Long & Wrong

This is more like therapy for me than interesting content for you.

I find that in the course of the past 4 years I have become a trader, it was inevitable really because learning to trade profitably requires long hours and obsessive dedication.  But I don’t want to be a trader, I want to be someone who earns money from trading.  There is a subtle but important difference between the two.

As this blog is part of thinking about trading, rather than just doing it, then it is time to call it a day. I have toyed with other ideas (Twitter, chart-only blog, etc.) but none solve the underlying problem. I want to sit here for sufficient hours to pay the bills, and enjoy doing that, but then rediscover what I am lucky enough to have the time/energy/money/opportunity to do with the rest of my life. In the last month I have reduced trading to 3 days/week.  Profits are down by less than 40% and happiness is up by more than 40%, I am smart enough to realise that is a good deal.

Trading is a lot like driving a car, an incredibly complex task that is fraught with danger but, once learnt, only seems to require about 10% of brain cells. It’s time to give the other 90% a bit of exercise.

So I will definitely be trading for 3 days/week  but no longer thinking about trading for 7 days/week, it was those thoughts that  kept this blog fed and watered. This may all be a symptom of my mid-life crisis(!) and I will return with something new. For now, and for the foreseeable future though….

I was about to hit “Publish” on a post that describes the future of this blog when I noticed my first ever reader request. I’m happy to try and answer it, not because I am nice, but because it gently inflated my ego still further.

I was wondering if you might make a post about your “bad” trading days – bad meaning you lost money, just traded badly, or both.

More specifically, how many “bad” days you tend to have in a month, and how you deal with them the following day. I know that “days” have little meaning with regard to the trades themselves because it’s really just a never-ending stream, but psychologically it’s easy to let those days have a negative effect.

Firstly, I am not sure what I can add as the question already includes two important conclusions.

1. Trading badly days and losing days are not one and the same.  It is possible to trade well and lose, trade badly and win, as well as the two other combinations (or is it permutations?) that you can add for yourselves.
2. Splitting the trade history up into days is indeed entirely artificial. You might like to experiment with the day lengths of different planets as these can make a remarkable difference to your state of mind if not the account balance. Splitting the trade history into statistically significant ‘blocks’ is a more practical suggestion, especially for those making only a few trades/day.

My personal experience is that losing days are regular  (I take 35+ trades/day. The more trades and higher WR%/ lower RR then the lower the daily variance), losing weeks are rare and losing months are almost non-existent.

The best advice that I can give to help deal with the bad days is to get to grips with the inescapable nature of variance. You can do this mathematically (once you have a handle on your historical WR%,RR, etc.) or just by trading for long enough to realise that variance is a  fact of random probabilistic events and not a feature of you or the way that you trade. I know that I have a certain amount of variance that I just have to grind through, it has averaged out profitably in the end before and, within certain limits (limits I have calculated but that it probably only for the hardcore geeks), I can only assume that it will again.

Ultimately the result of every trade is the same, the product of the risk and your long term expectancy. If there is (an impossible) goal then the ability to treat each trade in that dispassionate way might very well be it. If you have a positive expectancy then every day is a good day, even if it doesn’t always feel like it.

So I’ve dodged the question by trying to hint at a mindset in which there are no bad days so no need to be able to cope with them. The alternative is to have the emotional intelligence to be able to enjoy the highs and tolerate the lows, that is however something that I know even less about.

My implicit assumption throughout the above is that we are discussing the ‘shit that happens’ with a positive edge, with a negative edge then nothing is going to save you because bad days turn into bad weeks, months and years.

I’ve previously written about how evolution has equipped us so well to see patterns (the stripes of a tiger hiding in the grass) that our neurological wiring picks them out even when they aren’t really there.  Not surprisingly, that potentially includes lines on trading charts. I try not to think about it too much but I worry that a lot of the lines that I spend the day drawing are just the erroneous products of an over-active, pattern-seeking mind.

A non-trading example of this phenomenon is ley lines, the belief that certain geographical features are aligned along straight lines, a sort of mystical line of support!

