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AlphaBrain
book

AlphaBrain

by Stephen Duneier
February 2019
Intermediate to advanced content levelIntermediate to advanced
304 pages
7h 38m
English
Wiley
Audiobook available
Content preview from AlphaBrain

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.

Graph of price vs. time for a bullish investor displaying an ascending line representing expectation.

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).

Graph of price vs. time displaying 3 ascending lines for expectation (dashed), lower (dark solid) and upper (light solid) end of expectations, illustrating the expected trading range.

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.

Graph of price action, displaying intersecting ascending dashed line for expectation and zigzag line for spot between 2 ascending lines for lower (dark solid) and upper (light solid) end of expectations.

Figure 14.3 Price action

Let's examine what happens when the price moves down toward the lower end of your expectations ...

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Publisher Resources

ISBN: 9781119335566Purchase book