He are three principles that I think are important for success in the markets. They are all related to nature in some way, so I’ve grouped them together.
Key #1: Be Yourself
Summary: Nature (and the markets) punish those who go against the flow. You have to trade in harmony with your personality, and your means, and your environment. Otherwise, you will find yourself extinct.
When a bird on the ground wants to get to a tree branch, it doesn’t try to climb the tree. And it’s a good thing, too, since it would probably really suck at tree climbing. Everywhere you look in nature, you can see similar examples. For instance, trees don’t walk over to a nice spot, take out a shovel, and plant their seeds. Instead, they work in harmony with their environment (sometimes in strange and surprising ways) to “accomplish” their propagation.
I put “accomplish” in quotes, because there really is no effort involved. Birds don’t struggle to fly… they just fly. In nature, a predominant theme is to take the path of least resistance, and everything in nature seems to have developed an easy balance. Taoists have a concept of “wu wei” that describes this idea of “going with the flow” and “action without force.”
Some people believe that a higher power designed everything this way. Others prefer to think in terms of natural selection. But, regardless of how you think it got here, it’s here. Nature is complex, and chaotic, and does not reward those who fight against it. And, the stock markets are pretty much the same way.
Take me, for example. I don’t have a long-term viewpoint on stocks, or the overall markets. That stuff bores me. My broker’s commission structure does not lend itself well to scaling in and out of trades (at least not more than 2 entries/exits, anyway). I don’t have a large enough account to hold more than 2 or 3 positions at once. So, I am obviously not going to try to trade like a hedge fund. If I did, I would be the bird climbing the tree.
At the same time, if you do have a ton of money to invest over a long haul, there’s no way you should be trading like I do. It’s not practical. If you have too many distractions during certain hours, you shouldn’t try to trade through those hours. Et cetera, et cetera.
I wrote an article last year on this topic, called Trade In Harmony With Your Personality. It has more examples, and suggestions about how you might go about refining your style to fit you better.
Key #2: Stop Pretending You Control the Markets
Summary: When it starts to rain, you can seek shelter, or you can get wet. Nature doesn’t give you any other choices, and neither do the markets.
When my cats jump up on my countertops, they do their best to plan beforehand. They step back and look for any objects big enough to see from the ground. They stand on their hind legs and try to peek at their desired landing area. But, they still can’t see enough to be sure. At some point, they have to use their past experience, and their best guesses, and just jump. This is the same thing we do when we trade stocks.
I know what I expect my target stock to do, based on all the charts I’ve seen in the past. I look at various indicators, and market mood, to try to confirm my guesses. In the end, though, I just have to jump in and see what happens.
The difference between cats and novice traders is: when the cat doesn’t like the situation it finds, it jumps right back down. Sometimes, it’s able to change course in mid-air, not even landing at all. Novice traders, on the other hand, jump into a stock trade, and stick with it no matter what. They seem to have an infinite capacity for denial.
Say a stock trader opens a position expecting a run, and the price action stalls instead. Most traders I’ve met take this as a cue to start doing further analysis. “It’s still got good tone compared to its sector,” they might conclude (or any number of other reasons why the trade is still looking great). A lot of them also focus on what they want to happen (as in “I’ll wait for it to move just a few more cents and I’ll get out”), as if the market cares.
Some see reality (perhaps whining “hey, the trade’s stalled out” in some public forum), but they still do not close out their position. Another common reaction is to root for the stock, or otherwise somehow try to mentally prop it up.
All these reactions are stressful, and ultimately useless. Be like the cat. The cat knows it can always jump back up again, whenever it wants to. Deal with your situation.
Today (6/20/2007) on Wallstreak, I gave an example along these lines from a trade I made in SLAB. It was a stock I expected to run, but it stalled instead so I got right out. That’s just this article’s example, though… any time the markets don’t do what you thought, just get out. If you expect an uptrend and it makes a lower high or lower low, stop making excuses for it and get out. Got it? Good.
