In my decade-plus of working with both markets and traders, I’ve seen many things change and just as many things remain the same. Markets continually change, traders never do. Or at least we should say, human behavior expressed by traders never does.
One of the most important things we can do for ourselves (which no one else can) is figure out why we behave certain ways when trading. Bio-feedback for self improvement is equally important as what volume level or candlestick pattern or moving average setting is best for trade entry setups. At times in my writings and video conversation I may get too preachy, and probably say some unpopular things. Sometimes I say things that challenge the status quo and make statements that are totally opposite what aspiring traders wish to hear. But I do my very best to tell what I’ve experienced, what I’ve learned in this profession and hopefully steer some people from the wrong paths they are on toward the right directions forward and ahead of them.
One of the most critical needs for human survival is a sense of being comfortable. Animals like comfort… they actually need comfort to survive. That includes adequate shelter, water, food and companionship. Those four basic needs come right after oxygen in order of importance for survival. We as humans translate those core animal needs into everything we do. The act of trading is one such example. At first we try real hard to find ways that eliminate the uncomfortable parts of trading, such as fear and uncertainty. One way of doing that is by seeking popular opinion which supports our own belief. Humans tend to shy away from or aggressively reject thinking that counters their wishes and desires. That makes them uncomfortable, hence the total avoidance or verbal lashing out behaviors in self-defense.
Another way we seek comfort is to seemingly avoid risk. Common logic says the least amount of risk involved with trading would be to work with one futures contract or 100 shares of stock many times for brief interludes and small profits. That would accomplish several things which in our mind creates comfort. The natural fear of losing our nest egg is least felt when trading small size. How many times have you heard about, read about or experienced yourself the natural behavior of trading well with small positions and emotionally falling apart the very moment trade size is increased? Did the market somehow change when a trader moves from small to larger than small position size? Or did the trader’s perception of the market change instead?
To reduce uncomfortable fear of loss, we naturally want to stick with small trading size forever. We can see ourselves getting comfortable taking small risks over and over and over again. That’s not too scary. But we want to keep increasing our profit results in exponential fashion. Linear trade size… exponential trade results over time. In order to do that, the only choice would be continual increase of gains per trade and increase of such trades per day. Many little profit trades = one nice paycheck by day’s end. Unfortunately, that’s not how this game works.
Any and all financial markets will vary day by day in how much potential profit is available to capture. There is a finite $$ limit to what can be booked as net profit by any single trader inside a given period, be that an open outcry session or extended hours before and after pit sessions of trading. Some days offer tons of profit potential while other days are scant. That is a mathematical fact.
Aspiring traders seeking comfort inside fixed small position size and unlimited profit growth fixate on mastering the art of reading all market action, from every single bar on a chart to pull maximum profits out of every situation and circumstance. They try real hard to figure out if this session here is a trend day or range day, if the bias should be long or short, what the supposed “other guy” is doing as if said other guy represents the proverbial “herd”. All of this comes from an outlook of fixed position size which is small, centered from a need to be comfortable while trading.
One natural extension of this would be down the path of “scalping”. The longer our capital is exposed to risk of loss in the market, the greater chance something can happen that results in loss. Simple logic. So we naturally take actions to avoid discomfort that include trailing stops, time-based stops, cutting profits short, scaling out for smaller gains than potential loss risked on stops and other similar acts. Human logic drives us to seek ways that grasp quick profits “safely” with few losses if any. Music to any trader’s ear is the siren song of scalping 100 trades per day, in & out of trades in mere seconds with 95% win streaks and nil loss. Who in this world would not love to live in that fantasy land? How comfortable would that be? Tons of action to keep us entertained. Minimal time involved where fear and uncertainty are suffered thru. Maximum positive feedback that we are on the right track. Massive potential gains in the end, thru 95 bite-sized profits added into one giant lump of daily gains.
Well guess what? If you haven’t realized this fact by now, you eventually will. The profession of trading is all about being uncomfortable. There is nothing at all comforting about taking what’s precious to us (money) and placing it at risk repeatedly in the great unknown. That’s why things like fear, greed and adrenaline are involved. There is no way to make the act of wagering, speculating or gambling risk free aka free of discomfort. Scalping almost always has the opposite result in real time. Several small losses to start a given day often snowballs into huge losses as traders throw all caution to the wind, totally break down emotionally and act out their fear of loss in the most destructive ways possible. At day’s end when the smoke clears and their account balances are up in smoke, they ask themselves what the heck just happened and how that could possibly happen. Very simple. Said trader began with false pretenses on how this game works while seeking comfort in a profession where comfort simply does not exist.
Any performance sport is about performance outside one’s comfort zone. Playing big stakes poker at the final table of WSOP with cameras rolling and millions of dollars at stake is every card player’s personal dream. But just how many aspiring players could handle the massive pressure involved there? Playing the quarterback position on a SuperBowl winning team is every armchair jock’s personal fantasy. But how many wannabe athletes can handle the pressure to perform on that world’s audience stage?
Trading from home may be different, but it is the same. Hole cards turn to beat your hand. Passes get dropped, hand offs get fumbled and defenders tackle you for sacks. Strings of small trades get wiped out by one big loss. Small trade size results in small net profits realized over the course of time. That’s how performance professions work. WSOP is won by players who press big pots. SuperBowls are won by quarterbacks to bide their time and hit the big plays when opportunity presents. Home-based retail traders do not make a living from scalping one-lot futures contracts or 100 shares of stock one hundred turns per day. Not how those games are played to win.
We have to get comfortable with being uncomfortable. We have to continually press ourselves outside of our comfort zones in order to win. Comfort zones for traders include fear of increasing position size, fixation on increasing net profit results without end, obsession with being profitable every day lest finishing at a loss equals being a loser.
If the status quo of natural human desire actually worked out in reality, wouldn’t it stand to reason that all traders would be easily successful? Books have been written on the subject of trader psychology and many more could be penned that cover all new ground. Suffice it to say (for now) that a big part of reaching your performance goals as a trader hinge upon making peace with being uncomfortable. Pushing yourself outside the limits of comfort, constantly working towards doing what you know works rather than what you wish & hope would work is the difference between gradual success and eternal frustration.
By Austin, visit his blog at Coiled Markets.
Really a good article for retail traders….