Thursday, November 10, 2011

be content with what is possible

This post is about the frustrations that market fluctuations generate for a trader and how to deal with them. My message is a simple one: be content with what is possible.
I have been in this business full time for nearly 30 years now. I have known many traders. The majority of them were only in the business a relatively brief time. Most of these left because they lost money but some left because, even though they were making money trading, they couldn't stand the constant frustration traders experience.
Markets move up and down, sometimes quite violently. People tend to evaluate their trading performance not simply in terms of profit and loss but also in terms of how much money they could have made had they been able to catch a substantial part of most of the market's up and down swings. In fact, I have known profitable traders who were constantly frustrated and unhappy because they felt that they had left so much money on the table.
Put simply, this is crazy behavior. What basis do you have for thinking you can catch a substantial part of the market's many swings? Sure, in hindsight everything is obvious and we can see how we might have become gazillionaires.
But we cannot trade the past. We can only make profits betting on the future. And people who bet on future price fluctuations must necessarily rely on very, very cloudy crystal balls. So as a practical matter you should count yourself fortunate indeed if you consistently capture a small part of any given market swing.
What does this mean for you? It means that you should be focused on one thing and one thing only when evaluating your trading record. Have you been making consistent profits or not? Forget about how much you might have made - those sort of calculations are not in the realm of what's possible. What's possible is steady, month-by-month, quarter-by quarter profitability. Some people can achieve higher rates of return on their capital than others, but so what? Don't worry about what other people do. Focus only on what you can do based on your market knowledge and trading skills.
I had a friend who was a member of the Chicago Board of Trade and later a member of the Singapore exchange. He had a profit goal he aimed for each year. When he reached it he stopped trading for the rest of the year. It didn't matter whether it took him two months or six months or eleven months to reach his goal. When he reached it he stopped.
For him trading was just a way to make a good living, not a test of his value as a person or an affirmation that he was smarter than everyone else. This is an example of sane behavior in a business where various forms of insanity are the rule, not the exception.


MC said...

couldn't agree more, well done Carl ! Cheers. MC

observer said...

so true. thanks of writing it down.

Joe_in_Indiana said...

Very good Carl!

Need to save this one as a reminder!


modernarms said...

thanks Carl. I'd rather not trade at all then TRY to catch every move. I find that the less I trade, the more successful trades I make, and I don't trade in the afternoon because I don't like to give it all back. Thanks for sharing Carl.....

mfm9800 said...

I hate clich├ęs but sometimes they say it all. Like, "Easier said than done".

The market is a zero sum game and I don't want to be the zero. I just want some of the sum. But it's human nature to wonder if you couldn't have extracted more.

Wise words nonetheless. Maybe it's more like, be happy with the gains you get WITHOUT going too far out on your risk spectrum. Be happy within the risk profile your trading delivers. And remember more profits always means more risk.

BullandBearWise said...

Thanks for bringing up trading psychology. It’s all a lot tougher than it looks on TV.

First off, you have to accept that there’s disappointment in EVERY trade. You’ll never buy and not watch it drop and never sell and not watch it go higher. NEVER.

Second, the joy of profitable trades is always more muted than the pain of losing trades. And it gets worse as the years go by.

That said, one has to understand why they trade. It satisfies the need to be “in the game.” Try not trading for a while. There’s an addictive quality to it that you have to master and control, just like any other addiction.

If you can get 51 good trades and 49 bad trades, you’re still winning the game (though you may still be losing money).

Finally, don’t trade with money you can’t lose.

pej said...

Thanks Carl for this very sensible post.

Sasi Uppuluri said...

Thanks Carl. Excellent post. Amazed.

Zoe said...

Really enjoyed this blog. Thanks for posting.

Win said...

I learned from this post, as I do from so much that you post. Thank you again.