Key #3: See What’s Really There
Summary: Look at the markets like an artist looks at nature. Don’t abstract away all the richness of the market environment.
Nature is extremely rich and complex, but most of the time people are almost literally blind to it. We label things and box them into abstractions. In math and science, this is a really useful human ability. When living your life, I’d say it’s more of a liability.
When you look outside, do you see “the lawn” or do you see “millions of individual blades of grass, all different”? You filter out most of your available sensory information, most of the time. Most of the day, you probably don’t feel your clothes, or hear your refrigerator humming, for instance. But, if you choose to, you can.
In the markets, too, many of us throw concepts around and ignore the richness underneath. “Hammer” candle. “Liquid” stock. “Choppy” day. “Capitulation” selling. These simplifications make it easy to communicate in some basic way with other traders, in the same way as you might tell someone in passing that you have two trees in your yard.
That’s fine for a casual observer, but an artist would want to see those trees, and observe their individual shape, color, and texture. An artist pays attention to the individual leaves. And just as every tree has depth and complexity, every candle on your chart has unique time, volume, and trade rate characteristics (to name a few). You might be surprised what you can notice, if you actively watch the detail.
June 20th, 2007 at 10:34 pm
“Trade Naturally”…
meaning….
sans condom?
June 21st, 2007 at 12:04 am
I submit a condom with each of my market orders, in hopes that the specialist will wear it when he screws me.
June 21st, 2007 at 2:51 am
Very good article Richard. One of the difficult thing in trading is to accept things as they are and not trying to force one views or needs upon it… I will link this article to my blog and hope that my 3 regular readers will read it with a lot of attention !!!
saludos,
Stephane
June 21st, 2007 at 4:33 am
great article..chapter 1 in the upcoming book?
June 21st, 2007 at 7:39 am
Hey Richard,
Good article as always. But you know me, always interested in challenging a few points to make a good article excellent. Besides, the trading day is a bit slow today… :)
“For instance, trees don’t walk over to a nice spot, take out a shovel, and plant their seeds. Instead, they work in harmony with their environment (sometimes in strange and surprising ways) to “accomplish” their propagation.”
That sounds nice, but it isn’t true. Trees can spread literally millions of seeds over their lifetime and generally only one or two of them ever sprout. This is hardly effortless. Strangler figs have sticky seeds to sprout on the bark of other trees so the fig can grow on top of the other, eventually killing it. Eucalyptus Regans, one of the world’s tallest tree, grows at over 1m/year in a desperate struggle to outgrow competitors and pay for it with a life of “only” 400 years (compared to tens or hundreds of thousands of years for the Redwoods).
I don’t think there is such a thing as “harmony” in nature, only in New Age books which seek to recast nature. At best, nature exists in equilibrium where organisms which are bitterly fighting each other have found their weapons and defences evenly matched. A better description isn’t nature in harmony, but nature in a literal life-and-death competition.
You may wish to view yourself as going with the flow when trading, but I don’t think nature will provide you with a good analogy. Perhaps water flowing, shifting to work past obstacles, always moving and changing itself to fit with the terrain?
I put “accomplish” in quotes, because there really is no effort involved.
There’s a huge effort involved in propagation. That’s why plants and animals will either issue many minuscule seeds or will issue larger seeds but much fewer of them. Organisms need to put energy and nutrients into producing offspring which they need themselves, often at the cost of their own lives.
Maybe the lesson is that, in nature, there are always trade-offs. Survival may appear effortless to outsiders but it is actually anything but. You can play to your strengths and increase your chances but if the environment isn’t right you can still die despite your best efforts.
“Some people believe that a higher power designed everything this way. Others prefer to think in terms of natural selection. “
“Prefer to think”? Richard, for shame.
“Novice traders, on the other hand, jump into a stock trade, and stick with it no matter what. They seem to have an infinite capacity for denial.”
