Confirmation Bias
Posted by Mark on April 27, 2020 at 07:38 | Last modified: July 16, 2020 10:18As mentioned in the final sentence, this post from March 2016 begs for a follow-up discussion on confirmation bias.
Just over four years later, here we go!
Confirmation bias is the tendency to interpret new evidence as confirmation of one’s existing beliefs or theories. With regard to finance, this can be a situation where I think I’ve found a viable strategy and [unconsciously] disregard or censor subsequent evidence to the contrary.
In February 2016, I saw a webinar presenting a trading strategy by a guy named Jack. After the presentation, I e-mailed him:
> I totally agree with your premise that if you can generate
> enough income to cover the cost of the long then you
> lose on the trade. Your presentation made it sound
> like you believe this can always be done. What happens
> when it can’t? What is your risk management?
He responded with:
> “What happens when it can’t?”……… haven’t happened
> to me yet…..I’ll let you know when I don’t….lol
> “What is your risk management?”…..Fly has limited loss
> profile……if the market is outside of the fly at expiry
> the loss is what it cost you to place the fly…since the
> fly cost you zero the risk is zero…understand?
>
> Risk on calendar… at expiry WE DO NOT SELL THE LONG
> POSITION we just roll the short position till next week.
> Follow me? If I lose remember it is not money that I’m
> losing… it is only that I have no profits for that cycle.
> Said another way, no money is taken out of my account
> because the market went against me like all other option
> spread positions…this strategy is truly unique…..;)
>
> Hope this helps,
> keep asking.
I responded:
> I think your trading plan is very interesting. However, I
> also think it has a couple fatal flaws. Your presentation
> made it sound like it can’t lose and that’s why I asked
> what happens when it does. Your response suggests you
> still don’t think it can lose because if you lose “it is
> not money that I’m losing.” Every trade can lose. Also,
> there are no “unique” ideas and no Holy Grail exists.
>
> What you presented was not a trading system but rather
> a strategy. If you are trading it, though, then I hope
> you’re trading it more as a system: with defined capital,
> with max loss limits, and with firm understanding how the
> trade can lose and how to recognize when it’s heading in
> that direction. Especially with regard to the latter, if
> you don’t see these things then I strongly believe you
> have more work to do.
>
> Backtesting is a kinder teacher than Live Trading.
>
> I hope I do not seem patronizing or insulting with this
> e-mail. That is truly not my intent. And if I end up
> wrong about this then more power to you.
Why do people feel compelled to defend their strategies or advertise them as if they are infallible and can’t lose?
Confirmation bias is a big reason why. This is another reason I believe trading system development is best done with groups.
Categories: Trader Ego | Comments (0) | PermalinkPlanning My Next Meetup [hopefully not MIS] Adventure (Part 6)
Posted by Mark on August 2, 2019 at 07:24 | Last modified: January 28, 2019 06:02I will conclude the mini-series with this post to muse about a couple loose ends.
On January 25, I spoke with someone who has connections at the business school. I told him I have interest in forming a group to research, discuss, and teach option trading (see here). I said this would be great information for business students. He gave me a couple names and asked me to let him know if I have any trouble making the connections.
I need to be clear about my endgame in order to take these steps forward.
I have many research questions in need of answering to further my own personal trading. I can’t believe everything I see on TV because people get things wrong (see past blog mini-series here, here, and here). Long-time readers will recognize this as one of my fundamental theses (it’s #2 here). Doing this research should give me the confidence required (see second-to-last paragraph here) to stick with trading systems through challenging times (third-to-last paragraph here).
Others can certainly benefit from this research along with me. Many conclusions will be clear to all, and different individuals will draw further conclusions particularly meaningful to them.
The additional piece I would enjoy throwing into the mix is time spent teaching. I tutored math in high school, and I have often thought that in another life, I was probably a math teacher. This would absolutely fulfill that desire: nothing selfish about it. I don’t want to change the world (probably couldn’t even if I tried), but people have a ton to learn when it comes to options (e.g. mini-series here and here) and from what I have seen, the old-school financial industry isn’t helping much.
On a different note, Michigan Option Traders—while not a complete misadventure—was my group that did not last. In the second paragraph here, I discussed issues I had with the other experienced trader in the group and thoughts about failing to discuss losses in general.
