Tag: Essence of Trading

Some people think they can simply put hard work into trading and they will become proficient quickly. How hard could it be, many people asked, that it is just buying and selling something quickly to grab profit, right?

Well, I can use a similar argument claiming that it is just cutting someone up and glue it back, how hard can it be to become a surgeon?

Or that it is just driving a car, very fast, how hard can it be to become a professional racing car driver?

This under estimation of a skill, in fact, any skills, underlies the difficulties in seeing anything properly when you are not proficient in the skill you are trying to acquire. It is a common problem and it is also the root of many mistakes that people make when they decide to make trading their career.

This topic is very sensitive and I understand it can be very annoying to someone who is struggling to become profitable in trading. All I am trying to do here is to open a dialog on the subject so that you can see things from a different angle. Be patient with me – read the rest of the article first and curse me later.

You Cannot Become Profitable If You Repeat Your Trading Mistakes Again and Again

I did it. Many others did it too. But there is a point in time that you have to stop making the same trading mistakes. The fewer mistakes you make, the more likely you would be consistently profitable.

There are well known trading mistakes that we have all committed – averaging down on losing positions, jumping onto a trade just because we have not made a trade for some time, feeling lucky so suddenly increase position size, etc.

Making these mistakes is normal. The important thing is that we learn from the experience and stop making the same mistake again. If you somehow allow yourself to keep making the same mistake again and again for a long period of time, you may have a problem that is not necessarily originated from intellectual issues. It could be a psychological problem. You could be developing a habit into loving the mistakes you made, the emotional swings you experience, or the consequence you face right after.

It is important to deal with this issue as soon as you can. The first step, however, is that you have to recognize the problem and acknowledge its existence. Once you accept the fact that you have a problem, you will be able to open up to ideas and possibilities dealing with the problem.

Some people find that they can stop their bad trading habits by themselves. It takes certain characteristics for people to be able to do that. Remember that it is difficult among people beyond early adulthood (early 30s) to break any form of bad habits be that smoking or just swearing.

Some people find it easier to correct these mistakes with help from a mentor, or even a psychiatrist. The bad habits may not be removed completely though, but the impacts from the bad habits can be reduced and it will be very noticeable in the bottom line.

Another way that works, but not likely applicable to retail traders, is quite awkward. I have seen trading firms utilize special rules imposed on their traders to improve firm-wide bottom line and risk control. I know It works but the traders are called to stop trading like being called to the bench by a referee in a ball game. When the traders leave their firms, it is imaginable that they may not be able to enforce the same discipline by themselves.

Some individuals, however, may have deep psychological issues making it very difficult for them to choose trading as a career. The sense of insecurity with unstable income is one of them. If you do have such problem affecting your ability to trade, remember that there are always other things to do outside of trading. Good examples are part-time traders who consistently profit from short term swing trades on stocks who quit their day jobs to pursuit full time career in trading. Many who tried doing that would fail, not because they are not good at trading in the first place, it is the extra stress they experienced that killed their ability to perform.

The lesson here is that you do not have to make trading your only career. It can be a very profitable side project or part-time job. Keep this in mind.

The Thrill From Trading May Not Be Where Your Passions Lie

Trading can be exciting. Especially if you are trading with excessive risk. Many people hooked into trading because of this excitement quality. They have mistaken this as a sign of passions that they have for trading. It is not. What they are enjoying from the thrill ride is the addictive quality of gambling – the excitement and anxiety of going through uncertainties.

The truth is,  trading, especially at professional level, is quite boring. It can be very satisfying to see a trade works out beautifully and exactly as planned. But there is not much excitement to be remembered if it is just a normal trade that works out. Encountering a losing streak can be frustrating, but a winning streak would not make you high because it is just working according to the plan. So if you believe rolling on your luck and getting high on betting your farm is what trading is all about, you are wrong and you should not be trading at all.

Some people have hatred against their existing jobs. Some get bored by their jobs. Trading give them an exciting escape with potential of good money too. Of course many people will think that it is the best career choice for them. It is especially true for those who have some beginners luck.

