Rock Paper Scissors – A Trading Analogy!

Hello Traders,

this is a great article from my good friend Lance Beggs from www.yourtradingcoach.com:

Yeah… I’m serious!

Rock Paper Scissors!

 I know all the other trading educators are talking about poker and the lessons it provides in position sizing and trader psychology. I’d love to sound really cool as well and talk about No-Limit Hold ’em, or Aces over Kings, or all manner of other great-sounding terms. But the fact is that I don’t know the first thing about poker. And I figure I’m not the only one.

 So, here’s one for all of us non-poker nerds… a game that everyone should know, which also provides an excellent lesson for traders.

 If you’re not familiar with Rock Paper Scissors, check out Wikipedia or the World RPS Society website. That’s right… there is a worldwide body dedicated to the promotion of this game, the standardisation of its rules and to overseeing the annual International World Championships.

 Essentially, Rock Paper Scissors is a game that is widely used for decision making or solving disputes. Two players simultaneously deliver a hand signal representing either a rock (clenched fist), scissors (as per rock, but with the index and middle finger extended representing the two blades of a pair of scissors) or paper (open palm facing down).

  • Rock breaks scissors.
  • Scissors cut paper.
  • Paper covers rock.

 Typically, in an informal setting the winner will be determined by the best out of three throws, although you may from time to time see a single throw, sudden-death game. If you aspire to attending the World RPS championships, the winner is determined by the best out of three sets, each set being won by the best out of three throws.

 If you’re confused, don’t worry – personal Rock Paper Scissors trainers are available.

 

So, how does Rock Paper Scissors relate to trading?

 Let’s first examine the nature of the game. On the surface the result of each game appears to be random. Basically a coin toss, but with three outcomes instead of two – win, lose or draw. On closer examination though you’ll recognize that the reality is much different. Unlike a coin toss, the outcome of each game depends on decisions made by the human participants.

 And human decision making is NEVER random, particularly when there are high stakes involved.

 Your decision about whether to throw rock, paper or scissors, will largely be influenced by your beliefs about your competitors decision. If you know what they’re likely to throw, you’ll adjust your throw to ensure it beats their choice.

 A great example of this is the following exchange between Lisa and Bart in The Simpsons episode #9F16.

  • Lisa: “Look, there’s only one way to settle this. Rock Paper Scissors.”
  • Lisa’s thought: “Poor predictable Bart. Always takes rock.”
  • Bart’s thought: “Good old rock. Nothing beats that.”
  • Bart’s throw: Rock
  • Lisa’s throw: Paper
  • Bart: “D’oh!”

 

The result in this example is far from random. Lisa has managed to win the game through awareness of her opponent’s belief systems.

In fact, there appears to be a little bit of Bart Simpson in all of us.

The World RPS Society reports statistics from a number of Rock Paper Scissors sources. The one providing the largest sample comes from the Roshambull application on Facebook, which at the time of reporting had logged over 10 million throws from over 1.6 million games. Statistics in this sample show Rock being thrown 36% of the time as opposed to paper 30% and scissors 34%. It appears that rock is more often the number one choice of Rock Paper Scissors competitors.

If you doubt that psychology plays such a great role in Rock Paper Scissors, schedule a high stakes game against a family member or friend. Something harmless of course, but high stakes – maybe the loser has to wash the winners car each fortnight for the next 12 months. You’ll find that your throws are not random at all, but rather you’re trying desperately to anticipate your opponents move, exploiting any knowledge you have about the way your opponent thinks.

Before you schedule this game though, let’s have a quick look at how you can gain an edge at Rock Paper Scissors.

Firstly, we know from the above studies that the distribution is skewed slightly in favour of rock. So, if we’re playing against a novice, the initial edge is available through throwing paper, as paper covers rock. It’s a very slight edge, but it’s still an edge.