My advanced-level compatriot never talked about large losses, which should have occurred due to volatile markets at that time. I interpreted this as a reflection of inflated ego. You can only get lucky so many times. Over the years, I have often heard things like “I wasn’t around in August 2015 because I was on vacation” or “I didn’t trade in February 2018 because work was too busy and I had scaled back.” Survivorship bias may explain it: those stepping forward to present successful trading are those lucky enough to have missed the rough markets. I do not pretend to have missed them (e.g. here and here) and I think most pretenders will eventually meet their maker and [all too often] disappear from the landscape altogether (third-to-last paragraph here).
While perhaps a slight oversimplification, as an innocent bystander the trader services/education landscape appears to be different strategies pitched by a relentless march of traders who are either lucky enough to miss ugly market environments or who have (inadvertantly?) inflated performance by curve-fitting measures.
Categories: Networking, Trader Ego | Comments (0) | PermalinkThe Trader Meetup Dilemma (Part 4)
Posted by Mark on September 27, 2018 at 07:00 | Last modified: September 23, 2018 08:21Internal ego conflict could be a main reason why I have a difficult time resolving the dilemma of organizing a trader Meetup. While I outwardly say ego has no place in trading and outwardly refuse to associate with egotistical traders, perhaps deep inside I view myself as one of the same.
Let’s review why I might balk at organizing a free trader Meetup and being fully transparent about the totality of my strategy and experience.
One reason to hold back could be inflated ego. If I am arrogant then I may erroneously view personal knowledge as uniquely mine and therefore highly valuable. I may be willing to share—for the right price—but I would otherwise look to keep it secret. I generally do not believe any new ideas really exist when it comes to investing, which would make this is an ego issue. Holding back would therefore reflect an inflated view of myself.
Another reason to hold back could be because I am actually special. Everyone has access to the strategies I implement but I have survived 10+ years as a full-time trader with no other source of income. With hopes of collaboration, I have looked high and low for other full-time retail traders and have found hardly any. This suggests that I am unique. If I have succeeded where others have failed then I truly do have something of value and I would be selling myself short in giving it away for free. This is about capitalism, not ego.
Another reason to hold back is because too much transparency can be irresponsible. I’m sure many compliance firms would agree. Holding back may therefore be good business sense rather than anything related to ego.
As discussed here and here, SOP is to hold back when it comes to “proprietary information.” Although I have seen strong ego to be common among traders, I do not think this completely explains the SOP because I believe some successful (i.e. special and unique) retail traders do exist and I certainly believe the industry as a whole is successful (mostly due to raising assets). Again, a reliable money-making strategy is to be sold rather than given away. That is capitalism, not egoism.
The source of my reluctance will determine my future course of action. If my reluctance is a matter of ego then perhaps I should seek psychotherapy. If my reluctance is based on other reasons then I need to look further into what I can do (if anything) short of organizing a completely free Meetup.
I must side with the latter because I have laid out three good reasons to hold back that are unrelated to trader ego.
At least for the time being, I will consider this matter resolved.
Categories: About Me, Trader Ego | Comments (0) | PermalinkThe Trader Meetup Dilemma (Part 3)
Posted by Mark on September 24, 2018 at 06:19 | Last modified: September 23, 2018 08:20Ego aside, should I be willing to be completely transparent with regard to trading strategy if my historical performance has been enviable? Perhaps concern about others “stealing” my approach is arrogant and inconsistent with a humble (i.e. egoless) belief that I am nothing special. I think I have to accept the fact that I am something special, though. Furthermore, the line seems mighty fine between offering too much information just to stave off any possibility of ego involvement and giving away the house with reckless abandon. In December 2017, a financial advisor who I very much respect expressed concern over other advisors stealing my “secret sauce” were I to seek employment as a portfolio manager.
I also think something is to be said for standard of practice (SOP) as it relates to transparency. In this industry that is all about the money, the SOP is clearly not to disclose “trade secrets” without collecting some of the money. Compensation may take the form of a management (and/or performance in the case of hedge funds) fee, hourly consultation fee, subscription fee for trader education/investment newsletters, cost to purchase a black box system, or even a per-Meetup fee were I to organize.
As I have discussed extensively, unwillingness to disclose verified performance seems to be SOP among a large segment of the financial industry. I would be more willing to share performance details with those not under suspicion of ulterior motives. This requires an advanced degree of trust and would be more characteristic of a small, more intimate group of retail traders than a Meetup composed of tens to hundreds of people—some of whom may participate and most of whom are strangers.
