The Endowment Effect.
The endowment effect is a psychological tendency for people to place more value on something we already own, even if it isn’t actually worth more than something we don’t have. It is often attributed to loss aversion where the pain of losing something is felt more strongly than the pleasure of gaining something of equal value.

How is it relevant to trading?
Traders often have an emotional attachment to their positions, and this can cause them not to think clearly.
Many studies show that traders tend to hold on to losing positions, convinced that they will ‘bounce back’ recouping their losses, and they sell winning positions too early to ‘lock in their profits’.
Realizing Losses
You’ll have heard the advice: “you haven’t made a loss until you sell.” Traders are reluctant to sell at a loss, convincing themselves that as long as they haven’t realized the loss, they haven’t truly lost anything.
Boredom & NVIDIA
Not that I am immune – far from it! A few weeks ago, in a fit of boredom (the trader’s worst enemy!) I decided to have a flutter on NVDA. Not smart. Here’s the buy:

Since then, I has been underwater, but did I sell? Nope. Should I have sold? Absolutely. What did I do? I kept hanging on. Laziness? Apathy? Paralysis? Irrational hope?

Today, it has finally come back into profit, and so my urge is to sell it and ‘get my money back’. Now that I might make a profit, I’m going to get rid of it! Idiotic reasoning. Definitely NOT a good trade and definitely not well managed by me.
The Consistency Principle
According to the consistency principle, people have a deep desire to be seen as consistent in their attitudes, beliefs and behaviors. Once individuals commit to something they are more likely to continue behaving in ways that are consistent with that commitment, even if circumstances change or they are presented with evidence to the contrary.
Cognitive Dissonance
The consistency principle often leads to rationalizing or justifying past decisions to avoid the discomfort of cognitive dissonance (where a person holds 2 conflicting beliefs at one time).
For example, a trader can believe that they are a rational data-driven investor but continue to hold onto a losing stock because they fear admitting that they made a poor decision, which creates a conflict between their rational strategy and their emotional behavior.
I asked AI to make me a cartoon showing a trader with cognitive dissonance. Not great, but you get the idea

Why do we need to know this?
For 2 reasons: to understand our own behavior and that of the mass of traders out there. In ITM Bull, we discussed markets being made up of people, and people being basically irrational when decision making. (remember, the 3 levels of the brain?)
We can’t change other people’s behavior, but we CAN look out for our own biases and not fall into any traps and capitlize on the fact that most traders act in predictable ways..
The Pig Baby
For those of you who haven’t read Alice in Wonderland recently: the duchess has a baby that looks suspiciously like a pig.
The duchess insists that the baby is fine, she can’t see clearly because she is invested in it.
Alice rescues the pig baby, but it soon turns into a pig, and she lets it run off.

ITM Chat
It seems that there is enough interest to have ITM chat where you can communicate directly with other ITM traders without having to go through me. George, who is going to manage it, is currently reviewing the possible platforms. I am tending to host it on here so that you don’t have to go to another website and get another account to use it, but not definite yet.
To the markets . .
Well, this is a very nervous market. Lots of trepidation, people afraid to commit. This can be seen by looking at the shape of the candlesticks – most have small bodies which means a small different between open and close. if you compare the candles from the last 1-2 weeks with August / early September you will see what I mean.
Presumably it is due to the political situation domestically and internationally. People are unsure and unwilling to commit. That’s how I am reading it anyway – others will have different explanations, I’m sure.
SPY Charts
SPY has been making new highs and has traded over its previous high for 7 days now. As I pointed out, the candles are dojis or near-dojis showing nervousness in traders. I am expecting SPY to come down and test for support around $565, and if that holds, we may be in for a nice bull run. Hopefully. Although that could be the Endowment Effect kicking in!

In the weekly chart we can see that the uptrend is still intact.

QQQ Charts
Unlike SPY, QQQ has not been making new highs, although it is trading above resistance at $485. Lets hope that it holds and becomes support.

