Anybody who drives has experienced the difficulty of looking for a parking spot.
So now they know what trading is like.
Not really.
Trading is much more difficult.
Although some may experience the exuberance of being lucky, trading and parking can be stressful and frustrating.
Both require concentration, focus, and decision-making abilities under pressure.
Nevertheless, there are some similarities between trading and looking for a parking spot.
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When To Take Profits
As you are driving along, you see the first available parking spot.
Should you just take it and be done with it?
Mission accomplished.
You got a spot.
Or should you continue looking for a better parking spot?
If you continue looking, there is a chance that you might find a better spot.
But that requires more time and effort.
There are no guarantees that there would be a better spot.
It may no longer be there if you go back to that old spot.
This is the kind of decision that traders need to make with every trade. When are the profits good enough to take?
When should I exit a losing trade?
A trader’s P&L (profits and losses) will go through ups and downs.
As soon as the trade gets into profits, some traders will think, “Should I just take it and be done with it?”.
Mission accomplished.
I got a winning trade.
Just like people who park at the first available spot will rarely get the best parking spot, traders who take the first available profit will almost never get the large reward – unless they are really lucky.
Luck And Timing
Both trading and parking have an element of luck and timing.
Sometimes, you just get a really good parking spot quickly.
This is really lucky.
The same can happen in trading.
The market can do the right thing at just the right time you initiate a trade.
This is really lucky.
Patience And Impatience
Some drivers are impatient.
They don’t have the time or the patience to look for a good parking spot.
They just park at the first spot they see and settle for a lesser spot.
Some traders are impatient and eager to take profits.
Those with patience can often find a better parking spot and reap bigger rewards.
Always A Tradeoff
As humans go through life, almost all decisions involve tradeoffs.
If a decision does not involve tradeoffs, then the decision becomes easy.
Determining where to park involves tradeoffs.
Some drivers might prioritize parking quickly, even if it means walking further (for example, parking in a distant but empty area of the lot).
This heuristic simplifies the decision by balancing the effort to find a spot against the effort to walk.
Determining when to take profits is a tradeoff.
Take profit now and secure a gain?
Or risk losing what you have for a potentially larger reward?
Determining when to exit a losing trade involves tradeoffs.
Exit the trade at a loss now and prevent it from losing more.
Or risk losing more money for the potential of the trade recovering to break even.
Maximizing Versus Sacrificing
Maximizing is about trying to get the best possible outcome while sacrificing means settling for a “good enough” option.
Those who take the first parking spot they see are often willing to take a lesser-quality parking spot.
But they are more likely to secure a parking spot in less time.
Size Of Reward Versus Win Rate
Those who take profits early are often willing to take smaller profits.
As a consequence, they have a higher win rate.
However, a higher win rate does not equate to profitability.
The trader will lose money if the wins are too small to overcome the losses.
I guess that is not the same as parking.
Those who park in the first available space always get space.
They just need to walk more.
Those who take the first profit may end up losing money in the end.
Did I mention that trading is more difficult than finding a parking space?
Familiarity Heuristics
You can get better at finding parking spaces, just like you can get better at trading.
By having familiarity with the area and having a sense of how many parking spaces are likely to be available at this time of day, you can better know if the spot you have now is a good one or whether there are likely to be better spots up ahead.
Drivers often rely on where they found a spot last time, returning to familiar sections, assuming that what worked before will work again.
However, this heuristic strategy may forgo potentially better opportunities.
Knowing how much a particular trade can typically make in this market condition, you can better determine whether it is a good time to take profits or wait for larger profits.
By knowing how large a drawdown this particular trade typically has, the trader can better determine whether to cut losses or not.
Final Thoughts
This decision-making scenario not only plays out in trading and in searching for parking spaces (as we saw), but it also plays out in other facets of our lives.
When buying a home, how do we know that this fifth house we looked at is “good enough,” or should we continue looking for a better one?
When dating, how do we know this is the one to marry?
Speaking of relationships, how do we know when to break off a relationship, or do we try to “make it work”?
Game theory and priority heuristics have been used to model human behavior and see their decision-making behavior under conditions of uncertainty and competition.
We hope you enjoyed this article on the analogy between trading and finding a parking space.
If you have any questions, please send an email or leave a comment below.
Trade safe!
Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are not familiar with exchange traded options. Any readers interested in this strategy should do their own research and seek advice from a licensed financial adviser.
