a formula:
StoPiomorrow = Stoproday + AF * (EPiade — Stoproday)
where Stopioday = the current stop.
StopPiomorrow = the stop for the next trading day.= the extreme point reached by the market in thecurrent trade. If a trader is long, EP is the highesthigh reached since the day he bought. If a trader isshort, EP is the lowest low reached since theday he went short.the acceleration factor. This unique tool deter-mines how fast to move a stop in the direction of atrend. AF depends on the number of new highssince the entry into a long trade or the number ofnew lows since the entry into a short trade.
trade
Fe
On the first day in a trade, Acceleration Factor equals 0.02. This meansthat the stop is moved by 2 percent of the distance between the extreme point44, PARABOLIC TRADING SYSTEM 245
and the original stop. AF increases by 0.02 each day the rally reaches a newhigh or a decline reaches a new low, up to the maximum of 0.20.
If the market reaches 3 higher highs during a long trade, AF equals 0.08[0.02 + (0.02 + 3)], and if the market reaches 9 new highs, AF rises to itsmaximum of 0.20, or 0.02 + (0.02 ¢ 9). In the latter case, the daily stop getsmoved by 20 percent of the distance between the extreme point of the tradeand the latest stop.
In the beginning of a trade, Acceleration Factor is small and stops moveslowly. As the market reaches new highs or new lows, AF increases andstops move fast. If the market does not reach new highs or lows, AF keepsmoving stops in the direction of the trade. By doing so, Parabolic forcestraders to get out of trades that go nowhere.
Many traders change the Acceleration Factor. They adjust the size of thebasic 0.02 step and the 0.20 maximum size of AF. Some increase them tomake the system more sensitive, others decrease them to make the systemreact slower. The size of a step often varies from 0.015 to 0.025 and themaximum size of AF from 0.18 to 0.23.
Trading Psychology
Losers go broke by hanging onto losing positions and hoping for a reversal.The Parabolic system protects traders from indecision and imposes an irondiscipline on them. It sets a stop the moment you enter a trade and tells youto move it in the direction of the trade.
If you go long or short but prices remain flat, it gives you a message thatyour timing was wrong. You would not have bought or shorted unless youexpected prices to move right after you put on a trade! Parabolic does not letyou hang onto a trade that goes nowhere. It moves stops in the direction ofthe trade, saying in effect “Put up or shut up.”
The Parabolic system is extremely useful during runaway trends. Whenprices soar or crash without a pullback, it is hard to place stops using normalchart patterns or indicators. Parabolic is the best tool for placing stops underthose conditions.
Trading Rules
When you begin using Parabolic in any given market, go back several weeksto calculate its stops. Adjust Parabolic stops daily, with one exception: If ittells you to move the stop into the previous day’s range, don’t do it. Stopsshould be kept outside of the previous day’s range.246 TRADING SYSTEMS
IBMParabolic SystemStep=0.02 AF=0.20
(J OK to use Parabolic(ZA Do not use Parabolic
e far erFigure 44-1. Parabolic System
Parabolic works well when the markets are moving, but not when themarkets are flat. If you get whipsawed twice in a row, it signals a flatmarket. Stop using Parabolic, but continue to track it on paper until youget two good signals.
Parabolic shines in fast-moving markets. Here it took most of theprofit out of a 30+ point run in IBM and its subsequent decline, with asingle whipsaw in April. Two whipsaws in a row in May gave a signal tostop using Parabolic. .
 
The Parabolic system works well in trending markets but leads to whip-saws in trendless markets. It can generate spectacular profits during pricetrends but chop up an account in a trading range. Do not use it as an auto-matic trading method.
The original Parabolic was a true reversal system. When a trader was longone contract, it told him to place an order to sell two contracts if his stop washit. Then he sold his long position and automatically went short. When atrader was short one contract, Parabolic told him to place an order to buy twoif his stop was hit. Then he covered his short position and went long.
A trader is better off entering the market using some other tradingmethod, such as the Triple Screen trading system, and then switching to45. CHANNEL TRADING SYSTEMS 247
Parabolic only if he finds himself riding a dynamic uptrend or a downtrend(Figure 44-1).
1. When you find yourself in a strong uptrend, go over the past severalweeks of data and apply the Parabolic system. Having updatedParabolic to the current day, begin calculating stops daily and usethem to protect profits on your long position.