Of course, the strategy will have to change against someone with a little more experience, or in fact anyone who recognises the non-random nature of the game. These people will be expecting that we’ll throw paper, in order to beat their ‘obvious’ rock. As a result, they’re more likely to throw scissors in an attempt to beat our paper. So, instead of paper, we’ll throw rock to beat their scissors.

It’s all about staying one step ahead of your opponents thought processes.

There’s more… watch out for two throws in a row of the same type. People are very wary of being too predictable. If your competitor has produced two throws in a row exactly the same, their next throw is statistically more likely to differ. As an example, let’s say they’ve had two rocks in a row. Not wanting to be too predictable, they’ll most likely throw either paper or scissors on the third throw. So, your choice should be scissors, as it’ll win against their paper, or draw against their scissors.

Another great option is to suggest a throw to your opponent. Imagine your reaction if we were competing and I said to you, “It’s so easy to read you – your next throw is going to be paper.” Subconsciously I’ve implanted in you a desire to avoid paper. You don’t want to be predictable, so you’ll be more likely to throw either rock or scissors. This makes my choice easier. The edge for me is in throwing rock as it will beat your scissors, or worst-case tie against your rock.

The opposite of this is to state your own intentions before throwing. I could for example say “I’m going to smash you on this final one. Get ready for my rock.” The last thing you’d expect now is for me to actually be so stupid as to throw a rock. So you’d be expecting me to throw paper or scissors, leading to your likely choice being scissors in order to get a win or draw. So, I simply give the throw I mentioned – rock – beating your scissors.

Love it!

Of course, it’s not all that simple. The World RPS Society website has a strategy guide for sale if you’re interested in exploring this further. Remember though, you are playing against humans. Not only are their decisions not random, but they’re also often irrational. So, although you might have an edge, you’re still playing over a very small sample of games. Be sure to never bet what you can’t afford to lose.

So, how is this a trading analogy?

Novices mistakenly think that Rock Paper Scissors is a game of chance.

As we’ve seen though, Rock Paper Scissors is actually a game of skill and strategy in which success comes from being able to read your opponent, adapting your game to profit from their likely actions. Success is not guaranteed in any particular throw, but if you can successfully get within the mind of your opponent you’ll gain an edge which will see you to victory over a series of throws.

Likewise with trading…

Some novices believe it’s a game of fundamentals. They’ll study the company reports, PE ratios, dividend yields, or wider economic factors such as the retail sales or payroll figures. They aim to find a stock or instrument which is valued differently from what they believe is its true fundamental value. They’ll then enter expecting the fundamental factors to push price to their perceived ‘correct’ value.

Other novices believe it’s a game of technicals. They’ll use indicators, which are simply a derivative of price, in an attempt to predict future price movement. As price moves in a particular direction the indicators will follow, eventually triggering our novice trader into the market. There is rarely any thought as to what caused the initial price movement, or whether or not the context of the current market supports continued price movement. They operate simply on hope, that the price movement which triggered them into the trade will continue in the same direction.

In fact, neither is correct. Trading is not a game of fundamental or technical analysis.

Like Rock Paper Scissors, trading is a game of understanding people and how they make decisions.

True, your competitor is not one individual. Rather, you trade against the collective market which is made up of millions of other traders and investors all making individual buy and sell decisions.

Price moves in response to the net order flow that results from all these individual buy and sell decisions. If the net order flow is bullish, price will rise. If the net order flow is bearish, price will fall. It’s as simple as that. The fundamentals don’t move price. They technicals don’t move price. Order flow moves price.

So, the game of trading is one of identifying those areas where a significant number of traders are going to feel compelled to take action and then entering before they enter. It doesn’t matter whether you use fundamentals or technicals or any other form of analysis. If you can achieve this on a consistent basis, you’ve got yourself an edge.

Know what other traders are thinking – and you can position yourself to profit from their actions.

