What to Trade Continued

So, I did a little more reasearch (I think that's all I do) and found out about E-micro currency futures. Basically these are currency futures that are a tenth of the size of a normal currency contract. In the case of a EUR/USD contract, the size is 125,000 Euro, but the E-micro contract is only for 12,500 Euro. This means you only need a tenth of the margin to trade an E-micro contract.

The real benefit to these E-micro contracts is that they are cleared by the CME, and the brokers actually match your trade with other traders - the brokers are not taking the other side of your trades. Also of benefit is that the prices are transparent as they are marked to market every evening so there is a clear "standard" price, unlike the retail brokers who can essentially make up prices.

Naturally I was excited to find this. If you want to do Forex trading, E-micro futures are much better than retail trading. But there is somewhat of a drawback. My $100 bankroll is not enough to starting trading these contracts. The initial margin for a GBP/USD contract is $392. So unless I have several thousand dollars of capital, I can't effectively trade these futures. I could wait and demo/paper trade until I've saved up enough, but who wants to wait?

So my initial excitement has become disappointment. The E-micro currency futures are clearly the way to go, but without the capital I can't take advantage of it yet. So I've decided to still try to trade in the seedy retail world until I can do futures.

I'll be back with more system development stuff next time.

What to Trade

Before I get back into work on building a trading system, I need to explore some of my feelings the past few days regarding a decision of what markets/instruments to trade.


My initial ambition was to trade retail Forex. I also wanted to develop a system which could eventually be programmed and automated. MetaTrader 4 was going to be the platform on which I would program and trade. In doing research on MT4 for system automation, I discovered that the broker I wanted to use OANDA, does not support MT4 as a platform, but rather charges a hefty fee for access to their programming API for automated system development. So doing further research, I discovered a program called FXSpyder that lets you automate a system that would work with OANDA to make trades. The problem there is that FXSpyder charges a hefty fee to trade with OANDA. FXSpyder also supports FXCM to automate trades and that is free. Free is good, except that once I did reviews of FXCM, I found a lot of complaints about stop hunting, bad slippage, among other negatives. To be fair, I've read a lot of negative reviews about OANDA as well, but in the brief time I attempted to trade previously, I had no problems.

There are other brokers out there who support MT4 as a trading platform and don't have fees related to it, but I was really trying to avoid opening another account somewhere. I didn't want to go through opening another account and passing my personal information yet again out into the ether of the Internet. Plus, in further research I've learned more about just what retail Forex trading with a broker really is.

When you trade with a Forex broker, you are not interacting with an entire network of traders. Because there is no central clearing for retail Forex, there is no absolutely correct price for currency. Each broker gets feeds from banks and those become the prices, which won't always reflect what the broker is actually quoting to you. Brokers claim there is no commission and that they make their money through the spread, but really they can inflate the price they quote to you above and beyond what they get on their feeds from the banks. As a result there really is no transparent price when dealing with brokers.

In addition, when you trade with a broker, they are not matching your order with a buyer/seller on the other side. The broker itself is taking the other side of your trade, so they actually have an incentive to see you lose money. Your loss is their gain, hence the stop hunting, ridiculous widening of spreads during market volatility, or the delay in getting your orders through, etc. No wonder there are complaints about almost every Forex broker!

Initially I thought maybe these were disgruntled, losing traders attempting to place blame for their mistakes. However, the volume of grievances and their similarity give me pause. There must be some truth to this; would this many people complain otherwise?

There are people who make money trading retail Forex, so I guess the brokers can't be completely crooked. But as a rookie trader, do I really want to start out with the possible handicap of a less than scrupulous broker? Of course not.

So if all or most retail Forex brokers are potentially cheating me, what should I do?

Setting Objectives Continued

The final set of questions Tharp presents are specifically related to how a trader will go about the business of trading. Once again, I'll answer the questions as best I can.



What kind of markets do you want to trade? Is it appropriate to specialize? Do you want to trade only liquid markets or are there some illiquid markets you'd like to trade?