2. When you find yourself short in a fast downtrend, apply Parabolic tothe past several weeks of data and update it to the present day. Fromthat day on, calculate its stops daily to protect profits on your shortposition.
The Parabolic system ties together price and time and moves stops in thedirection of the trade. The faster the trend, the faster Parabolic moves itsstops. Parabolic is an excellent tool for getting the most out of a strong trendthat was entered using any method.
45. CHANNEL TRADING SYSTEMS
Prices often flow in channels, the way rivers flow in valleys. When a rivertouches the right edge of its valley, it turns left. When a river touches the leftrim of its valley, it turns right. When prices rally, they often seem to stop atan invisible ceiling. When they fall, they often seem to hit an invisible floor.
Channels help traders identify buying and selling opportunities and avoidbad trades. The original research into trading channels was conducted by J.M. Hurst and described in his 1970 book, The Profit Magic of StockTransaction Timing.
Four Ways to Construct a Channel
Channels help traders because their boundaries show where to expect sup-port or resistance to come into the market. There are four main ways to con-struct a channel:
1. By drawing a channel line parallel to a trendline (see Section 21).
2. By plotting two lines parallel to a moving average: one above it andanother below.248 TRADING SYSTEMS
3. Same as above, only the distance between each line and the movingaverage changes depending on the market’s volatility (Bollingerbands).
4, By drawing a moving average of the highs and another of the lows.
Channels parallel to trendlines are useful for long-term analysis, especiallyon the weekly charts. Channels around moving averages are useful for short-term analysis, especially on daily and intraday charts. Channels whose widthdepends on volatility are good for catching early stages of major new trends.
Support is where buyers buy with greater intensity than sellers sell.Resistance is where sellers sell with greater intensity than buyers buy (seeSection 19). Channels show where to expect support and resistance in thefuture.
A channel’s slope identifies a market’s trend. When a channel lies flat,you may trade all swings within its walls. When a channel rises, it pays totrade only from the long side, buying. at the lower wall and selling at theupper wall. When a channel declines, it pays to trade only from the shortside, shorting at the upper channel wall and covering at the lower wall.
Moving Average Channels
A 13-day exponential moving average can serve as the backbone of a chan-nel (see Section 25). Draw upper and lower channel lines parallel to it. Thewidth of a channel depends on the coefficient selected by the trader.
Upper Channel Line = EMA + Channel Coefficient * EMALower Channel Line = EMA — Channel Coefficient * EMA
You need to adjust channel coefficients until a channel contains 90 per-cent to 95 percent of the price action. A channel shows the boundariesbetween normal and abnormal price action. It is normal for prices to beinside a channel, and only unusual events push them outside. The market isundervalued below its lower channel line and overvalued above its upperchannel line.
For example, in 1992, the channel coefficient on the daily chart of theS&P 500 futures was 1.5 percent. If the 13-day EMA stood at 400, then theupper channel line was 406 [400 + (400 + 1.5/100)] and the lower channelline was 394 [400 — (400 * 1.5/100)].248 TRADING SYSTEMS
3. Same as above, only the distance between each line and the movingaverage changes depending on the market’s volatility (Bollingerbands).
4. By drawing a moving average of the highs and another of the lows.
Channels parallel to trendlines are useful for long-term analysis, especiallyon the weekly charts. Channels around moving averages are useful for short-term analysis, especially on daily and intraday charts. Channels whose widthdepends on volatility are good for catching early stages of major new trends.
Support is where buyers buy with greater intensity than sellers sell.Resistance is where sellers sell with greater intensity than buyers buy (seeSection 19). Channels show where to expect support and resistance in thefuture.
A channel’s slope identifies a market’s trend. When a channel lies flat,you may trade all swings within its walls. When a channel rises, it pays totrade only from the long side, buying at the lower wall and selling at theupper wall. When a channel declines, it pays to trade only from the shortside, shorting at the upper channel wall and covering at the lower wall.
Moving Average Channels
A 13-day exponential moving average can serve as the backbone of a chan-nel (see Section 25). Draw upper and lower channel lines parallel to it. Thewidth of a channel depends on the coefficient selected by the trader.
Upper Channel Line = EMA + Channel Coefficient * EMALower Channel Line = EMA — Channel Coefficient * EMA
You need to adjust channel coefficients until a channel contains 90 per-cent to 95 percent of the price action. A channel shows the boundariesbetween normal and abnormal price action. It is normal for prices to beinside a channel, and only unusual events push them outside. The market isundervalued below its lower channel line and overvalued above its upperchannel line.