The problem is, however, the excitement will disappear if you are doing it right. You would become profitable. But your original problem of boredom or lack of excitement from your previous job will resurface again. Sadly, this time around you would not want to go back to your old job. And believe me, I have seen enough how people spice up their trading careers – increasing position size to the point that can make them sweat, seeking excitement from trying out markets they have never touched, etc. And we all know how that will likely end.

If you suffer from this issue, I do not have to convince you that you have this problem because you know clearly I am describing you. What you need to do, however, can be very difficult if you want to stop this downward spiral.

Those of you who developed track records proving that you are indeed quite profitable when you are (mentally) in control, should seriously consider sparing significant amount of time doing something outside of trading. By shifting focus into something you are passionate about, the skills you have developed in trading will serve you well as an income generator. You will also less likely doing stupid things to screw up your trading as a business when you know that it is funding your passionate interest.

Time To Stop and Deal With Reality

For those not lucky enough to have a choice due to the problems mentioned above, your trading capital would have been depleted to the point that it is not likely you can continue to trade properly. It is time to stop trading if this happens to you.

Do not just jump back into trading with fresh capital from borrowed source, period. Deal with the problems first – the markets are always there.

You may be determined to correct your trading mistakes and have promised yourself with more discipline, but your mind may not be able to cooperate yet. What you think you are going to do is not necessarily what you will do when you are trading again. It is important to let your mind accepting and hardwiring the new rules and concepts you choose to follow first. That will take time. Taking a break from trading, or having a career change, even for a short while, can be beneficial.

Sir Ken Robinson’s Talk on The Element

Personally I find trading to be quite boring. I love discovering, understanding and (to certain extend) teaching how markets work. I am not a good trader as I am always distracted when I am trading, so I compensated the weaknesses with self imposed rules and restrictions to improve my trading performance. I also balance myself by limiting my trading with straight sizing rules and spend most of my time outside of trading. So far, this strategy serves me well.

Everyone is different, so the road to trading success is also different for everyone.

I will end this article with a video link to Sir Ken Robinson’s lecture at UCLA about the concept of being in the element. His lecture is a bit long. His message is simple but important – to be able to perform at your best, you have to be passionate with the career you choose.

End Notes

No one dares to write articles on this subject – persuading people to think over their choice of picking trading as a career. Obviously many in the financial industry cannot afford to do this because it can be a career ending move.

I feel obligated to do this because anyone who give trading a try should know, in the first place, that it may not be the ultimate career they are thinking of. It is possible to stop trading, or changing that to part-time, and choose to do something else as the primary career. The earlier the decision is made the easier it is due to the addictive aspect of trading.

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What I am going to talk about is not the kind of emotional roller coasters from life-altering events that we know for sure can cloud your judgement. It is something more subtle and will surprise a lot of people.

A Good Read

First, I have to mention the book Risk by Dan Gardner as one of the influences that drive me to write this article. I have the book for a long time. A reread of the book lately reminded me how easy people are affected by the environment they are put into. The implications of such influence on traders are profound and can affect their bottom line without them knowing the reasons at all.

There are two main points delivered by the book. First human mind functions with a 2-tier system – one by gut, and another one by our head. Examples after examples presented in the book on real-life events and experiments done by academics prove that humans can be conditioned by the information they get in touch with, without really reading or listening to them at all. Second is that once human gut is overwhelmed by a strong feeling, it in turn influence the opinion formed by the person in other issues as the logical part, the head, is suppressed.

All it takes is that a person is exposed to words / sound / visual that they can associate with a specific feeling or bias. Then the gut side of that person takes over. Opinions will then be biased disregarding the actual content of the news reports or articles these people that are going to read or listen to. The changes is subtle. Most of the time the opinion is just nudged a bit more towards the opposite end.

In normal situation, that is not likely going to affect people greatly because they can keep their opinions to themselves.

