Nov 30, 1998
Technician's Take: In Trading World, Only the Strong Survive
By Gary B. Smith
Special to TheStreet.com
On my recent Yahoo! chat, I had this exchange:
Guttergrover: What are the odds against trading?
gsmith4: Well, about 80% of traders never make money.
Now, this is anecdotal, of course. I don't really know the number. But, based on my experience, this is probably in the ballpark.
So, assuming it's close, the big question is, "Why so low?" Well, there's a lot of answers, but here's what I think it gets down to. Being successful at trading is like winning the Olympic decathlon. Big and strong, but not fast? Forget it, you'll never win. Fast and big, but uncoordinated? Sorry, maybe you'll get a bronze. Big, strong and fast, but no endurance? Right, the 1500 meters will kill you.
See, that's the problem. Over two days, the decathlon explores and exposes any weakness an athlete might have. If you want to be the best, you just have to have every aspect covered.
And that's why I think trading is so difficult. Sure, you need a good methodology. But that's just the beginning. You also need consistency, mental toughness, endurance and patience. It's not good enough to be great one day and lousy the next. No, you need to be pretty good just about every day.
And if battling the market isn't tough enough, you then have to muster the energy to battle yourself. And maybe that's why most traders end up out of business. It's those inner demons that get us in the end.
And that leads us to this e-mail I received from astute reader Derek Amy:
Mr. Smith,
Let me preface this by saying that I too sold At Home (Nasdaq:ATHM - news) yesterday for a nice gain of about 25 to 30%. The reason I write this is to ask how do you cope with selling a stock, which we both did for a gain, and then seeing it ramp again? I am second-guessing myself for selling a stock that had broken its previous all-time high and wondering if I have learned a valuable lesson. My main point for writing is that I am trying to learn something from this trade and so far all I can figure out is, man, the stock hit 75 today!!
Yep, Derek sums up one of the subtler, yet nasty inner demons -- the one called regret.
Now, why is it subtle? Because on the surface, this looks like a good thing. Your call was right, and even better, you made a healthy profit. In fact, you underestimated just how darn good you were. Why, if you had just stuck to your guns and not been so hasty to take your profits, you wouldn't have had a healthy little win. No, you'd have had a great big whopper of a win.
So, you start recalculating and find that if you had just held ATHM for a few more days, you'd be having your best year ever. Man, you are an even better trader than you thought!
So, blessed with newfound confidence, you start rejiggering your money-management rules. First thing you do is get rid of that annoying limit order. You want to ride these babies, not settle for some idiotic 25% gain.
Second, you really need to bump up your lot sizes. Heck, worrying about using margin is for losers. And this ATHM trade proves you are most definitely not a loser. No, it's time to start using that leverage and taking advantage of your newfound brilliance.
So, you hit the accelerator and zoom off into hyper-trading space. "Hmmm, let's see, just a few more of those ATHM winners, and it's going to be a very merry Christmas!"
And ... well, you know the rest. Sure, you were that good on the ATHM trade. But, you're not that good on every trade. No, the fact is that the market, the industry, fate and good timing conspired to make ATHM a huge winner. But, it turns out, that was the exception.
The only problem is now you're playing home-run ball when you built your entire trading philosophy on hitting singles. You made a nice steady profit, month in and month out. You slept well at night. You were pleasant to your kids. And now, you're counting on every trade being a dinger.
Unfortunately, like many home-run hitters, you also end up with a lot of strikeouts. And those hurt because you've always hit for average. Always. It's what you counted on. And now, it's just not there. No, now you've lost your rhythm, your timing and your batting title.
And then finally you get the call: It's back to Double A ball for you, superstar. Or worse, you're drummed out of the majors altogether. And all because of that ATHM trade. That $%#@& profitable ATHM trade! That's really the galling part. If that trade had only been a loser, you'd still be in the bigs today. Oh well, see you later, slugger.
Sound familiar? It is to me because I've walked to that precipice more than once. With that in mind, let me answer Derek's question in two succinct parts.
The first part is the short, easy answer. Once I am out of a trade, I take it off my quote screen. That's it. I don't look at it; I don't think about; I don't mull it over. It did what I wanted it to do, and now other people can have fun with it.
Now for the hard part. You just can't get to wiping it off your quote screen without a lot of hard work. I mean, c'mon, we're all human. Unless you're some kind of Zen trader from the get-go -- and no one is, believe me -- you're going to keep pulling up that ATHM quote. And the more you look, the more your teeth will get ground to dust.
So don't even think about taking the easy way out before you satisfy yourself. How do you think I know about not looking? Right, I had to learn it the hard way. I had to learn that if GBS looks, he will get in trouble by thinking about changing his method.
So, Derek, my real advice is this: Test a lot of trading methods. And then test a lot of other trading methods. (All on paper, hopefully.) Maybe you are a home-run hitter. Maybe not. But, you're never going to know your niche until you fail in a number of other areas. And, after you've failed enough, then you'll know what works best for you. For me, I fight the inner demons by removing that symbol from the quote screen. Such a simple cure, but so hard to get to.
And that, folks, is why only 20% of traders make it. We're battling tough, fierce competitors who won't go down easily. Ourselves. |
