What a wild ride last week; down Monday & Tuesday, up Wedneday & Thursday, and then a tepid down on Friday.
How did I fair trading this insanity? Did I grind my teeth, starred at the screen like a frozen deer in front of the headlight, or cursed at the market while watching my gain evaporated in my portfolio faster than you could finish debating the wisdom of cutting your losses quick (for Monday and Tuesday in hindsight)?
I would have done all of the above in my early days of my trading career. Yes, I remember back in those days my mind was filled with trading wisdom from all the books I read. Practically every author was shouting “Cut your losses! Cut your losses!” What did I do then, I was having a difficult time overcoming my emotional response while witnessing the “turn of the event” that was decimating my portfolio.
And I guess lot of you would understand when I finally “cut my losses” when the pain became too great to bear. And as usual, if you waited until your pain became too great to act, you “coincidentally” called the bottom! Up and up away the market took off with fanfare while you were left by the train station in a remote desert with no water in sight. After experiencing these desolate event several times, I would be foolhardy to continue trading without re-assessing my “weaknesses”.
That was when I realized reading books would not make you a good trader (forget about being a great trader for you must be a good trader first!) Overcoming my emotional response during trading became my top priority in life; hence began my learning path in Tai Chi and meditation.
While meditation helped me to open my mind, it would take me more years before I could see the “solution” to overcoming my emotional interference in my trading plan. Btw, being aware of your thought (from the benefit of meditation) by itself doesn’t mean you are free of emotional response activated by the thought. Thus, began my new search to find a way to overcome the emotional connection to my thought.
I was in Vegas for holiday and it reminded me about a book on card-counting by Ken Uston I read years ago. (At this point, you probably figured out that I LOVE reading!) My light-bulb lighted up and I found my “solution”. Card-counting is a game of skill which required LOT of discipline to make it work. What more, card-counting is relying on gaining a statistical edge against the house in order to win. What MORE, the betting system required to win in Blackjack is a form of money management. Whoa! Did it ring a bell???
It sure did for me. I plunged right into the art of card-counting and practiced daily using computer simulation. The beauty of card-counting is that there are PLENTY of rules to follow: like when to hit (or not to hit) based on dealer’s face card or when to increase your bet when the count is in your favor. So, as you practice in computer simulation, you get plenty of feedback when you are NOT following the rules. Inevitably, as you practiced more and more, you began to develop a new set of habit that is based on your experience that, in the long run, despite the multiple losses to the dealer, you could still beat the house. Since the new habit is the ability to take action based on rules without thinking about it; you bypass the emotional connection to the thought.
BACK to last week.
Suffice to say that on Monday, while sitting on profit from my getting back into the market on Oct 26th, I wasn’t worry about the correction which I considered as normal due to the strong rally for the last 3 weeks. However, when Tuesday came with the news from Greece; it changed the dynamic of the market. Without thinking, I “automatically” liquidated most of my position despite the fact the most of the positions turned to red from green. It was automatic. I didn’t stop to think or freeze like I did in the early days. I took the losses because the trading rules dictated it. Even though some of the position I liquidated eventually bounced back from the low by end of the day; I was fine with it.
Wednesday came and the market started to rally. This told me that the market dynamic had not changed at all; otherwise, it would be another down day due to vote of no confidence to the European bailout package. Without hesitation, I started buying back some of the position I sold at a higher price. I was fine with paying higher price. I took action because my trading rules dictated it.
I explained my action above because I wanted to demonstrate how developing new habit (from practicing card-counting) help me took action without hesitation. Emotion is what make us human but it isn’t really designed for trading in a highly volatile market. Instead of doing away with emotion which is literally impossible unless you succeeded in being enlightened likes Buddha. By then, you won’t care about money and ambition so becoming a great trader is a non-issue.
In summary, from my experience anyway, productive habit and discipline in following rules from card-counting can be transferred to trading which allowed me to take action without hesitation.
Thus, in action we resolve; in hesitation we fumble.
While I didn’t make money last week, I took action commensurate to the risk I was willing to take. If the market continues to rally next week, I could pat myself on the back for not letting the market spook me out of my original position. If the market tank next week, I would, no doubt, liquidate my position as a losses again automatically. Remember, we MUST accept loss and take them before you can see the truth in being a winning trader. Btw, The Fly did exactly that when took his losses in RENN! In the long run, like a dedicated card-counting professional, we “can” (but not guaranteed) have an edge to come out ahead. The beauty of the stock market is that no matter how much money you made based on your trading skill, they can’t kick you out of the exchanges like they did to you in the casino.
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