But the book shows us that when the biased opinions somehow formed right before decision making on important issues, it becomes a problem. From survey results, penalties given out to a sports team, emergency policy making, to people voting for their government officials , the biased opinions can really mess up the world.

The Sources can be Trading Related

Think about the news that people read in the morning – economic reports, earning results, overseas markets performances, etc.

All these reports are not written with plain wording. Instead, we see “strong economic data”, “disappointing results”, “overseas markets very bullish”, “spectacular earning”, etc.

All these words that one can associate with some kind of feelings, some we recognize consciously, some we don’t. Depending on the stories that a person read, it will shape this person’s mood without him/her knowing.

My guess is that if a person is conditioned in an aggressive or irritated mood, that can easily push the person to take on countertrend trades, oversized trades, or refused to cut losses. If a person is conditioned in a depressed or frightened state, the person will have difficulties pulling trigger or managing an existing position.

The Sources can also be Non-Trading Related

There are other news that are not related to the markets but you read them, heard them, listen them anyway. Keywords like “upsetting tragedy”, “happy ending”, etc.

The conditioning can also come from sound, visual images and physical contacts.

It can also be incidents like a prank done on you by co-workers, could not get a parking spot in 20 minutes, being reminded to exercise more by family members, etc.

It does not happen all the time, but occasionally the accumulated effect can be pretty one sided, and you will be conditioned without knowing.

Some Useful Techniques Known to be Helpful in Restoring a Balance Mindset

So many things can affect us, is there something we can do about it?

There are well known techniques people use to clear their minds. It can be simple and easy to do.

Techniques often used to clear the mind, empty your thoughts, or giving you the inter-peace:

• exercise
• a walk
• a swim
• meditation
• breathing exercise

Many people find that in order for a technique to be effective, you need to do that consistently.

The important thing here is to clear your mind from thoughts you are stimulated earlier in the day by media, email you read, website you browsed, etc. or emotional swings from major issues in your life. Given enough practise of the same routine everyday, even if your mind was clouded, you would still gain a small window of time that your mind is not filled with prejudice.

That moment of a balanced mind would allow you to make an assessment of yourself whether you are fit to trade for the day.

A balanced mindset is not one without an opinion. It is one that is flexible enough to see other possibilities.

i.e. You can be very bullish as long as you have an exit plan that you are going to honour.

Some People Find It Difficult to Read Charts All the Time

I have seen many people, given enough training in basic chart reading techniques, produce inconsistent results in their chart reading analysis most of the time. The idea that external influence affecting a person is a plausible explanation.

Some people are just affected by other people’s opinions more easily.

Some are just more pessimistic overall comparing to others.

Some are more optimistic than others.

Almost all of us, one way or the other, would be affected by our emotion in making a trade. But some people are just affected by emotions more often than the others. For these individuals, it is very difficult to separate their objective analysis and emotional bias.

I am not sure to what extend the techniques mentioned above can do for these more emotional individuals.

The Goal – A Detached Mindset

Without a balanced view, the basic rule of letting the chart telling you the story is violated. The rest of the decision making process is no longer applicable. This is effectively turning trading into gambling and we know it is not a good thing. Worst yet, if the ability to accept a loss and move on is shutdown from the analytical process, a small loss is likely going to turn into a disastrous one.

If you find yourself struggling with trading from time to time and that it seems like the bad days coming from nowhere. Take some time to reflect on yourself to see if it fits the symptoms described here. If so, you should give the mind clearing techniques listed above a try.

The goal is to eventually detach your emotional side from your trading decisions. It sounds easy but it is quite difficult for most people.

Think of a physician – before qualifying as one, the rigorous training required is a process to enforce diagnoses done with professional knowledge and opinions with the goal to minimizing the impact of judgement affected by outside influence. Even with intensive training and actual experience, it is not possible to eliminate all the errors made.

Surgeons are generally recommended not to operate on their close relatives for a good reason – the emotional aspect of a person can affect his/her professional judgements.

After all we traders are just humans.