A Quick Thought on Trading

Trading Peaks and Troughs

In John Coate's excellent book, The Hour Between Dog and Wolf: Risk Taking, Gut-Feelings and the Biology of Boom and Bust, he makes an interesting point. Assume for one moment that the graph above applies to the trades of one trader as opposed to the S&P 500 Large Cap Index. Coates makes the argument that traders are most in danger of screwing up as they approach LP or the "new higher peak" as the confidence they gain from each successful trade changes their biology slightly, in turn causing them to act less rationally.

However, my experience is that my worst trades come at LT, straight after making a loss. This stands to reason, surely? After a long successful run of trading, you make one bad trade which knocks you out by 10% and you're keen to get back to where you were right before. So what do you do? You risk even more on the next trade in an effort to recover quickly. But the problem is that because the first trade wasn't successful, the second trade is possibly even less likely to be successful for two reasons: there are less opportunities in the market than there were the first time and now... you're almost certainly acting more irrationally than you were on the first trade.

Just a thought.