Trading with the Committee.
A committee (or “commission”) is a type of small deliberative assembly that is usually intended to remain subordinate to another, larger deliberative assembly—which when organized so that action on committee requires a vote by all its entitled members, is called the committee of the whole. Committees often serve several different functions:
How this relates to trading.
While writing this trading note, I thought about calling it “who’s doing the trading, you or the committee”?
Most self-directed Investors and traders have found Trading from a desk at home at time is at times lonely, if you have been trading for a while this is not news.
When markets are going their way there is no one to celebrate with and conversely when trading is not going well there is no fall back into the comforting and encouraging dialogue of the psychology coach which everyone seems to look for in dark times of trading.
Or is there? What about that little committee of voices that we listen to, “sometimes”?
That little voice that sits on our shoulder constantly coming up with different scenarios and debating a course of action when a decision is required.
Committee members include Ego, Survival and Bias.
Firstly lets look at what a committee is supposed to do. As described above a committee is subordinate group brought together to provide discussion and to vote on an outcome. This is then relayed higher up for further decision making.
That committee voice that suggests we stay in a winning trade a little to long to watch the profits whittle away or stay in losing trade just one more day with all the correct reasoning for the decision that actually makes sense at the time. So whatever the outcome, the job of committee based trading is working perfectly.
As described, the committee will provide several different answers. And each one is formally voted on and passed to a higher level. When we shrug our shoulders and say “ I don’t know “ this simply means the committee has not come to the vote.
Lets break this down a bit further
One of the hardest questions I was ever asked in the past is what do you want from your trading?
This really was a lead in to ask, why are you trading?
The why of trading, if you cannot write the reasons for why am I trading down on a piece of paper,
get one out now and make a start.
The other questions to answer are, why do I take an interest in the markets and risk my capital, why do I go to those trading meetings and listen to webinars.
As experienced traders find out and every trader will eventually discover, this endeavour may be the hardest vocation ever attempted, so there needs to be a very clear “why”. So strong it will keep the trader focused on his or her target outcome no matter what the market provides in the way of price movement and volatility.
If this “why “ is about “beating the market” for returns, rethink!
This is far from a specific outcome and does not take into account bear markets and market corrections, if beating the market is about losing less than a falling market, this is not trading, its just managing capital.
Cutting to the chase.
This why of trading can only be held in the higher authority of first thought, and not subject to the committee vote. That means it must be held at the same level as survival.
Committees came in different shapes and forms one of the strongest is the Personnel Ego.
When the Ego committee gets hold of the “why” there is all sorts of debate and the requirement for more information, to come to a conclusion to satisfy the ego itself, bad move!
This Ego driven decision making often has nothing to do with the market movement itself, but rather holding out to the originally desired outcome, in effect holding on to bad trades waiting for the outcome that will satisfy the personnel Ego of the trader.
It’s very easy for the trader to identify Ego trading when a number of indicators or reports are referenced to justify the position.
The other way to know its Ego trading? Have you ever heard the words “it will come back”
Now we have the real situation, as this trading outcome can only be random.
Rule based trading.
Everyone knows about it very few master it. Putting the committee aside and letting the market trade for you with rule based trading.
There is an infinite number of potential trading systems based on types of market and different time frames.
Markets can be open 24 hours or limited to the trading day in its own time zone, the trader really has a very large range to choose from with equities, Index futures and currencies and commodities.
So trading systems can vary widely between markets.
To master your trading the individual work often beings with asking the question, “why do I let the committee trade when I want to trade”.
The trading system that works is price based entry and exit, as this is all the market offers everyday.
And it around this that trading systems is designed.
A trading system can be designed by a trader to suit their lifestyle and risk profile.
At the end of the day the system itself has to trade not the trader.
The trader is best advised to work on ways of eliminating the committee based trading system and letting the Rule based trading plan do its work.
This is where survival in the markets begins.
Rule based trading has fixed entry signal and fixed exit levels. Rule based trading does not refer back to the committee for information or clarification.
Rule based trading is a trading plan written down.
Rule based trading has the actual trade identified and mapped out before the entry order is placed.
This includes risk per trade and position size for the position.
Rule based trading know the maximum risk before the trade is placed.
Coming soon we will look at some rule based systems and put them to the test.
Gary Burton CFTe Technical Analysis Research, First Prudential Markets AFSL 286354