Primarily I want to trade the Forex market. It is extremely volatile and gives a number of opportunities to trade. I also like equities, but they take much more time to research I think. Eventually I'd like to do them both, but for now I want to focus on Forex.



To be even more specific, I want to start with the GBP/USD pair. From the beginning I wanted to trade this pair, probably because the GBP's exchange rate (1.6002) is larger than other pairs, meaning to take a position forces me to be more cautious.



Being a beginner, I'm only interested in liquid markets, so I won't be dabbling in exotic pairs or crosses. I'll leave those to the professionals.



What belief do you have about entering the markets? How important do you believe entry to be?



One of the ideas I love about trading in general is that the markets are composed of the hopes and fears of all of its participants, and with this collective psyche you attempt to connect. Your connection with the market allows you to be tuned in to its movements, to understand what it might be thinking, where it might be going. When you participate in trading or investing you are a part of the market.

I believe one can be successful in the endeavor of trading, but that the success will be hard-earned. I don't believe the market is necessarily an adversary to be contended with. I do believe that trading can be a key to self-awareness and discovery.

Entries are important, but having read Trade Your Way... already, I also know that having a high-percentage entry does not guarantee trading success. Some entries with a 40% success rate can be enormously profitable. Psychological resiliency is most important to help one stay objective and proper money management will ensure that one continues to have an opportunity to play the game.

Given your goals in terms of returns and drawdowns, what kind of initial risk stop do you want? If it's close, will you be able to get right back in the market so that you will not miss a move?

Part of the general canon of trader wisdom suggests that one always have a stop when a trade is on. Recently, however, I have come across some knowledge regarding Forex that makes me a bit leery to actually set a stop in a given trading platform.


A phenomenon known as "stop hunting" or "stop loss hunting" is the intentional movement of market prices by brokers to levels where a great deal of stops are placed (brokers know where your stops are when you put it on your trade) in order to close traders' positions. Forcing all of the stops generates revenue for brokers because they are trading against the traders' positions and forcing trader losses mean gains for them.


A Google search produces a litany of results, a lot of which express skepticism that the practice exists. Some feel their profitable positions are ruined because of stop hunting, others think unprofitable traders simply need a scapegoat for their poor performance and the brokers are to blame. Some acknowledge stop hunting but think its effect can be mitigated by placing stops away from the more likely levels. There are still other traders who use software plug-ins to mask their stops, or who trade on ECNs and thus avoid brokers altogether. Finally there is the group I think I may belong to, who believe that by not putting stops into a broker's platform, the broker doesn't know where your stop is, and therefore can't hunt it.

So when it comes to a question of initial risk stop, I will probably be using some kind of range indicator, but I won't be putting it into a platform.

How do you plan to take profits? Reversal stops? Trailing stops? Technical stops? Price objectives?
My initial thought is that I'll most likely be using some kind of trend trading system, so a reversal stop will be the most likely tool. While "you won't go broke taking a profit", you also won't realize the full potential of a winner. That's part of the trade-off of using a trend trading system; you won't get the confidence (i.e. "I was right") boost of lots of small victories, but you will hit the really big win on occasion, enough to hopefully dwarf the many little small losses sustained along the way.

What do you do in terms of money management (which I call "position sizing" in this book)?
I think I will most likely limit my exposure to a fixed percentage of equity, something like maybe 1%. I've also thought about maybe doing a fixed amount that represents a fixed percentage of my original capital, like $1 if I'm starting with $100. I'm sure as I get more into Way of the Turtle, I'll have a better idea of what I would like to do.

Next time I'll get into Chapter 4 of Trade Your Way..., which is about Tharp's 12 steps to developing a system.

Setting Objectives Continued

In this next section of questions, I will attempt to determine what my objectives are so I can better aim my efforts in developing a system.

