May 2008

Contrary to what most of us would like to believe, decision-making may be a process handled to a large extent by unconscious mental activity. A team of scientists has demonstrated in brain scanning images how the brain might unconsciously prepare our decisions. Even several seconds before a conscious decision its outcome could be predicted from unconscious activity in the brain.

Fig.: Brain regions (shown in green) from which the outcome of a participant’s decision can be predicted before it is made. The top shows an enlarged 3D view of a pattern of brain activity in one informative brain region. Computer-based pattern classifiers can be trained to recognize which of these micropatterns typically occur just before either left or right decisions. These classifiers can then be used to predict the outcome of a decision up to 7 seconds before a person thinks he is consciously making the decision. (Credit: John-Dylan Haynes)

Having choices is typically thought of as a good thing. Maybe not, say researchers who found we are more fatigued and less productive when faced with a plethora of choices.

Researchers from several universities have determined that even though humans’ ability to weigh choices is remarkably advantageous, it can also come with some serious liabilities. People faced with numerous choices, whether good or bad, find it difficult to stay focused enough to complete projects, handle daily tasks or even take their medicine.

Researchers conducted seven experiments involving 328 participants and 58 consumers at a shopping mall. In the laboratory experiments, some participants were asked to make choices about consumer products, college courses or class materials. Other participants did not have to make decisions but simply had to consider the options in front of them.

The scientists then asked each group to participate in one of two unpleasant tasks. Some were told to finish a healthy but ill-tasting drink (akin to taking ones medicine). Other participants were told to put their hands in ice water. The tasks were designed to test how the previous act of choosing, or not choosing, affected peoples’ ability to stay on task and maintain behaviors aimed at reaching a goal.

Researchers found that the participants who earlier had made choices had more trouble staying focused and finishing the disagreeable but goal-focused tasks compared to the participants who initially did not have to make choices.

In other experiments, participants were given math problems to practice for an upcoming test. The participants who had to make important choices involving coursework spent less time solving the math problems and more time engaging in other distractions such as playing video games or reading magazines, compared to participants who were not asked to make choices prior to that point. The participants who made choices also got more math problems wrong than participants not faced with decisions.

To further buttress their laboratory findings, the researchers conducted a field test at a shopping mall. The shoppers reported how much decision-making they had done while shopping that day and then were asked to solve simple arithmetic problems. The researchers found that the more choices the shoppers had made earlier in the day, the worse they performed on the math problems. The authors note they controlled for how long the participants had been shopping, and for several demographic categories such as age, race, ethnicity and gender.

Kathleen D. Vohs, PhD, the study’s lead author and a member of the University of Minnesota’s marketing department, concluded that making choices apparently depletes a precious resource within the human mind. “Maintaining one’s focus while trying to solve problems or completing an unpleasant task was much harder for those who had made choices compared to those who had not,” says Vohs. “This pattern was found in the laboratory, classroom and shopping mall. Having to make the choice was the key. It did not matter if the researchers told them to make choices, or if it was a spontaneously made choice, or if making the choice had consequences or not.”

But what about making fun choices” How does that affect our mental acuity” In their last experiment, researchers determined that making a few enjoyable decisions, such as spending four minutes selecting items for a gift registry, was shown to be less mentally draining than when participants spent 12 minutes doing the same task. In other words, even if people are having fun making decisions, their cognitive functions are still being depleted with every choice they make.

Vohs says these experiments provide evidence that making choices, as opposed to just thinking about options, is what is especially taxing. “There is a significant shift in the mental programming that is made at the time of choosing, whether the person acts on it at that time or sometime in the future. Therefore, simply the act of choosing can cause mental fatigue,” says Vohs. “Making choices can be difficult and taxing, and there is a personal price to choosing.”

Ignore all the “Bayliss” nonsense, that’s my riding style!

Some long term data to provide some context.

