THE CALL - I got a call the other day from an old friend. He was in distress and highly discouraged. When I asked if everything was ok, he told me that all of the important things were better than ok and that this was not what was troubling him. I have always admired this friend and have thought very highly of him. He is a warm, kind, generous person. He has a wonderful family and is is very accomplished professionally. I suppose, he has a lot of what we all want. So what was it that was troubling him? He told me that he has been trying to trade for many years and each and every time he tries, he goes through the same pattern. He is always very profitable initially, but then at some point, in a very short period (could be 24 hours), he suffers a loss that initially wipes out a chunk of his hard earned gains, then all of his hard earned gains and then all of his equity.
SAME SAD STORY - He can't understand why he keeps going through this cycle and is devastated that he can't get it right. And so, we talk at length about life and the good old times and I try to get him back to the person I know he is in every other area of his life. At that point, I go back to the trading and ask him to tell me about what it is that exactly happens when everything goes downhill. After going into it for a while and after a lot of back and forth, we discover that a lot of the catalyst for the downfall comes ironically from being in a good position. It seems he is so successful initially, that he begins to deviate from the course that got him to where he was and starts to try and force the market, taking positions he normally shouldn't be.
STAY ON COURSE - It is so important that we all understand just how dangerous it is when we deviate from our course. Not only can it result in a bad trade, but it also changes the dynamic from trading to gambling. So even if you find success in gambling, you most likely won't feel as confident with your results and this could lead to a slippery slope of self doubt that ultimately leads to a blow up. My friend didn't understand that he needed to stay the course. There is no room for gambling in markets. The second you gamble, is the second you lose your edge. I don't think it is ever a good idea to tell yourself "hey..I've done really well and I'm up a lot, so let me try something new and just trade because I want to." I told him that his failure as a trader had nothing to do with his ability to analyze the market and everything to do with a lack of discipline and temptation to want to gamble and take unnecessary risk.
LESSONS FROM 'ROUNDERS' - I think it is critical that every day you wake up, you need to approach the market in the same way. If things are going well, keep doing what you are doing and learn to be satisfied with this process. It isn't always glamorous and exciting this way, but it is the way to ensure that you are trading for a very long time to come. I have talked about this in the past, but I will revisit now. One of my favorite movies out there is 'Rounders.' The movie stars a young Matt Damon funding his way through law school with his skills at the poker table. I won't get into the plot in case you want to watch it, but the movie glorifies the wrong character. There is a character in the film called the 'Knish' played by John Turturro. The Knish is another poker player who acts as a kind of mentor to Matt Damon's character.
BE LIKE THE 'KNISH' - The Knish never goes for the home runs. He knows how to walk away when he takes a loss, and he comes to the table each day as a true professional, with a respect for his craft, knowing full well that it has everything to do with calculated risk and sound discipline and very little to do with gambling. The 'Knish' is a grinder. He grinds out wins consistently, but never pushes too hard and never goes where he shouldn't. And he never looks to go all in.
THE NEXT FORK - As a trader, this is where you need to be. You need to be thinking like the Knish. The truth is, there is glory in trading. But the glory of successful trading is never about one trade, it is about hanging around and sticking it out over time. Perhaps my friend got too caught up with his success as a trader and felt he could push the market around a bit. I reminded him about 'Rounders' and told him how important it was to be like the 'Knish.' He is feeling a lot better right now and looks forward to getting to that fork in the road the next time, where he told me he will happily choose the path of the Knish. Here's a youtube link to 'Rounders' in case you never saw. Enjoy!