QQQ is back in the trading range which has been going on for almost a year now. Note the pink support line – it was previously resistance in March / April and has recently turned into support. Sometimes it is amazing how predictable the market is (indexes, not stocks)

SPYG Charts
SPYG has not yet made a new high, but is closely approaching it. Like SPY, it has been trading over resistance for 7 days, and it would be quite normal for it to come down and test it for support.
Interesting that we have been in this trade now for well over a year. The golden cross happened when SPYG was trading around $56, and so we are sitting on a 66% increase. That means at a 50% strike you are sitting on profits of well over 100%, and if you have a 60% strike even more

On the weekly chart, it can be seen that SPYG is still in an uptrend. Yes, we are still using the make-shift arrow, the drawing tools in OptionGear are refusing to work which is beyond annoying.
I am going through first-level support at the moment where they tell you things like: you click on the drawing tools icon to make it launch (duh!), have you tried closing it down and opening it up again (goodness, that would never have crossed my mind) have you rebooted your PC (wow, what an idea!), have you cleared your cache, etc etc. Once I can get past all that stuff I might get escalated to second-level and get some decent help!! OK, grump over.

VIX Chart (Volatility)
The VIX is comfortably under 20.

ITMeter

New Strategies
I have been backtesting some ideas, and none of them perform as well as the ITM method. While I was at it, I ran backtest using the MACD and RSI – the results were woeful, I pity anyone following these indicators. Yes, you can always find an instance where they work (in hindsight) but other than that they are worse than useless (in my opinion – yes, many would disagree, that is their prerogative).
One of the strategies had reasonable results, but required me to do something every day. When I consulted myself about this, I decided that just wasn’t on. I like my easy life and 3 months holidays too much!
I am giving myself a 1 week break from backtesting and strategies, I think my brain needs a rest.

The week ahead . . .
A busy week. The nonfarm payrolls are out on Friday (+144k jobs expected), Jerome Powell (Fed Chair) speaking on Monday (doesn’t that man ever shut up?), and we are going into earnings season again but none of the big guns are reporting this week. The election, of course, is overshadowing everything so expect some volatility
The futures
The futures are down slightly, but it is still 10 hours to market open.

