Thinking clearly

[crash]

Marcus Padley writing on share trading in the Melb. Age makes some good points that are as true for share traders as they are for punters [just read 'punter' instead of 'trader' as a trader is on the punt too, just a different market]:

Why do so many people lose at trading? The answer is that they are humans not machines. Most traders do not think clearly and, faced with losses, gains, luck and indecision, they begin to function emotionally instead of mechanically. It is this weakness the studied professional trader takes advantage of.

Identifying common behavior patterns that lose you money. Here's a list of some of the more common ones. In financial and social theory some of these are called cognitive biases, erroneous rules of thumb or common errors of judgment. In trading there are many. You might recognize a few of your own:



■Emotional bias — the tendency to believe the things that make you feel good and to disregard things that make you feel bad. In trading terms this means ignoring the bad news and focusing on the good news. It's called losing objectivity. You don't recognize when things go wrong because you don't want to.

■Expectation bias — the tendency to believe in things that you expect. In financial terms this means not bothering to analyze, test, measure or doubt the conclusion you expect or hope for. It is also known as the law of small numbers. Believing in something with little real evidence.

■The disposition effect — the tendency to cut your profits and let your losses run. The complete opposite of what a trader should be doing. Making small profits and big losses is a recipe for losses.

■Loss aversion — the tendency to value the avoidance of loss more highly than the making of gain. Losses affect you more than gains. Because of this you become more emotional when making losses, the point at which a rational decision would save you the most money.

■The sunk cost fallacy — this is the tendency for our decision making to be influenced by the size of the loss we have already incurred. The bigger the loss the more likely we are to persist with a losing trade rather than to take the rational decision and cut to a more profitable trade. The size of your loss has no effect on the future share price but a huge effect on your ability to make the right decision.

■The bandwagon effect — the tendency to think it must be right because everyone else is doing it. A thought process guaranteed to get you in when it's obvious and get you out when it's obvious. Put another way, it has you buying at the top and selling at the bottom.

■Past price fixation — this is the tendency to avoid prudent trading decisions by anchoring your thought process to prices that no longer exist. "I'll sell it if it gets back to $4." "I'll buy it if it gets down to $4 again." We are all guilty.
--------------------------------------

Crash: I'll put my hand up to a few of these. Not as many as once upon a time, but I still fall into the emotional traps now and then.

[Maurice]

What a good post. I guess he can follow that up with a part 2. When we have conquered those emotional demons and start thinking mechanically, to remember that its only nuts, bolts and on paper (or a screen) and start thinking more logically, not so mechanically.
Tak, now I am going to have to take off these business mans clothes, before i turn into a computer :)

[Brendon]

I'll add one:


■Unnecessay Tweaking Bias — the tendency to believe in a current run of losses that make you feel bad about the selction process you worked so long and hard on. You disregard the long term profit of your method and develop an unnecessary need to pointlessly change things around, perhaps tweaking a win out of recent selections. In trading terms this means ignoring the long term good news and focusing on the recent bad news. It's called losing objectivity. You don't recognize that you really are onto something good because you don't want to

(I've been guilty on all counts, including the one I just posted. LOL)

[crash]

I love this one:

■Loss aversion — the tendency to value the avoidance of loss more highly than the making of gain. Losses affect you more than gains. Because of this you become more emotional when making losses, the point at which a rational decision would save you the most money.

Commonly know as quit as soon as your ahead [avoiding any further profit or possible loss ]. What do we do when we are behind? Keep betting or give up the punt?

The natural progression of this rule leads to small profits [quit as soon as you have one] and big loses [just keep betting].

[Maurice]

Loss aversion - yep, and i wonder if this really applies to 'punters' or rabbits.
( and i do recall this was for stocking trading )

Have you seen a bloke who loves a punt, the wins spur him on to the next race and the losses spur him onto the race and breaking even sends them to the cardies and/or pokies. ;)

[Crackone]

To me all this means take the emotion out of betting. Very hard to do, unless you have strict rules to follow (a mechanical system ) . Back every horse that it throws up no matter what price because in the end you now your system will come out in front.:)

[Brendon]

Very good article.

