The markets are down – and to me, everything looks for them to stay so for the foreseeable future, barring some inevitable end-of-year volatility – possibly a late relief rally and most likely some late-December tax-loss harvesting from the war chest of the 2020 bull.
Since we are where we are, and sitting on our hands also means having idle time on our hands, I shall jot down some thoughts for you to ponder on one of the prime qualities of a pro speculator. It is currently relevant more than ever. Its importance is easy to overlook without substantial experience of what mental and financial havoc it can wreak when it is not part of your ‘traders psyche’.
Simple but not easy
Anyone that makes consistent money in financial markets year in, year out, will agree that a well developed but simple strategy yields better results most of the time – simple … not simplistic, not easy. Simple approaches to achieving profits require you to do less, better … because profits do not come equally.
In fact, they come very asymmetrically – few opportunities or tactics bring big profits, and conversely the majority of opportunities or tactics will not enable you to make a killing. Few tactics or trading ideas will work well, conversely the majority of them will not.
Pareto would be proud if he had known that the majority of financial success over the career of a Wall Street Pro is achieved by relatively few great opportunities, seized properly, or by relatively few great tactics, applied consistently. This also has personal implications – as long as no stellar opportunities show up, no actions are needed nor desirable. The more simple a strategy, the less mental friction, stress, frustration.
We are our own enemies
As is often seen though on Wall Street, what stands in the way of application of such a strategy is the speculator himself – his emotions, his wants, his needs … his impatience. The importance of patience cannot be understated. It shouldn’t just be something you’ve read about, or something that you agree with but then continue to jump at any marginal opportunity anyway.
On a ranked list of qualities, your ability to patiently wait should be among the highest tiers. It is a crucial pillar of any discretionary strategy, whether patiently waiting means months, weeks, days or hours – the principle remains.
Many troubles in trading arise from a fervent romantic relationship with the ‘Now’. Having a relationship with someone brings with it expectations, demands on, needs from each other. When speculators are in love with the ‘Now’, they start demanding profits from it, impatiently, impetuously. They want to make money. They need to make money, now – this moment, this day, this week. Impatient traders demand action, and demand profits to happen now – from this pattern, from this opportunity, from this rally, from this breakout. That very one, on the screen.
The Now
The ‘Now’ is very important to many speculators, because it is where they are – not in the past, not in the future. It is visceral, colorful, dynamic, meaningful. What happens in the now has more significance to them, because it is tangible. More tangible than what they learned in the past, or what might come in the future.
In their mind, ‘Now’ is the birthplace of everything possible, achievable, of all potential. This very setup might be the one to make them rich. As with people, an intense but dysfunctional relationship of speculators with the ‘Now’ also brings with it projecting – decisions are influenced or even steered by what speculators want the ‘Now’ to be, not what it is.
This quickly turns a marginal opportunity into a once-a-year opportunity, a ‘meh’-trade into a great trade. And it ignores that money is made by consistently applying a strategy when the odds are in your favor – not on this single trade that you “might miss and then never see another again”. The result is the bane of the financial Pro … overtrading.
Overtrading
Overtrading simply is placing orders when you shouldn’t. This will cause losses, and even small losses can and do accumulate when they rack up one after the other. When things don’t work as they’re supposed to, when you stop making money, you have to pull the break, back out. Now, this either happens because you are breaking your own rules and are becoming careless, or because the market has turned sour. A lot of the time, it’s the former, so be mindful.
If you are sure that the markets are the issue – wait until the dust settles, until your strategy starts getting traction again. You need to detach yourself emotionally, and look at the market objectively. You need to understand that staying out at bad times is good. Trying to be in at bad times, just for the sake of being in, or because the ghost of FOMO always whispers in our ears, is bad. This may sound like a trivial statement, but anyone who spent a few years in the market trenches will agree that the simplest ideas can be the hardest to implement. The graveyards of the financial world are scattered with the bodies of those trying to force the market to give them what it didn’t have to give.
Unfortunately most people, including today’s smartphone traders and especially self-proclaimed “long-term investors” act in the stock market the way they would in a betting shop, or playing cards in a casino. No systematic approach, no rigorous risk control, barely a strategy that spans beyond betting (and yes, it is betting) on what they hope will do well, or what a few online articles say should do well. They’re swinging for the fences, willing to lose most or all of their capital … and many do.
Stepping out of the Now
Understanding the importance of patience, and sitting on your hands for certain periods, takes time and experience …. Going through a complete market cycle, including a 2-3 year bear market, will do the trick. How this understanding happens, is largely a result of your strategy.
Do you day-trade? Swing-trade? Do you scalp? Do you trade in stocks, commodity futures? Do you trade volatility (or lack of it) with options? Do you trade heavily-leveraged forex positions? Do you buy ‘value’ stocks? Are you a technical trader, a fundamental investor? Or both? For any possible combination, you need to define under what circumstances and in what environments your strategy will work. And it will not work all the time, none does.
This requires detailed and almost obsessive observing, analyzing, designing and synthesizing a set of principles and rules. Once you deeply grasp how your strategy fits within the framework of whatever market you trade in, you can ask yourself questions that will help you gauge the viability of how jumping in ‘Now’ will likely work out.