What is your advantage or edge in trading? What is the particular concept that you are trading that gives you an advantage?
Later on in the book, Tharp gives a few examples of trading concepts. Trend following, fundamental analysis, seasonal tendencies, spreading, arbitrage, neural networks, and what he calls "there is an order to the universe" are the concepts he lists. I really think I will be engaging in some for of trend following, as it simply works. I'm also reading Way of the Turtle by Curtis Faith right now, so perhaps my eagerness to use trend following is a result of that reading. In his book, Faith describes his participation in an experiment in the early 1980s by 2 successful futures traders. In this experiment, Richard Dennis and Bill Eckhardt attempt to train a group of non-professional traders to use a proven trend following system. The results are surprising in that all the participants were taught the same system, but some failed and some prospered spectacularly. I haven't finished the book, but I think the reason for the disparity in performance is the psychological makeup of the participants. Some could work through the negative aspects of trend following and stay true to the system they were taught while others could not.

Anyhow, I'm sold on trend following right now as the way to trade. I'm also interested in contra-trend trading, but I'll need to do more research on that.

How much money do you have personally? How much of that money could you afford to lose? For example, most funds stop trading at 50%. How about you? How much risk can you afford to take on a given trade?
I'm not trading for a living so technically I can afford to lose all of my risk capital. I'd like to see what I can do starting off with $100 in my FX account. I don't want to risk any more than $1 on each trade. It would take 100 consecutive losses to put me out of the game. My idea is to find a system that can give me a positive expectancy with minimized drawdown, but with trend following, the drawdown can be psychologically devastating. One of the examples in Faith's book is of cocoa futures trades in 1999. A trend following system would have resulted in 17 consecutive small losses until encountering a big winner that would have put a trader in positive territory. I would really need to have faith in my system to handle that sort of losing streak.

How much money do you need to make each year? Do you need to live off that money? What if you don't make enough to live off? Can you make more than you need to life off so that your trading capital can grow? Can you stand regular withdrawals from your trading capital to pay your monthly bills?
Again, I'm not doing this to make a living. Its more of playing a game for me, one that, if I'm successful, I can scale up and use to really supplement my income. I have a full-time job and can stand to lose all my trading capital without any negative repercussions in my life.

Are you being realistic, or are you expecting to trade like the best trader in the world? For example, supposed you have a very good system that is right half the time and gives you profits that are twice as large as your losses. In that system, just be chance, you could still easily have 10 losses in a row. Your system is still working as expected, but you could easily have 10 losses in a row. Could you tolerate that?
I know from experience that I definitely will not be trading like the best in the world. In fact, I actually expect to lose, maybe even all the trading capital. This is an extremely difficult venture in which there are very few winners, and even those winners will experience disaster occasionally. I read Reminiscences of a Stock Operator about Jesse Livermore, one of the best traders to ever live. He went broke several times in his career, the last of which prompted him to commit suicide. I can only hope that I can tolerate 10 consecutive losses, but I won't know until I get there.

Do you have the time to trade short term?
Given that I work full time, I won't be able to sit in front of the computer and trade short-term. I may be able to create an automated system that trades for me, and so I could remotely engage in short-term trading. That's not necessarily my goal right now, but it could definitely become a goal.

How much social contact do you need?
I'm an introvert by nature, so I really don't need a great deal. I like having someone to talk about my ideas with, but I don't need to be with people to feel happy.

Can you work by yourself day after day? Do you need one or two other people around, or do you need a lot of other people around? How much do those other people influence you?
I could work by myself. I'd prefer to have a handful of other people to talk to about my ideas, but not anymore than maybe 4 or 5. I don't think they would have a tremendous amount of influence on me. I like to chart my course and stick with it until I determine I need to change it.

I imagine Tharp is asking these last 2 questions of someone who is intending to trade full-time. Of course, they don't directly apply to me right now in my current ambitions.

