“Is trading difficult?” my second grader asked me on Thursday afternoon. “Yes, sometimes,” I replied. Acknowledging that something is difficult is the beginning of much understanding: it applies to most, if not all, things. Philosophy moment over. Why is trading difficult? Well, it’s about people, innit!
That it’s about people scratches the surface. It’s what the people are doing that matters: I am not going to get into a debate about whether trading is gambling or speculation, but it is risk-taking, and can be on an enormous scale, whether done by an individual or by a bank. Size matters as far as ‘people’ are concerned: I am not going to get into an argument about whether the markets are rigged by big banks, other financial institutions, and government against retail traders. As one Twitter commentator (@Forexlive) mentioned during the week, “Oh, what it is to be big!”. If you are trading lots that are US$1 million each, a 1 pip movement is good money. Success and failure affect the way the people react: I am not going to get into what is a good performance–the bottom line is risk management. Someone posted a video of a futures trading flipping out as he ‘lost it all’: rising to the clouds or sinking into the abyss matters.
But, being about people, we have to talk about ‘who has game’ (as opposed to ‘who is gaming’). Difficulties come from self-doubt. Can you go ahead without support for your view? You need to, because no one has a crystal ball and know one is always right. But, views of ‘experts’ affect people’s trading–big and small alike. So, I admire the ‘experts’–big and small–who puts their heads above the trenches. It takes a lot of courage or self-confidence to put your views out in public, whether or not the person doing so is actively trading as they analyse: outcomes will tell if the person has got it right, and raise or lower their credibility. But, if you are not equally confident in your assessments then trading gets difficult, as you waver between self-belief and countervailing options.
Getting it right in trading is about gauging sentiment properly: we are trying to benefit from our understanding of human behaviour. Why will there be more buyers or sellers and how long can the contest favour one side over the other? That’s what we are trying to understand. Depending on how you trade, your need for good understanding can be very short-term–a few minutes or much less–or longer-term–hours, days, weeks, even months. Behaviour seems more consistent in the short time frames, so hoping to stay with wavering sentiment longer than a few days makes life very difficult. That is why some prefer to just be day traders: what happens within the sessions of the various markets may be easier to follow. Close the book. Start again tomorrow.
This week gave me a wonderful example of how hard it is to gauge sentiment and why trading can be immensely difficult. Some banks in Europe decided to bid for funds from the European Central Bank. Some policy makers, in particular, in the US, Europe, the UK, Australia, and Japan spoke about how they perceived economic and financial prospects in their country or region. If the results of these events had been as market participants had expected, we should have seen very little change: if markets are forward-looking, and anticipate correctly, then expectations being confirmed should mean you have the right positions in place. The fact that markets turned meant that there was a surprise. I will spend a little time over the weekend to try to see what the surprise element was, but I know it will help me only a little. Bottom line: markets turned, at least for a few days, and if I was in the same direction as the turn, good for me :-); if I was in the opposite direction, I have to decide how long things will move against me :-(.
Many other things make trading difficult. The obvious problem of getting sentiment and direction right is one difficulty. Another is managing patience. Some suggest that when a trade is in place, your ‘bet’ is placed, so you may as well go for a walk, or head to the gym, or take a nap, or watch a trading video, waiting for the outcome–stopped for a loss, or your profit target is hit. You can also be analysing charts or reading, preparing for another trade. Things moved a lot on Wednesday this week, then on Thursday, it seemed that watching paint dry was the order of the day. Markets were digesting the moves, or tightly consolidating (in technical jargon). For hours, it seemed, things barely moved. I decided to go to a kick boxing class: I had a great workout and was energized (not least because one of my trades had moved nicely while I was out). But things would change. As a trader named Scott Cisco quipped on Friday morning “A consolidating pair is much like the 3 Martini woman at the party. Nothing yet, but there is enough potential to keep an eye on her…” [It made a lot of people laugh and I know some will squirm, but blink and let this one pass :-)] A lot of pairs broke from consolidation, and continued the pain or gave more gain that began on Wednesday, almost all day into the close of business. Day done. Week done. Thank you.
Three martinis would have done very nicely last night, as I pondered the week. A leisurely, indulgent drink or meal enjoyed with some friends or family seemed perfect. The working day and week was over for me, so why not? Not because it’s Lent, I could pass on the steaks and lobster. But, alas, it was not to be. Instead, I amused myself planning a Saturday surprise breakfast of Jamaican johnny cakes and frittata.
So, difficulties aside, life goes on.