I went through the points, and out came the cliches:



Put a reasonable amount of analysis into each race program. Be ruthless when weeding out weak picks. And if my numbers say an unlikely runner is a good chance, give it a good look.



Bet according to my bank, and accept I will have losing days. Don't try to break even or win with a larger bet at the end of the day. If my bank grows because of a positive POT I will have bigger wins. Chasing losses will hit my bank hard for frequent little profit and frequent big losses.



DON'T try to chase losses. Smaller bets from a losing streak help dampen the negative effects on my bank. A winning streak with bigger bets helps profit grow larger too.



Make sure if I back a favourite it better be a sure thing and not stupidly short. If I think it has the field covered on all counts, even $2.50 is good. Just because a hot jockey is on, or it won a Listed race last campaign means nothing if it doesn't all add up. Odds on, look on.




Might be cliche, but they have a ring of truth

[Bhagwan]

OK , we have read about the things we should not do.

One may notice that the folk who write these articles originally , don't seem to offer how it should be done.

Its like reading an article on what Psychologist think is abnormal but never write an article on what is normal.

Cheers.

[Stix]

OK , we have read about the things we should not do.

One may notice that the folk who write these articles originally , don't seem to offer how it should be done.

Its like reading an article on what Psychologist think is abnormal but never write an article on what is normal.

Cheers.Interesting Bhagwan and very true, looking at the other threads all the discussion is on what not to do and why not to bet. There is very little "relevant" (IMHO) discussion on how to bet, how to win etc. Everyone is too protective. And anyone who posts gets debated to the nth degree or if you present something you get challenged for contributing something that is simply for people to think about ...not follow blindly - give people some credit. Anyway that's my last 2c worth.

[crash]

OK , we have read about the things we should not do.

One may notice that the folk who write these articles originally , don't seem to offer how it should be done.

Cheers.

A bit harsh there Bhagwan. A simple check [ 'Marcus Padley-The Melb. Age']
to see if he or does or doesn't give some good advice to winning [he can't do it for us though] wouldn't have been hard [?]



What I originally put up here was not the whole article, just the common traps. If you want the whole article or many others by Marcus Padley who writes weekly [mostly to do with share trading]. http://www.theage.com.au/execute_search.html?text=marcus+padley&ss=theage.com.au&x=15&y=8

Here is some positive advice from the same guy regarding things we should be doing to improve our lot. Equally relevant for a good trader or punter, laying or betting:

Your 'part 11' Maurice :-)
-----------------------------------------------------------------

Marcus Padley
June 6, 2009

"PUT a bet on through a bookie and the reality is, if you win, they lose and, more importantly, if you lose, they win.

Work that out and you will realize that behind that flashy smile and flirtily comment the bottom line is that they want you to lose. It is in their interests that their customers lose. An ethic that would doom most businesses to the graveyard, yet after centuries of losing customers money, the bookies are still in business.

They stay in business because everyone loves to punt, needs to punt even. They stay in business because they provide an "essential service". But if they didn't make money, they wouldn't exist. So, how do they make money? Why do they make money? Learn that and maybe you too can win.

Well, it's simple. Two things.

The first is risk management. Not losing money. Bookies succeed because they put structure around risk. They manage risk. It is the same in the sharemarket with the new breed of sharemarket bookie, the contract for difference (CFD) providers. They too take the opposite side of your trade.

They will tell you that controlling risk means knowing when to hedge, who to hedge. You probably have the idea they hedge everything, but they don't. It would cost too much. Instead they simply identify people who have a habit of winning and when a winner takes a position, they hedge the risk and move the price. With CFD providers it means they differentiate between the good traders and the bad. That's why they ring you up, to suss you out. Otherwise, they just watch what you do. The winners, they hedge. The losers, they don't.

