Friday, January 22, 2010

Trading as Life

Recently, I received what I considered to be a very insightful email. I found it so interesting for reasons I'll discuss at the end of the article that I asked the author's permission to share it with you. In the interests of space, I have editorially deleted some small surplusage. Here is what she wrote:

"Since I have been trading, I have come to see the stock market more and more as a parallel to life. Especially in the last year, I've had almost a reflex reaction to interpreting events in my life as similes and metaphors to my trading... and I can't seem to get it to stop. ;)

Take this weekend for example, I was fortunate enough to be invited to the Green Bay/Cardinals playoffs. [editor's note: the Cardinals won in overtime 51-45] In the first 10 minutes of the quarter, the Cards scored 2 touchdowns. I immediately thought of the linear regression line that I use to track and monitor my equity curve on my trading system. and I said to myself..."this wont last" .. I envisioned this quick "get ahead" as a parabolic move up from the mean, and knew that there had to be a retracement, or at least a consolidation of some sort. I turned to my friend, and while his eyes glazed over, I explained to him that this couldn't last because it was beyond the mean, and not only that , but this would cause an overconfident shift in sentiment from being the losers to being the winners, and that was a setup for the next event to be a loss.

I then went on to predict, in that same first quarter, that I expected that the Packers would catch up , and tie the score, and that we would go into overtime. Seriously I said this, and I have witnesses.! Needless to say, the game unfolded as expected. The Packers scored (the retracement) the mean between these two competing forces was restored to equilibrium.. I hadn't predicted or really thought about what would happen next, after the score was tied, but I should have known that something unexpected, would be the final denouement to this story.. But of course, that crazy Cards defensive recovery of the Packers ball in the final minutes was exactly as it should have been. An unpredictable event, an outlier if you will, and one that the Packers didn't see coming... Are you hearing stock market again..? Does this sound familiar? It sure did to me. Think news, think 9-11, think computer breakdown. The Packers stops were just not in place for that final play

These parallels just seem to keep popping up wherever I go. I have noticed that my relationships in life seem to follow the same sequences and can be couched in the same terms as market behavior.. Sometimes there are big moves in relationships that are positive, and in my life , that are happy and joyous,( trending up) only to be followed by periods of calm ( sideways) or total reversals of experience..bad moments, days weeks or even years, in the opposite direction ( trending down) . The rhythm still applies....

Life, unlike the market however, is short, and finite. I have learned that if you can learn to follow the same concepts as in your trading , trying to maximize your life as I try maximize my equity curves, it might just be the path to make your life happier, and more rewarding. Whenever possible, find the happiest, stimulating and most fulfilling part of your experiences and go there.. Ride that trend as long as you can and keep the people around you who help make that happen. Know that this will, eventually, give way to a quieter period and accept that too. Assess the risk for each situation going in and act accordingly. Have a plan.

And if you ever find yourself in a downtrend, don't resist,.go short.. ride that one out too. You may not have a choice. If you resist, it will only cause you pain, and at least in my life, it seems to be a given, that, like the market, somewhere down below, there will be support, a place of rest, a place for a reversal of fortune. Cover your short there, and go long again..If you are very lucky, like me, you will find yourself a V- bottom which could bring you back up to where you started or even beyond.

Right now , I'm in a big bull uptrend and loving every minute."

I don't know whether or not you would agree with me, but the writer's message seems quite insightful and covers some very important ground. I would disagree only with the beginning statement that the market is a parallel to life. Rather, I would suggest it is a part of rather than a parallel to life. Trading and negotiating is something all of us do every day whether it be in the market or otherwise and is heavily influenced if not controlled at times by our emotions.

As an example, the email notes how relationships progress with ups, downs, and sideways periods. The ups, both in markets and in relationships can produce euphoria and a feeling that the good times will go on forever. Of course, that is rarely the case. Both in the markets and in relationships, there are downturns and even occasional catastrophes. I have had traders come to me for coaching after suffering large losses because they were afraid to trade again. I have seen formerly active traders quit trading completely following a series of losses and I have seen traders with big gains "bet it all on black" and lose everything. The question becomes how will we handle the reversals and how will we handle the positives. Certainly there is nothing wrong with enjoying things when they go our way, but in the markets, at least, we need be ready to exit before we are hurt too badly. The same may be true of a relationship. On the other hand, when things are going great, we may have too high an expectancy that they will remain that way forever. We can't help having emotions, but in the market setting, it is important that we do not permit them to rule us.

As the author of the email noted, we can do better with a plan. By that, I don't mean that we can expect every plan to work every time. I only mean that if we have a plan of action then when things go against us we may be able to cut losses more effectively when a position turns against us than we might if we just followed the impetuous action of an inner emotional dialogue. So, too, with a plan we might do better letting profits run than if we permit ourselves to take profits emotionally.

Bottom line, trading is life. It takes work to be successful. It requires an understanding that we do have emotions that can affect our behavior and, in trading, it can be quite important to discipline out as much of the emotion as possible.

Thanks to the author of the email I quoted for allowing me to bring her insights to you.

by Bill Kraft, Editor
Copyright 2010, Makin' Hay, Inc.
All Rights Reserved

P.S. Save $50 PER MONTH on my subscription trading newsletters!
SAVE on my Under $10 Stock Trader Service!
SAVE on my Option Trader Service!
SAVE on my Trend Trader Service!

Technorati tags:

To comment on Bill's article click on the "comments" link below.

No comments: