happen to them personally, especially in a hedge fund, is that they lose their job, their current income and any forthcoming annual bonus. In the case of Brian Hunter, he made $75 million in 2005 and beyond the one-third of his bonus that he had invested in Amaranth, he will emerge from the debacle with tens of millions in the bank from his trading in 2004 and 2005.”
Peterson cautions that many traders miss the lesson of these high profile downfalls. “Risk management is key, yet it is often boring and restricts profitability. Firms that are trapped in a death spiral will often take far more risk to get out of their hole. Often, doubling down works and then an addiction to risk can become entrenched.”
What about top managers who perform consistently year after year? Not only can they control their losses, but over time, they made the most money because they knew when to add to winning positions, says Dr Ari Kiev of Kiev Consulting. Good managers need to take enough risk, and know when to take large enough positions to make their winning trades more profitable. Kiev worked with Steven A Cohn at SAC Capital for 16 years as an in-house trading coach.
Good managers also know how to manage stress. Keeping a trading diary of prices, one’s thought process, and emotional response is one way to find out what are some stress triggers, says Dr Kiev. To manage stress, one can practice techniques such as sports, meditation or music to help one to relax, focus on reviewing one’s trades, and plan different ways of responding to events.
Personality tests such as the Caliper are useful when applied to finding out how people make their decisions. Good traders are self-aware, open to learn, and are resilient to losses. “Managers need to set goals, find out how they can improve, and take on more challenges,” says Dr Kiev. After all success does not happen overnight, it takes hard work and practice to achieve it.
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Seminar CD available – if you missed this (or other Infovest21) seminars but would like to buy a CD of the seminar, please call Infovest21 at 212 686 6440.
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Harry Berkowitz
www.bottomlinewealth.com
Just when it seems that the economy and the financial markets have punished us enough, the torture continues- stock market relapses…disintegrating automakers…rising credit card fees… even more multibillion-dollar Ponzi schemes. All the ingredients for unrelenting financial stress.
For advice, I turned to Ari Kiev, MD, a psychiatrist, consultant and author of books, including Mastering Trading Stress, who counsels Wall Street traders on dealing with investment anxiety. He explained that most of us cope with intense fear by pretending it doesn’t exist, but such avoidance actually makes the fear grow.
What to do instead: First, acknowledge that you are scared and that you made some mistakes. Allow yourself to experience panic. This feels very uncomfortable at first- but then something surprising happens. You’ll find that even the most negative feelings aren’t so intimidating because they dissipate rapidly, usually in a matter or minutes or, at most, hours.
When drafting your investment strategy, swing for singles that will slowly improve your score, not home runs that you are much less likely to achieve. Don’t pretend that you can completely repair your portfolio overnight. At best, it’s going to take several years to make back what you have lost.
Finally Kiev says that listening to the experiences of others in similar circumstances can help you identify your own self-defeating patterns and change them to more helpful ones. The American Association of Individual Investors has local chapters around the country where small investors meet to discuss their successes, failures, concerns and ideas. Membership cost; $29/year. 800-428-2244, www.aaii.com
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