For example, in 1992, the channel coefficient on the daily chart of theS&P 500 futures was 1.5 percent. If the 13-day EMA stood at 400, then theupper channel line was 406 [400 + (400 + 1.5/100)] and the lower channelline was 394 [400 — (400 * 1.5/100)].248 TRADING SYSTEMS
3. Same as above, only the distance between each line and the movingaverage changes depending on the market’s volatility (Bollingerbands).
4. By drawing a moving average of the highs and another of the lows.
Channels parallel to trendlines are useful for long-term analysis, especiallyon the weekly charts. Channels around moving averages are useful for short-term analysis, especially on daily and intraday charts. Channels whose widthdepends on volatility are good for catching early stages of major new trends.
Support is where buyers buy with greater intensity than sellers sell.Resistance is where sellers sell with greater intensity than buyers buy (seeSection 19). Channels show where to expect support and resistance in thefuture.
A channel’s slope identifies a market’s trend. When a channel lies flat,you may trade all swings within its walls. When a channel rises, it pays totrade only from the long side, buying at the lower wall and selling at theupper wall. When a channel declines, it pays to trade only from the shortside, shorting at the upper channel wall and covering at the lower wall.
Moving Average Channels
A 13-day exponential moving average can serve as the backbone of a chan-nel (see Section 25). Draw upper and lower channel lines parallel to it. Thewidth of a channel depends on the coefficient selected by the trader.
Upper Channel Line = EMA + Channel Coefficient * EMALower Channel Line = EMA — Channel Coefficient * EMA
You need to adjust channel coefficients until a channel contains 90 per-cent to 95 percent of the price action. A channel shows the boundariesbetween normal and abnormal price action. It is normal for prices to beinside a channel, and only unusual events push them outside. The market isundervalued below its lower channel line and overvalued above its upperchannel line.
For example, in 1992, the channel coefficient on the daily chart of theS&P 500 futures was 1.5 percent. If the 13-day EMA stood at 400, then theupper channel line was 406 [400 + (400 « 1.5/100)] and the lower channelline was 394 [400 — (400 * 1.5/100)}.45. CHANNEL TRADING SYSTEMS 249
Adjust channel coefficients at least once every three months to make achannel contain 90 percent to 95 percent of prices. If prices keep blowingout of a channel and staying outside for more than a few days, that channelshould be widened. Too many reversals within the channel without reachingits walls indicate falling volatility, and that channel should be tightened.
Volatile markets require wider channels, and quieter markets require nar-tow channels. Long-term charts require wider channels. As a rule of thumb,weekly channel coefficients are twice as wide as daily ones.
Mass Psychology
An exponential moving average reflects the average consensus of valueduring the time covered by that average (see Section 25). When prices riseabove the average consensus of value, sellers see an opportunity to takeprofits on long positions or go short. When they overpower the bulls,prices decline. When prices fall below the moving average, bargain huntersstep in. Their buying and short covering by bears lift prices, and the cyclerepeats.
When prices are near their moving average, the market is fairly valued.When prices are at or below the lower channel line, the market is underval-ued. When prices are at or above the upper channel line, the market is over-valued. Channels help traders find buying opportunities when the market ischeap and shorting opportunities when the market is dear.
The market is like a manic-depressive person. When he reaches the heightof mania, he is ready to calm down, and when he reaches the bottom of hisdepression, his mood is ready to improve. A channel marks the limits ofmass optimism and pessimism. Its upper line shows where bulls run out ofsteam, and its lower line shows where bears become exhausted.
Every animal fights harder closer to home. The upper channel line showswhere bears have their backs against the wall and fight off the bulls. Thelower channel line shows where bulls have their backs against the wall andfight off the bears.
When a rally fails to reach the upper channel line, it is a bearish sign. Itshows that bulls are becoming weaker. If a rally shoots out of a channel andprices close above it, it shows that the uptrend is strong. The reverse rulesapply in downtrends.
Channels help traders who use them remain objective when others getswept up in bullish or bearish hysteria. If prices touch the upper channel line,250 TRADING SYSTEMS
you see that mass bullishness is being overdone and it is time to think aboutselling. When everyone turns bearish but prices touch the lower channel line,you know that it is time to think about buying instead of selling.
Trading Rules
Amateurs and market professionals handle channels differently. Amateursbet on long shots—they tend to buy upside breakouts and sell short down-side breakouts. When an amateur sees a breakout from a channel, he hopesthat a major new trend is about to begin and make him rich quick.
Professionals trade against deviations and for a return to normalcy. It isnormal for prices to remain within channels. Most breakouts are exhaustionmoves that are quickly aborted. Professionals like to fade them — tradeagainst them. They sell short as soon as an upside breakout stalls and buywhen a downside breakout stops reaching new lows.
Breakouts can produce spectacular gains for amateurs when a major newtrend blows out of a channel. Amateurs occasionally win, but it pays to tradewith the professionals. Most breakouts are false and are followed by reversals.
Moving average channels can be used as a stand-alone trading method orcombined with other techniques. Gerald Appel has recommended the follow-ing rules for trading with channels:
1. Draw a moving average and build a channel around it. When a chan-nel is relatively flat, the market is almost always a good buy near thebottom of its trading channel and a good sell near the top.
2. When the trend turns up and a channel rises sharply, an upside pene-tration of the upper channel line shows very strong bullish momentum.It indicates that you will probably have one more chance to sell in thearea of the highs that are being made. It is normal for the market toretum to its moving average after an upside penetration, offering anexcellent buying opportunity. Sell your long position when the marketreturns to the top of the channel.
3. The above rule works in reverse during sharp downtrends. A breakoutbelow the lower channel boundary indicates that a pullback to themoving average is likely to occur, offering another opportunity to sellshort. When prices return to the lower channel line, it is time to covershorts.45. CHANNEL TRADING SYSTEMS 251
The best trading signals are given by a combination of channels andtechnical indicators. Indicators give their strongest signals when theydiverge from prices (see Figure 45-1). A method for combining channelsand divergences has been described by Manning Stoller in an interviewwith this author.
4. A sell signal is given when prices reach the upper channel line whilean indicator, such as Stochastic or MACD-Histogram, traces a lowertop and creates a bearish divergence. It shows that bulls are becomingweak when prices are overextended.
5. A buy signal is given when prices reach the lower channel line whilean indicator traces a higher bottom and creates a bullish divergence. Itshows that bears are becoming weak when prices are already low:
We must analyze markets in more than one timeframe. Go long whenprices are rising from the bottom to the top of the channel on both weeklyand daily charts. Sell short when prices are sinking from the top to the bot-tom of the channel on both weekly and daily charts.
6. Go long below the moving average when the channel is rising, andtake profits at the upper channel line. Go short when the channel isfalling, and take profits at the lower channel line.
Standard Deviation Channels (Bollinger Bands)
Standard Deviation Channels have been proposed by Perry Kaufman in hisbook, The New Commodity Trading Systems and Methods, and popularizedby analyst John Bollinger. The unique feature of Bollinger bands is that theirwidth changes in response to market volatility. Trading rules for them differfrom those for other channels.
1. Calculate a 21-day EMA.
2. Subtract the 21-day EMA from each closing price to obtain all thedeviations from the average.
3. Square each of the deviations and get their sum to obtain the totalsquared deviation.
4. Divide the total squared deviation by the EMA length to obtain theaverage squared deviation.252 TRADING SYSTEMS
0Swiss Franc :13-day EMA : 682% channels R
66
0.21328.06090.091402438
ee 64| 62A MACD-Histogram — uy 3655
ep
Figure 45-1. Trading with Channels and Indicators
A moving average reflects the average consensus of value. A channel oran envelope must be adjusted until it contains 90 percent-95 percent ofall data. The upper channel line shows where the market is overvalued.The lower channel line shows where it is undervalued. It pays to buy inthe lower half of a rising channel and to sell short in the upper half of afalling channel. Channels work best when their signals are combinedwith indicator divergences.
Bullish divergences in July and October occurred when the SwissFranc was undervalued, near its lower channel line. These buy signalsled to strong rallies. Bearish divergences occurred in August andNovember, when the Swiss Franc was overvalued, near its upper chan-nel line. These sell signals were followed by sharp breaks. Combiningchannels with divergences allows you to trade against the market crowdat key turning points.
 
5. Take the square root of the average squared deviation to obtain thestandard deviation.These steps, outlined by John Bollinger, can be performed by many soft-ware packages for technical analysis. A Bollinger band becomes wider whenvolatility increases and narrows down when it decreases. A narrow Bollinger45, CHANNEL TRADING SYSTEMS 253
band identifies a sleepy, quiet market. Major market moves ted to erupt fromflat bases. Bollinger bands help find transitions from quiet to active markets.
When prices rally outside a very narrow Bollinger band, they give a buysignal. When they drop out of a very narrow Bollinger band, they give a sig-nal to go short. When prices pull back to their channel from the outside, it istime to close out positions.
Bollinger bands are especially useful for options traders. Options pricesdepend heavily on the swings in volatility. Bollinger bands help you buywhen volatility is low and options are relatively cheap. They help you selloptions when volatility is high and options are expensive.
More on Channels
Some traders use channels whose upper line is a moving average of thehighs and whose lower line is a moving average of the lows. They appearmore ragged than other channels. A trader has to choose a smoothing periodfor these channels. Here, as elsewhere, a 13-day EMA is a safe bet. A 13-dayEMA of the highs creates the upper channel line, and a 13-day EMA of thelows creates the lower channel line.
One of the popular technical indicators is the Commodity ChannelIndex (CCI). It is based on the same principles as channels — it measuresdeviations from the moving average. If you use channels in trading, you maydispense with the CCI. Channels are better because they keep you visuallycloser to prices.X
Risk Management
 
46. EMOTIONS AND PROBABILITIES
Trading is so exciting that it often makes amateurs feel high. A trade forthem is like a ticket to a movie or a professional ballgame. Trading is a muchmore expensive entertainment than the cinema.
Nobody can get high and make money at the same time. Emotional trad-ing is the enemy of success. Greed and fear are bound to destroy a trader.You need to use your intellect instead of trading on gut feeling.
A trader who gets giddy from profits is like a lawyer who starts countingcash in the middle of a trial. A trader who gets upset at losses is like a sur-geon who faints at the sight of blood. A real professional does not get tooexcited about wins or losses.
The goal of a successful professional in any field is to reach his personalbest —to become the best doctor, the best lawyer, or the best trader. Moneyflows to them almost as an afterthought. You need to concentrate on tradingright—and not on the money. Each trade has to be handled like a surgical_. procedure — seriously, soberly, without sloppiness or shortcuts.
Why Johnny Can’t Sell
A loser cannot cut his losses quickly. When a trade starts going sour, hehopes and hangs on. He feels that he cannot afford to get out, meets his mar-
25446. EMOTIONS AND PROBABILITIES 255
gin calls, and keeps hoping for a reversal. His paper loss grows until whatseemed like a bad loss starts looking like a bargain. Finally, his broker forceshim to bite the bullet and take his punishment. As soon as he gets out of atrade, the market comes roaring back.
The loser is ready to smash his head against the wall—had he hung on, hewould have made a small fortune on the reversal. Trends reverse when theydo because most losers are alike. They act on their gut feelings instead ofusing their heads. The emotions of people are similar, regardless of their cul-tural backgrounds or educational levels. A frightened trader with sweatypalms and a pounding heart feels the same whether he grew up in New Yorkor Hong Kong and whether he had 2 years or 20 years of schooling.
Roy Shapiro, a New York psychologist from whose article this subtitle isborrowed, writes:
With great hope, in the private place where we make our trading decisions, ourcurrent idea is made ready. . . . one difficulty in selling is the attachment expe-rienced toward the position. After all, once something is ours, we naturallytend to become attached to it... . This attachment to the things we buy hasbeen called the “endowment effect” by psychologists and economists and weall recognize it in our financial transactions as well as in our inability to partwith that old sports jacket hanging in the closet.
The speculator is the parent of the idea. . . . the position takes on meaningas a personal extension of self, almost as one’s child might. . . . Another rea-son that Johnny does not sell, even when the position may be losing ground, isbecause he wants to dream. . . . For many, at the moment of purchase criticaljudgment weakens and hope ascends to govern the decision process.
Dreaming in the markets is a luxury that nobody can afford. If yourtrades are based on dreams, you are better off putting your money intopsychotherapy.
Dr. Shapiro describes a test that shows how people conduct businessinvolving a chance. First, a group of people are given a choice: a 75 percentchance to win $1000 with a 25 percent chance of getting nothing — or a sure$700. Four out of five subjects take the second choice, even after it isexplained to them that the first choice leads to a $750 gain over time. Themajority makes the emotional decision and settles for a smaller gain.