Which brings up the second reason they make money. By taking bets off losers. Off Joe Public. Off the majority. Off the people who don't take their betting seriously. People who fly by the seat of their pants. People who "love having a punt". "Love to Punt" means "Love to Lose". This is where the real money is.

There's no need to hedge losers, all they need to do is to encourage loser activity with a host of bait. Like glamorising the life of a trader - telling them how sophisticated they are. By trumpeting winners with hindsight examples, offering sexy software, free. And, most importantly of all, by making it really easy and terribly tempting to just "click and trade" and place that bet.

Amazingly enough, when it comes to making money as a do-it-yourself trader it is not the product you are up against. On the contrary; CFDs are a fantastic product for winners. What you are up against is something far more dangerous: it is you, with your feeble mind that is in no position from a standing start to be trading highly leveraged products against professionals.

So, what do you do? How do you narrow your odds?

Well, it's what you don't do first. You don't trade just because you can. Just because you can trade shares or CFDs from your kitchen doesn't mean you should. What you do do is educate yourself about what it really means to be a "trader".

Ultimately trading is a business activity. It is not glamorous or exciting.

It is methodical and routine.

It is boring. Half the game is handling risk, 40 per cent is discipline, 9 per cent is vigilance and the rest is picking winners. You can't do it part-time.

"Trader" is a title you will only gain through many losses and much experience; through constant effort and an appetite for education. As you elevate yourself from beginner to "trader" you have to try not to get wiped out. Something few achieve. That means start small, start on paper even and, meanwhile, get educated. It means doing what the professionals do and learn how to put structure around risk.

Trading is many great things: interesting, fulfilling and challenging. But it is not punting and it's not sexy or glamorous. It is business. Learn how to do it. Don't just do it".

-----------------------------------------------

Crash: Plenty of good advice there I reckon.

[Brendon]

OK , we have read about the things we should not do.

One may notice that the folk who write these articles originally , don't seem to offer how it should be done.

Its like reading an article on what Psychologist think is abnormal but never write an article on what is normal.

Cheers.If you par down the main issues in the OP, you end up with 4. My "cliches" answer them in racing parlance. In short: Level betting, not chasing losses, looking beyond favorites, and disciplined analysis.

[crash]

A bit harsh there Bhagwan. A simple check [ 'Marcus Padley-The Melb. Age']
to see if he or does or doesn't give some good advice to winning [he can't do it for us though] wouldn't have been hard [?]



What I originally put up here was not the whole article, just the common traps. If you want the whole article or many others by Marcus Padley who writes weekly [mostly to do with share trading]. http://www.theage.com.au/execute_search.html?text=marcus+padley&ss=theage.com.au&x=15&y=8

Here is some positive advice from the same guy regarding things we should be doing to improve our lot. Equally relevant for a good trader or punter, laying or betting:

Your 'part 11' Maurice :-)
-----------------------------------------------------------------

Marcus Padley
June 6, 2009

"PUT a bet on through a bookie and the reality is, if you win, they lose and, more importantly, if you lose, they win.

Work that out and you will realize that behind that flashy smile and flirtily comment the bottom line is that they want you to lose. It is in their interests that their customers lose. An ethic that would doom most businesses to the graveyard, yet after centuries of losing customers money, the bookies are still in business.

They stay in business because everyone loves to punt, needs to punt even. They stay in business because they provide an "essential service". But if they didn't make money, they wouldn't exist. So, how do they make money? Why do they make money? Learn that and maybe you too can win.

Well, it's simple. Two things.

The first is risk management. Not losing money. Bookies succeed because they put structure around risk. They manage risk. It is the same in the sharemarket with the new breed of sharemarket bookie, the contract for difference (CFD) providers. They too take the opposite side of your trade.

They will tell you that controlling risk means knowing when to hedge, who to hedge. You probably have the idea they hedge everything, but they don't. It would cost too much. Instead they simply identify people who have a habit of winning and when a winner takes a position, they hedge the risk and move the price. With CFD providers it means they differentiate between the good traders and the bad. That's why they ring you up, to suss you out. Otherwise, they just watch what you do. The winners, they hedge. The losers, they don't.