There are numerous ways of achieving this. A simple example is the use of chart pattern failures. The more obvious the chart pattern, the better. A technically perfect head and shoulders pattern will produce a large order flow short as price breaks the neckline. But should that pattern fail there will be an even greater order flow long, as the bears scramble to cover their losses. Knowing how traders will act at the point of pattern failure, I can position myself to enter long at this point, to exploit the increase in bullish order flow.

So, examine your trading approach. Whether it’s based on fundamental or technical or quantitative or astrological or any other means of analysis, ensure you consider the fact that the market exists because traders make trading decisions. It’s not about the technicals or fundamentals. It’s about knowing what your competitor is thinking.

Like Rock Paper Scissors, if you know the likely decisions and actions of your competitor, you’ll know how to position yourself for a higher probability of success.

Lance Beggs

http://www.yourtradingcoach.com/

 

(c) Copyright 2009. Lance Beggs. All Rights Reserved.

 

 

 

Integrity & Discipline

Integrity = being true to ones word, do what you say you do not what you feel like doing.
Discipline = obeying rules or a code of behaviour.
Unless the trader is willing to adopt those 2 traits they will continue to lose money…

Possibility vs Probability of Making Profits With Trading

Do you know the difference between the Possibility & the Probability of Making Profits in Trading?

If you are a share trader then you need to know … It’s vital for your success!

It doesn’t matter if you trade options, cfds, or futures, you will want to read this article below on how you can make more money in trading than you currently do … which is what you want, right?

I will never forget the day it suddenly all made sense to me. I was at a seminar listening to the presenter talking about the possibility of success vs. the probability of success. It got me thinking about my share trading business.

I started to wonder … is it really possible to make money with trading? The answer of course is obvious…

It is 100% Possible for YOU to make an infinite amount and reach financial independence with share trading if someone else has done it before you! Now that’s a pretty big claim … but I think you are about to find out it is true …  Think about it:

– The market doesn’t care how old you are, your gender or if you are a good or bad person, it is the same for everyone!

– Everyone has the same opportunities.

So it is safe for us to conclude that yes, in fact, it is 100% possible for you to become a profitable trader and truly live financially independent.

The big question then is …. why aren’t you?

If success is 100% possible for you in share trading … then why haven’t you achieved it yet? Why aren’t you making as much money as you thought you would when you started out with trading?

Now I have no doubt you have been asking yourself these questions already … right? Here is what I discovered ..

Even though it may be 100% possible for you to be a profitable trader … the probability of you achieving success is a sliding scale from 0% up to 100%!

So where are you right now? Where you are on the probability scale right now will totally determine your results and ultimately your success in the share market!

Now, I have first hand experience with this: When I went to my first trading seminar I bought a trading system that I knew had made a few traders thousands of dollars … So there was no doubt it was 100% possible …

But where do you think I was on the scale of probability?

Well looking back on it … I was likely around the 10% mark. In other words I had a 10% chance of making it and becoming successful. Why so low?

Well let me outline it for you … there I was with no knowledge about the share market, no business skills, low self-esteem, no discipline in any area of my life, not much capital to put into my trading account, no quick decision making skills, no self belief, no goals, a scarcity mindset, surrounded by people with an even greater poverty consciousness than I had, a negative attitude and no support from family or friends.

On reflection, perhaps I am being too kind to myself suggesting I had even a 10% chance of success. What do you think?

So there I was a brand new share trader using a proven trading system … 100% possibility that I could be successful … 10% probability of success … and the result?

Well you guessed it, I lost a lot of money in my first year of trading To my credit though I did make a few winning trades. Of course none of them was big enough to cover all the losses and it only took me another 4 years to discover why …    Here is what I discovered …

Rarely will you be able to make more money than you currently do … In fact you will usually lose a lot of money first! …  Why is this so?

Because if you have the mindset of someone who is only at 10% probability of success then you are not going to react to the movements in the market in such a way that you will make profits. You will be at the effect of your emotions so much so that you are doomed to stay stuck or worse.

