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Matter of Confidence

April 1, 2009
1 person likes this post.

Following on from last weeks blog on executing good trades, this week I will look at the issue of confidence from a trading perspective.

The dictionary definition of confidence is ‘a feeling of reliance or certainty’. Here’s another positive way to define it:- Confidence is thinking about, and concentrating on what you want to happen. Lack of confidence is thinking about, and concentrating on what you don’t want to happen. If you think about what you don’t want to happen in the trading arena there is a high probability that you won’t do the action that might produce what you don’t want to happen. Sounds a bit double dutch but this simply means that without confidence you don’t execute thereby also eliminating the possibility of a positive outcome. Or you execute poorly. As trading is about constantly probing for opportunities to achieve positive outcomes, traders require confidence in their system and themselves to enable them to continually execute trades.

Confidence is a feeling and that feeling is determined by what you think. Notice, too, that confidence is defined as a feeling of certainty. This does not mean that the outcome that you feel confident about is certain, just that you feel certain about it. If you don’t feel certain, i.e. confident, then it is likely that you won’t execute the action, either at all, or as you intended. Why would anybody actually do an action where they feel they will lose compared to another action where they feel they will win? What I have learned is that the quality of our execution is based on the degree of confidence that we have nourished in our conscious and subconscious minds.

However, no outcome can be certain because there are simply too many variables at play in the universe that are beyond our control. These can affect the future outcome of any event, especially in the financial markets. It is important to accept this as a trader (or any other role in life) otherwise we may set an expectation into the future that we know (either through feeling certainty or some other basis) what will happen next and this expectation will attach us to the outcome. When we become attached to the outcome we put significance and meaning on the outcome and hence we set ourselves up for disappointment when the outcome is not what we expected. When we experience disappointment on an ongoing basis we become disillusioned about what we are doing and we spiral into programming ourselves to having a losing state of mind. As a result we lose confidence.

This happens with the majority of traders, especially short-term and medium-term traders. How many times have you not executed trades that soar and you have found yourself saying: “I knew that I should have done that trade!” What actually transpired was that you weren’t confident about the trade (for whatever reason) so you didn’t execute or executed poorly by entering too late. The negative thoughts that popped into your head are a part of who you are and are an indication of your degree of trading confidence.

So how do we learn to feel certain about outcomes that we know are uncertain? This is a paradox. The market, like life, is full of paradoxes and uncertainty. As traders (or golfers or most other things in life) we need to learn to think about what we want to happen and block out the thoughts of what we don’t want to happen.

The things that we don’t want to happen, like losing trades, will still happen due to randomness or the limitless number of variables out of our control that interact in the market. But we can learn to detach ourselves from the outcome of trades. Doing so will overcome emotionally charging our reaction to outcomes, losing or winning outcomes. We can do this if we have confidence in the edge of the trading system we are using and by having a trading plan. Confidence in the edge of the system can be gained by understanding the probabilities generated by the system over time. If over a large sample of trades the system generates a profit and has a positive trade expectation, then this is what we must focus on. Being able to do this will generate confidence to continually execute signals to buy and sell, knowing that some trades will win, and some will lose but the edge is in our favour over a large sample.

To nourish confidence you must have faith and trust. But how is trust developed? Defining a trading process that you believe in and learning to both trust it and believe in it will be the topic of further discussion in this blog.

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Comments

  • Tom Hynes says:

    What about Trading Strategies both short and long!

  • Lubo says:

    Dear Gary,

    my name is Lubo and I read your thoughts about trading , yesterday(31.03.) I listened to you on ABC with Tony Delroy program which was very nice to listen to your thoughts about the markets.
    I’d like to ask you two questions :
    1. Why Educators all the time mention Golf to compare to traders and not other kinds of sports ?
    2. and when analysing the markets ,do you take into cosiderations any geopolitical events what happened in recent years ?
    I do not want to sound smart, but history does not need to repeat with the same or similar results like from the other market crashes that market will rise again especialy with so much debt. I was brought to spend only what I earn but when I read about these stimulus and they want to draw all the countries to do the same,I see straight away,we are heading like Zimbabwe to the bring of economic collapse. When there are rules they must be adhere to there can be a difference of + or – from the rules but not too much, but what these educated CEO’s have done is too much and bring the economy back again won’t be so easy because they took us all faraway from the mean and without the economic and social pain it won’t be brought back to the mean and with all these stimulus programs – means more debt how these can happen ?
    or will it be like in post WW II when people used money to heat houses ?

    I just wonder how this is going to be resolved because debt is debt and 1 day it must be repayed and markets,which are us-people will react to it adversaly,because we are expressing our thoughts in the markets in buying or selling.
    I think people in the past they had their honour and when they did something wrong they commited suicied and resigned but nowdays they do not want to admit they’ve done wrong and instead they will collect their 29 million dollars and 1 -or 2 million pension for life like CEO from General Motors and they let you die without penny on the street.
    Now these educated people have no social morals and are attached to monies very much and I am talking about CEO’s and their cronies which are not much better in running business then any other ordinary people.

