Rule 1: Think of the economy as being more like a cat than a washing machine.
Rule 2: Favor businesses that benefit from their own mistakes, not those whose mistakes percolate into the system.
Rule 3: Small is beautiful, but it is also efficient.
Rule 4: Trial and error beats academic knowledge.
Rule 5: Decision makers must have skin in the game.
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Technically Yours/ASR TEAM/BARODA/INDIA
You absolutely must have an edge. In the short run, you can get lucky and make money doing something that has no edge, but expected value will catch up with you. Don’t gloss over this point, because it might just be the single most important thing we can say about trading–you have to have an edge.
You must be consistent. You must trade with discipline. Nearly everyone who writes anything about trading says these things, but the why is important: you must be consistent because the market is so random. You cannot change your approach based on short-term results because those short term results are confounded by the level of noise in the market. In other words, you can lose doing the right thing and make money doing the wrong thing. Too many traders make adjustments based on evaluating a handful of trades, and this is likely a serious (fatal) error. See point 1: have an edge, and, now, apply that edge with consistent discipline. Markets are random; you don’t have to be.
Luck matters. There’s no denying that, but so does skill and so does edge. In fact, the more skillful you are as a trader, paradoxically, the more luck matters. (See Mauboussin book and video link near the end of this post.) You can be successful without luck, but the wildly successful traders (who are outliers) always have some significant component of luck. If the overall level of investment skill in the market is rising (far from a certain conclusion, in my opinion), then performance will converge and luck will play a bigger part for the top performers.
If you understand the part luck plays in your results, you will realize that emotional reactions to your results are largely inappropriate. Yes, that sentence sounds like something a Vulcan (from Star Trek) would say, but it’s true. Too many traders ride the emotional roller coaster from euphoria to depression based on their short term results, and this really doesn’t make sense because you’re letting luck (random fluctuation) jerk your emotions around. (It is worth considering, though, that this works for some traders and may actually help their performance.)
Causes of Trading Discomfort
Discomfort in trading usually comes in two forms and both have micro and macro causes.
Monetary Discomfort – Just like it sounds, this is where you are uncomfortable because you are losing money.
This can happen simply because you have a position with an open loss that is beyond your comfort level, or it can have more a more complex genesis.
Are you down big for the year in your trading account? Are you in financial trouble in your regular life? Is the mortgage payment coming due and your trading profits are the funds you have to use to pay it?
Control Discomfort – This where you feel discomfort not because of the monetary loss, but because the trade is “not doing what it is supposed to.”
This could be the result of a choppy day where every trade you attempt, no matter long or short, reverses against you.
Or once again it could be a related to larger issue. Are you the type of person that always needs to be in control in your life? Do you have an obsession with always being “right?” Is the world a place that would be better off if it listened to your opinions DAMMIT? (more…)
