Wednesday, October 17, 2012
Ah, glamorous life of a trader... Shimmering monitors, scrolling news headlines, whispering TV, hot coffee... You are alert, in control, overseeing and managing complicated situations... Suddenly something big develops, you catch a whiff of a big move coming, you are among the first to hear fresh news and evaluate just how significant it is - and on a moment notice you spring to action, pounding the keyboard, sending orders, talking into your headset. By the time mere mortals come home from their mundane day jobs and find out about what transpired, you already profited from it and moved on. When they ask you about that event at the weekend party, you will remember (with some feigned effort) how it went down... And how you moved right on to that next big deal between Japanese electronics company and German concern, followed by FDA approving new miracle drug...
Fun, isn't it? Except of course it's nothing but adolescent fantasy that has zero to do with reality. Well, almost... TV screen is there, monitors too - and even coffee if you make it. News headlines are scrolling but by the time you got them, so did half of trading world... and the other half just doesn't care. Now, I am not going to debunk the parts about being in control etc.; we are on a somewhat different topic here so let's assume you know what you are doing when pushing those buy and sell buttons.
One crucial part of that image however is utterly and irreparably wrong: good trading is not exciting. It's boring. And it should be. More than that - if it's exciting, you are doing it wrong. Let's see why.
Some traders feel that they have to be in the middle of the battle, in the hottest stock of the day. It's almost as though unless they take part in the "water cooler topic" of the day, the trading day doesn't count. The truth is, however, those scorching hot stocks are much more likely to cause heavy losses than bring you profits. They tend to be extremely volatile, move with hard to handle speed, move to extremes that provoke emotional reactions - and if all that was not enough, they get halted. If you ever tried to find a bottom in one of those "oversold” stocks cut in half or so, you know what I mean. Ditto for shorting freight trains that just keep going. Do these deliver in the excitement department? No doubt - but that's where you have to ask yourself about your motivation for trading: is it profit you are after or the exultation of being a participant in a hot event? If it's profit (and if not, just stop reading this and go look for another huge mover to donate more of your money to), then remember that the amateurs evaluate profit potential while professionals gauge risk first. If you can't control risk properly, move on to another trade, no matter how tempting the opportunity seems. Remember also that it looks just as tempting to many others - do you want to be a part of the crowd which, as we all know never makes money?
Another frequently seen reason for one's trading being exciting is creative approach to each given trade. Yes, this is not a mistype (not that I am a stranger to those). You see, good trading doesn't call for the whole thinking process to happen during trade search, evaluation and development. All this process should take place during designing your trading system, at the drawing board. Trading time is execution time. You don't get creative during the battle when your decisions are more likely to be influenced by emotions and made in a rush - you execute pre-planned solutions.
This takes us to the idea of correct trading approach. It should include IF-THEN scenarios that make your responses pre-planned. Those scenarios are implemented in a form of setups that are nothing more than a set of recognizable situations and instructions how to trade them. In my case, those setups are chart formations; in yours it can be something else. Time for thinking, for creative process is when you create, test and tweak your trading system. Providing you have such setups in your arsenal, got them tested, tweaked to perfection and adjusted for the current market conditions, your trading turns into quite robotic affair. You are scanning for your setups and as soon as they appear, it’s purely a matter of execution. It’s pure eye-finger coordination, with no brain in-between. See setup – take setup – wait for the market to tell you what it’s going to be, stop or profit. Take either with no second-guessing. Move on to the next. Repeat. Repeat. Shut down software at the end of trading day, to fire it up the next morning and go over whole exercise once again.
Does the process described above strike you as boring? It should – because it is. You may sit for undetermined length of time waiting for your trade to come along and doing nothing. Learn to do that, because when you start pushing for trades just to break boredom, you start trading marginal setups. Automatic execution of your trades isn't very exciting, it makes you feel like a robot – and as far as your wallet is concerned, it’s a good thing because your actions won’t be influenced by your emotions. You want excitement? Get your kicks, whatever you do for them, after market close. Trading time is for profit, after hours time is for other stuff… like life, you know. Dull me with profits and I will yawn all the way to the bank.