1) Putting Prediction Ahead of Understanding - In a sense, this boils downward to acting earlier nosotros genuinely sympathise the rationale for action. At outset blush this makes no feel at all. Still, the fearfulness of missing moves in addition to the request to brand coin sometimes Pb us to anticipate marketplace behaviour earlier we've fully done the move of agreement why markets should displace inwards such a fashion. Traders oft verbalize most the importance of having confidence inwards their views. Genuine conviction, I find, is a business office of deep understanding. If nosotros perceive that nosotros receive got a grasp of what is driving markets, nosotros are to a greater extent than probable to stick amongst the merchandise ideas emanating from that understanding. Nothing guarantees, of course, that our explanations of marketplace behaviour are correct. It's a pretty adept guarantee, however, that if nosotros anticipate marketplace movement in addition to lay on positions earlier nosotros accomplish a grasp of why that movement should occur, we'll endure easily shaken from our ungrounded convictions.
In the nautical chart above, I rails what I telephone band "Demand" for stocks. It is a running five-day average of upticks vs. downticks amid NYSE shares. There is some predictive value to those data, but especially of import from my vantage betoken is putting the information into context to sympathise what is happening inwards markets. When markets displace speedily from a betoken of negative Demand--net selling pressure--to a betoken of high Demand (net buying pressure), that momentum reflects an of import shift inwards marketplace participation that tends to persist over the close term. Conversely, when markets bounce higher but internet Demand remains negative, that suggests a lack of upside participation and, ultimately, a vulnerability to the rise. Note how that was the instance during the marketplace topping inwards September. One of import ingredient of agreement is only identifying whether buyers or sellers are inwards command of the marketplace in addition to which agency that residue is moving. Identical nautical chart patterns tin laissez passer on notice follow from real dissimilar configurations of internet Demand.
2) Mismatch of Time Horizons - This is the outcome of conceptualizing merchandise ideas on 1 fourth dimension horizon in addition to managing the chance on a real dissimilar fourth dimension frame. Influenza A virus subtype H5N1 classic instance would endure a "macro" trader who develops a cardinal thesis most how stocks should displace over the side past times side 3-6 months, but thus is forced to halt out of positions on retracements that, ultimately, are expectable over such a fourth dimension period. In other words, the psychological tolerance for loss is poorly matched amongst the trader's conceptual framework. This occurs at trading firms where chance is managed tightly, but where traders soundless experience a request to stick amongst ideas in addition to hold their convictions. I recollect working amongst a rookie daytrader whose hitting charge per unit of measurement on trades was startlingly abysmal. It seemed equally though the results were non random, but represented a pregnant negative alpha. What that trader would exercise is ready stops insanely some the betoken of entry, pride himself on a "good risk-reward trade" in addition to thus larn stopped out 80% of the fourth dimension on a putative 3:1 adept bet.
When the press for chance greatly exceeds the tolerance for loss, it's a certain bet that adept trades volition endure managed poorly. We tin laissez passer on notice receive got superior marketplace understanding, derive splendid merchandise ideas from that understanding, in addition to soundless neglect to brand coin only because nosotros our psychological misalignment betwixt chance in addition to vantage leads to poorly aligned seat management. Far amend to rest inwards adept trades amongst minor size than continually halt oneself out on dissonance in addition to neglect to capitalize on solid understanding.
Further Reading: Five Distinguishing Features of Great Traders
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