I couldn’t agree more! I read this sentence from the book, “The Life of Pi” by Yann Martel. For those who have not heard of this book, it is a fictional story of a teenager who survived 227 days on the ocean. I bought this book for years but finally decided it was time to read it last week since I wasn’t actively trading (due to my promise to myself to take a break while price actions was trading inside the dead zone).
The author gave a full treatment on the subject of “fear” in one short chapter (chapter 56). While the information provided in the chapter is “nothing new” since we all have at one point in our life experience fear in its naked form; it is still quite “revealing” to read the author’s recap of the essence of fear.
I’m sure everyone who are reading this post know and understand that fear is our worst enemy when it comes to trading. While fear can destroy us “slowly” in our normal day-to-day living if you don’t do something about it, it will “accelerate” your demise in the trading world by paralyzing your ability to trade with a plan and thereby destroy any chance you have to improve your game.
You must FACE fear. You must ACKNOWLEDGE fear. Only by facing and acknowledging your fear can you then embark on developing a PLAN to trade with DISCIPLINE in spite of your fear.
Yes, it means you have to WORK at it.
Nope, it doesn’t matter if you follow the most successful traders on this planet, you will still lose your shirt if you don’t INVEST your time to become a disciplined trader. Every successful trader trades with a style that is very much their OWN UNIQUE style. And the odd that you can be successful by taking the easy way out in following the trades of any successful trader is a big ZERO.
You know why?
FEAR
Just because a trader is successful doesn’t mean he has no fear. It only means that he FINDS his own personal way to work around this fear and still be successful. And guess what, if you didn’t spend the time and investment to develop the discipline need to follow a trading plan that is unique to your own personality; your fear will destroy the trades you took by following Trader X.
How?
Does the following sound familiar?
1) Trader X bought AAAA
You just took a loss from previous Trader X’s trade; now you FEAR to take another one.
2) Trader X sold BBBB as a loss
You hesitate to take the loss because you FEAR stock BBBB will take off without you. On top of that, you now decided Trader X is wrong to take loss so soon.
3) Trader X is holding CCCC thru the volatility while sitting on profit
You FEAR of losing the profit so you closed the trade to lock in profit even though Trader X is still holding it.
4) Trader X is still holding DDDD when the loss is now approaching 5%
You FEAR that the stock is going to zero; so you cut your losses (which by incident is the right thing to do but it’s just not part of Trader X’s trading plan).
Don’t forget, Trader X is NOT PERFECT and Trader X will have his usual % of trades that are wrong; however, by second-guessing Trader X and proving to yourself that you are “right” when Trader X is “wrong”, you are only encouraging your bad habit and allowing your FEAR to dictate your market decision instead of relying on a sound trading plan.
You see, there is no short-cut to become successful in trading. Either you work on your discipline as a mean to control your fear or you may as well be the benefactor to those who win consistently because they find their way to work around their fear.
Here is how the author Yann Martel closed his chapter on fear:
“…if your fear becomes a wordless darkness that you avoid, perhaps even manage to forget, your open yourself to further attacks of fear because you never truly fought the opponent who defeated you.”
Amen
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Good post. I know we disagree on this topic, but there are many paths to trading enlightenment. Sometimes trying to battle the fear demon only gives it more power.
Fear can also fade away by practice. Many very small trades will allow the trader to focus on the mechanical process of stalking, entering, monitoring, and closing. There’s not much more to it than that. Learning about, and developing proficiency in a variety of strategies will give the trader the specifics to profit from a particular market or “tradeable’s” condition.
Actually, we are on the same page. We are merely expressing the context differently.
I’m not advocating anyone to battle fear; just to acknowledge it and then find a way to work around it. Your suggestion of practicing small trades is definitely an excellent example.
Practicing, as you already mentioned, is the KEY to working on your discipline and trading plan. The only downside to many readers is that it means more work on top of their busy schedules.
My point to all is that it takes time and work to become successful; reading is good for the brain but not enough for the mind to grasp the essence of trading success.
Like any expert martial artist, it is going to take a lot of practice before you can become a master. Reading a book ain’t going to teach you how to block a ferocious punch heading in the direction of your head; even though you read how you should be blocking it.
Yes, FEAR will be there when you see that punch coming your way…
Thanks for your comment.
“Forget the buying and selling, the big money is in the sitting and waiting” ~ Jesse Livermore
Truer words have never been spoken.
It is you and I that disagree about the amount of trading people should do.
When I blew out my account, one of the root causes of it was over-trading.
Market speculation isn’t like a golf swing that requires great hand-eye coordination and muscle memory developed with daily practice.
Truly great opportunities only come around every so often. Success in speculation depends on your level of patience and ability to control emotions and risk.
That is it.
The financial services industry has run a magnificent marketing campaign though. The flashing red and green ticks, impressive charting software, the ESPN pre-game show style TeeVee programming like ‘Fast Money’.
Everyone is supposed to be a ‘trader’ now, you’ll be an instant millionaire if you just TRADE! A sophisticated every-men, taking control of their own finances and smashing the market averages every year by diving in and out of positions at the speed of light through the deep discount broker round the clock. Buy, Buy, Buy, Sell, Sell, Sell Cramer!
Go watch a stocktwits feed for just one hour when the market is open on SPY if you want to laugh.
