Hello, fellow trader!

I’ve been following the MPs’ expenses scandal and am absolutely fascinated by it all. What I’m most interested in is the psychology, especially the excuses and justifications used.

The first thing I would do is hand every MP a copy of Tavris & Aronson’s Mistakes Were Made (But Not by Me). This is a brilliant book that I recommend everyone read no matter what your walk of life. It helps you to spot your own mental blind spots and recognise the same in others. It explains how we all justify foolish beliefs, bad decisions and hurtful acts and may just help your trading if you acknowledge this in your psychology.

How many MPs have admitted they are sorry? I mean really sorry with no justifications thrown in to lessen what they have done. How about something like “I messed up, I got greedy. Everyone else was doing it, but I knew it was wrong to claim for my butler’s new fob watch and did it anyway. I’m sorry.”

Similarly how many bankers and regulatory officials have said they are sorry and explained themselves without any post hoc rationalisations? If you watch the treasury select committee grilling of bankers, you won’t spot a single bank chief say “I’m sorry for the pain I personally caused”. Any mention of personal culpability is completely removed, probably due to fear of litigation.

The problem with all this is that unless you fully admit culpability without rationalisation, you never believe you have done anything wrong and crucially, the mistake is likely to be repeated again. In fact, you are more likely to believe you are right and acted properly as one justification feeds further justification. I’m not very confident that ‘lessons will be learned’ from the credit crunch and the next bubble will burst within a decade.

How can we apply this to our trading psychology?

Quite a lot in my experience. I’ve made so many bad trades that I’ve justified with “Well I was only experimenting”, “I was only testing the waters” or “I knew it was a punt”. When in fact they were just dumb stupid trades. I’ve found that I learn more when I’m more honest with myself about what happened. It’s hard to be honest with yourself (excruciating sometimes), but ultimately it has helped me become a slightly better trader.

Along these lines, I remember an interesting chat I had with a professional trader a while back. He talked about his wife a lot, explaining that he shared his ups and downs with her and that she often acted as a brutally honest sounding board.

Man: “I lost this much today”

Wife: “How on earth did you do that?”

Man: (Initial attempt at justifying) “Well the markets were powering up, the US govt…..” (Man looks at unconvinced wife) “….To be honest, it was a stupid trade”.

I got the impression that this professional trader was in part successful because he was honest about his failures and triumphs. There was no attempt to rationalise anything to himself or his wife. In this way he continued to learn about himself and correct mistakes better.

Wives / girlfriends / female friends / mothers make excellent sounding boards, perhaps because according to some experts, women are actually better traders.

I know there are a growing number of female traders and quite a few amongst the Market Maven readership. Hat tip to you, chances are you’ll do a better job than your male counter parts.

According to a recent Wall Street Journal article, women’s risk adjusted returns beat those of men by an average of one percent annually. Women trade less frequently, hold less volatile stocks and have lower expectations.

After the testosterone fuelled banking crisis, you won’t be surprised to hear that women traders perform better by focusing on safety first and are not so hindered by over confidence.

I hope this helps you with your trading mindset.

I highly recommend these books for further reading: Mistakes Were Made (But Not by Me) by Carol Tavris & Elliot Aronson (not specifically trading but very applicable); and Trading in the Zone by Mark Douglas.

My trades

After a few frustrating short trades (and one rather stupid one) on the S&P 500 I’ve changed tack over the last week. I remain unconvinced by the rally, but the market evidently isn’t judging by the way it keeps going up. As I explained last week, I’m more neutral than anything else and my favourite market oracle www.sentimentrader.com is also not seeing much of an edge in either direction. So I’ve switched tack by placing a few fixed odds trades with www.betonmarkets.com. I’ve done a few no touch higher which will work out well if markets either trade in a range or plunge. If we get some more extreme readings likea big rally day I’ll probably be more confident with some short trades, but for now I think this is the best option for me.

Better week with my forex trades after I did some analysis of my money management. I realised I hadn’t taken into account how forex markets have been calming down in recent months. I was holding out for the big moves too much, but with a decrease in volatility, the big uninterrupted moves have become less frequent. So I’ve tighten my stops and decreased my profit targets. So far it seems to be working better.

This week’s hot trading buttons

Today’s highlights include UK manufacturing production data followed by US Trade balance. Wednesday morning brings UK claimant count change, the BOE inflation report, and US retail sales are released around midday. Thursday sees the release of US PPI and unemployment claims, followed by more inflation data with CPI on Friday.

Trading wisdom

“Markets can remain irrational longer than you can remain solvent” John Maynard Keynes.