Does this explain to you why you may not have achieved the level of success you desire with your trading?

Can you see why some people make millions of dollars in the share market whilst many others flounder around for years without moving forward?

The key to success in trading is really simple … do everything you can to raise yourself as close as you can to the 100% probability of success mark! When you do that everything will fall into place for you. I promise!

You will know exactly when to get in and when to get out of the market, you will have the discipline to follow your trading system no matter what the market does you handle it with confident superiority.  Your level of belief, conviction and passion will radiate in such a way that you won’t be able to help but become a huge success.

So the burning question becomes … what can you do right now to move yourself higher up the scale of probability?

How can we improve your chance of success? Well it may not be what you are thinking …

Lots of traders mistakenly think that there is some secret indicator that the profitable traders use differently to them and if they just knew what it is they too would become a success. So to increase their chance of success they go to more trading seminars, if they read all the books and listen to the cds, hoping to find the one thing that will help them to be unfailable or in the attempt to find the holy grail they even buy a black box… ouch!

Some think that if they become professional ‘backtesters’, that will lead them to the path of ultimate success … yeah right … after all … we only need to find that one perfect indicator and we will be rich, right? WRONG!

I have met fellow traders who thought the answer lied in blaming their broker, complaining about the lack of support from their partner or justifying why they don’t follow their trading system. Amazing ….

In desperation we turn to the traders we think are successful who tell us to just stop being greedy, be more disciplined, not to fear but to believe in ourselves and to be patient. Yeah, I knew all of that, but how do I do that?

Newsflash for you … if you continue to operate only at 10% on the probability scale no matter what new indicator you pick up you will still only be going to be at 10%.

Here is the most important thing you need to know about moving yourself rapidly up the scale towards the 100% probability of success …

The skills and tools of trading system only account for about 10% on the scale of probability … the other 90% is trading MINDSET! It’s all about your trading mindset …

It’s who you are as a person …  your character, identity, beliefs, values, integrity, ethics, passion, vision, goals, language, attitude, inspiration, philosophy! It’s how you think that matters most!

The way to move up the scale of probability towards the 100% probability mark is to at least spend as much time working on you than you do refining your trading system.

There is no point going through potential trades two hours every night after work if your mindset only gives you a 10% chance of probability of success … you will wind up frustrated and broke, desperately waiting for the next rally to pump you up…  Work on your trading MINDSET!

That’s the key to your ultimate success … the good news is that it’s within you. The good news is that it is within your control and there is something you can do right now starting today to dramatically improve your mindset.

I want you to reflect on where you are on the scale of probability right now. Where do you see yourself? Are you at 10%, perhaps 50% … or maybe even closer to 70%?…  It is easy to discover … just look at your results!

 

 

 

James Flanagan: Major Sell Signal in Bonds on the Immediate Horizon

I have been following James Flanagan from www.gannglobal.com for a number of years now and find his practical application of the potentially highly confusing Gann theory fascinating.

Over the past 6 months, he has been preparing his subscribers for an opportunity for Bonds to establish a top basis the 60-year cycle. James wrote: “It looks like the market is going to accommodate what we’ve needed to see. At present, there is a specific sell pattern which could be developing.”

Check out his latest video of the complimentary video series on http://www.gannglobal.com/webinar/2012/04/04-J12-TP-Video-3.php.

“I believe the stage is set for a major sell signal being given in the bond market. In our analysis, all of the criteria are close to being met to confirm this, including the culmination of the 60-year cycle between April 18th and the 29th.

Over the past 6 months, we have been preparing subscribers for this opportunity and it looks like the market is going to accommodate what we’ve needed to see.
At present, there is a specific sell pattern which could be developing. We refer to it as a “breakdown retracement sell signal”.

I hope you enjoy James’ work as much as I do.

With a toast to your trading profits

Mandi

Building Your Trading Success ‘Abs’

Trading Success Abs