    Mr. Gary Thank you very much for your time to read my thoughts.

    Kind regards Lubo

  • Peter Brown says:

    As always, I find your comments instructive and educative. I particularly like the blogs that focus on the psychological aspects of trading. This current blog is very relevant to trading at any time and particularly at this time in the market. I am not new to reading about psychology and investing/trading but your blog made me stop and reflect. I have now read this blog several times. It has reinforced for me why I need to stick to my trading plan and why I need to stop myself being tempted or feeling scared. Best wishes. Peter

  • Jock Norman says:

    Golf was invented by a Scottish commodities trader.

  • Gary Stone says:

    Response to Comment by Lubo:

    At the outset I must say that you have hit a few issues right on the head in your posting. I’ll break my response into two parts. Firstly:

    “Why Educators all the time mention Golf to compare to traders and not other kinds of sports ?”

    I’m not sure that many do but I do because I am a single figure handicap golfer and have plenty of empathy for the psychological parallels between golf, life and trading. IMHO golf is the game/sport that parallels life and trading the closest.

    What makes golf almost unique as a sport is that the ball is stationary and it is not a team sport that has dependencies on other members or opponents. You are playing against yourself and the environment (which has a large number of changing variables) both of which you need to overcome through, amongst other things (which we have and will cover in blogs), empathy.

    In team sports and other ‘singles’ net sports you are playing against an opponent(s) and you react instinctively to a moving ball which almost eliminates thinking time. A round of golf takes 4 – 4.5 hours but you spend about 2 minutes actually executing a golf shot, the rest of the time you are thinking about executing shots, just hit or about to be hit. Just like trading where execution of a transaction takes a second but preparing and thinking about it ……….

    In trading and golf you are always battling against a benchmark. In trading, your financail goal is to outperform the index. In golf your goal is to break par – the handicapping system provides this challenge for every golfer.

    There is no doubt that the right psychological attitude in all others sports is a major asset, especially in contact sports.

    I could go on but will leave it there.

    Regards
    Gary

  • Jock Holland says:

    Gary, Simply a great article on confidence. Regards Jock Holland

  • Max says:

    Hi Lubo

    Why Golf? Money Management! As well as Gary’s comments.

    Big Golf Tournament Clubs only want the best golfers to win their Championship so they make it over 72 holes (4 rounds). This way a golfer with a very good game plan and disipline will always rise to the top over a large number of holes.

    The same as a trader as stated by Gary above, an edge over a large number of trades will bring a good trader home a winner. A bank divided by 72 is roughly 1.4% per trade, a roundabout figure that most books recommend to risk at the most per trade.

    It’s funny because Tennis do the same thing for their biggest men’s matches.
    5 sets in the finals. The shortest a match can be is 3-0 but there is 6 games in each set which = 18 games and there is 4 points in each game. 15 love, 30 love, 40 love then game. So 18 x 4 = 72 points he has to win to make the match the shortest he can.

    It’s designed to make sure the best win most of the time. Maths, don’t you love it.

    Cheers … Max

  • Lubo says:

    Hello Gary and Max,

    thank you very much to both of you,for a very nice explanation and it is really amazing how(I thing almost everything) is governed by mathematic and fyzics in this world and when the sums do not sums up togheter as they should everything goes out of balance and then it is very hard to put toghether because onother numbers which came in and distorted the sequence of natural process.
    and if we want to come again to the mean( natural process) we have to allow these new numbers to take care of themselves and not to stir in anything new otherwise the process will take longer and longer.
    Thank you.

    Cheers Lubo

  • Victor says:

    I think confidence is not having to know you are right. Anything can happen. I just accept it (or at least I know I should).

    Once you’re in the trade, keep planning to take that small loss. Expect it. Just don’t be surprised when you don’t.

  • Gerry says:

    Is it possible to have a trial run of SPA? For example is it possible to try it out for no cost for say 6 months?

  • Gary Stone says:

    Comment from: Gary Stone [Member]·http://www.sharewealthsystems.com
    Response to Comment by Lubo (Part 2):

    “..when analysing the markets ,do you take into cosiderations any geopolitical events what happened in recent years ?”

    In short, no. I look at price action only. Indirectly I do look at geopolitical events, through price action. The prices of equities, currencies, commodities etc will react taking into account ALL the variables that can possibly interact on the market, including geopolitical events.

    Geopolitical events are just a subset of ALL the events and varaibles that thrust themselves on the markets. Being AWARE of ALL the variables that might affect the markets is an impossible task let alone knowing how each and then the sum total of ALL the varaiables will affect the market is an even more impossible task (if something can be more impossible!). Each of us will only ever be aware of a subset of all the varialbes in the universe of the markets.

