Wednesday, December 19, 2012


I've been reading Nassim Taleb's "Antifragile". The book is an argument for the idea that there are some things that benefit from disorder and volatility. It seems that the author made quite a bit of money predicting and trading some of the recent "Black Swans" in the financial world. So the message of the book so far, (I am about halfway through) is a perfect fit with the general rules and philosophy of trading as I've come to know trading.

One of the key points of Taleb's philosophy is the concept of "optionality". This refers to the power of an option, which is the right, but not the obligation to make a choice. An option. And people, and systems can grow and profit from the randomness and volatility that is life and trading if they have some capability to use adverse events to their benefit. This means that when an adverse event happens the antifragile person or system is the one that can use that event to learn, and is able to let the adverse event pass without the cost becoming debilitating, and to profit in some way from the event. At the same time the antifragile system or person is able to keep the flexibility to use the rare events to their benefit precisely because they have survived and learnt from the adverse occurances. They have the option.

In trading this is the basis for the classic advice to "cut your losses short and let your profits run". Easy advice to give but sometimes difficult to practice. The antifragile trader would be the one with the system that can recognize losses and stop the losses and at the same time be able to recognize the good profitable trades and get the maximum from them that the system will allow.

System is an easy word to say. But every system has a human behind it who must make the decision to follow a system or to overrule the system. So the antifragile trader is the one who can take a loss without becoming psychologically damaged, who is robust, and yet has the psychologic steadiness to let a profitable trade run it's course and avoids and resists the urge to take a quick, small profit because it relieves the pressure of the trade and comforts the mind and the ego. If a trader can do these things consistently he/she will be antifragile. The trader will be able to profit from randomness, particularly those events that have large repercusions, those "fat tails" that cause so much misery for those of less mental flexibility.

This is the optionality. The ability to keep the trade that has the potential for a large outsize gain even when the outsize gain is in no way predictable. And to keep the losses small. In this way a trader can try on lots of trades and have many small losses while still maintaining the mental attitude to keep the good trades. And the few large wins will dwarf the small losses. Not only due to the time that the winners are allowed to develop, but by the size of the bet when they are winners. This is why it makes sense to buy higher. To add to a winner as it proves itself a winner. In that way the big winning trades are much larger by many factors.

To put it simply trading is a mind game. And the opponent is oneself. You must overcome your own doubts and fears to profit from those same emotions in the other traders.

Richard Russell put it this way: "He who loses least......Wins."

Here is the latest test of trading psychology:

See the Dec. 5th post,  "TC".
Keep your losses small.....

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