Tuesday, October 15, 2013

Trading in Denial

Many traders, even experts will go into denial when the Market goes against them. This is a sure recipe for disaster.

When the Nifty bounced back from 5750, it became clear that the market is willing to put higher lows in place. Internal examination of the Nifty price moves also suggested the same. The Nifty rallied from 5110 with gaps and large range bars – a sign of a strong trend. Then we had a higher lows, so the trade should be to either go long or avoid the market if you do not have any conviction in the up move. Not doing something is also a trade, often a wise trade.

Much to my surprise, many experts come on CNBC-TV18 and keep on giving short selling trades, saying they continue to remain bearish. Now, we can have a bearish view, there is nothing wrong in that. But, to take a short term sell when the market is going up day after day is not prudent trading.

Behavioural Science experts call this ‘denial’. We see something in front  of us, but refuse to accept the reality. I am often guilty of this, so who am I to complain? I am giving below an excerpt from our newsletter of October 12, which tells you how we can all go wrong.

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WE ARE OFTEN WRONG. WE ARE HAPPY WHEN WE ARE WRONG, SINCE THIS TELLS US (A) WE ARE HUMANS, AND, (B) MARKETS CAN DO ANYTHING THEY LIKE.

A lot of people claim 100% or maybe 90% accuracy in their forecasts. We have no such claims. We are often wrong. When we feel the market is going its own way, we try to adjust our views according to the market action. But, we acknowledge that the market is wiser than we are.

I write this to explain our completely wrong perception on the CNX-IT where we felt that a trading range was a distribution, but it turned out to be a consolidation, pushing the Index to life time new highs.

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1 comment:

Rajesh Alawadhi said...

Dear Sir,
I really appreciate your sincere efforts in guiding us with your informative and practical posts which remind each and every trader of the mistakes he has been doing over and over again.The assumption of being right every time is the biggest attitudinal deficiency in most humans and that is the reason why most of them lose when they enter a highly competitive field like markets.When markets go against us we are frozen rabbits and completely deny the truth.By the time we wake up,it is normally too late.After suffering a recent big loss, i learnt one thing that i wanted to share and have your views.
1. Decide your own extent of losses from a trade and not let markets force a loss upon you.
2. When a trade goes wrong,the best thing is to accept it rather justify it and just look out for an exit.
3. My job as a trader is to make sure that my account is depleted the minimum and i am the only one responsible for my loses.I am just a risk manager and its not me but markets which give me profits.Targets set by me which are not met in a given time frame and given risk conditions are detrimental to my trading and i need to press the refresh button of my brain and accept the new reality.

Out of thousands of trades executed by, i would accept that i have never been 100% right in even a single trade in terms of entry,exit and time frame.I do not think it is possible to be always right more than 50% of times and that is good enough to make good money.

Sir kindly also guide us on managing stops on swing trades in today's market conditions.