Slow Trader

Tag: Nicholas Taleb

  • Not a good idea to match experts

    Each of my faults, the ones that I’m aware, seem to balance themselves out.

    For example, my type of dyslexia (probably detectable in many of my spellings) gave me reading problems as a child (I’ve overcompensated as most would now consider me a voracious reader) but was balanced by my skills in mathematics.

    Later in my career as a squadron commander my propensity to change my mind in a flash and go with a different tack was undoubtedly frustrating for my management team.

    That same trait is, as it turns out because I wasn’t aware that this oddity of mine could possibly be put to advantage, gives me a traders edge.

    That is because in trading, and in particular my chosen method of short-term trading, is based on probability. Where (according to Taleb) probability is about the belief in an alternative outcome, it is not about the odds.

    Beliefs (Taleb goes on to say) are said to be path dependent if the sequence of ideas is such that the first one dominates. We may be programmed to build a loyalty to ideas in which we have invested time – a good salesman, for example, will take advantage of this principle.

    A great trader on the other hand will change their belief (probability assessment) in an instance. That is why it is not a good idea to attempt to take the same trade of an expert: we know they are long, they said convincingly that they are going long, we follow and take the trade long – the expert went short.

  • 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’.