Avoiding Punishment is the mistake

30 09 2007

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This chapter gives several examples of different peoples method of placing their trades, and uncovers the difficulties that many people have in following a trading method. Much of the difficulties lie in the behavior pattern of avoiding punishment. A speculator may make mistake and know that he is making them, but not why. He simple calls himself names and lets it go at that. 

Mistakes are always around if you want to make a fool of yourself. Mistakes are part of the human condition, and should not cause lost sleep. But being wrong – not taking the loss – that is what does the damage to the pocketbook and to the soul.  

Trading Commodities rather than stocks partakes more of the nature of a commercial venture than trading in stocks does. Commodities are governed by one law in the long run, supply and demand.  Fundamental information is more concrete than in Stocks, where the investor must guess about many influences.  

Technical analysis, or tape reading, works exactly the same for stocks as for cotton or wheat or corn or oats. Still, the average trader from Missouri everywhere will risk half his fortune in the stock market with less reflection than he devotes to the selection of a car. Today the popular analogy is that most people spend more time planning their vacation than they spend planning for their retirement.  

The speculator wishes to profit by either a rise of fall in prices. The thing for the speculator to determine is the line of least resistance – and wait for the moment when the line defines itself. Getting in to early will often cause you to be whipsawed.  Best to define areas of resistance, and wait for a breakout.  Once prices breakout, the patient trader will have two forces in his favor 1) underlying conditions and 2) traders who were wrong and have to cover their positions. News items often come out to explain why prices broke through and are often unexpected by the trade.  It is human nature to exaggerate bull news in a bull market and to ignore bear news, and visa vera in a bear market – yet people will always express astonishment at this fact. {this is the basis of The Reversal Thingy of Mikey’s Methods to Money or Madness}  

The speculator is not an investor, who wishes a steady return at a good rate of interest, nor a gambler, who hopes for a great big profit, but a speculator looks for smaller but much more probable profit from either a rise or fall in prices.   Larry’s system of placing his bets incorporates the key importances of Phantom’s Rule #1 and Rule #2.  Often this system would show and initial loss in testing a market. Once the correct timing occurs on entry, the initial loss is easily recovered and, using Rule #2, greater position size is added when the trade is proven correct.  

In order to proactive what you preach, you must trade according to your own nature. There is another example given of the Pat He arne method of placing his bets, and of covering his positions. A workable system that was implemented by another trader, with much poorer results, because he was not able to make himself follow the rules.  Even though he knew he was ten thousand kinds of an ass for not sticking to that style of play, he repeated his costly mistakes.   Human weakness that may make you likeable to others, that are not so dangerous in other venues, are fatal in speculation.  A man has to ‘reverse what you might call his natural impulses’, or, use a counter-intuitive principal.  The correct emotional responses are to fear that your losses will get larger, and hope that your profit will grow.  Instead, most investors lose money trying to avoid a loss – they hold a loser hoping it will reverse, and when they show a profit, they fear the market will take it away, and so take the profit to quickly.  

The last chapter brings up the re-occuring theme that no man can beat the market.  Or as Phantom puts it – trading is a losing game.  Throughout these pages, the correct manner of entering and building a position are both geared to reducing the risk of loss – to avoid damage to your pocketbook and your soul.

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