Another reminder for those who will be attending the Trader’s Expo in New York this year, I will be giving a free workshop there this coming Monday February 15th from 1:30 to 2:30 PM.

If any readers drop by to see my workshop, please stop by the podium before or after to say hello.

Irrational investors and traders make it possible for master traders to make money. So if you want to improve your trading, it helps to understand the predictable ways that other traders may act, and what makes them act that way. Jonah Lehrer has an interesting blog post on the neurological basis for the cognitive bias of Loss Aversion. He states:

Loss aversion also explains one of the most common investing mistakes: investors evaluating their stock portfolio are most likely to sell stocks that have increased in value. Unfortunately, this means that they end up holding on to their depreciating stocks. Over the long term, this strategy is exceedingly foolish, since it ultimately leads to a portfolio composed entirely of shares that are losing money. (A study by Terrance Odean, an economist at UC-Berkeley, found that the stocks investors sold outperformed the stocks they didn’t sell by 3.4 percent). Even professional money managers are vulnerable to this bias, and tend to hold losing stocks twice as long as winning stocks. Why do investors do this? Because they are afraid to take a loss⎯it feels bad⎯and selling shares that have decreased in value makes the loss tangible. We try to postpone the pain for as long as possible. The end result is more losses.

The whole post is worth a read as Jonah goes on to provide some evidence that this human bias has a basis in physical brain function.

An understanding the motivations of other traders can be an important source for confidence in your trading strategies. If these strategies are based on ideas which, in turn, rely on the innate irrational behaviors of humans, they are more likely to continue to work over time.

It looks like I’m not the only one to be thinking of the Virtue of Integrity in trading. Today from Dr. Brett Steenbarger:

But there’s an easy way to identify those who offer goods and services with integrity and those who don’t: Go to their websites or blogs and measure the ratio of self-promotional posts/articles to the number of substantive, informational posts/articles.

If you have substance, showing it is your best marketing strategy. If you don’t have substance, all you can bank on is hand waving.

We all put our best foot forward when we first meet someone we want to know. What vendors of goods and services put on their home pages represents their best feet forward. If there’s no substance there, caveat emptor.

Read his whole post, and the older one which started it all. It is destined to be a classic of righteous outrage.

Jonah Lehrer has an interesting blog entry on the role of intuition and chess in which he discusses Magnus Carlsen, the youngest chess player to achieve a number one world ranking. He notes:

At first glance, there is something surprising about a teenager weaned on chess software extolling the wonders of intuition. It’s as if we expect Carlsen to act like his software, to be as explicit in his strategic decisions as Deep Blue, the IBM supercomputer. But that misses the real purpose of practice and the real genius of the human brain. When we practice properly — and this means engaging in deliberate practice — we aren’t just accumulating factual knowledge. Instead, we’re embedding our experience into our unconscious, so that even insanely complicated calculations – and Carlsen can regularly plan twenty chess moves in advance – become mostly automatic.

This is a truism of expertise. Although we tend to think of experts as being weighted down by information, their intelligence dependent on a vast set of facts, experts are actually profoundly intuitive. When experts evaluate a situation, they don’t systematically compare all the available options or consciously analyze the relevant information. Carlsen, for instance, doesn’t compute the probabilities of winning if he moves his rook to the left rather than the right. Instead, experts naturally depend on the emotions generated by their experience.

This is the essence of the idea behind Trading from Your Gut, learning how to develop the level of expertise required to trade with intuition.

There is a big difference between merely guessing, or shooting from the hip when you have no experience, and the honed intuition of a true expert.

There is a lot of money to be made selling to desire. Marketing is essentially the science of identifying wants and finding a way of selling to them. Good products deliver on their promise. Poor products don’t.

But that doesn’t stop unscrupulous marketers from selling those products, nor from pretending that they solve problems they don’t actually solve or meet needs they don’t actually meet.

The pure marketer will ignore the truth and sell to the market’s existing perceptions. This is indeed the easier route, and the one that will make the most money. It is a dishonest route, however.