While SOP therefore validates the extent to which I hold back, I don’t necessarily want to be like all the others. I break the mold with what I trade. I break the mold with my longevity as a trader. I do but I don’t want to break the mold with regard to performance disclosure (I am now seeing the other side of this blog mini-series and will expound at a later date). I want to be different but if I break the mold by disclosing everything to everybody then is it not possible Edge may be depleted? This would indeed be “reckless” and although an unlikely consequence, such is my fear.
Maybe this is more about fear and paranoia than it is about ego involvement. Either way, I’m not convinced it is a bad thing and either way, I think you are getting a good sense of the motivation and reluctance that constitutes my dilemma.
Categories: About Me, Trader Ego | Comments (0) | PermalinkThe Trader Meetup Dilemma (Part 2)
Posted by Mark on September 21, 2018 at 07:19 | Last modified: September 23, 2018 08:19Continuing from Part 1, I wonder whether I would have any compunctions about organizing a Meetup at personal expense and freely sharing everything I have learned were I to have no ego involvement whatsoever. I do think this is setting the bar pretty high. Even the organizer of the most successful options trading Meetup I know does not do this. Big kudos to him for donating extensive personal time organizing meetings, finding speakers, communicating with members, and maintaining the website content. He has built an automated backtester that he does not share with others, however. He also shares few details about his own strategies. I know he has a separate, full-time job, which I would assume may limit the scope of his trading.
In spite of the fact that my strategy is hardly unique,* I certainly have reservations about sharing the specific details. This also manifests as reluctance to approach financial advisers in hopes of forming some sort of partnership or gaining employment. Short of an audited track record, which I do not have, one thing I believe would be expected is full disclosure of my trading strategy. I worry that such transparency would allow them to bypass me and simply trade it themselves regardless of how reckless that may be due to the lack of my extensive trading and backtesting experience (it’s one thing to see it on paper and quite another to manage the drawdowns accordingly when they occur).
I am also hesitant to disclose trading performance to others partly because in most cases, I do not think people should believe such claims anyway. I regard performance claims offered by random individuals as being different from those offered by registered investment advisors and other entities that likely pay hefty annual fees for compliance.
I hesitate to organize a trader Meetup because I am not convinced sharing everything that I have learned should be free. I have written about this here in addition to the “Giving Back” mini-series. Because I have paid dearly for the lessons I have learned (catastrophic losses included), why should others get my lessons for free? I debate whether these are legitimate reasons to reject the possibility of organizing or simply rationalization to cover up repressed ego.
I will continue next time.
* What may be unique is the way I implement this strategy or the fact that I implement it at all.
The Trader Meetup Dilemma (Part 1)
Posted by Mark on September 18, 2018 at 04:51 | Last modified: September 23, 2018 08:17I spent most of the previous post talking about trading groups. I now want to go into more detail about what holds me back from starting one.
Let me first distinguish between trading groups and trading Meetups. While much of my content will also pertain to general trading groups, the idea I have been entertaining is starting a group (hereafter referred to as “Meetups”) on the Meetup.com website. This is purely for advertising/exposure reasons. I have been to trader Meetups before and I have written about them in this blog (e.g. here). I know Meetup offers the potential to connect with others of like interests. I do not know whether enough people with a serious enough trading interest exist in the Metro Detroit area but if they do then I can’t think of any better way to find them than through Meetup.com.
When trying to explain my dilemma about starting (“organizing” in Meetup jargon) a trading Meetup, one word that comes to mind is “roadblock.” I sometimes feel that everywhere I turn in the financial services industry a roadblock awaits to greet me. I blogged on this with regard to wealth management here. I also mentioned roadblocks here. I will also mention roadblocks later with regard to implementing new trading strategies.
I have a difficult time explaining why I struggle with the idea of organizing a trader Meetup. On many occasions I have written about bits and pieces of this difficulty. It might be easier to just give links to a bunch of posts, but that would probably leave you fishing for the key morsels among a huge brain dump of ideas.
Under investigation will be the possibility that at least part of my challenge surrounding the trader Meetup idea relates to ego. I firmly believe that ego and trading do not mix, and I could provide several links where I have discussed my disdain for those who boast about performance or trading expertise. I am always on the lookout for underlying motives when I see such hubris. Indeed, one ingredient I consider integral to whatever trading success I have had is avoidance of the lofty sales pitch. No matter how experienced the trader, I rarely think certainty has any legitimate place (Bill Miller, anyone?).
