Wednesday, April 21, 2010

Rational vs irrational

The other day, nice discussion was developed on one small trading chat. I’ve posted there these definitions from some other blog:

“A rational decision is based on testing and data and an understanding of the mechanics underneath the system you're working on. The more you know, the better you decide.”

“An irrational decision is based on gut instincts, conviction and faith.”

I’ve linked them with trading and related them to having or not having system and trading on instincts.

After that, I got a reply from very good friend of mine:

“Igor, you are so right but just a thought, I've met recently few guys that trade SSF, they have a great deal with one medium to large company so they pay ridicules small fees to trade, When I asked them what triggers your trade, not one could tell me!! They say, if the price goes up, we buy, if it goes down we sell.

Now before you jump to conclusions, all of them are trading for a living, most of them never had any other job, some did work for brokers but got laid off, one of the okes bought my old house for cash.

They have a simple target, make 5-10k a day and what makes me sick in my stomach they do it almost all of the time.”

This is how I replied:

“One can make money trading million different ways: fundamental or technical analysis, long or short term, intraday, swing or end of the day trading. Who knows what story is behind those guys. How long they trade 10-20 years, how much capital they have, do they live out of trading or out of something else. Let's see example if they sold company for 50 million and now trade with 10 bars. Making 10k a day or 200k a month is not big achievement.”

At the end, it came down to the fact that those three guys are all self-made traders with 10-15 years of experience. They traded all their life for 8-9 hours a day. Remember what is being said – if one spends 10.000 hours on some activity he could be considered as very good in what one does. So, those three guys spent 10 years x 220 days x 8 hours = 17.600 hours watching markets and trading. They have 30 years of experience between three of them, so it is relatively easy for them to say: ”If the price goes up, we buy, if it goes down we sell.”

I want to make a point here – Not many of us have that feeling or instinct, call it as you wish. The only bet one can make to survive, before one gets instincts, is to have a sound system with positive expectancy and proper money management, as that system will make money for you for as long as it takes you to start with trading based on gut feel – if one ever gets to that point.

Trade with trend!

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