Dangers of Confidence

 The Nifty rallied to trigger my STT buy levels of 5524. The LTT remains short and will turn into a buy only above 5610. Since I have a 2/3 weight on STT and only 1/3rd on LTT, I am now 1/3 of my total exposure long on Nifty.(+2/3-1/3) If and when the Nifty moves above 5610, I will go long on LTT and therefore be long my max exposure on the Nifty. (+2/3+1/3) At the same time, STT turns short, if Nifty futures falls below 5494. Therefore I will be short the maximum allowed exposure.(-2/3-1/3) I am sorry if this sounds confusing. I have tried but failed to put it in a better manner.

Despite my 1/3 long positions, I am not confident about my trade nor am I optimistic about the market. Which brings me to one of the issues I wanted to write about. Confidence. It is a trait which makes for a personable personalitly. But in excess, this is a trait that can spell disaster for a trader. It is also the same trait which makes people flock to the futures markets which is essentially a zero sum game. Why should any rational person believe that he can make money using his judgement/ability in a game where at least 50% of the participants lose it? More so, when he has no reason to believe that his ability/judgement is any better than the other participants?     

In his book "Value Investing" James Montier implies that the reason for such irrational behavior could be confidence/optimism in ones own ability and he also goes on to say that it is something that is ingrained in a majority of people. In his class, for example, more than 80% of the students expected to make it to the top 50% of his class. In a study of more than 500 fund managers, around 74% answered that they were better than the average. Some even wrote that "I know everybody says they are better, but I really am". Clearly this confidence/optimism-often misplaced- in ones own ability is the reason for the continous influx of new participants in the futures markets even as existing participants bow out after taking big losses. In fact, this confidence might be the key trait that perpetuates the futures market.

Luckily, I do not suffer from any such afflictions. I am clearly not in the majority that James Montier is referring to. Life has always taught me that if anything can go wrong, then it inevitably will. My world view actually borders on the pessimistic. So, early on in my career as a trader, I decided to place my trust on a set of trading rules rather than my own ability or judgement of the market. As long as I took exceptional care during the testing process, there was no need to be confident or optimistic about the trade I was taking. Despite all this, I worry, obsessively almost, about things that can go wrong.

Which is why you will see me write about my STT (Short term trade system) and LTT (Long Term Trade system). Rarely will you hear me express a view on the market. Of course, I have views on a lot of other subjects and lately I seem to be expressing them liberally. Maybe I need to tone that down a little.

Finally, Current Position STT-Long, LTT-Short

Possible trades- STT Short < 5594

                        LTT Long > 5610