How does my mindset affect my trading?
Hi guys, hi from Andrea Unger.
Today I want to talk about a mindset, life mindset applied to the trading and trading mindset applied to life.
Well, you have been a tourist for sure somewhere and when you go out and you decide to buy some small souvenir to take home, you normally, I think, discuss with the shopkeeper to find the deal, to get a discount, to pay as small as possible.
This is normally true in many other branches of life, if you have to buy a house for a living, you might wait until you feel that the real estate costs are on a medium or a minimum zone, which is obviously pretty much normal.
This mindset is often applied also to trading from newbies and they try to buy at the minimum price possible, probably the bottom of the value of a stock, which is fine, obviously, there’s nothing wrong in this, but while normally you buy a house once or twice in your life for living, therefore you can look for a proper timing, in trading this might be possible, but it does not happen very often.
It’s true that if you were able to buy at the very bottom and you were able to sit and wait you probably have a pretty nice amount of money today, but the sitting and the waiting is not always in the DNA of a trader, right or wrong, I mean, I don’t want to discuss this now, but it’s true that being a trader you try to be active and waiting and seeing your capital that is growing is not always something that copes with traders mindset.
So actually, you don’t have that great amount of occasions to buy at what you supposed to be a bottom.
You suppose, because you know only afterward if it was a bottom or if it was just a pause in a down
Why this mindset in trading could not be profitable?
The truth is that in trading, in systematic trading or systematic approach, one of the most common approaches, I don’t have the precise statistics, so don’t ask me how many models work on this, but the most common well-known approach is to buy at the breakout, a breakout of a new high.
This is against the common sense mindset of a standard citizen because you wait for an asset to be more expensive, more expensive, and when it is so expensive as it has never been before, you are a buyer.
So you wait to pay as much as possible to buy that asset!
Let’s see a practical example
This is really crazy if you think about it, but if you look at this from a different perspective, let’s imagine you go and you bet on a horse race.
I’m not an expert, I’ve never bet, I don’t know anything, but if I had to go and bet on a horse, I will probably have a look at past races and I would choose the horse which won more, the strongest, unless I could choose the weakest, for sure not because I believe it could win but just because I hope to win more, being probably the payout much higher.
Apart from this sort of speculation, if I had to do it with a high chance of winning, I will choose what I had the feeling to be the strongest horse, this is normal, it makes sense, doesn’t it?
So from this point of view, I choose the strongest and the same thing in a soccer match, the coach chooses the players who showed to be the strongest, the fittest at the moment.
He doesn’t choose those who had just an injury or whatever, he chooses those who demonstrated in the past matches to be at the top of their fitness level.
So he goes with the strongest and under this perspective, if you look at trading, you choose the strongest, you choose what showed to be strong, supposing it will be even stronger afterward, like the horse which wins again or the players who will play well again once you put them on the court.
So in trading most often it happens that to make more money you have to pay more.
If you try to pay less buying at the bottom, you will have a higher risk of losing part of your money.
You’re not making anything of what you apparently saved painless.
This does not mean this is the universal approach, pay as much as possible and you will make money, no!
But it makes sense if you look at it from the strength point of view, this is not necessarily true everywhere, there are assets where you wait for a retracement to buy.
The miniS&P500, I always show this example, but it works, so you wait for a retracement because you believe that this asset goes up in the long term, but going sometimes a bit down.
When it goes that bit down, you enter because you save the money from buying at the top, this works.
But it doesn’t on other assets, if you wait for that retracement and you buy them, you would probably lose money, because it goes on in the weakness shown, that weakness goes on and you will buy here but it goes further down and you lose part of your money if you apply the stop-loss, which is always good to apply.
The bottom line
I don’t mean don’t apply the stop-loss so you will not lose the money, you lose money if it goes down and it loses value, but generally speaking, buying what is shown to be strong pays more than buy what shows to be weak.
This is the hidden truth in trading which does not always cope with a common sense or mindset of people and that maybe is the reason why people lose money in trading, maybe.
Obviously, this is not a universal rule so don’t go out there buying what’s the most expensive and saying: ” Andrea Unger told me to do so and now I’m losing my money!”.
Andrea Unger, I didn’t tell anything, Andrea Unger is telling you that normally betting on strength pays more than betting on weakness and gives also more opportunities because being a general at least stock market trend upward, you have more opportunities to buy when things go up well.
So this is it, I mean think about it.
Think about it and if you are one of those who always try to buy at the bottom, think and have a look into this.
How do I have a look into this?
I test, I am an Algo trader, so when I get a tip or find an idea I put it together into my software machine and I test what the results have been so far.
If they look promising I might consider it, if they look a disaster I don’t even consider it.
So actually algo trading help in this because whatever idea you get or you are told, you can test and you can verify with numbers if that idea makes sense or maybe not that much.
Ciao from Andrea Unger, see you next time, ciao.