I was just wondering how the mechanical signals adjust to significant price spikes, such as Biogen’s activity yesterday. All history and the statistical edge line are based on long term trends prior to the spike (caused by the FDA approval, which was unexpected from what i have subsequently read). Its a great problem to have but just wanting to know if the edge will catch up as I am tempted to take some profit (which is against the rules).
The discipline is so hard to maintain, I fully expected a profit stop. Sorry Gary I did sell down half my holdings at $412.00. note: Held position is now 34 shares.
I noticed the outcome from the last spike in Nov 2020.
I have placed a note in the trade journal to highlight the need to only act on signals.
Mark
Afaik there is no profit stop. Futures are showing a small retracement but anything can happen.
If your investment plan says to sell on a spike, then it is ok to sell, so it wouldn’t be against your rules. You could make up a rule on the fly so it became a rule, but would you change the rule again if the stock just kept rising? or you could just sell and treat it as a mistake.
Ultimately, you are paying for a system that has a defined edge and contained in that edge are plenty of spikes up and down. One trade here and there has an insignificant effect on the edge.If you follow the system religiously you will get somewhere around that edge as defined by the research. If you change the suggested rules, you will get something other than the edge. Probability is such that you will degrade the edge over time.
If your brain screams sell, then you will probably do what you have to do, but over time your brain will (or should) trust the edge, as the best outcome for the Investor system has already been determined.
Disclosure: I am still learning to trust the edge.
Hi Phil.
You are correct in your statement, make a rule then stick to it. Or follow the system and create your edge.
Cheers
Mark
Thanks Phillip, great reply.
A few learning points to add.
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If you feel a strong urge to sell part of or all your BIIB position after its 38% spike yesterday, this will be emanating from one of the four primary fears of trading that Mark Douglas taught us. In this case, most probably the fear of missing out on the profit that you now have, combined with losing some of all of that profit.
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Ultimately, to develop life-lasting skills to be profitable beyond all alternative avenues thru which you may invest, you have to become consistent and objective wrt buy/sell/position decisions in the stock market. Every time you act in a way that is inconsistent and / or subjective, you are enforcing the bad habits of inconsistency and subjectivity.
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The question begs, consistent and objective to what? As Phillip says - your Investment Plan. Which shouldn’t be modified on-the-fly w/o some degree of evidence-backed research (you’ll know when you are and when you aren’t modifying on-the-fly).
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When we act against the rules of our Investment Plan, it is almost always out of fear of something happening that we interpret as potentially being harmful to us (emotional pain). Which we try to avoid.
The point being that even tho this time you may avoid the emotional pain by being inconsistent, will inconsistency cause less or more emotional pain over a larger sample of trades in the future?
- The trick is to redefine what we allow to be harmful to us so that we can overcome the potential emotional pain on an ongoing basis. This means defining ‘right’ and ‘wrong’ acts wrt trading.
‘Right’ is following the rules of your Investment Plan, ‘wrong’ is breaking them, regardless of the outcome of each and every trade.
You will do this if you have a big picture perspective that firstly understands and then trusts the Edge over a large sample of trades.
How can you grow this trust? Initially from empirical evidence. And then from flawless execution of the Edge yourself.
The easiest and best place to study the empirical evidence is the real-money public portfolios that I trade on the ASX and US markets (which you can download into your instance of Portfolio Manager in Beyond Charts).
The second best place is the training, education and historical research to truly understand the importance and magic of what a Statistical Edge is and what it means.
Then it’s up to you to surrender to the consistent process that produces the Edge. How? By completely accepting the predefined the risk of each and every position that is opened and that remains open in a portfolio. And then objectively exiting positions when exit signals occur.
If you have difficulty doing this with your current portfolio, then execute a portfolio with a smaller amount of money that is big enough to mean something to you but not too big that it causes you to fear the outcomes of each trade, that is, allowing the 4 primary fears to affect the execution of your objective mechanical rules…
Your most important task for the long-term is it to acquire the mental skills of consistency and objectivity - these will liberate you to execute the Edge as is. And achieve the returns that are on offer.
Regards
Gary
Thanks all, very helpful responses. I guess the message I will take away is if I want to create a rule for this sort of scenario in my plan I must first research it, otherwise I must stick to my plan, which is what I will do. As I spent most of my working career trying to get people to trust models built to predict a person’s credit risk I must now learn to do the same. Although I am relatively new to SWS I do love having clear rules!
P
Yes indeed, thanks all. Great advice
My learning from this is to stop/think when the urge to quick react presents.
Back on track