Which brings up the second reason they make money. By taking bets off losers. Off Joe Public. Off the majority. Off the people who don't take their betting seriously. People who fly by the seat of their pants. People who "love having a punt". "Love to Punt" means "Love to Lose". This is where the real money is.

There's no need to hedge losers, all they need to do is to encourage loser activity with a host of bait. Like glamorising the life of a trader - telling them how sophisticated they are. By trumpeting winners with hindsight examples, offering sexy software, free. And, most importantly of all, by making it really easy and terribly tempting to just "click and trade" and place that bet.

Amazingly enough, when it comes to making money as a do-it-yourself trader it is not the product you are up against. On the contrary; CFDs are a fantastic product for winners. What you are up against is something far more dangerous: it is you, with your feeble mind that is in no position from a standing start to be trading highly leveraged products against professionals.

So, what do you do? How do you narrow your odds?

Well, it's what you don't do first. You don't trade just because you can. Just because you can trade shares or CFDs from your kitchen doesn't mean you should. What you do do is educate yourself about what it really means to be a "trader".

Ultimately trading is a business activity. It is not glamorous or exciting.

It is methodical and routine.

It is boring. Half the game is handling risk, 40 per cent is discipline, 9 per cent is vigilance and the rest is picking winners. You can't do it part-time.

"Trader" is a title you will only gain through many losses and much experience; through constant effort and an appetite for education. As you elevate yourself from beginner to "trader" you have to try not to get wiped out. Something few achieve. That means start small, start on paper even and, meanwhile, get educated. It means doing what the professionals do and learn how to put structure around risk.

Trading is many great things: interesting, fulfilling and challenging. But it is not punting and it's not sexy or glamorous. It is business. Learn how to do it. Don't just do it".

-----------------------------------------------

Crash: Plenty of good advice there I reckon.


.."Ultimately trading is a business activity. It is not glamorous or exciting.

It is methodical and routine.

It is boring. Half the game is handling risk, 40 per cent is discipline, 9 per cent is vigilance and the rest is picking winners. You can't do it part-time".

And: "Learn how to do it. Don't just do it".

[Mark]

Everyone will get something different out of this article, but the most important for me was this.....The first is risk management. Not losing money. Bookies succeed because they put structure around risk. They manage risk.

[Brendon]

Everyone will get something different out of this article, but the most important for me was this.....The first is risk management. Not losing money. Bookies succeed because they put structure around risk. They manage risk.And where do you feel you could improve with risk management, or implement a risk management strategy when following you betting system?


(PS. I'm not allowed to say "punting". I have to say "betting system" instead, because punting now means losing, as opposed to what it meant a just short while ago in the dictionary.)

[Mark]

Nothing to do with punting or any betting system Brendon.
The majority of my income comes from making no risk books on Betfair. But of course, as I've been told over the years, that can't be done.

[Mark]

And todays classic example ......
Kyneton R5 laid Always Elusive at an average price of 2.65, and backed it with IAS @ 5.50. Who cares if it wins or loses.

[crash]

A classical example of 'loss aversion' today. Zoe picks YASEYNITALL 27.30w r5 [?] at Kyneton [likes Linda Meech]. Halves her usual win bet because of the odds. Does the same on Sunday for a $21w and last week again on a $54 winner! I seem to be having a run of outs.

[Brendon]

A classical example of 'loss aversion' today. Zoe picks YASEYNITALL 27.30w r5 [?] at Kyneton [likes Linda Meech]. Halves her usual win bet because of the odds. Does the same on Sunday for a $21w and last week again on a $54 winner! I seem to be having a run of outs.Have to re-jig the level stakes betting. I have done the same thing with long odds picks. But when I bet a comfortable percentage of my bank, that "gulp!" feeling isn't there.

I don't seem to have a run of outs, I am having a run of outs! A bit of bad luck coupled with wet tracks has my strike rate plummetting these past 2 weeks. One out of 4 picks came home on the weekend and it nearly covered my losses.