Regret and Placing Trades

I have discussed this many times before, once I have made up my mind about a specific trade I become increasingly tense that I may not get my trade on. Over the years I have come to accept that for my personality and my style of trading, i.e. I tend to take longer term views typically in the months and some times years, that it is of little relevance to get in on the trade at the "best/lowest if long" price if you run the risk of missing the trade completely.

What I have learnt through deep introspection is that not placing the trade and the following feelings of regret far outweigh the pain of being early and withstanding short term movements against my trade position. My approach to minimize the effects of being early is to stagger my entry. I typically place a 3rd or quarter of my desired position on the 1st trade, this allows me to have a position if the market takes off in my anticipated direction.

Another point making up my entry approach is that as a contrarian investor I need to buy when the market is falling and sell when the market is rising. This approach goes against the conventional trend following wisdom which dominates the investment landscape. Following the trend is a very acceptable means of investing, as it reflects the herd and as many people will tell you "the market always knows best". For the large part this is correct; however, it is at inflection/turning points that the market in fact gets it wrong.

As JP Morgan said during the Great Depression, "you need to buy when there is blood on the street" and as Warren Buffet recently said, " you need to buy when there is maximum fear, and sell when there is maximum greed".

If we know that markets trend for far longer periods than reversals, why don't I trade the trend. The answer is one of probability and psychology. Depending on ones view of market randomness the continuation of the trend following a random walk theory (majority academic view) is not something one can forecast with any degree of certainty other than a random view. (This is not my view, my views are more complex). This still doesn't answer the question. My answer is that I do trade the trend as I do believe markets follow a non random pattern, albeit with a certain degree of randomness interspersed. My problem with trading the trend and staying with the trend is that most systems only pick up a change in the trend after a substantial trend reversal which invariably leads to large draw downs. This brings me to my initial answer of psychology.

I find that I am able to stay with a particular trade an endure the discomfort of a period of loss only by providing my psyche with the mental accounting of having bought something cheaply or sold it expensively. So my answer is actually quite simple. If the markets do possess a high degree of randomness this means that our forecasts are likely to incorporate a reasonable degree of randomness even if one believes it is possible to forecast the future based on probability. With this in mind the ability to position ones mind psychologically to withstand the buffeting of the short term randomness allows me to withstand the volatility knowing that I have as a security the fact that I bought something cheap or that I sold short something expensively.