I’m not sure how your cute cat metaphor agrees with your header of controlling the markets.
On the subject of control, I’d look at the stories & excuses novices use. Whom do they blame for their losses? Is it a conspiracy of stop-running programs, the specialist screwing them out of fills, their broker playing games with them? People who blame other people for losses aren’t going to take steps to avoid them.
When you talk about looking forward but being ready to back out, I don’t think you’re talking about control at all, I think you’re talking about being receptive to new information and being willing to leap when the odds are in your favour despite not being able to see the future.
“We label things and box them into abstractions. In math and science, this is a really useful human ability. When living your life, I’d say it’s more of a liability.”
How is this a benefit in trading?
I’ll draw the analogy to medicine: as patients, we all want to feel like we’re individuals and our problems are unique, but doctors have learned that medicine works best when patient problems are treated in exactly the same way as other patients. When a patient presents the symptoms of eczema, it does no good to consider their eye colour, their relationship to their Aunt Margaret or their birth date (sorry astrologers). You give them the same topical cream that you would give to the last eczema patient.
The only “doctors” who treat every patient as an individual are the homeopaths. So if you are serious about getting healthy, you abstract away the differences and deal with the commonalities; if feeling like an individual is more important than getting healthy, then you get expensive magical placebos.
I think the same thing holds for stocks. Every setup will be different because the participants will be different. But if you worry about all of the differences, you won’t be able to take action. There will always be some change which can tell you to stay out of a trade: different bond prices, S&P moved close to the 50d MA, the guy on TV said oil was coming down, whatever. Your magical decisions may work for a time, but they can ruin your wallet and your health when things get hard.
Instead of paying attention to every blade of grass, don’t traders need to look at a field and see the predominant grass species and distribution while ignoring the weeds, bumps and minor differences and make quick decisions? Isn’t trading about learning what is important and what isn’t then setting aside all unimportant details? What trader could act if they had to look at every blade of grass? How could you make decisions?
June 21st, 2007 at 11:57 am
I like number 2. I would add that you can control when you trade. I think you did allude to this idea.
June 21st, 2007 at 4:59 pm
@Tyro: Good grief, that’s a huge comment. I will try to address all your points.
Regarding lack of harmony in nature. I think we aren’t using the same definitions of what it means to be “effortless” and what it means to “struggle.” Lots of processes in nature are inefficient (such as producing thousands of seeds when only a few will sprout into trees). But, it’s not like the tree wishes it didn’t have to make so many seeds. It just produces them, because that’s what it does. The Eucalyptus Regans don’t resent Redwoods for living longer, or get fed up with having to grow so fast. I’m fairly certain that saying they are in a “desperate struggle” is projecting a human mindset onto them. They just grow that fast, because that’s what they do. If they didn’t, they wouldn’t survive.
I don’t see a desperate struggle anywhere, frankly, except when humans are involved. That’s not to say there isn’t pain and death, but that is all part of the harmonious balance that I perceive. Humans are the only animal I know of that consistently fight their own nature, trying to be more than they are, with a more important place in the universe than they actually have.
I think this is one of those topics where you will pretty much always find what you are looking for. Whether there is or is not an objective truth about reality, as a human, you can only ever see things through the filter of your mind. If you see life as a bitter struggle against everyone and everything, you will find that struggle everywhere you look. Another viewpoint will produce a different flavor of experience.
“Prefer to think”? Richard, for shame.
I’m not ashamed of saying there are people that prefer the idea of natural selection to the idea that a deity guided creation. I’m sure you agree that both camps (and many in between) have plenty of adherents. So, what’s the problem?
I’m not sure how your cute cat metaphor agrees with your header of controlling the markets.
The cats don’t suffer from delusions that their situation will somehow improve just because they have committed to a choice. They don’t rationalize “the counter’s not too wet… this will probably be alright.” They just abort, and they don’t feel bad about it afterwards.