In summary, what do you expect to make each year as a percentage of your trading capital?
Given that I don't exactly know what I'm doing, I'd be happy to not lose money after a year of trading. Tom Basso, the trader that Tharp is interviewing, answered between 20 to 40%. Basso is a professional and I'm not, so my goal is to make 10%. Very low, but still ambitious for a rank amateur.

What risk level are you willing to tolerate in order to achieve that?
Basso answered with 20%, about half the potential gain. So I guess I'll say the same thing, half the potential gain, or 5%.

What is the largest peak-to-trough drawdown you are willing to tolerate?
Basso answered 25%, so I'll go with that as well. I feel kind of stupid mimicking his answers, but as a newbie, I don't know what the answer really is. Once I go through a live-fire experience I should have a much better idea of what my real answers are.

How will you know your plan is working, and how will you know when it's not working? What do you expect from your system in various kinds of markets? Trending? Consolidating? Highly volatile?
With a trend following system, it could be hard to tell when the system is working given the possibly of a successful system still generating a large number of losses. My plan will work when I execute trades precisely as the system specifies despite the results. If the system is well designed with positive expectancy, then in the long run it will work. A trending market will obviously be good for a trend following system. A consolidating market will probably result in a few small losses and a volatile market will lead to a lot of whipsawing and lots of small losses.

The next section in Setting Objectives is working through Trading Ideas. I'll get to that next time.

Setting Objectives

Chapter 3 of Trade Your Way to Financial Freedom is about setting objectives for your trading and creating a system to meet those objectives. Essentially you can't go anywhere until you know where you are going.

The first part of the chapter is an interview with Tom Basso, a trader, as an example of the self-assessment necessary to begin building objectives. I'm going to basically have an interview with myself where I answer these questions.

Self-Assessment

How much time during the day to you have to devote to trading?
My day starts around 7:45 (maybe an hour before that if I go to the gym) and I'm at work by 9 am. I work full-time, so I leave work for home at about 6 pm. There's an hour break for lunch when I normally go to the library and read or work on my trading blog. When I get home from work, there is about a 2-hour window for dinner and watching Jeopardy!, after which I might hang out with my wife, read, do housework, or just veg out until bedtime, which is usually sometime between 11 pm and 12 am. At most I have about 5 hours to spend on trading pursuits, but in reality it will be closer to 2 hours. Included in this is the fact that I can skim a little downtime at work to look at markets and read up on news.

When you are trading, how many distractions can you expect to have?
I don't expect a great deal, as most of the time on trading will be spent late in the evening at home or during the afternoon at the library, both with minimal interruptions.

How much time do you expect to devote to developing your trading system, to doing your personal psychological work, and to working on your business plan for trading?
Not having gone through a rigorous process like this before, I'm honestly not sure. I think a thorough assessment of my psychology and objectives wouldn't take a tremendous amount of time. I think I'm fairly aware of my limitations and strengths. I don't have a "business plan" so I'll more time to work on that. The mental work to create a system might be fairly quick, but the time to put it into practice will be considerable, particularly if I elect to program it using MetaTrader.
If I had to put a number on it, I think I could be ready to trade as early as February.

What are your computer skills? What skills did you need before you began this trading venture?
I have solid computer skills. I'm very comfortable with spreadsheets, database software, pretty much almost anything computer related. I can program in VBA and SQL as well as MQL, the proprietary language for MetaTrader. I'm going to skip that second question since I don't know if I've actually started a "trading venture" yet.

What do you know about statistics?
I know a fair amount about statistics including the basics (mean, median, mode, normal distribution, etc) and more advanced ideas like regression analysis, hypothesis testing, and sampling. I actually like statistics and put together a small study of FX prices during my last foray. I focused mainly on prices by tracking average movements by day and hour.

How would you rate your market knowledge? Here you should include what you know about trading mechanics, what moves the markets, how to execute orders effectively at low cost, which trading indicators you might need, etc.
From playing around in the FX market before I know about the bid-ask spreads and how to place different types of orders and how to use leverage. I know there are times when the bid-ask spread is so large that you can't trade at a low cost. I've done a lot of reading about technical analysis so I have an idea of what certain indicators represent and when they might be helpful. I think my knowledge is good for a non-professional.