I will continue next time.
Categories: About Me, Trader Ego | Comments (0) | PermalinkRecycling of Market Participants (Part 2)
Posted by Mark on December 28, 2017 at 07:23 | Last modified: September 27, 2017 09:10Today I continue with a July 2015 thread about relative quiet in the forum.
On Jul 14, 2015, at 12:51 am (PDT) . Posted by CM:
I went back to the States for a couple of months for our annual fishing trip and to help my brother-in-law put up hay for his horses for the winter… When I return to a normal life in a few weeks I will be able to start posting again. My portfolio is currently flat, because of depressed stock prices, but the option trades are positive. Yes, trading plan is working…
I felt inspired to refresh the thread over two years later.
On Sep 26, 2017, at 4:08 am (PDT) . Posted by Mark:
I’m here with one follow-up post because I think many of you are missing the point. Please feel free to disagree; my words are hardly set in stone.
Over the years, I have found traders to be a very fickle lot. The oft-quoted statistic that 90% fail within five [1-2?] years supports this. I don’t know who [if?] did the original study but it is consistent with what I’ve seen of human nature from attending trading groups. Ego fulfillment means bragging when correct and/or making money. And Mr. Market lets us do that—sometimes with gradual profits over a long period of time. At some point he gets crabby and catastrophic losses await for many who have become smug and started to trade position sizes that are too large.
These washouts are when the fickle traders disappear. First they feel stress and lose sleep. Then they are forced out at big losses feeling lucky [hopefully] to have escaped with something. After a period of reflection, they finally walk away—head down and tail between their legs—possibly never to talk about or discuss this with anybody. After the grieving is complete they pull themselves up by the bootstraps and move onto the next big thing.
On multiple occasions I have seen people present impressive performance records punctuated by pauses during sudden market pullbacks/corrections. How lucky they were to have been vacationing at the worst times! I wouldn’t call any particular individual a blatant liar but they certainly are out there.
I think a good strategy meets profit goals within risk tolerance levels net losses—and there will always be losses! Anyone presenting a large sample size of trades without losses is a liar and someone to avoid because that is not reality.
The takeaway here is nothing new: THERE WILL ALWAYS BE LOSSES! As a trader I need to accept this before I begin the journey and strive to always size my positions accordingly. Failure to do this can potentially end my trading career, which on a larger scale, results in the recycling of market participants.
Recycling of Market Participants (Part 1)
Posted by Mark on December 26, 2017 at 06:59 | Last modified: September 26, 2017 07:35On the heels of this post, I recently stumbled upon the following July 2015 thread from a covered calls forum that I saved.
Sun Jul 12, 2015 12:22 pm (PDT) . Posted by AS:
Where is everyone???
Sun Jul 12, 2015 12:55 pm (PDT) . Posted by SP:
Probably vacationing.
Sun Jul 12, 2015 3:21 pm (PDT) . Posted by SB:
People like talking when they make money, remain silent when they lose it. How have covered calls in general done over the last few weeks?
Sun Jul 12, 2015 9:48 pm (PDT) . Posted by JW:
I am thinking SP has if correct, a lot of folks are away for the summer break. This is traditionally a very slow time of year. One member states on the bottom of his posts that “boring is better.” That is certainly the case with myself. There are periods when I feel like I am on a perpetual vacation here… My “job” truly is like watching paint dry. Most of this group will not want to read about each time I pull the trigger on my boring income trades.
Mon Jul 13, 2015 5:03 am (PDT) . Posted by Mark:
On this point I very much disagree with you. Yes, “boring is better” but people are usually losing money when these type of trades are not boring.
I think SB is right on: “people like talking when they make money, remain silent when they lose it.”
This is just my opinion because it’s not something we can ever know for certain.
On Jul 13, 2015, at 3:10 pm (PDT) . Posted by MM:
Or some people aren’t participating.
I’ve been in cash for some months with only a few selective trades which aren’t in options. It’s been a time to be very, very selective in my opinion.
On Jul 13, 2015, at 4:37 pm (PDT) . Posted by MA:
I, for one, have been very busy at work and haven’t had the time it takes to do this right, so I’ve been on the sidelines for the past few months, which appears to be a good place to be with all the turmoil going on with Greece and the market’s reaction.
On Jul 13, 2015, at 4:44 pm (PDT) . Posted by JW:
Many new traders think they are not trading when they are in cash. I think those who have been in the battle for a while know well that cash is a position you chose and there are times that it is the best position.
