Hi Vic,

I thought I'd pass along some lessons I've learned of late working with a variety of portfolio managers. Please feel free to share with Specs, should there be more than a daytime meal in the observations:

Maslow one commented that, when all you have is a hammer, you tend to treat everything as a nail. So it is with psychologists that involve themselves in markets. Lacking an understanding of actual speculative strategies and tactics–not to mention portfolio construction–they reduce performance problems to the lowest, psychological denominator. In so doing, they confuse cause and effect: they observe frustrated traders and assume that relieving frustration is the key to making money.

The professional speculator, unlike the retail daytrader, rarely falls into performance problems because of derelict discipline or runaway emotions. Rather, it is the very competence of the professional that leads to performance challenges. *It is when pros are most in sync with markets, identifying and profiting from themes and patterns, that they are most vulnerable to ever-changing patterns of direction, volatility, and correlation*. The confidence that permits healthy risk-taking under the best of speculative conditions inevitably gives way to confusion and frustration when skilled participants are no longer in sync with their markets.

The wise speculator utilizes this confusion and frustration as information: they often are early signs that something meaningful has shifted in the marketplace. The proper intervention in such circumstances is not to quell the frustration with psychological exercises. Rather, it is to extract the information from the situation and feed that forward into strategy and tactics. Very often, today's bad trade was a good trade in yesterday's regime: there is information in that.

It is when the confusion and frustration are taken personally, as threats, that setbacks are most likely to turn into slumps. If one stops looking for ever-changing market patterns, then the only other source of changed performance is oneself. The internal focus leads to altered trading behavior, much as a pitcher experiencing a control problem might start aiming the ball and altering his delivery. Such alterations begin vicious cycles of diminished performance and unhelpful adaptations.

Ironically, in embracing ever-changing patterns–and the inevitable responses to those as regimes shift–traders are most able to make helpful adaptations. It is when good trades turn out to be losing trades that speculators gain some of their most important information about markets.

B.S. Humbert





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1 Comment so far

  1. James Humbert on December 8, 2010 11:11 am

    I liken this to wagering on professional or collegiate sports (football and basketball). I have used a system based on the way in which books manipulate the line odds from opening to close just prior to game time to determine what the higher probability outcome will be. At face value, one might think that a line opening at 7 and moving to 8 is only reflective of the public bidding up the favorite. As the public is wrong just over 60pct of the time, one might think that consistently betting against a line move is the winning strategy….But, there are more sinister tricks of the bookmaker going on.

    The same can be said for lines of 2.5, 3.5, 6.5, or 7.5. Add moves of a line opening at 5 that moves to 4.5 or 5.5.

    Add the issue of bet sizing…..I have never had a successful season should any bet during a “season” be greater that the size of the first bet of the season. The various “sports information” services in the market (please see Steve Budin on youtube) are traps. They are employed in the market by “the man” to influnce the public into mis-sizng their bets at the perfectly wrong time.


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