- They have inadequate capitalization.
- They are using someone else’s system.
- They lack knowledge of the system’s performance.
- They are unable to sit through flat periods or drawdowns.
- They are unable to handle stress.
- They lack commitment.
- They experience drawdowns that are greater than their hypothetical testing.
- They override the system’s signals.
- Their ego prevails.
- Their system is overoptimized; they make additional rules to take out losing trades.
- They lack parameters for spike performance in markets.
- They lack diversification between systems and/or markets.
Posts Tagged: stress
The stress that financial traders suffer during periods of high volatility in the markets reduces their appetite for risk, according to a study led by Cambridge university neuroscientist and former Wall Street trader John Coates. This may prolong financial crises.
The research, published in Proceedings of the National Academy of Sciences, combines field and lab work. Prof Coates and colleagues discovered that levels of the stress hormone cortisol increased by 68 per cent on average in a group of City of London traders over eight days in which market volatility increased.
The scientists took this finding to Addenbrooke’s Hospital in Cambridge where they used pharmacology – hydrocortisone tablets – to raise cortisol levels in volunteers, also by 68 per cent over eight days. Participants then played an incentivised risk-taking game. The appetite for risk collapsed, by as much as 44 per cent according to one measure, in those with raised cortisol. (The study was double-blinded with a control group taking dummy tablets.) >> Read More
Markets have been particularly volatile recently, at least for intraday traders and daytrading can create a significant amount of stress. Because our bodies are designed to adapt to stress, we may fail to realize that we are stressed out.
Here’s an inventory of common trader behaviors that may signify excessive stress.
12 Signs of Stress
1. A vivid fantasy of making lots of money today.
2. Feelings of invulnerability.
3. Eating breakfast or lunch at your trading desk.
4. Hyperfocus on price bars as they form.
5. Talking out loud to the market.
6. Bargaining with the market about an open position.
7. Cursing at the market.
8. Expressing irritation at partner, kids, pets, plants, inanimate objects.
9. Sudden urge to increase position size or frequency.
10. Canceling or moving stops for no good reason
11. Adding to a losing position.
12. Trading in your underwear !
TIP: Stress degrades decision-making. If you are stressed out, shift your focus
International Monetary Fund Managing Director Christine Lagarde said Thursday that questions marks remain over the health of Europe’s banks and that coming stress tests are a chance to build confidence in them.
In an article published online by Project Syndicate, Lagarde said Europe is “at a key juncture”, showing signs of recovery but stuck with “uneven and unbalanced” growth.
“While many countries are doing well, demand in general remains weak, and unemployment in the periphery remains obstinately high, particularly for young people.”
“One area of uncertainty for Europe is the health of its banks,” she said.
“The forthcoming stress tests and asset-quality review can help restore confidence and advance financial integration, but only if they are conducted well.”
The European Central Bank has said it will conduct stress tests on the banks sometime this year, to see if they have rebuilt their capital enough to withstand new crises.
Lagarde also called on the region to boost demand and advance reforms that will help generate jobs.
Planning on watching a scary movie or going out to a haunted house on Thursday? In honor of Halloween we thought it would be interesting to look at what actually happens in our brains when we get scared.
Bytesize Science talked with Abigail Marsh, professor of psychology at Georgetown University, to find out how the brain processes fear.
We feel fear because we see or hear something that makes us anticipate harm. Say you’re walking through a haunted house this Halloween and a spooky skeleton jumps out at you. That skeleton acts as a stimulus that triggers a signal in your brain.
The signal travels to the amygdala – a region near the base of the brain. The amygdala fires a brain chemical called glutamate out into two other regions of the brain. The first region makes us freeze or involuntarily jump. These reactions are so automatic because the signal is sent deep into the base of the brain to an area that we have little control over. >> Read More
A lot has been written about concentration of system credit to few large corporate/ Infra cos. In this detailed report, we identify ~US$50bn of power SPVs and risky corporate groups which “is or could get stressed” and dig a lot deeper into bank-wise exposure in these potential stress assets. (All from Publicly available sources – The caveat here is that this is based on bank charges created and actual exposures may marginally differ).
ICICI/Axis – Large exposures but better placed than PSUs: Exposure in these ~US$50bn assets is ~28% of Networth (NW) for ICICI and ~35% for Axis lower than PSU banks (~40-60% of NW). Risky power exposure is marginally lower than PSUs at 20- 25% of NW but ex-Infra risky corporate exposure is significantly lower at <5-10% of NW v/s 10-30% of NW for PSU banks. While Axis bank’s exposure is lot more dispersed, ICICI’s exposure is lot more concentrated in few groups like JPA/Essar/Adani but indicates better underwriting with lower share of risky power exposure.