One thing I have grown very cautious about is posting our bragging rights trades. For example, we did a series of trades on JRJC… [and] nailed returns as high as 13% per monthly cycle selling put options…
I dislike posting these positions for two reasons. I have had a few folks call me a liar when they could not replicate the trade a few days later because the stock took off and they did not have the patience to wait for the right entry opportunity. The other reason is I do not like encouraging newbies to work with volatile issues like JRJC until they have experience and a good plan of how to handle the trade if the tide turns against them.
To be continued next time.
Ego and Trading Do Not Mix
Posted by Mark on November 22, 2017 at 07:10 | Last modified: August 24, 2017 12:21I do not believe ego has any place in trading or in trading-related discussion.
It occurred to me that I may sound overly confident and opinionated at times when talking about financial topics. I could talk passionately when discussing many topics covered in this blog, for example. These would include option fundamentals, tenets of trading system development, financial chicanery and fraud, etc. Conviction, in general, can probably be mistaken for ego even though it may only be the manifestation of passion.
I hope I never sound too proud of my track record because past performance is no guarantee of future returns. Bill Miller epitomizes this lesson. While at the helm of Legg Mason (LM) Value Trust, Miller is credited with beating the S&P 500 every year from 1991 through 2005. For this longevity, Miller was a legend—and then the wheels came off. Miller led the smaller LM Opportunity Trust to big losses from 2007 through 2011 with a $10,000 initial investment shrinking to $4,815 (vs. $8,565 for an identical S&P 500 investment). Miller went on to trounce the benchmark in 2012 and 2013 before underperforming in 2014, 2015, and the first half of 2016 [after which he was no longer retained by LM].
Remembering that it can happen to Bill Miller should be motivation for me to maintain a large dose of humility at all times. Miller teaches us that a brilliant record yesterday does not justify inflated ego today. I feel strongly that historical trading volume and historical performance don’t make a damn bit of difference because tomorrow can be altogether different. And yes: I would pound the table passionately in support of this argument.
A corollary to this is that historical performance should not be a criterion for someone looking to hire an investment adviser.
I disagree with said corollary and that puts me in a catch-22 situation. Some have told me that promoting a strong track record is the most critical requirement for raising assets. This brings me full-circle to posts such as this, this, this, and this.
I guess it all comes down to modesty and gratitude: two things I think traders should never be without. I truly believe that how good I am as a trader will only be revealed after I click the “place order” button for the final time. Representing as if I know the answer to this any sooner through ego symptoms like arrogance or condescension would be deception at its finest.
Categories: Trader Ego | Comments (0) | PermalinkDay Trader Meetup Review (Part 3)
Posted by Mark on May 2, 2016 at 05:58 | Last modified: March 4, 2016 12:46Today I will conclude my review of the first day trader Meetup.
Once we finally got around the table and through the introductions, the organizer took 15 minutes to present one strategy and a few other slides. We then got to eating and talking among ourselves. It seems like a good group of people. Being filled with newbies, I think the group could benefit from some basic presentation about trading. This would include some teaching on trading system development, countering heuristic thinking tendencies, and general tenets of optionScam.com.
Later that evening, WM posted a comment on the website:
> I came to a day trading group with undesired long term ideas. I
> then tried to force them on the group. SORRY won’t happen again.
My intent was not to make this guy feel bad but rather to teach him something. I figured that unfortunately, he would just go on studying Hurst and continuing to get nowhere. WM is like the occasional entrepreneur we see on Shark Tank who has spent a huge amount of money [and time] trying to develop a product/business. Without revenue the Sharks often shake their heads and say things like “this is just a bad idea,” or “cut your losses already and move onto something else.”
The Holy Grail is advertised and marketed in many places. I firmly believe it is myth and only capable of impeding my progress by draining resources. One way I avoid this trap is to steer clear of anything too complex. In WM’s case, the advanced theoretical math is literally way over his head. Anything “proprietary” is also too complex for me because by definition, I will never know what it is.
A second Meetup was held a few weeks later on a Wednesday evening and only three of us (WM, the organizer, and myself) showed up. Yes, WM was still trying to preach Hurst theories and he eventually stood up and said “thanks guys but this group just isn’t for me.” I think he’s too brainwashed to contribute but I do hope others attend future Meetups.
Categories: Networking, Trader Ego | Comments (0) | Permalink