The blame game traders employ after the fact wasn’t really what I wanted to talk about, though it is important not to carry baggage from losses, or need to explain them to protect your ego.
I don’t know if I’d say I’m looking forward, but ready to back out. I’m never planning to back out… I think if you are looking for a reason to back out, you can always find one. But, when something unexpected happens, I think it’s key to realize that you actually don’t know what’s happening, and you should be out. Trying to assess the new information is a bad idea, I think, because it’s almost impossible to eliminate some kind of bias when you have money on the table.
How is this [eliminating abstractions] a benefit in trading? … Isn’t trading about learning what is important and what isn’t then setting aside all unimportant details? What trader could act if they had to look at every blade of grass? How could you make decisions?
Not sure what to say about this one. All I can say is, I’ve had a great deal of success, and I’m trying to describe how it is that I’m doing that. Over the course of my time on Move the Markets, I’ve written a number of articles about finding the detail that charts and indicators hide from you. I don’t put any credence in those named “hammer doji etc” candles. I keep moving farther and farther away from summarized information.
Last few months, I try to catch every nuance of the stock leading up to my trade. I don’t watch the charts anymore once I have a target. I only watch the bid/ask/last/volume. This is as close to the raw “blades of grass” as I can get.
One of the reasons I’ve primarily been scalping is that there isn’t time to go and examine all the T&S information on each candidate stock. Instead, I make a very localized trading decision based on watching the prints for 10 to 15 minutes. Over time, I have put less and less faith in what the charts and broad market indicators can tell me about the next two hours of price action. I find I can’t depend on them. Not if I want to make 6 winners out of 6 trades on a given day, anyway.
June 21st, 2007 at 6:48 pm
I want to add that I’m not trying to say that the ideas I’m talking about are the only way to succeed. I’m just trying to write a bit about why I think I personally succeed. I hope it gives people some “alternative ideas”!
June 22nd, 2007 at 12:11 pm
But, it’s not like the tree wishes it didn’t have to make so many seeds. It just produces them, because that’s what it does.
What do you think “effort” should mean? I’m using the conventional definition: that you expend effort and work to produce an outcome. Trees and all other animals expend a great deal of effort to reproduce. Many animals will die because reproduction uses up so much energy and nutrients that their own bodies collapse.
Seeds require nutrients and energy which the tree could use to help itself, so yes, producing these seeds are expensive and costly and if the tree didn’t have to do it, it wouldn’t. (Not a conscious choice by the tree, but an evolutionary adaptation.) You can see this trade off clearly in fruit trees as they weigh the costs of producing fruit against the need to attract distributing animals.
I don’t see a desperate struggle anywhere, frankly, except when humans are involved. That’s not to say there isn’t pain and death, but that is all part of the harmonious balance that I perceive.
I see. So trying to survive, facing starvation and predation isn’t a struggle. It’s “harmony”. I think you should make that clear when you’re talking about achieving harmony with the market or nature. Perhaps not everyone would wish to exist “harmoniously” if it means being eaten.
When you say “go with the flow” and “trade in harmony”, are you sure you’re using this same definition of harmony? If so, I think all new traders are perfectly able to achieve “harmony”.
I’m not ashamed of saying there are people that prefer the idea of natural selection to the idea that a deity guided creation.
I hadn’t realized that evidence was a preference. It’s like saying some people prefer to believe in germs while others think in terms of demonic possession.
Last few months, I try to catch every nuance of the stock leading up to my trade. I don’t watch the charts anymore once I have a target. I only watch the bid/ask/last/volume. This is as close to the raw “blades of grass” as I can get.
And yet I’ll bet you ignore the news, the price of oil, the price of bonds, the Canadian market moves, the TICK and the price of tea in China. Perhaps you will look at the ES and some momentum leaders to get a feel of the market mood, perhaps not. You have identified which details are important and which are not. You let the rest of the world fade into a general abstraction as “lawn” or “grass” while you pay intense attention to the details that you feel is important. Instead of paying attention to every blade of grass, you ignore everything except the one blade that interests you.
