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The Great Trades Are Obvious

The great trades don’t require predictions. The Soros trade of going short the pound in 1992 was based on something that had already happened — an ongoing deep recession that made it inevitable that the U.K. would not maintain the high interest rates required by remaining in the E.R.M. Afterward, everyone said, “That was incredibly obvious.”

“Most of the great trades are incredibly obvious. It was the same in late 2007. In my mind, it was clear that the financial system was imploding and that most market participants hadn’t noticed.”

– Colm O’ Shea, Hedge Fund Market Wizards

Do you agree that the great trades are obvious? Why do so many market participants miss what is unfolding right before their eyes?

What are the elements in your process for observing, keeping tabs on, and exploiting major macro trends?

The harder I try, the more money I lose. What’s going on?

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A:  This is a fairly common phenomenon which is why we have to learn how to adapt to market conditions and be patient with our strategies. Just because you “try harder” doesn’t mean that your profits will expand equally in relation to your effort. While effort helps create and sustain an edge, at the end of the day you still need the market to cooperate with whatever you are doing.

The best analogy I can provide here is one that many golfers are familiar with. If you’ve ever golfed in high winds, you know that your score will often be higher. Some of this, obviously is due directly to the windy conditions (which you have no control over). However, studies show that the most significant reason why golfers perform poorly in windy conditions has less to do with the conditions but more about how they react to those conditions. For example, many golfers will tend to swing harder in high winds which causes them to lose both their swing tempo and balance and they make more mental mistakes because the wind distracts them. The same is true for traders whose strategies are not flowing with the market. Without realizing it, traders will modify their own approaches (often by trying harder by making trades that don’t fit their strategy) which tends to hurt performance more than it helps.

Bottom line – keep close tabs on yourself and how you’re “adjusting” to market conditions. Being aware of how the market environment is affecting you and your changes to it is an important skill every trader must possess.

The Fallacy Of Higher Effort = Higher Returns

mailEvery week I will try to dedicate some time to answering questions that readers and  members send in to me.
First off, thank you again for letting me know what is on your mind and for pointing out topics I need to discuss further. While I’m not able to answer all of the questions submitted, I have read each one submitted to me and will be looking for opportunities to share information that will be helpful to you in the coming weeks.
Today just covering one question sent by one Trader.
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Q:  The harder I try, the more money I lose. What’s going on?

 

A:  This is a fairly common phenomenon which is why we have to learn how to adapt to market conditions and be patient with our strategies. Just because you “try harder” doesn’t mean that your profits will expand equally in relation to your effort. While effort helps create and sustain an edge, at the end of the day you still need the market to cooperate with whatever you are doing.

The best analogy I can provide here is one that many golfers are familiar with. If you’ve ever golfed in high winds, you know that your score will often be higher. Some of this, obviously is due directly to the windy conditions (which you have no control over). (more…)