Here’s another one: Have you ever looked at a chart or quote screen, dropped an F-bomb (or three!), and then realized, oh, I’m looking at the wrong chart/ticker. The stress immediately evaporates. This is proof positive that a market doesn’t generate fear. Fear comes from within.
Borrowing from Ms. Nin, my point is that we don’t see markets as they are, we see them as we are.
“We don’t see things as they are, we see them as we are.”
Anis Nin
A Good Ole Book
As mentioned recently, the best books on trading tend to be the oldest. One of my favorites, next to the obligatory “Reminiscences Of A Stock Operator,” is “The Psychology Of The Stock Market” by G.C. Selden. Although the book was published in 1912, it still rings true today. Here are two of my favorite quotes:
“Not one trader in a thousand ever becomes so expert or so seasoned as to entirely overcome the influence his position in the market exerts upon his judgment. That influence appears in the most insidious and elusive ways.”
“The market is relentless. It cannot be budged by our sophistries. It will respond exactly to the forces and personalities which are working upon it, with no more regard for our opinions than if we couldn’t vote. We cannot work for our own interests as in other lines of business— we can only fit our interests to the facts. To make the greatest success it is necessary for the trader to forget entirely his own position in the market, his profits or losses, the relation of present prices to the point where he bought or sold, and to fix his thoughts upon the position of the market. If the market is going down the trader must sell, no matter whether he has a profit or a loss, whether he bought a year ago or two minutes ago.”
What is, IS
Selden’s point is that price reflects all forces acting upon it. If demand exceeds supply, stocks will rise. If supply exceeds demand, stocks will fall. And if supply meets demand, stocks will trade sideways. He also touched upon some of our external influences that have nothing to do with the underlying market.
As I preach, the value of a classic car or comic book is worth whatever someone is willing to pay for it, aka “the greater fool.” The price bid of a market IS the current value. Don’t believe me? Try to explain to your banker why your portfolio is worth more than its current value.
So, How Do You Learn To See What Is?
First, again, recognize that if you’re long or short a market, you’re no longer an unbiased judge. Perceptual distortion and selective perception are your two biggest enemies. If you’re long a market that has begun to implode, you might be inclined to label it “just a correction.” If the market continues to drop and you’re in denial, you might have to employ a six-year-old kid.
“If you don’t know what direction a market is heading, ask a six-year-old kid.” Linda Raschke
When you boil it all down, there are really only two questions to ask:
1. What do I want this market to do?
2. What is it doing?
The answer to question number two is obvious unless it doesn’t jive with our answer to the first question. Be constantly cognizant of your own bias vs. what actually is.
A Good Offense
You’re going to be wrong a lot in this business. Therefore, a good defense is crucial. Before I discuss defense, let’s talk a little about offense.
Your best defense is a good offense.
Have you ever taken a trade and, the second you get stopped out, shouted: “I KNEW I should not have taken THAT trade!” Guilty! (more often than I’d care to admit). If so, then you obviously know a little something about proper setup selection. The better your stock selection, the less you’ll get stopped out. The true enlightenment will then come when you get stopped out of a trade, shrug your shoulders, and say, “So what. If I saw that same setup tomorrow, I’d take it.”
“Better ingredients, better pizza.”
Pappa John
Pappa John would probably make a good trader. Pick the best and be willing to sit on your hands when nothing’s looking good.
“When in doubt, keep out of the market. Delays cost less than losses.”
Selden, George Charles
Getting To Know You, Getting To Know All About You
As I’ve mentioned before, I’m very emotional. I cry like a schoolgirl when forced to watch a Nicholas Sparks movie or willingly watch a Formula One documentary (Spoiler alert: They usually end badly. Start with Senna, then watch Schumacher). That’s not my only flaw as a trader. I’m also not very agreeable. I thought I was until I took a personality test. My lowest score, if it was high enough to call it a score, was in agreeableness. Shortly after taking the test, I stormed into the house and exclaimed, “I just took a personality test and scored really low in agreeableness. Can you believe that!?” My wife and daughters looked at me like I just pooed my pants.
Accepting what the market IS doing and keeping your emotions in check are the two most important traits for a trader. So, that’s two strikes against me. You need to discover your own flaws. Take a personality test, and if you’re brave, ask your family.
Accept That All Predictions Are About The Future
When you are doing your analysis, you know where the price was and is. The current price has factored in everything known to it. The moment you place the trade, you’re stepping into the unknown. As my disclaimer states, “All predictions are about the future. And a lot of ‘stuff’ can happen between now and then.” (Morris) Further, as the late great Mark Douglas once said: “All it takes is one a-hole to screw up a perfectly good trade.” “It” spelled with a silent sh, happens. So, no matter how great the setup, you could be wrong. Therefore, you’re going to need to place a stop at a level where you are obviously wrong (not to be confused with a “tight stop,” which all but guarantees a loss).
Document, Document, Document
Document the trade. Explain why it’s an “F-yeah” setup that you’d be stupid not to take. Document your orders and what happened. Document any animosity that you might have after the trade settles. Was it really an F-yeah setup? If yes, then work to accept, again, that “it” happens. If not, do better.
It’s also important to figure out what’s going on with you. It’s vitally important that you identify any extraneous influences. How’d you sleep? How are things at home? Any injuries or illnesses with you or your loved ones? Are you feeling great about your recent trading, or is it that you can’t hit the side of the barn (from inside the barn!). Trading, both good and bad, affects your decision-making. Do you have any unexpected expenses? Are there any expected expenses due?
Morning Pages
The easiest way to figure out “what’s eating Gilbert Grape” is to do your morning pages.* Every day, as soon as you awaken, write three handwritten pages. Stay analog. Don’t check your social media, emails, the news, or the weather. We’re bombarded with more information in ONE day than our ancestors dealt with in a lifetime. From an evolutionary standpoint, our brains haven’t caught up and likely never will. Wake your brain up slowly before the deluge.
“Compared to the 15th century, we now consume as much data in a single day as an average person from the 1400s would have absorbed in an entire lifetime. Not so long ago, information moved glacially through word of mouth, or a newspaper, or a posted bulletin in a town square. Now we have so much access to information that it’s taking a toll on our time and our quality of life.” Jim Kwik, Limitless
Write about anything, everything, or nothing.
At first, it’s a chore. Plod along. Eventually, you’ll grow to enjoy it. You’ll find that 95% of the stuff you’re worried about won’t come true. And, on the 5% that does, it’s either not as bad as you feared or you dealt with it.
You’ll be forced to face bad trading and devise steps to avoid it, or risk becoming Einstein’s definition of insanity: doing the same thing over and over and expecting a different outcome. As I preach, you know what you’re doing wrong? You know what you’re doing wrong.
In Summary
See what is, even and especially if it’s not what you want it to be. Be vigilant for the ever-present extraneous influences that could cloud your judgment. Pick the best, leave the rest, and be willing to sit on your hands when conditions are conducive.
Do your morning pages!
Happy 4th!
May the trend be with you!
Dave Landry
*I used to call this a “brain dump.” I did them years ago, quit, and restarted several years ago after reading about “Morning Pages” in a Julia Cameron book (The Artist's Way). In hindsight, I wish I had never quit!
