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 many reasons, says Dave Landry, founder and president of DaveLandry.com. More Trading Lessons every Friday.
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.
Control, or lack thereof
In the real world, you must have a high degree of control to be successful.
However, in trading, you have no control over what the emotional market participants will do next. You can only control your reaction to it.
Being right vs. making money
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.
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And, by the way, the only way to profit from a trade is to capture a trend.
Ready, set, action?
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 butt. 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 person 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.
Get paid to trade?
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 you must avoid seeking bargains. (And FYI, the only way to profit from a trade is to catch a trend.) 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 2001 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.
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. The point is that you’re often being taught by a bad teacher.
So, why aren’t there more profitable and consistent traders?
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!
May the trend be with you!
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