    The only way that we can achieve awareness of the net affect of all the variables on the market at any given moment is to watch price action. It is impossible to predict what may happen if a certain event occurs or not. We can look to history to get an idea and determine the probability of what may happen given a certain set of circumstances that have occurred before but there is no certainty.

    “…..history does not need to repeat with the same or similar results like from the other market crashes that market will rise again especialy with so much debt…”

    In your email you have focussed on the variable of debt which I discussed in our eUGM webinar with customers and on ABC radio on Tuesday evening. Making assumptions on how the debt:GDP ratio will affect market direction is a big mistake. As is taking any single variable or subset of variables and making assumptions on how they will affect market direction. The answer is to surrender to the fact that you will never know what will happen and nor do you need to know what will happen because anything can happen. You execute your surrender through establishing a process that enters and exits the market based purely on price action.

    All variables are discounted into price action at any given moment.

    In the last 120 or so years we do have 2 other periods besides the period that we now find ourselves in where debt grew because, as a nation, we lived beyond our means. This is measured through the debt to GDP ratio. Refer to the Australian Debt:GDP chart below which measures debt as a percentage of GDP.


    (Source: http://www.debtdeflation.com/blogs/)

    This clearly shows (on the right of the chart) that growth over the last 20 years has been achieved through leverage. I don’t wish to get into econonic debate but IMHO growth through moderate debt that can be paid off through income in a relatively short period of time and through productivity improvements and innovation is good growth but growth fueled mainly through leverage (even though there has been plenty of productivity improvement and innovation in the last 20 years) is not sustainable growth. Leverage has accelerated during the 1990’s and 2000’s.

    To get an idea of how the market might react in the next few years, let’s look at what the stock market did during the previous 2 periods of over-leverage which peaked in 1892 and 1931, respectively. On both occassions the stock market experienced a serious bear market when the over-leverage came home to roost through strains on the banking system, corporate collapses and credit crunches etc. The bear markets occurred in the early 1890’s and the 1929 crash. Notice, importantly, that on both occassions the market peak occurred before the debt:GDP ratio peaked. Very similar to what we have experienced over the last 18 or so months where our current debt:GDP ratio is still rising while the market has retraced by 55%!!

    What’s important is what the stock market did during the period of deleveraging that followed when debt as a percentage of GDP dropped. On both occassions it took 20+ years for the delevering process to reach manageable levels but the stock market rose. Following 1929 and during the 20 years of deleveraging the Australian market rose 290%. A simlar rise occurred following 1890 while deleveraging was taking place.

    In the USA exactly the same thing occurred. During the deleveraging period that took USA debt from being 260% of GDP in 1935 to 130% in 1955 the S&P500 rose 300%.

    There were other variables that interacted on the market at the time like 2 World Wars. There are other variables that are around now that weren’t around then. Things may not accur exactly the same as they did in history but the probabilities are in favour that they will. What else can we go with unless you or anybody knows with certainty what outcome all the current varialbles will produce. Just as it is incorrect to assume that history will repeat itself and we will have a 300% rise in stocks over the next 20 years it is equally incorrect to assume that because the debt to GDP ratio is at all time highs that the market defintely won’t rise and make a new high over the coming few years (a new high requies a >100% rise from the recent trough).

    My point is that neither you nor I know. Anything can happen. There is one guarantee that I can give you: spectators will not profit. Over the coming years as economies around the world deleverage some investors will lose (either directly or through opportunity cost of inaction) and some will profit. IMHO those with strategies that have an edge that rises by more than the market during rising markets and protects capital during falling markets will do very well in the years to come. Who knows, it may have already started……

    In conclusion, the economy and the market are not synchronised and never have been. Markets fall from their highs before economic problems are known on a wide scale. Markets rise from their troughs during economic gloom not when the economic news is good. Don’t get the two confused. The way to tell the difference is to watch the price action of the markets.

    Regards
    Gary

  • David Sayer says:

    Replying to Gerry;s comment:
    “Is it possible to have a trial run of SPA? For example is it possible to try it out for no cost for say 6 months?”

    Unfortunately, this is not practical or realistic for this type of product. There is a lot of propriety and valuable information within SPA that we can’t just give away for 6 months. I would agree that before you commit a reasonable amount of money to any product you need to make sure it does what it says, look at its reliability and check its credibility.

    We do our best to provide prospective customers with all the information they need to make the decision to become a customer. We have live 1 to 1 demonstrations, discovery sessions with Gary, plenty of phone support and most of all, COMPLETE transparency of our long term results. Our public forum is open for anyone to register and ask questions of existing customers. This blog should also give you a picture of a company that knows about trading and trading methodologies.

    Please give us a call and we’ll start the information flowing.
    Regards,
    David

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