Archive for July, 2010

Differences Among the Fast, Slow and Full Stochastic

Trading Pyschology: Counter-Intuitive Approach

Folks who know me know that I always stress the importance of trading psychology, apart of capital and risk management.

One of the reason why trading turn out to be difficult for many people is that the tenet of cutting losses short and letting winners run is counter intuitive to how most people would think. When a new position is taken, and it not behaving correctly, one should close the position and get out as soon as possible, however, many people would choose to hold on to the position, hoping against hope that the position will improve so that they could get out at say, breakeven point. However, sometimes things can get out of hand and that is when an initial small loss starts to balloon to bigger and bigger loss if the position is not cut.

Conversely, many people tend to take small profit when it is made available to them. Well, there is a saying that says:”You can’t go broke taking a profit.” This statement, in my personal opinion, is very wrong. Yes, you could take profit, but no, definitely not at the first sight of seeing it. The whole idea is to let your profit runs as much as it could so that you maximise your return.

So, combining the two counter-intuitive trading approaches (to cut losses short and let winners run), you basically put together a trading plan that has a positive expectation which is important in any trading system.

Trade well.

The Turtle Mind

*. Think long term when trading
*. Avoid outcome bias (tendency to judge a decision on the basis of its outcome rather than process).
*. Believe in the effects of trading with positive expectation.

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