But the problem is that if you are a bit selective with your data, a bit tolerant of deviation and get a helping hand from our old friend randomness then you can make just about anything follow remarkable linear patterns, even Woolworths (RIP) stores. The image is appropriated from here where you can also find more information on the subject.

So next time you are drawing lines on a chart, forget you ever read this or you’ll be stuck with a blank page, or worse than that you may start using indicators.

I’m busy trialling a new twitter-based direction for Long&Wrong that includes regularly published FX charts (Those of you that have requested to follow @LongAndWrong, please don’t take it personally that I haven’t responded, I am currently just experimenting with this idea).  With my attention elsewhere it would be tempting for you to think that I won’t be making significant posts here, and you’d be right. But I love a challenge, so here is a single sentence by which you can solve all of your life’s problems (!)…

The cure for anything is salt water – sweat, tears or the sea  - Isak Dinesen

So there you have it, any problem solved.  But as this blog is meant to be about trading, let’s think about it in that specific context.

By now we have worked out for ourselves that trading is not a get-rich-quick scheme.  If you aren’t prepared to put in a lot of effort, a lot of hours and a lot of sweat then you will be donating to the market for as long as your account can stand it.

We have also worked out that, unless you are an algorithm or an emotionally-retarded Brit, psychology plays a huge role in whether you succeed. You will have to handle the emotions that come with winning and losing large sums of money.  Everyone has to find their own coping strategy (throwing the mouse, drinking scotch, viewing  photography of dubious merit, punching walls, kicking cats, meditation or even bursting into tears) but whatever it is it must allow you to wipe the mental  slate clean and come back afresh to the PC and start making good decisions again.

But here is where that quote is at its most brilliant. There are, I think, barriers to becoming a succesful trader that won’t be solved by spending another 90 hour week looking at charts or by attaining zen-like calm irrespective of profit or loss.  You have to sort your life out and you do that by staring at the sea on a Sunday afternoon, because it is a place that makes you happy and provides that all important sense of perspective. And when it doesn’t matter quite as much and when you can even smile occasionally, random events seem to go your way just that little bit more often, edges suddenly become that little bit sharper and expectancy just that bit more positive.

Beach near L&W-Towers, SW England.

You’ll miss this nonsense when I am Twittering in fewer than 140 characters…”Be happy, trade better #psychobollocks”!

Those nice people at WordPress send out an end of year summary for each blog, mine is reproduced below.

I get the feeling though that blogging is ‘very 2010′ (and familiarity with some of the blogs that I link to will show that this opinion is widespread, it’s awfully quiet out there).  I will pause for a while and think about my future direction (current ideas include something Twitter-based that automatically squirts out charts at regular intervals during the trading day i.e. some upfront API effort reduces my workload and gives people what they really want).

Back soon in some form or other; perhaps the same or perhaps not. I’ll keep annoying you with my predictable comments though. Here’s that report…

The stats helper monkeys at WordPress.com mulled over how this blog did in 2010, and here’s a high level summary of its overall blog health:

The Blog-Health-o-Meter™ reads Wow.

Crunchy numbers

A Boeing 747-400 passenger jet can hold 416 passengers. This blog was viewed about 13,000 times in 2010. That’s about 31 full 747s.

In 2010, there were 59 new posts, growing the total archive of this blog to 119 posts. There were 74 pictures uploaded, taking up a total of 4mb. That’s about 1 pictures per week.

The busiest day of the year was November 4th with 169 views. The most popular post that day was This is Why People Hate Traders….

Where did they come from?

The top referring sites in 2010 were juzjules.blogspot.com, tradingcrude.blogspot.com, priceactionscalping.blogspot.com, dt233forextradingblog.blogspot.com, and Google Reader.

Some visitors came searching, mostly for gordon gekko, rubber duck, apple turnover, pause button, and turnover.

Attractions in 2010

These are the posts and pages that got the most views in 2010.

This is Why People Hate Traders… November 2010
17 comments

Yerkes-Dodson Law March 2010
13 comments

Head & Shoulders & Economists & Journalists October 2009
4 comments

Existential Angst September 2010
24 comments

(a)’s and (b)’s. September 2010
5 comments