Self Appraisal -A Story
*A little boy went to a telephone booth which was at the cash counter of a store and dialed a number.
The store-owner observed and listened to the conversation:
… …
Boy : “Lady, Can you give me the job of cutting your lawn?
Woman : (at the other end of the phone line) “I already have someone to cut my lawn.”
Boy : “Lady, I will cut your lawn for half the price than the person who cuts your lawn now.”
Woman : I’m very satisfied with the person who is presently cutting my lawn.
Boy : (with more perseverance) “Lady, I’ll even sweep the floor and the stairs of your house for free.
Woman : No, thank you.
With a smile on his face, the little boy replaced the receiver. The Store-owner, who was listening to all this, walked over to the boy.
Store Owner : “Son… I like your attitude; I like that positive spirit and would like to offer you a job.”
Boy : “No thanks,
Store Owner : But you were really pleading for one.
Boy : No Sir, I was just checking my performance at
the job I already have. I am the one who is working for that lady I was talking to!
This is called “Self Appraisal”
Better to be Profitable Than Right
Mark Cook, a well-respected trader and trading educator from rural Ohio, for many years has stressed that traders need to lose their egos before getting into trading futures markets. He is also an advocate of survival in futures trading. One must survive in this challenging arena before one can succeed. I enjoyed listening to Mark at a trading seminar a few years ago. He even used to wear bib-overalls (with no shirt) at some of his trading seminars – just to drive home the point that trading futures is not easy and that ultimate success takes a lot of hard work.
My good friend and respected trader and educator Glen Ring also espouses the notion, and may have even coined the phrase, “it’s better to be profitable than right in futures trading.” Those who know or have talked to Glen know he, too, is a no-nonsense, no-hype trader who takes a yeoman’s approach to the business. When asked what direction a specific market “will” go in the future, Glen is never afraid to say, “I don’t know,” before he adds that, “successful trading is not a business of predictions but one of probabilities based on past price history.”
It’s been reported that people who get into the endeavor of futures trading tend to be of higher-than-average intelligence and have more aggressive personalities – called “Type A” personalities. Having higher-than-average intelligence certainly can be advantageous in any field of endeavor. However, in futures trading, possessing the “Type A” personality can be a disadvantage. Reason: More aggressive and competitive people do not like to lose and do not like to be wrong. It’s a time-proven fact that trading futures is about absorbing numerous losing trades. But that does not mean “Type A” personalities cannot succeed in futures trading. Those with the competitive and aggressive tendencies just need to realize they possess those traits and then manage them properly when trading futures. (My wife says that I’m a “Type A” personality, but I say I’m not. I just know I’m right and she’s wrong – just kidding!)
Most have heard the simple trading adage, “Cut your losses short and let your winners run.” What this also implies is that during any given year the vast majority of futures traders will see more losing trades than winning trades. Yet, some can still realize profits by getting out of the more numerous losing trades quickly at small losses (by setting tight protective stops), and allow the fewer winners to run and accrue bigger profits.
Just think for a minute about the futures trader who does not want to lose his or her ego. This is the trader who likes to be right and cannot stand to be wrong. In fact, this type of trader will probably go to great lengths just to be proven right. What does this mean when executing trades? It probably means that the trader who hates to be wrong won’t be willing to get out of a losing position at a small loss. Instead, this type of trader may pull a protective stop when in the heat of a trade, or may not use protective stops at all – in the hope that he or she will be proven correct. This type of trader is likely to see a small loser turn into a big loser, and might even get a margin call from his or her broker. And if this type of trader repeats this scenario and keeps absorbing big trading losses, he or she will eventually be forced to exit the endeavor of futures trading. This is also the type of person who would likely blame the markets or the broker for his or her lack of trading success.
Be a humble futures trader. If you are not a humble futures trader now, the markets will eventually make you one – and very likely sooner rather than later. I guarantee it. There are few guarantees in futures trading but this is one that I can make.
Market Metaphors and Perception
Some of the most powerful lenses are the metaphors that we use in describing markets. Consider the following:
* A trader views the market as an enemy to be conquered;
* A trader approaches the market as a puzzle to be solved;
* A trader sees the market as a paradise of potential riches;
* A trader regards the market as a mistress to be wooed;
* A trader views the market as a dangerous minefield;
* A trader looks at the market as a video game.
How do these metaphors affect our trading? Our emotional responses to trading? How would being aware of our metaphors–and shifting them–change how we trade and how we experience our trading?