Another test is given: People have to choose between a sure loss of $700or a 75 percent chance of losing $1000 and a 25 percent chance of losingnothing. Three out of four take the second choice, condemning themselves tolose $50 more than they have to. In trying to avoid risk, they maximizelosses!X
Risk Management
 
46. EMOTIONS AND PROBABILITIES
Trading is so exciting that it often makes amateurs feel high. A trade forthem is like a ticket to a movie or a professional ballgame. Trading is a muchmore expensive entertainment than the cinema.
Nobody can get high and make money at the same time. Emotional trad-ing is the enemy of success. Greed and fear are bound to destroy a trader.You need to use your intellect instead of trading on gut feeling.
A trader who gets giddy from profits is like a lawyer who starts countingcash in the middle of a trial. A trader who gets upset at losses is like a sur-geon who faints at the sight of blood. A real professional does not get tooexcited about wins or losses.
The goal of a successful professional in any field is to reach his personalbest —to become the best doctor, the best lawyer, or the best trader. Moneyflows to them almost as an afterthought. You need to concentrate on tradingright—and not on the money. Each trade has to be handled like a surgicalprocedure — seriously, soberly, without sloppiness or shortcuts.
Why Johnny Can’t Sell
A loser cannot cut his losses quickly. When a trade starts going sour, hehopes and hangs on. He feels that he cannot afford to get out, meets his mar-
25446. EMOTIONS AND PROBABILITIES 255
gin calls, and keeps hoping for a reversal. His paper loss grows until whatseemed like a bad loss starts looking like a bargain. Finally, his broker forceshim to bite the bullet and take his punishment. As soon as he gets out of atrade, the market comes roaring back.
The loser is ready to smash his head against the wall—had he hung on, hewould have made a small fortune on the reversal. Trends reverse when theydo because most losers are alike. They act on their gut feelings instead ofusing their heads. The emotions of people are similar, regardless of their cul-tural backgrounds or educational levels. A frightened trader with sweatypalms and a pounding heart feels the same whether he grew up in New Yorkor Hong Kong and whether he had 2 years or 20 years of schooling.
Roy Shapiro, a New York psychologist from whose article this subtitle isborrowed, writes:
With great hope, in the private place where we make our trading decisions, ourcurrent idea is made ready. . . . one difficulty in selling is the attachment expe-rienced toward the position. After all, once something is ours, we naturallytend to become attached to it... . This attachment to the things we buy hasbeen called the “endowment effect” by psychologists and economists and weall recognize it in our financial transactions as well as in our inability to partwith that old sports jacket hanging in the closet.
The speculator is the parent of the idea. . . . the position takes on meaningas a personal extension of self, almost as one’s child might. . . . Another rea-son that Johnny does not sell, even when the position may be losing ground, isbecause he wants to dream. . . . For many, at the moment of purchase criticaljudgment weakens and hope ascends to govern the decision process.
Dreaming in the markets is a luxury that nobody can afford. If yourtrades are based on dreams, you are better off putting your money intopsychotherapy.
Dr. Shapiro describes a test that shows how people conduct businessinvolving a chance. First, a group of people are given a choice: a 75 percentchance to win $1000 with a 25 percent chance of getting nothing — or a sure$700. Four out of five subjects take the second choice, even after it isexplained to them that the first choice leads to a $750 gain over time. Themajority makes the emotional decision and settles for a smaller gain.
Another test is given: People have to choose between a sure loss of $700or a 75 percent chance of losing $1000 and a 25 percent chance of losingnothing. Three out of four take the second choice, condemning themselves tolose $50 more than they have to. In trying to avoid risk, they maximizelosses!256 RISK MANAGEMENT
Emotional traders want certain gains and turn down profitable wagers thatinvolve uncertainty. They go into risky gambles to avoid taking certainlosses. It is human nature to take profits quickly and postpone taking losses.Irrational behavior increases when people feel under pressure. According toDr. Shapiro, “bets on long shots increase in the last two races of the day.”
Emotional trading destroys losers. If you review your trading records, youwill see that the real damage to your account was done by a few large lossesor by long strings of losses while trying to trade your way out of a hole.Good money management would have kept you out of the hole in the firstplace.
Probability and Innumeracy
Losing traders look for “a sure thing,” hang on to hope, and irrationallyavoid accepting small losses. Their trading is based on emotions. Losers donot understand the key concepts of probability. They have no grasp of oddsor random processes and have many superstitions about them.
Innumeracy — not knowing the basic notions of probability, chance, andrandomness — is a fatal intellectual weakness in traders. Those simple ideascan be learned