What are your psychological strengths and weaknesses, especially in terms of trading system development?
First the weaknesses... I know I will lean toward trying to optimize test results to match the data set, attempting to get a perfect system. I probably will spend so much time trying to perfect any one idea that I won't work on other, maybe more promising ideas. I may not spend as much time as I should on understanding the principle I'm trying to exploit and focus too much on getting the code right.
For the strengths, I think I'm analytical and almost always looking for ideas. I'm patient and I like to do research particularly when it comes to data. I'm comfortable with numbers and doing data manipulation using spreadsheets and databases.

How about your strengths and weaknesses in terms of your personal discipline?
First the weaknesses again... I'm not very tolerant of failure or a lack of success, so I get down on myself quite easily. I focus so intently on details sometimes that I might miss a larger idea or goal. I tend to look for the potential negative in a situation before I will the positive aspects. I can be stubborn and unwilling to concede that my ideas are not working.
For strengths, I can work for a long time towards a goal. I can follow a plan pretty well. I'm usually deliberative, so I won't make rash decisions.

Do you tend to get compulsive (i.e., get caught up in the excitement of trading), have personal conflicts (i.e., have a history of conflicts with your family, at your job, or during past trading experience), or have any emotional issues that constantly crop up, such as fear or anger?
I have had times in the past where I did get into the excitement of having a position on that I didn't focus as much on what I was trying to do. I just enjoyed the fun of playing the game. I wouldn't go so far as to call it a tendency, though. I don't think I have a "history" of conflict as its intended by the question. Of course my wife and I have differences that lead to conflict but its far from an ongoing state for us. At times I get annoyed with work, but it is typically temporary in nature. As for emotional issues, I do get quite angry at times usually with work. Sometimes more broadly I feel anger, or maybe what be closer to disappointment with situations that aren't as I'd hoped or prepared for them to be. I think it would be nice to talk to a counselor or therapist, just to vent my feelings since I have a tendency toward not expressing my emotions. I try to stay level-headed as much as I can.

Based upon your personal inventory, what did you need to learn, accomplish, or solve prior to beginning trading? How did you do that?
That's a huge question. I don't think I know precisely what I need to work on to start trading, but I have an idea. The biggest thing is to curb the need to be right. Part of my personality is wanting to do thing the right way to produce the right outcome. I need to accept that quite often, I will be wrong. In fact, in trading, I'm probably going to be wrong more often that I am right. I think what held me back before is the fact that I focused on creating a perfect entry and was so discouraged when I found that most of my entries failed. Along with that need to be right is to be able to explain everything. Particularly in FX, things just move, sometimes without any accompanying news or reason. I think in the past I've let that fear of not knowing why things are doing what they are prevent me from continuing to trade.
I don't know how to overcome these things. I think part of the answer lies in blogging about my experience to reflect and process the goings on. I feel as if all I can do is keep trying to play the game.

Objectives will be explored tomorrow.

Judgmental Biases Continued

Trading System Testing

The degree-of-freedom bias is essentially the over use of system development parameters to fit a set of historical market data. I think this is somewhat erroneously named, but I understand why Tharp calls it what he does. He describes a degree-of-freedom as "a parameter that yields a different system for every value allowed." So for a moving average, each different number used gives a different value, giving infinite degrees of freedom. When developing systems, it is quite easy to keep changing moving average, MACD, or RSI indicators to get the perfect fit for the historical data.

I think I fell into this when I designed my candle system a few years ago. I remember being dissatisfied with the results and tinkering endlessly to improve performance. Tharp suggests that truly understanding the concept you are using will reduce the need to optimize the system. He also suggests that you think about various scenarios your system could encounter and how the system might be expected to behave. His final suggestion is to minimize the number of indicators used.

