Monday, 25 April 2011

A 35 million year losing streak

One of my students sent me this link here. It links to a talk about our flawed financial decision making process being rooted in our DNA.
The video describes how a group of scientists introduced monkeys to trading and how the monkeys, from whom we evolved some 35 million years ago, make the same trading mistakes we make today. Rather than crying: "See, it's not my fault", what I take away from this is that it provides us with a more direct opportunity to correct something that is in most of us - a flawed decision making process.

I have long believed, as I have written in this blog, that it is the exits that are responsible for a big part of our profitability, probably more than 50%. What's my evidence? Well, most of my losing trades were in profit after I have put them on. It is rare for me to put on a trade that goes into the red the very next tick after I put it on.
There are only two things I can control in a trade: my entry time and my exit time. How I make those decisions is what determines whether I make a profit or a loss.
The entry part has been easier to resolve than the exits. I have a number of tested potentially profitable entry pictures that I recognise and I put the trade on. Because I may try and second guess or hesitate due to the fact that the pictures "don't work" 100% of the time, I have a trained robot to put the trades on for me if I want. But the exits are more complex. If most trades make at least 1 tick profit, should I try and make just 1 tick every time?
My route has been to use money management for my exits - a mathematical model that gives me profit over time. I don't really know when it's best to exit so I scale out, taking profits as I go. I do take care to choose where to scale. But it seems that this methodology is my own personal work around to fight the evolutionary deficits that I have inherited. It seems that learning to manage this DNA embedded process is critical to our financial well being, otherwise we will be at the mercy of a 35 million year old possible losing streak.
I have known what the problem is that has to be resolved, but I did not know how heavily embedded it is in our psyches.


  1. I also think scaling out is the best way to profit in ES.

    I typically use 1, 3, 5, 7, 11 tick targets.

    What do you usually use?

  2. If your targets are 1,3,5,7 and 11 then whats your stops?

    The 1 must get hit all the time and 11 must get hit some of the time.

  3. hello EL was wondering if trading QM (mini oil) with your systeme could work, Have you tried it ? what range bar wouild you use?

  4. samtrader, I usually use 5 ticks for the ES as foirst scale but vary it with context, the others are context sensitive as are the stops. I start with my stop 6 handles away.
    joseph, there are several range bars that work for me for light crude, .4 and .6 included. Look for smoothness in vertical development without creating too large a bar.