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Reading Room

What I'm reading about now:

Generally, the concept of the disposition effect is easy to understand. We have all experienced it in trading as letting our losses run or, after a loss, doubling up on the next trade to take revenge on the market.

If we are rational people, we generally only let this happen a few times, hopefully preserving a small portion of our starting capital with which to begin anew, as Richard Dennis did back in 1994. Some of us, however, do not learn and merely serve as providers of liquidity to the more disciplined traders out there. To be sure, the markets need these people. But do we Lonely Traders have to be these people? I say no.

The disposition effect is not just about holding onto losing trades, however. As Hens and Vlcek write, prospect theory has not necessarily cornered the market in explaining the disposition effect. Rather, the outcome of an investment or trading decision may depend on a particular agent's (read: trader's) preferences and on where his or her frame of reference is before and after a trade has taken place.

Without getting into the gory details of the findings from Hans and Vlcek, we traders must become proficient at judging our trading personalities from day to day -- whether we are feeling risk averse or risk seeking, or whether we are simply trading the plan. We must be aware of where we are in our trading and we must have strategies in place that compel discipline.

We must prepare a plan that incorporates failsafe strategies -- much like large trading houses do. From the business plan, to the daily trading plan, to audits of our trading, to periodic personality assessments, it is imperative that we write this awareness into our trading and into our lives. JRS

Book Store

Review:

How to Become a Successful Trader
Ned Gandevani

This is the only book I've read on the topic of trading psychology that truly provides a framework for meaningful analysis of one's trading personality, and then guides the reader through a process of developing strategies for both exploiting strengths and mitigating weaknesses. Other than the many formatting, spelling and grammatical mistakes, the content is very clearly organized and easy to read and retain. Unlike many other authors in the field of trading, this one does not infuse his writing with pet theories or personal affectations. If you read this book you can expect to gain:

A clear understanding of the five factor model and how it differs from other models,
A fairly strong knowledge of those aspects of your personality that help your trading and those that are not so helpful,
A framework with which to identify those trading styles that suit your personality,
A clear process for defining what the author calls developmental and complementary strategies for working through personality-related trading issues, and
A launch point from which to start a life of trading with important self-knowledge that most traders never bother to uncover.

His presentation of perceptual biases and decision traps is also helpful in framing our problems as traders. A mindful reading of this book and purposeful studying of the model for personality assessment will help traders take control of their trading behavior and use it to their advantage. JRS

News / Analysis

Best Free FX Analysis:

Like all good things on the internet, Lloyds TSB FX Technical Strategy is free. It is also offered in the weekly timeframe, which in my mind is less prone to disrupt my own individual daily trading process. Better still, there are archives of previous issues. But Lloyds TSB does not stop at FX technicals. They offer a suite of financial commentary that is, in my opinion, of the highest quality.

The best part, for me, about the FX issues is that they are written from the UK and thus do not have the USD bias that most analysts in the US seem to have. The GBPUSD and EURGBP are two of my trading mainstays. The authors are also seasoned veterans, often starting commentary with openers such as, "For anyone that has been in the market over the past 20 years...."

The Economics Weekly and Financial Markets Review round out the FX Technical Weekly. For those who trade the Sterling, these free resources are indispensable for gaining a picture of the other side of the Cable equation. It is important that currency traders do not get caught up in a USD-centered approach to their market research. Although the dollar is still the dominant currency, there are two values at work in a currency pair.

As an extra bonus, take a look at the Bond Technical Strategy Weekly and the Emerging Markets Technical Strategy Weekly. Even if you don't trade, this all makes for some interesting reading and an excellent launch point into more focused investigation.

Check in again soon for another free FX technical analysis resource. Or click the arrow at the top of the page and check out some great free news and analysis resources on the internet. JRS