Algorithm to trade by

Nicholas Taleb, in his book ‘fooled by randomness’, suggests that “some psychologists estimate the negative effect for an average (traders) loss to be up to 2.5 the magnitude of a positive one”.

Therefore in short-term trading, and particularly day-trading, that is a lot of pangs.

A longer-term investor may check her portfolio, say, once a year. If she averages a 15% gain per year then this investor will have an emotional pang about one in nine years.

The expert day trader on the other hand (the beginner and intermediate trader are off the scale here) will have 7 to 15 trades per day of which about half will be an emotional drain. Leaving the trader some 250% more emotionally drained – and that’s on a reasonable day!

Beginners are attracted to day-trading because it sounds cool, and, as a stop order can be closer in a low time frame trade, they can trade for less per trade than on a higher timeframe chart. An individual’s chance of surviving the beginner to intermediate to expert in day trading is slim.

An expert day trader, someone who was properly coached or who has graduated from the ranks of the higher time frame trades, will, I feel, only survive the emotional pangs of day trading if they develop and follow an (unemotional) algorithm.

That is why I’ve renamed my page ‘how I trade’ to ‘algorithm to trade by’.

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