We all like to talk about knowing the probabilities … and then just sticking to them. Most of us like to harangue other traders for not doing so while finding it not so easy to do ourselves.

It isn’t so easy for a number of reasons -

1. Whether you are conscious of it or not, your brain recognizes the ambiguity and uncertainty on your charts.

2. Your own level of beliefs and your confidence in those beliefs (the true “in your gut” feelings that need acknowledged) influences your view of the probabilities. This is more or less what the term “subjective probability” means.

Taleb and now Mr. Elie Aiyache, the author of The Blank Swan – the end of probability, like to say that the whole business of probability and markets is “for philistines”. They are really skipping the reality of how probabilities work inside a brain making a decision under uncertainty. It isn’t that the probabilities are worthless or non-existent, it is gaining a better understanding of how to use them for the tool they are.

Last New Year’s eve I was on CNBC with Mark Haines and I had prepared some truisms for the new year … “The Trend is your friend” being one of them. Mark exclaimed but “C’mon Denise, you haven’t told me anything I didn’t already know!” …Well yes Mark … but I am not talking to you I am talking to your listeners… and they tend to forget.

Never short a dull market is the same. Traders get bored. They like to be short (for a variety of reasons but mostly having to do with the rush I think)…. so when they are bored they think “what the hell – it can’t go up so I will get short.” Then what happens …. usually a vicious, quick short squeeze just before it drops right through the floor.

Why? Most day-traders put their stops too tight – so all you need is one too tight stop market order and it kicks off the one above it and the one above that and so on and so forth… THEN … those buy orders (and their counterparts that were formerly BELOW the market) are gone… and to the day’s floor we go.

So… boredom usually means the market will make a quick trip up before it goes down! … USUALLY.

… and I talked to Jon about that and this is what he said -

(Referring to a specific inquiry)… “but I really encouraged him to do whatever he could to purchase your course since that is what gave me the context to get so much more out of the books that I read, which was literally hundreds.  I read everything you mentioned (articles included) and others books that were connected by topics, but you provided me with an exceptional framework from which to discern what I was reading and how to apply it to myself.  Well, I do hope more people went out to purchase your course  rather than try to read all the books that I read.  It’s part of my own learning style and I have a certain way of processing information.  Also, my wife played a huge role in helping me understand myself.  We don’t own a t.v., so you can imagine how much time we get to talk (that is if our three little boys aren’t wrestling or playing Nerf swords with me).  I guess you better get your book done soon…”

But … having said that, Deborah Bershatsky, one of our most talented and experienced mental coaches, suggested to me yesterday that a terrific place to start is with The Road Less Traveled... a book I read in the early 1980’s! And I agree. After that, Emotional Intelligence by Daniel Goleman is a great start. Descartes’ Error and The Feeling of What Happens by Damasio.

1. Was it purposeful?

2. Were specific orders entered that would “sweep the book” in PG, MMM and Accenture? Why those stocks?

3. Why 2:40 pm? Isn’t that a suspicious time in terms of margin calls from clearing houses and expiration of limit down rules @ NYSE?

4. What kind of requirements should there be to be an exchange of any kind – major or dark pool? 50 – do we really need 50 different marketplaces? Isn’t that asking for trouble (see #1).

The SEC isn’t known for its immunity to the perceptual biases known from behavioral finance. In fact, they are known for the opposite.

Congress isn’t known for its prescient thinking …

Who is going to ask this stuff?

….oops add one more #5) Some high frequency firms supposedly pulled their orders… maybe the cause was a LACK of high frequency or at least a sudden shock to the balance. Given that there were apparently no bids in the three aforementioned stocks… that makes MORE sense!

… well I feel rather obligated to go through with my bullish ITM put spread but honestly, since I didn’t manage to get it on, I also feel a personality change in the market. For me, I sense these things through speed and rhythm and the s/r of yesterday and this morning, is striking my “UPR” (unconscious pattern recognition) as a change.