“ROC is turning up on 3 min long”
“MACD is breaking down on 5 min short”
I promise you that many of these people have no plan. Most of them will get blown to pieces and will be out of the market entirely, never to return within 1 year. Half of the money goes to the broker in commission for the privilege to trade and the other half gets eaten by the market.
This system is great for earning commissions and keeping the casino packed full of dupes giving their money away.
The truth is people are simple animals that mostly come to the market for the ‘action’ not to make money. Most people would be just as happy at the horse track where they can stand on the seat, scream at the jockey and pump their fists in the air. Some will win and hug each other and cash in the big winner long shot and some will lose, tear up the ticket in disgust and head to the bar. The only one winning at the track is the bookie, who grinds it out, treats it like a business and doesn’t get excited.
I don’t agree with just trading super small positions either. I tried that for awhile, but it was just excuse to rationalize getting more action and being in the market all the time. Paying commission is a real business expense that eats into the bottom line of every speculator. If you have a plan, you should be trading a proper size. Sure there is a place for small bets, but that doesn’t mean if you trade small you can trade more. Every bet should count in the market and have a good prospect of making you money. The only reason to put on a smaller bet is because you want to gamble.
From my experience, over-trading is emotionally exhausting. It caused me to miss huge moves by getting out early more times than I care to admit. Always diving in and out also takes your valuable focus away from current positions and market conditions.
Bottom line is, if you are successful and happy with your results, then by all means keep doing what you are doing. But there is a very good reason you don’t ever hear about Johnny Daytrader and Freddie Fastmoney mentioned along side greats like Elder, Cook and Livermore.
Excellent comment!
Yes, you made some strong argument and I agree strongly with the debilitating effect of over-trading.
While my PERSONAL trading style seems to be more active than normal giving the fact that I’ve been updating my trading journal actively at iBC. Yes, from YOUR perspective, I might come across at over-trading.
But I’m NOT advocating my trading style; not by a long shot. I’m simply advocating taking a more active approach to investment instead of just following someone’s pick here or anywhere.
Jesse Livermore’s “big money is in the sitting” wisdom rings very true only if you have done your “homework” and willing to sit out the “predetermined” draw-down but yet still following the major trend. Remember, Jesse was a quintessential tape-reader and considered the best in his days. His sitting and waiting was predicated on his tape-reading skills. Meaning that when he was sitting on the stocks, the stocks were already in the money and he was maximizing his gain. In fact, Jesse was a strong support on cutting losses quickly.
Jesse failed at the end because he deviated against his own tape-reading skills and followed other “supposedly” smart people’s fundamental analysis and ignored his own trading rules.
My point is that there is no short cut to trading success. You must spend some time to educate and learn to overcome your emotion (fear being the focus on this post).
If your trading style is buy and hold only on the stocks you believe in (which required you to take time to investigate and study the fundamental); then by all means, follow that path. But you have to put an effort on it. And you also must be knowledgeable enough about trading to cut your losses to protect your portfolio. And to do that, you must be disciplined enough to execute your trading plan. Remember, buy and hold have a bigger draw-down than a trader; but you have to accept the fact that at some point you are wrong in order to protect your portfolio.
Just don’t buy a stock and sit and wait because you read someone say it is a winner. And don’t try to rationalize with the sitting when you are going thru a draw-down that is in danger of shrinking your portfolio beyond your comfort zone.
In summary, everyone should FIND their own trading style and not following someone pick blindly. While I’m comfortable getting in and out more actively than most; it is not for everyone. In fact, my 25% long-term portfolio contributed to my 17% YTD gain which I reduced now to 10% to lock in profit.
I want to thank you for bringing up the good point about over-trading. It is another one of those rule I’ve to keep a check on myself from time to time.
Sorry to hijack your excellent post Zen. My over-trading diatribe was directed more towards Yogi. He and I disagree on how much one should trade.
As I said, if you can get in and out quickly and often and are happy with your results, I am jealous more than anything. Because of my lifestyle, plan and personality, I just don’t do it like that.
And that isn’t exactly true. I am always ready to move fast and cut a position. If a position moves against me, it will get cut. Likewise, if I catch a parabolic move, I will always lock in some profit and I will never ride a winner until it turns into a loser. I generally like to scale in and scale out of positions, trading around them seems to work well for me.
Part of my past failure wasn’t just over trading in volume, but also in % of capital – a toxic combination if there ever was one.
You are absolutely correct, there is no shortcuts in trading. You have to treat it like a business.
How many times have you heard this ‘plan’ from a rookie? “I want to make a lot of money as fast as I can!”
I have two goals:
Don’t lose money
Beat the market
No need to apologize. You made an excellent point and I’m glad you made it here! 🙂
From your reply here, you and I are not that different in trading style. It just that I jumped in more often and was wrong more often; thus the appearance of over-trading.
Yogi found HIS way to overcome the emotional aspect of trading and I happened to believe his method because I took martial art training when I was in high school. If you practice sparring with someone long enough, you don’t fear the punch aiming for your head that much anymore. In fact, you will find comfort in knowing that you can dodge the punch as easily.
It is the same as trading; once you realized that you can easily cut your losses quickly and are getting in the habit of doing it often (like what you and I are doing now); you don’t fear the losses anymore.
And this is the point Yogi is expressing. Practice enough and your emotion will slowly fade away.
Thanks again for making some excellent points here!