by Dave Landry
Recently, while looking at everyone complaining on Facebook-whatever happened to “look at me, I’m traveling the world while you’re busy working,” pictures of cute kittens and ugly baby grandchildren?-I received a pop-up chat from a chap in Brazil. He’s writing a piece on why there aren’t more profitable and consistent traders and was looking for my take. The short answer is that the real world and the trading world are two different worlds. And, quite frankly, we’re not made to trade. Let’s explore this further.
I once asked my wife Marcy to check out my latest column. She said, "You say a lot of the same $h*t." Well, that's true. So, longer-term readers will notice that this column “beats the dead horse.” I’m glad that you noticed. And, I’m going to keep beating that dead horse until everyone gets it. Judging by my inbox, I’m going to keep up with the SSDD for a long time—God willing.
We must apply a high degree of logic in our daily lives to survive and prosper. Yet, in trading, there often isn’t any. People buy and sell markets for a variety of reasons. If you’ve been reading this column for more than a day, then you’ll know that I often quote Marian McClellan (the late mother of Tom McClellan):
“People buy and sell stocks for a variety of reasons. Some people buy when they have money. Some people sell when they need money. And, others use far more sophisticated methods.”
The point is that many times their often illogical reasoning-which has nothing to do with the markets-helps to move markets. This is why it is more difficult for more intelligent people to become successful traders. They think there has to be some sort of logic, but often there is none. This is not to say that trends and reoccurring tradable patterns do not exist. They do. It’s just that sometimes markets will do illogical things.
One way I wrap my head around all this is to monitor my own emotions and mistakes. Am I dropping F-bombs? Did I do something stupid? Or, am I tempted to (confession, I literally almost just jumped the gun on a signal but resisted and forged ahead with this column)? I also have an unfair advantage because my educational business allows me to often see the mistakes of many others. This serves as a constant reminder of what not to do. It also reminds me that there is a lot of emotionally charged trading out there.
In the real world, you can’t be wrong very much. You can’t be an engineer and have half (or even one) of your bridges collapse. If you’re a doctor, you can’t kill over half of your patients. However, in trading, you can and will be wrong quite often. In fact, with a trend following methodology, you can be wrong more than half of the time* and still do exceptionally well. And, by the way, the only way to profit from a trade is to capture a trend.
In the real world, you must take action. Unless you’re a toll taker, you're not going to get paid to sit on your ass. Yet, in trading, often the best new action is no new action. You must only trade when conditions are conducive to your methodology. Trading in less-than-ideal conditions will all but guarantee you a loss. Sometimes, you just have to wait. This goes against human nature, at least for the motivated like you.
In the real world, provided that you work hard, you receive a steady paycheck. However, in the markets, you can work hard and do everything right but still lose money. It’s an odds game at best. Provided that you have a conceptually correct and viable methodology, then you must follow the process and not be “end goal” oriented. Learning to accept losses even when you did everything correctly is difficult. Many soon get frustrated and begin seeking out new methodologies. Occasionally, they will have some brief success but will go right back to “Grail hunting” as soon as they hit the inevitable string of losses. This is why you don’t see many consistently profitable traders longer-term. They give up and end up perpetually out of phase, bouncing from one methodology to the next.
This is not to say that hard work does not pay off longer-term in trading. You must work hard to find the best opportunities and follow your methodology. You must work hard to be process oriented and reward yourself for following the process regardless of the outcome. You might want to write that down.
In the real world, we seek bargains. To run a business, you must seek out the lowest prices possible. Quite simply, keeping cost in check might be the only thing that makes you successful. This is especially true if you’re in a low margin business. However, in the trading world, as a trend follower (and fyi, the only way to profit from a trade is to catch a trend), you must avoid seeking bargains. A market that appears to be “low” will often go much lower. As I preach, "it’s always darkest right before it gets 'more dark.'" The Nasdaq might have seemed cheap in ’01 when it was down over 50% but It went on to lose another 34%. If you are buying, you must wait for a market to rise both over the somewhat longer-term to establish a trend and over the short-term to trigger the buy.
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In the real world, experience is the best teacher. You learn from your success and mistakes. In the trading world experience is also important but, unfortunately, the market can be a bad teacher. Sometimes you'll do something stupid and make a lot of money. It’s human nature to attribute this to skill. Now, suppose that you are prudent and follow your system and make a lot of money. You can’t let this go to your head. Maybe current conditions were just conducive to your methodology. On the flip side, no methodology works all the time. There will be blood. Surviving the bad times and resisting the urge to join the “Church of What’s Happening Now” is key. Again, I see many who remain perpetually out of phase for years, even decades.
The market often “teaches” you not to use stops. Just last weekend, I was at a cocktail party where a gentleman told me that he "no longer uses stops because 'they' are out to get him." The longer-term bull market has kept him alive. Unfortunately, as I preach, "that'll work until it don't." The market will also teach you to take small profits, to pick tops/bottoms, and to trade in less-than-ideal conditions. I can go on and on but I don't want to bore you (too late?). The point is that you’re often being taught by a bad teacher.
Quite simply, we are not made to trade. Trying to apply logic, attempting to control the situation, bargain hunting, and seeking constant action keeps many from becoming a consistent and successful trader. Embrace this and accept this you'll beat the odds!.
This column was originally written nearly 2 years ago (May, 2016). I find it interesting that a lot of the concepts discussed-outcome biases, being process oriented, attributing good luck to skill and a bad process to bad luck were covered in detail in Annie Duke's recently released Thinking In Bets. See recommended reading for more on this.
*Statistically, a pure longer-term trend following methodology is only right about 28% of the time. This is why I have taken a hybrid approach-trading for both short-term and longer-term gains-in attempt to beat those odds.
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