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Brett Steenbarger
@steenbab
Trading coach, psychologist, author, blogger. Please do not respond to anyone soliciting business in my name.
가입 July 2007
875 팔로잉 중    98.3K 팬
Very insightful presentation of the role of heuristics in deliberate practice and the development of expertise from @adamfiskebt:
Using heuristics as an edge 1/6 Thinking something through is a conversation with yourself. So whenever you enter a trade, manage it (add, take partial profits, re-enter), or exit, it's a conversation. Inner conversations you have while trading, other traders have too. But even though these conversations are on the same topics, their length, clarity, and confusion vary wildly. Some of them are like the dreaded meeting we've all sat through. They go round in circles, waffle on and seem to go nowhere. Others are like a frustrating conversation that's either full of irrelevant detail or so brief it skips important information. Hold that thought. You're always competing against other traders. And in doing so, you want to see opportunities before they do, act before they act, and take profits before they can. We're told the importance of deliberate practice, which requires deliberate thinking. Deliberate thinking is how you work out and develop the best course of action. But when it's time to take the stage, the field or the trading screens, deliberate thinking isn't an option if musicians, athletes and traders want to perform and/or compete well. Turning all that thinking and planning into a performance skill, while the market moves in real time, calls for a shorthand version. A rule of thumb/heuristic is the shorthand version of that mental conversation. In the trade examples that follow, you'll see how they lead to fast, clear trade decisions. You only have to look back at everything you've consumed about trading to know this is an uncommon topic. That's why applying rules of thumb is an edge over other traders. Heuristic one: Is fuel used up? The beauty of this heuristic is that it gives traders who tend to chase the market entering a trade insight into what's happening beyond price changing quickly. Being counterintuitive, it also gives you an edge over the competition. Starting with the counterintuitive part, traders are drawn to fast-moving price like moths to a flame. Mostly, this leads to buying tops and selling bottoms. I say mostly because there are times when 'chasing' is the correct trade, and I have a rule of thumb for that too. But the majority of the time, when it isn't, consider this. Let's say, having trended up for three hours prior, the market has stalled for about half an hour. It's not going down, but it's no longer going up. That stall has some traders assuming the market will reverse, and they're now looking to get short. If price suddenly rolls over and drops quickly, the sudden drop is the trigger for traders to chase the market and enter a short trade. If you've traded for any length of time, you know what I'm referring to, because it's the intuitive thing to do, and we've all done it. The problem, of course, is that by the time we're short, the market flips and starts heading back up again. From a rule-of-thumb perspective, I think of price movement as using fuel. How fast the fuel gets used depends on the speed of the move. Say you head out to an oval for a run, and you can either sprint at your top speed or jog at a relaxed pace. If you run flat out, you're likely to be on your back gasping for breath within a hundred metres, because you've run out of 'gas'. But if you jog, you can do complete lap after lap before you reach that same out-of-gas state. It's the same for price movement, but people think about it in reverse. When price is moving slowly, grinding away, many traders doubt it can keep going. Yet it's using up buying fuel at the pace of a relaxed jog, which in turn leads to 'refuelling'. That refuelling comes from short sellers having to cover (who've entered because they anticipate price rolling over to the downside), and from buyers who sold prematurely, also anticipating price rolling over, now having to re-enter once they see their long trade is still working. By contrast, fast movement uses up all the stops traders have placed close to the current price. As usual market behaviour, experienced traders don't react. But less experienced traders enter into short positions, unknowingly refuelling the market with more buying fuel to take prices higher when they cover their shorts. So the rule of thumb is: is fuel used up? Of course, this is contextual, because trading is chess, not checkers. But that's all the more reason to use heuristics, because you can tie them together, like in the example below. Heuristic two: Aggressive or defensive? Firstly, I have a bigger-picture view chart telling me the market is ideally suited to 'Premium Long' playbook trades showing up. An indicator tells me when this is the case - which is a heuristic in itself. Note the second line in the message box: 'Defensive profit-taking when fading'.
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