Fingers crossed for a good week!
Heather
Q & A
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19 Responses
Dear Heather,
As an Australian, you are too smart, please come to the United States and make yourself more successful. The United States appreciates smart and strong people like you.
Sincerely,
George Halongton in Los Angeles
Thank you! You’re too kind!
h
Dear Heather,
Thank you for your weekly blog. As always, I find your weekly blog educational and enlightening. Speaking of trading in the United States, we can obtain a “trader tax status” if we trade and/or day trade 4 times per day which is about 20 times per week which is 1,000 trades and/or day trades per year. In addition to this, if we spend about four hours each trading day learning and reading the stock market and trading and day trading, we can obtain the trader tax status. This allows us to treat trading and /or day trading like a business and we can claim tax benefits as traders.
Live well and be of service to each other.
Sincerely,
George Halongton
Hi George – interesting information.
I pay tax mainly in Australia, but this may be of great interest to others.
1,000 times a year? You are going to be busy!!
h
I love your discussion about hanging onto losers. I find that in my case there is always a struggle between the right hemisphere of the Brain embodying intuition we all live with and the left hemisphere of the brain which is the analytical side of the Brain. The two sides of the Brain at times conflict with each other as to which side is in control of the situation. If you can use the correct side of the Brain for the situation at hand without conflict for control of your actions you eliminate angst and frustration. The best way is to trade with balance. Easier said than done. The best Book I have read in regard to the problem of Brain hemispheres and trading is an old Book, The Tao Jones Averages, by Bennett W. Goodspeed. The book relies heavily on the ancient philosophy of Lao Tzu who wrote the Tao Te Ching or Tao Teh King, depending on the translation. In any event old Lao Tzu was definitely in favor of right Brain dominance. The last line of the Book, being a spoiler here, is “All you need to accomplish this is to treat intuition as an equal partner with logic.”
HI Tommy – am going to check out that book (great title by the way!). I’ve just read the intro and this made me laugh: Bennett W Goodspeed overcame the handicaps of having an MBA and working for several prominent Wall St firms’. – so I have just bought it.
Re intuition – I think it is something we treat as ‘woo woo’ when actually we should listen to it more often. I think it is your brain making connections in your subconscious and giving you some information without detailing all the steps it took to get there.
‘Blink’ by Malcolm Gladwell is a good book about it.
I often wonder if looking for a trading strategy that is based purely on statistics is leaving out half of our brain – but how to back test that? Even simply things like trend lines & support / resistance are wasy for our brains to see, but trying to code it nearly impossible – well, for me anyway.
Am looking forward to reading the book – ,aybe it is what I am looking for.
Thank you!
h
Hope you like the book. Alas, I am sure there is no way to back test the right brain’s think tank and is, I am sure, as unattainable as forward testing is. If nothing else the Book gives one food for thought if not action.
Hi Heather, I bought your book “in the Money” and I am playing with the 10 and 200-day SMA on your graph. However, the relationship between the lines (10 and 200 SMA) changes depending on the timeframe chosen. For instance, if I graph the SPY for 1 year, there is no death cross or golden cross. However, if the timeframe is 6 months, , I do see intersections between the lines and the signals to get in and get out. What is the ideal timeframe you recommend? Thank you
Eduardo
Hi Eduardo, if you go to https://heathercullen.com/stock-charts/ and follow the instructions you will get the right settings.
The charts are the daily chart (one candle to a day), and the moving averages are the 10 day and 200 day SMAs.
Please try again, making sure you have these settings and if you still can’t see it please get back to me.
h
Have to call you out, Heather – you say in the books not to trade stocks only indexes. Yet here you are trading NVIDIA!
Jay
Hey Jay – yes, you are right, I caution against buying individual stocks as they are risky and not as predictable as the major ETFs.
But – yes, I sometimes have a flutter – for me it is instead of buying a lottery ticket (which I don’t do!) and always, always with a very small part of the account, usually way less than 1%.
I probably do it 5 – 6 times a year, and it rarely makes any money, which keeps me humble!
h
Dear Heather,
Thank you for your weekly blog as always. Speaking of SPYG, there is a similar ETF called SPLG. Have you also taken a look at SPLG? If yes, please let us know what you think about it. SPLG charges 0.02% fee.
Sincerely,
George Halongton
Hi George – my problem with using SPLG is the spread – for a 50% strike at today’s prices the bid / ask is $30.20 / $34.20, which ias a 13% spread. This is because the OI (Open Interest is practically non-existent (i.e. no one is buying the options) which means that as there is no competition for options the prices are set by market makers.
You will always be able to buy and sell options, but the penalty is that you will be buying too high and selling too low.
Hope this helps
h
I read your book and it was a great idea. What if I do not have enough buying power of stocks for the leap calls I bought? Do I need to be afraid of that case? What method do you prefer buying 30% of the portfolio or 100%? I have been selling options for Tesla, Nvidia, Plantir and Nio 1 year now.
HI Kyaw – no it doesn’t matter. If you do not have enough money in your account to buy the stocks when you are exercised then your broker will immediately sell them for you. It is always better to sell the options before expiry, though, it saves the hassle.
Hope this helps.
h
Hi Heather. Do you have an alert service to when buy and sell options?
Eduardo
Hi Eduardo, all ITM updates are via the blog.
ITM does not trade very frequently, we wait for a death cross to sell and a golden cross to buy. If either of those are likely between blog posts (every Monday) then I will send out an alert email.
Hope this answers your question.
h
I probably missed it in the Bull Market book, still rereading, but how long are you usually in a trade? Thanks Chris
Hi Chris, however long we are in the trade depends on whether the golden cross is still in force (i.e. we have not seen a death cross). This can be as little as a few days or as long as a year or more. However, if we are long trade we will need to roll our options to keep them current. For example, if the trade lasted 2 years and you bought a 9 month to expiry option then after 8 months or so, you would roll. And after another 8 months you would roll again.
That is still counted as the same trade in ITM, you are simply renewing the currency of the option.
The chapter on rolling is in Chapter 9 Stay in or Sell?
Hope this helps
h