Retail and Regional banks – Reaffirms their almost negligible exposure: Not only all retail banks (HDFCB/Kotak/IIB) but even regional banks (Federal/SIB/KVB/CUB) have almost negligible exposure in these assets (<5-10% of NW v/s 20-30% for ICICI/Axis), with J&K bank being the only exception.
Large PSUs– PNB/Canara worst, surprisingly BOI/Union better than SBI/BOB : PNB is omnipresent in most risky assets that we have analysed followed by Canara bank and these assets constitute 55-70% of their NW. BOI/Union’s exposure is surprisingly lower than SBI/BOB(considered relatively safer). For SBI, names in power book is less risky v/s peers but is as risky as peers in the large corporate book. BOB’s claim of small ticket sizes seems right for power but ticket sizes is large in the ex-Infra book.
Medium and Smaller PSUs: Exposure for smaller PSUs are similar to larger peers at ~30-40% of NW in these assets. United/Uco/IOB are worse off where as Indian/Dena seem better off on exposures relating to these assets.
Infra NBFCs/IDBI: IDBI, like PNB, is omnipresent in most risky names constituting ~90% of their NW. For IDFC, these assets constitute ~35% of NW largely linked to gas assets. PFC/REC’s claims of low gas exposure seems right but their exposure to risky coal assets is very high at 80-90% of their NW.
We urge you to use this checklist for your own trading and investing preparation. We truly feel that these traits are very important for you to understand. These trader traits coupled with the proper psychology can make a huge positive difference in your overall trading performance.
• The ability to act on your decisions.
• The ability to accept responsibility for your actions.
• You must have emotional detachment from the markets.
• The ability to accept risk and take losses (you’ll never be right 100% of the time). >> Read More
1)Strategic Trader :This type of trader has a great chance of success but is (a ) likely not to recognize emotional mistakes ,(b ) lean toward perfectionism ,and (c ) have a strong desire to be right
2)Planning Trader :Again ,this type of trader has an excellent chance of success.Your major challenge is the desire for excitement and the need to be right.You easily could become bored with trading and do things to lessen the boredom and thus limit your profits.
3)Detailed Trader :The detailed trader has a good chance of success,but you could be so into details of what you are doing that your miss the big profits.
4)Administrative Trader :You may be overly critical of yourself but not recognize mistakes that are right in front of your eyes.Furthermore ,under stress your may question your commitment to trading because your don’t find it satisfying.An administrative trader also has a good chance of success.
5)Facilitative Trader :This kind of trader has an above average chance of success.However ,you could have a problem with logic and ideas because you are always finding something new.Furthermore ,you may need external confirmation of your ideas ,beliefs ,and systems.
6)Innovative Trader :You have an above -average chance of success.However ,you probably want external confirmation for everything you do and have a strong need for a mentor.Furthermore ,you may tend to abandon a good system prematurely if it goes against you because of your emotional reactions.
7 )Value-driven Trader :You have an above -average chance of success in trading but find that you must do things your way.In addition ,discipline ,follow -through ,and attention to details will always be a problem for you.You also may find trading boring and do things to fulfill your need for excitement.
8)Independent Trader :You are driven by logic and could easily reject systems that work well because you don’t understand them logically.Furthermore ,your trading could dominate your time and leave you socially isolated.That said ,you have a good chance of success if you apply yourself.
The remaning 7 types have a much more difficult time becoming successful in trading arena. >> Read More
- Stop trying to outsmart the market. NO ONE knows exactly where it will go.
- With each decision you make comes stress:Forget about the “whys’ of the market. After all is said and done, the reasons will be known.
- The more decisions you make, the more likely you are to be wrong.
- The more decisions you are used to making, the more pressure you’ll put on yourself to make even more decisions.
- No one can be that right.
- Don’t apply logic. Markets move on emotions — period!
- Plan your trade and trade your plan.
- Reduce the amount of decisions you make.
- Make decisions and live with them (also a life lesson!).
- Good decisions come from experience.
- Experience comes from bad decisions.
With the nation’s short-term funding markets in crisis mode - no matter how much they are jawboned about temporary seasonal factors - it seems yet another indicator of stress is flashing the red warning signal. China’s sovereign CDS has spiked by the most since Lehman in the last 3 days – up 55% to 140bps. This is the highest spread (risk) in 18 months and looks eerily similar to the period around the US liquidity market freeze. Hedging individual Chinese bank counterparty risk is hard (given illiquidty) and so it would seem traders are proxying general risk of failure via the nation’s sovereign risk (and stocks which also languish at post-Lehman lows). On a related note, Aussie banks have seen there credit risk rise 50% in the last month as they suffer domestically and from the China contagion.
China’s 5Y CDS spiked to 18 month highs…
as CDS is tracking 1-month SHIBOR extremely closely… >> Read More