Vimal & Sons

April 27, 2022

Building a Counterintuitive Mindset

For readers who haven’t been following this series of posts, it makes sense to read these posts first:

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The dictionary definition of the word counterintuitive is 'contrary to what one would intuitively expect.' Building a counterintuitive mindset isn't easy. The following might help.  

  • Trading is all about going against the standard human emotions. As a trader, you're continually going up against your emotional limitations. That is why so few people succeed in trading. You have to have a high degree of self-awareness; you've to be able to see your flaws and your strengths and deal effectively with both - leveraging your strengths and guarding against your weaknesses. 
  • Our emotions are a signal source, they are our friends, not our enemies. One should be aware of our emotional extremes and trade accordingly. So, the moment you're feeling greedy, you know it's the wrong trade you're going to put on and the opposite for when you're fearful. For example, if you're in a trade that moves strongly in your favour, we tend to think: “This trade can’t lose, I better load up on this position before it runs away,”; use this as a signal to liquidate immediately. 
  • Any counter-to-expected market response to a news development can provide a valuable timing signal. The initial reaction to an impending Trump victory was negative, but the losses were quickly reversed and it led to the start of a 14-month bull run.
  • The key to successful trading is: Don't have an Opinion. The maxim is: Should've been up, but it's down, so short it; should've been down, but it's up, so long it. When the tape is telling you something, don't fight it; go with it.
  • The time when you least want to think about trading is the time when you need to focus the most on trading.
  • When a breakout occurs and you get terrible fills, the better your trade. Because there is no supply to fill your trade, it would generally mean that you are directionally correct. The general rule is the less observed the better your trade.
  • One should be a reactive trader, not an opinionated one. Moreover, most of us lose money on somebody else's opinion. An opinion isn't worth that much. It is more important to listen to the market. While trading if it is not your idea and you have put on a position because someone told you to, it messes up your trading. You need to ask yourself: how many people are left to act on this particular idea? You can judge that by studying market tone which is to say the price action and the market sentiment. 
  • Most traders don't want to listen to your opinion, they only want to tell you theirs. If someone calls you every day after a market has rallied, it means he is short and he is not sure of his position. If that is true for a bunch of traders, it means that the market will go higher. 
  • Never ask anyone for their opinion, forecast, or recommendation. Just ask them what they have or don’t have in their portfolio. In other words, don't ask people their positions, they won't tell you the truth. Alternatively, if you do ask others for their opinion on the market, and if they are telling the truth, you can work backwards from there to guess how they are positioned. That's how you can get a feel of what the consensus opinion is.
  • When you do see a long-term historical chart, look for the anomalous years and ask: What caused those? Why did that happen? If one tries to figure out the answers, one can learn an enormous amount. 
  • To be successful at trading one has to be willing to change one's opinion. Most people are afraid of making money than losing money - that's why they want to sell a stock that is up by 20 per cent. If a stock is down 20 per cent, they are not going to sell. What they are really afraid of is not being right. If they sell when it is down it will confirm that they were wrong and that is difficult to accept.
  • Staring at the screen the whole day is counter-productive. Watching every tick will lead to both selling good positions prematurely and overtrading. The idea is to find something else to occupy part of your time to avoid the pitfalls of watching the market too closely. 
  • If one is not alert, our senses tend to deceive us. When trading it's important to examine the situation from as many different angles as possible because your initial impulses are probably going to be wrong. There is never any money to be made in the obvious conclusions.
  • Counter-intuitive trades have a higher probability of success. If one feels that some stock or commodity is inherently very cheap, but the chart pattern says that one should short it, in such cases, more often than not, following the chart pattern, tends to be profitable. If you're playing for emotional satisfaction, you're bound to lose, because what feels good is often the wrong thing to do. So, there is an inverse correlation between how one feels about a particular trade and how it turns out. The reason is that it is easy to believe in a trade that conforms to conventional wisdom. 
  • "The larger the position, the greater the danger that trading decisions will be driven by fear rather than by judgement and experience" - Jack Schwager
  • When investors feel the risk is high, their actions serve to reduce risk. But when investors believe the risk is low, they create dangerous conditions. Markets are inherently counterintuitive.
  • Everyone understands that the market is a discounting mechanism. What they don't realise is that the discounting mechanism is not price; it is participation. When a stock moves from Rs. 50 to Rs. 100, it may not be the case that the bullish fundamentals are discounted. The counterintuitive trader checks for participation. If there were to be no participation (everyone wasn't long), then the bullish fundamentals wouldn't be discounted. In other words, the key is participation, not price. Another example would be the stock price of Amazon. When it reached the $700–$800 level, everyone thought the price was ridiculous. There was lots of talk about Amazon being a bubble. It was clear, though, that the majority of people did not own it, or they wouldn’t be calling it a bubble. The stock is now trading above $3,000. 
  • The concept that a market’s discounting mechanism is based on speculator participation, not price, is very important. Hence, markets bottom because speculators are already fully positioned short, a  condition that will naturally occur in an environment of pervasive bearish news. A similar explanation would apply to market tops. 

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