Can you trust your eyes? What trading can teach you.

Honestly, I have been wanting to write about this topic for a few days. I hesitated earlier in the week as I pondered how my trading week was going to play out: I was due to attend a conference and had also taken a view about trading while a lot of event risks were present with interest rate decisions and another EU emergency summit at the end of the week.

If trading teaches you anything it is that you will not be right all of the time. It may be that you are not right most of the time. Yet, the objective of trading is to make money, which means your trades being right more than they are wrong, at least in terms of amounts. It may not be stellar performance but losing $1 and gaining $2 is a winning record; keep that up and you will see a better balance sheet. If it reverses, your balance sheet will be worse. Simple? Not at all.

One of the really hard things about trying to stay in an activity such as trading is realising that the same essential information about price movements can be interpreted by different people in many and quite contradictory ways. For someone trained in economics, such as I am, it can be that the adage about ‘on the one hand…on the other hand’ is always at play and you do not need anyone but yourself to feed you contradictory views :-). Keeping things simple or no harder than they need to be can be difficult. Traders often talk about ‘trading the charts’ or ‘trading what you see’. But what you see is often conditioned by what you expect, and you can make yourself expect whatever you want. The market, however, will decide what will be.

For any given financial instrument or currency pair, the market has many points of support and resistance. Over time, however, you realise that there are many levels to which prices return, from above or below, and traders are trying to make educated assumptions about what directions prices will take. You may have a personal bias about direction and while you may be much better off playing both sides of the market, you are unwilling to do so. That unwillingness–implicit or explicit–will affect what you really see.

Economists talk about markets as having two sides, supply (sellers) and demand (buyers), and about the efforts of these two sides to move prices to and from points of equilibrium (not a third side, but a third element, I would say), which may or may not be stable or last very long. Trading shows you a lot about these three sides or elements. The buyers and sellers have different objectives, time horizons, funds/ability to move price, information, and more. As these factors play out, the market moves between various price points. The moves can be very clear and sometimes dramatic, in an upward or downward direction. But that clarity is really after the event. When you are getting into a trade you have to anticipate where the move will go. What does your reading of chart patterns tell you? Just because you were right before, there is no assurance that you will be right again.

While you are figuring out what to do you may also see that the market is doing the same. While the market is going through some period of indecision, prices may move up and down but remain in an essentially sideways direction. That sideways movement is not necessarily in a very narrow range and one of the many difficulties a trader may have is to see that markets are really moving sideways, but in a wide range. While it may be sensible to trade with lighter positions and wider expectations for price movements, that may not be too obvious until it is too late :-(.

What to do at the extremes of such sideways movements–sell high, buy low–may not leave you the room for maneuver you want if you see prices in the middle zone. Of course, you may not see the movement as sideways, which may come from the time horizon that you have adopted, and feel that you have a clear directions with which to work.

Because you want to catch the moves and ride them profitably as long as you can or wish to you may feel compelled to see something that is not there and initiate a trade that will go bad. But, if you find you are on the wrong side of the move, then you have to see the need to try to get off before sliding into the abyss.

Yet, sometimes, the best strategy for a trader is to be inactive, either because one’s reading of the market says the desired trade is not there, or because the way that prices are moving makes one uncomfortable or do not seem understandable and time and energy are not available to work to a better understanding. (Two professional traders I know and respect have in recent weeks talked about how fear of what was going on in the foreign exchange market recently made them stop trading for a while–a day, a week, it does not really matter.) Because one may be trading on a regular basis, and its outcome affects livelihood, not trading can seem like the wrong thing to do because there is no way to make money. (You can take the view to shuffle up and deal and keep at it, but if you feel wrong, you may end up regretting playing the cards dealt and want to demand quickly a redeal.) Because the observe is that there is also no chance to lose you may be more at ease with that certainty. So, although trading is essentially about trying to make money, it is quite alright to not trade sometimes. What you do instead is a matter of personal choice. You can watch charts and see how markets develop. But that may involve elements of “What if I had traded this?” You can go off and do something else, which may be better in giving a chance to stand back and review many things or even offer a fresh outlook. It’s also a time to remember that trading is not about screen time: a winning or losing trade can happen within minutes; hours could be spent in front of the screens and prices barely move. On a day such as yesterday, when it rained all day and was grey and miserable, one may feel different about leaving the screens than on a day such as today when there is sunshine (even though outside it is bitterly cold).

In many aspects of life it is hard to trust your own eyes, keep your own counsel and not be swayed unduly by the views and observations of others, especially if they have had a tendency to be right much more often than they are wrong. Trading is very much like that. But, there is a lot to be said for developing an internal rhythm that is really driven by your own observations. What matters is to rationalise your decisions and try to not stay with them too long if they are proving to be wrong. That is what a stop-loss is supposed to do: it should limit your risk of loss by marking the point at which your assumption is invalid. I emphasise the personal assumption because others cannot see what risk profile you have, or the amount of money with which you are playing, or the time horizon that you wish to adopt. All of that is individual. So, a trader then has to develop rules that fit his or her profile and personality and stick with them. You trade your way. I trade mine. My trade should not matter to you and yours should not really matter to me.

It is important to find some way to feel satisfied with what you are doing. Trading yanks your emotions to an enormous extent. When a trade is done and profitable, one can often look back and say “I could have made more” but it is always humbling to remember that luck as well as judgement have been at work in your favour. If they had gone against you that you could have lost more. Dr. Brett Steenbarger (a clinical psychologist turned professional trader) has some useful comments on the importance of the emotional element of trade performance, and dealing with the three vices (perfectionism, ego, and overconfidence).

A good piece of advice offered by Dr. Steenbarger and shared with me several months ago was to aim to “focus on being profitable for the week – individual trades may go against you and individual trading days can offer little opportunity … there are enough fresh opportunities in a week to make it reasonable to set a goal of being profitable for the week. You won’t reach your goal every single week, but the mere act of setting the goal keeps you focused. When you really push yourself to be profitable every week, you don’t let individual days get away from you. And when you don’t let individual days get away from you, you start managing each trade carefully to ensure that your largest loss won’t exceed your largest gain. Time and again I’ve seen a consistent sign of progress among developing traders: they stop digging themselves into holes.” That can also be translated into trading when it is right for you and not when it is wrong, or when your eyes see what is really going on, not what you would like to go on.

Another view offered earlier today, and attributed to trader, David Kyte was “Trading is very simple; either you make money or you don’t make money. I wasn’t depending on anyone else. When you work for someone else, if you make money somebody gives you a bonus and if you lose money, somebody else pays your salary. When I was working for myself, it was the ultimate meritocracy, I was worth exactly what I made, no more, no less.”

Because retail trading can be an activity done without the benefit of someone regularly looking over your shoulder and saying “What are you doing?” you need to develop a set of real eyes that see better what is really going on as well as a set of virtual eyes to watch over you.

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About The Grasshopper

Professional international economist, recently retired from an international organization. I use blogging as a way of organizing my ideas and thoughts about a range of topics. I was born in Jamaica, and spent many years being educated, living, and working in the UK. I lived in the USA for a few decades, and worked and travelled abroad extensively. My views have a wide international perspective. Father of girls. Also, married to an economist.
This entry was posted in Economics, Education, Financial markets, Human relationships, Life styles, Private enterprise, Technology and tagged , . Bookmark the permalink.

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