Despite the many analogies that securities trading has been compared and contrasted to, there exist only a few truths – all of which are the basic elements that set apart an amateur trader from a professional trader.
What exactly is securities trading about? Securities trading is about transferring money from one illusion to the next, in the hope that one of these illusion will become a reality, thus realizing profit. This process is conducted by means of stocks, options, futures and essentially any other speculative financial instrument that has been created for the purpose of converting equity into something or nothing.
Throughout history, we have exchanged money for an illusion in the hope that this illusion will become a reality. We have bought famous paintings, carpets, securities, gold etc., in the hope that one day they will be worth more than what we paid for them – for the illusions to become real. Unfortunately, there are no definite rules and guarantees in these “practices” – much like gambling. However, there is one thing that has a rather interesting power in delivering better odds: the laws of probability and statistics.
The laws of probability and statistics essentially predict the outcome, or possible outcomes, of a particular event, or set of events, based on historical data by use of equations, graphs and mathematical “wizardry”. This is the only material tool we have available to partially better our chances – anything else is merely a faulty concept bound to lead you towards failure. Although the laws of probability and statistics may very well slightly better your odds, there still are no guarantees: either way you look at it, you are still gambling. Since you are still gambling, this means you are playing a losing game. How does one win in a losing game? Simply, lose less than everyone else by protecting your positions! This is what sets apart a professional gambler from a degenerate gambler – with obvious preference towards the former.
What about trading systems? Trading systems use various mechanical instruments operated by computers and software to provide signals. Unfortunately, these tools will simply give you another set of illusions for an already established illusion – nothing can be worse than using a set of illusions for determining the conversion of an illusion into a reality. This is like betting on a bet based on someone else’s bet – there are no mechanisms set in place for protecting your positions. Your bet will simply become a blind roll of dice.
Besides the laws of probability and statistics, which eventually become “second nature” when practiced for a long enough time, there is another problem we face: the ego. Emotions, delivered by the ego, are a set of highly credible enemies in the business and discipline of securities trading. Emotions will divert you from your plans and goals, they will eat your profits and they will make a degenerate gambler out of you. Emotionless trading is what should be strived for, and through this “serenity” one will establish a personal trading mechanism that works consistently and almost flawlessly.
What, among the many rules of trading, can be used to silence the emotions delivered by the ego? There are various techniques, most involving meditation, concentration, discipline and practice. Amongst these several techniques, below is a list of simple credos that can be used regularly:
- “Trust yourself” – As an old saying goes: “Believe in nothing you hear or read, and be sceptical of what you see”. With this premise in mind, you are left with yourself and your judgements. The first step towards conducting your trading without the excessive interference of fear, doubt or disbelief, is to trust your actions and your reasons for them. You are your own enemy – battling yourself will begin to put your trust in others.
- “Focus on trading” – This sounds simple enough, but difficult to implement. It simply means that once you decide to trade securities, focus on it, and while you are focusing on it avoid distractions from intruding your operations. Distractions will generate complications by the awakening of your emotions. Furthermore, as a trader, your job is to control your inventory (cash) and gather point movements of your positions – your concerns should never tip towards the struggle of “making money”. Point movement comes first, and the money will follow.
- “Master your emotions” – However ridiculous this may sound, trading is 90% emotions and 10% effort. Learn to manage your emotions, rather than control them, thus allowing you to focus on creating, establishing and following your plans through.
- “Protect your principle” – Protect and preserve your capital. Your inventory (cash/equity) must be guarded at all times to whatever extent possible. Use it wisely, not carelessly.
- “Know before you trade” – Use whatever data you want/need to establish plans/strategies for your trades. If you have no reasons for conducting a trade, do not trade. You should be able to ask yourself why you are conducting a trade and have a convincing set of answers before making the trade. More than often, you will find that the less data you use, the more clear your reasons will be.
- “Follow your plans through” – A prepared trading plan consists of conditional statements/goals. For example, if the price hits 18, take the position long to 23 – if it drops to 17, stop loss out. Your plans should be as simple as this, and you must always follow them through without emotions and/or after-thoughts detering you from completing them. Patience is also required to complete your plans, so avoid being hectic.
- “Trade on what the market does, not on what you think it will do” – This simply means that you must, at all times, conduct your trades without emotions. Your trades should be conducted on what the market is telling you at that moment, and what it has said in the past. The market speaks for itself – listen, and you will understand. Do not try to think for the market, it has a mind of its own.
Although the above list may seem simple to read and understand, it takes conviction to integrate them fully with your trading habits. Unfortunately, the ego does not easily accept losses – the more you silence the ego, the more you better your odds. Think about it: if humans had no ego to deal with, we would not be faced with so many complications in our lives. With less complications the process becomes more fluid and efficient.
From investing, to trading, to day-trading, whatever you do, the various situations present the same problems under different circumstances. Eliminating these problems will dissolve the emotions delivered by the ego, which leads towards the qualities of a respectable securities trader and speculator.
One last piece of advice is to keep a diary. Humans often have a short memory span, having a diary will help you remember your past mistakes and successes.
Finally, remember that without the losers there would be no winners… just try not be in the former crowd!