Long & Wrong

Blogging is like trading, when the reasons reach a certain critical level then you have to take action.

1. I have deliberated long enough.
2. I have sunk to new depths.
3. I have a ‘significant birthday’ in the next few weeks (the kind that makes you think about buying a Honda Fireblade).
4. There are not enough hours in the day.
5. The short guy has sadly died (this must be a sign!).
6. It is spring (sort of), .

I will probably be back, probably with something a bit different, probably later rather than sooner. It has been fun. I will be having a break (from blogging) but I won’t be having a Kit Kat, I will be having a dozen.

Firstly for my American readership (both of you) “pants” are not trousers. An internet dictionary defines them…

This word can have two meanings if you are from the UK. It either means

1. The British word for panties, underpants, etc
2. Rubbish, bad

Now that potential confusion is out of the way, I can begin.

The market loves doctors and dentists. These professions are made up of intelligent (even dentists are quite smart!), high-achieving, high-earners.  They are though often poor traders who donate large sums to the market because being smart isn’t enough.

There are plenty of smart unprofitable traders.  They are so smart that they can accurately asses where they are going wrong.  They have a long list of lessons learned, have all the necessary knowledge and a logical plan to make a lot of money from trading.  But where they (and the much less intelligent L&W ) often fall down is in applying what they know at that tricky right-hand-side of the chart where things happen relatively quickly.

Apart from House, doctors aren’t free to do whatever they want at work. But trading offers plenty of flexibility and this seems detrimental to performance.  I would argue that this is because a large degree of freedom allows us to make late decisions, we don’t have to plan in advance.  In the heat of the moment we make bad short-term decisions at the expense of the greater long-term good, even if we  understand exactly what that greater good requires.

I’ve never met any, but apparently some women sleep with men on the first date even when they promise themselves earlier in the day that they won’t. They make ‘bad’ short-term decisions and forget about the greater long-term good. So perhaps traders can learn something from these women!  I haven’t just mentioned them because I have an unhealthy fascination with the subject but because they are discussed in  a book I have recently read on the conflict between short-term and long-term goals.

The solution chosen by these women is when getting dressed for the date they put on their grubbiest granny-pants as they know that they will be too embarrassed to (how do I put it?) reveal them later in the evening.

So that is what we must do. If we can’t trust ourselves to make the right decision in the heat of the moment (as EUR/USD falls 40 pips in 18 seconds) then we must find a way before it happens to prevent that bad decision. If we keep taking large losses because we are ever hopeful that “it’s about to turn back my way” then we have to enter a stop when we open every trade.  Fixed stops can be our granny-pants.

There are many other pre-prepared solutions to combat poor short-term decisions when trading.  If you can’t trust yourself, you must force yourself, although grubby underwear remains optional.

In a recent post I was wondering if I am asking too much of my brain (as well as  the allegedly stain-resistant carpet).  Those thoughts led me on a long and winding route through related material on the internet.  The web is however such a strange beast that I ended up here, proving that my busy brain isn’t as smart as I think it is.

How many passes can you count…?

In February I made a lot of money. “A lot” is a relative term but it was many times a typical professional monthly salary for someone of my age. To me that is a lot.

For many people a monthly performance of that magnitude would be cause for wild celebration. To others it might call for macho bluster (“yeah, I totally ****ed the markets”) or even guilt (“I don’t deserve this, I only pressed a few buttons”). More dangerously it might be cause for the pride (increased risk) that comes before a fall.

My thoughts however, you may not be entirely surprised to hear, turned to statistics.  Monthly returns show significant variance and extreme departures from the mean, whilst rare, are to be expected. The same is true of the height of humans.

February was the guy on the right (8ft 1in), March might be the guy on the left (2ft 5in). Best to just keep trading.

I am genuinely this boring in my trading. Away from the screens I did though have a very small celebration and a slightly larger amount of guilt.

Whilst driving down the motorway/freeway/autobahn/autostrada at 80 mph you notice that a lorry about 300 yards ahead has started to drift into your lane. You immediately ease off the accelerator (even in a Toyota it is worth a try) but you often do something else, something which you may not even notice, you turn the music down.

The reason for this is a subconscious recognition that our mental performance decreases as arousal (not that kind) increases.  You turn the music down to free up your brain to deal with the sudden change from monotonous driving to a potentially hazardous situation.  Much of the theory of this is crudely summarised by the Yerkes-Dodson Curve.

This week I have failed to turn the music down.

There are the ‘directly related to trading‘ activities. I have been trading my usual 3 FX  pairs, 2 index futures (with little enthusiasm) and also monitoring a couple of other markets that I am starting to become interested in (yes Solfest, including oil).

Then there are the ‘not actually trading but trading related‘ activities.  Chatting on IM, maintaining this blog, reading (then ignoring) financial stories and tinkering with IT.

Then there are the ‘you work from home so could you…?‘ activities.  Doing the shopping, vacuuming and wondering why dogs feel the need to throw-up at their owner’s feet rather than outdoors before realising that “wondering about it” won’t help to clear it up.

I don’t know if this sounds familiar to you (perhaps not the dog vomit) but I am certain that I am way past the point on the Yerkes-Dodson Curve where my performance starts to decline. I hate to use the phrase “declutter” (“decluttering” seems to provide cheap fodder for daytime TV shows where people with borderline obsessive-compulsive behaviour are forced to sell their prized collections of junk for our entertainment) but it is probably the best word to describe what I need to do.

Any ideas on how to provide better focus as a home-based trader then please let me know. Actually, this is so important, then either let me know or the vomiting dog gets it.

A week of trades by Trader A (Blue) and Trader B (Red)

 So how do we think Trader A has done? What about Trader B? We’ll get back to them later, but first let me apparently digress for a paragraph or two.  

RF engineers talk about the “Digital Cliff“, a phrase that describes a feature of the reception of digital signals.  As the strength of the signal starts to  decrease the quality of, for example the digital TV picture, decreases only slightly. For example the ‘blockiness’ that you might see when watching television in bad weather.  

 However as the signal quality decreases slowly further, the picture quality doesn’t continue to decrease at a corresponding rate, instead the picture disappears all together.  There is suddenly insufficient data in the signal to render any picture at all.  The transition from moderate picture to no picture is sudden, you have fallen off the digital cliff.  

Back to Traders A and B.  There doesn’t appear to be a marked difference in their results, however,  Trader A made exactly £0.00 (yes, I fudged the data) whereas Trader B ended the week with a healthy £1,080 (in the top 7% of UK earners).  The difference between these two sets of trades is marginal to the naked eye but Trader A has fallen off the trading cliff whereas Trader B is happily on the metaphorical cliff top.  

Trader B

And that is the problem with trading, there is no smooth progression to success. If you are in ten feet of water just off the beach or a hundred fathoms a mile out,  you are still drowning. A doctor gets paid as an SHO and then much later gets paid much more as a consultant.  An academic gets paid as a postdoc research fellow and then gets paid more as a professor.

 A trader has an edge or they don’t, and the dividing line is much steeper than many believe, it’s a cliff.