GDP Nominal 1885-2007……………………..+5.97% compounded
Dow Jones 1885-2007………………………+5.05% compounded
Inflation 1885-2007………………………….+2.58% compounded

Thus we can see that the DJIA has tracked the growth of the economy quite closely, returning a positive real return. This does not include dividends, which would increase the return substantially. From a viewpoint of Dow Theory however, the data correlates.

My sport is and always has been, apart from childhood sports, Powerlifting and strongman events. When I first started training, I was as keen as mustard and trained twice-a-day, seven days of the week. Eventually through the years, and various injuries, I learned and evolved to the methodology that I have used for the last fifteen years…training half the body once a week, with a maximum of four sets a body-part.

Trading, specifically daytrading I have found to benefit from the same philosophy, viz. “Less, is More” I have therefore constructed a trading rule base that emphasises this philosophy.

*Volume, go to where the other traders are. Look for stocks trading at least 10M+ shares each day. I have a preference for higher priced stocks, but this is not material.

*Only take ONE TRADE per day. I have found when I break this rule, rather than saving my day, I compound the error and naturally increase the damage.

*Only trade the OPEN. The OPEN is a continuation [unless news intervenes] of the previous days CLOSE. Thus, you have plenty of time to plan your trade, stops, etc. when you are under no PRESSURE. If you get it wrong, why, would you improve with added pressure? The OPEN will provide a trade at the EXTREME…this trade has a very favourable RISK/REWARD profile.

*Only trade ONE stock. Stocks have patterns that become apparent when you trade them everyday. On occasion, you may well feel the change in the flow that can save [or make] you some money.

*Only trade in the direction of the TREND. Counter-trend does work, but it’s a jumpier trade. When you have a high volume stock, go with the crowd.

In summary, overtrading, like overtraining, is dangerous to your health. Making more money is simply a matter of increasing share size [or the amount of weight lifted], not the number of trades [or sets]

The following post I have hi-jacked from “dt’s” site. You can actually see the results from the VO in spreadsheet form if you go to his site and read the original post. I’ve pinched this in part as it’s probably the best post he’s ever written, in that the analysis is in regard to styles and methodologies within daytrading currently.

The second reason that I’ve pinched it, is that the changes he has made, viz. no longer trading the OPEN are in direct opposition to my own thinking on the subject.

The third reason, although not mentioned specifically in this post, is the issue of VOLUME. If you follow dt’s blog, you’ll be aware that this is an ongoing theme, viz. the lack of volume currently, relative to the near past. DT, wants volume [just in case you were wondering]

VOLUME tends to congregate at the OPEN and CLOSE. Through the rest of the day, it can be lacklustre [as a generalization] Therefore, [after reading his post] why move away from trading the OPEN?

I’ll repost some of my daytrading thoughts [rules] a little later. Here then is DT’s missive;

At the end of April, for the first time in my 9 year stock trading career, I took a stab at setting some monthly goals for myself. Apparently, forecasting isn’t my forte.

I didn’t get even remotely close to meeting my modest monthly profit goal, of $6000. In fact, I was down on the month, to the tune of $675. Not good. I’m new to this “setting goals” game, but I guess I should roll my profit goal back somewhat for June.

In May, I set a target of $300 a day. In June, I’ll set a target of $250 per day, or $5000 for the month.

Another goal I set and missed was my “win/loss ratio,” that is, positive days to negative days. Look at this particular stat as a measure of my sanity. I figure if I can just be green 75% or 80% of the time, I’ll be generally happy with work… it won’t feel so “grindish.” So for May, I set a goal of 3 green days for every 1 red day.

Instead, I was green 11 days of 21… about 1 to 1. Pretty awful. I was probably in a bad mood for most of May. Indeed, reflecting on my actions during the past month, I was a dick.

Nevertheless, in June, I’m going to keep the 3 wins for every 1 loss goal.

So how did I get here? I started the month in a total tailspin, losing 5 of the first 7 days. I lost $915 on my worst day of the month. That’s too much. One of my goals for this month was to limit my worst day to -$600. The silver lining is that my second worst day was -$509 and after that, every loss was sub $500 and most, far smaller.

