Richard Dennis once said:
One man’s volatility is another man’s profit.
And an anonymous trading quote:
Lose your opinion, not your money.
A paragraph from the book The Invisible Hands:
If you read Edwin Lefevre’s book, Reminiscences of a Stock Operator, the fictionalized version of the early years of Jesse Livermore, he gives a great account of this type of behavior. Livermore goes long before he goes short. That’s genius. He would buy because he wanted to experience the thrill of owning something. Taking a position changes the chemical balance of the body and the brain and you start to understand what it is you were missing. Likewise being subject to the risk that it might go down opens up neuro passageways in the mind which you perhaps didn’t see. So you begin to understand and articulate what you’re fighting against, which you wouldn’t have known had you just gone short straight away. It is like touching a hot plate; as the plate gets hotter, your sense of timing gets heightened by the fact that you have risk on… George Soros explains a version of this phenomenon when he says, “Invest first, and investigate later.”
I too have heard some stories of how George Soros wanted to lets say buy some bonds, but first he shorted $100-200 million dollars worth of bonds to see how it felt being short the market. Then depending on how that made him feel, he would cover the trade and go long with a bigger position size.
I have experienced this phenomenon on a few different occasions. Most recently was on Friday, May 10, 2013, when I shorted the e-mini S&P with a small position size. I thought that the rise in the dollar and the overextended nature of the rally would cause some profit taking. So I shorted the market. After having some risk in the trade and watching it for a few hours, it just didn’t feel like the right trade to have on. The market just wouldn’t break lower. The market tested the support level then started bouncing higher and I got out for a small profit. But being on the short side didn’t feel right. I felt paranoid the whole time that the market would somehow break out higher and I would be stuck short. I felt that underlying conditions were against me. So that was one the reasons in addition to my daily order flow habits that convinced me to stay away from the short side and stick to the long side of the market.
As the old trading quote says:
Being right and being early is the same as being wrong.