As I mentioned earlier this week when I wrote ‘Making connections’, I would get back to some of the conversation topics that struck me from being with a group of traders the past weekend. It is perhaps fitting to try to do that at the weekend. Part of the routine–and I shy away from saying ‘discipline’–that I have tried to develop since I began trading is to take stock of the past week from a trading perspective when the weekend comes along. Whether the week has been good or bad in terms of trading, there is a sense of exhaustion and it needs a day of not dealing with 24-hour price movements–and you have them in your head even when you are not actively trading–to try to get that out of your system. You try to prepare for the week ahead but then have to assess how things worked out.
Those who trade financial assets for a living know that the maxim of the professional trader is “You are there to make money”. Nothing complicated about that? Except that you are doing so in a minefield, a quagmire, a pool of quicksand. As one trading coach shared recently:
“The market is like a beautiful woman—endlessly fascinating, endlessly complex, always changing, always mystifying.” (taken from The Money Game by George J. W. Goodman, published 1976 [Goodman was a.k.a. “Adam Smith”, a pseudonym which he adopted while writing about the stock market]).
I do not make a living from trying to get trade calls right publicly and do not have to deal with an audience–small or large–ho heard me say “Go this way” only for the market to go the other way. It was humbling to read one professional trader who shared what had happened to his equity position over the past year and that he had been getting a lot of hate e-mails about the directions suggested by his analysis.
The market is also so large–estimated at some US$ 4 trillion a day–that it is impossible for small traders (retail or even institutional) to affect market direction. The challenge then is to fathom where the market is heading, and go with it, either in continuing a direction or taking a new one. It is easy to be wise with hindsight. It is hard to be right at the time, and right is relative, depending on in what time frame you operate. In a five-minute span you may be up. In a 30 minute span you are down. Over several hours you are up again. At the end of the day you are looking at a losing position. But, when were you or are you planning to exit the trade. Taken early, that winning position may turn to be bigger if you had waited. Left longer, that losing position may turn into a bigger loser or turn into a winning position. It may seem easy to get part or even all of a move, but it takes patience and courage to stay with a move for a longer period. It is hard to see sometimes sizeable unrealised profits come and then go and not take them until the right levels (profit targets) are reached, or even get to a position where you merely break even, or get hit for a loss because you stop-loss is reached. A lot of discipline is involved, as is a lot of ‘pain’. That is quite separate from when ‘circumstances conspire against you’. One trader this week lamented how a trade had been closed out even though the price had never been touched. Was that a brokerage playing fast and loose? Was it a technological problem? Whatever was behind it, the concerns of the trader have to be resolved and he or she may have much less confidence going forward that something similar wont recur.
No doubt, success is elusive, even for professional traders, and the learning curve can be long and shallow. Foreign-exchange brokerages say the success rates for retail traders are comparable to active traders in other markets. Studies indicate that some 20-30 percent of retail traders are profitable, ie more lose money than make it. But, part of that analysis needs to be considered over an appropriate time frame: the longer you can stay in the game, the better you are likely to do.
Yet, the ‘success’ of traders as measured by income gain and its consistency is worth comparing with what ‘success’ may mean in other fields. For example, moving up a career ladder means that you have to accept that very few places exist at the top, so ‘success’ and ‘satisfaction’ have to be measured in ways other than where one reaches on the ladder.
Retail traders are also believed to be better at navigating markets that are in ranges–as has been the case for much of the past 12-24 months–rather than those that are trending. As the study noted above mentions, many individual traders are drawn to volatile markets, which can be difficult to navigate: “When you get strong winds, sailing becomes a lot more fun. But it can become dangerous very quickly.” But, retail sentiment is important if only so that the market can exploit it. Crowds move markets and crowds are often wrong at major market turning points. When crowd sentiment is overwhelmingly positive or overwhelmingly negative that often signals that the trend is exhausted and the market is ready to move powerfully in the opposite direction. Sentiment can be a contrarian indicator and has long been a tool used by equity, futures, and options traders.
Some people trade for themselves, while others trade for themselves and for proprietary interests. Some people trade small amounts (mini-lots, $10,000 positions). Some trade larger amounts (standard lots, $100,000 positions). Some people trade for a few hours only, others trade almost constantly. There is no pattern and there need not be. Each person has different objectives and opportunities. It also takes time for each person to figure out what works best for his or her circumstances, and those circumstances can change and then force a change of rhythm. These changes are not trivial and may take quite a good amount of time to rebalance. Your status also matters: single person; in a relationship; married with no children; married with children, etc. If you are trying to trade for a living, do you have other sources of income? A whole raft of things have to be considered.
From speaking to professionals much emphasis is placed on the need for a clear focus and the dangers of splitting attention. It is ironic that old-style trading rooms were noisy, bustling places, while in the era of online access, one can trade in the relative quiet of an office, with personal choice of music or news source being the only intrusion. Better or worse? You have to create an environment that works. You have may less physical contact with other market participants, but can telephone or online contact be an acceptable and workable substitute? I liked much better the relatively laid-back setting of being able to trade in the open air from a deck overlooking a sunny tropical garden in Barbados compared with hunkering down in a basement office during the cold, dark days of autumn and winter in the U.S.A. Maybe when spring is here again, I will revert to trading on my deck. But, will the intense heat and humidity of the summer make me wish to get back down into that basement?
Sometimes trading is very active–markets are moving fast; other times, trading can be like watching paint dry. Some say that’s time to go to the gym or take a walk. I recall the difficulties one professional trader was having while trying to do that as his regular job but also trying to set up a new venture. He was honest to describe how jetting across continents as part of his regular work was also playing havoc with his trading. None of that makes trading unique, but as with other tasks you need to be aware of the consequences. When you have other things to do you have to decide what to do with your trade. If it’s time for my first grader’s ballet class just as an important piece of data is released, what should I do? I take her to class on time, of course. I then return to see whether I had wished I had delayed. But, you have to move on from focusing on whether one good or bad thing occurs.
For many traders, trading needs to be active; it’s not usually about letting a position sit for weeks or months, but being completed within hours, or a few days. But a lot can change in a very short time and part of the allure of trading is being able to exploit those changes. It’s also one of the dangers. It can pay to be nimble. Machines can execute orders as instructed, but it is a complex operation to ‘manage a trade’, which can demand a good amount of discretion. As situations develop, you may need to intervene. Do you add to positions or lessen them? Do you decide to cut a losing position early? Do you want to extend the target set for a winning position? The mechanics depend on what you see and feel.
While I have thought much about what trading means as a work activity, I know that those who do other kinds of work think much about what that means. When I overhear the conversations of former colleagues I know that a constant battle rages over the merit of the job being done. “My talents could be better used elsewhere,” is a common remark from someone who has spent a substantial part of their working life in one or other institution. But, will they give it up? “I have bills to pay,” gives a good signal of what will be the answer. No criticism of that realistic approach. I am sure that it would be easier to deal with work that brings in a regular salary than to see the income go up and down.
As if dealing with the mechanical and emotional aspects of regular trading were not enough, one retail trader asked during the week “Why are we doing this? What is its social value?” That’s not something I want to tackle today, but as with many elements of activity in the financial world, it’s a topic to really consider hard.