In his wonderful blog a www.wealthofcommonsense.com Ben Carlson, tackles the day- to-day frustrations of life in the markets.
One of my favorite Carlson posts is called “How to be Wrong as an Investor” where he literally lists a litany of problems that can befall an individual investment idea.
There are many day-to-day frustrations of life in the markets, such as:
- You can pick the right stock, but in the wrong industry.
- You can pick the right asset class, but in the wrong geography.
- You can pick the right country, but in the wrong currency.
- You can nail the direction of a trade, but not the timing.
- You can time things perfectly, but invest in the wrong stocks.
- You can invest in the right market, but in the wrong style of stocks.
- You can nail the macro, but miss the micro implications.
- You can optimize your asset allocation based on past experiences, but be blindsided by new risks in the future.
The list goes on and on and it’s worth investigating and reading in its entirety because it rings so true.
Anyone who has ever tried to make money from capital markets has been victim of several… if not all… of those failures and has certainly paid the price at the school of hard knocks.
Yet, for those of us who day trade, the true problem lies with money rather than being wrong.
Allow me to explain.
A few years back, I overheard an old-time Chicago options market maker describe in complete detail, exactly how he would win money from a golf player who was much more skilled than he. “First”, the market-maker said, “You never play for penny ante odds.
You put serious money on each hole, and then you keep raising the pot by doing double or nothing with the guy.
Eventually, even the best players will crack because they are no longer playing the game… but instead, only thinking about the money.”
This guy was a master manipulator who understood human psychology better than any Harvard professor I’ve ever met.
And in the day-to-day battle of pit trading, he excelled precisely because he knew how to make other traders “think about the money rather than the game.”
Although the floor days are long gone, the principles of trading remain the same. Think back to your worst trading mistakes and they inevitably turn out to be a pathetic melodrama of chasing the market at the worst possible moment because you wanted to “get the money back”.
The best traders have an almost ethereal ability to separate their decision-making process from the P&L statement. For the rest of us, that’s not so easy; which is why I recently started to do something interesting with my account and it has turned out to be very helpful.
I literally cover up the money. Or more accurately, I remove the P&L module from my software so that I have no idea what my account is worth at any given moment. Yes, it’s a cheap psychological trick but it helps because it forces me to focus on the only thing that matters on a day-to-day basis…and that is making pips.
A pip (percentage in point) is the fundamental unit of measure in the currency market, and as long as I focus on my pip count, I retain a certain level of control. Of course, there are still terrible days when I may lose a hundred pips on a series of ill-advised trades, but it is far easier to regain your composure by focusing on making a few pips back a time… rather than obsessing over the loss in your account.
The great irony of the financial markets is that money — the very thing we all seek — is truly the root of all evil when it comes to trading. To win, you need to trade for process not profit and that literally means you need to have the thought process that “that money doesn’t matter”.
Until next time,
Mr. Schlossberg is the managing partner at BKForex. He is also a weekly contributor to CNBC’s Squawk Box and a regular commentator for CNBC Asia and CNBC Europe. His daily currency research is quoted by Reuters, Dow Jones, Bloomberg and Agence France Presse newswires and appears in numerous business publications and newspapers worldwide. Mr. Schlossberg has written articles on trading for SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is the author of Technical Analysis of the Currency Market and Millionaire Traders: How Everyday People Beat Wall Street at its Own Game, both of which are published by Wiley. Boris’ extensive experience in trading and developing momentum based techniques provide the foundation for BKForex strategies.