Minimizing Trader Regret
I see it all perfectly; there are two possible situations—one can either do this or that. My honest opinion and friendly advice is this: Do it or do not do it—you will regret both.
Can anything be done to make adherence to disciplined, rule-based trading easier? Since the most common reason for abandonment of discipline is regret over losses or missed opportunities, this chapter offers various techniques to counteract these self-destructive tendencies. Particular emphasis is placed on specific techniques to minimize regret for both trend-following as well as countertrend traders.
THE SOFTER SIDE OF DISCIPLINE
Chapter 3 examined unwavering discipline as a prerequisite for our adherence to positive expectancy models and robust risk management methodologies. Here we will augment that work with what I like to call the softer side of discipline. These are techniques that make adherence to positive expectancy models and risk management more palatable. These techniques are consequently not necessarily intended to make positive expectancy models more robust, but merely to make sticking with them easier instead. Because each of these tools tries to minimize the emotion of regret that inevitably accompanies any and all trading decisions, my umbrella term for all these techniques is regret minimization. To explain the technique, let us return to the opaque urn introduced in Chapter 3. Remember that the urn contained 57 green marbles and ...