I myself capitalize on multi-month trends in growth stocks. When a bad market environment for my strategy (such as now) comes along, I might ask, “Have I been able to make money recently in buying such trends?”, “Are there even remotely viable odds for me to make money when institutional capital is not forming the very trends in the securities that I am interested in?”, or “Does this market look historically like any strong market that I participated in/ would have participated in if I would have been alive at the time?”
Don’t be in a hurry
There is a quote by Jesse Livermore, probably the most famous stock trader of all times. It goes along the lines of “There is the plain fool, who does the wrong thing at all times everywhere, but there is the Wall Street fool, who thinks he must trade all the time […] The desire for constant action irrespective of underlying conditions is responsible for many losses in Wall Street, even among professionals”. He also said “This is how to make a fortune: Patience, patience, patience is the key to success. Don’t be in a hurry”.
But my most favorite quote of his is “Remember this, when you are doing nothing, those speculators who feel they must trade day in and day out, are laying the foundation for your next venture”. They are placing the orders that form the very patterns that you will be looking for. Let them work for you.
Getting in sync
Consider the market as the conductor of your orchestra. You don’t just start to play your instrument whenever you feel like it. You have to wait patiently until the conductor signals you to. Else, you will literally destroy the orchestra performance.
The anonymous trader interviewed in Jack Schwager’s Market Wizards book series talks about getting in sync with the markets. In another interview of the book series, Wall Street legend Victor Sperandeo responds that in successful speculation, “just like in poker you have to know when the odds are in your favor.” Trend speculator William O’Neil often compared the markets to big-wave surfing – no waves, no opportunity.
Pro trader Chris Cathey said that with “boredom trades” you just write cheques to the market. Mark Minervini suggests in Trading like a Stock Market Wizard that in order “to trade with ease, you must learn to wait patiently until the wind is at your back. Why not wait for a breezy day to set sail?”.
These ‘soundbites’, taken from various practitioners whose approaches to profiting in financial markets vary widely, all share the same point – when there is nothing to do, there is nothing to do.
Emotional discipline and the subconscious
Sperandeo stated many times that the key to success in trading is emotional discipline. Emotional discipline is the ability to control emotional impulses (fear, FOMO, greed, anger, frustration, …) in the face of tempting but low-odds situations. It is the adherence to a well-thought-out plan, and executing it no matter what the circumstance. It is committing to never again saying ‘I know, but … just this once’.
Part of that plan of yours has to be patience, which is self-control, which is emotional discipline. Patience and discipline over long stretches produce consistent profits, and compounding of profits. A rule-breaking attitude, a desire to get rich quickly, or unfiltered listening to your impulses will become a polished titanium nail in the coffin of your trading career.
After gaining some experience in relating your decision-making process with your plan, and your predictions and actions with success or failure, you will learn to mistrust emotional impulses, and very slowly learn to trust your subconscious.
Your subconscious is nothing esoteric, on the contrary – it’s a synthesis of all your knowledge and first-hand experience that you have gathered throughout your studies, learning period, and career. The subconscious is what Daniel Kahneman means by “thinking fast” – the part that kicks in immediately after your impulses, with almost no need to think consciously and “slowly” about risk/reward, a focus point that keeps the Pro from engaging in low-odds opportunities almost automatically despite strong impulses.
Thinking and intuition
There will be a time coming until the subconscious almost overrides impulses, resulting in a professional attitude to markets and risk. However, for a beginner it is almost impossible to know the difference between the impulse and the subconscious ‘hunch’.
Until you achieve this stage, it is paramount that you systematically engage with your decision-making process, regularly writing your decisions down, thinking everything through attentively and slowly, always relating what you want to do with what you should do according to the odds of your actions, your rules, your plan, your strategy.
Make a weekend plan, where the markets are closed, where you can think with a cold head. Imagine what your trading idol would tell you in a given situation if they sat next to you. From time to time, turn off your active thinking and hear out what your instinct says. Don’t act on it though without comparing it to what the rules would demand.
No matter what you do, always protect yourself with stop losses. In this process, you are slowly building your subconscious, a type of mental filter, your “fast thinking” ability for the future. You are aligning your inner instinct with how the market reality works, essentially syncing your subconscious with your rules and strategy and the experience you have made by applying them, to be able to guide you in the right direction in the future almost without thinking.
Patience is Zen
Patience will become almost automatic, once you have developed a deep understanding of the markets, of your strategy, and of yourself. But you will have to put in the time.
Patience itself however is no axiom, no cause, no irreducible primary. It is post-hoc, a result, an effect – of a deep understanding of markets, of your strategy, of odds, of your own psychology, of running and living to fight another day, of selectivity.
It should not be enforced for its own sake. Do not stay away from an opportunity because you want to be patient. Stay away if the opportunity is marginal, if the market health is bad, if the odds are against you.
The Buddha said that the finger pointing at the moon is not the moon. Don’t stare at the finger, look where it points. Be patient, don’t commit to being patient. Know why, when, and when not to be.