So I limited my losses quite well, overall. I didn’t have any crazy blowup days that saw me screaming, red faced, at the computer. That’s a positive as far as health and mental stability are concerned, surely. And that’s important.

I’ve started over, basically. Trading a completely new style almost exclusively for the entire month. And it’s not just the trading style that’s completely different. Trading style goes far beyond watching exits and entries and figuring out which stocks to watch. Trading style also effects the pace of your trading day, and your expectations throughout the day.

Early on in my career, and up until very recently, I actively traded the open, somewhat like a madman. I just don’t do that anymore, and I feel the “extra space.” Sometimes it feels like boredom and a lot of the time, frankly, it has felt like lost opportunity. It’s definitely made it harder for me to focus… because without positions, I feel my mind wandering.

Just look at the statistics. In February, I averaged 24,800 shares traded per day. By April, I had dropped down to 12,900 average. In May, I averaged just over 10,000 a day. So I’m trading half as much as I did just a few months ago. And last year? In May of 2007 I averaged nearly 40,000 shares a day. So transition is occuring. Change is happening, and relatively quickly.

And don’t forget… I’m doing this on my own. This blog is my sounding board… I trade remotely, without the benefit of talking to other traders each day. I sometimes wonder if I traded in an office if I wouldn’t already be out of this slump. The point is, I think change goes much slower when you do it by yourself and without the group dynamic that an office provides.

However, later in the month, I started to feel like I was finally getting used to the “extra space.” I can see how, in the near future, it will be an asset. I’m starting to feel less pressure on the open to be active for activity’s sake. I’m slowly becoming more calculating and watching for eventualities and waiting for scenarios to develop and play out. It’s a mental shift. I watch fewer stocks, more actively, instead of watching many stocks with less focus devoted to each.

If I can get through this summer and come out in September a more confident, stable, profitable trader, these months of indecision and worry will be worth it. If September comes and I’m not seeing any improvement in my trading, I’m really going to have to start considering a second stream of income. That will be the theme of this blog for the next few months… me continuing to work out the kinks, hopefully getting leaner and stronger as a trader, and all the while imagining what else I could possibly do for an income.

It’ll be interesting. Let’s see what June brings.

This next post is from OBAT. Again, similar topic. I highlighted also 10K Trader a while back, who also was having similar problems. One must ask…has the Market REALLY changed?

I am not sure what is happening to my trading. I was doing well the first two weeks of May. I thought I finally saw the light and steady improving gains are along the horizon. Then suddenly the power went out. I have been wading through the darkness this past two weeks and my trading is being crippled by fear. I told myself maybe the market trend has changed and I am looking for the wrong setups. Everyday I feel like I am trading blind and I cannot seem to see a decent setup. I take trades but I did not have the clear conviction. Most of the time I am worried that I will stop out and lose money and that came true.

After some soul searching I have come to the same conclusion. I have to conquer my fear and trade. There are moves in the market everyday. I missed them because I was fearful. I kept telling myself the market would be slow and I am going to lose money everyday. At the end of the day I either lost money or end up flat. I got to keep trading and follow my plan. I am going to cut my size down to 100 shares if that will help me trade without fear. I feel if I can get some positive days I can get my rhythm back again.

The Dinosaur had some breakthrough in his trading yesterday. Can you throw me a flashlight DT?

Chicago & North Western
Delaware, Lackawanna & Western
Lake Shore
Louisville & Nashville
Missouri Pacific
New York Central
Northern Pacific Pfd
Pacific Mail
St Paul
Union Pacific
Western Union

Pacific Mail was a Steamship company.
Western Union was a Telegraph company.
All the other constituents were Railways.

By tracking the constituents of the index, and later Transports and Industrials indices, it can be analysed with regard to Dow Theory. By tracking the changes through history, and their relevance to the economy at the time, eventually the current index can be evaluated in terms of the Dow Theory.

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