Decide Already!

Harvard researcher Dan Gilbert tells us why we’re bad at predicting our future happiness, how that affects our decision making, and why we are actually happier after making a decision that feels irrevocable.

Fun with data

Monthly options on SPY started trading back in January of 2005. Here are a few statistics that I found interesting and thought I’d share:

  • Not including the current cycle (May 2016) there have been 136 monthly option expirations for SPY
  • When opening the cycle above the pivot, there have been 7 (5.15%) instances where SPY touched both R1 & S1
  • Of those 7 instances, 5 of them either closed OpEx above S1 or under R1

In other words, only two times did S1 fail to hold as support and two times that R1 failed to hold as resistance. That’s an impressive 98.5% “win rate” for S1 and R1 to hold after both being touched in the cycle. The failed support dates were in Jan ’05 and May of ’06 while the failed resistance dates were in July ’05 and Mar of ’13 . Interestingly, Mar of ’13 also saw R2 fail to hold as resistance.

Pretty neat information that can be used, depending on how you trade. Buy why stop there? Add another filter and both instances that saw OpEx close under S1 also started the cycle above the 13EMA. Guess what? Both instances that saw OpEx close above R1 started the cycle below the 13EMA.

Option expiration for SPY is next Friday (5/20) and S1 for the May 2016 cycle is down at 203.48. SPY started the cycle above both the 13EMA and the pivot. On 4/20, SPY touched R1 so next week could be interesting if S1 is tested. A rare occurrence if nothing else.

Poor Habits

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Poor habits are difficult to overcome, especially those that have been a part of a routine for years. Part of the reason is that habits are perfected through experience. Habits can be formed and reinforced through expectations (from one’s self or others), triggers (smells, visuals, etc.) and even market conditions. Research suggests that we never truly forget our habits but overwrite them with new ones. If the old habit isn’t replaced with a new one then it can resurface. One way to replace a poor trading habit is to focus on the point of performance rather than the habit itself. This is where we as traders need to be on point or on task. To put it another way, the WHAT, WHEN and HOW of our trading system. Ask yourself these questions the next time you’re ready to put capital on the line to assess whether or not you’re on task:

  • Am I doing what I’m supposed to be doing (WHAT)?
  • Is this the right time to do it (WHEN)?
  • Am I following my system (HOW)?

It’s the third item I’d like to focus on for the remainder of this post. Checklists are vital to trading success yet they are widely overlooked and even shunned. In his book “The Checklist Manifesto” Dr. Gawande writes “Under conditions of complexity, not only are checklists a help, they are required for success. There must always be room for judgment, but judgment aided – and even enhanced – by procedure.”

Trading is a high-pressure environment where simple mistakes can be costly. The biggest benefit of using a checklist is the process itself. Creating a checklist removes the potential of simple mistakes caused by missing a mundane task (forgetting to check the earnings date or clicking the buy button instead of sell button). In addition, a check list frees up vital working memory which can then be allocated to the discretionary side of our trading system.

Another benefit of a checklist is that it forces us to be detached and systematic about certain key aspects of our trading system. Aspects such as calculating trade size or stops (managing risk) which should be systematic rather than discretionary. Just as a pilot would not fly until they’ve gone through a rigorous checklist, we shouldn’t trade unless we’ve gone through our checklist. In a sense, checklists are a form of discipline which is something we can all improve upon.

Excerpt from chapter 1

March Option Expiration

It appears the data I was using (Think or Swim) was/is wrong. Take a look at the image below. On the left side you’ll see the OHLC for the opex month. On the right side you’ll see the OHLC for the actual opex week. The close does not match. Something is fishy and I’ve reached out to Think or Swim support and have been told they are looking into it. Who knows what will come of it, maybe nothing. 

I was able to procure SPY data from Bloomberg and have been crunching some statistics that I plan on sharing at a later time.

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