Greed, Fear and Irrational Behaviour
The field of Behavioural Finance attempts to interpret and understand why people behave the way they do with financial activities. It is an investigation of how people’s decisions are affected by cognitive errors and emotions.
Some key points in Behavioural Finance are:
- The ‘Fear of Regret’ – where people beat themselves up about incorrect decisions or errors of judgement. They avoid this pain by holding onto positions that are moving against them, despite the intelligence that they should exit the trade while the loss is small.
- People are more upset by potential losses than pleased by wins.
- People perceive chance wins as trading success.
- The more people win, whether by method or luck, the more confident they become. This is very dangerous for those who win by luck.
- People are more exuberant and optimistic on bullish days and depressed and pessimistic on bearish days.
- People tend to make irrational decisions reflecting biased or wrong beliefs. People have a tendency to cling to beliefs, even when presented with evidence to the contrary.
It is important to understand that emotions and intuition can lead to poor decision-making at times. Never trade on gut-feeling, intuition or untested ideas. Don’t desperately try out new ideas in the hope that they will be the solution to your trading woes. These un-researched and under-tested ideas lead to disappointment and poor decision-making at times when calm and order are required.
To minimise the risk of making irrational or stupid decisions in trading we must set up guidelines and rules. Trend trading with a written plan or system is a crucial factor in being successful in the market. A second crucial factor is the patience and discipline to follow your system without doubt or deviation, even when it appears times are tough.
If you trade without a system you are unlikely to be successful. The concepts behind Behavioural Finance indicate that if you have no plan, but win some of the time, the wins will appear more significant, you will develop over-confidence in your abilities, with the result that you will begin to take greater risks.
Ultimately, you will lose if you follow this path. You must know in advance what you will do in any market situation. Never place yourself in a situation where you are making decisions on the run – faced with a plummeting market and no pre-determined strategy to cope with such an event.
Most people tend to overtrade – I doubt there is one successful trader who would not admit to having over-traded at some point in their trading career – it is a common fault among new (and not-so-new) traders. Following a loss, they become fearful of more losses, so they ‘revenge’ trade to try to win back the losses. These trades are usually ill-thought out and result in more losses, which results in more fear. Eventually these traders may self-destruct and quit the market, disillusioned, broke and believing that trading can never work.
People who overtrade and win are at risk, too. The euphoria leads them to jump into more and more trades without proper analysis. They expose themselves to too much risk, believing they are invincible.
Generally, the more often people trade, the less they earn. There is a perception that short term trading is less risky and more profitable than long term trading, because you are getting out of trades earlier and naturally have stops closer to your opening position. However, the opposite tends to be the reality. You are risking your money more often.
Trend trading with a set of rules – a checklist for every scenario – will allow you to trade without distraction or doubt. You will be confident in your decisions and will be happy with the result. A loss taken with the conviction that it is the best course of action need not be an unhappy event. It builds confidence in your ability to make correct decisions for your trading style and personality.
To be successful in the market, you must be systematic in your approach. You must have rules. Follow those rules. Don’t be distracted by outside news and events. Have a strategy in your rules to deal with such things.
Trend trading is a skill and strategy that can be used in any market, be it stocks, commodities, futures or forex. Learn it well and you will succeed. Remember that your aim should not be to make money in the markets but to be the best trader you can – then the money will follow.
Take heed of the words of Richard Driehaus – “Everyone wants to be rich, but few want to work for it.”
Most buyers and sellers in the financial markets do so without any plan, discipline or risk management. It takes strength of character and courage to do what others are notdoing, but ultimately, you will be the winner.
Don’t trade to be right – trade to win!
Lack of Patience
That may explain why I believe that for any given time frame, there are only two or three really good trading opportunities. For example, if you’re a long-term trader, there are typically only two or three compelling tradable moves in a market during any given year. Similarly, if you are a short-term trader, there are only two or three high-quality trade setups in a given week.
All too often, because trading is inherently exciting (and anything involving money usually is exciting), it’s easy to feel like you’re missing the party if you don’t trade a lot. As a result, you start taking trade setups of lesser and lesser quality and begin to over-trade.
How do you overcome this lack of patience? The advice I have found to be most valuable is to remind yourself that every week, there is another trade-of-the-year. In other words, don’t worry about missing an opportunity today, because there will be another one tomorrow, next week and next month … I promise.
I remember a line from a movie (either Sergeant York with Gary Cooper or The Patriot with Mel Gibson) in which one character gives advice to another on how to shoot a rifle: ‘Aim small, miss small.’ I offer the same advice in this new context. To aim small requires patience. So be patient, and you’ll miss small.”