Chapter 14Trading Decisions
What Makes Trading So Difficult
In this section I will discuss why one of the most common approaches to trading is dead wrong. I'll also explain what makes it so appealing and why it will continue to be difficult to resist, even after I prove to you that it is irrational.
Let's begin with the basics of investing. You form a view and with it come expectations. See Figure 14.1 for an example. In this case the investor is bullish.
Figure 14.1 A bullish investor
Of course, we aren't so naive as to believe that anything will move in such a straight line, so we have a range within which we expect it to trade (see Figure 14.2).
Figure 14.2 Expected trading range
As time goes by the spot price ebbs and flows, sometimes moving higher confirming your view, while other times it moves lower calling your view into question (see Figure 14.3). When we look back on an asset's price action it actually appears to be this clear cut, and the job, with the benefit of hindsight, seems like it really is that simple. The reality, however, is quite different.
Figure 14.3 Price action
Let's examine what happens when the price moves down toward the lower end of your expectations ...