Here’s a really good article about overvaluing recent events. For a trader it is instructive. I say this because one of our new traders sent me an email recently: “I know my big weakness is trading on the Open. Do you have any suggestions on how to improve or what to look for in order to increase my morning productivity?” I get this a lot. Too often what follows is the conclusion that you should not trade the Open.
It’s not that this new trader can’t trade the Open, and it’s not that he ought to sit out the first 30 minutes of the trading day going forward. What he needs to do is identify his human error. Generally those who struggle trading on the Open improperly calculate their downside risk. So what happens? They take rips. The solution to the problem is to realize that the Open is when you must be more certain and careful about your downside risk. If the stocks turns where can you get out? Are you confident you can get out? Usually doing a better job with the answers to these questions improves a new trader’s Open performance.
But what I find most interesting as a trader is the tendency to overvalue recent events. It usually goes like this: new traders will take a rip on the Open, they analyze the results—and then conclude that they cannot trade the Open. Please put things in perspective. Fight human nature. You have just started trading. It’s not that you cannot trade the Open. It’s that at this stage of your career you are making the error of miscalculating your downside risk. As you gain experience you will not miscalculate your downside risk. And thus your performance on the Open will improve.
There are trading periods where I will rip it up for three consecutive days. My first response is to go home and consider if I can continue trading. I wonder if this is the end of my trading career. At worst my mind wanders momentarily that I have had a nice run and maybe it’s time now for something else. And then some time passes. I consider some adjustments that I need to make. I make them and then run off 45 straight profitable trading days. During this profitable run I sometimes sit on my couch reviewing the trading day in my head and convince myself that I have finally mastered the markets, that my poor trading streaks and negative trading days are behind me—and then I take a huge rip very soon after. Our minds overvalue recent events. We need to be aware of this so that when we are doing poorly we should put that period in the proper perspective and make constructive adjustments.
Bad days happen. I will have many more of them. I had one on Thursday. Friday I spent the day interviewing trading candidates at Williams. During my breaks I was haunted by the poor trades I had made on Thursday. Friday night at a Halloween party my mind wandered to my poor trades in GS the day before. I spent almost no time remembering the thousands of positive trades I have made trading GS. This is just human nature. It’s downright silly for me to think I’m done as a trader after three poor trading days. It is even more ridiculous for me to ever think I have finally mastered the markets. That will never happen. It’s like golf. I can always improve. There are always more shots to learn and more trading plays to improve. But this weekend I need to spend some time feeding my mind with the positive trades I have made in GS. I must make sure I program my mind so that I do not overvalue my poor trading this Thursday.
For the new traders that struggle on the Open, I have one word for you: relax. Understand that you are overvaluing recent events. Consider how good of a trader you can be on the Open three years from now. Identify your human error. Focus on the trades that work for you on the Open, and feed you mind with the positive trades that you have made on the Open.
Good luck with your trading.
