The Difficulty of Trading

The Nifty moved down a bit and ended the day with a small loss. My STT buy trigger at 5703 was not hit and continues to remain at the same levels for Wednesday. Similarly my LTT sell levels at 5561 has not been hit too. The Nifty continues to trade between these two levels- making life very boring. To add to my woes, my personal short positions in gold and silver have taken a beating. The only saving grace is that I am long Crude and it has made a move. BTW, I do think that Crude is probably going to rally past 104-105(Nymex Crude)in the coming weeks.

WARNING. You can skip the next couple of paras and go to the end straight if you are not interested in reading about my views on the difficulty of trading!!! 

After talking about the skills required for a trader in the DOING NOTHING series and in Tuesday's Laws of Trading, I wanted to talk about the problems in becoming a successful trader. One important problem is that unlike most professions success in trading is not correlated to hardwork. For eg on an average, the doctor who works harder and longer than the other enjoys more success. Similarly for a lawyer, engineer, professor etc. Most professions are like this. However trading has more in common with professions like acting or writing or modelling where success is not correlated to hardwork. A struggling writer can work as hard as he wants but might never taste success. Similarly a trader can work hard, work late, read all the financial news and study all the data that he wants but can still fail to be successful.

The second problem is even more insiduous. It is our own biases that stop us from doing well as traders. Our need to be right, the fear of going wrong, the avoidance of losses and a few others all of which are a part of our genetic make up. To be a successful trader, one needs to unlearn this and learn new ways of thinking about the market. This naturally is very difficult for most people. You might however say, that even animals can get trained to do things that are not natural to them. For eg a dog trainer can train and teach a dog new tricks simply by a process of rewarding good behaviour and punishing bad.  That same process should enable the trader to learn through the years of market experience.

Even there, however, the market conspires against the trader. Notice that the dog gets trained by the trainer because the trainer constantly rewards good behaviour and punishes bad behaviour. The key is the consistency in the reward and punishment process. It is then easy for the dog to understand what is required of it to get rewarded. However, the market, is not consistent in its approach. It rewards good behavior and sometimes even rewards bad behavior. It also does the opposite and punishes good behavior. This leads to very inconsistent teachings from the market. A trader might keep a stoploss (good behavior for eg) and see the market hit his stoploss and then reverse back into a profit. The market punishes this good behavior and the learning from this episode for the trader is mixed. He might learn that it is better not to keep a stoploss. Similarly if the trader had not kept a stoploss (bad behavior) and then sees the market dip below his supposed stoploss levels and then reverse up will see the market reinforce his bad behavior. The market is therefore a very bad dog trainer. It is very difficult for a trader to learn anything from the inconsistent behavior of the market.

All this does not mean that trading cannot be learned. Well if I can do it then anybody can I guess. The key is to be able to follow a disciplined approach irrespective of the short term vagaries of the market. The key is to focus on the long term goals. This is such a paradox. Trading is supposed to be short term in nature but the only traders who are successful are those who can stop worrying about short term losses or profits and focus on the long term prospects by doing a few simple things consistently.                              

Current Position STT Short and LTT long 

STT: Cut Short and Go Long > 5703 

LTT: Cut Long and Go Short < 5561