Postdictive error bias involves using information for testing that you would could only know in retrospect, like a price high, which you cannot know unless you are looking backwards. This one is sort of hard for me to conceptualize. Tharp says that exceptionally good testing results are probably a result of postdictive errors. That makes sense as the better your testing results are, the more likely they are to be a result of fitting your system to your data.

Lack of protection bias is really just having a system that is too risky by not preserving capital, not providing for an expedient exit if the trade goes against you, and having low expectancy (which is a great topic Tharp addresses later).

I know I did this when I first experimented with FX, and later I replicated it in my Roth IRA with stocks/ETFs. Through the magic of leverage I would risk as much as 20% of capital in the FX, and I would risk my entire Roth in a single position. While I considered these to be playing around in the market (I keep real retirement and investment monies elsewhere in much more sensible allocations), what I did was silly for real trading purposes. I want to be much more conservative and smart when I try this again in the FX game.

How you Trade the System

The gambler's fallacy bias is probably one of my favorites because it seems so common-sensical. This bias simply leads you to believe that because the market (or game or whatever) has been trending in a certain direction, it is "due" to change. So because the last 5 coin flips have been heads, the next has a higher chance to be tails, or because the last 4 days have been down on the Dow, the next day should have a higher chance of being an up day. To coincide with this belief is the tendency to wager a greater amount on that next iteration of the game, so you'll bet even more now since the market/game is more due for a change. Needless to say, this bias can take you out of the game very quickly.

I think I fell victim to this on the first FX go 'round. It just makes too much "sense"! Mostly this did me in because of the poor position sizing aspect of it. I'm finally learning that one should size their positions using a consistent methodology and not based on the idea of what the market should do, completely ignoring the element of randomness.

The conservative with profits but risky with losses bias is pretty much exactly what it says. I know I'm guilty of this one. The tendency is to take a win as soon as things go against you, but hold on to a loss in hope of it coming back. From later readings in the book, I've learned that taking a high percentage of losses is okay but only if you cut those losses short. I think this is highly related to the next bias.

"My Current Trade Must Be a Winner" bias is exactly what it says as well. This one is definitely a downfall for me, because it is extremely difficult to admit that you made a bad decision, or your analysis was flawed. Predictions speak to the ego and to be wrong is to take a hit to that ego. But as Tharp says "being right has nothing to do with making money."

Judgmental Biases

In the second chapter of Trade Your Way to Financial Freedom, Tharp talks about the mental filters that we use to parse the vast amounts of information with which we are bombarded everyday. These judgemental heuristics allow us to reach conclusions which often coincide with our already established notions, making it difficult to re-examine our conclusions. Tharp breaks these biases down into those that affect system development, testing systems, actually trading a developed system.

System Development

Representation bias is when "people assume that when something is supposed to represent something, it really is what it is supposed to represent." Tharp goes on to give an example of a daily bar chart. Of course the bar represents the day's movement, but its really a line on paper, not the market itself. You would need to know volume, the number of new/old positions were opened/closed, the number of trades that took place and at what prices, the number/identity of large institutional or small retail investors placed trades, the number of long/short positions, opinions of market movement, etc. to truly know what the market was doing that day.

In short, it would take a lot of information and time to get an accurate picture of the market on a given day. So naturally we used a line on a chart(s) to try to distill all of that information into a managable item. Even if you could process all of the information in its raw form, what would you do with it?

Reliability bias is assuming that the data we use is reliable. I know for myself that it often is not. I remember looking at FX prices from Oanda side-by-side with those for the same currency and time period from MetaTrader. They did not agree. I've also seen beta calculations and P/E ratio calculations for stocks from various free online sources and seen a disparity. Vendors use different methods to produce their results and so what they produce may not be as reliable as you might like.

Lotto bias is having a feeling of increased confidence from manipulating data, feeling that your maniuplation will lead you to control over the market's movements. I'm extremely guilty of this one. I often think that if I can find the right series of manipulations to any given set of data, I can make a really good guess at what will happen. Its a sneaky psychological effect that says "because I have seen some information and put my special touch on it, I can control what will happen." I guess the name of this bias comes from playing a lottery where you pick the numbers, feeling as if picking the "right" numbers increases your odds of winning.

