The frugality of an edge

Quash the gambling instinct don’t fall in love with a trade.

To get us to invest time and energy into a deal is an old salesman’s technique.

If we do so, we will then not analyse as clearly as we would from a cold start. We are often overly influenced by the current ‘open’ bar.

If we think a trade has gone to a 50/50 outcome, it is probably more likely to be 40/60 against us.

The enthusiasm generated after a win can be described as professional or everyday arrogant overconfidence. The difference, in my experience, is narrower then we may think but the outcome depending on which approach taken can be everything.

Gambling to my mind is when we are not working consistently to a clear set of rules. It is commitment through emotion rather than analysis. It is relying on chance rather than a measured probable outcome.

However, other areas can be just as damaging as that of the blatant gamble.

Once we have given our time and energy, we feel that we are entitled to a positive outcome; this could not be further from the truth. The market does not give two hoots either way.

We think rationally, and we decided to exit the market at a specific pullback point. All well and good until we see the pullback bar. This bar often looks so inviting, and we feel that if we only hold we will make it work. However, in the briefest of moments, we miss our exit opportunity as the price reverses and presents us with an exit loss.

The success or otherwise of our trading account is based on how we manage our edge. At best our advantage in the market will provide us with a 60/40 outcome in our favour. However, when our margin escapes us, for whatever reason, then our issue usually does not fall to a 50/50 but more likely a 40/60 or worse against us.

Our edge is taken away whenever (1) we wander into the gambling mindset, (2) be overly influenced by the ‘live’ as opposed to a closed price, or (3) commit ourselves to a trade not based on sound management but anything approaching arrogance.

Yes, as day traders we deal with these issues many times daily. However, they apply just as equally to the longer term fundamentalist fund manager.

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