Unnatural Acts
Every trader brings along the habits, ideas, biases conceptual framework and value structure–in short, all the baggage–accumulated over the years prior to becoming a trader. It is said that we already are what we will become by the age of three. If that is so, then it is no wonder that so many beginning traders become frustrated or quit. How many three-year-olds do you know who are equipped to trade?
Trading well is an unnatural act. If trading well amounted to doing what comes naturally, then we’d all trade well from the beginning. Since we don’t, it follows that those who do not learn the unnatural art of trading will sooner or later turn over their capital to those who do. Doing what comes naturally is the worst possible trading method.
Paradoxically, those new to trading are not aware of how profoundly ill-prepared they are. How could they be? How does one know what it is that one does not know? Even when we find out that we must change the way we think and act as traders, there is, as Mark Douglas* keenly observed, a tendency to defend what we already know, to resist change. When we are young, we soak up knowledge like a sponge, but as we grow older, we resist taking on ideas which may run counter to what we have already taken in. (*Mark Douglas, The Disciplined Trader)
The first unnatural act of any trader on the path to proficiency is, therefore, to discard what he knows or thinks he knows–to OPEN the mind. What you already know can hurt you. No . . . it will hurt you. Those who trade based on what they already know, which includes the majority of those who trade, lose money. This includes some very smart people. Indeed, very smart people often carry an extra burden into their trading. A high I.Q. sometimes breeds overconfidence, even arrogance. And nothing blocks growth quite as effectively as intellectual arrogance.
One idea which we must discard is that successful traders predict the market. It is natural to conclude that because one can only benefit from future price changes, market analysis amounts to peering into the future. Most traders simply accept that premise uncritically. Countless hours are spent analyzing past data in order to divine the future course of prices. I spent years making this mistake over and over. Not only are such endeavors a waste of time, in the real world of the trader they are dangerous.
Since markets are the free and spontaneous creation of buyers and sellers, markets are inherently unpredictable. At least that’s how we should think of them. It’s healthier and ultimately more profitable to remain open to surprise and the possibility of error, than to assume too much.
This is not an argument for agnosticism, for there is something we can know about the market, or a group or a stock. The trend. A trend has this unique logical quality: it is enough to describe a trend; it is unnecessary, superfluous, to go on and make a prediction about it.
Successful traders approach the market fully prepared to be surprised by the unexpected. They resist being locked into a preconceived scenario or a limited set of scenarios, but remain open to new evidence which may cause them to change their assessment.
I once heard a trader who had been successful for many years address a roomful of analysts. He pointed upward and asked the assembly if they knew which way was up. Taken aback, the group issued a nervous, muffled reply. He then pointed down, and asked if we knew which way was down. A few more responded. He then made his point by saying, “That’s all you need to know to be a successful trader.”
Of course he overstated his point for effect. But his lesson was not lost on me. With all our sophisticated computer-based analysis, the better part of successful trading is simply knowing which way is up. He was not putting down analysis, which is critical to trading success. He was putting it in a new perspective.
For me, he brought home the lesson that trading well does not depend on predicting future events, but on reacting to current market conditions–in short, going with the flow. That stuck in my mind because maybe that’s what I needed most to learn.
As long as we’re cataloguing unnatural acts, here’s a short list. Many of these items are covered in detail elsewhere in this course.
- Anticipate, don’t predict.
- Take losses quickly.
- Let winners run.
- Buy into bad news.
- Sell into good news.
- Buy high.
- Sell low.
- Keep your mouth shut.
- Do not seek support in others’ opinions.
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