Australian cricketer-turned-commentator Dean Jones, in an interview for Wisden, observed that two-thirds of Sachin Tendulkar’s game is based around defence. Most of the shots in any Sachin century, he says, are based on forward defence, back-foot defence and letting the ball go. As any coach would vouch, letting the ball go is possibly as important as hitting good shots in the career of a batsman.
With analogies from the world of sports, we discuss why “doing nothing” is just as important a strategy in the world of trading as action.
In the trading there are huge incentives to make correct decisions. Trading can be simple or complex based on the trading strategy you want to follow. After the 2020 Covid Crises modern information economy is constantly throwing out gigabytes of data, coaxing the receiver of this information to react. The institutional imperative for professional trader as recipients of the information stimuli is typically to react by trading in the markets. You have emerging country crisis, Fed Tapering China data to digest all this are market moving event.
The outcome of all this is a market where every few point rise and fall can change the trade status from Buy to Sell or Sell to Buy. So if you follow “multiple trading strategies” few might generate Buy and few might generate Sell. So at the end of day trader becomes confused what exactly should he/she do?
Behavioral science uses the term action bias to explain such behavior. Action bias is the tendency in uncertain circumstances to choose action over inaction, no matter how counterproductive it might be. It is the strong urge to act, despite the fact that an objective analysis of past action might repeatedly prove that the action did not produce the desired results.
In an interesting research paper, Michael Bar-Eli, et al, analysed 286 penalty kicks in top soccer leagues and championships worldwide. In a penalty kick, the ball takes approximately 0.2 seconds to reach the goal, leaving no time for the goalkeeper to see clearly the direction the ball is kicked. He has to decide whether to jump to one of the sides or to stay in the centre at about the same time as the kicker chooses where to direct the ball. About 80% of penalty kicks resulted in a goal being scored, which emphasizes the importance a penalty kick has to determine the outcome of a game.
Interestingly, the data revealed that the optimal strategy for the goalkeeper is to stay in the centre of the goal. However, almost always he jumped left or right. In short, goalkeepers choose action (jumping to one of the sides) rather than inaction (staying in the centre). If the goalkeeper stays in the centre and a goal is scored, it looks as if he did not do anything to stop the ball. The goalkeeper clearly feels lesser regret, and risk to his career, if he jumps on either side, even though it may result in a goal being scored.
Just like the goalkeeper, professional trader too feels compelled to play every trade that is out there in the market. In most cases either the event is already priced in or it just does not play out in line with the popular belief. Despite data proving that frequent trading might be counterproductive, the norm is always to act. Action seems to always triumph inaction.
So the next time you feel compelled to place a trade in the market, remember sitting around and doing nothing may just be a better option.
brilliant statement, need of the hour is discipline, if we are NOT disciplined in our trades then it’s clearly NOT trading its gambling, so we need to plan our trade and trade our plan, so many times making no trade is more a wise decision no doubt, that requires discipline and mind control.
Thanks for emphasizing this so many times, Brahmesh Ji.
Thanks sir !!!
3. China Economy- As its open and strong but causing major disruption in commodity prices especially metals like steel and copper are now correcting big time which will impact these sectors and we see a correction there in progress.
4. Indian Two Tax System- One of the key concerns for all DIIs/FIIs as w.e.f 2020-2021 there are 2 tax regime one can opt for in India, 1. Deduction based 2. Flat Tax . We know so far DIIs had access to good money because of 1. Investment based funds 2. Tax Benefits funds and for last few years there was a constant inflow of $ 1-1.5B from general public in these funds. Now there is an ambiguity on what percentage of people will opt for non deduction based tax regime, this can severely impact DIIs inflow. DIIs so far have been key to holding market during falls.
My understanding is that market can be in choppy mode for next 1-2 quarters before finally resuming a bull or bear rally. Sir, I do not understand technical much , infact was a non believer first but now have started reading a lot on technical analysis. Hope to catch up with you someday. Pls keep the good work.
Dear Bramesh Ji, I am really inspired by you. You have got great discipline as I see your post and was checking and found you have been regularly updating your blog since many years and I know what it takes to be in market trading daily and still maintaining the discipline. Somewhere I read you mentioning why you try and maintain these trade journals and I really believe that doing so has made you a very disciplined trader as habits are difficult to form and maintain. I do inspire to be such strong disciplined.
Sir, I majorly trade based on fundamentals and wanted to share my 1cent on the current market condition. I feel market is still in bull zone but there is a strong sentiment fight between bulls and bears, I chose the word “sentiment” as its more of a fear and greed situation currently which is evident as few hundred points market rise is met with a quick retracement back to the 14800-900 levels.
I will try and bring forth few of the key points which will decide future market levels and a winner between bulls and bears.
1. Macro economic fundamentals are driven by 7-10 major concepts. The current fear is of trade deficit which impacts a country growth in a big way, due to fall in exports and high crude price there is a fear that India trade deficit will be on the higher level with no clarity on what trade deficit numbers we will see in next few quaters. Finance ministry has been bold enough to come up with a high trade deficit number but again exports and crude is causing a relook to those numbers as well.
2. US bond yields, not much to say as its all over the news. It can have big impact but we have not seen it so far as FII have been net buyers so far. But if tide turn big correction can come.
Thank you for sharing !!!
If a Trader has the habit of coming out of market during Market hours say 10 am to 12 or 1 pm , then he can easily think of NO TRADE . After 2 failure trades or Breakeven trades one can close the trading terminal and do some other activities or read a story book etc, clean the house clean the car/bike etc… spending time on something else diverting mind..
Dear Brameshji, Thanks for this nice article.
It is very very difficult to practice NO TRADE as many of the times I also felt that DOING NOTHING would have been more profitable than TRADING.
Thanks once again for the Education and stressing the Correct Point.
P.S. Hariharan. Mumbai