I can’t yet go so far as to want a bearish call spread… and I think I will still take the opportunity to put on the bullish put spread today …. but as much for the learning experience as for the conviction in the trade.

Well between the margarita’s and the great NYC weather (and the garden and the dogs and …), I have yet to learn tos analytics… so my trade isn’t on. But… it is about to be (or at least I am dedicating the rest of the afternoon to the analytics part)!

Yes I should be writing … but geez, a girl has to trade sometime doesn’t she?

While I am at it… might take a look at some $GS options too!

(ahhh… it didn’t happen… man even THIS is hard with all the phone ringing!)

Even though this options (learning) gig allows me write while I have a trade working – and not be staring at the screen all day  … TODAY is a good example of how the intraday movement gave me an opportunity to get in BUT I missed it. Now I haven’t yet looked at the options chains to see what I might have had or how much might have moved (maybe not much) but with the wide range day it is easy to have the feeling – that very common feeling in trading – that I MISSED IT!

The easiest thing to do would be to jump into the trade.

But, luckily, I learned a LONG time ago NOT to do that. June is still a LONG way away (I think).

Hmmmm… maybe this options gig isn’t so psychologically different than pure directional trading after all. That is what Mike W. told me!

ZAP is the guy who got me into my first trade, my first prop desk, my first job in NY managing traders and now I am thrilled to have him as my new business partner in The ReThink Group/TraderPsyches & SportPsyches. More importantly for our purposes here though, he knows options …well like I know … (hmmm… maybe I don’t know anything as well as he knows options).

In any event, new dilemma – he wants me to buy a call spread vs. sell a put spread. Reasons being 1) I won’t get the prices I need on such an in the money put spread because who is going to take the other side? (Back to the human question – even in options!)

Good thing this is a June trade. It is taking longer to figure out (or maybe just for me to understand it) than I thought! I think I need my margarita drinking partner Bill, my business partner Don and our thinkorswim analytics all in the same room. Geez – I NEVER liked group trades!

UPDATE TO POST “Joining the Options Counter Culture“

1. Nice to have a tutor in thinkorswim software … better to have it be the same guy you drink margaritas at home with.

2. A put spread risks less than just buying calls.

3. I am actually bearish for May and bullish for June.. so now I am looking at two simple spreads.

4. Strikes are kind of tough – but not really. SPY 127/128 for the raging bull. In other words, I feel comfortable with 1250  and think even 1300 on the index so… how about splitting the diff?

5. Timing – well I expect to take it off the week or two (or even three) BEFORE June expiration. And this is where some more analysis is needed…

…. now look at that, except for the margaritas, every other decision here is discretionary and ambiguous. I mean I could take the probabilities produced by the model (and its assumption on what the vol will be) …. but then I would have to BELIEVE that vol… and I don’t actually. Trade lesson #1 from 1994 – “Non-volatility begets volatility”.

The key however is that I have an opinion and I am convicted about it… someone explain to me that those two pillars of successful hedge fund managers are NOT feelings. (Now yes those feelings are based on intellectual analysis which is also based on experience -which has a feeling component to it – and yes I could definitely be wrong… particularly with SEC v. GS in the air!)

Ok… so I have my idea … and I have my time-frame …. i.e. after maybe a “pro-longed” (relative to recent history – after all, ALL market moves only occur in context) swoon/retracement over $GS, we will resume the march known as “markets climb a wall of worry”.

Now think about it – those two “decisions” in and of themselves require taking a stab within the relentless roller-coaster of market uncertainty. Take the first – market direction – this SEC takes on GS theme could pound away at the banks for months … and if it does, we have just seen the high of this 13.5 month bull market that started in March ‘09. I am going to consciously take the bet that “the trend is your friend (until it is not)” …but of course I could be wrong.

2nd…. time-frame…. well…. over the course of my trading lifetime, I have seen too many summers plagued by sell-offs…. so for now, I just want to get started with implementing a relatively short-term spread for an expiration between May and June. But… which one? Man… I just don’t know.

B back to you after I spend some time with this “new-fangled” thinkorswim analytics I now have.