|
PureBytes Links
Trading Reference Links
|
I agree with Mubashir Nabi, very well said. But how do we follow or measure
or keep track of the fear factor as traders if you are not on the floor?
----------
> From: Mubashir Nabi <nabi@xxxxxxxxxxxxxx>
> To: RealTraders Discussion Group <realtraders@xxxxxxxxxxxxxx>
> Subject: GEN: Fear Is The Key.
> Date: Friday, April 03, 1998 3:57 PM
>
> Hello RT,
>
> Lately there have been a lot of mails about mechanical trading systems
and
> what types of indicators make a perfect system. I would like to share my
> opinion on trading systems and markets they are trying to predict. Let me
start
> with a story which took place at the floor of the CBOT.
>
> "Soybeans were sharply higher. There was a drought in the Illinois
Soybean
> Belt, and unless it ended soon, there would be a severe shortage of
beans....
> Suddenly a few drops of water slid down a window. "Look," someone
shouted,
> "rain!". More than 500 pair of eyes shifted to the big windows... Then
came a
> steady trickle which turned into a steady downpour. It was raining in
downtown
> Chicago.
> Sell. Buy. Buy. Sell. The shouts cascaded from the trader's lips with a
roar
> that matched the thunder outside. And the price of soybeans broke like
some
> tropic fever. It was pouring all right, but no one grows soybeans in
Chicago. In
> the heart of the soybean belt, some 300 miles south, the sky was blue,
sunny
> and very dry. But even if it wasn't raining in on the soybean fields, it
was in
> the heads of traders, and that, is all that counts."
>
> So what's the moral? Fear! The trader were afraid. Afraid that the rain
might
> turn the market against them and unconsciously contributed to this very
fear.
> NO trading system, how ever advanced, could have anticipated this
'irrational'
> decision.
>
> Fear drives the market. Fear of not following the crowd; fear of being on
> the wrong side of the market; fear of missing a trade; fear of being
stopped;
> fear of forces of nature ruining your perfect bet, fear of not getting
you order
> filled.... You must have heard the veteran traders saying that a trader
should
> be disciplined. In other words, he should be able to control his fear and
act
> rationally.
>
> But markets are people. Fear is an important part of human psychology.
And
> fear - does not compute very well. The vast number of mechanical trading
> systems available today, try to anticipate almost all the possible
aspects of
> trading; but do they have a fear indicator which might alert the trader
that this
> time, market may not behave the way it 'should' as it 'did' last time
when the
> conditions were similar.
>
> If someone can come up with a mathematical model which represents the
> market psychology, there will be no loosing trades at all. All those time
when
> your $3000 trading system said "BUY" and the market broke through your
> stop like a mad bull, you can rest assure that it was due to something
which
> could not be incorporated in your system. Statistics and mathematics can
> build a trading system, back testing the system can give it a touch of
some
> realism. But THAT is history with no emotions (fears) to challenge its
signals.
> In real life, market is NEVER obliged to follow its speculations.
>
> I am not against mechanical systems, but they should not be trusted
blindly.
> Like John Manyard Keynes said, "there is nothing so disastrous as a
rational
> investment policy in an irrational world."
>
> CONCLUSION:
> a) You should not follow your system blindly, as it is not designed to
cover the
> "irrational" side of trading. You should use your discretion when you
smell
> that 'something' which your system is unable to compute.
>
> b) Fear is an important ingredient of the market. It should be understood
in
> order to understand the underlying markets.
>
> Regards,
>
> Mubashir Nabi.
|