What is Trading? Trading is a game of skill. It is also a game of force. It is also a game of relative speed. It is a game of judgment and evaluation information. These are obvious things to the observer of the activity of trading. All of these things go into the algorithmic computer programs which are used to trade the markets.
Well, if that is the case – how is it that when you ask a trader what is the most difficult thing about trading, they begin to reply in very subtle zen-like concepts, sometimes invoking martial arts, and always referring in some way to knowing yourself. They are – in short – talking about trading as if it is something to do with psychology and understanding of humanity. Above all, they keep using the word “emotion”.
No computer has emotions and computers can trade – so what is all that about? As I once heard somebody say about coming out of the theater from a viewing of Samuel Beckett’s play “Waiting For Godo” .... He said “It was all very interesting. But what does it mean?”
A true story which seems unrelated, but isn’t. It's right on topic. I was on vacation, staying at a hotel on a famous salmon river to do some fishing. So one day I am wading deep in the river casting my fly and basically enjoying myself, and along the other bank comes the hotel ghillie (instructor pro fisherman) with another guest. So the guest gets into the water and begins to cast. I am on the other side keeping one eye on my own activity and the other eye on my newly arrived colleague other side.
Usually a fly caster uses his rod like a whip throwing the line backwards and behind, then he reverses the movement throwing it forwards.
Pretty much like this short video shows:
The guest on the other side begins to fish, casting with his fly rod, and instantly my interest level rises significantly. He is using a trick cast called the speycast. (I had read about speycasting, which looks very clever, before then but reading about it does not teach a practical expertise skill. The spey cast helps in all kinds of ways. Unlike the to and fro overhead cast, it is all circular movement instead, and it allows the angler to avoid his fly passing behind him where it may snag in the trees or undergrowth before he catapults it out and forwards over the water towards the fish. Here is a short video, to see the circular movements involved:
I instantly recognized a need to watch and learn something valuable that I couldn’t do, and I stopped fishing and for the next half hour observed my colleague. (Traders should recognize an embryonic trader’s trait in this decision.) Then I went back to fishing.
Later that evening I spoke with the ghille and mentioned how impressed I was by my opposition during the day. He replied that at the beginning of the day his beginner client could not cast at all, and so he taught him to cast only with the spey technique because it would work on the place they were to fish that day, but his client could not cast in any other but that way, in short he was a one trick pony, but with a good trick! This amazed me – I had about five years of experience but I had been so impressed by a novice! But he could do something I could not do and I knew it. It is most illuminating to realize that an apparently invincible opposition was actually a one trick pony behind one in every other skill within the toolbox!
This was instantly remedied and we went into the pub, I bought a pint of beer for each of us, and brought them out onto the grassy lawn out front and got out my salmon fly rod from the car. One pint and 30 minutes later I could cast spey style, and double spey style like a pro, and we returned to the hotel bar for another pint. I now had acquired a new skill which would improve as time passed and I practised using it. (The quick reaction to the need for acquiring a new skill is another trader’s trait.)
So much for fishing – let’s get back to survival in the financial markets.
We are like explorer- innovators figuring things out pretty much on our own. Assimilating information from all sides, but we must then prioritize that information keeping the good and discarding the bad. This more difficult than it sounds.
We must learn the mechanical techniques necessary. Many would be traders stop learning after that, and they suffer great loss as a result.
You see, the markets are also like a contact sport, where our trading colleagues are also opponents. So their responses must be taken into account. Move; anticipate response tackle or feint from the other side; make correct next move in response. This trading business is starting to sound a bit like a game of chess now. But let’s move onwards even more.
After a while the market surprisingly turns out to be a sort of weird mirror. Let me explain what I mean by that. A tentative traders gets in too late, after wasting time waiting for added clues to add surety to a decision, which becomes a late decision. An overly competitive trader wants the excitement and can’t wait to get into the next trade. He or she probably enters too early, before enough clues have been received from the market, make too many trades and has a lower winning to losing trade ratio as a result.
There is a strong tendency for each type of trader to get a different response from the market, and that response depends upon what the trader puts into the market. So it’s like a mirror, a sparring partner sort of mirror. Did you notice the use of the words “sparring partner”. Yes it’s is like a sparring partner. The punch you throw, causes a certain number of possible responses to come back at you. But if you throw a different type of punch at this market sparring partner, the response seems to be selected from a different “list” of responses appropriate to that initial action of yours.
So it is a physical contact or combat opponent sport, and it is a mental one too.
But if you act in coordination with a group of similar minded traders you have a crowd, a virtual team of traders like yourself, and there is strength in numbers. When you are one of many thousands of bulls, and long, and your “team” punches the market upwards, towards victory and profit, the benefits of having joined the team become clear. But the team is a visible group and being visible, the colleagues on the other side, bears in this case, can make a counter attack, aiming at selling prices down to capture your stops, positions, and money, so they have a team too!
Hmmm .... also a team sport, but members can swop teams at any time, or even sit on the sidelines for a while before going back in and joining what appears to be the winning team of the moment.
Now I’ve brought up crowd management, estimation of odds in combat between two teams, estimation of the acquisition and attrition rates of the number of team members on each side. This is becoming a bit like wargaming now with battles, or very physical team sports. But, but .... we can choose what teams we join, leave teams, stop playing, swop sides and those are undoubtedly purely mental decisions. All we have to do is decide correctly, so it’s back to strategy again and mental performance based upon our own personality and knowledge.
Where am I going with this? I am talking about scarce resources and the training of ourselves!
I would like to recommend four books as being particularly suitable for traders to upgrade their game. One is about trading. It’s a trading classic, and, after MacKay, it’s compulsory reading in my opinion, and apparently many other traders’ opinions. For it is highly recommended by many of the best in the business. But none of these four books is a newly written title. They are decades old, and these particular ones will go on and on and, I think, never wear out.
The other three books are small little books, and quickly read from start to finish. They are more subtle. You need to lose a bit of money in bad trades, then you modify your approach, and then you somehow lose a bit more. So you study a bit, upgrade your techniques, and after you restart you you still lose a bit more! Now you begin to look at your inner game, and begin to doubt your ability to actually succeed at this trading game. Now is the very best time to read these other less well known books I am going to recommend. But you will find a strange desire kicking in every 12 or 24 months or so to get them back off the shelf and refresh your memory. They seem to still apply after you have raised your game, because you can always raise your game still more. I hope the reason will be clear to those “who are willing to give it a go”.
Here they are:
Reminiscences of a Stock Operator by Edwin Lefevre (a pseudonym for Jesse Livermore, one of the greatest traders of all time)
Games People Play: The Psychology of Human Relationships by Eric Berne M.D.
Mastery by George Leonard
Zen in The Art of Archery by Eugen Herrigal
At this stage I could make a summary of these books, and a little review. But I won’t! (Readers who comment in the blog might like to give their own personal comments about them for an independent view). I’ll just say in general they are about learning to use what you have the best way you can in difficult circumstances and stay happy about the mistakes and setbacks that inevitably occur while moving forwards. Reading Berne right after finishing Lefevre is a very good idea.
So I will just make a strong suggestion that every trader should read them once, and after that as often as it takes to see the weakness within and foil it’s temptations to step out blindly into the next patch of quicksand that the market contains so many of.
Best wishes to all.