If you know the truth about what is important, you should say the truth. Perhaps gently, being mindful of the existing perceptions, but still telling the truth.

In trading, the vast market consists of neophytes who are looking for magical answers to make lots of money quickly and with little risk. They want specific ideas. They want to be told exactly what to do. Those looking for such things will not find them. They will not be successful as long as they continue to favor the easy over the truth.

It is easy to sell to the desires of these newbies. Indeed, a sizable portion of the industry does just that. But this is wrong.

Those who will be successful traders seek the truth and reality. The stock market doesn’t care about what you think. Gold doesn’t care what you want. The commodities markets behave the way they do without concern for your desires and wishes. Master traders look for what is actual. They are not afraid to confront the reality.

Trading is hard. There are no sure things. Learning specific methods from a book will not help most people. There are countless reasons.

The answers are out there. You can find them. If you keep your eyes open, pay attention, and learn humility.

For those of you who will be attending the Trader’s Expo in New York this year, I will be giving a workshop there on Monday February 15th from 1:30 to 2:30 PM. Here’s the blurb from the marketing materials:

Swing Trading When the Market Is Right

Not all markets should be traded. Not all trades should be taken. Learn how to determine which trades to take and when to take them. Join bestselling trader and writer, Curtis Faith, author of Way of the Turtle and Trading from the Gut, as he shows you the reasons why some trades are better than others and how to tell the difference between a trade you should take and one you should pass on. Learn how to use your intuition to quickly process the information you need to take your trading to the next level.

I hope to see some of you there.

- Curtis

One of the blogs I read regularly is Seth Godin’s blog. This morning, he made a thought provoking post about the decade in retrospect in which he describes a friend’s lament at looking over the previous seven years at his job with regret, because after working seven years at something he didn’t enjoy, he had nothing to show for it.

At the end of his post, Seth asks:

Maybe ten years is too long a period of time to plan for. So how about seven?

Seven years from now, what will you have to show for what you’re doing right now?

If your answer is, “not much,” perhaps you should consider a new plan, one that might generate a different answer, or, at the very least, be a more fun way to waste seven years.

This continues a theme that I first covered in the epilogue for Way of the Turtle, the idea that it is more rewarding to define your own future and live your life according to your own particular set of priorities and principles rather than any that are handed to us by our culture. In the end, you’ll be the one wasting your own life if you don’t enjoy what you are doing and you don’t accomplish any goals that you yourself find worthwhile.

Hard work itself can be fun if you believe in the goals you set and you are doing something for which you are well suited; if you have the skills and motivation to perform well, even a marathon or triathlon can be fun.

Making changes takes a willingness to risk failure. Change is disrupting and can be scary. The alternative is known and concrete and seems safer but often leads to a place you don’t want to go.

So how about you? Are you doing something you believe in? What will you do different in the next decade? Will you make sure it won’t become a “lost decade” for you?

I did a live radio interview today with Vince Rowe as part of the publicity for the book launch. You can find it here.

Trading From Your Gut is now shipping at Amazon.com and BarnesAndNoble.com.

Any online reviews after you read it are much appreciated.

Renegade entrepreneur and Dallas Mavericks team owner Mark Cuban had an interesting blog entry last week. On the reasons for making choices, he stated:

As [someone who] has been incredibly blessed, let me just tell you that the things at the top of my list are not numbers or dollars.  They are my family and the things I had fun doing.

A lot of people think Im crazy, or chasing publicity, or whatever. I don’t care what they think. Before I do any of the many things that I get asked to do, and that I think might be fun, I have one simple question i ask myself.  When I hopefully turn 90 and look back at my life , would I regret having done it, or not having done it ?

Mark’s post gets to the heart of what makes trading difficult for some and easy for others. Most of the really great traders I have known are driven by more than money, they trade because they love trading, or they view it as a grand challenge to be conquered. I have found that those who are primarily driven by the desire to get rich most often fall prey to the psychological pressures of the ups and downs of trading.

Some people start out learning about trading because of the money but then learn to love it because of the challenge. Others trade because they love the independence it affords.

How about you? Why are you trading? Has it brought you what you expected?