This is a little quiz prompted by a recent conversation with Matt F who brought these little metrics to my attention. Below is a chart of the Dow and on it I have plotted a simple 3 ATR stop which can serve as a trend indicator.
The question is – given the information above would you prefer to be long or short?. My preference would definitely be and is to be long as I am currently long US indices and have been for sometime. However, the point of this exercise is to draw your attention to what I would call variant perception as defined by the trade direction taken by others. Below is snip from a dashboard produced by IG Markets which shows the percentage of traders who are opting for a given direction.
As you can see the majority of traders are short this market, this is despite the fact that the Dow has been going up almost continuously for eight years and has accelerated its run over the past year. This raises the interesting question as to why traders can look at a given market and reach a conclusion that is totally at odds with the evidence. The evidence in this case being that the market has been going up – note I didn’t say will go up because all we ever do in trading is place bets – nothing more. One of the skills that traders must develop if they are to prosper is to trade what they see, not what they think they see, or what they wish they would see. This is actually very difficult because it involves having sufficient self awareness to be cognisant of the role of your own biases within your decision making. In the broad scheme of things there seems to be two distinct aspects to self awareness. The ability to be aware of your internal dialogue and how you fit in the world around you versus the ability to be aware of the world around you. That is how others perceive us. Traders require liberal dose of the former in that we have to be aware of our own emotions, values and judgements. Traders with a high degree of self awareness will challenge their own view and act as their own form of peer review when it comes to making decisions.
A trading system is a form of Q&A for your values as a trader – the system forces you to work through a series of logic gates, each one refining your decision with ever greater fidelity. Fall at any hurdle and the system should reject the trade.Intriguingly this is not what happens with poor traders. Their system is either too loose to be workable or it simply doesn’t exist. Their trades result from a random series of inputs from something they may have read, heard or seen. Effectively trading ides are pulled out of their arses.
This raises the question as to what can be done to improve the performance of a losing trader and I must admit I vacillate between being hopeful that people can change their behaviour followed by being quite pessimistic when I run into the examples of some peoples behaviours. Such as being short a market that has been rising.I think the correct answer lies somewhere within the following quote by Ed Seykota –
A losing trader can do little to transform himself into a winning trader. A losing trader is not going to want to transform himself. That’s the kind of thing winning traders do.
This is an evolutionary process and winning traders are constantly evolving in their perceptions, reactions and emotions whereas losing traders never evolve.
While I raised an eyebrow when I first came across the IG client sentiment data I came to realise (not arrogantly, just realistically) that I require traders like this to ensure that money is redistributed from their account into mine.