I’m not trying to trash you or anything (though I do like debating points that I believe in). On this point, I wanted to be clear because I think that a big failings of many traders is to consider too many variables in their decisions. They consider the news, the T-bill prices, the blogger sentiment, the short interest, the market prices, the oil prices, the season, the star sign, anything which gives them the illusion of fortelling the future or of talking them into/out of a trade. Their signals tell them to take a trade, but they pass because some talking head on CNBC is talking about a market crash.
To be an effective trader, I think they should model themselves on you in many ways. But that’s not by considering everything, but by eliminating as much noise as possible and focusing in on the few details that they’ve decided are important. That means no blades of grass or if grass is important, seeing all of the grass but ignoring the weeds, the soil, the rain, the trees, the gophers, the moles, the bushes, the clouds, the wind, everything else.
June 22nd, 2007 at 12:12 pm
Ahem.
Um, pardon the tone & length. Wowsers.
June 22nd, 2007 at 1:34 pm
well, there’s two sides to every story, right? When a lion kills a buffalo, that’s not so good for that one buffalo, but it does mean that one or more lions won’t starve, and it does mean there’s more grazing area available for the remaining buffalo in the herd. If the system were to become imbalanced, one of the two groups would suffer until balance is restored, or the system collapses and something else replaces it.
I do need dumb money to take the other side of my trades. Maybe some of the money I made today was the trade that took some sucker out of the markets forever. That sucks for them today, but it’s an opportunity for them to grow. They weren’t cut out for trading in the same space as me, and will be happier elsewhere. Or maybe it gives them the drive to study until they are more fit. Either way, it’s for the best.
In the same way, I make sure I’m quicker than the bigger traders that can crush me underfoot. I know my place in the food chain, so to speak. When a stock doesn’t have enough small stupid traders in it, I have learned to stay out, because the price gets manipulated until I have to fold when the big players are in control.
Humans don’t like to know their place, though. If we were the animals that died in the course of reproduction, we would probably choose abstinence, because we think we’re individually very important. But, nature as a whole seems to respect the needs of the overall system (and of course that’s the way it has to be, or the system would collapse).
I didn’t say you had to think that theists/creationists were right, or even smart. But they do exist (and I am not one of them). Maybe you don’t think it’s right to say that you “prefer” to go with scientific theories over other options. That’s fine by me. There is room for all of us, I promise.
As I’ve said in other articles, I think the thing I call “me” is just a figment of my ego’s imagination, which probably skews my worldview a bit, relative to most other atheists.
yeah, I am presupposing that people are only looking at what their setup needs as inputs, so chinese tea charts will probably not be up unless you are trading chinese tea. The message I want to get across is: whatever you are looking at, don’t shove the data into nice abstract cookie-cutter boxes.
For the record, when looking for something to trade, I look at a daily 6-month PnF chart, a daily 3-month candlestick chart, 2 intraday PnF charts, the 15-minute candlestick chart, the DIA and QQQQ intraday PnF charts, the NYSE and NASDAQ TICK and TRIN quotes, and sometimes a relevant sector ETF intraday chart. When all those look decent, I pare it down to just the TICK/TRIN and bid/ask/last data, and lately I’ve also been pulling up totalview to spot pools of liquidity.
June 22nd, 2007 at 7:01 pm
Pardon my comments, Richard. I was acting like a real ass. Have a good weekend and thanks for staying active here when so many others are retiring for the summer.
June 22nd, 2007 at 7:23 pm
Have a great weekend, as well! If your comments were offensive, I actually didn’t notice. They certainly weren’t anything compared to the “you are a fraud” all-caps comments I get sometimes.
June 27th, 2007 at 10:50 pm
But I….I…I do control the market.