The bias of the law of small numbers is when you see a few examples of a particular methodology working and generalize that this particular methodology is successful. Unfortunately you don't spend the time to examine it in all circumstances to see how truly successful it is. I'm guilty of this based on looking at charts for technical cues. I love to try to read candles, and when I spot a few successful patterns in the books or even in real charts, I think they absolutely work.

The conservatism bias is when, after establishing an idea in our mind, we are unwilling to examine conflicting evidence or ideas. I'm sure that I'm guilty of that one, or at least I don't have a visceral reaction telling me that I never exhibit this bias.

The randomness bias is a belief that market prices move in a random fashion and the erroneous assumptions about what that randomness might mean. Tharp argues that while academic studies have shown that markets are random (I'm thinking of Malkiel's Random Walk Down Wall Street - I need to read that one day), there are extreme tails in the market's distribution that would not arise from normally distributed random prices. Tharp further argues that the greater extremes in price movement lead traders to underestimate risk. Tharp goes on to say that if markets are random, then traders misinterpret what that randomness means. When they see a long trend in a price series, their natural inclination is to create a theory to explain the trend, which would lead to seeking patterns and establishing causal relationships. This also leads to trying to pick tops and bottoms in the market.

This one probably pertains to me in that I have been obsessed with finding the highs and lows in markets, trying to find the turning points. In fact, the last FX system I tried developing was to find candlestick patterns for turning points. Needless to say, it didn't perform well.

The need to understand bias is definitely a sore spot for me. This relates to the need to theorize on why markets are doing what they are doing. I've had countless conversations expressing confusion at various market behaviors, usually in the face of some bit of fundamental news, like a better than expected earnings report. I had a conversation just this week about the stock market's sell off in the face of news that the Fed will continue to leave interest rates at a record practically zero level. I think the financial media has an awful lot to do with this, as everyday they tell us "why" the market moved the way it did, and they do it as if they have analyzed the situation and can pinpoint exactly the reason. So we think there is always a reason, and we always go looking for it. Of course by "we" I mean "I".

I'll get into the other biases in the next post.

A New Beginning

I just finished reading Trade Your Way to Financial Freedom by Van Tharp and it helped to rekindle my interest in the trading game. Tharp proposes that the biggest determinant to success in speculation is the individual psychological makeup of the trader himself. While this is clearly quite obvious, the very plain nature of this fact causes me to overlook the task of figuring out just what my own psychology is and how to adapt it to trading. I think I've gone through so many fits and starts when it comes to trading because I didn't spend the time examining my own mental state, strengths, hang-ups, etc. I spent more time on trying to create a system, a "Holy Grail" to make profits. Tharp talks about a Holy Grail too, but not as some construct that is external to the trader, not as a system just to find trades and enter/exit positions. The Holy Grail Tharp speaks of is an integration of the trader and whatever means he uses to trade, an acknowledgement that everyone has their own Holy Grail and that the way to find it is to truly search the depths of one's own psyche and use the findings as a guide to trade.

There are several reasons why I'm drawn to trading, but one of the biggest is the idea that it can be a means by which to come to truly know myself. It involves so many of the emotions that drive us like fear, greed, hubris, exultation, and disappointment. For me its almost a romantic notion, one of matching wits with this nameless and faceless entity called simply "The Market", knowing that odds are overwhelmingly against me. But then I think about those few who are successful and I wonder if I can be successful, too. Do I have the "right stuff" to be a successful trader? Can I learn to be a successful trader?

So that's why I can't seem to shake the trading bug. I read about it, I talk about it, sometimes I even dream about it. I want to experience self-discovery through speculation in financial assets. I want a window into my true inner-being, not who I think I am, or who others tell me I am. I think trading is the way to get there.